BankUnited, Inc. Reports Second Quarter 2020 Results

BankUnited, Inc. (the “Company”) (NYSE: BKU) today announced financial results for the quarter ended June 30, 2020.

“Our financial performance was strong this quarter, in a very challenging environment. We continued to deliver for our customers, employees and shareholders," said Rajinder Singh, Chairman, President and Chief Executive Officer.

For the quarter ended June 30, 2020, the Company reported net income of $76.5 million, or $0.80 per diluted share, compared to $81.5 million, or $0.81 per diluted share, for the quarter ended June 30, 2019. On an annualized basis, results for the quarter ended June 30, 2020 generated a return on average stockholders' equity of 11.6% and a return on average assets of 0.90%.

For the six months ended June 30, 2020, the Company reported net income of $45.6 million, or $0.47 per diluted share, compared to $147.4 million, or $1.45 per diluted share, for the six months ended June 30, 2019. Results for the six months ended June 30, 2020 were negatively impacted by the application of the Current Expected Credit Losses ("CECL") accounting methodology, including the expected impact of COVID-19 on the provision for credit losses.

Financial Highlights

• Pre-tax, pre-provision net revenue ("PPNR") improved by $37.3 million, or 44%, to $122.3 million for the quarter ended June 30, 2020 compared to $85.0 million for the immediately preceding quarter ended March 31, 2020 and by $16.2 million, compared to $106.1 million for the quarter ended June 30, 2019. Growth in PPNR for the quarter ended June 30, 2020 compared to the immediately preceding quarter resulted from (i) an increase of $9.8 million in net interest income; (ii) a $15.1 million increase in non-interest income; and (iii) a decrease of $12.5 million in non-interest expense. For the six months ended June 30, 2020 and 2019, PPNR was $207.3 million and $206.6 million, respectively.
• The net interest margin, calculated on a tax-equivalent basis, increased to 2.39% for the quarter ended June 30, 2020 from 2.35% for the immediately preceding quarter. The yield on interest earnings assets declined by 0.44% while the cost of interest bearing liabilities declined by 0.60% for the quarter ended June 30, 2020 compared to the quarter ended March 31, 2020. The net interest margin was 2.52% for the quarter ended June 30, 2019.
• The average cost of total deposits declined by 0.56% to 0.80% for the quarter ended June 30, 2020, from 1.36% for the immediately preceding quarter ended March 31, 2020. The cost of total deposits was 1.70% for the quarter ended June 30, 2019. On a spot basis, the average annual percentage yield ("APY") on total deposits declined to 0.65% at June 30, 2020 from 1.12% at March 31, 2020 and 1.42% at December 31, 2019.
• The provision for credit losses totaled $25.4 million for the quarter ended June 30, 2020 compared to $125.4 million for the immediately preceding quarter ended March 31, 2020. The provision for credit losses was $150.8 million for the six months ended June 30, 2020. For the quarter and six months ended June 30, 2019, the Company recorded a provision for (recovery of) loan losses, under the incurred loss model, of $(2.7) million and $7.5 million, respectively.
• Non-interest bearing demand deposits grew by $1.3 billion, or 28%, for the quarter ended June 30, 2020, to 23% of total deposits compared to 18% of total deposits at March 31, 2020. Total deposits increased by $1.1 billion during the quarter ended June 30, 2020. Average non-interest bearing demand deposits increased by $944.5 million for the quarter ended June 30, 2020 compared to the immediately preceding quarter, and by $1.4 billion compared to the quarter ended June 30, 2019. Growth in non-interest bearing demand deposits for the quarter ended June 30, 2020 was positively impacted by proceeds from Paycheck Protection Program ("PPP") loans.
• Loans and leases, including operating lease equipment, grew by $656 million for the quarter ended June 30, 2020. Loan and lease growth for the quarter ended June 30, 2020 included growth of $827 million in PPP loans and $308 million in mortgage warehouse outstandings, partially offset by expected declines in certain other portfolio segments. We funded over 3,500 PPP loans totaling $876 million during the quarter ended June 30, 2020.
• The net unrealized loss on investment securities available for sale improved to $2.6 million at June 30, 2020 from $249.8 million at March 31, 2020, in response to both declines in market rates and tightening spreads.
• Stockholders' equity increased by $238.9 million during the quarter ended June 30, 2020 to $2.8 billion. The increase was driven by the recovery of $180.6 million in accumulated other comprehensive income related to the reduction in unrealized losses on investment securities available for sale and by the retention of earnings. At June 30, 2020, book value per common share and tangible book value per common share were $29.81 and $28.97, respectively.
• During the quarter ended June 30, 2020, the Company completed an underwritten public offering of $300 million aggregate principal amount of its 5.125% subordinated notes, augmenting Tier 2 capital.

Capital

The Company's and BankUnited, N.A.'s regulatory capital ratios at June 30, 2020 and December 31, 2019 were as follows:

On a fully-phased in basis with respect to the adoption of CECL, the Company's and the Bank's CET1 risk-based capital ratios would have been 11.9% and 13.2%, respectively, at June 30, 2020.

Loans and Leases

A comparison of loan and lease portfolio composition at the dates indicated follows (dollars in thousands):

Loan and lease growth for the quarter ended June 30, 2020 was primarily driven by $827 million in PPP loans and a $308 million increase in mortgage warehouse outstandings. At June 30, 2020, mortgage warehouse commitments totaled $1.7 billion, with line utilization of 71%, compared to $1.3 billion at December 31, 2019, with line utilization of 59%. The decline in multi-family balances was driven primarily by continued runoff of the New York portfolio. Commercial and industrial loans declined by $317 million, as a result of lower production, payoffs and lower line utilization.

At June 30, 2020, March 31, 2020 and December 31, 2019, the residential portfolio included $805 million, $760 million and $676 million, respectively, of GNMA early buyout loans. Residential activity for the quarter included purchases of approximately $243 million in GNMA early buyout loans, offset by approximately $199 million in re-poolings and paydowns. Residential and other consumer loans, excluding GNMA early buyout loans, experienced a net decline of approximately $101 million driven by higher prepayment speeds.

The following table presents loan portfolio sub-segments that, in light of current circumstances, were initially identified for enhanced monitoring and the amount within each of those sub-segments for which payment deferrals were granted (dollars in thousands):

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The rate of re-deferral requests to date for these portfolio segments, in the aggregate is 17%, compared to the initial deferral rate of 55%.

Asset Quality and the Allowance for Credit Losses

The following table presents the allowance for credit losses ("ACL") at the dates indicated, related ACL coverage ratios, as well as net charge-off rates for the quarters ended June 30, 2020, March 31, 2020 and the year ended December 31, 2019 (dollars in thousands):

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The ACL at June 30, 2020 represents management's estimate of lifetime expected credit losses from the loan portfolio given our assessment of historical data, current conditions and a reasonable and supportable economic forecast as of the balance sheet date. The estimate was informed by Moody's economic scenarios published in June 2020, economic information provided by additional sources, certain data obtained during the month of June reflecting the impact of recent events on individual borrowers and other relevant information. For the quarter ended June 30, 2020, the Company recorded a provision for credit losses of $25.4 million, which included a reduction of $6.2 million related to unfunded loan commitments.

The following table summarizes the activity in the ACL for the periods indicated (in thousands):

Charge-offs for the quarter ended June 30, 2020 included $16.1 million related to one BFG franchise borrower.

Non-performing loans totaled $204.2 million or 0.86% of total loans at June 30, 2020, compared to $204.8 million or 0.88% of total loans at December 31, 2019. Non-performing loans included $45.7 million of the guaranteed portion of SBA loans on non-accrual status at both June 30, 2020 and December 31, 2019, representing 0.19% and 0.20% of total loans at June 30, 2020 and December 31, 2019, respectively.

Net interest income

Net interest income for the quarter ended June 30, 2020 increased to $190.3 million from $180.6 million for the immediately preceding quarter ended March 31, 2020 and was relatively flat to net interest income of $190.9 million for the quarter ended June 30, 2019. Interest income decreased by $26.4 million for the quarter ended June 30, 2020 compared to the immediately preceding quarter, and by $59.5 million, compared to the quarter ended June 30, 2019. Interest expense decreased by $36.1 million compared to the immediately preceding quarter and by $58.9 million compared to the quarter ended June 30, 2019. Decreases in both interest income and expense resulted from decreases in market interest rates, partially offset by the impact of increases in average interest earning assets and average interest bearing liabilities.

The Company’s net interest margin, calculated on a tax-equivalent basis, increased by 0.04% to 2.39% for the quarter ended June 30, 2020, from 2.35% for the immediately preceding quarter ended March 31, 2020, and decreased from 2.52% for the quarter ended June 30, 2019. The Company's net interest margin, calculated on a tax-equivalent basis, was 2.37% for the six months ended June 30, 2020, compared to 2.53% for the six months ended June 30, 2019. The interest rate spread increased to 2.13% for the quarter ended June 30, 2020 from 1.97% for the quarter ended March 31, 2020 and 2.10% for the quarter ended June 30, 2019 as declines in the cost of interest bearing liabilities outpaced declines in the yield on interest earning assets.

The increase in the net interest margin for the quarter ended June 30, 2020 compared to the quarter ended March 31, 2020 resulted from the decline in the cost of interest bearing liabilities, particularly the cost of deposits, outpacing the decline in yields on interest earning assets. Offsetting factors contributing to the increase in the net interest margin for the quarter ended June 30, 2020 compared to the immediately preceding quarter ended March 31, 2020 included:

• The most significant factor leading to the increase in the net interest margin for the quarter ended June 30, 2020 compared to the immediately preceding quarter was the decline in the cost of deposits. The average rate on interest bearing deposits decreased to 1.01% for the quarter ended June 30, 2020, from 1.66% for the quarter ended March 31, 2020. This decline reflected initiatives taken to lower rates paid on deposits following actions by the Fed in the fourth quarter of 2019 and first quarter of 2020. We expect the cost of interest bearing deposits to continue to decline; at June 30, 2020, approximately $2.3 billion or 35% of the time deposit portfolio, with an average rate of 1.91%, has not yet repriced since the last Fed rate cut.
  
  For the quarter ended June 30, 2020, the increase in average non-interest bearing demand deposits as a percentage of average total deposits also positively impacted the cost of deposits and the net interest margin.

• The average rate paid on borrowings declined to 1.97% for the quarter ended June 30, 2020, from 2.51% for the quarter ended March 31, 2020, reflecting declines in rates on overnight and short-term FHLB advances as well as the impact of PPPLF borrowings priced at rates lower than the average rate paid by the Company on its borrowings.
• The tax-equivalent yield on loans decreased to 3.71% for the quarter ended June 30, 2020, from 4.18% for the quarter ended March 31, 2020. The most significant factor contributing to this decrease was the decline in benchmark interest rates, which impacted the level of prepayments of higher rate loans as well as rates earned on both existing floating rate assets and new production. The addition of lower yielding PPP loans to the balance sheet also contributed to the decline in the yield on loans.
• The tax-equivalent yield on investment securities decreased to 2.48% for the quarter ended June 30, 2020 from 2.81% for the quarter ended March 31, 2020. The most significant factor contributing to this decrease was the impact of decreases in benchmark interest rates on both existing floating rate assets and new securities added to the portfolio.

Significant offsetting factors contributing to the decrease in the net interest margin for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019 included:

• The average rate on interest bearing deposits decreased to 1.01% for the quarter ended June 30, 2020, from 2.04% for the quarter ended June 30, 2019,
• The average rate on borrowings declined to 1.97% for the quarter ended June 30, 2020, from 2.62% for the quarter ended June 30, 2019.
• The tax-equivalent yield on loans decreased to 3.71% for the quarter ended June 30, 2020, from 4.52% for the quarter ended June 30, 2019.
• The tax-equivalent yield on investment securities decreased to 2.48% for the quarter ended June 30, 2020 from 3.61% for the quarter ended June 30, 2019. The most significant factors contributing to this decrease were the decreases in benchmark interest rates impacting new purchases of investments and re-pricing of variable rate securities, and to a lesser extent, increased prepayment speeds.

Non-interest income

Non-interest income increased to $38.4 million for the quarter ended June 30, 2020 from $23.3 million for the immediately preceding quarter ended March 31, 2020 and from $35.3 million for the quarter ended June 30, 2019. Non-interest income totaled $61.6 million and $71.6 million for the six months ended June 30, 2020 and 2019, respectively.

The main reason for the increase in non-interest income for the quarter ended June 30, 2020 compared to the quarter ended March 31, 2020 was an increase in gain on investment securities; gain on investment securities was $6.8 million for the quarter ended June 30, 2020 compared to a loss of $(3.5) million for the immediately preceding quarter. Non-interest income for the prior quarter included a $5.0 million unrealized loss on marketable equity securities, resulting from the impact on markets of the COVID-19 crisis, which improved to a $1.1 million unrealized gain for the quarter ended June 30, 2020.

The increase in non-interest income for the quarter ended June 30, 2020 compared to the corresponding period in 2019 was primarily related to increases in gains on investment securities and gains on sale of loans of $2.7 million and $2.2 million, respectively.

Deposit service charges for the quarter ended June 30, 2020 were impacted by fee waivers related to COVID-19 and to lower levels of activity, also related to COVID-19.

Non-interest expense

Non-interest expense declined by $12.5 million to $106.4 million for the quarter ended June 30, 2020 from $118.9 million for the immediately preceding quarter ended March 31, 2020 and by $13.7 million to $120.1 million for the quarter ended June 30, 2019. Non-interest expense totaled $225.2 million and $246.8 million for the six months ended June 30, 2020 and 2019, respectively, a decline of approximately 9%.

• Employee compensation and benefits decreased by $10.0 million for the quarter ended June 30, 2020 compared to the immediately preceding quarter ended March 31, 2020. Compensation and benefits declined by $8.4 million and $14.7 million, respectively, for the quarter and six months ended June 30, 2020, compared to the corresponding periods in 2019. These decreases reflected reductions in headcount related to our BankUnited 2.0 initiative. Additionally, compensation cost for the quarter ended June 30, 2020 was reduced by (i) lower variable compensation costs, (ii) a decrease in equity based compensation expense related to the impact of a declining stock price on liability-classified awards and (iii) in comparison to the prior quarter, seasonally lower payroll taxes and benefits.
• Professional fees decreased by $3.8 million and $8.5 million, respectively, for the quarter and six months ended June 30, 2020, primarily due to the consulting services in 2019 related to our BankUnited 2.0 initiative.
• Costs incurred directly related to the implementation of our BankUnited 2.0 initiative during the six months ended June 30, 2020 and 2019 totaled $0.3 million and $12.1 million, respectively.
• For both the quarter and six months ended June 30, 2020, non-interest expense included approximately $1.5 million in costs directly related to COVID-19.

Earnings Conference Call and Presentation

A conference call to discuss quarterly results will be held at 9:00 a.m. ET on Wednesday, July 29, 2020 with Chairman, President and Chief Executive Officer, Rajinder P. Singh, and Chief Financial Officer, Leslie N. Lunak.

The earnings release and slides with supplemental information relating to the release will be available on the Investor Relations page under About Us on www.bankunited.com prior to the call. Due to recent demand for conference call services, participants are encouraged to listen to the call via a live Internet webcast at http://ir.bankunited.com/. The dial in telephone number for the call is (855) 798-3052 (domestic) or (234) 386-2812 (international). The name of the call is BankUnited, Inc. and the conference ID for the call is 4097326. A replay of the call will be available from 12:00 p.m. ET on July 29th through 11:59 p.m. ET on August 5th by calling (855) 859-2056 (domestic) or (404) 537-3406 (international). The conference ID for the replay is 4097326. An archived webcast will also be available on the Investor Relations page of www.bankunited.com.

About BankUnited, Inc.

BankUnited, Inc., with total assets of $34.7 billion at June 30, 2020, is the bank holding company of BankUnited, N.A., a national bank headquartered in Miami Lakes, Florida with 74 banking centers in 14 Florida counties and 5 banking centers in the New York metropolitan area at June 30, 2020.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the Company’s current views with respect to, among other things, future events and financial performance.

The Company generally identifies forward-looking statements by terminology such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “could,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates, ” "forecasts" or the negative version of those words or other comparable words. Any forward-looking statements contained in this press release are based on the historical performance of the Company and its subsidiaries or on the Company’s current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations contemplated by the Company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including (without limitations) those relating to the Company’s operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by the COVID-19 pandemic. If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, the Company’s actual results may vary materially from those indicated in these statements. These factors should not be construed as exhaustive. The Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. Information on these factors can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K, which are available at the SEC’s website (www.sec.gov).

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Non-GAAP Financial Measures

PPNR is a non-GAAP financial measure. Management believes this measure is relevant to understanding the performance of the Company attributable to elements other than the provision for credit losses, particularly in view of the adoption of the CECL accounting methodology, which may impact comparability of operating results to prior periods. This measure also provides a meaningful basis for comparison to other financial institutions and is a measure frequently cited by investors. The following table reconciles the non-GAAP financial measurement of PPNR to the comparable GAAP financial measurement of income before income taxes for the three and six months ended June 30, 2020 and 2019 and the three months ended March 31, 2020 (in thousands):

ACL to total loans, excluding government insured residential loans, PPP loans and MWL is a non-GAAP financial measure. Management believes this measure is relevant to understanding the adequacy of the ACL coverage, excluding the impact of loans with a zero-loss expectation. Disclosure of this non-GAAP financial measure also provides a meaningful base for comparison to other financial institutions. The following table reconciles the non-GAAP financial measurement of ACL to total loans, excluding government insured residential loans, PPP loans and MWL to the comparable GAAP financial measurement of ACL to total loans at June 30, 2020 (dollars in thousands):

Tangible book value per common share is a non-GAAP financial measure. Management believes this measure is relevant to understanding the capital position and performance of the Company. Disclosure of this non-GAAP financial measure also provides a meaningful base for comparison to other financial institutions as it is a metric commonly used in the banking industry. The following table reconciles the non-GAAP financial measurement of tangible book value per common share to the comparable GAAP financial measurement of book value per common share at June 30, 2020 (in thousands except share and per share data):

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