BankUnited, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited. BankUnited is a bank holding company operating primarily in Florida and the New York metropolitan area, with additional national lending platforms.
Financial performance and position
| Metric | Q3 2020 | Comparison |
|---|---|---|
| Net interest income, GAAP | $187.5 million | $185.7 million in Q3 2019 |
| Provision for credit losses | $29.2 million | $1.8 million in Q3 2019 |
| Net income / diluted EPS | $66.6 million / $0.70 | $76.2 million / $0.77 in Q3 2019 |
| Tax-equivalent net interest margin | 2.32% | 2.41% in Q3 2019; 2.39% in Q2 2020 |
| PPNR, non-GAAP | $115.1 million | $102.2 million in Q3 2019 |
For the nine months ended September 30, net income was $112.1 million, or $1.17 diluted EPS, versus $223.6 million, or $2.23, in 2019. Net interest income was $558.4 million versus $567.5 million; the tax-equivalent margin was 2.35% versus 2.49%. The nine-month provision for credit losses was $180.1 million versus $9.4 million. PPNR, a non-GAAP measure, was $322.5 million versus $308.8 million.
- Balance sheet at September 30: Assets $35.0 billion; loans $23.8 billion gross and $23.5 billion net; investment securities $9.3 billion; deposits $26.6 billion; stockholders’ equity $2.9 billion.
- Credit allowance and asset quality: Allowance for credit losses (ACL) was $274.1 million, or 1.15% of loans, versus $108.7 million at year-end 2019. Nonperforming loans were $200.3 million and nonperforming assets $204.5 million; nonperforming loans were 0.84% of total loans.
- Cash flow, nine months: Operating activities provided $634.9 million; investing activities used $2.57 billion; financing activities provided $2.09 billion. Cash and cash equivalents ended at $369.8 million.
- Funding and debt: FHLB and PPPLF borrowings totaled $4.12 billion; federal funds purchased were $180 million; notes and other borrowings were $722.6 million. The company issued $300 million of 5.125% subordinated notes in June 2020, due 2030.
- Liquidity and capital: Management reported approximately $9.7 billion of available liquidity, a 267% 30-day liquidity ratio and a 223% one-year liquidity ratio. BankUnited’s CET1 and total risk-based capital ratios were 13.48% and 14.37%, respectively; the company reported capital above regulatory well-capitalized thresholds.
Material changes versus comparable periods
- Q3 net income declined year over year despite higher net interest income, primarily reflecting a much larger credit-loss provision. Nine-month earnings fell substantially, with CECL adoption and COVID-19-related expected losses weighing on results.
- Deposit costs fell: the average total deposit cost was 0.57% in Q3, compared with 1.67% a year earlier. Non-interest-bearing demand deposits increased to 26% of total deposits at quarter-end, from 18% at December 31, 2019.
- Total loans grew $624 million from year-end, including $830 million of PPP loans and a $482 million increase in mortgage warehouse lending, partly offset by runoff in other commercial and commercial real estate segments. Investment securities increased about $1.5 billion from year-end as liquidity was deployed amid weaker lending conditions.
- Commercial criticized and classified assets rose materially: pass-rated commercial loans were 85.9% of commercial loans at September 30, versus 97.5% at year-end 2019. Substandard accruing loans reached $1.38 billion. Nonperforming loans had not increased materially, but management cautioned that deferrals and assistance programs could delay visible deterioration.
- The company repurchased approximately $101 million of stock in Q1 and paid $65.7 million in dividends during the nine months; it temporarily suspended its share repurchase program during the pandemic.
Outlook, risks and unusual items
- No specific earnings or full-year financial guidance is provided. Management expected loan production in many segments to remain muted in the near term and deposit costs to continue declining.
- Management warned that credit-loss expense and the ACL could be volatile and increase if economic conditions or forecasts deteriorate. The ACL uses a two-year reasonable-and-supportable forecast, and estimates depend on uncertain economic and borrower conditions.
- COVID-19 remained the principal risk: effects could include weaker borrower performance, higher charge-offs and provisions, lower demand, margin pressure from low interest rates, reduced fee income, and operational, liquidity or capital impacts.
- COVID-related loan deferrals and modifications had declined from initial levels. At September 30, $1.1 billion of loans remained subject to short-term deferral or longer-term modification, or were being modified; by October 25, the amount was $983 million. Commercial deferrals/modifications or cases in process totaled $567 million at October 25.
- The company originated over 3,500 PPP loans totaling $876 million; $17 million of associated fees remained to be recognized, and management expected most forgiveness in Q1 2021.
- Unusual credit item: Q3 charge-offs included $22.1 million on one commercial and industrial relationship that was rated substandard before the pandemic. Securities unrealized losses were concentrated in private-label commercial mortgage-backed securities and CLOs; a $0.6 million ACL was recorded for one private-label commercial MBS security.
- Management said liquidity remained adequate and no material operational or control failures had been identified. It reported that legal proceedings were not expected to be material, but disclosed a Department of Justice subpoena received in October 2019 concerning the Bank’s former taxi medallion lending business; the company is cooperating.
Important facts for investors to verify
- Whether criticized/classified commercial loans, especially hotel, retail, franchise finance and other pandemic-exposed credits, migrate to nonaccrual status or generate further losses as relief periods end.
- Whether the $274.1 million ACL adequately reflects evolving economic conditions, forecast assumptions and borrower risk, noting CECL makes direct comparison with 2019 less comparable.
- How much of the remaining deferred or modified loan balance returns to normal payment, and the subsequent credit performance of those borrowers.
- Whether the reported $9.7 billion liquidity availability and capital ratios remain resilient as funding needs, collateral values and credit exposures change.
- Whether investment-security valuations and unrealized losses, PPP fee recognition and forgiveness timing, and the DOJ taxi medallion investigation develop materially differently from management’s current assessment.