Business context and reporting period
BankUnited, Inc. is a bank holding company whose subsidiary operates 79 banking centers in Florida and the New York metropolitan area and offers commercial lending and deposit products through national platforms. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; balance-sheet comparisons are to December 31, 2019.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net income | $76.5 million | $81.5 million | $45.6 million | $147.4 million |
| Diluted EPS | $0.80 | $0.81 | $0.47 | $1.45 |
| Net interest income, GAAP | $190.3 million | $190.9 million | $370.9 million | $381.8 million |
| Provision for credit losses | $25.4 million | Recovery of $2.7 million | $150.8 million | $7.5 million |
| Non-interest income | $38.4 million | $35.3 million | $61.6 million | $71.6 million |
| Non-interest expense | $106.4 million | $120.1 million | $225.2 million | $246.8 million |
- Tax-equivalent net interest margin was 2.39% in Q2, up from 2.35% in Q1 2020 but below 2.52% in Q2 2019. The average cost of total deposits was 0.80% in Q2 2020 versus 1.70% a year earlier; management said it expected interest-bearing deposit costs to continue declining.
- Pre-provision net revenue, a non-GAAP measure, was $122.3 million in Q2, compared with $85.0 million in Q1 and $106.1 million in Q2 2019. Six-month PPNR was $207.3 million versus $206.6 million.
- At June 30, total assets were $34.75 billion, loans were $23.83 billion, and deposits were $26.07 billion. Since year-end, assets grew from $32.87 billion, loans from $23.15 billion, and deposits from $24.39 billion. Cash and cash equivalents were $402.2 million.
- The allowance for credit losses (ACL) was $266.1 million, or 1.12% of loans, compared with $108.7 million and 0.47% at year-end. Six-month operating cash flow was $320.8 million; investing cash outflow was $2.14 billion and financing cash inflow was $2.01 billion. Cash increased $187.6 million over the six months.
- Borrowings included $4.65 billion of FHLB and PPPLF borrowings, $722.3 million of notes and other borrowings, and $100 million of federal funds purchased. The company issued $300 million of 5.125% subordinated notes, due in 2030, in June.
- At June 30, the company reported regulatory capital ratios of 8.46% Tier 1 leverage, 12.19% CET1, and 14.34% total risk-based capital. BankUnited’s corresponding ratios were 9.29%, 13.42%, and 14.31%.
Material changes versus comparable periods
- Q2 net income and diluted EPS were modestly lower year over year; six-month net income fell substantially, primarily reflecting the large credit-loss provision recorded under CECL amid the COVID-19 downturn. Q1 2020 included a $125.4 million provision, compared with $25.4 million in Q2.
- CECL adoption on January 1 increased the loan ACL by $27.3 million and reduced retained earnings by $23.8 million. The company also changed its reasonable-and-supportable economic forecast period from five years to two years in Q2.
- Total loans grew by $680 million in the first half. Growth included $827 million of PPP loans and a $392 million rise in mortgage warehouse balances, partly offset by declines in other portfolios. The company funded more than 3,500 PPP loans totaling $876 million in Q2; $21 million of associated fees remained to be recognized at quarter-end.
- Commercial criticized loans increased sharply: special-mention balances rose to $1.34 billion, or 7.3% of commercial loans, from $288 million, or 1.6%, at March 31. Substandard accruing balances rose to $561 million from $239 million. Management attributed most of the deterioration to COVID-19.
- Q2 comprehensive income was $257.1 million, including $180.6 million of other comprehensive income, as unrealized securities losses improved. The net unrealized loss on available-for-sale securities narrowed to $2.6 million from $249.8 million at March 31; the six-month comprehensive result remained a loss of $65.6 million.
- Stockholders’ equity was $2.76 billion, down from $2.98 billion at year-end. The first-half decrease included share repurchases of $101.0 million, dividends of $43.8 million, CECL adoption, and other comprehensive loss. The company suspended share repurchases during the pandemic.
Outlook, risks, contingencies and unusual items
- The filing gives no specific earnings or revenue guidance. Management expected loan production in many portfolio segments to remain muted in the near term and warned that credit-loss expense and the ACL could become more volatile or rise if economic forecasts deteriorated.
- Management reported $9.8 billion of available liquidity, a 235% 30-day liquidity ratio, and a 207% one-year liquidity ratio. It said it had not experienced unusual deposit outflows, material credit-line usage increases, or liquidity disruption and expected liquidity needs to be met over the next 12 months.
- Commercial borrowers had received $3.02 billion of initial payment deferrals, representing 17% of the commercial portfolio, through July 17; $696 million, or 4%, was subject to a re-deferral request. Deferrals were generally for 90 days. Management cautioned that government support and deferrals could delay visible increases in delinquencies, non-performing assets, and charge-offs.
- COVID-19-related pressure was most evident in hotel, retail, restaurant and fitness exposures. Management identified $3.31 billion of selected commercial segments for enhanced monitoring. It also noted potential stress in energy-related lease assets. Reported non-performing assets were $209.2 million, or 0.60% of assets, at June 30, but management said pandemic effects might not yet be reflected.
- The securities portfolio had $101.1 million of gross unrealized losses at June 30, concentrated particularly in private-label commercial mortgage securities and CLOs. No ACL was recorded on available-for-sale securities; management stated it expected to recover their amortized cost and did not expect to be forced to sell them before recovery.
- Other risks include lower interest rates and pressure on asset yields, changes in borrower collateral values, geographic and commercial real-estate concentrations, and operating-lease equipment residual values. The company reported $4.74 billion of lending-related commitments, including unfunded credit lines, loan commitments, and commitments to purchase loans.
- Management considered ordinary-course litigation unlikely to have a material effect. Separately, the company received a Department of Justice subpoena in October 2019 seeking documents concerning its former taxi-medallion business and said it was cooperating.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. It described additional controls for CECL and remote work.
Important facts for investors to verify
- Whether criticized loans, payment-deferral re-requests, delinquencies, non-performing assets, and charge-offs increased after June 30 as borrower relief expired.
- How sensitive future ACL requirements and earnings are to updated economic forecasts, particularly unemployment, GDP, and commercial property conditions.
- Whether hotel, retail, franchise-finance, and other concentrated exposures remain adequately collateralized and performing.
- Whether reported liquidity and capital remain resilient as deposits, PPP balances, borrowing maturities, and credit-line utilization change.
- Whether unrealized securities losses are recovered as management expects and whether market valuation changes or required asset sales affect equity.
- The status and potential implications, if any, of the DOJ subpoena concerning the former taxi-medallion business.