BankUnited, Inc. — Q2 2021 Form 10-Q
Business and period. BankUnited is a bank holding company operating primarily in Florida and the New York metropolitan area, with commercial lending and deposit platforms serving customers nationally. This unaudited filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020.
Financial performance and position
- Earnings: Q2 net income was $104.0 million ($1.11 diluted EPS), versus $76.5 million ($0.80) a year earlier. First-half net income was $202.8 million ($2.17 diluted EPS), versus $45.6 million ($0.47). First-half annualized return on average equity was 13.2%; return on average assets was 1.15%.
- Revenue and margins: Q2 net interest income was $198.3 million, up $8.0 million year over year. Tax-equivalent net interest margin was 2.37%, down from 2.39% in both Q1 2021 and Q2 2020. Q2 non-interest income was $32.8 million, down from $38.4 million; non-interest expense was $118.5 million, up from $106.4 million. First-half pre-tax, pre-provision net revenue (non-GAAP) was $215.9 million, versus $207.3 million.
- Credit provision: The company recorded a $27.5 million Q2 recovery of credit losses and a $55.5 million first-half recovery, compared with provisions of $25.4 million and $150.8 million in the prior-year periods. Management attributed the recoveries mainly to an improved economic forecast.
- Cash flow: First-half operating cash flow was $577.8 million; investing cash outflow was $542.1 million and financing cash inflow was $462.0 million. Cash and cash equivalents increased $497.6 million to $895.3 million.
- Balance sheet and funding: Total assets were $35.7 billion; deposits were $28.6 billion, up $1.1 billion from year-end. Loans were $22.9 billion, down $981 million. Investment securities were $10.2 billion, up approximately $1.1 billion. FHLB advances were $2.68 billion and notes and other borrowings were $722 million; federal funds purchased were zero. Stockholders’ equity was $3.16 billion.
- Credit quality: Allowance for credit losses was $175.6 million, or 0.77% of loans, versus $257.3 million, or 1.08%, at year-end. Non-performing loans were $292.7 million (1.28% of loans), versus $244.5 million (1.02%) at year-end; the increase was primarily attributed to one $69 million commercial and industrial relationship. Criticized and classified loans declined $541 million in Q2 to $2.1 billion. Government-insured residential loans more than 90 days delinquent totaled $732 million and are excluded from the company’s non-performing-loan measure.
- Capital and liquidity: The Bank’s CET1 and total risk-based capital ratios were 15.11% and 15.70%, respectively; management said capital exceeded well-capitalized requirements. At June 30, liquidity ratios were 301% for available liquidity to volatile liabilities, 270% for 30-day total liquidity, 424% for one-year liquidity and 219% for liquidity stress-test coverage. Management said liquidity needs were expected to be met over the next 12 months.
Changes, outlook and risks
- Deposit growth, especially non-interest-bearing deposits, outpaced loan growth; the company deployed excess liquidity into securities. Non-interest-bearing deposits were 31% of deposits at June 30, versus 25% at year-end. Management noted that elevated liquidity and low interest rates weighed on margin.
- Total loans fell during the first half, with commercial loan demand and line utilization remaining below pre-pandemic levels. Management expected loan production to increase in the second half of 2021, subject to the pandemic and economic recovery.
- Management expected criticized and classified loans to decline further if recovery continued as forecast, but warned that credit deterioration, delinquencies and charge-offs could increase as deferrals and modifications ended. At June 30, loans under short-term deferral or modified under the CARES Act totaled $497 million, down from $762 million at March 31.
- COVID-19, uncertain economic conditions, low rates, commercial real estate and borrower concentrations remain important risks. Commercial exposure includes hospitality and retail; the company also disclosed energy-related equipment exposure. New York rent regulation may affect certain multifamily borrowers. Management stated that its stress tests indicated sufficient capital to withstand a severe downturn.
- On July 21, 2021, the Board authorized up to $150 million in additional share repurchases, alongside $37.7 million remaining under a prior authorization. Timing and amount depend on market conditions, capital, retained earnings and regulatory requirements. No quantified earnings guidance was provided.
- Management considered pending legal proceedings unlikely to have a material effect. The filing reported no material changes to the risk factors in the 2020 Form 10-K and concluded disclosure controls were effective.
Key facts for investors to verify
- Whether the sharp credit-loss recoveries and lower allowance remain appropriate as the economic outlook and borrower performance evolve.
- Whether the increase in non-performing loans, including the identified $69 million relationship, leads to further losses; track commercial risk ratings and loans exiting deferral or modification programs.
- Whether loan growth resumes and excess deposits can be deployed without further pressure on net interest margin and asset yields.
- Exposure and collateral trends in commercial real estate, hospitality, New York rent-regulated multifamily, and energy-related leasing.
- How any share repurchases affect capital and liquidity, and whether reported liquidity and regulatory capital remain within management’s stated limits.