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BankUnited, Inc. Reports Second Quarter 2018 Results

July 24, 2018

MIAMI LAKES, Fla.--(BUSINESS WIRE)--Jul 24, 2018--BankUnited, Inc. (the “Company”) (NYSE:BKU) today announced financial results for the quarter ended June 30, 2018.

For the quarter ended June 30, 2018, the Company reported net income of $89.9 million, or $0.82 per diluted share compared to $66.4 million, or $0.60 per diluted share, for the quarter ended June 30, 2017, a 37% increase in diluted earnings per share. For the six months ended June 30, 2018, the Company reported net income of $175.1 million, or $1.59 per diluted share, compared to $128.7 million, or $1.17 per diluted share, for the six months ended June 30, 2017.

The annualized return on average stockholders’ equity for the six months ended June 30, 2018 was 11.49% compared to 10.21% for the six months ended June 30, 2017, while the annualized return on average assets was 1.16% compared to 0.93% for the same periods.

Rajinder Singh, President and Chief Executive Officer, said, “BankUnited turned in another solid quarter from an earnings standpoint; reported EPS increased 37% over the comparable quarter of the prior year. We also had some excellent news from Moody’s Investor Service, who recently upgraded the Company’s issuer rating.”

Performance Highlights

Net interest income increased by $15.7 million to $255.3 million for the quarter ended June 30, 2018 from $239.6 million for the quarter ended June 30, 2017. Interest income increased by $50.0 million, driven by increases in the average balances of loans and investment securities outstanding as well as increases in yields on interest earning assets. Interest expense increased by $34.3 million, driven primarily by increases in average interest bearing deposits and an increase in the cost of interest bearing liabilities. For the six months ended June 30, 2018, net interest income increased by $32.9 million to $503.1 million from $470.2 million for the six months ended June 30, 2017. The net interest margin, calculated on a tax-equivalent basis, was 3.60% for the quarter ended June 30, 2018 compared to 3.56% for the immediately preceding quarter ended March 31, 2018 and 3.76% for the quarter ended June 30, 2017. Significant factors contributing to the decline in the net interest margin from the comparable quarter of the prior year were (i) an increase in the cost of interest bearing liabilities; (ii) the impact on tax equivalent yields of the reduction in the statutory federal income tax rate; and (iii) although yields on all categories of interest earning assets increased, non-covered loans and investment securities were added to the balance sheet at yields lower than the existing yield on earning assets, which is impacted by the yield on covered loans. Non-covered loans and leases, including equipment under operating lease, grew by $431 million during the quarter. For the six months ended June 30, 2018, non-covered loans and leases grew by $497 million. For the quarter ended June 30, 2018, total deposits declined by $62 million. Total deposits increased by $299 million for the six months ended June 30, 2018. Growth in non-interest bearing demand deposits accounted for $245 million of this increase. Book value per common share grew to $29.17 at June 30, 2018 from $28.32 at December 31, 2017 while tangible book value per common share increased to $28.44 from $27.59 over the same period. During the six months ended June 30, 2018, under the terms of the share repurchase program authorized by its Board of Directors, the Company repurchased 1.3 million shares of its common stock for an aggregate purchase price of $54.4 million. During the quarter ended June 30, 2018, the Company repurchased 0.1 million shares for an aggregate purchase price of $5.8 million. In July 2018 Moody’s Investor Service upgraded the Company and BankUnited, N.A.’s issuer rating to Baa3 from Ba1.

Capital

The Company and its banking subsidiary continue to exceed all regulatory guidelines required to be considered well capitalized. The Company’s and BankUnited, N.A.’s regulatory capital ratios at June 30, 2018 were as follows:

Loans and Leases

Loans, including premiums, discounts and deferred fees and costs, totaled $21.9 billion at June 30, 2018 compared to $21.4 billion at December 31, 2017. Non-covered loans grew to $21.4 billion while covered loans declined to $451 million at June 30, 2018.

For the quarter ended June 30, 2018, non-covered commercial loans, including commercial real estate loans, commercial and industrial loans, and loans and leases originated by our commercial lending subsidiaries, grew by $342 million to $17.6 billion. Non-covered residential and other consumer loans grew by $88 million to $4.4 billion during the second quarter of 2018.

The Company’s national platforms and the Florida franchise contributed net non-covered loan growth of $280 million and $301 million, respectively, for the quarter ended June 30, 2018, while balances for the New York franchise declined by $150 million. We refer to our commercial lending subsidiaries, our mortgage warehouse lending operations, the small business finance unit and our residential loan purchase program as national platforms. The most significant contributors to growth across the national platforms were mortgage warehouse lending at $104 million, residential at $89 million and commercial lending subsidiaries at $94 million. Growth in the Florida franchise was primarily driven by C&I and owner occupied real estate loans, which grew by $305 million, partially offset by declines across other portfolio segments. The decline in New York was due to a $215 million decline in the multi-family category, partially offset by net growth of $65 million across other portfolio segments. At June 30, 2018, the non-covered loan portfolio included $7.7 billion, $5.8 billion and $7.9 billion attributable to the Florida franchise, the New York franchise and the national platforms, respectively.

A comparison of loan portfolio composition at the dates indicated follows:

Asset Quality and Allowance for Loan and Lease Losses

For the quarters ended June 30, 2018 and 2017, the Company recorded provisions for loan losses of $9.0 million and $13.6 million, respectively, substantially all of which related to non-covered loans. For the six months ended June 30, 2018 and 2017, the Company recorded provisions for loan losses of $12.1 million and $25.7 million, respectively, substantially all of which related to non-covered loans. The provision related to taxi medallion loans totaled $11.1 million and $7.4 million for the quarters ended June 30, 2018 and 2017, respectively and $14.0 million and $16.9 million for the six months ended June 30, 2018 and 2017, respectively.

Significant offsetting factors impacting the decrease in the provision for loan losses related to non-covered loans for the quarter ended June 30, 2018 as compared to the quarter ended June 30, 2017 were (i) lower loan growth and (ii) a net decrease in reserves related to certain qualitative factors; partially offset by (iii) an increase in the provision related to taxi medallion loans; (iv) an increase in the provision related to specific reserves for other loans; and (v) the relative impact on the provision of changes in quantitative loss factors.

Significant offsetting factors impacting the decrease in the provision for loan losses related to non-covered loans for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 were (i) lower loan growth; (ii) a decrease in the provision related to taxi medallion loans and (iii) a net decrease in the relative impact on the provision of changes in qualitative loss factors; partially offset by (iv) the relative impact on the provision of changes in quantitative loss factors.

Non-covered, non-performing loans totaled $186.4 million or 0.87% of total non-covered loans at June 30, 2018, compared to $172.0 million or 0.82% of total non-covered loans at December 31, 2017. Non-performing taxi medallion loans comprised $87.2 million or 0.41% of total non-covered loans at June 30, 2018 and $106.1 million or 0.51% of total non-covered loans at December 31, 2017. At June 30, 2018 and December 31, 2017, the entire taxi medallion portfolio was on non-accrual status.

The ratios of the allowance for non-covered loan and lease losses to total non-covered loans and to non-performing, non-covered loans were 0.63% and 72.11%, respectively, at June 30, 2018, compared to 0.69% and 84.03%, at December 31, 2017. The decrease in the ratio of the allowance for non-covered loan and lease losses to non-performing, non-covered loans was primarily a result of the increase in non-accrual multi-family loans during the six months ended June 30, 2018 and charge-offs, related primarily to taxi medallion loans. The annualized ratio of net charge-offs to average non-covered loans was 0.21% for the six months ended June 30, 2018, compared to 0.38% for the year ended December 31, 2017. The annualized ratio of charge-offs of taxi medallion loans to average non-covered loans was 0.13% for the six months ended June 30, 2018, compared to 0.29% for the year ended December 31, 2017.

The following table summarizes the activity in the allowance for loan and lease losses for the periods indicated (in thousands):

Charge-offs related to taxi medallion loans totaled $8.1 million and $5.9 million for the quarters ended June 30, 2018 and 2017, respectively, and $13.5 million and $11.8 million for the six months ended June 30, 2018 and 2017.

Deposits

At June 30, 2018, deposits totaled $22.2 billion compared to $21.9 billion at December 31, 2017. The average cost of total deposits was 1.19% for the quarter ended June 30, 2018, compared to 1.04% for the immediately preceding quarter ended March 31, 2018, and 0.79% for the quarter ended June 30, 2017. The average cost of total deposits was 1.12% for the six months ended June 30, 2018, compared to 0.76% for the six months ended June 30, 2017.

Net interest income

Net interest income for the quarter ended June 30, 2018 increased to $255.3 million from $239.6 million for the quarter ended June 30, 2017. Net interest income was $503.1 million for the six months ended June 30, 2018, compared to $470.2 million for the six months ended June 30, 2017. Increases in interest income were partially offset by increases in interest expense. The increases in interest income were primarily attributable to increases in the average balances of loans and investment securities and related average yields. Interest expense increased due to increases in average interest bearing deposits and the cost of funds.

The Company’s net interest margin, calculated on a tax-equivalent basis, was 3.60% for the quarter ended June 30, 2018, compared to 3.56% for the immediately preceding quarter ended March 31, 2018 and 3.76% for the quarter ended June 30, 2017. Net interest margin, calculated on a tax-equivalent basis, was 3.58% for the six months ended June 30, 2018, compared to 3.73% for the six months ended June 30, 2017.

Significant offsetting factors impacting the declines in net interest margin for the quarter and six months ended June 30, 2018, compared to the quarter and six months ended June 30, 2017, included:

The tax-equivalent yield on loans increased to 5.43% and 5.35%, respectively, for the quarter and six months ended June 30, 2018, compared to 5.24% and 5.15% for the quarter and six months ended June 30, 2017, reflecting increased yields on both non-covered and covered loans. The tax-equivalent yield on non-covered loans was 3.96% and 3.89%, respectively, for the quarter and the six months ended June 30, 2018, compared to 3.78% and 3.70% for the quarter and six months ended June 30, 2017. The most significant factor contributing to the increased yield on non-covered loans was the impact of increases in benchmark interest rates. The tax-equivalent yield on covered loans increased to 70.82% and 67.96%, respectively, for the quarter and six months ended June 30, 2018 from 54.51% and 52.10% for the quarter and six months ended June 30, 2017. The tax-equivalent yield on investment securities increased to 3.33% and 3.19%, respectively, for the quarter and six months ended June 30, 2018 from 3.05% and 3.03% for the quarter and six months ended June 30, 2017. Tax-equivalent yields on non-covered loans and investment securities and the net interest margin were each negatively impacted by approximately 0.08% for the quarter ended June 30, 2018 as compared to the quarter ended June 30, 2017 as a result of the reduction in the statutory federal income tax rate. For the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, the tax rate change negatively impacted the net interest margin by approximately 0.08%. Growth of non-covered loans and investment securities at yields lower than the overall yield on interest earning assets. The average rate on interest bearing liabilities increased to 1.58% and 1.48%, respectively for the quarter and six months ended June 30, 2018, from 1.07% and 1.03% for the quarter and six months ended June 30, 2017, reflecting higher average rates on both interest bearing deposits and FHLB advances. Increases in the cost of interest bearing liabilities primarily reflect increases in market interest rates and extension of the duration of FHLB advances.

The Company’s net interest margin continues to be impacted by reclassifications from non-accretable difference to accretable yield on ACI loans. Non-accretable difference at acquisition represented the difference between the total contractual payments due and the cash flows expected to be received on these loans. The accretable yield on ACI loans represented the amount by which undiscounted expected future cash flows exceeded the recorded investment in the loans. As the Company’s expected cash flows from ACI loans have increased since the FSB Acquisition, the Company has reclassified amounts from non-accretable difference to accretable yield, resulting in increases in the yield on covered loans.

Changes in accretable yield on ACI loans for the six months ended June 30, 2018 and the year ended December 31, 2017 were as follows (in thousands):

Non-interest expense

Non-interest expense totaled $161.2 million and $323.1 million, respectively, for the quarter and six months ended June 30, 2018 compared to $160.4 million and $317.0 million for the quarter and six months ended June 30, 2017. The most significant components of non-interest expense are employee compensation and benefits and amortization of the FDIC indemnification asset. Employee compensation and benefits increased by $5.1 million and $12.5 million for the quarter and six months ended June 30, 2018, compared to the quarter and six months ended June 30, 2017, mainly due to an increase in the number of employees and compensation increases.

Amortization of the FDIC indemnification asset was $44.3 million and $84.6 million, respectively, for the quarter and six months ended June 30, 2018, compared to $45.7 million and $90.1 million for the quarter and six months ended June 30, 2017. The amortization rate increased to 76.79% and 66.78% for the quarter and six months ended June 30, 2018 from 41.76% and 38.92% for the quarter and six months ended June 30, 2017. As the expected cash flows from ACI loans have increased, expected cash flows from the FDIC indemnification asset have decreased, resulting in continued increases in the amortization rate. Although the amortization rate increased, total amortization expense declined due to the reduction in the average balance of the indemnification asset. At June 30, 2018, total future estimated amortization of the FDIC indemnification asset is approximately $104 million.

Provision for income taxes

The effective income tax rate was 23.2% and 23.1% for the quarter and six months ended June 30, 2018, compared to 30.4% and 30.6% for the quarter and six months ended June 30, 2017. These declines in the effective income tax rate were primarily attributable to the reduction of the statutory corporate federal income tax rate from 35% to 21%, effective January 1, 2018.

Non-GAAP Financial Measures

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. 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, 2018 (in thousands except share and per share data):

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