BankUnited : Reports First Quarter 2014 Results, Sustained Organic Growth

BankUnited, Inc. (the “Company”) (NYSE: BKU) today announced financial results for the quarter ended March 31, 2014.

For the quarter ended March 31, 2014, the Company reported net income of $55.3 million, or $0.53 per diluted share, generating a return on average stockholders’ equity of 11.41% and a return on average assets of 1.46%. The Company reported net income of $48.2 million, or $0.47 per diluted share, for the quarter ended March 31, 2013.

John Kanas, Chairman, President and Chief Executive Officer, said, “We are obviously pleased with this quarter’s results. We are particularly encouraged by the sustained, balanced growth across all of our lending platforms.”

Performance Highlights

• New loans grew by $1.1 billion during the first quarter of 2014 to $8.6 billion.
• Total deposits increased by $591 million for the quarter ended March 31, 2014 to $11.1 billion.
• The net interest margin, calculated on a tax-equivalent basis, was 5.05% for the quarter ended March 31, 2014 compared to 5.93% for the quarter ended March 31, 2013 and 5.24% for the immediately preceding quarter ended December 31, 2013. The net interest margin continues to be impacted by the origination of new loans at current market yields lower than those on the covered loan portfolio.
• The cost of deposits continues to trend downward. The cost of deposits was 0.60% for the first quarter of 2014 as compared to 0.70% for the first quarter of 2013. Excluding the impact of hedge accounting and accretion of fair value adjustments, the cost of deposits was 0.55% for the quarter ended March 31, 2014.
• Earnings for the quarter ended March 31, 2014 benefited from a net gain on the sale of covered commercial and consumer loans and commercial other real estate owned (“OREO”) with an aggregate carrying value of $84 million. Better than previously projected pricing resulted in a net favorable pre-tax impact on quarterly earnings of $11.2 million, inclusive of the impact of FDIC loss sharing and direct expenses of the sale. Loss sharing under the terms of BankUnited, N.A.’s Commercial Shared-Loss Agreement with the FDIC will terminate on May 21, 2014.
• Book value and tangible book value per common share grew to $19.47 and $18.80, respectively, at March 31, 2014.

Capital

The Company and its banking subsidiary continue to exceed all regulatory guidelines required to be considered well capitalized. The Company’s regulatory capital ratios at March 31, 2014 were as follows:

Loans and Leases

Loans, net of premiums, discounts and deferred fees and costs, increased to $10.0 billion at March 31, 2014 from $9.1 billion at December 31, 2013. New loans grew by $1.1 billion to $8.6 billion at March 31, 2014. Covered loans declined to $1.3 billion at March 31, 2014 from $1.5 billion at December 31, 2013.

The New York franchise contributed $406 million to new loan growth for the quarter while the Florida franchise contributed $368 million and our national platforms contributed $312 million. We refer to our three commercial lending subsidiaries, our mortgage warehouse lending operations, our residential loan purchase program and our indirect auto platform as national platforms. At March 31, 2014, the new loan portfolio included $3.5 billion, $2.0 billion and $3.1 billion attributable to the Florida franchise, the New York franchise and our national platforms, respectively.

For the quarter ended March 31, 2014, new commercial loans, including commercial loans, commercial real estate loans and leases, grew $0.9 billion to $6.4 billion, reflecting the continued success of lending operations in New York as well as continued growth in the portfolios of our Florida franchise and lending subsidiaries. New residential loans grew by $142 million to $2.0 billion during the first quarter of 2014, primarily as a result of the continuation of the Company’s residential loan purchase program. New consumer loans, comprised primarily of indirect auto loans, grew by $85 million.

A comparison of portfolio composition at March 31, 2014 and December 31, 2013 follows:

Asset Quality

Asset quality remains strong. The ratio of non-performing new loans to total new loans was 0.24% at March 31, 2014 as compared to 0.31% at December 31, 2013. The ratio of total non-performing loans to total loans was 0.30% at March 31, 2014 as compared to 0.39% at December 31, 2013. At March 31, 2014, non-performing assets totaled $59.7 million, including $29.6 million of OREO, as compared to $76.2 million, including $40.6 million of OREO, at December 31, 2013. At March 31, 2014, 64% of total non-performing assets were covered assets.

For the quarters ended March 31, 2014 and 2013, the Company recorded provisions for loan losses of $8.4 million and $12.0 million, respectively. Of these amounts, $0.8 million and $4.8 million, respectively, related to provisions for covered loans, and $7.6 million and $7.2 million, respectively, related to provisions for new loans.

The provision related to new loans for the quarter ended March 31, 2014 reflects growth in the new loan portfolio. The provision related to new loans for the quarter ended March 31, 2013 was impacted by specific reserves recognized on impaired loans, particularly related to one commercial relationship.

The provisions for loan losses related to covered loans were significantly mitigated by offsetting increases in non-interest income recorded in “Net loss on indemnification asset.”

The following tables summarize the activity in the allowance for loan and lease losses for the quarters ended March 31, 2014 and 2013 (in thousands):

Credit risk continues to be limited, though to a declining extent, by the Loss Sharing Agreements with the FDIC. At March 31, 2014, covered loans represented 13% of the total loan portfolio.

Deposits

At March 31, 2014, deposits totaled $11.1 billion compared to $10.5 billion at December 31, 2013. Demand deposits, including non-interest bearing and interest bearing deposits, comprised 26% of total deposits at March 31, 2014. The average cost of deposits was 0.60% for the quarter ended March 31, 2014 as compared to 0.70% for the quarter ended March 31, 2013. The decrease in the average cost of deposits was attributable to both the growth in non-interest bearing deposits as a percentage of average total deposits and a decline in market rates of interest.

Net interest income

Net interest income for the quarter ended March 31, 2014 increased to $166.5 million from $153.8 million for the quarter ended March 31, 2013.

The Company’s net interest margin, calculated on a tax-equivalent basis, was 5.05% for the quarter ended March 31, 2014 as compared to 5.93% for the quarter ended March 31, 2013. Significant factors impacting this expected trend in net interest margin for the quarter ended March 31, 2014 included:

• The tax-equivalent yield on loans declined to 7.04% from 10.54% for the quarter ended March 31, 2014 compared to the quarter ended March 31, 2013, primarily because new loans, originated at yields lower than those on the covered loan portfolio, comprised a greater percentage of total loans.
• The yield on new loans decreased to 3.63% for the quarter ended March 31, 2014 from 4.03% for the quarter ended March 31, 2013, primarily reflecting the impact of lower market interest rates on new production over the last year compared to periods prior to 2013.
• The yield on covered loans for the quarter ended March 31, 2014 increased to 26.14% from 24.12% for the quarter ended March 31, 2013. This increase in yield on covered loans primarily reflected improvements in expected cash flows and corresponding transfers from non-accretable difference to accretable yield.
• The average rate on interest bearing liabilities declined to 0.88% for the quarter ended March 31, 2014 from 0.99% for the quarter ended March 31, 2013, primarily due to declining market interest rates.
• Non-interest bearing deposits comprised a greater percentage of average total deposits for the quarter ended March 31, 2014 than for the quarter ended March 31, 2013. Average non-interest bearing deposits were 20% of average total deposits for the quarter ended March 31, 2014 as compared to 15% of average total deposits for the quarter ended March 31, 2013.

Interest income for the quarters ended March 31, 2014 and 2013 included proceeds of $8.5 million and $10.2 million, respectively, from the sale of loans from a pool of ACI loans carried at zero. The impact of sales of loans from this pool is expected to decrease in the future. 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 carrying value of the loans. As the Company’s expected cash flows from ACI loans have increased since the FSB Acquisition (as defined below), the Company has reclassified amounts from non-accretable difference to accretable yield.

Changes in accretable yield on ACI loans for the three months ended March 31, 2014 and the year ended December 31, 2013 were as follows (in thousands):

Non-interest income

Non-interest income totaled $30.2 million for the quarter ended March 31, 2014 as compared to $20.1 million for the quarter ended March 31, 2013.

The consolidated statement of income line items Provision for losses on covered loans, Income from resolution of covered assets, net, Gain (loss) on sale of covered loans and Gain (loss) on covered other real estate owned relate to transactions in the covered assets. The line item Net loss on indemnification asset represents the mitigating impact of FDIC indemnification on gains and losses arising from these transactions in the covered assets. The impact on pre-tax earnings of these transactions, net of FDIC indemnification, for the quarter ended March 31, 2014 was $17.5 million compared to $1.7 million for the quarter ended March 31, 2013.

Income from resolution of covered assets, net was $13.1 million for the quarter ended March 31, 2014, compared to $19.2 million for the quarter ended March 31, 2013. This decrease in income resulted mainly from lower income from commercial recoveries and residential paid in full resolutions, offset in part by lower losses on foreclosure and short sale resolutions.

The Company recognized gains on the sale of covered loans of $19.3 million for the quarter ended March 31, 2014, compared to losses of $0.8 million for the quarter ended March 31, 2013. The Company sold covered commercial and consumer loans and commercial OREO in the first quarter of 2014, in anticipation of the termination of commercial loss sharing in May 2014. Pre-tax gains and the impact of FDIC loss sharing were recognized on these sales in the consolidated statement of income as follows:

Gains were recognized on these sales due primarily to better than expected pricing. Covered residential loans continue to be sold on a quarterly basis. Gains of $1.3 million were recognized on the sale of covered residential loans in the quarter ended March 31, 2014, compared to losses of $0.8 million recognized in the quarter ended March 31, 2013. Improvements in the results of the sales were primarily due to improved pricing.

Net loss on indemnification asset was $16.9 million for the quarter ended March 31, 2014, compared to $11.7 million for the quarter ended March 31, 2013. Variances in net loss on indemnification asset are directly related to variances in income from resolution of covered assets, net, the gain (loss) on sale of covered loans, the provision for losses on covered loans and gain (loss) on covered OREO.

Securities gains for the quarter ended March 31, 2013 included $1.6 million related to the sale of securities in conjunction with the merger of Herald National Bank into BankUnited.

Other non-interest income increased to $9.2 million for the quarter ended March 31, 2014 from $5.3 million for the quarter ended March 31, 2013. The most significant component of the increase was an increase of $2.9 million in rental income on operating leases.

Non-interest expense

Non-interest expense totaled $102.5 million for the quarter ended March 31, 2014 as compared to $82.8 million for the quarter ended March 31, 2013.

Increased compensation and occupancy and equipment expense for the quarter ended March 31, 2014 compared to the quarter ended March 31, 2013 related to the Company’s overall growth and its expansion into New York.

Amortization of the FDIC indemnification asset was $15.7 million for the quarter ended March 31, 2014 compared to $2.3 million for the quarter ended March 31, 2013. As the expected cash flows from ACI loans have increased, resulting in an increased yield on ACI loans as discussed above, expected cash flows from the FDIC indemnification asset have decreased, ultimately resulting in a negative yield on the FDIC indemnification asset.

For the quarter ended March 31, 2014, foreclosure and OREO expense was $1.0 million as compared to $1.4 million for the quarter ended March 31, 2013. For the quarter ended March 31, 2014, (gain) loss on OREO, net was $(2.7) million as compared to $0.2 million for the quarter ended March 31, 2013. These changes reflect continuing trends of lower levels of OREO and foreclosure activity and an improving real estate market.

Provision for income taxes

The effective income tax rate decreased to 35.6% for the quarter ended March 31, 2014 from 39.1% for the quarter ended March 31, 2013. This decrease primarily reflects the impact of increases in tax-exempt income and changes resulting from state tax law changes in the first quarter of 2014.

Non-GAAP Financial Measure

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 comparability 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 March 31, 2014 (in thousands except share and per share data):

Earnings Conference Call and Presentation

A conference call to discuss quarterly results will be held at 9:00 a.m. ET on Thursday, April 24, 2014 with Chairman, President and Chief Executive Officer, John A. Kanas, and Chief Financial Officer, Leslie N. Lunak.

The earnings release will be available on the Investor Relations page under About Us on www.bankunited.com prior to the call. The call may be accessed via a live Internet webcast at www.bankunited.com or through a dial in telephone number at (888) 713-4199 (domestic) or (617) 213-4861 (international). The name of the call is BankUnited, Inc. and the confirmation number for the call is 14384832. Participants may pre-register for the call on the Investor Relations page on www.bankunited.com. A replay of the call will be available from 1:00 p.m. ET on April 24, 2014 through 11:59 p.m. ET on May 1, 2014 by calling (888) 286-8010 (domestic) or (617) 801-6888 (international). The pass code for the replay is 53910405. An archived webcast will also be available on the Investor Relations page of www.bankunited.com.

About BankUnited, Inc. and the FSB Acquisition

BankUnited, Inc., with total assets of $15.8 billion at March 31, 2014, is the bank holding company of BankUnited, N.A., a national bank headquartered in Miami Lakes, Florida with 99 branches in 15 Florida counties and 6 banking centers in the New York metropolitan area at March 31, 2014.

The Company was organized by a management team led by its Chairman, President and Chief Executive Officer, John A. Kanas in 2009. On May 21, 2009, BankUnited acquired substantially all of the assets and assumed all of the non-brokered deposits and substantially all other liabilities of BankUnited, FSB from the FDIC, in a transaction referred to as the FSB Acquisition. Concurrently with the FSB Acquisition, BankUnited entered into two loss sharing agreements, or the Loss Sharing Agreements, which covered certain legacy assets, including the entire legacy loan portfolio and OREO, and certain purchased investment securities. Assets covered by the Loss Sharing Agreements are referred to as “covered assets” (or, in certain cases, “covered loans”). The Loss Sharing Agreements do not apply to subsequently purchased or originated loans (“new loans”) or other assets. Pursuant to the terms of the Loss Sharing Agreements, the covered assets are subject to a stated loss threshold whereby the FDIC will reimburse BankUnited for 80% of losses, including certain interest and expenses, up to the $4.0 billion stated threshold and 95% of losses in excess of the $4.0 billion stated threshold. The Company’s current estimate of cumulative losses on the covered assets is approximately $4.3 billion. The Company has received $2.5 billion from the FDIC in reimbursements under the Loss Sharing Agreements for claims filed for incurred losses as of March 31, 2014.

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” 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 relating to the Company’s operations, financial results, financial condition, business prospects, growth strategy and liquidity. 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, 2013 available at the SEC’s website (www.sec.gov).