BankUnited, Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2018. BankUnited is a bank holding company operating primarily in Florida and the New York metropolitan area, with national commercial lending platforms. Comparisons below are with the corresponding 2017 periods unless otherwise noted.
Financial performance and position
| Metric | Q3 2018 / Sep. 30, 2018 | Comparable period / prior year-end |
|---|---|---|
| Net income | $97.3 million; diluted EPS $0.90 | Q3 2017: $67.8 million; diluted EPS $0.62 |
| Net interest income | $252.0 million | Q3 2017: $241.3 million |
| Tax-equivalent net interest margin | 3.51% | Q3 2017: 3.62% |
| Provision for loan losses | $1.2 million | Q3 2017: $37.9 million |
| Non-interest income | $38.7 million | Q3 2017: $53.3 million |
| Non-interest expense | $170.8 million | Q3 2017: $156.7 million |
| Total assets | $31.5 billion | Dec. 31, 2017: $30.3 billion |
| Gross loans | $21.9 billion | Dec. 31, 2017: $21.4 billion |
| Deposits | $22.3 billion | Dec. 31, 2017: $21.9 billion |
| Allowance for loan and lease losses | $124.7 million | Dec. 31, 2017: $144.8 million |
| Stockholders’ equity | $3.07 billion | Dec. 31, 2017: $3.03 billion |
For the first nine months, net income was $272.5 million versus $196.5 million; diluted EPS was $2.49 versus $1.79. Net interest income was $755.0 million versus $711.4 million. Operating cash flow was $403.9 million, investing cash flow was negative $937.1 million, and financing cash flow was positive $618.4 million. Cash and cash equivalents ended at $279.8 million.
At September 30, borrowings included $4.95 billion of FHLB advances, $175 million of federal funds purchased, and $402.8 million of notes and other borrowings. Regulatory capital ratios were above well-capitalized thresholds: company CET1 and total risk-based capital ratios were 13.2% and 13.8%; Bank ratios were 14.3% and 14.9%. Bank 30-day and one-year liquidity ratios were 182% and 155%, respectively.
Material changes versus prior periods
- Q3 net income increased 44%, supported by higher net interest income and a sharply lower loan-loss provision. The 2017 comparison included a large taxi-medallion-related provision and hurricane provision.
- Interest income rose, but funding costs increased faster: Q3 interest expense rose to $105.7 million from $68.2 million. The tax-equivalent margin declined to 3.51% from 3.62%, mainly as deposit and borrowing costs rose and the mix shifted toward lower-yielding non-covered assets.
- Non-interest income fell, primarily because Q3 2017 included $26.9 million of net securities gains, compared with $0.4 million in Q3 2018. Employee compensation also increased.
- Non-covered loans grew by $646 million from year-end, while covered loans fell by $143 million. Management continued to reduce New York multifamily exposure; that portfolio declined by $427 million over nine months.
- Non-performing loans increased to $206.3 million from $173.4 million at year-end; non-performing assets rose to $220.5 million from $185.4 million. The ALLL declined, and the allowance-to-non-performing-loans ratio fell to 60.5% from 84.0%.
- The company repurchased $150 million of stock during the first nine months. In October, the board authorized up to a further $150 million in repurchases.
Outlook, risks, contingencies, and unusual items
- No formal earnings or margin guidance is provided. Management expects deposit growth to continue alongside earning-asset growth and anticipates near-term runoff in New York multifamily loans. Future margins depend on rates, funding costs, asset mix, and deposit competition.
- In October, the FDIC consented to a final covered-loan portfolio sale planned for Q4: approximately $263 million UPB to be sold, with about $421 million UPB expected to be retained. Management estimated Q4 covered-loan accretion of $114 million and FDIC-asset amortization of $117 million, a net pre-tax impact of approximately negative $2.7 million; it estimated about $302 million of accretion after Q4 on retained loans. These estimates depend on sale price, prepayments, defaults, and loss severity and may differ materially. Management expects the FDIC indemnification asset to be amortized to zero or near zero in Q4 and does not expect covered-asset non-interest income to be material after 2018.
- Taxi medallion loans totaled $80 million, all on non-accrual and risk-rated substandard; delinquency and collateral values remain concerns. The portfolio allowance was $11.0 million, or 13.7% of balances.
- Hurricane Michael affected areas where some borrowers operate or hold collateral. Of approximately $677 million UPB identified as potentially exposed, borrowers initially reported little or no impact on about $628 million and moderate to significant impact on about $35 million. The company had not completed its assessment; effects on collateral, repayment, and credit losses remained uncertain.
- CECL adoption is expected in 2020. Management stated the impact could be material to financial position and results but could not yet reasonably estimate it. The expected January 2019 lease-accounting adoption was estimated to add approximately $100 million of lease liabilities and $90 million of right-of-use assets, with no material impact expected on results or cash flows.
- Legal proceedings were described as ordinary-course matters with remote likelihood of material impact. Management reported no material change to previously disclosed risk factors and concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether higher deposit and borrowing costs continue to outpace asset-yield growth and further pressure net interest margin.
- Actual Q4 covered-loan sale proceeds, FDIC-asset amortization, and realized accretion versus management’s estimates.
- Trends in non-performing loans, allowance coverage, and losses—especially taxi medallion and New York multifamily exposures.
- The eventual credit and collateral effects of Hurricane Michael on the identified $677 million portfolio.
- Capital and liquidity after any additional share repurchases, and progress and estimated impact of CECL implementation.