BankUnited, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. BankUnited is a bank holding company with banking centers in Florida and the New York metropolitan area, as well as national commercial lending and deposit platforms. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance and position
- Profitability: Net income was $62.3 million, up 13.5% from $54.9 million in Q1 2016. Diluted EPS was $0.57 versus $0.51. Return on average assets was 0.91%; return on average equity was 10.08%. The quarter included $2.6 million of excess tax benefits from share-based awards, adding approximately $0.02 to EPS.
- Revenue and margins: Net interest income before loan-loss provision was $230.6 million, up from $206.8 million. Tax-equivalent net interest income was $240.7 million versus $214.1 million. Tax-equivalent net interest margin was 3.70%, down from 3.83% a year earlier but up from 3.67% in Q4 2016. Total non-interest income was $28.1 million, compared with $23.2 million.
- Credit costs: Provision for loan losses was $12.1 million, versus $3.7 million a year earlier, primarily reflecting higher taxi medallion reserves. Net charge-offs were $13.8 million; the allowance for loan and lease losses was $151.3 million, or 0.79% of loans.
- Expenses and taxes: Non-interest expense was $156.6 million, up from $142.1 million. The increase included higher FDIC indemnification asset amortization, employee costs, deposit insurance and professional fees. The effective tax rate was 30.8%, versus 34.8%.
- Balance sheet: Total assets were $28.0 billion at March 31, compared with $27.9 billion at year-end. Loans, including premiums and deferred items, were $19.5 billion, up $65 million from year-end; deposits were $19.9 billion, up $433 million. Available-for-sale securities totaled $6.4 billion.
- Cash flow and liquidity: Operating cash flow was $35.4 million, down from $58.1 million in Q1 2016. Investing activities used $275.2 million; financing activities provided $30.9 million. Cash and cash equivalents ended the quarter at $239.4 million, down $208.9 million from year-end. Management reported liquidity ratios of 190% for 30-day liquidity and 145% for one-year liquidity; unencumbered available-for-sale securities were $4.5 billion, with $3.6 billion of available FHLB borrowing capacity.
- Debt and capital: FHLB advances were $4.8 billion, down from $5.2 billion at year-end. Notes and other borrowings were $402.8 million, including $393.2 million of senior notes. Company regulatory capital ratios included 8.66% Tier 1 leverage, 11.84% CET1 and 12.63% total risk-based capital; the Bank’s ratios were higher. Both exceeded applicable well-capitalized requirements. Book value per share was $23.71 and tangible book value per share was $22.98.
Material changes versus comparable periods
- Net income and EPS rose year over year, supported by higher net interest income and non-interest income. Average earning assets increased $3.8 billion, including $2.6 billion of average loan growth and $1.1 billion of average securities growth.
- Interest expense increased $9.0 million as average interest-bearing liabilities and deposit costs rose. The tax-equivalent loan yield declined year over year, while the overall net interest margin fell 13 basis points.
- Provision for loan losses increased $8.4 million year over year. Commercial loan charge-offs rose, with taxi medallion loans an important credit concern.
- Non-performing non-covered loans were 0.69% of total non-covered loans, and non-covered non-performing assets were 0.49% of total assets. Total non-performing assets were $143.9 million, compared with $149.0 million at year-end.
- Comprehensive income was $79.7 million, versus $38.3 million in Q1 2016, reflecting positive other comprehensive income in 2017, including gains on available-for-sale securities and derivatives.
Outlook, risks, contingencies and unusual items
- Management gave no specific numerical earnings or growth guidance. It expected net interest margin and spread to continue declining, assuming a stable rate environment, as higher-yielding covered loans run off and newer loans carry lower market yields. Deposit competition and market interest rates may affect funding costs and margins.
- Taxi medallion lending is a significant identified credit risk: the portfolio was approximately $169 million, about 98% concentrated in New York City. Approximately 81.5% of directly secured loans had modeled pro forma debt-service coverage below 1.00; estimated current LTV averaged about 90%, and 54.7% had LTV above 100%. The company reported $5.9 million of taxi medallion charge-offs for the quarter and was no longer originating these loans.
- Commercial real estate and commercial lending, equipment leasing asset values, interest-rate changes, deposit competition, and estimates for loan losses and FDIC recoveries are other exposures. The FDIC indemnification asset was $459.3 million; expected future cash collections from the FDIC, net of expected amortization, were estimated at $233.8 million. The commercial loss-sharing agreement continued to require reimbursement of certain recoveries through May 21, 2017; single-family coverage runs through May 21, 2019.
- Management said adoption of the new expected-credit-loss standard (CECL) could materially affect the allowance and results, but the impact was not yet estimable. The quarter also included adoption of share-based compensation guidance that contributed the $2.6 million tax benefit.
- Outstanding lending-related commitments totaled $3.14 billion, including $2.19 billion of unfunded lines of credit; not all commitments are expected to be drawn. Management considered the likelihood of material impact from ordinary-course litigation remote. The filing reported no material changes to previously disclosed risk factors, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether taxi medallion loan performance, collateral values, restructurings and reserves continue to improve or deteriorate.
- How loan growth, covered-loan runoff, deposit pricing and interest-rate movements affect net interest margin and funding costs.
- Whether the $151.3 million loan-loss allowance remains adequate, particularly for commercial lending and taxi medallions.
- Realization timing and assumptions for the FDIC indemnification asset, including the approaching end of commercial recovery-sharing provisions.
- Liquidity, deposit mix—including $2.2 billion of brokered deposits—and capital levels as the balance sheet grows; also monitor the future CECL adoption impact.