BankUnited, Inc. — 2014 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. BankUnited is a bank holding company operating through its national bank subsidiary, with 101 Florida branches and six New York-area banking centers. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where applicable.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Interest income | $201.2 million | $187.7 million | $583.5 million | $550.2 million |
| Net interest income, before provision | $173.2 million | $164.1 million | $505.6 million | $482.0 million |
| Provision for loan losses | $5.4 million | $2.6 million | $21.0 million | $19.5 million |
| Non-interest income | $14.5 million | $13.7 million | $65.1 million | $47.0 million |
| Non-interest expense | $108.9 million | $96.6 million | $318.0 million | $264.9 million |
| Income before taxes | $73.4 million | $78.6 million | $231.7 million | $244.6 million |
| Net income | $53.6 million | $54.3 million | $157.4 million | $156.5 million |
| Diluted EPS | $0.51 | $0.52 | $1.50 | $1.51 |
- Margins: Tax-equivalent net interest margin was 4.58% for Q3, down from 5.70%; for the first nine months it was 4.75%, down from 5.92%. Management attributed the pressure chiefly to lower yields on new loans and the declining share of higher-yielding acquired loans. Total interest-bearing-liability cost fell to 0.89% in Q3 from 0.93%.
- Balance sheet at September 30: Total assets were $17.68 billion versus $15.05 billion at December 31, 2013. Loans were $11.09 billion versus $9.05 billion; deposits were $12.83 billion versus $10.53 billion. Investment securities were $4.30 billion versus $3.64 billion.
- Funding and equity: FHLB advances and other borrowings totaled $2.59 billion versus $2.41 billion at year-end; stockholders’ equity was $2.04 billion versus $1.93 billion. The quarterly dividend was $0.21 per share, unchanged from the comparable quarter.
- Cash flow and liquidity: Nine-month operating cash flow was negative $51.6 million, investing cash flow negative $2.29 billion, and financing cash flow positive $2.44 billion; cash and equivalents ended at $348.1 million. Management explained that noncash accretion on acquired credit-impaired loans weighs on reported operating cash flow, while loan repayments/resolutions and FDIC reimbursements are reported in investing activities. Bank liquidity measures included liquid assets of 8.3% of total assets and a one-year liquidity ratio of 147.7%. The Bank reported $2.1 billion of available FHLB capacity and $3.3 billion of unencumbered securities.
- Credit and capital: Allowance for loan and lease losses was $78.9 million, up from $69.7 million at year-end. Non-performing assets were $50.1 million, down from $76.2 million; non-covered non-performing assets equaled 0.15% of total assets. Regulatory capital ratios were 11.2% Tier 1 leverage, 17.2% Tier 1 risk-based, and 18.0% total risk-based, above applicable well-capitalized thresholds.
Material changes versus comparable periods
- Q3 net income declined slightly year over year, while nine-month net income increased slightly. Despite higher net interest income, Q3 pretax income fell as expenses increased; nine-month non-interest expense rose to $318.0 million from $264.9 million.
- Loan and deposit balances expanded substantially. New commercial lending and residential mortgage purchases contributed to loan growth; the company also expanded its New York franchise.
- Non-interest income for the first nine months rose to $65.1 million from $47.0 million, including improved gains on covered-loan sales. However, income from resolution of covered assets declined to $39.8 million from $64.4 million.
- Amortization of the FDIC indemnification asset increased to $48.9 million for the first nine months from $21.8 million. The FDIC indemnification asset declined to $1.02 billion from $1.21 billion at year-end.
- The indirect auto lending business was terminated; substantially all of its loans, with recorded investment of $302.8 million, were sold in June. The reported total pretax benefit, including related exit costs and allowance effects, was $1.8 million.
Outlook, commentary, risks and unusual items
- Outlook: Management expects net interest margin and spread to decline further as lower-yielding new loans grow and higher-yielding FSB-acquired assets run off. Deposit growth is expected to continue. Management stated that expected liquidity sources should meet requirements over the next 12 months; no earnings or revenue guidance was provided.
- FDIC loss sharing: Loss sharing for commercial and consumer assets and covered securities ended May 21, 2014. The Bank now bears credit risk on the remaining formerly covered commercial/consumer loans and securities; recoveries due to the FDIC may continue through May 21, 2017. Residential shared-loss coverage continues under a separate agreement.
- Tax item: Q3’s 27.0% effective tax rate benefited from a $5.0 million release of uncertain-tax-benefit reserves following a statute lapse. In the same quarter, the liability for uncertain state tax positions increased by $15.6 million, net of federal tax benefit, related to certain amended and recently filed returns.
- Interest-rate and valuation risks: The company relies on modeled interest-rate sensitivity, which is subject to assumptions about rates, depositor behavior and market conditions. Securities included $174 million of Level 3 private-label residential mortgage-backed securities valued using significant unobservable inputs. Unrealized securities losses were attributed primarily to higher market rates; management reported no securities identified as other-than-temporarily impaired in the first nine months.
- Regulatory and contingencies: The company identified Re-Remic holdings of $203 million that might be treated as impermissible under Volcker Rule requirements, with compliance then required by July 2015. Legal proceedings were described as routine, with a material adverse impact considered remote. The filing reported no material change to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether net interest margin continues to compress, and how quickly legacy acquired-loan accretion and related income run off.
- Credit quality and allowance adequacy as the loan book grows, particularly commercial real estate, commercial and industrial, and residential purchased loans.
- The timing, collectability and assumptions underlying the $1.02 billion FDIC indemnification asset, including the effect of ended commercial loss-sharing coverage.
- Deposit funding costs, borrowing levels, liquidity capacity and the ability to fund continued loan growth without weakening capital or margins.
- Potential sensitivity of Level 3 securities, derivatives and interest-rate models to changing rates and valuation assumptions.
- Resolution of the state tax positions and the company’s compliance approach for potentially affected Re-Remic securities under the Volcker Rule.