Business context and reporting period
BankUnited, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The Florida- and New York-based bank also lends through national commercial platforms. Its portfolio includes legacy loans covered by FDIC loss-sharing agreements, alongside loans originated or acquired since the 2009 FSB acquisition.
Financial performance and position
| Metric | Q2 2016 / June 30, 2016 | Comparison |
|---|---|---|
| Net income | $56.7 million; diluted EPS $0.52 | Q2 2015: $46.6 million; $0.43 per diluted share |
| Six-month net income | $111.6 million; diluted EPS $1.03 | Six months 2015: $93.1 million; $0.87 per diluted share |
| Net interest income | Q2: $214.3 million; six months: $421.2 million | Q2 2015: $181.0 million; six months 2015: $353.7 million |
| Tax-equivalent net interest margin | Q2: 3.75%; six months: 3.79% | Q2 2015: 3.95%; six months 2015: 3.99% |
| Assets / loans | Assets $26.3 billion; loans, net $18.1 billion | December 31, 2015: assets $23.9 billion; loans, net $16.5 billion |
| Deposits / borrowings | Deposits $18.2 billion; FHLB advances $4.9 billion; notes and other borrowings $402.8 million | December 31, 2015: deposits $16.9 billion; FHLB advances $4.0 billion; notes and other borrowings $402.5 million |
| Cash flow, six months | Operating +$143.4 million; investing −$2.254 billion; financing +$2.203 billion; cash increased $92.2 million | 2015 operating cash flow: +$76.2 million |
- Q2 non-interest income was $28.9 million versus $21.1 million; non-interest expense was $144.1 million versus $123.4 million. The increase in expense included higher FDIC indemnification asset amortization.
- At June 30, stockholders’ equity was $2.33 billion. Regulatory capital ratios exceeded well-capitalized thresholds: holding-company CET1 11.83%, total risk-based capital 12.59%, and Tier 1 leverage 8.74%. Book value and tangible book value per share were $22.38 and $21.63.
- Liquidity measures were above policy thresholds: the 30-day ratio was 144% and the one-year ratio 141%. Available capacity included $2.3 billion at the FHLB, $442 million at the Federal Reserve, and $70 million in federal funds lines.
Material changes versus comparable periods
- Q2 net income rose about 22% year over year, and six-month net income rose about 20%. Higher average loan and securities balances drove interest income growth, while interest expense also increased.
- Margin pressure continued: management attributed the year-over-year decline mainly to new loans earning lower current-market yields than legacy acquired loans and the cost of $400 million of senior notes issued in November 2015. Average total deposit cost rose to 0.66% in Q2 from 0.60% a year earlier.
- Loans grew $1.6 billion from year-end, including $1.7 billion of growth in new loans, while acquired loans declined $111 million. Deposits increased $1.3 billion from year-end.
- Available-for-sale securities increased to $5.69 billion from $4.86 billion at year-end; their net unrealized gain was $144 million. No securities were identified as other-than-temporarily impaired.
- The allowance for loan and lease losses rose to $135.7 million from $125.8 million. The company extended the historical loss look-back period used in its allowance methodology from 12 to 16 quarters; management estimated this increased the allowance by approximately $9 million at March 31, 2016, largely offset by lower qualitative factors.
Outlook, commentary, risks and contingencies
- Management expects net interest margin and spread to continue declining, though at a decreasing rate, as lower-yielding new loans become a larger share of the portfolio and higher-yielding acquired loans run off. It also expects covered-loan and FDIC indemnification asset runoff to continue, while new lending and deposits grow.
- Management stated that liquidity needs are expected to be met over the next 12 months. It also expects to continue quarterly sales of covered loans and anticipates growth in SBF loan sales and servicing revenue and in the equipment operating-lease portfolio.
- Credit risk warrants attention in taxi medallion lending: exposure was about $200 million, with $118 million rated substandard. Loans 30 or more days delinquent were $16.6 million (8.3% of the portfolio), versus $7.9 million (3.7%) at year-end; $34.3 million was on non-accrual. Management reported that underlying medallion values and market liquidity had declined and that it was no longer originating these loans.
- Other relevant risks include sensitivity to interest rates and funding costs, commercial real estate and commercial lending exposures, securities valuation and extension risk, and asset values in the railcar and other equipment leasing portfolio. The company reported $2.60 billion of lending-related commitments; actual funding needs may be lower because some commitments expire unused.
- The FDIC indemnification asset declined to $633.7 million from $739.9 million at year-end; management said amortization will continue and may increase if estimated future FDIC payments decrease. The company had $62 million of Re-Remic securities it believed could be subject to Volcker Rule restrictions and stated it must comply for legacy covered funds by July 2017.
- Management considered pending legal proceedings unlikely to have a material effect and reported no material changes to previously disclosed risk factors. Disclosure controls were deemed effective. The filing provides no specific earnings guidance.
Important facts for investors to verify
- Whether loan growth and deposit growth can continue without further significant pressure on net interest margin or funding costs.
- Changes in taxi medallion delinquencies, criticized classifications, collateral values, charge-offs and reserves, and any spillover to broader commercial credit quality.
- Allowance adequacy as the loan book grows and as the revised loss-estimation methodology and qualitative adjustments evolve.
- The pace and assumptions behind FDIC indemnification asset amortization, covered-loan resolutions and sales, and related earnings volatility.
- Capital and liquidity headroom, including reliance on FHLB advances and the composition and market valuation of the securities portfolio.
- Execution of Volcker Rule compliance for Re-Remics and future effects of accounting standards not yet adopted, including CECL.