BankUnited, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2018. BankUnited operates in Florida and the New York metropolitan area, alongside national commercial lending and equipment-financing platforms.
Financial performance and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income, GAAP | $255.3 million | $239.6 million | $503.1 million | $470.2 million |
| Provision for loan losses | $9.0 million | $13.6 million | $12.1 million | $25.7 million |
| Non-interest income | $32.0 million | $29.9 million | $60.0 million | $58.0 million |
| Non-interest expense | $161.2 million | $160.4 million | $323.1 million | $317.0 million |
| Net income | $89.9 million | $66.4 million | $175.1 million | $128.7 million |
| Diluted EPS | $0.82 | $0.60 | $1.59 | $1.17 |
| Cash dividends per share | $0.21 | $0.21 | $0.42 | $0.42 |
- Q2 net income rose about 35%; first-half net income rose about 36%. First-half annualized return on average equity was 11.49% and return on average assets was 1.16%.
- Tax-equivalent net interest margin was 3.60% in Q2, versus 3.76% a year earlier and 3.56% in Q1 2018. First-half margin was 3.58%, versus 3.73%. Management attributed the year-over-year compression chiefly to higher funding costs, the lower federal tax rate’s effect on tax-equivalent yields, and growth in lower-yielding assets.
- At June 30, total assets were $31.35 billion, loans net of allowance were $21.73 billion, and investment securities were $7.10 billion. Deposits were $22.18 billion, FHLB advances $5.07 billion, notes and other borrowings $402.8 million, and stockholders’ equity $3.10 billion.
- Since December 31, 2017, total assets increased $1.00 billion, deposits increased $299 million, and loans including deferred fees and costs increased $453 million. Non-covered loans grew $505 million while covered loans declined $52 million.
- The allowance for loan and lease losses was $135.0 million, down from $144.8 million at year-end; it was 0.63% of loans. Non-performing loans were $188.6 million (0.87% of loans), and non-performing assets were $204.8 million (0.62% of assets).
- Operating cash flow for the first half was $229.9 million, compared with $128.9 million a year earlier. Investing activities used $573.9 million and financing activities provided $528.7 million; cash and cash equivalents ended at $379.3 million.
- Regulatory capital ratios at the holding company were 9.7% Tier 1 leverage, 13.4% CET1 and Tier 1 risk-based, and 14.0% total risk-based. The Bank’s corresponding ratios were 10.2%, 14.1%, 14.1%, and 14.7%.
Material changes, outlook and risks
- Interest income increased with loan and securities growth and higher asset yields, but interest expense rose faster: Q2 deposit expense increased $25.8 million and FHLB expense increased $8.6 million year over year. Average cost of interest-bearing deposits rose to 1.40% from 0.93%.
- Management reported $431 million of non-covered loan and lease growth in Q2. It expects deposits and earning assets to continue growing, while the New York multifamily portfolio is expected to decline near term as the company reduces that concentration.
- No specific earnings or revenue guidance is provided. Management expects liquidity needs to be met over the next 12 months. Liquidity measures were above internal thresholds: 30-day ratio 193% and one-year ratio 154%; unencumbered securities were $4.8 billion, with $3.6 billion of available FHLB capacity.
- The FDIC indemnification asset declined to $200.8 million from $295.6 million at year-end. The company forecasts sale of substantially all remaining covered assets in 2019, consistent with the expected end of the Single Family Shared-Loss Agreement; estimated future net pre-tax earnings impact from covered-loan accretion and indemnification-asset amortization was $236.4 million, subject to cash-flow estimates.
- Taxi medallion exposure remains a notable credit risk: $87.2 million outstanding, entirely on non-accrual and risk-rated substandard; $12.7 million allowance, 14.5% of exposure. Q2 and first-half taxi-loan charge-offs were $8.1 million and $13.5 million. Non-accrual multifamily loans also increased, mainly New York repositioning loans that did not stabilize on schedule.
- Rising rates and deposit competition may pressure margins. The company’s interest-rate simulations were within policy limits, but actual outcomes may differ with rate moves, yield-curve changes, depositor behavior, and management actions. The investment portfolio had $34.0 million of gross unrealized losses; management reported no securities as other-than-temporarily impaired.
- The company repurchased 1.3 million shares for $54.4 million in the first half under a $150 million authorization; $95.6 million remained available at June 30. The TCJA lowered the statutory federal tax rate to 21%; the effective tax rate was 23.1% for the first half, versus 30.6% in 2017.
- CECL adoption is expected in 2020. Management was still evaluating the impact and stated it could be material to financial position and results. The company estimated adoption of the new lease standard in 2019 would add approximately $100 million of lease liabilities and $90 million of right-of-use assets, without a material expected effect on results or cash flows.
- Legal proceedings were described as ordinary-course matters with a remote likelihood of material impact. The filing reported no material changes to previously disclosed risk factors and effective disclosure controls.
Investor verification priorities
- Track deposit pricing and funding mix against loan yields and net interest margin as rates and competition evolve.
- Review New York multifamily delinquencies, stabilization progress, non-accrual trends, and reserve adequacy.
- Monitor taxi medallion collateral values, payment performance, charge-offs, and remaining loss exposure.
- Assess the assumptions and timing behind covered-loan cash flows, FDIC recoveries, and the expected 2019 asset runoff.
- Verify the effect of CECL implementation on reserves and capital, and the eventual lease-standard balance-sheet adjustments.
- Reconcile reported cash generation with noncash ACI-loan accretion and the runoff of covered assets; confirm capital and liquidity remain adequate as growth and repurchases continue.