BankUnited, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. BankUnited is a bank holding company serving Florida and the New York metropolitan area, with additional national commercial lending and deposit platforms.
Financial performance and position
- Q2 earnings: Net income was $66.4 million, up 17.1% from $56.7 million a year earlier. Diluted EPS was $0.60 versus $0.52. Return on average assets was 0.94%; return on average equity was 10.33%.
- First-half earnings: Net income was $128.7 million versus $111.6 million; diluted EPS was $1.17 versus $1.03.
- Net interest: Q2 GAAP net interest income before loan-loss provision increased 11.8% to $239.6 million. Tax-equivalent net interest margin was 3.76%, compared with 3.75% in Q2 2016 and 3.70% in Q1 2017. First-half margin was 3.73%, down from 3.79%.
- Other income and expenses: Q2 non-interest income was $29.9 million versus $28.9 million; non-interest expense rose to $160.4 million from $144.1 million. Expense growth included higher FDIC-asset amortization, compensation, deposit insurance, professional fees and lease-equipment depreciation.
- Credit costs: Q2 provision for loan losses was $13.6 million, compared with $14.3 million. First-half provision rose to $25.7 million from $18.0 million, driven in part by taxi-medallion reserves. Allowance for loan and lease losses was $155.6 million at June 30.
- Balance sheet: Total assets were $29.0 billion, up from $27.9 billion at year-end 2016. Loans were $20.2 billion, up from $19.4 billion; deposits were $20.8 billion, up from $19.5 billion. Stockholders’ equity was $2.58 billion.
- Funding and liquidity: FHLB advances totaled $4.95 billion and notes and other borrowings $402.8 million. Cash and cash equivalents were $228.4 million, down from $448.3 million at year-end. The company reported a 188% 30-day liquidity ratio and 153% one-year liquidity ratio; available FHLB borrowing capacity was $3.4 billion.
- Cash flow: First-half operating cash flow was $128.9 million, investing cash outflow $1.37 billion and financing cash inflow $1.03 billion. Net cash and cash equivalents decreased $220.0 million.
- Capital and dividends: Company CET1 and total risk-based capital ratios were 11.89% and 12.69%; the Bank’s were 13.04% and 13.82%. The quarterly dividend declared was $0.21 per common share.
Material changes and credit developments
- Q2 net interest income benefited from loan and securities growth and higher yields, while deposit and borrowing costs increased. Average interest-bearing deposits rose and their average cost increased year over year.
- Non-covered loans increased $923 million from year-end; covered loans declined $87 million. Total loans grew $836 million.
- Non-performing non-covered loans were 0.69% of non-covered loans. Taxi-medallion loans totaled $160 million; $66.2 million were on non-accrual. The filing cites falling collateral values and weak debt-service capacity: about 88.1% of directly secured medallion loans had estimated pro forma coverage below 1.00. The company is no longer originating these loans.
- First-half net charge-offs were $23.0 million, including $11.8 million on taxi-medallion loans. Medallion delinquency rates improved from year-end, but non-accrual medallion balances increased.
Outlook, risks and unusual items
- Management expects deposit and non-covered loan growth to continue, with covered-loan runoff and decline in the FDIC indemnification asset also expected to continue. It expects liquidity needs over the next 12 months to be met from identified funding sources. No numerical earnings or margin guidance was provided.
- Management cautions that ACI loan accretion and FDIC-related income and expense are declining or changing over time; as covered loans run off, accretion’s positive contribution to net interest margin is expected to diminish. Future margin also depends on rates, yield-curve shape, asset mix and funding costs.
- The FDIC indemnification asset fell to $406.8 million from $515.9 million at year-end, including $90.1 million of first-half amortization. The commercial shared-loss recovery period ended June 30, 2017; residential loss sharing continues through May 21, 2019 under stated terms.
- Taxi-medallion collateral and cash-flow estimates are a material credit and valuation uncertainty. Other exposures include commercial real estate, interest-rate movements, deposit competition, securities valuations and equipment-lease residual values.
- First-half tax expense benefited from $2.9 million of excess tax benefits related to share-based awards and option exercises. Management reported no material change in risk factors from the 2016 Form 10-K, and considered ordinary-course legal proceedings unlikely to have a material effect.
- Management said controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether taxi-medallion collateral valuations, non-accrual balances, charge-offs and reserves remain adequate as the market and borrower performance evolve.
- Whether deposit growth can be maintained without further material increases in funding costs, and how rising rates affect margin and liquidity.
- How covered-loan runoff, declining ACI accretion and FDIC-asset amortization affect recurring earnings after the commercial recovery period ends.
- Whether loan growth, criticized commercial exposures and the allowance remain consistent with management’s credit assumptions.
- How investment securities and equipment leases perform under changing rates, prepayments, credit conditions and residual-value assumptions.