BankUnited, Inc. — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2015. BankUnited operated 97 Florida branches and six New York-area banking centers. The filing reflects continued loan and deposit growth and the May 2015 acquisition of CertusHoldings’ Small Business Finance unit (SBF).
Key financial metrics
Amounts are in millions of dollars except per-share data, percentages, and where noted.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $189.0 | $173.2 | $542.7 | $505.6 |
| Non-interest income | $31.2 | $14.5 | $73.0 | $65.1 |
| Non-interest expense | $132.3 | $108.9 | $369.9 | $318.0 |
| Net income | $102.3 | $53.6 | $195.4 | $157.4 |
| Diluted EPS | $0.95 | $0.51 | $1.83 | $1.50 |
| Tax-equivalent net interest margin | 3.88% | 4.58% | 3.95% | 4.75% |
- Profit quality: Q3 net income included a $49.3 million discrete tax benefit related to additional tax basis in certain assets acquired in the 2009 FSB transaction. Excluding that benefit and related professional fees, diluted EPS was $0.50 for Q3 and $1.37 for the nine-month period; adjusted net income was $53.8 million and $146.9 million, respectively.
- Balance sheet at September 30: Assets were $22.54 billion versus $19.21 billion at year-end 2014. Loans were $15.43 billion versus $12.41 billion; deposits were $15.90 billion versus $13.51 billion. Cash and cash equivalents were $276.3 million; available-for-sale securities were $4.66 billion.
- Funding and capital: FHLB advances and other borrowings totaled $4.09 billion, up from $3.32 billion at year-end. Stockholders’ equity was $2.21 billion. Regulatory capital ratios included 9.7% Tier 1 leverage, 13.5% CET1 and Tier 1 risk-based capital, and 14.3% total risk-based capital; the company reported ratios above well-capitalized requirements.
- Cash flow and liquidity: Nine-month operating cash flow was $160.2 million, compared with cash used of $51.6 million in the prior-year period. Investing activities used $3.24 billion, and financing activities provided $3.17 billion; cash ended at $276.3 million. Reported liquidity ratios were 1.54% for the 30-day measure and 145% for the one-year measure. Unencumbered available-for-sale securities were $3.3 billion, with $1.9 billion of available FHLB borrowing capacity.
- Credit and allowance: The allowance for loan and lease losses was $118.3 million, or 0.77% of loans. Non-performing loans were $104.0 million and non-performing assets $116.6 million; non-performing non-covered loans were 0.66% of non-covered loans. The filing attributes much of the increase in non-covered problem loans to one commercial relationship with a $44.3 million balance, reportedly affected by external fraud; approximately $6.3 million was reserved.
Material changes versus comparable periods
- Q3 net interest income increased 9% year over year, while the net interest margin fell 70 basis points. Average loan balances rose substantially, but loan yields declined as newer, lower-yield loans became a larger share of the portfolio.
- For the first nine months, total loans grew $3.0 billion from year-end 2014. New loans grew $3.2 billion while FSB-acquired loans declined. Deposits increased $2.39 billion over the same period.
- Non-interest income rose in Q3, supported by lease-financing income, loan-sale gains, and securities gains. Non-interest expense also increased, including higher FDIC indemnification asset amortization and growth-related compensation and operating costs.
- The SBF acquisition involved $277.6 million in cash consideration, added approximately $174 million in investment loans and $82 million in loans held for sale, and generated $10.4 million of goodwill. Its operating results were described as not material.
Outlook, commentary, and risks
- Management expected net interest margin and spread to continue declining as higher-yield FSB-acquired loans run off and new loans are originated at lower market yields. The filing provides no specific earnings or revenue guidance.
- Management expected continued growth in new loans and leases, continued runoff of covered loans and the FDIC indemnification asset, and ongoing quarterly sales of covered residential loans.
- The FDIC loss-sharing arrangement for covered single-family residential loans and OREO runs through May 21, 2019; the commercial loss-sharing period had ended in May 2014, though recovery-sharing obligations for certain commercial assets continue through May 2017.
- Credit risks include growth in criticized and classified commercial loans, the identified fraud-affected borrower relationship, and approximately $215 million of taxi-medallion lending, largely concentrated in New York City. Management reported declining medallion collateral values and market liquidity.
- Interest-rate sensitivity modeling showed forecast net interest income increases of 1.6% over 12 months and 4.2% over 24 months in a +200-basis-point scenario. Management cautioned that actual outcomes may differ due to market conditions, depositor behavior, and model assumptions.
- The investment portfolio included $113 million of Re-Remic securities that could be affected by Volcker Rule interpretation and compliance requirements. Management said it expected amortization and prepayments to reduce the balance before the then-applicable compliance date.
- Management said ordinary-course legal proceedings were not expected to have a material effect; no material change in previously disclosed risk factors was reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after removing the $49.3 million tax benefit and related professional fees.
- Whether falling loan yields and margin compression continue, and how loan growth and funding costs affect net interest income.
- Subsequent developments, recoveries, and reserve adequacy for the $44.3 million commercial relationship associated with reported external fraud.
- Credit performance in fast-growing commercial, equipment-finance, SBF, and taxi-medallion portfolios, including collateral values and concentration exposures.
- Changes in FDIC indemnification asset estimates, amortization, claims, and the timing of covered-loan runoff.
- Liquidity and capital trends as assets grow, borrowings mature, and deposits and off-balance-sheet commitments change.