BankUnited, Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2019. BankUnited is a Florida-headquartered bank holding company operating 80 banking centers in Florida and five in the New York metropolitan area, alongside national commercial lending platforms.
Key financial and operating metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $190.9m | $255.3m | $381.8m | $503.1m |
| Net income | $81.5m | $89.9m | $147.4m | $175.1m |
| Diluted EPS | $0.81 | $0.82 | $1.45 | $1.59 |
| Tax-equivalent net interest margin | 2.52% | 3.60% | 2.53% | 3.58% |
| Net cash from operating activities | Not provided for quarter | $237.8m | $229.9m |
- At June 30, total assets were $33.1bn; deposits $23.9bn; loans, net of allowance, $22.5bn; investment securities $8.1bn; cash and cash equivalents $442.8m.
- Borrowings comprised $5.33bn of FHLB advances, $99m federal funds purchased and $403.7m notes and other borrowings. Stockholders’ equity was $2.87bn.
- Six-month loan growth was $615m, to $22.6bn; excluding $189m of Pinnacle loans moved to held-for-sale, loans and leases grew $809m. Deposits increased $448m. Non-interest-bearing demand deposits rose $478m.
- Allowance for loan and lease losses was $112.1m, or 0.50% of loans. Six-month net charge-offs were $5.3m; non-performing loans were 0.61% of loans and non-performing assets 0.45% of assets.
- Regulatory capital ratios exceeded well-capitalized thresholds: Bank CET1 12.88% and total risk-based capital 13.37%; holding-company CET1 11.95% and total risk-based capital 12.44%.
Material changes versus comparable periods
- Q2 net income fell $8.4m year over year; six-month net income fell $27.7m. Net interest income declined $64.4m in Q2 and $121.3m in the first half.
- Management attributed the sharp NII and margin contraction principally to lower accretion income on formerly FDIC-covered residential loans. The Single Family Shared-Loss Agreement ended February 13, 2019; covered-loan interest income was $16.5m in Q2 2019 versus $84.2m a year earlier.
- Funding costs also rose: Q2 interest expense on deposits increased $34.7m year over year, and the average cost of interest-bearing deposits rose to 2.04% from 1.40%. Higher average interest-bearing deposits and higher rates on FHLB advances contributed to expense growth.
- Non-interest expense declined to $120.1m from $161.2m in Q2, chiefly because the FDIC indemnification asset had been fully amortized in 2018. Partly offsetting this, professional fees and technology expenses increased, including spending on the BankUnited 2.0 initiative and digital, cloud and risk-management capabilities.
- Q2 provision was a $2.7m recovery versus $9.0m expense in Q2 2018; first-half provision was $7.5m versus $12.1m. Six-month net charge-offs were lower than in 2018, which included taxi-medallion charge-offs.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said it expects liquidity needs to be met over the next 12 months through operating cash flows, deposits, securities and borrowing sources.
- Liquidity measures were above internal minimums at quarter-end: 30-day total liquidity ratio 200% (100% threshold) and one-year liquidity ratio 160% (100% threshold). Available capacity included $3.6bn at FHLB, $430m at the Federal Reserve and $161m in federal funds lines; unencumbered securities were $5.8bn.
- Interest-rate sensitivity modeling showed a 13.8% decline in year-two net interest income under a 200-basis-point rate decrease, slightly beyond the 13% policy guideline. Management was evaluating possible responses. The model’s most-likely scenario assumed four 25-basis-point cuts; results depend on assumptions and may differ from actual outcomes.
- Key risks include the planned LIBOR transition after 2021, potential costs or disputes in moving contracts to alternative rates, and adoption of CECL in 2020. Management stated CECL could materially affect the allowance and was still evaluating the impact.
- New York rent-regulation reforms may affect multi-family borrowers. The company reported $1.45bn of loans to rent-regulated properties. It also disclosed $72m of equipment under lease rated special mention or substandard, including $67m tied to the energy industry.
- Unusual items include the end of FDIC loss sharing, the transfer of $189m in Pinnacle loans to held-for-sale, and $142m of share repurchases in the first half. The company repurchased 4.1m shares at an average $34.44 and had approximately $7.9m remaining under its $150m authorization at June 30.
- Management described asset quality as strong, while substandard accruing commercial loans rose to $180m from $96m at year-end. Residential loans more than 30 days past due increased following a servicing transfer; management said delinquency levels had begun to normalize after quarter-end.
- Management considered the potential impact of pending legal proceedings remote and not material. Disclosure controls were reported effective, with no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether core NII and margin stabilize as covered-loan accretion declines and deposit and borrowing costs evolve.
- Credit trends behind the increase in substandard accruing loans, non-performing loans and TDRs, including exposure to New York rent-regulated properties and energy-related equipment leasing.
- The eventual CECL transition impact on reserves, earnings and capital, and progress toward LIBOR replacement.
- Whether interest-rate exposure, particularly the down-200-basis-point year-two scenario, is addressed and how actual results compare with model assumptions.
- Whether deposit growth, available liquidity and capital remain adequate as lending grows and the company continues dividends and repurchases.