BankUnited, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. BankUnited is a bank holding company operating primarily in Florida and the New York metropolitan area, with national commercial lending platforms.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable / prior period |
|---|---|---|
| Net income | $54.9 million; diluted EPS $0.51 | $46.5 million; diluted EPS $0.44 in Q1 2015 |
| Net interest income, GAAP | $206.8 million | $172.7 million in Q1 2015 |
| Net interest margin, tax-equivalent | 3.83% | 4.02% in Q1 2015 |
| Noninterest income / expense | $23.2 million / $142.1 million | $20.7 million / $114.1 million in Q1 2015 |
| Operating cash flow | $57.8 million | $28.1 million in Q1 2015 |
| Total assets | $24.8 billion | $23.9 billion at December 31, 2015 |
| Total loans, including premiums and fees | $17.1 billion | $16.6 billion at December 31, 2015 |
| Total deposits | $17.5 billion | $16.9 billion at December 31, 2015 |
| Cash and cash equivalents | $245.8 million | $267.5 million at December 31, 2015 |
| FHLB advances / notes and other borrowings | $4.26 billion / $402.7 million | $4.01 billion / $402.5 million at December 31, 2015 |
Return on average assets was 0.91% and return on average equity was 9.76%. The company declared a $0.21 per-share dividend. Book value and tangible book value per common share were $21.74 and $20.99, respectively.
Cash used in investing activities was $909.1 million, primarily reflecting investment-security purchases; financing provided $829.6 million, including deposit growth and net FHLB borrowing. The allowance for loan and lease losses was $125.6 million, or 0.74% of loans. Regulatory capital ratios exceeded well-capitalized thresholds; the company reported a 9.04% Tier 1 leverage ratio, 12.05% CET1 ratio and 12.78% total risk-based capital ratio.
Material changes and management commentary
- Net income rose year over year, while the tax-equivalent net interest margin declined 19 basis points. Management attributed margin pressure to runoff of higher-yield acquired loans, growth in new loans originated at lower market rates, and the cost of senior notes issued in November 2015.
- New loans and leases, including equipment under operating lease, increased $527 million during the quarter. Total deposits grew $576 million; average total deposit cost increased to 0.63% from 0.59% in Q1 2015.
- Noninterest expense increased $28.0 million year over year, notably from FDIC indemnification asset amortization ($39.7 million versus $22.0 million) and higher employee and operating-lease depreciation costs. Management noted that excluding FDIC-asset amortization, annualized noninterest expense as a share of average assets declined to 1.7% from 1.9%.
- Management expects net interest margin and spread to continue declining, but at a decreasing rate, as new lower-yielding loans grow and acquired higher-yielding loans run off. It expects liquidity needs over the next 12 months to be met from stated funding sources; the filing provides no specific earnings guidance.
- Liquidity indicators were above internal thresholds: the 30-day and one-year liquidity ratios were 161% and 163%. The company also reported $3.4 billion of unencumbered available-for-sale securities, $2.7 billion of available FHLB borrowing capacity, $177 million of unused FRB capacity and $70 million of unused federal funds lines.
Risks, contingencies and unusual items
- Taxi medallion exposure: Commercial and industrial taxi medallion loans totaled approximately $205 million. Delinquencies of 30 days or more increased to $13.3 million (6.5%) from $7.9 million (3.7%) at year-end; $8.5 million was on nonaccrual. Management cited falling collateral values and weaker industry conditions, and said it had stopped originating these loans.
- Allowance methodology: The company extended its historical loss lookback period from 12 to 16 quarters, increasing the calculated allowance by approximately $9 million before largely offsetting reductions in qualitative factors.
- Acquired assets and FDIC sharing: The FDIC indemnification asset declined to $683.9 million from $739.9 million at year-end. Loss-sharing arrangements mitigate eligible losses on covered residential assets, but the agreements have contractual terms and the asset depends on projected cash flows and estimates.
- Market and valuation exposure: Derivative-related unrealized losses contributed to other comprehensive loss of $16.6 million and a decline in accumulated other comprehensive income to $5.6 million. Available-for-sale securities had $34.9 million of gross unrealized losses; management reported no securities as other-than-temporarily impaired.
- Commercial real estate and lending concentrations, equipment residual values, interest-rate changes, borrower and derivative-counterparty performance, and estimate uncertainty remain relevant risks. Management said legal proceedings were not expected to have a material effect and reported no material change in previously disclosed risk factors.
Investor verification priorities
- Track whether margin compression continues and whether loan and deposit growth compensates for lower asset yields and rising funding costs.
- Review taxi medallion delinquencies, collateral valuations, criticized loans, charge-offs and reserve adequacy.
- Assess the assumptions and pace of FDIC indemnification asset amortization and remaining covered-asset cash flows.
- Monitor the composition and valuation sensitivity of the securities portfolio, including unrealized losses and derivative-related AOCI movements.
- Confirm liquidity and capital remain adequate as loans expand and FHLB advances increase.