BankUnited, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. BankUnited is a bank holding company operating primarily in Florida and the New York metropolitan area. This unaudited report covers the three months ended March 31, 2015; income and cash-flow comparisons are against Q1 2014, while balance-sheet comparisons are against December 31, 2014. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q1 2015 / March 31, 2015 | Comparable period / date |
|---|---|---|
| Net income; diluted EPS | $46.5 million; $0.44 | Q1 2014: $55.3 million; $0.53 |
| Net interest income | $172.7 million | Q1 2014: $166.5 million |
| Net interest margin, tax-equivalent | 4.02% | Q1 2014: 5.05%; Q4 2014: 4.26% |
| Total assets | $20.0 billion | December 31, 2014: $19.2 billion |
| Total loans, before allowance | $13.2 billion | December 31, 2014: $12.4 billion |
| Total deposits | $14.3 billion | December 31, 2014: $13.5 billion |
| FHLB advances and other borrowings | $3.29 billion | December 31, 2014: $3.32 billion |
| Cash and cash equivalents | $304.5 million | December 31, 2014: $187.5 million |
| Allowance for loan and lease losses | $99.8 million | December 31, 2014: $95.5 million |
| Stockholders’ equity | $2.12 billion | December 31, 2014: $2.05 billion |
Interest income was $201.9 million versus $190.6 million in Q1 2014, while interest expense rose to $29.2 million from $24.1 million. The loan-loss provision was $8.1 million, compared with $8.4 million. Non-interest income fell to $20.7 million from $30.2 million, and non-interest expense increased to $114.1 million from $102.5 million. The decline in net income reflects, in particular, lower gains on covered-loan sales and higher FDIC asset amortization and other expenses.
Net cash provided by operating activities was $28.1 million, versus cash used of $18.6 million in Q1 2014. Investing activities used $665.7 million; financing activities provided $754.5 million, including a $749.5 million increase in deposits. Cash and cash equivalents increased by $117.0 million during the quarter. The company declared a quarterly dividend of $0.21 per common share.
Material changes and operating performance
- Loans, net of premiums, discounts and fees, increased $824 million during Q1; new loans grew $891 million as acquired FSB loans continued to run off. Management reported $943 million of growth in new loans and leases, including equipment under operating lease.
- Deposits rose $749 million, including $536 million of growth in New York deposits, which reached $2.2 billion.
- Net interest income increased year over year, but tax-equivalent net interest margin declined to 4.02%. Management attributed margin pressure to a growing share of new loans originated at lower market yields and the runoff of higher-yielding acquired loans; it expects further margin and spread declines, at a declining rate.
- Non-performing assets were $61.0 million, or 0.31% of total assets, versus $52.8 million and 0.27% at year-end. Non-performing loans were $49.8 million, or 0.38% of total loans, versus $39.0 million and 0.31%. The non-covered non-performing asset ratio was 0.21%.
- Net charge-offs were $3.9 million; the allowance equaled 0.75% of total loans and 200.37% of non-performing loans. The allowance increased from year-end, principally alongside growth in the new-loan portfolio.
- Available-for-sale securities were $4.45 billion, down from $4.59 billion at year-end. The portfolio had $132 million of net unrealized gains; no securities were deemed other-than-temporarily impaired.
Liquidity, capital, outlook and risks
- Management reported liquid assets equal to 6.5% of total assets and a one-year liquidity ratio of 117%, above its stated 100% internal threshold. Available liquidity included $3.2 billion of unencumbered available-for-sale securities, $2.0 billion of FHLB borrowing capacity, $86 million of unused Federal Reserve borrowing capacity and $95 million of unused Federal funds and other lines.
- At March 31, regulatory capital ratios exceeded well-capitalized guidelines: Tier 1 leverage 10.34%, CET1 14.87%, Tier 1 risk-based 14.87%, and total risk-based 15.67%. Basel III requirements took effect for the company on January 1, 2015; the capital conservation buffer is scheduled to phase in beginning in 2016.
- Interest-rate simulations showed forecast net interest income increasing 0.9% over 12 months and 4.6% over 24 months in a +200 basis-point scenario. Estimated economic value of equity declined 8.3% in that scenario, within the company’s stated policy limit. Results depend on assumptions and actual outcomes may differ.
- Management expects continued growth in new loans and leases, continued runoff of covered loans and the FDIC indemnification asset, and further net interest margin pressure. No numerical earnings or revenue guidance was provided.
- The FDIC commercial shared-loss agreement ended in May 2014; the single-family agreement continues through May 21, 2019. Covered-asset activity contributed $4.9 million to pretax earnings in Q1 2015, down from $17.5 million in Q1 2014. The company expects the net impact to decline as covered assets run off.
- On May 1, 2015, after quarter-end, the Bank acquired CertusHoldings’ Small Business Finance Unit for $279 million in cash, subject to adjustment. The acquired loan portfolio had a pre-acquisition carrying amount of approximately $245 million; purchase accounting valuation was not complete at filing.
- The company identified Re-Remic securities that may be impermissible under Volcker Rule requirements; their carrying value was $164 million. Management expected amortization and prepayments to reduce holdings before the applicable compliance date, then anticipated as July 2016, with a possible extension to July 2017.
- Management said legal proceedings were not expected to have a material effect and reported no material changes to the risk factors in its 2014 Form 10-K. Disclosure controls were deemed effective, with no material control changes during the quarter.
Important facts for investors to verify
- Whether continued loan growth can offset lower yields and the runoff of acquired high-yield loans, and how quickly net interest margin stabilizes.
- Drivers of the year-over-year decline in earnings, including covered-loan sale gains, FDIC indemnification effects, and higher amortization and operating expenses.
- Loan-quality trends, especially rising non-performing loans and the performance of rapidly growing commercial and commercial-finance portfolios.
- Deposit retention and funding costs, upcoming maturities of large certificates of deposit and FHLB advances, and the sustainability of reported liquidity measures.
- Integration, final purchase accounting, and returns from the Certus small-business finance acquisition.
- Exposure to interest-rate, fair-value and credit assumptions in securities and derivatives, and the company’s future Volcker Rule compliance plan.