Business context and reporting period
BankUnited, Inc. is a bank holding company operating BankUnited, National Association, with 99 branches in Florida and six banking centers in the New York metropolitan area. This unaudited Form 10-Q covers the three months ended March 31, 2014; financial comparisons are primarily with the three months ended March 31, 2013. Amounts below are U.S. dollars.
Key financial metrics
| Metric | Q1 2014 | Comparable period / date |
|---|---|---|
| Net interest income | $166.5 million | $153.8 million, Q1 2013 |
| Provision for loan losses | $8.4 million | $12.0 million, Q1 2013 |
| Non-interest income | $30.2 million | $20.1 million, Q1 2013 |
| Non-interest expense | $102.5 million | $82.8 million, Q1 2013 |
| Net income | $55.3 million; diluted EPS $0.53 | $48.2 million; diluted EPS $0.47, Q1 2013 |
| Tax-equivalent net interest margin | 5.05% | 5.93%, Q1 2013 |
| Total assets | $15.75 billion | $15.05 billion, Dec. 31, 2013 |
| Loans, net of allowance | $9.90 billion | $8.98 billion, Dec. 31, 2013 |
| Total deposits | $11.12 billion | $10.53 billion, Dec. 31, 2013 |
| FHLB advances and other borrowings | $2.47 billion | $2.41 billion, Dec. 31, 2013 |
| Cash and cash equivalents | $263.2 million | $252.7 million, Dec. 31, 2013 |
| Stockholders’ equity | $1.98 billion | $1.93 billion, Dec. 31, 2013 |
Changes and operating performance
- Net income rose about 15% year over year. Net interest income increased $12.7 million, primarily as average loan balances expanded; reported interest income rose $14.2 million while interest expense increased $1.5 million.
- The tax-equivalent loan yield fell to 7.04% from 10.54%, and the net interest margin declined 88 basis points. Management attributed the pressure to new loans being originated at lower market rates and the runoff of higher-yielding legacy assets; it expects these trends to continue.
- Loans grew $920 million during the quarter, with new loans increasing $1.1 billion while acquired covered loans ran off. Deposits increased $591 million.
- Non-interest expense rose $19.7 million. A key unusual item was $15.7 million of FDIC indemnification asset amortization, versus $2.3 million a year earlier. Compensation and occupancy expenses also increased with business growth and New York expansion.
- Q1 earnings benefited from covered commercial and consumer loan and commercial OREO sales, with a net favorable pretax impact of approximately $12.2 million, including loss-sharing effects and direct sale expenses. Covered-asset activity is expected to diminish as the portfolio runs off.
Cash flow, asset quality and capital
- Operating activities used $18.6 million of cash in Q1 2014, compared with $47.4 million used in Q1 2013. Investing activities used $606.4 million; financing activities provided $635.4 million, including deposit growth and net borrowing activity. Cash and cash equivalents increased $10.4 million.
- Management explained that operating cash outflows largely reflect noncash accretion of acquired credit-impaired loans; repayments and resolutions of covered loans and FDIC reimbursements are reported as investing cash flows. The company received $41.0 million in FDIC claim-related cash proceeds during the quarter.
- Nonperforming assets were $59.7 million, or 0.38% of total assets; nonperforming loans were 0.30% of total loans. The allowance for loan and lease losses was $70.0 million, 0.72% of loans.
- Regulatory capital exceeded “well-capitalized” guidelines: Tier 1 leverage 12.12%, Tier 1 risk-based capital 19.42%, and total risk-based capital 20.27%. Book value per share was $19.47; tangible book value per share was $18.80.
- Management reported liquid assets of 7.1% of total assets and a one-year liquidity ratio of 139%, against internal thresholds of 5% and 100%, respectively. Available liquidity included $2.4 billion of unencumbered securities, $1.9 billion of FHLB borrowing capacity, and additional Federal Reserve and other lines.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expects continued new-loan and deposit growth, continued runoff of covered loans and the FDIC indemnification asset, and further pressure on net interest margin as new production replaces higher-yielding legacy assets.
- FDIC loss sharing under the Commercial Shared-Loss Agreement was scheduled to end May 21, 2014. At quarter-end, covered commercial and consumer loans had a carrying value of about $91 million and covered securities had a carrying value of about $209 million; the company expected to bear the credit risk on these assets after coverage ended. The residential agreement was scheduled to continue through May 2019.
- After quarter-end, the company decided to terminate indirect auto lending and was evaluating plans for the existing portfolio.
- The company held $252 million of Re-Remic securities that it believed might be affected by the Volcker Rule; compliance was required by July 2015. Management expected amortization and prepayments to reduce the holdings before the compliance date, but said interpretation and implementation remained uncertain.
- Interest-rate sensitivity models showed forecast net interest income changes of +1.5% in the 12-month +200-basis-point scenario and +9.0% over 24 months; modeled EVE change was -2.4% in the +200-basis-point scenario. These estimates depend on assumptions and actual outcomes may differ.
- Legal proceedings were described as arising in the ordinary course; management, based on counsel’s advice, considered a material impact remote. The filing reported no material changes to the risk factors in the 2013 Form 10-K. Disclosure controls were judged effective.
Most important facts for investors to verify
- Whether loan growth and deposit growth remain profitable as new-loan yields and net interest margin decline.
- The sustainability of earnings excluding the covered-asset sale benefit and the effect of rising FDIC indemnification asset amortization.
- Asset quality, reserve adequacy and the performance of rapidly growing commercial, purchased residential and indirect auto portfolios.
- The impact of the May 2014 commercial loss-sharing termination on covered loans and securities, including any post-termination credit losses.
- Liquidity, funding costs and interest-rate exposure under actual market and depositor conditions, compared with management’s model assumptions.
- Plans and financial effects associated with the indirect auto lending exit and compliance with the Volcker Rule.