BankUnited, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The unaudited filing covers BankUnited, Inc. and its banking subsidiary, BankUnited, with operations in Florida, the New York metropolitan area and national commercial lending platforms.
Financial performance and position
| Metric | Q3 2019 | Comparable period / balance |
|---|---|---|
| Net income | $76.2 million; diluted EPS $0.77 | Q3 2018: $97.3 million; diluted EPS $0.90 |
| Net interest income | $185.7 million GAAP; $190.8 million tax-equivalent | Q3 2018: $252.0 million GAAP; $257.8 million tax-equivalent |
| Net interest margin | 2.41% tax-equivalent | Q3 2018: 3.51% |
| Provision for loan losses | $1.8 million | Q3 2018: $1.2 million |
| Non-interest income / expense | $37.9 million / $121.3 million | Q3 2018: $38.7 million / $170.8 million |
| Assets / loans / deposits | $33.0 billion / $22.9 billion / $24.0 billion | At September 30, 2019; year-end 2018 assets $32.2 billion, loans $22.0 billion, deposits $23.5 billion |
| Cash and cash equivalents | $230.2 million | December 31, 2018: $382.1 million |
| Shareholders’ equity | $2.91 billion | December 31, 2018: $2.92 billion |
- For the nine months, net income was $223.6 million and diluted EPS was $2.23, versus $272.5 million and $2.49 in 2018. Annualized return on average equity was 10.2%; return on average assets was 0.91%.
- Nine-month operating cash flow was $412.2 million; investing cash flow was negative $992.5 million; financing cash flow was positive $428.5 million. Cash decreased by $151.8 million over the period.
- At September 30, borrowings included $4.93 billion of FHLB advances, $175 million of federal funds purchased and $403.8 million of notes and other borrowings. The $400 million senior notes carry a 4.875% coupon and mature in 2025.
- Regulatory capital ratios were above well-capitalized thresholds: Bank CET1 12.91% and total risk-based capital 13.38%; holding-company CET1 12.22% and total risk-based capital 12.69%.
Material changes and operating developments
- The company attributed the sharp year-over-year decline in net interest income and margin mainly to lower accretion income on formerly FDIC-covered residential loans following substantial loan sales and changes in expected accretion timing. Deposit and borrowing costs also rose: nine-month interest expense increased $125.7 million year over year.
- The Single Family Shared-Loss Agreement ended in February 2019. As a result, the company reported no covered-asset resolution income or FDIC indemnification gains in 2019; 2018 results included related income and $132.9 million of FDIC indemnification asset amortization for the first nine months.
- Loans grew $878 million from year-end 2018. Mortgage warehouse balances increased $474 million, while multifamily loans fell $364 million, primarily from runoff in the New York portfolio. Deposits increased $482 million; non-interest-bearing demand deposits rose $506 million.
- Credit indicators showed mixed movement: nonperforming loans were 0.60% of loans and nonperforming assets 0.43% of assets, broadly similar to year-end ratios. Criticized and classified commercial loans rose to 1.9% of total loans from 1.4%; substandard commercial exposure increased to $348.4 million from $210.0 million.
- The company repurchased $150 million of shares during the first nine months, approximately 4.4 million shares at a $34.39 weighted-average price. A new authorization permits up to another $150 million in repurchases.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management stated it expects liquidity needs over the next 12 months to be met from operating cash flows, deposits, securities and borrowing capacity. Reported liquidity ratios were 207% for 30 days and 168% for one year; unencumbered securities were $5.8 billion.
- CECL adoption is planned for Q1 2020. Based on the September 2019 portfolio and assumptions, management estimated the allowance for credit losses could increase 15%–30%, to approximately 0.55%–0.62% of loans from the current 0.47%. The ultimate effect depends on portfolio composition, economic conditions and model refinements.
- New York rent-regulation changes may affect cash flows and collateral values for rent-regulated multifamily loans. The filing reports $1.38 billion of loans secured by New York properties with some or all units subject to rent regulation, including $64.5 million secured by non-stabilized properties.
- Bridge had $306 million of energy-industry exposure, including $261 million in operating lease equipment and $45 million in loans and finance leases. Management identified quick-service restaurant exposures as correlated risk within Bridge franchise finance.
- The filing identifies LIBOR transition uncertainty as a risk, including potential operational costs, valuation impacts and disputes over replacement rates. Management reported it was executing a transition plan.
- Unusual items included a $3.8 million loss on extinguishment of higher-cost FHLB advances and a $2.4 million loss on sale of a commercial OREO property. Management said pending legal proceedings were not expected to be material, but disclosed an October 2019 Department of Justice subpoena seeking records concerning the Bank’s former taxi medallion business; the company is cooperating.
- Management reported disclosure controls and procedures were effective and no material changes to internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether ongoing loan and deposit pricing can offset funding-cost pressure and continued lower accretion from formerly covered loans.
- How CECL model updates and year-end economic assumptions affect the allowance, retained earnings and regulatory capital at adoption.
- Whether rising criticized/classified commercial loans, substandard accruing loans and specific sector exposures lead to higher provisions or charge-offs.
- The performance and collateral sensitivity of rent-regulated New York multifamily loans, equipment leases and energy-related exposures.
- Developments in the DOJ taxi medallion inquiry and any material change in legal or regulatory contingencies.
- Actual use of the new $150 million repurchase authorization and its interaction with capital needs and dividends.