BankUnited, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. BankUnited is a bank holding company operating primarily in Florida and the New York metropolitan area, with national commercial lending platforms.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $241.3 million | $221.7 million | $711.4 million | $642.9 million |
| Provision for loan losses | $37.9 million | $24.4 million | $63.6 million | $42.4 million |
| Net income | $67.8 million | $50.8 million | $196.5 million | $162.4 million |
| Diluted EPS | $0.62 | $0.47 | $1.79 | $1.50 |
| Cash dividends per share | $0.21 | $0.21 | $0.63 | $0.63 |
- Tax-equivalent net interest margin was 3.62% for Q3, down from 3.69% a year earlier and 3.76% in Q2 2017. The nine-month margin was 3.69%, versus 3.75% in 2016.
- At September 30, assets were $29.55 billion, loans net of allowance were $20.45 billion, deposits were $21.22 billion, FHLB advances were $4.87 billion, and notes and other borrowings were $402.8 million. Stockholders’ equity was $2.62 billion.
- For the first nine months, operating cash flow was $231.2 million; investing cash flow was negative $1.78 billion and financing cash flow was positive $1.40 billion. Cash and cash equivalents ended at $292.6 million.
- Regulatory capital ratios exceeded well-capitalized thresholds: company CET1 and Tier 1 risk-based ratios were 11.91%, total risk-based capital was 12.70%, and Tier 1 leverage was 8.56%. The Bank’s corresponding ratios were 12.98%, 13.77%, and 9.32%.
- Non-performing loans were 1.00% of total loans and non-performing assets were 0.69% of total assets. Allowance for loan and lease losses was $158.6 million, or 0.77% of loans.
Material changes and notable items
- Q3 net income rose about 33% year over year. Growth in average loans and securities, higher asset yields, and higher net interest income contributed; the increase in interest expense and loan-loss provision partly offset those benefits.
- Q3 non-interest income included a $26.9 million net gain on available-for-sale securities, substantially from sales of securities formerly covered by the FDIC commercial shared-loss agreement. This materially boosted reported income and may not recur at the same level.
- Credit costs increased substantially, principally due to the taxi medallion portfolio. Q3 provision for non-covered loans was $37.6 million, including $32.7 million related to taxi medallion loans. The portfolio was placed entirely on non-accrual and substandard; $35.3 million of taxi medallion charge-offs were recorded in Q3 and $47.1 million in the first nine months.
- Loans increased $1.2 billion from year-end 2016 to $20.6 billion, driven by $1.3 billion growth in non-covered loans, while covered loans declined $76 million. Deposits increased $1.7 billion over the same period.
- FDIC indemnification asset declined to $349.6 million from $515.9 million at year-end 2016. Amortization of the asset was $135.4 million for the first nine months and is reported as expense.
Outlook, risks and contingencies
- No quantified earnings or margin guidance is provided. Management expects continued growth in deposits and interest-earning assets, ongoing runoff of covered loans and the FDIC indemnification asset, and expects liquidity needs to be met over the next 12 months through described funding sources.
- Management identifies rising deposit and borrowing costs, competitive deposit markets, covered-loan runoff, interest-rate and yield-curve movements, and the mix of earning assets as key influences on future margins. Management’s modeled net interest income changes were within policy limits; actual outcomes may differ with market conditions, depositor behavior, and management actions.
- Hurricanes Irma and Harvey prompted a $5.4 million loan-loss provision and $0.6 million of primarily facility and employee-related expense. Assessment of borrower and collateral impacts remained ongoing. Management said it had not identified material impact on the majority of borrowers, but could not yet determine the storms’ ultimate effect. Insurance recovery amounts and timing are uncertain.
- Taxi medallion values and cash flows remain a significant credit risk. The company’s estimated New York City medallion value was $351,000, based on an internal cash-flow analysis and other assumptions; the market is illiquid and values have declined.
- Off-balance-sheet lending commitments totaled $3.15 billion, including $2.36 billion of unfunded credit lines. Management considers material loss from ordinary-course legal proceedings remote.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Adoption of the CECL credit-loss standard was expected to materially change allowance policies and could materially affect financial position or results; the impact had not yet been estimated.
Most important facts for investors to verify
- Whether the unusual $26.9 million securities gain is repeatable and how results look excluding it.
- Further deterioration, charge-offs, collateral values, and reserve adequacy in taxi medallion lending.
- Subsequent hurricane-related delinquencies, loan downgrades, collateral damage, and any insurance recoveries.
- Whether deposit and borrowing costs continue to rise faster than asset yields, pressuring net interest margin.
- Future FDIC indemnification asset runoff and the eventual quantified impact and implementation plan for CECL.