BankUnited, Inc. — Q3 2016 Form 10-Q
Business context and reporting period: Unaudited results for the quarter and nine months ended September 30, 2016. BankUnited is a bank holding company headquartered in Florida, with branches in Florida, banking centers in the New York metropolitan area, and national commercial lending platforms.
Financial performance and position
- Q3 earnings: Net income was $50.8 million, or $0.47 per diluted share, versus $102.3 million, or $0.95 per diluted share, in Q3 2015. The prior-year quarter included a $49.3 million discrete tax benefit; excluding that benefit and related professional fees, 2015 net income was $53.8 million, or $0.50 per diluted share.
- Nine-month earnings: Net income was $162.4 million, or $1.50 per diluted share, versus $195.4 million, or $1.83, in 2015. Excluding the prior-year tax benefit and related professional fees, 2015 net income was $146.9 million, or $1.37 per diluted share.
- Net interest income and margin: GAAP net interest income was $221.7 million in Q3, up from $189.0 million. On a tax-equivalent basis, it was $230.5 million versus $194.0 million. Tax-equivalent net interest margin declined to 3.69% from 3.88%; the nine-month margin was 3.75% versus 3.95%.
- Other income and expenses: Q3 non-interest income was $25.1 million, down from $31.2 million; non-interest expense rose to $148.0 million from $132.3 million. Nine-month non-interest income was $77.1 million versus $73.0 million, while expenses increased to $434.2 million from $369.9 million. Higher FDIC indemnification asset amortization was a major expense driver.
- Credit costs and asset quality: Q3 provision for loan losses was $24.4 million versus $17.8 million; nine-month provision was $42.4 million versus $34.4 million. The allowance for loan and lease losses was $154.5 million, or 0.83% of loans. Non-performing non-covered loans were 0.61% of non-covered loans; non-covered non-performing assets were 0.43% of total assets.
- Cash flow: For the nine months, operating cash flow was $226.4 million, investing cash outflow was $3.32 billion, and financing cash inflow was $3.09 billion. Cash and cash equivalents ended at $262.0 million, compared with $267.5 million at year-end 2015.
- Balance sheet and funding: Total assets were $27.27 billion, up from $23.88 billion at December 31, 2015. Loans were $19.04 billion, compared with $16.64 billion; deposits were $18.84 billion, compared with $16.94 billion. FHLB advances were $5.22 billion, up from $4.01 billion; notes and other borrowings were $402.8 million, including $400 million of senior notes due in 2025.
- Capital and liquidity: Stockholders’ equity was $2.37 billion. Company capital ratios included Tier 1 leverage of 8.50%, CET1 and Tier 1 risk-based capital of 11.57%, and total risk-based capital of 12.40%; management said ratios exceeded applicable well-capitalized guidelines. The Bank’s 30-day and one-year liquidity ratios were 139% and 121%, respectively. Unencumbered available-for-sale securities were $3.8 billion; stated available FHLB borrowing capacity was $2.5 billion.
- Dividend and book value: The quarterly dividend declared was $0.21 per share. Book value and tangible book value per common share were $22.79 and $22.04, respectively.
Material changes versus comparable periods
- Loan and lease growth drove higher interest income: total loans increased $2.4 billion from year-end 2015, and management reported $2.6 billion of growth in new loans and leases over the first nine months.
- Despite higher net interest income, margin compressed as newer loans carried lower yields than acquired loans and funding costs increased. Management also cited the cost of senior notes issued in November 2015.
- Deposit growth was accompanied by a higher average total deposit cost: 0.67% in Q3 2016 versus 0.61% a year earlier. Brokered deposits were $1.9 billion at quarter-end, up from $1.1 billion at year-end 2015.
- The allowance increased from $125.8 million at year-end 2015 to $154.5 million, reflecting loan growth, reserves on classified and impaired credits, and a methodology change that added about $9 million to the allowance as of March 31, 2016.
- Q3 2015 reported earnings were unusually elevated by the discrete tax benefit. On the company’s adjusted comparison, Q3 2016 net income was modestly lower than Q3 2015, while nine-month 2016 adjusted net income exceeded the comparable 2015 figure.
Outlook, risks, contingencies, and unusual items
- Management outlook: No specific earnings or balance-sheet guidance was provided. Management expected net interest margin and spread to continue declining, though at a decreasing rate, as lower-yielding new loans grow and higher-yielding acquired loans run off. It expected continued growth in new loans and leases, operating leases, and SBF loan sales and servicing, and stated that liquidity needs over the next 12 months were expected to be met from identified funding sources.
- Taxi medallion exposure: The commercial and industrial portfolio included approximately $192 million of taxi medallion loans. At September 30, $54.5 million was non-accrual; 4.2% of the portfolio was 90 days or more delinquent, and the weighted-average estimated current LTV on directly secured loans was about 90%. Management cited declining collateral values and market liquidity, higher reserves, and expected growth in TDRs as loans mature or are refinanced. The company was no longer originating these loans.
- FDIC asset and legacy covered loans: The FDIC indemnification asset declined to $582.9 million from $739.9 million at year-end 2015, and amortization expense increased. The remaining asset relates to residential loans and OREO under the Single Family Shared-Loss Agreement, which provides coverage through May 21, 2019, subject to its terms.
- Investment and interest-rate risk: Available-for-sale securities totaled $5.95 billion, with a $147 million net unrealized gain; $906 million of securities were in unrealized loss positions. The filing reported $463,000 of other-than-temporary impairment on positions in one private-label commercial MBS security that the company intended to sell. Management’s interest-rate simulations were within its stated policy limits, but actual outcomes may differ with rates, depositor behavior, market conditions, and model assumptions.
- Other unusual items and contingencies: Q3 and nine-month 2016 expense included a $2.1 million increase in litigation accruals and a $1.1 million payroll-tax-audit settlement. The company accrued approximately $2.8 million related to a jury award involving Herald National Bank; the award could be doubled and plaintiff’s attorneys’ fees could also be awarded. Management was considering an appeal. Lending-related commitments totaled $2.73 billion, though some are expected to expire undrawn.
- Controls and filing risks: Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2015 Form 10-K.
Important facts for investors to verify
- Whether taxi medallion delinquencies, non-accrual balances, collateral values, and required reserves continue to worsen or stabilize.
- Whether loan growth and deposit pricing preserve earnings as net interest margin declines and acquired-loan accretion runs off.
- The quality, liquidity, valuation sensitivity, and concentration risks in the $5.95 billion available-for-sale securities portfolio.
- The pace and assumptions behind FDIC indemnification asset amortization and remaining shared-loss recoveries.
- Whether liquidity, capital ratios, and reliance on FHLB advances and brokered deposits remain within management’s stated thresholds.
- The outcome and potential additional cost of the jury-award matter and other legal proceedings.