BankUnited, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. BankUnited is a bank holding company operating in Florida and the New York metropolitan area, with 99 Florida branches and six New York-area banking centers. Results include the Small Business Finance Unit (SBF), acquired May 1, 2015.
Financial performance and position
| Metric | Q2 2015 / June 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net income | $46.6 million; diluted EPS $0.43 | Q2 2014: $48.5 million; diluted EPS $0.46 |
| Net interest income, GAAP | $181.0 million | Q2 2014: $165.9 million |
| Net interest margin, tax-equivalent | 3.95% | Q2 2014: 4.67%; Q1 2015: 4.02% |
| Total assets | $21.40 billion | December 31, 2014: $19.21 billion |
| Total loans, before allowance | $14.33 billion | December 31, 2014: $12.41 billion |
| Total deposits | $15.25 billion | December 31, 2014: $13.51 billion |
| FHLB advances and other borrowings | $3.74 billion | December 31, 2014: $3.32 billion |
| Cash and cash equivalents | $164.9 million | December 31, 2014: $187.5 million |
| Stockholders’ equity | $2.15 billion | December 31, 2014: $2.05 billion |
For the six months, net income was $93.1 million versus $103.8 million in 2014; diluted EPS was $0.87 versus $0.99. Tax-equivalent net interest margin was 3.99% versus 4.85%. Six-month return on average assets was 0.93% and return on average equity was 8.86%. Q2 dividends declared were $0.21 per share.
Six-month operating cash flow was positive $76.2 million, compared with negative $51.5 million in the first half of 2014. Investing activities used $2.27 billion and financing activities provided $2.17 billion; cash and equivalents declined $22.7 million during the period. The filing explains that repayment and resolution of acquired loans and FDIC reimbursements are presented as investing cash flows.
At June 30, the allowance for loan and lease losses was $107.4 million, or 0.78% of loans. Non-performing loans were 0.48% of total loans and non-performing assets were 0.36% of total assets. Regulatory capital ratios included a 9.87% Tier 1 leverage ratio, 13.72% CET1 ratio and 14.49% total risk-based capital ratio. Management reported liquid assets of 6.0% of assets and a one-year liquidity ratio of 163%.
Material changes and management commentary
- Loans increased $1.9 billion from year-end, principally from growth in new commercial lending; deposits rose $1.7 billion. Management reported $1.2 billion of new loans and leases added during Q2, including $174 million of acquired SBF loans.
- Higher average loan balances lifted net interest income, but loan yields fell as lower-yielding new originations replaced higher-yielding loans acquired in the 2009 FSB transaction. Management expects continued pressure on net interest margin and spread as this portfolio mix shifts.
- Q2 non-interest expense increased to $123.4 million from $106.6 million. FDIC indemnification-asset amortization rose to $26.5 million from $15.2 million; compensation, occupancy and other costs also increased. Six-month amortization was $48.5 million versus $30.9 million.
- SBF was acquired for a cash purchase price of approximately $278 million. The transaction added roughly $174 million of loans held for investment and $82 million of loans held for sale, and generated $10.4 million of goodwill. Management said the acquired business’s results were not material and anticipated growth in loan sales, servicing assets and related revenue.
- The FDIC indemnification asset was $860.0 million at June 30, down from $974.7 million at year-end. Commercial loss sharing had ended in May 2014; the remaining asset relates to residential assets covered under the agreement that runs through May 2019. Management expects covered-asset runoff and the indemnification asset to continue declining.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management expects net interest margin and spread to continue declining, though at a decreasing rate, as acquired higher-yield loans run off and new loans are originated at prevailing market yields. It expects liquidity needs to be met over the next 12 months through deposits, loan repayments, securities and borrowing capacity.
- Commercial credit exposure warrants attention: approximately $216 million of loans were secured by taxi medallions, predominantly in New York City. The filing notes falling collateral values and market liquidity; the weighted-average estimated current LTV was approximately 74%, with $1.3 million past due 60 days or more.
- Credit metrics were generally described as strong, but non-accrual commercial loans increased, primarily due to one relationship in resolution. The allowance depends on management estimates, economic conditions, collateral values and portfolio performance.
- Investment securities available for sale had $1.46 billion of fair value in unrealized loss positions, with $11.1 million of aggregate unrealized losses. No securities were identified as other-than-temporarily impaired. Management identified $138 million of Re-Remic securities that could be affected by Volcker Rule requirements and was evaluating them ahead of the applicable compliance date.
- Outstanding lending-related commitments totaled $1.98 billion. Management considers material loss from ordinary-course legal proceedings remote. The filing reported no material change in previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether continued loan growth can offset further loan-yield and net-interest-margin compression, including the pace of runoff in acquired loans.
- Performance and credit quality of the fast-growing commercial portfolio, particularly taxi-medallion exposure and loans in non-accrual or criticized classifications.
- SBF integration, loan-sale activity, servicing revenue and credit performance of acquired SBA/USDA-related assets.
- Assumptions supporting the FDIC indemnification asset, its expected cash collections and amortization, and the effect of covered-asset resolutions on reported earnings.
- Deposit growth, funding costs, FHLB borrowing levels, liquidity measures and the availability of securities and borrowing capacity under changing market conditions.
- Valuation and regulatory treatment of investment securities, including the Re-Remic holdings and unrealized-loss positions.