BankUnited, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. BankUnited is a bank holding company operating through its national bank subsidiary, with 99 Florida branches and six New York-area banking centers. Unless otherwise noted, amounts below are in millions.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income, GAAP | $165.9 | $164.1 | $332.3 | $317.8 |
| Net interest margin, tax-equivalent | 4.67% | 6.14% | 4.85% | 6.04% |
| Non-interest income | $20.5 | $13.2 | $50.7 | $33.4 |
| Non-interest expense | $106.6 | $85.5 | $209.1 | $168.3 |
| Net income | $48.5 | $54.0 | $103.8 | $102.2 |
| Diluted EPS | $0.46 | $0.52 | $0.99 | $0.99 |
- At June 30, 2014, total assets were $17.0 billion, up from $15.0 billion at December 31, 2013. Loans, net, were $10.5 billion versus $9.0 billion; available-for-sale securities were $4.1 billion versus $3.6 billion.
- Deposits totaled $12.0 billion, up from $10.5 billion at year-end. FHLB advances and other borrowings were $2.7 billion, compared with $2.4 billion. Stockholders’ equity was $2.0 billion, up from $1.9 billion.
- Cash and cash equivalents were $379 million, compared with $253 million at year-end. For the first six months, operating cash flow was negative $51.5 million, investing cash flow negative $1.58 billion, and financing cash flow positive $1.76 billion; cash increased $126 million.
- Regulatory capital ratios at June 30 were 11.6% Tier 1 leverage, 17.7% Tier 1 risk-based, and 18.5% total risk-based. Management said these exceeded applicable “well capitalized” guidelines. Book value and tangible book value per share were $19.82 and $19.14, respectively.
- Asset quality measures remained low: non-performing assets were 0.29% of total assets and non-performing loans 0.27% of total loans. The allowance for loan and lease losses was $75.5 million; net charge-offs were 0.07% of average loans, annualized, for the first half.
Changes versus comparable periods
- Q2 net income fell 10% year over year, while first-half net income increased modestly. Q2 diluted EPS declined from $0.52 to $0.46.
- Q2 net interest income rose $1.8 million on a GAAP basis, but tax-equivalent net interest margin contracted 147 basis points. Higher average loan balances supported interest income, while loan yields fell as newer production carried lower rates and acquired high-yield loans ran off.
- Q2 non-interest expense increased $21.1 million year over year, including higher FDIC indemnification-asset amortization, compensation, and occupancy costs. Non-interest income improved, partly reflecting other income and covered-asset activity.
- Loans grew during the quarter, including $971 million of new-loan growth before the indirect-auto portfolio sale. Total deposits increased $913 million during Q2. The company sold substantially all of its indirect auto loans, with a $303 million recorded investment; the transaction increased pretax earnings by $1.8 million, including release of related allowance and exit costs.
- Commercial Shared-Loss Agreement coverage terminated May 21, 2014. At quarter-end, $102 million of commercial and consumer acquired-credit-impaired loans and $204 million of securities no longer had loss-sharing coverage; the company bears credit risk on those assets. The agreement still provides for FDIC reimbursement of specified recoveries through May 21, 2017. Single-family loss sharing continues under its separate agreement.
Outlook, management commentary, risks and unusual items
- Management expects net interest margin and spread to decline further as lower-yielding new loans grow and higher-yielding assets acquired in the 2009 FDIC transaction continue to run off. No specific earnings or revenue guidance was provided.
- Management expects liquidity needs over the next 12 months to be met through deposits, loan repayments and resolutions, FDIC reimbursements, securities and borrowing capacity. Reported liquidity measures were 8.1% liquid assets to total assets and a 137% one-year liquidity ratio; available FHLB borrowing capacity was $1.6 billion.
- Interest-rate sensitivity models showed net interest income changes of +0.5%, +1.2% and +1.8% over 12 months under +100, +200 and +300 basis-point scenarios. The filing cautions that actual outcomes may differ because of market conditions, depositor behavior, timing, and management actions.
- Investment securities had a $146 million net unrealized gain at quarter-end; no securities were deemed other-than-temporarily impaired in the first half. The filing says losses were primarily related to higher market interest rates. Securities with fair values totaling $543 million had been in unrealized loss positions for at least 12 months, with $9 million of related losses.
- The company held $231 million of Re-Remic securities that it believed could be treated as impermissible covered-fund investments under the Volcker Rule. Compliance was required by July 2015; management expected amortization and prepayments to reduce the portfolio materially before then and said it would continue evaluating the holdings.
- Other risks include credit losses—particularly as commercial coverage ends—changes in collateral values and borrower performance, assumptions used to value acquired loans and the FDIC indemnification asset, and interest-rate and securities valuation risks. Legal proceedings were described as ordinary-course matters with a remote likelihood of material impact. Management reported no material change to the risk factors in the 2013 Form 10-K and stated disclosure controls were effective.
Key facts for investors to verify
- Whether new-loan growth and deposit funding can offset acquired-loan runoff and the expected decline in net interest margin.
- Credit performance, allowance adequacy and charge-offs in the growing commercial portfolio, including assets no longer covered by the Commercial Shared-Loss Agreement.
- Actual FDIC reimbursements and the pace of reduction in the $1.085 billion indemnification asset, including the effect of its amortization on earnings.
- Whether liquidity and funding remain adequate as deposits, FHLB borrowings and loan growth change; also review large-certificate maturities and commitments totaling $1.80 billion.
- Resolution of the Volcker Rule treatment of the $231 million Re-Remic portfolio and any required actions before the July 2015 compliance date.