BankUnited, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. BankUnited is a bank holding company operating primarily in Florida and the New York metropolitan area, with additional national lending platforms.
Financial performance and condition
- Earnings: Net income was $85.2 million, up from $62.3 million in Q1 2017; diluted EPS was $0.77 versus $0.57. Annualized return on average assets was 1.14% and return on average equity was 11.28%.
- Interest income and margin: GAAP net interest income before provision rose to $247.8 million from $230.6 million. Tax-equivalent net interest income was $253.5 million versus $240.7 million. Tax-equivalent net interest margin declined to 3.56% from 3.70%, as funding costs rose faster than asset yields.
- Other income and expenses: Non-interest income was $28.0 million, nearly unchanged from $28.1 million. Non-interest expense increased to $161.8 million from $156.6 million, including $67.0 million in employee compensation and $40.3 million in FDIC indemnification-asset amortization.
- Credit costs: The loan-loss provision fell to $3.1 million from $12.1 million. The allowance was $137.5 million, or 0.65% of loans, versus $144.8 million, or 0.68%, at year-end. Net charge-offs were $10.5 million.
- Balance sheet and funding: Total assets were $30.4 billion; loans were $21.5 billion and deposits were $22.2 billion. Deposits grew $361 million during the quarter. FHLB advances were $4.4 billion, down from $4.8 billion at year-end; notes and other borrowings were $402.8 million.
- Cash flow and liquidity: Operating cash flow was $138.1 million versus $35.4 million in Q1 2017; investing activities used $76.5 million. Cash and cash equivalents ended the quarter at $199.8 million. Management reported a 173% 30-day liquidity ratio and 162% one-year ratio, against a 100% threshold for each, plus $4.2 billion in unencumbered securities.
- Capital and shareholder returns: Company capital ratios included a 9.6% Tier 1 leverage ratio, 13.0% CET1 ratio and 13.7% total risk-based capital ratio. The company repurchased 1.2 million shares for $48.6 million under a $150 million authorization and declared a $0.21-per-share dividend.
Material changes versus comparable periods
- Net income increased about 37% year over year, supported by higher interest income and a lower loan-loss provision. Interest expense increased $27.0 million, reflecting deposit growth, higher deposit rates and more expensive FHLB funding.
- The effective tax rate declined to 23.1% from 30.8%, primarily following the federal corporate tax-rate reduction under the Tax Cuts and Jobs Act.
- Average loans and investment securities increased year over year, while covered loans continued to run off. Management said New York multifamily balances were declining as it reduced that concentration.
- Nonperforming loans rose to 0.92% of total loans from 0.82% at December 31, 2017; nonperforming assets rose to 0.69% of total assets from 0.61%. Management attributed the increase principally to new non-accrual multifamily loans.
Outlook, risks and unusual items
- No quantified earnings or margin guidance was provided. Management expects deposits and earning assets to continue growing, New York multifamily balances to decline in the near term, and covered assets and the related FDIC indemnification asset to run off. It forecasts selling substantially all remaining covered assets in 2019, near the expected end of the Single Family Shared-Loss Agreement; these estimates depend on expected cash flows.
- Funding-cost pressure, competitive deposit markets, interest-rate and yield-curve movements, loan growth and changing asset mix may affect future margins. The filing’s rate-sensitivity model projected higher net interest income in rising-rate scenarios and lower income in a down-100-basis-point scenario; actual results may differ.
- Credit concentration: The $98 million taxi-medallion portfolio was entirely non-accrual and risk-rated substandard. The company recognized $5.4 million of related charge-offs in the quarter and cited continued declines in medallion values and operating cash flows. New York multifamily re-positioning loans that missed stabilization timelines also contributed to higher non-accrual loans.
- Unfunded lending-related commitments totaled $3.85 billion. Affordable-housing investments had a stated maximum exposure to loss of approximately $72 million, although management considered potential losses remote. Management considered ordinary-course legal proceedings unlikely to have a material effect.
- The company adopted accounting standards affecting equity-security measurement and stranded tax effects; adoption adjustments included reclassifications within equity. The new CECL credit-loss standard is not yet adopted; management said its impact could be material but could not yet be reasonably estimated.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It reported no material changes to the risk factors in the 2017 Form 10-K.
Important facts for investors to verify
- Whether margin pressure from deposit and borrowing costs continues, and whether asset yields keep pace.
- Trends in multifamily non-accruals, delinquencies and criticized loans, and developments in the taxi-medallion portfolio and collateral values.
- Whether deposit growth and available borrowing capacity remain adequate as loans grow and covered-asset cash flows run off.
- Actual timing and proceeds from the planned 2019 covered-asset sales, and changes in the FDIC indemnification asset and related earnings contribution.
- The eventual CECL adoption impact on the allowance, capital and earnings, along with use of the remaining share-repurchase authorization.