BankUnited, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. BankUnited is a bank holding company operating through its national bank subsidiary, with Florida and New York branches and national commercial lending platforms. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions where appropriate.
Financial performance and condition
| Metric | Q1 2019 / Mar. 31, 2019 | Comparable period / Dec. 31, 2018 |
|---|---|---|
| Total interest income | $321.8 million | $327.8 million in Q1 2018 |
| Net interest income, GAAP | $190.9 million | $247.8 million in Q1 2018 |
| Net interest margin, tax-equivalent | 2.54% | 3.56% in Q1 2018; 4.01% in Q4 2018 |
| Provision for loan losses | $10.3 million | $3.1 million in Q1 2018 |
| Non-interest income | $36.3 million | $28.0 million in Q1 2018 |
| Non-interest expense | $126.7 million | $161.8 million in Q1 2018 |
| Net income / diluted EPS | $66.0 million / $0.65 | $85.2 million / $0.77 in Q1 2018 |
| Return on average equity / assets, annualized | 9.05% / 0.82% | Not stated as a comparable figure in the filing excerpt |
| Total assets | $32.7 billion | $32.2 billion at Dec. 31, 2018 |
| Loans, gross | $22.4 billion | $22.0 billion at Dec. 31, 2018 |
| Deposits | $23.7 billion | $23.5 billion at Dec. 31, 2018 |
| Cash and cash equivalents | $241.5 million | $382.1 million at Dec. 31, 2018 |
| Total stockholders’ equity | $2.92 billion | $2.92 billion at Dec. 31, 2018 |
Cash flow, funding and capital
- Operating cash flow was $88.5 million, versus $138.1 million in Q1 2018. Investing activities used $609.5 million; financing activities provided $380.4 million. Cash and cash equivalents declined $140.6 million during the quarter.
- Deposits increased $205 million during the quarter, including $143 million in non-interest-bearing demand deposits. Loans and leases, including equipment under operating lease, grew $390 million, according to management.
- Quarter-end funding included $5.03 billion of Federal Home Loan Bank advances, $175 million of federal funds purchased and $402.7 million of notes and other borrowings. The $400 million senior notes carry a 4.875% coupon and mature in November 2025.
- The Bank reported a 12.94% CET1 risk-based capital ratio and a 13.45% total risk-based capital ratio; management said BankUnited and the holding company exceeded well-capitalized guidelines and internal targets.
- Bank liquidity ratios were 196% for the 30-day measure and 148% for the one-year measure, above the company’s stated 100% thresholds. Available capacity included $3.4 billion at the FHLB, $487 million at the Federal Reserve and $85 million in federal funds lines. Unencumbered investment securities were $6.1 billion.
Material changes and management commentary
- Net income declined to $66.0 million from $85.2 million year over year. Net interest income fell $56.9 million; management attributed the main pressure to lower accretion income from formerly FDIC-covered residential acquired-credit-impaired loans, along with higher deposit and borrowing costs.
- Tax-equivalent net interest income was $196.5 million, down from $253.5 million in Q1 2018. Average interest-bearing deposit cost rose to 1.97% from 1.22%, while the average cost of FHLB advances rose to 2.38% from 1.66%.
- The Single Family Shared-Loss Agreement with the FDIC terminated on February 13, 2019. The related indemnification asset had been amortized to zero by year-end 2018; covered-asset income and FDIC indemnification effects shown in Q1 2018 did not recur in Q1 2019.
- Non-interest expense fell year over year mainly because Q1 2018 included $40.3 million of FDIC indemnification asset amortization. Q1 2019 professional fees increased to $7.9 million from $2.9 million, reflecting consulting for the BankUnited 2.0 initiative and CECL implementation.
- The Board authorized up to $150 million of share repurchases in January. The company repurchased approximately 1.1 million shares for $40 million at an average $35.91 per share during the quarter; approximately $110.0 million remained available at March 31.
- Book value per share was $29.71 and tangible book value per share was $28.92, compared with $29.49 and $28.71, respectively, at year-end 2018.
Credit quality, risks and contingencies
- Non-performing loans were $133.2 million, or 0.60% of loans, versus $129.9 million, or 0.59%, at year-end. Non-performing assets were $145.0 million, or 0.44% of assets, versus $139.4 million, or 0.43%. The allowance for loan and lease losses was $114.7 million, 0.51% of loans.
- Net charge-offs were $5.5 million in Q1 2019, compared with $10.5 million in Q1 2018; Q1 2018 included taxi-medallion charge-offs. The provision increased year over year, with management citing specific reserves, changes in loss factors and loan growth.
- Residential 1–4 family loans more than 30 days past due, excluding government-insured loans, rose to $190.3 million from $23.5 million at year-end. Management attributed the increase to a first-quarter servicing transfer and expected delinquencies to normalize over the following quarter. Verify subsequent-period performance.
- Commercial loans were concentrated in commercial real estate and commercial and industrial lending. At March 31, 98.2% of commercial credit exposure was rated pass; 1.3% was substandard and 0.1% doubtful. The company also reported two substandard operating-lease relationships with $72 million of leased assets, including $36 million exposed to the energy industry.
- The investment-securities portfolio totaled $8.37 billion. Available-for-sale securities had $31.1 million of gross unrealized losses; management said losses were primarily interest-rate-related, did not intend to sell securities in significant loss positions and did not consider forced sale before recovery likely. No securities were deemed other-than-temporarily impaired.
- Management was implementing the CECL credit-loss standard, expected to apply beginning in 2020. The company said the adoption impact could be material but could not yet be reasonably estimated.
- Off-balance-sheet lending-related commitments totaled $4.19 billion, including $2.83 billion of unfunded credit lines and $774 million of commitments to purchase loans. Management said many commitments may expire unfunded. Legal proceedings arise in the ordinary course; management assessed the likelihood of a material impact as remote. No material risk-factor changes from the 2018 Form 10-K were reported.
- Management stated that it expected liquidity requirements to be met over the next 12 months. The filing provides no specific earnings or revenue guidance and cautions that quarterly results are not necessarily indicative of future results.
Key facts for investors to verify
- Whether net interest margin and deposit funding costs stabilize, given the substantial year-over-year margin compression.
- Whether the residential delinquency increase reverses as management expected after the servicing transfer, and how non-performing loans and reserves trend.
- The eventual CECL adoption effect on the allowance, earnings and capital ratios.
- Credit and residual-value exposure in commercial real estate, energy-linked equipment leasing and the investment-securities portfolio.
- Liquidity and funding conditions, including near-term FHLB advance maturities, deposit pricing and the extent of further share repurchases.