BankUnited, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. BankUnited operates a full-service bank, primarily in Florida, and had 97 Florida branches and two New York-area branches at quarter-end. Herald National Bank was merged into BankUnited in March, and the company launched its New York franchise. Management planned to discontinue its small insurance and wealth-management subsidiary’s operations in May 2013.
Financial and operating highlights
- Earnings: Net income was $48.2 million, down from $50.3 million a year earlier; diluted EPS was $0.47 versus $0.49. Q1 2012 included a $5.3 million bargain-purchase gain related to Herald. Net income available to common shareholders was $48.2 million versus $49.4 million.
- Revenue and margins: Interest income was $176.4 million, up from $170.3 million. Interest expense declined to $22.6 million from $32.5 million, lifting GAAP net interest income before provision to $153.8 million from $137.8 million. Tax-equivalent net interest margin declined to 5.93% from 6.09%; tax-equivalent net interest income was $156.0 million versus $140.0 million. The margin decline reflected lower loan and securities yields, partly offset by lower funding costs.
- Credit costs and other income: Loan-loss provision rose to $12.0 million from $8.8 million. Non-interest income fell to $17.8 million from $36.4 million, in part because the prior-year period included the Herald bargain-purchase gain and higher FDIC- and mortgage-related income. Non-interest expense declined to $80.5 million from $84.1 million.
- Balance sheet: Total assets were $12.75 billion, up from $12.38 billion at year-end. Loans were $5.84 billion, up from $5.57 billion; deposits were $8.75 billion, up from $8.54 billion. Available-for-sale securities were $4.28 billion. The FDIC indemnification asset was $1.40 billion, down from $1.46 billion.
- Funding, debt, and liquidity: FHLB advances totaled $2.02 billion, compared with $1.92 billion at year-end; short-term borrowings were $1.2 million. Cash and cash equivalents were $461.2 million, down from $495.4 million. Management reported liquid assets at 12.8% of total assets, above its 5% internal threshold, and stated that the one-year liquidity ratio exceeded the company’s acceptable limit.
- Cash flows: Operating activities used $47.4 million, investing activities used $295.6 million, and financing activities provided $308.8 million. Cash and cash equivalents decreased by $34.2 million during the quarter.
- Credit quality and reserves: Non-performing loans were 0.74% of total loans and non-performing assets were 0.88% of total assets. The allowance for loan and lease losses was $61.0 million, up from $59.1 million. A $12.3 million loss provision related to one commercial relationship; a $6.8 million charge-off on that relationship contributed to higher annualized net charge-offs.
- Capital and shareholder items: The company reported Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios of 13.64%, 31.14%, and 32.35%, respectively, above applicable well-capitalized thresholds. About 5.42 million Series A preferred shares converted into common shares. A secondary offering of 22.54 million common shares was completed; selling stockholders received the proceeds, not the company. The company declared $0.21 per common share in dividends.
Material changes, outlook, and risks
- New loans grew by approximately $379 million during the quarter, outpacing resolution of covered loans. New loans were increasingly important to the portfolio, while covered loans declined as a share of total loans.
- Management expected net interest margin and spread to continue declining as new loans were added at lower prevailing rates and accretion from acquired credit-impaired loans diminished.
- The company began amortizing the FDIC indemnification asset in Q1 2013, rather than recording accretion as in the prior-year quarter. Management expected the amortization rate to increase in future periods; covered-asset-related income was also expected to decline as covered assets ran off.
- Management expected compensation, occupancy, and general operating costs to rise during 2013, particularly with New York expansion. Expansion costs included branch and technology investments; professional fees and Herald merger-related vendor termination costs also increased.
- Key risks include loan-credit deterioration—particularly in new commercial lending—uncertainty in cash-flow estimates for acquired covered assets and FDIC reimbursements, sensitivity to interest rates, and valuation uncertainty in less-liquid or Level 3 securities. The filing states that management’s estimates may differ from actual results. Regulatory capital and liquidity were reported within company limits.
- Management said legal proceedings were not expected to have a material effect, and reported no material changes to the risk factors in its 2012 Form 10-K. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether growth in new loans can sustain earnings as acquired-loan accretion and FDIC-related income decline.
- Credit performance and reserve adequacy in the growing non-covered commercial portfolio, including developments related to the significant commercial relationship charged down in Q1.
- The pace and assumptions behind FDIC indemnification-asset amortization, claims, and collections under the loss-sharing agreements.
- Whether lower loan yields and expected operating-cost growth pressure future margins and profitability as the New York franchise expands.
- Liquidity and funding needs, including FHLB advance maturities, and the company’s ability to maintain reported capital and liquidity levels.