Business context and reporting period
BankUnited, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. It is a regional bank holding company operating primarily in Florida, with 98 Florida branches and two New York-area branches at year-end. The annual results include Herald National Bank from its February 29, 2012 acquisition; the filing describes the acquisition as not material to consolidated results. The filing also provides unaudited fourth-quarter information.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Net income | $211.3 million | $63.2 million |
| Diluted earnings per share | $2.05 | $0.62 |
| Net interest income | $597.6 million | $499.2 million |
| Tax-equivalent net interest margin | 6.04% | 6.21% |
| Provision for loan losses | $18.9 million | $13.8 million |
| Non-interest income | $89.2 million | $163.2 million |
| Non-interest expense | $323.1 million | $455.8 million |
- Management reported return on average assets of 1.71% and return on average common equity of 12.45% for 2012. The 2011 comparison was affected by a $110.4 million IPO-related equity compensation charge.
- At year-end, assets were $12.38 billion, loans net were $5.51 billion, deposits were $8.54 billion, and stockholders’ equity was $1.81 billion. Assets grew from $11.32 billion in 2011; deposits increased about $1.17 billion and loans net about $1.42 billion.
- Cash and cash equivalents were $495.4 million. FHLB advances were $1.92 billion, down from $2.24 billion; short-term borrowings were $8.2 million. The company reported liquid assets at 13.0% of BankUnited assets, above its 2.5% internal minimum, and said its one-year liquidity measure exceeded its internal limit.
- Operating cash flow was negative $351.6 million, versus negative $248.6 million in 2011. Investing activities provided $201.0 million and financing activities provided $342.2 million; cash increased $191.6 million. Cash-flow figures reflect substantial acquisition-accounting accretion and other noncash adjustments.
- Capital ratios exceeded regulatory well-capitalized thresholds. At year-end, the company reported Tier 1 risk-based capital of 33.60%, total risk-based capital of 34.88%, and Tier 1 leverage of 13.16%.
- Non-performing loans were 0.62% of total loans and non-performing assets were 0.89% of assets. New-loan non-performing loans were 0.43% of new loans; the allowance was $59.1 million, or 1.06% of loans. Certain delinquent acquired-credit-impaired loans continue accruing under acquisition accounting and are excluded from standard non-performing measures.
- Annual dividends were $0.72 per share, including an increase to $0.21 per share for the fourth quarter.
Material changes versus the prior comparable period
- Net income rose substantially, but 2011 included the $110.4 million IPO-related compensation charge. The 2012 result also reflects the Herald acquisition and changing covered-asset and FDIC-related income.
- Net interest income increased as average loans and securities grew and funding costs fell. However, margin declined 17 basis points as lower-yielding new loans and securities replaced higher-yielding covered assets.
- New loans increased $2.0 billion to $3.7 billion, led by commercial lending; total loans grew despite the runoff of legacy covered loans. The share of loans covered by FDIC loss-sharing declined to 33% from 59%.
- Deposits rose, with non-interest-bearing demand deposits reaching 22% of year-end deposits. The average rate paid on deposits fell to 0.81% from 1.09%.
- Non-interest income fell by $74.0 million, mainly reflecting sharply lower indemnification-asset accretion and changing covered-asset resolution gains and losses. Non-interest expense fell by $132.7 million, chiefly because 2011 included the IPO compensation charge; excluding that charge, the company reported expenses at 2.6% of average assets in 2012 versus 3.2% in 2011.
- OREO declined to $76.0 million from $123.7 million, and non-performing assets declined to $110.6 million from $152.6 million.
Outlook, commentary, risks and unusual items
- Management cited opportunities for continued Florida and Tri-State growth, including three planned Manhattan branches, broader mortgage origination, mortgage servicing, and strategic acquisitions. It expected compensation and occupancy costs to increase in 2013 as the business expanded.
- Management expects pressure on net interest margin as covered assets run off and are replaced with lower-rate loans. It also noted that Florida economic conditions remained under stress and that regulatory uncertainty and potentially higher capital expectations could challenge growth and expenses. No quantified earnings or revenue guidance is provided.
- The FDIC loss-sharing agreements cover specified legacy assets, generally reimbursing 80% of losses up to a stated $4.0 billion threshold and 95% above it. The FDIC indemnification asset was $1.46 billion at year-end, down from $2.05 billion. Management expected accretion to turn to amortization beginning in first-quarter 2013; the timing and value of recoveries depend on covered-asset performance and FDIC claim payment.
- Fourth-quarter 2012 included $14.2 million of loss on extinguishment of FHLB advances and $8.7 million of loss on termination of an interest-rate swap. The transactions were intended to improve net interest margin in 2013. Fourth-quarter net income was $62.5 million.
- Key risks include credit losses in the growing, relatively unseasoned non-covered loan portfolio; interest-rate and margin sensitivity; Florida real-estate and weather concentration; delays in foreclosure and FDIC reimbursements; compliance with loss-sharing terms; acquisition and expansion execution; and evolving banking regulation. Management said ordinary-course litigation was not expected to have a material effect.
- KPMG issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective. The assessment and audit excluded Herald’s controls, associated with $490.5 million of assets and $13.5 million of net interest income.
Important facts for investors to verify
- How much future earnings depend on FDIC-related income and whether the expected shift from accretion to amortization occurs as described.
- Credit performance and allowance adequacy as the fast-growing new-loan portfolio seasons, including commercial exposures and early delinquencies.
- Whether new lending growth and lower funding costs can offset continued covered-loan runoff and margin compression.
- Liquidity and refinancing exposure, including the $1.29 billion of FHLB advances scheduled to mature in 2013 and deposit retention and pricing.
- Execution, cost, and returns from Herald integration, planned Tri-State branches, and other 2013 expansion initiatives.
- The effect of regulatory requirements and dividend restrictions on capital deployment and shareholder distributions.