BankUnited, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. BankUnited is a Florida-based bank holding company operating 85 branches in 13 counties. Its acquired loan and other asset portfolio remains substantially subject to FDIC loss-sharing agreements.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $128.8m | $98.8m | $358.4m | $287.5m |
| Net interest margin | 6.30% | 5.04% | 6.02% | 4.95% |
| Provision for loan losses | $1.3m | $19.1m | $9.8m | $45.2m |
| Non-interest income | $32.8m | $71.3m | $149.9m | $237.5m |
| Non-interest expense | $79.8m | $79.9m | $380.0m | $220.0m |
| Net income | $45.6m | $45.0m | $21.9m | $156.9m |
| Diluted EPS | $0.45 | $0.48 | $0.20 | $1.69 |
Q3 net interest income rose 30% year over year, reflecting higher loan yields—especially on acquired credit-impaired loans—and lower deposit costs. Q3 net income was nearly flat, while diluted EPS declined. For the nine-month period, earnings fell sharply, primarily reflecting a one-time $110.4m noncash compensation charge tied to the IPO/Profits Interest Unit exchange, lower FDIC-related income, and higher OREO losses and expenses. The IPO charge was not tax-deductible and was offset by a credit to paid-in capital.
Financial position, liquidity and capital
- Assets: $11.01bn at September 30, 2011, versus $10.87bn at December 31, 2010.
- Loans, net: $3.96bn, up from $3.88bn; growth in new loans more than offset runoff and resolution of covered loans. New commercial and commercial real estate lending expanded.
- Investment securities: $3.89bn, up from $2.93bn, reflecting deployment of cash from loan resolutions and FDIC claims. Management reported no securities deemed other-than-temporarily impaired.
- Deposits: $6.95bn, down from $7.16bn. Core deposits increased during the quarter and nine-month period; time deposits continued to run off. Average interest-bearing deposit cost fell to 1.18% in Q3 from 1.53%.
- Borrowings: FHLB advances were $2.24bn; short-term repurchase-agreement borrowings were $0.3m. The filing reports no FHLB advance additions or repayments during the first nine months of 2011.
- Cash and cash equivalents: $385.1m, down $179.7m during the nine months. Operating cash flow was negative $183.1m, investing cash flow positive $157.2m, and financing cash flow negative $153.8m.
- Equity and regulatory capital: Stockholders’ equity was $1.50bn, up 19.7% from year-end, supported by IPO proceeds and equity compensation, partly offset by dividends. Bank capital ratios exceeded well-capitalized thresholds: Tier 1 leverage 10.79%, Tier 1 risk-based 37.32%, and total risk-based 38.17%.
- Liquidity: Liquid assets to total assets were 13.69%, above the company’s 2.5% policy threshold. Management expected near-term liquidity and capital needs to be met through operations, core deposits, portfolio cash flows, and FDIC reimbursements.
Material changes and asset quality
- The allowance for loan losses declined to $55.1m from $58.4m at year-end; nine-month provision expense was $9.8m versus $45.2m in 2010. Covered-loan loss exposure is substantially mitigated by FDIC reimbursement, while new loans are not covered.
- Non-performing assets declined to $162.0m from $232.5m, and the ratio to total assets improved to 1.47% from 2.14%. Non-performing loans increased to $37.0m from $25.8m; the ratio to total loans rose to 0.92% from 0.66%. Annualized net charge-offs were 0.46% versus 0.37%.
- OREO fell to $125.0m from $206.7m, but nine-month OREO impairment was $21.8m and losses on OREO sales were $27.3m. Management attributed rising sale losses to continued home-price deterioration in its primary markets.
- The FDIC indemnification asset declined to $2.11bn from $2.67bn, primarily as claims were filed and paid. Management expects accretion income from this asset to decline in future periods.
Outlook, risks and unusual items
- The filing gives no numerical earnings or revenue guidance. Management expects commercial core deposits to become a larger share of funding and says commercial lending will drive core deposit growth; it also anticipates continued decline in FDIC-asset accretion.
- Under the loss-sharing agreements, the FDIC generally reimburses 80% of covered losses up to a $4.0bn stated threshold and 95% above it. Reimbursements depend on covered-asset resolution, eligibility, claim submission and FDIC payment timing.
- In November 2011, management approved a sale of covered residential loans with approximately $269.3m unpaid principal and $146.4m carrying value. The company estimated a $13.5m pretax loss, net of FDIC indemnification, in Q4; the final amount remained subject to transaction terms.
- BankUnited agreed to acquire Herald National Bank, subject to shareholder, regulatory and other customary conditions. Consideration is cash or BKU shares valued at $1.35 plus 0.099 BKU shares per Herald share; the filing anticipated the surviving bank would merge into BankUnited in August 2012.
- Other items include an $8.1m provision for uncertain state tax positions, including estimated interest and penalties, and a $25m FDIC warrant redemption in February 2011. Management reported no material changes to previously disclosed risk factors and no litigation expected to materially affect the company.
- Interest-rate sensitivity modeling showed a projected net interest income increase of 1.67% in year one and 10.20% in year two under a +200-basis-point scenario; management considered these within policy limits. Actual results may differ from model assumptions.
Most important facts for investors to verify
- Whether Q3 margin gains from acquired-loan cash-flow estimates and lower deposit costs can persist as covered assets run off and accretion declines.
- The quality and seasoning of rapidly growing, uncovered new loans, including commercial exposures and residential loans purchased during 2011.
- Future credit costs and collateral recoveries, given rising non-performing loans, delinquent acquired loans, and home-price pressure affecting OREO dispositions.
- The timing and amount of FDIC claims and reimbursements, and the final loss on the planned covered-loan sale.
- The effect of the IPO-related compensation charge and uncertain-tax-position provision when assessing recurring earnings and the unusually low nine-month net income.
- Completion terms, regulatory approvals and integration implications of the Herald acquisition.