BankUnited, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited and consolidated. BankUnited operates primarily in Florida and the New York metropolitan area; it reported 103 branches at quarter-end.
Financial performance and condition
| Metric | Q3 2013 / Sep. 30, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net income | $54.3 million; diluted EPS $0.52 | Q3 2012: $49.6 million; diluted EPS $0.48 |
| Nine-month net income | $156.5 million; diluted EPS $1.51 | Nine months 2012: $148.8 million; diluted EPS $1.44 |
| Net interest income | Q3: $164.1 million GAAP; $166.7 million tax-equivalent. Nine months: $482.0 million GAAP; $489.0 million tax-equivalent. | Q3 2012: $139.4 million GAAP; $141.6 million tax-equivalent. Nine months 2012: $423.0 million GAAP; $429.8 million tax-equivalent. |
| Net interest margin | Q3: 5.70%; nine months: 5.92%, tax-equivalent | Q3 2012: 5.47%; nine months 2012: 5.82% |
| Assets / loans / deposits | Total assets $14.31 billion; loans, net $7.75 billion; deposits $9.85 billion | Dec. 31, 2012: assets $12.38 billion; loans, net $5.51 billion; deposits $8.54 billion |
| Cash and borrowings | Cash and cash equivalents $525.7 million; FHLB advances and other borrowings $2.36 billion | Dec. 31, 2012: cash $495.4 million; borrowings $1.92 billion |
| Equity and capital | Stockholders’ equity $1.89 billion; Tier 1 leverage 13.11%; Tier 1 risk-based 24.10%; total risk-based 24.97% | Capital ratios exceeded applicable “well capitalized” guidelines |
Q3 interest income rose $17.4 million year over year, mainly on higher average loan balances; interest expense fell $7.3 million as funding costs declined. For the first nine months, provision for loan losses was $19.5 million, versus $17.9 million a year earlier. Non-interest income was $1.3 million in Q3 versus $25.7 million, and $25.2 million for nine months versus $83.7 million. Non-interest expense was $84.3 million in Q3 versus $77.2 million, and $243.1 million for nine months versus $244.4 million.
Cash flows for the first nine months included $42.8 million used in operating activities, $1.67 billion used in investing activities, and $1.74 billion provided by financing activities; cash increased $30.3 million. Investing included $906.4 million of loan purchases and $1.12 billion of net loan originations, repayments and resolutions. Financing included a $1.31 billion increase in deposits and net additions to borrowings. The company also acquired $148.6 million of equipment under operating lease.
Material changes versus comparable periods
- Net income increased 9.6% in Q3 and 5.2% for the nine-month period. Q3 results benefited from a lower effective tax rate, including a $3.6 million release of uncertain state tax reserves.
- Loans grew substantially: new loans increased $1.1 billion in Q3; total loans before premiums, discounts and fees rose $2.2 billion from year-end 2012. Deposits increased $817 million during Q3.
- Tax-equivalent net interest margin improved, chiefly due to lower deposit and borrowing costs and increased non-interest-bearing deposits. Loan yields fell as newer loans entered the portfolio at lower market rates.
- FDIC indemnification asset amortization replaced prior-period accretion: expense was $12.4 million in Q3 and $21.8 million for nine months, versus accretion income of $3.4 million and $14.5 million, respectively, in 2012. The asset declined to $1.27 billion from $1.46 billion at year-end 2012.
- Non-performing assets were $87.2 million, or 0.61% of total assets; non-performing loans were $38.7 million, or 0.50% of loans. OREO declined to $48.5 million from $76.0 million at year-end 2012.
- In March 2013, all outstanding Series A preferred shares converted one-for-one into common shares. The company declared common dividends of $0.21 per share in Q3, compared with $0.17 in Q3 2012.
Outlook, commentary, risks and unusual items
- Management expects net interest margin and spread to decline as new loans are added at current lower rates and acquired credit-impaired loans become a smaller share of the portfolio. It also expects growth in new loans and continued resolution of covered assets; no numerical earnings or revenue guidance is provided.
- The FDIC loss-sharing agreements cover specified acquired assets, generally reimbursing 80% of covered losses up to a stated $4.0 billion threshold and 95% above it. Covered assets and related income are declining, and management expects amortization of the indemnification asset to increase if recent trends continue.
- Credit risk warrants attention: a commercial relationship generated $13.2 million of losses recognized in the first nine months; new-loan provisions rose to $20.4 million from $16.7 million. The annualized net charge-off ratio increased to 0.47% from 0.17% in the prior-year nine-month period.
- Interest-rate exposure is material. A +200 basis-point scenario projected net interest income up 2.2% in year one and 7.9% in year two; estimated economic value of equity declined 4.2% in the +200-basis-point scenario. Management did not model falling-rate scenarios given the low-rate environment.
- One covered investment security incurred $963,000 of other-than-temporary impairment; the FDIC-related effect mitigated $770,000. Investment-security unrealized losses increased amid higher medium- and long-term rates, wider credit spreads and liquidity premiums.
- Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the quarter. It reported no material change in previously disclosed risk factors and considered the potential impact of routine legal proceedings remote.
Important facts for investors to verify
- Whether loan growth and deposit growth can be sustained without weakening underwriting or increasing credit losses, particularly in commercial lending, purchased residential mortgages and lease financing.
- How much earnings depend on acquired-loan accretion, covered-asset resolutions and FDIC reimbursements as those balances and benefits run down.
- Whether lower yields on new loans will outweigh funding-cost improvements and pressure net interest margin as management expects.
- The development of charge-offs, non-performing assets, criticized commercial loans and the allowance for loan losses, including the impact of the identified commercial loan relationship.
- Interest-rate and valuation sensitivity of the securities portfolio, including Level 3 assets and the effects of changing rates on accumulated other comprehensive income.
- Liquidity and funding needs as deposits, FHLB advances and commitments change; outstanding lending-related commitments totaled $1.54 billion at September 30, 2013.