BankUnited, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. Unless noted, figures are in U.S. dollars. BankUnited is a bank holding company headquartered in Florida; its 2012 acquisition of Herald expanded operations into the New York metropolitan area.
Financial performance and condition
| Metric | Q3 2012 / Sep. 30, 2012 | Comparable period / prior date |
|---|---|---|
| Net interest income | $139.4 million | $128.8 million in Q3 2011 |
| Net income | $49.6 million; diluted EPS $0.48 | $45.6 million; diluted EPS $0.45 in Q3 2011 |
| Net interest margin | 5.39% | 6.30% in Q3 2011 |
| Assets | $12.75 billion | $11.32 billion at Dec. 31, 2011 |
| Loans, net | $5.24 billion | $4.09 billion at Dec. 31, 2011 |
| Deposits | $8.46 billion | $7.36 billion at Dec. 31, 2011 |
| FHLB advances and other borrowings | $2.22 billion | $2.24 billion at Dec. 31, 2011 |
| Stockholders’ equity | $1.75 billion | $1.54 billion at Dec. 31, 2011 |
- For the first nine months, net interest income was $423.0 million versus $358.4 million in 2011; net income was $148.8 million versus $21.9 million. The prior-year result included a $110.4 million non-deductible IPO-related equity compensation charge.
- Q3 interest-earning asset yield fell to 6.58% from 7.96%; the average cost of interest-bearing liabilities declined to 1.31% from 1.62%. The lower funding cost only partly offset lower asset yields, reducing net interest margin.
- Q3 non-interest income was $25.7 million versus $32.8 million; nine-month non-interest income was $83.7 million versus $149.9 million. Lower FDIC-asset accretion and a nine-month net loss on the indemnification asset contributed to the decline. Nine-month non-interest expense fell to $244.4 million from $380.0 million, substantially reflecting the prior-year IPO compensation charge.
- Nine-month cash flows were $286.4 million used in operations, $300.0 million used in investing, and $629.3 million provided by financing. Cash and cash equivalents increased $42.9 million to $346.6 million.
- Credit indicators improved from year-end 2011: non-performing assets were 0.96% of assets versus 1.35%, and annualized net charge-offs were 0.17% versus 0.62%. Non-performing loans were 0.62% of loans; the allowance for loan and lease losses was $60.4 million, or 1.14% of loans. Substantially all non-performing assets were covered by FDIC loss-sharing agreements.
- Regulatory capital ratios remained well above stated well-capitalized thresholds: Tier 1 leverage 12.89%, Tier 1 risk-based 34.31%, and total risk-based 35.64%. Liquid assets were 15.4% of total assets, above the company’s 2.5% internal minimum.
Material changes and operating developments
- Loans grew by $1.1 billion from year-end, including $1.5 billion growth in new loans, partly offset by a $382.7 million decline in loans acquired in the 2009 FDIC-assisted acquisition. Commercial lending expanded, while covered loans continued to run off.
- Non-interest-bearing demand deposits increased, and demand deposits rose to 20.5% of deposits from 16.6% at year-end. Time deposits fell to 32.2% from 35.1% of deposits.
- Herald was acquired on February 29, 2012 for approximately $65.0 million in cash, stock, and options. BankUnited recorded a $5.3 million bargain-purchase gain; Herald’s results were not material to consolidated results.
- The investment portfolio grew to $4.78 billion from $4.18 billion at year-end and had a net unrealized gain of $183.4 million. The company reported no other-than-temporary impairment for the periods presented.
Outlook, risks, and contingencies
- No formal quantitative earnings guidance was provided. Management expected to sell covered loans in Q4 2012, including loans from an ACI residential pool whose carrying value had been reduced to zero. Proceeds from that pool sale were expected to be recorded as interest income and to increase its yield and Q4 net interest margin; the timing and net FDIC-related impact could vary.
- Management expected accretion income from acquired credit-impaired loans and the FDIC indemnification asset to decline as covered assets resolve and projected loan cash flows improve. It noted that negative accretion, or amortization, of the indemnification asset could occur in future periods.
- Results depend on estimates of covered-asset cash flows, FDIC reimbursements, loan-loss reserves, collateral values, deferred tax assets, and investment-security fair values. Management cautioned that actual results may differ from estimates. The FDIC loss-sharing agreements mitigate, but do not eliminate, covered-asset effects; new loans are not covered.
- Interest-rate risk remains relevant: management’s +200 basis-point scenario projected net interest income changes of +1.5% in year one and +9.2% in year two. The filing notes that actual outcomes may differ as rates, markets, and the yield curve change.
- Outstanding lending-related commitments totaled $816.4 million. Management considered the likelihood of material adverse effects from ordinary-course legal proceedings remote. The company reported no material change in previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the planned Q4 covered-loan sale occurred, its proceeds, earnings classification, and effect on FDIC indemnification.
- Whether net interest margin can be sustained as acquired-loan accretion and FDIC-asset income decline.
- Credit quality and reserve adequacy as the uncovered loan portfolio grows, including commercial-loan performance and residential delinquencies.
- Assumptions underlying the FDIC indemnification asset, deferred tax assets, and Level 3 investment valuations.
- Deposit growth, funding costs, liquidity, and capital levels as the business expands.