BankUnited, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011 unless noted. Financial statements are unaudited. BankUnited operates primarily in Florida and, following its February acquisition of Herald National Bank, also has three branches in the New York metropolitan area. Amounts below are in U.S. dollars.
Financial performance and condition
- Profitability: Net income was $50.3 million, or $0.49 per share, versus a $67.7 million net loss, or $0.72 loss per share, in Q1 2011. The prior-year result included a $110.4 million non-deductible equity-compensation charge related to the IPO. Q1 2012 included a $5.3 million Herald acquisition gain and $1.2 million of acquisition costs.
- Revenue and margins: Net interest income rose to $137.8 million from $112.3 million; net interest margin increased to 5.99% from 5.76%. Net interest spread was 5.96%, versus 5.97%. Total non-interest income fell to $36.4 million from $64.3 million, including lower FDIC-asset accretion and indemnification gains.
- Credit costs and expenses: Loan-loss provision was $8.8 million, down from $11.5 million. Non-interest expense was $84.1 million versus $204.3 million, largely reflecting the prior-year IPO-related compensation charge. Income-tax expense was $31.1 million; the reported effective tax rate was 38.2%.
- Assets and funding: Total assets were $12.20 billion, up from $11.32 billion. Net loans were $4.65 billion versus $4.09 billion, and available-for-sale securities were $4.66 billion versus $4.18 billion. Deposits increased to $8.09 billion from $7.36 billion. Federal Home Loan Bank advances were $2.23 billion, broadly unchanged.
- Cash flow: Operating cash flow was negative $97.6 million, compared with negative $50.8 million in Q1 2011; investing cash flow was negative $184.1 million versus positive $131.9 million; financing cash flow was positive $290.0 million versus negative $191.8 million. Cash and cash equivalents ended at $312.1 million, up from $303.7 million at year-end.
- Capital and liquidity: Reported bank capital ratios exceeded “well-capitalized” thresholds: Tier 1 leverage 13.41%, Tier 1 risk-based 36.84%, and total risk-based 38.18%. Liquid assets were 11.6% of total assets, above the company’s 2.5% internal minimum. Stockholders’ equity was $1.64 billion, versus $1.54 billion.
- Credit quality: Non-performing assets were 1.14% of total assets, down from 1.35%; non-performing loans were 0.69% of loans, versus 0.70%. Annualized net charge-offs were 0.07%, versus 0.62%. The allowance for loan and lease losses was $56.5 million, up from $48.4 million, and equaled 174.06% of non-performing loans.
Material changes and notable items
- BankUnited completed the Herald acquisition on February 29 for approximately $65.0 million. Acquired assets included $306.0 million of loans and $161.0 million of securities; acquired deposits were $435.5 million. The company recorded a $5.3 million bargain-purchase gain. Herald’s results were included from the acquisition date and were described as immaterial.
- Deposit growth included acquired Herald deposits. Management also cited a shift toward lower-cost demand, savings, and money-market deposits: demand deposits were 19.0% of deposits at quarter-end, up from 16.6% at year-end; time deposits declined to 32.4% from 35.1%.
- New loans grew, while legacy covered loans continued to decline. Covered loans were 49% of loans net of discounts and deferred fees at March 31, compared with 59% at year-end. Commercial lending was a strategic focus.
- The FDIC indemnification asset declined to $1.79 billion from $2.05 billion, primarily reflecting $269.6 million of claims paid. The FDIC loss-sharing agreements cover specified acquired assets, generally reimbursing 80% of losses up to the stated $4.0 billion threshold and 95% above it.
Outlook, risks, and contingencies
- No formal earnings or revenue guidance is provided. Management expects accretion from the FDIC indemnification asset to continue declining as covered assets resolve, projected covered-loan cash flows improve, and the indemnification asset is reduced. Accretion on acquired credit-impaired loans also is expected to decline as those loans run off.
- Management expects operating cash generation and FDIC reimbursements to support liquidity and capital needs over the next 12 months. It reported the one-year liquidity measure exceeded the company’s internal acceptable limit.
- Interest-rate simulation showed projected net interest income increasing 1.7% in the first 12 months and 8.1% in the second year under a +200 basis-point scenario. Management cautioned that actual outcomes may differ because of rate timing, market conditions, yield-curve shape, and management actions.
- Key risks include uncertainty in estimates of acquired-loan cash flows, the FDIC indemnification asset, loan-loss reserves, real-estate collateral values, and fair values of securities. Level 3 securities were $525.7 million at quarter-end and rely on significant unobservable valuation inputs. Management reported no securities as other-than-temporarily impaired.
- Outstanding lending-related commitments totaled $705.8 million, including $488.0 million of unfunded lines of credit. These commitments may not all be drawn. The company reported various legal proceedings but judged a material adverse impact remote; it disclosed no material change in previously reported risk factors.
Important facts for investors to verify
- How much future earnings depend on FDIC-related accretion, covered-asset resolutions, and the assumptions supporting the $1.79 billion indemnification asset.
- Whether growth in non-covered loans and the $8.1 million increase in the allowance adequately reflect credit risk as the portfolio mix shifts toward new lending.
- The sustainability of the 5.99% net interest margin, given declining yields on securities and new loans and the continued runoff of acquired-loan accretion.
- The valuation sensitivity and liquidity of Level 3 securities, and the potential effect of interest-rate and credit-market changes on the investment portfolio.
- The terms, maturity profile, and refinancing implications of $2.23 billion of FHLB advances, alongside deposit retention and funding costs.
- The final purchase-accounting values for Herald, which the filing says were provisional in certain areas, and the integration and performance of the acquired franchise.