Business Context and Reporting Period
Company: BankUnited, Inc.
Reporting Period: Fiscal Year Ended December 31, 2010
Business Overview: BankUnited is a savings and loan holding company headquartered in Miami Lakes, Florida, operating primarily through its subsidiary, BankUnited. The company was formed in May 2009 to acquire substantially all assets and assume non-brokered deposits of the failed BankUnited, FSB in an FDIC-assisted transaction. The company operates 81 branches across 13 Florida counties and focuses on commercial, commercial real estate, and consumer banking. A key feature of its business model is the Loss Sharing Agreements with the FDIC, which cover a significant portion of the legacy loan portfolio and other real estate owned (OREO).
Key Financial Metrics
| Metric | 2010 (Year Ended) | 2009 (Post-Acquisition Period) |
|---|---|---|
| Total Assets | $10.87 billion | $11.13 billion |
| Total Deposits | $7.16 billion | $7.67 billion |
| Net Interest Income | $389.5 million | $251.7 million |
| Non-Interest Income | $297.8 million | $253.6 million |
| Net Income | $184.7 million | $119.0 million |
| Earnings Per Share (Basic/Diluted) | $1.99 | $1.29 |
| Return on Average Assets | 1.65% | 1.69% |
| Return on Average Equity | 15.43% | 18.98% |
| Efficiency Ratio | 47.0% | N/A |
| Tier 1 Leverage Ratio | 10.34% | 8.78% |
| Tier 1 Risk-Based Capital Ratio | 41.30% | 40.42% |
| Non-Performing Assets to Total Assets | 2.14% | 1.24% |
Material Changes vs. Prior Period
- Profitability: Net income increased by 55.2% to $184.7 million in 2010 compared to $119.0 million in the post-acquisition period of 2009. This growth was driven by higher net interest income and significant non-interest income from the resolution of covered assets.
- Non-Interest Income: Increased to $297.8 million, largely due to accretion of the FDIC indemnification asset ($134.7 million) and income from the resolution of covered assets ($121.5 million). A $24.1 million settlement with the FDIC regarding investment securities valuation was also recognized in 2010.
- Expense Management: Non-interest expense rose to $323.3 million from $283.3 million. This increase was primarily due to higher employee compensation (including $36.2 million for time-based Profits Interest Units) and a $21.8 million increase in the value of the FDIC warrant. However, 2009 included $109.2 million in one-time acquisition-related costs and a $69.4 million write-off of an FDIC receivable, which were absent in 2010.
- Asset Quality: Non-performing assets increased to 2.14% of total assets in 2010 from 1.24% in 2009, reflecting continued transfers of loans to OREO and nonaccrual status. However, the allowance for loan losses to non-performing loans ratio remained robust at 226.35%.
- Capital Position: The company strengthened its capital ratios, with the Tier 1 leverage ratio rising to 10.34%, well above the regulatory requirement of 8% for its first three years of operation.
Guidance, Outlook, and Risks
Outlook and Strategy: Management intends to invest excess capital to grow organically and through acquisitions. The company plans to shift its deposit mix from time deposits to lower-cost core deposits. The company completed its Initial Public Offering (IPO) on February 2, 2011, raising approximately $97.6 million in net proceeds.
Key Risks and Contingencies:
- FDIC Loss Sharing Compliance: A significant portion of revenue is derived from assets covered by Loss Sharing Agreements. Failure to comply with servicing standards could result in the loss of FDIC coverage, leading to significant losses.
- Geographic Concentration: Operations are concentrated in coastal Florida, making the company susceptible to local economic downturns and natural disasters (e.g., hurricanes).
- Real Estate Market: Continued correction in residential and commercial real estate prices in Florida could lead to higher delinquencies and foreclosures, delaying cash flow collections from the FDIC.
- Regulatory Changes: The Dodd-Frank Act introduces new capital requirements, shifts regulatory oversight from the OTS to the OCC and Federal Reserve, and increases deposit insurance assessments, which may impact profitability and operations.
- Interest Rate Risk: The company is exposed to changes in interest rates, though it manages this risk through asset/liability management. The low interest rate environment limits yields on new assets.
Investor Verification Checklist
- FDIC Indemnification Asset Valuation: Verify the assumptions used to calculate the $2.67 billion FDIC indemnification asset and the projected cash flows from the Loss Sharing Agreements.
- Loss Sharing Compliance: Confirm the company's adherence to FDIC servicing standards to ensure continued coverage on the legacy loan portfolio.
- Non-Covered Loan Performance: Monitor the credit quality of the $549 million loan portfolio originated or purchased post-acquisition, which is not protected by FDIC loss sharing.
- Real Estate Exposure: Assess the impact of Florida's housing market on the $206.7 million OREO portfolio and the timing of foreclosure resolutions.
- Regulatory Capital Requirements: Track the impact of the Dodd-Frank Act and Basel III on future capital requirements and deposit insurance costs.
- FDIC Warrant Settlement: Note that the FDIC warrant was redeemed for $25.0 million in February 2011; verify the accounting treatment and cash impact.