BankUnited, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unless noted otherwise, financial amounts are in millions of dollars. BankUnited is a Florida-based bank holding company; it acquired Herald National Bank in February 2012, expanding into the New York metropolitan area.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $145.8 | $117.3 | $283.6 | $229.6 |
| Non-interest income | $21.7 | $52.9 | $58.1 | $117.1 |
| Non-interest expense | $83.0 | $95.9 | $167.1 | $300.2 |
| Net income (loss) | $48.9 | $44.0 | $99.2 | $(23.7) |
| EPS, diluted | $0.48 | $0.44 | $0.96 | $(0.25) |
| Net interest margin | 5.82% | 5.99% | 5.90% | 5.87% |
- Q2 net interest income rose 24% year over year, reflecting loan and securities growth and lower deposit costs. Loan yield fell to 11.87% from 13.15%; the average rate paid on deposits declined to 0.84% from 1.12%. The Q2 net interest margin narrowed 17 basis points.
- Non-interest income declined as FDIC-related accretion and reimbursement income decreased and the indemnification asset produced a loss. Six-month 2012 non-interest income also included a $5.3 million Herald acquisition gain.
- At June 30, total assets were $12.43 billion, loans net were $5.02 billion, and available-for-sale securities were $4.76 billion. Deposits totaled $8.23 billion, up from $7.36 billion at year-end 2011; FHLB advances were $2.23 billion and short-term borrowings $42.6 million.
- Cash and cash equivalents were $164.1 million, down from $303.7 million at year-end. For the first six months, operating cash flow was $(170.4) million, investing cash flow $(420.8) million, and financing cash flow $451.6 million.
- Stockholders’ equity was $1.69 billion. Regulatory capital ratios were 12.83% Tier 1 leverage, 34.82% Tier 1 risk-based, and 36.19% total risk-based. Management reported liquid assets equal to 14.0% of total assets, above its 2.5% minimum.
Material changes and credit quality
- Loans before discounts and deferred fees increased $923 million from year-end 2011. New loans grew $1.2 billion, while loans acquired in the 2009 FSB transaction declined $242.9 million. Herald contributed approximately $306 million of loans.
- Deposits increased $861.9 million; demand deposits rose to 20.1% of deposits from 16.6% at year-end, while time deposits fell to 31.9% from 35.1%.
- Non-performing assets were $121.3 million, or 0.98% of assets, down from $152.6 million and 1.35% at year-end. Non-performing loans were 0.54% of loans; annualized net charge-offs were 0.19%. The allowance for loan and lease losses increased to $55.6 million from $48.4 million.
- Substantially all non-performing assets were covered under FDIC loss-sharing agreements. The FDIC indemnification asset declined to $1.71 billion from $2.05 billion, principally reflecting claims filed and cash received.
- OREO declined to $93.7 million from $123.7 million. Management attributed improved OREO sale results and lower expenses to reduced foreclosure activity and improved loss severity.
Outlook, risks and unusual items
- Management expects FDIC indemnification asset accretion to continue declining as the asset is reduced and projected cash flows from covered loans improve. It also expects margin pressure as ACI loans and related accretion become a smaller share of the portfolio.
- Management expects to meet liquidity needs over the next 12 months from operations, FDIC reimbursements, deposits, and available borrowing or securities-sale capacity. The company’s rate-sensitivity model showed projected net interest income increases of 1.6% in year one and 8.8% in year two under a 200-basis-point rate increase; management said these were within policy limits. These projections depend on assumptions and may differ from actual results.
- Key exposures include credit performance and valuation of acquired/covered loans, estimation of the FDIC indemnification asset, real estate values, interest-rate movements, and liquidity. New-loan credit provisions rose with portfolio growth; unlike covered-loan losses, these are not offset by FDIC reimbursement.
- The six-month 2011 expense comparison is affected by a one-time $110.4 million equity-compensation charge related to the 2011 IPO. Herald acquisition costs included $1.2 million of professional fees. In July 2012, the company sold certain preferred-stock positions, recording a $5.9 million gain.
- Management reported no material change in previously disclosed risk factors, no material control changes, and legal proceedings were considered unlikely to have a material effect. No specific earnings guidance was provided.
Important facts for investors to verify
- Whether continued loan growth can offset lower loan yields and declining accretion-related income, and how margins evolve.
- Credit trends in the expanding, non-FDIC-covered loan portfolio, including allowance adequacy and charge-offs.
- Assumptions and timing underlying FDIC claims, reimbursements, and the declining indemnification asset.
- Deposit mix, cash levels, borrowing needs, and the effect of interest-rate changes on earnings and liquidity.
- Herald integration and the sustainability of earnings excluding acquisition gains and other unusual or FDIC-related items.