BankUnited, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2011; balance-sheet comparisons are with December 31, 2010. BankUnited operates 81 branches in 13 Florida counties. A substantial portion of acquired loans, securities and all OREO are covered by FDIC loss-sharing agreements, generally reimbursing 80% of covered losses up to the stated threshold and 95% above it.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $117.3m | $96.2m | $229.6m | $188.7m |
| Net interest margin | 5.99% | 4.93% | 5.87% | 4.90% |
| Non-interest income | $52.9m | $83.7m | $117.1m | $166.2m |
| Non-interest expense | $95.9m | $74.4m | $300.2m | $140.1m |
| Net income (loss) | $44.0m | $51.2m | $(23.7)m | $111.9m |
| Basic and diluted EPS | $0.44 | $0.55 | $(0.25) | $1.20 |
- Quarterly drivers: Net interest income increased 22% year over year, reflecting higher loan yields and lower deposit costs. The loan yield rose to 13.15% from 10.15%; the average rate paid on interest-bearing deposits fell to 1.24% from 1.60%. Q2 included a $2.9m provision recovery for loan losses.
- Six-month unusual item: Expenses included a $110.4m non-cash, non-tax-deductible compensation charge tied to the IPO exchange and vesting of profits-interest units. The charge was offset by a credit to paid-in capital and did not reduce regulatory capital. A $7.6m provision for uncertain state tax positions also contributed to the unusually high effective tax rate of 162%.
- Balance sheet at June 30: Total assets were $10.85bn, broadly unchanged from $10.87bn at year-end. Loans, net of allowance, were $3.76bn versus $3.88bn; available-for-sale securities were $3.77bn versus $2.93bn; and the FDIC indemnification asset was $2.25bn versus $2.67bn.
- Funding and debt: Deposits totaled $6.82bn, down from $7.16bn. Core deposits rose $379m over the first half, while time deposits declined. FHLB advances were $2.25bn, little changed from year-end; $1.1bn mature in 2012. Cash and cash equivalents were $343.8m, down from $564.8m.
- Cash flow, first half: Operating activities used $123.0m; investing activities provided $174.7m; financing activities used $272.7m. Cash decreased $221.0m to $343.8m. Financing outflows included a $334.4m net deposit decrease and $28.0m of dividends, partly offset by $98.6m from common-stock issuance.
- Capital and liquidity: Stockholders’ equity was $1.48bn, up from $1.25bn, principally reflecting the IPO and equity-based compensation accounting, partly offset by dividends. Bank capital ratios were 10.79% Tier 1 leverage, 40.62% Tier 1 risk-based and 41.50% total risk-based; each exceeded the stated well-capitalized threshold. Liquid assets divided by total assets were 12.91%, compared with the company’s 2.5% minimum policy level.
- Asset quality: Non-performing assets were $175.6m, or 1.62% of assets, down from $232.5m, or 2.14%, at year-end, mainly reflecting OREO sales. Non-performing loans were $33.8m, or 0.89% of loans, versus $25.8m, or 0.66%; management attributed the increase primarily to one non-ACI relationship. Annualized net charge-offs were 0.55%, compared with 0.37%.
Material changes, outlook and risks
- Lower FDIC-related and resolution income weighed on comparisons: non-interest income from covered assets was $37.5m in Q2 2011 versus $76.3m a year earlier. Management said covered-asset resolution income was lower as it incorporated additional performance history into cash-flow estimates, and expects FDIC-asset accretion to continue declining as projected recoveries from acquired loans improve.
- OREO sale losses and impairments rose amid continued home-price deterioration. OREO declined to $141.7m from $206.7m at year-end; management reported about 3,600 properties in foreclosure at June 30, down from about 6,100 a year earlier. FDIC reimbursement mitigates, but does not eliminate, covered-asset costs and losses.
- Non-covered loans grew while covered loans ran off: during Q2, non-covered loans increased $303.5m and covered loans declined $232.8m. Management cited depressed loan demand in its primary markets, although growth accelerated in the quarter.
- On June 2, 2011, the company agreed to acquire Herald National Bank, which had $486.6m in assets at June 30. Completion is subject to shareholder, regulatory and other customary conditions; the agreement contemplated a later merger of the surviving bank into BankUnited. The filing also reports pending charter and holding-company applications.
- No specific earnings guidance is provided. Management said it expects to meet liquidity needs over the next 12 months through operations, core deposits, portfolio cash flows and FDIC reimbursements, with additional borrowing or securities sales available if needed. Forward-looking results remain subject to economic, credit, interest-rate, FDIC-recovery and other risks; actual outcomes may differ.
- The filing reports effective disclosure controls, no material change in internal control over financial reporting, no material change in previously disclosed risk factors, and no legal proceeding management believed would materially affect the company.
Important facts for investors to verify
- Whether the $110.4m IPO-related compensation charge and related tax effects are clearly separated when assessing recurring earnings and future comparisons.
- How FDIC loss-sharing recoveries, indemnification-asset estimates and the expected decline in accretion affect future earnings and cash receipts.
- Whether non-performing loans, commercial-credit classifications, charge-offs and OREO values improve or deteriorate, including exposure to continued Florida home-price weakness.
- Deposit trends, time-deposit maturities, FHLB advance refinancing and liquidity after the first-half cash decline.
- Regulatory approvals, consideration, timing and integration implications of the Herald transaction and charter applications.