BankUnited, Inc. — Q2 2013 Form 10-Q
Business and period: BankUnited is a bank holding company headquartered in Florida, with 98 branches in 15 Florida counties and four in the New York metropolitan area at June 30, 2013. This filing covers the quarter and six months ended June 30, 2013; financial statements are unaudited. Herald National Bank was merged into BankUnited in March 2013, and the company discontinued its BUIS operations in May 2013.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $164.1 million | $145.8 million | $317.8 million | $283.6 million |
| Provision for loan losses | $4.9 million | $2.7 million | $16.8 million | $11.5 million |
| Non-interest income | $6.1 million | $21.7 million | $23.9 million | $58.1 million |
| Non-interest expense | $78.3 million | $83.0 million | $158.9 million | $167.1 million |
| Net income | $54.0 million | $48.9 million | $102.2 million | $99.2 million |
| Diluted EPS | $0.52 | $0.48 | $0.99 | $0.96 |
| Tax-equivalent net interest margin | 6.14% | 5.92% | 6.04% | 6.00% |
- Q2 net interest income rose $18.3 million year over year, as loan growth and lower funding costs more than offset lower yields on earning assets. The average yield on earning assets declined to 6.96% from 7.21%; the cost of interest-bearing liabilities fell to 0.95% from 1.38%.
- At June 30, total assets were $13.23 billion, loans net of allowance were $6.75 billion, and deposits were $9.03 billion. Deposits increased from $8.54 billion at year-end 2012. FHLB advances were $2.20 billion, up from $1.92 billion; short-term borrowings were $1.6 million.
- Cash and cash equivalents were $213.6 million, down from $495.4 million at year-end 2012. For the first six months, operating cash flow was negative $45.9 million, investing cash flow negative $997.3 million, and financing cash flow positive $761.4 million. These cash flows reflect banking balance-sheet activity.
- Stockholders’ equity was $1.85 billion. Regulatory capital ratios exceeded well-capitalized thresholds: Tier 1 leverage 13.69%, Tier 1 risk-based 27.93%, and total risk-based 28.94%. Liquid assets were 10.9% of total assets, above the company’s 5% policy minimum. Book value and tangible book value per common share were $18.43 and $17.74.
- Cash dividends declared were $0.21 per common share for Q2 and $0.42 for the first half. Series A preferred shares converted one-for-one into common shares in March 2013.
Material changes and operating trends
- Loans grew approximately $1.2 billion from year-end 2012; new loans increased while covered loans acquired in the 2009 FDIC-assisted transaction continued to resolve. Management reported $963 million of net loan growth in Q2 after covered-loan resolutions.
- Commercial loans and leases were 57.8% of the loan portfolio at quarter-end; residential loans were 40.8%. New commercial lending increased $1.0 billion in the first half, with growth from Florida, New York, and lending subsidiaries.
- Asset quality measures improved in aggregate: nonperforming assets were 0.66% of total assets versus 0.89% at year-end, and nonperforming loans were 0.54% of total loans versus 0.62%. However, first-half net charge-offs increased to $20.3 million from $5.6 million, primarily reflecting an $11.1 million charge-off on one commercial relationship. The allowance for loan and lease losses was $58.4 million, down from $59.1 million.
- OREO declined to $50.0 million from $76.0 million at year-end. Q2 gains on OREO sales were $6.1 million, while impairment was $0.4 million. Management attributed improved sale results and lower foreclosure-related costs to improving real estate markets and lower foreclosure activity.
- Other comprehensive income was negative $28.3 million in Q2, mainly reflecting unrealized losses on available-for-sale securities as market rates rose. Accumulated other comprehensive income declined to $62.1 million from $84.0 million at year-end.
Outlook, risks, and unusual items
- No quantitative earnings or growth guidance was provided. Management expects net interest margin and spread to decline as a greater share of loans is added at lower current market rates; it also expects compensation, occupancy, and general operating expenses to increase through the remainder of 2013 as New York expansion takes full effect.
- The FDIC loss-sharing arrangements cover specified acquired assets, reimbursing 80% of covered losses up to the stated $4.0 billion threshold and 95% of losses above it. The FDIC indemnification asset fell to $1.35 billion from $1.46 billion at year-end. The company began amortizing the asset in 2013 and expects amortization to increase if projected FDIC cash receipts continue to decline. Covered-asset gains and losses are therefore not fully representative of recurring earnings.
- Non-interest income fell sharply year over year, partly because the FDIC indemnification asset shifted from accretion to amortization, and because of covered-loan sale losses and lower mortgage-insurance income. Q2 also included a $1.0 million other-than-temporary impairment on a covered mortgage mutual fund; the FDIC-related asset increase mitigated much of its impact.
- New-loan provisions are not FDIC-protected. First-half provision on new loans was approximately $15.0 million, including losses on a commercial relationship; two impaired commercial relationships generated $14.6 million of provisions and were substantially offset by $13.7 million of charge-offs.
- Interest-rate exposure is a key risk. Management’s simulation showed projected net interest income 1.1% higher in the first year and 7.9% higher in the second year under a +200-basis-point scenario; estimated economic value of equity declined 5.46% under that scenario. Management cautions actual outcomes may differ from model estimates.
- Outstanding lending-related commitments totaled $1.67 billion, including $820.8 million to fund loans and $729.1 million of unfunded lines. Management said legal proceedings in the ordinary course are unlikely to have a material effect; no material risk-factor changes were reported. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether loan growth and net interest income can offset lower yields on new loans and the expected decline in margin.
- Credit performance in the rapidly growing, non-FDIC-covered commercial and purchased residential portfolios, including further losses or charge-offs on large commercial relationships.
- The assumptions, timing, and collectability underlying the $1.35 billion FDIC indemnification asset and the pace of its future amortization and claims.
- Liquidity and funding resilience as cash balances decline, FHLB advances rise, and $410 million of advances mature in 2013.
- Exposure to rising interest rates, including available-for-sale securities valuation changes, hedge performance, and the sensitivity of actual results to model assumptions.