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BKU > SEC Filings for BKU > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for BANKUNITED, INC.

Form 10-Q for BANKUNITED, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to focus on significant changes in the financial condition and results of operations of the Company during the three and nine months ended September 30, 2012 and should be read in conjunction with the consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and BKU's 2011 Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Annual Report on Form 10-K").

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the Company's current views with respect to, among other things, future events and financial performance. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions identify forward-looking statements. These forward-looking statements are based on the historical performance of the Company or on the Company's current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations so contemplated will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to the Company's operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if the Company's underlying assumptions prove to be incorrect, the Company's actual results may vary materially from those indicated in these statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, the risk factors described in Part I, Item 1A of the 2011 Annual Report on Form 10-K. The Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Quarterly Highlights

Net income for the quarter ended September 30, 2012 was $49.6 million or $0.48 per diluted share, as compared to $45.6 million or $0.45 per diluted share, for the quarter ended September 30, 2011.

Net interest income increased by $10.6 million to $139.4 million for the quarter ended September 30, 2012 from $128.8 million for the quarter ended September 30, 2011. Interest income increased by $7.1 million and interest expense declined by $3.5 million for the quarter ended September 30, 2012 as compared to the quarter ended September 30, 2011. The increase in interest income resulted from growth in both the loan and investment portfolios, partially offset by a decline in the yield on average earning assets to 6.58% from 7.96%. The decline in interest expense primarily related to a decline in the average cost of interest bearing liabilities to 1.31% from 1.62% coupled with an increase in non-interest bearing deposits as a percentage of total funding sources. The net interest margin decreased to 5.39% from 6.30%. Declines in the yield on average earning assets, the cost of interest bearing liabilities and the net interest margin are reflective of lower market interest rates.

Loans, net of discount and deferred fees and costs, increased by $222.8 million during the quarter ended September 30, 2012. New loans grew by $361.3 million while covered loans declined by $138.5 million.

Asset quality remained strong, with a ratio of non-performing assets to total assets of 0.96%, a ratio of non-performing loans to total loans of 0.62%, and an annualized net charge-off ratio of 0.17%. Substantially all non-performing assets were covered assets at September 30, 2012.

Demand deposits represented 20.5% of total deposits at September 30, 2012 compared to 16.6% of total deposits at December 31, 2011 while time deposits declined to 32.2% of total deposits at September 30, 2012 from 35.1% at December 31, 2011.


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The Company's capital ratios continue to exceed the requirements to be considered well capitalized under applicable regulatory guidelines, with a Tier 1 leverage ratio of 12.9%, a Tier 1 risk-based capital ratio of 34.3% and a Total risk-based capital ratio of 35.6% at September 30, 2012.

Results of Operations

Net Interest Income

Net interest income is the difference between interest earned on interest earning assets and interest incurred on interest bearing liabilities and is the primary driver of core earnings. Net interest income is impacted by the relative mix of interest earning assets and interest bearing liabilities, the ratio of interest earning assets to total assets and of interest bearing liabilities to total funding sources, movements in market interest rates, levels of non-performing assets and pricing pressure from competitors.

The mix of interest earning assets is influenced by loan demand and by management's continual assessment of the rate of return and relative risk associated with various classes of earning assets. The mix of interest bearing liabilities is influenced by management's assessment of the need for lower cost funding sources weighed against relationships with customers and growth requirements and is impacted by competition for deposits in the Company's markets and the availability and pricing of other sources of funds.

Net interest income is also impacted by the accounting for ACI loans and to a declining extent, the accretion of fair value adjustments recorded in conjunction with the FSB Acquisition. ACI loans were initially recorded at fair value, measured based on the present value of expected cash flows. The excess of expected cash flows over carrying value, known as accretable yield, is being recognized as interest income over the lives of the underlying loans. Accretion related to ACI loans has a positive impact on our net interest income, net interest margin and interest rate spread. The impact of accretion related to ACI loans on net interest income, the net interest margin and the interest rate spread is expected to continue to decline as ACI loans comprise a declining percentage of total loans. The proportion of total loans represented by ACI loans will decline as the ACI loans are resolved and new loans are added to the portfolio. ACI loans represented 33.9% and 50.8% of total loans, net of discounts, premiums and deferred fees and costs, at September 30, 2012 and December 31, 2011, respectively. As the impact of accretion related to ACI loans declines, we expect our net interest margin and interest rate spread to decrease.

Payments received in excess of expected cash flows may result in a pool of ACI residential loans becoming fully amortized and its carrying value reduced to zero even though outstanding contractual balances remain related to loans in the pool. Once the carrying value of a pool is reduced to zero, any future proceeds from the remaining loans are recognized as interest income upon receipt. The carrying value of one pool was reduced to zero in late 2011. Future expected cash flows from this pool totaled $151.5 million as of September 30, 2012. The UPB of loans remaining in this pool was $313.5 million at September 30, 2012. We expect that future proceeds from loans in this pool will result in an increase in resolution income from this pool. To some extent, the increase in interest income will be offset by a reduction in non-interest income reported in the consolidated statement of income line item "Income from resolution of covered assets, net." The timing of receipt of proceeds from loans in this pool may be unpredictable, leading to increased volatility in the yield on the pool.

Consistent with prior years, the Company plans to sell covered loans in the fourth quarter of 2012, including loans from the ACI residential pool with a carrying value of zero. All of the proceeds from the sale of loans in this pool will be recorded as interest income in the fourth quarter of 2012. We expect this to result in an increase in the yield on this pool and in the net interest margin of the Company in the fourth quarter as compared to the third quarter of 2012. Also see the section entitled "Non-Interest Income" below for further discussion of the anticipated fourth quarter loan sale.

Fair value adjustments of interest earning assets and interest bearing liabilities recorded at the time of the FSB Acquisition are accreted to interest income or expense over the lives of the related assets or liabilities. Generally, accretion of fair value adjustments increases interest income and decreases interest expense, and thus has a positive impact on our net interest income, net interest margin and interest rate spread. The impact of accretion of


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fair value adjustments on interest income and interest expense will continue to decline as these assets and liabilities mature or are repaid and constitute a smaller portion of total interest earning assets and interest bearing liabilities.

The impact of accretion and ACI loan accounting on net interest income makes it difficult to compare our net interest margin and interest rate spread to those reported by other financial institutions.

The following tables present, for the periods indicated, information about
(i) average balances, the total dollar amount of interest income from earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and
(v) the net interest margin. Nonaccrual and restructured loans are included in the average balances presented in this table; however, interest income foregone on nonaccrual loans is not included. Yields have been calculated on a pre-tax basis (dollars in thousands):

                                                  Three Months Ended September 30,
                                           2012                                     2011
                              Average                    Yield/        Average                    Yield/
                              Balance       Interest    Rate (1)       Balance       Interest    Rate (1)
Assets:
Interest earning assets:
Investment securities
available for sale         $   4,658,274   $   32,149       2.76 %  $   3,747,679   $   28,984       3.09 %
Other interest earning
assets                           559,889        1,117       0.80 %        544,733          522       0.38 %
Loans                          5,117,295      137,039      10.69 %      3,885,210      133,649      13.72 %
Total interest earning
assets                        10,335,458      170,305       6.58 %      8,177,622      163,155       7.96 %
Allowance for loan and
lease losses                     (56,392 )                                (56,489 )
Non-interest earning
assets                         2,372,698                                2,710,161
Total assets               $  12,651,764                            $  10,831,294
Liabilities and
Stockholders' Equity:
Interest bearing
liabilities:
Interest bearing demand
deposits                   $     505,657          824       0.65 %  $     384,425          637       0.66 %
Savings and money market
deposits                       3,989,263        5,867       0.59 %      3,425,440        7,599       0.88 %
Time deposits                  2,661,285        9,768       1.46 %      2,371,668       10,201       1.71 %
Total interest bearing
deposits                       7,156,205       16,459       0.91 %      6,181,533       18,437       1.18 %
Borrowings:
FHLB advances and other
borrowings                     2,225,235       14,420       2.58 %      2,243,737       15,919       2.81 %
Short-term borrowings              7,952            9       0.43 %            939            1       0.49 %
Total interest bearing
liabilities                    9,389,392       30,888       1.31 %      8,426,209       34,357       1.62 %
Non-interest bearing
demand deposits                1,199,577                                  634,205
Other non-interest
bearing liabilities              335,193                                  280,601
Total liabilities             10,924,162                                9,341,015
Stockholders' equity           1,727,602                                1,490,279
Total liabilities and
stockholders' equity       $  12,651,764                            $  10,831,294
Net interest income                        $  139,417                               $  128,798
Interest rate spread                                        5.27 %                                   6.34 %
Net interest margin                                         5.39 %                                   6.30 %



(1) Annualized


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                                               Nine Months Ended September 30,
                                        2012                                    2011
                           Average                    Yield/       Average                    Yield/
                           Balance       Interest    Rate (1)      Balance       Interest    Rate (1)
Assets:
Interest earning
assets:
Investment securities
available for sale      $   4,582,143   $   99,247       2.89 % $   3,498,872   $   90,770       3.46 %
Other interest
earning assets                535,912        3,306       0.82 %       635,780        2,145       0.45 %
Loans                       4,736,869      415,957      11.72 %     3,803,764      370,543      13.00 %
Total interest
earning assets              9,854,924      518,510       7.02 %     7,938,416      463,458       7.79 %
Allowance for loan
and lease losses              (54,540 )                               (58,693 )
Non-interest earning
assets                      2,408,962                               2,954,630
Total assets            $  12,209,346                           $  10,834,353
Liabilities and
Stockholders' Equity:
Interest bearing
liabilities:
Interest bearing
demand deposits         $     494,331        2,406       0.65 % $     368,896        1,814       0.66 %
Savings and money
market deposits             3,870,050       18,790       0.65 %     3,309,392       21,848       0.88 %
Time deposits               2,621,599       29,270       1.49 %     2,602,147       34,105       1.75 %
Total interest
bearing deposits            6,985,980       50,466       0.96 %     6,280,435       57,767       1.23 %
Borrowings:
FHLB advances and
other borrowings            2,229,674       44,976       2.69 %     2,248,456       47,238       2.81 %
Short-term borrowings          14,777           45       0.41 %         1,672            6       0.48 %
Total interest
bearing liabilities         9,230,431       95,487       1.38 %     8,530,563      105,011       1.65 %
Non-interest bearing
demand deposits             1,040,153                                 593,357
Other non-interest
bearing liabilities           276,857                                 276,457
Total liabilities          10,547,441                               9,400,377
Stockholders' equity        1,661,905                               1,433,976
Total liabilities and
stockholders' equity    $  12,209,346                           $  10,834,353
Net interest income                     $  423,023                              $  358,447
Interest rate spread                                     5.64 %                                  6.14 %
Net interest margin                                      5.72 %                                  6.02 %



(1) Annualized

Three months ended September 30, 2012 compared to three months ended September 30, 2011

Net interest income was $139.4 million for the three months ended September 30, 2012 compared to $128.8 million for the three months ended September 30, 2011, an increase of $10.6 million. The increase in net interest income was comprised of an increase in interest income of $7.1 million and a decrease in interest expense of $3.5 million.

The increase in interest income resulted primarily from a $3.4 million increase in interest income from loans and a $3.2 million increase in interest income from investment securities available for sale. Increased interest income from loans resulted from a $1.2 billion increase in the average balance outstanding and a decrease in the average yield to 10.69% for the three months ended September 30, 2012 from 13.72% for the comparable period in 2011. The yield on loans acquired in the FSB Acquisition was 20.04% for the three months ended September 30, 2012 as compared to 17.16% for the three months ended September 30, 2011. This increase resulted primarily from (i) covered loans being resolved at a faster rate than expected, resulting in higher accretion,
(ii) improvements in probability of default and loss severity given default leading to an increase in expected cash flows and (iii) recognition of all proceeds from resolution of loans in one residential pool with a carrying value of zero as interest income as discussed above. The increased yield on loans acquired in the FSB Acquisition was offset by a decline in the yield on new loans to 4.15% for the three months ended September 30, 2012 from 4.66% for the three months ended September 30, 2011, coupled with an increase in the proportion of the total portfolio represented by new loans. The decline in yield on new loans was a function of lower market rates of interest. New loans represented


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58.85% of average loans outstanding for the three months ended September 30, 2012 as compared to 27.51% of average loans outstanding for the three months ended September 30, 2011.

Increased interest income on investment securities available for sale for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 resulted from an increase of $0.9 billion in the average balance outstanding. The impact on interest income of the increase in the average balance was partially offset by a decline in the average yield to 2.76% for the three months ended September 30, 2012 from 3.09% for the three months ended September 30, 2011, reflecting the impact of lower market interest rates and the sale of certain higher yielding preferred stock investments.

The primary components of the decrease in interest expense for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 were a $2.0 million decline in interest expense on deposits and a $1.5 million decrease in interest expense on FHLB advances and other borrowings. The decline in interest expense on deposits was attributable primarily to declining market rates of interest partially offset by a $1.6 million reduction in accretion of fair value adjustments and an increase of $1.0 billion in the average balance of interest bearing deposits. The decline in interest expense on FHLB advances and other borrowings resulted primarily from lower interest rates on outstanding advances.

The net interest margin for the three months ended September 30, 2012 was 5.39% as compared to 6.30% for the three months ended September 30, 2011, a decrease of 91 basis points. The net interest spread declined to 5.27% for the three months ended September 30, 2012 from 6.34% for the three months ended September 30, 2011. An improvement in the average rate paid on interest bearing liabilities to 1.31% for the quarter ended September 30, 2012 from 1.62% for the quarter ended September 30, 2011 was offset by a decline in the average yield on interest earning assets to 6.58% from 7.96% for those same periods. The decline in the average yield on interest earning assets resulted from the lower yield on loans and investment securities as discussed above. The impact on the net interest margin of the decline in average yield was partly mitigated by an increase in average interest earning assets as a percentage of average total assets combined with a decrease in average interest bearing liabilities as a percentage of average total liabilities and equity.

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

Net interest income was $423.0 million for the nine months ended September 30, 2012 compared to $358.4 million for the nine months ended September 30, 2011, an increase of $64.6 million. The increase in net interest income was comprised of an increase in interest income of $55.1 million and a decrease in interest expense of $9.5 million.

The increase in interest income resulted primarily from a $45.4 million increase in interest income from loans and an $8.5 million increase in interest income from investment securities available for sale. Increased interest income from loans was attributable to a $0.9 billion increase in the average balance outstanding offset by a decrease in the average yield to 11.72% for the nine months ended September 30, 2012 from 13.00% for the comparable period in 2011. The yield on loans acquired in the FSB Acquisition was 19.99% for the nine months ended September 30, 2012 as compared to 15.03% for the nine months ended September 30, 2011. The increased yield on loans acquired in the FSB Acquisition was offset by a decline in the yield on new loans to 4.32% for the nine months ended September 30, 2012 from 5.01% for the nine months ended September 30, 2011, coupled with an increase in the proportion of the total portfolio represented by new loans.

While the average volume of investment securities available for sale increased by $1.1 billion for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011, the yield declined to 2.89% for the nine months ended September 30, 2012 from 3.46% for the nine months ended September 30, 2011.

The primary components of the decrease in interest expense for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011 were a $7.3 million decline in interest expense on deposits and a $2.3 million decline in interest expense on FHLB advances and other borrowings.


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The net interest margin for the nine months ended September 30, 2012 was 5.72% as compared to 6.02% for the nine months ended September 30, 2011, a decrease of 30 basis points. The net interest spread declined to 5.64% for the nine months ended September 30, 2012 from 6.14% for the nine months ended September 30, 2011. An improvement in the average rate paid on interest bearing liabilities to 1.38% for the nine months ended September 30, 2012 from 1.65% for the nine months ended September 30, 2011 was offset by a decline in the average yield on interest earning assets to 7.02% from 7.79% for those same periods.

The factors impacting trends in net interest income for the nine months ended September 30, 2012 were consistent with those impacting net interest income for the three months then ended, discussed above.

Provision for Loan Losses

The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the ALLL at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date and that, in management's judgment, is appropriate under U.S. generally accepted accounting principles. The determination of the amount of the ALLL is complex and involves a high degree of judgment and subjectivity. Our determination of the amount of the allowance and corresponding provision for loan losses considers ongoing evaluations of the various segments of the loan portfolio and of individually significant credits, levels of non-performing loans and charge-offs, statistical trends and economic and other relevant factors. See "Analysis of the Allowance for Loan and Lease Losses" below for more information about how we determine the appropriate level of the allowance.

Because the determination of fair value at which the loans acquired in the FSB Acquisition were initially recorded encompassed assumptions about expected future cash flows and credit risk, no ALLL was recorded at the date of acquisition. An allowance related to ACI loans is recorded only when estimates of future cash flows related to these loans are revised downward, indicating further deterioration in credit quality. An allowance for non-ACI loans may be established if factors considered relevant by management indicate that the credit quality of the non-ACI loans has deteriorated.

Since the recognition of a provision for (recovery of) loan losses on covered loans represents an increase (reduction) in the amount of reimbursement we ultimately expect to receive from the FDIC, we also record an increase (decrease) in the FDIC indemnification asset for the present value of the projected increase (reduction) in reimbursement, with a corresponding increase (decrease) in non-interest income, recorded in "Net gain (loss) on indemnification asset" as discussed below in the section entitled "Non-interest income." Therefore, the impact on our results of operations of any provision for loan losses on covered loans is significantly mitigated by the corresponding impact on non-interest income. For the three months ended September 30, 2012 and 2011, we recorded provisions for (recoveries of) losses on covered loans of $1.0 million and $(6.4) million, respectively. For the three months ended September 30, 2012 and 2011, the impact on earnings from these provisions was significantly mitigated by recording increases (reductions) in non-interest income of $0.9 million and of $(3.8) million, respectively. For the nine months ended September 30, 2012 and 2011, we recorded provisions for (recoveries of) losses on covered loans of $1.1 million and $(2.8) million and increases (reductions) in related non-interest income of $1.6 million and $(2.9) million, respectively.

For the three months ended September 30, 2012 and 2011, we recorded provisions for loan losses of $5.4 million and $7.6 million, respectively, related to new loans. For the nine months ended September 30, 2012 and 2011, we recorded provisions for loan losses of $16.7 million and $12.6 million, respectively, related to new loans. Increases in the provision for losses on new loans related primarily to growth in the new loan portfolio. These loans are not protected by the Loss Sharing Agreements and as such, these provisions are not offset by increases in non-interest income.

Non-Interest Income

The Company reported non-interest income of $25.7 million and $32.8 million for the three months ended September 30, 2012 and September 30, 2011, respectively. Non-interest income was $83.7 million for the nine months ended September 30, 2012 as compared to $149.9 million for the nine months ended September 30, 2011. The following table presents a comparison of the categories of non-interest income for the three and nine month periods ended September 30, 2012 and 2011 (in thousands):


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