BankUnited, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited quarterly results, including fourth-quarter comparisons. Financial amounts below are U.S. dollars.
Business context
BankUnited is a bank holding company operating through BankUnited, N.A. It reported $15.0 billion of assets and served customers through 99 Florida branches and six New York-area banking centers. Its business focuses on commercial and middle-market banking, consumer banking, residential mortgages, and equipment and municipal finance. Herald National Bank was merged into BankUnited in March 2013, accompanying the launch of the New York franchise.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Interest income | $738.8 million | $720.9 million |
| Net interest income | $646.2 million | $597.6 million |
| Provision for loan losses | $32.0 million | $18.9 million |
| Non-interest income | $31.1 million | $89.2 million |
| Non-interest expense | $327.4 million | $323.1 million |
| Net income | $208.9 million | $211.3 million |
| Diluted earnings per share | $2.01 | $2.05 |
| Return on average assets / equity | 1.55% / 11.16% | 1.71% / 12.45% |
| Tax-equivalent net interest margin | 5.73% | 6.05% |
At December 31, 2013, total assets were $15.05 billion, loans net of allowance were $8.98 billion, deposits were $10.53 billion, FHLB advances and other borrowings were $2.41 billion, and stockholders’ equity was $1.93 billion. Cash and cash equivalents were $252.7 million; available-for-sale securities totaled $3.64 billion.
Operating cash flow was negative $67.1 million; investing cash flow was negative $2.61 billion, principally reflecting loan purchases and originations; financing cash flow was positive $2.43 billion, including deposit growth and net borrowing activity. Cash and cash equivalents decreased by $242.6 million during the year.
Liquidity measures included liquid assets equal to 8.4% of total assets, above the company’s 5.0% internal threshold. The company reported that its one-year liquidity ratio exceeded its internal limit and that other monitored measures were within acceptable limits. Regulatory capital ratios remained above “well-capitalized” levels: BankUnited’s Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios were 10.58%, 18.06%, and 18.93%, respectively.
Material changes versus 2012
- Net interest income rose 8%, supported by loan growth and lower funding costs, while the tax-equivalent net interest margin declined 32 basis points as new, lower-yielding loans replaced higher-yielding legacy assets.
- Net income declined about 1%; diluted EPS fell from $2.05 to $2.01. The higher loan-loss provision and sharply lower non-interest income offset higher net interest income.
- Loans grew to $9.05 billion from $5.57 billion, with new loans reaching approximately $7.55 billion. Deposits increased to $10.53 billion from $8.54 billion; demand deposits represented 27% of deposits at year-end.
- Non-interest income fell primarily because the FDIC indemnification asset moved from accretion to amortization and covered-asset-related income declined. The asset balance fell to $1.21 billion from $1.46 billion.
- Asset-quality measures improved overall: non-performing assets were 0.51% of total assets versus 0.89% in 2012; OREO declined to $40.6 million from $76.0 million. However, net charge-offs increased to 0.31% of average loans from 0.17%, primarily due to a commercial loan relationship.
- Fourth-quarter net income was $52.4 million, or $0.50 diluted EPS, versus $62.5 million, or $0.61, in fourth-quarter 2012. The quarter included a $12.5 million loan-loss provision versus $1.0 million a year earlier.
Outlook, commentary, risks and unusual items
- Management identified continued organic growth in Florida and the Tri-State market, growth through national lending platforms, deposit-mix improvement, and possible strategic acquisitions as opportunities. It expected to expand in-house mortgage originations in 2014 and grow mortgage servicing moderately.
- Management expected margin pressure to continue as legacy covered assets run off and new loans are originated at lower market rates. It also expected compensation costs to increase in 2014 as staffing supports growth. No specific numerical earnings or revenue guidance is provided.
- FDIC loss-sharing protection on commercial and other covered assets was scheduled to end May 21, 2014. At year-end, covered commercial and consumer loans had a carrying value of $202 million, covered securities had a carrying value of $206 million, and covered commercial OREO was $7 million. The company would bear credit risk after coverage ends, subject to applicable sale and extension provisions. After year-end, the FDIC approved sale of certain covered loans with a year-end carrying value of approximately $87 million.
- Key risks include credit losses in the rapidly growing, less-seasoned new loan portfolio; interest-rate and liquidity risk; economic and real-estate conditions in Florida and the New York metropolitan area; and compliance with FDIC loss-sharing terms. The filing also discusses regulatory change, including Basel III capital rules beginning in 2015 and Volcker Rule compliance requirements.
- Unusual or non-recurring factors included 2013 amortization of the FDIC indemnification asset, an $11.1 million charge-off and $15.3 million of losses associated with one commercial relationship, and securities sales in response to the Volcker Rule. The company recognized a $963,000 other-than-temporary impairment on a covered security, substantially offset by the related FDIC indemnification adjustment.
- Outstanding lending-related commitments totaled $1.77 billion; the filing notes that many may expire undrawn. Management considered the potential impact of routine legal proceedings remote and not material. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Track the post-May 2014 performance and credit losses of commercial assets no longer covered by FDIC loss sharing, and the final outcome of the approved loan sales.
- Assess whether rapid new-loan growth is being matched by stable credit quality, adequate reserves, and sustainable loan yields; note the increase in provision and charge-offs.
- Monitor net interest margin, deposit costs and mix, and the effect of runoff of higher-yielding covered loans on earnings.
- Review liquidity and refinancing exposure, including the substantial FHLB advances scheduled to mature in 2014 and the company’s reported borrowing capacity.
- Confirm the effect of Basel III implementation, regulatory compliance costs, and any further changes to capital, dividend capacity, or securities holdings.