Bankunited, Inc. annual report, FY2016

BankUnited, Inc. — FY2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016; filed February 27, 2017. The filing also reports fourth-quarter results. BankUnited is a Florida-based commercial bank operating primarily in Florida and the New York metropolitan area, with national commercial lending platforms. Figures are in U.S. dollars.

Financial performance and position

Metric	FY2016 / Dec. 31, 2016	Prior comparable period
Total assets	$27.88 billion	$23.88 billion at Dec. 31, 2015
Net loans	$19.24 billion	$16.51 billion
Deposits	$19.49 billion	$16.94 billion
Net interest income	$870.4 million	$745.7 million
Net income / diluted EPS	$225.7 million / $2.09	$251.7 million / $2.35
Net interest margin, tax-equivalent	3.73%	3.94%
Provision for loan losses	$50.9 million	$44.3 million
Operating cash flow	$307.2 million	$217.9 million
Cash and cash equivalents	$448.3 million	$267.5 million
Stockholders’ equity	$2.42 billion; tangible book value $22.47 per share	$2.24 billion; $20.90 per share

Interest income rose with asset growth, while interest expense also increased. Net interest income on a tax-equivalent basis was $904.2 million, up from $765.9 million. The filing reports no company-wide gross margin measure; net interest margin is the relevant banking margin. Return on average assets was 0.87% and return on average common equity was 9.64%, versus 1.18% and 11.62% in 2015.

FY2015 net income included a $49.3 million discrete tax benefit. Excluding that benefit and related professional fees, 2015 net income was $203.1 million and diluted EPS was $1.90; on that adjusted basis, FY2016 earnings increased. FY2016 effective tax rate was 32.7%, compared with 15.2% in 2015.

For Q4 2016, net income was $63.3 million and diluted EPS was $0.59, compared with $56.3 million and $0.52 in Q4 2015. Q4 provision for loan losses was $8.5 million, down from $24.4 million in Q3 2016.

Funding, liquidity, capital and cash flow

• Loans grew faster than deposits year over year; the loan-to-deposit ratio rose to 99.72% from 98.50%. Average total deposit cost increased to 0.66% from 0.61%.
• FHLB advances were $5.24 billion, up from $4.01 billion. The company also had $402.8 million of notes and other borrowings, including $400 million face value of 4.875% senior notes due in 2025.
• Management reported a 162% 30-day liquidity ratio and a 131% one-year liquidity ratio, both above its 100% internal thresholds. Available capacity included $2.9 billion at the FHLB, $327 million at the Federal Reserve and $70 million in federal funds lines; unencumbered available-for-sale securities were $4.2 billion.
• Cash provided by operating activities was $307.2 million; investing activities used $3.83 billion, largely reflecting security and loan purchases; financing activities provided $3.70 billion, including deposit growth and net FHLB borrowing. Ending cash increased by $180.8 million.
• Company and Bank capital ratios exceeded regulatory “well-capitalized” thresholds. At year-end, the Company’s CET1 ratio was 11.63% and total risk-based capital ratio 12.45%; the Bank’s were 12.89% and 13.70%, respectively.
• Cash dividends were $0.84 per share for the year. The board’s future dividend decisions remain subject to financial condition, capital needs, regulatory limits and other factors.

Material changes and credit quality

• Total assets increased 16.7%, deposits 15.1%, and net loans 16.5%. New loans grew by about $3.0 billion, principally commercial; loans acquired in the 2009 FDIC transaction continued to run off.
• Net income declined from reported 2015 results, primarily reflecting the prior-year tax benefit. NIM compressed by 21 basis points as lower-yielding new loans became a larger share of the portfolio and the 2015 senior-note issuance added funding cost. Management expected further pressure as higher-yielding acquired loans run off.
• Nonperforming loans were $135.9 million, or 0.70% of loans, versus $73.1 million and 0.44% a year earlier. Nonperforming assets were 0.53% of total assets versus 0.35%. The ALLL was $153.0 million, or 0.79% of loans, compared with $125.8 million, or 0.76%.
• Taxi medallion loans were a notable area of deterioration: approximately $179 million outstanding, with $60.7 million on non-accrual; 16.4% was at least 90 days delinquent, compared with 0.9% a year earlier. The company recorded $11.1 million of related charge-offs and stopped originating these loans. Management cited competition from app-based ride services and falling collateral values. Comparisons of nonperforming loans are affected by a change effective January 1, 2016, under which accruing TDRs were no longer reported as nonperforming.
• Management stated that 97.5% of the new commercial portfolio was rated pass and substantially all new residential loans were current. The new residential portfolio had a weighted-average FICO score of 766 and weighted-average LTV of 65.8%.

Outlook, risks and unusual items

• No quantified earnings or revenue guidance is provided. Management’s stated priorities include sustainable balance-sheet growth, core deposit growth, disciplined credit underwriting and an operating model that can scale. It anticipated deposit growth exceeding loan growth in 2017 and targeted a loan-to-deposit ratio below 100%.
• Management cautioned that competitive deposit pricing and potentially rising rates could increase funding costs, while new loan yields and runoff of acquired assets could continue to pressure NIM. Results are also exposed to interest-rate changes, economic and real-estate conditions, and the company’s Florida and New York market concentrations.
• The 2009 FDIC loss-sharing arrangements cover remaining residential assets through May 21, 2019; the commercial loss-sharing period ended in 2014, with certain recovery-sharing obligations continuing through May 21, 2017. Residential covered assets had a carrying value of about $619 million and the FDIC indemnification asset was $515.9 million at year-end. Compliance with agreement terms is required to preserve coverage.
• FY2016 non-interest expense included $4.1 million of impairment on tank cars affected by new safety regulations, $2.4 million in litigation accruals and a $1.1 million payroll-tax-audit settlement. Covered-loan sales produced a $14.5 million loss before the related FDIC indemnification impact.
• John A. Kanas retired as President and CEO effective December 31, 2016; Rajinder P. Singh became President and CEO on January 1, 2017. A previously accrued legal matter was settled after year-end without additional cost, according to the filing. Management and KPMG reported effective internal control over financial reporting; KPMG issued an unqualified opinion on the financial statements.
• Key forward-looking risks include credit losses (particularly taxi medallions and commercial lending), interest-rate and liquidity risk, FDIC loss-share compliance, regulatory and compliance costs, cyber and third-party service-provider risks, and execution of the growth strategy. The filing notes that the future impact of regulatory and policy changes was uncertain.

Most important facts for investors to verify

• Whether taxi medallion delinquencies, collateral values, TDRs and loss reserves continue to deteriorate, and whether other commercial credit problems emerge.
• Whether deposit growth keeps pace with loan growth and whether deposit costs, FHLB borrowing and the 2017 advance maturities affect funding costs or liquidity.
• How quickly NIM compresses as acquired high-yield assets run off and new loans are originated at current market yields.
• Whether FDIC indemnification estimates, asset runoff and remaining loss-sharing obligations evolve as management expects, especially ahead of the 2019 residential agreement end date.
• How FY2016 earnings compare with normalized FY2015 results, excluding the $49.3 million tax benefit, and whether future tax items materially affect reported earnings.
• Whether capital remains comfortably above regulatory requirements while supporting growth, dividends and any future acquisitions.