BankUnited, Inc. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; quarterly figures include the three months ended December 31, 2014. Amounts are U.S. dollars unless otherwise stated. BankUnited is a regional bank holding company serving Florida and the New York metropolitan area, with national commercial-finance and residential-mortgage activities. It reported $19.2 billion in assets and operated 100 Florida branches and six New York-area banking centers.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Net interest income | $677.1 million | $646.2 million |
| Net income | $204.2 million | $208.9 million |
| Diluted earnings per share | $1.95 | $2.01 |
| Return on average assets | 1.21% | 1.55% |
| Return on average common equity | 10.13% | 11.16% |
| Tax-equivalent net interest margin | 4.61% | 5.73% |
| Net interest income after loan-loss provision | $635.6 million | $614.2 million |
| Non-interest income | $84.2 million | $68.0 million |
| Non-interest expense | $426.5 million | $364.3 million |
Interest income rose 6% to $783.7 million, while interest expense increased to $106.7 million. The provision for loan losses rose to $41.5 million from $32.0 million. The effective tax rate fell to 30.4% from 34.3%, partly reflecting tax-exempt income, state tax changes and releases of uncertain-tax-position reserves.
Balance sheet at year-end: Assets were $19.21 billion, up from $15.05 billion; net loans were $12.32 billion, up from $8.98 billion; deposits were $13.51 billion, up from $10.53 billion; and FHLB advances and other borrowings were $3.32 billion, up from $2.41 billion. Stockholders’ equity was $2.05 billion, versus $1.93 billion. Cash and cash equivalents were $187.5 million, and available-for-sale securities were $4.59 billion.
Cash flow and liquidity: Operating activities used $49.7 million, compared with $67.1 million used in 2013. Management attributed operating cash outflows principally to non-cash accretion on acquired credit-impaired loans. Financing activities provided $3.79 billion, including $2.98 billion of deposit growth. The Bank reported a 5.8% liquid-assets-to-assets ratio and a 107% one-year liquidity ratio; it also had $1.5 billion of FHLB borrowing capacity. The loan-to-deposit ratio increased to 91.9% from 86.0%.
Capital and credit quality: The Company and Bank exceeded regulatory “well-capitalized” thresholds. Company tier 1 risk-based capital was 15.45% and total risk-based capital was 16.27%; the Bank’s respective ratios were 13.18% and 13.99%. Non-performing loans were 0.31% of total loans and non-performing assets were 0.27% of total assets. The allowance for loan and lease losses was $95.5 million, or 0.77% of loans; net charge-offs were 0.15% of average loans.
Material changes versus the prior year
- Net income declined 2.3% and diluted EPS fell from $2.01 to $1.95, despite higher net interest income.
- Net interest margin contracted 112 basis points. Management cited the shift from higher-yielding acquired covered loans to newer loans originated or purchased at lower market rates; it expects further pressure as this mix shift continues.
- New loans grew by $4.0 billion to $11.3 billion, excluding the effect of the indirect-auto portfolio sale. Commercial lending drove much of the growth; deposits increased by $3.0 billion.
- Non-interest expense increased $62.2 million, including higher employee and occupancy costs from growth and expansion, and $69.5 million of FDIC-indemnification-asset amortization, compared with $36.9 million in 2013.
- Asset quality indicators improved in several respects: non-performing assets fell to $52.8 million from $76.2 million, and OREO declined to $13.8 million from $40.6 million.
- The Commercial Shared-Loss Agreement’s loss-sharing coverage ended May 21, 2014. Certain covered commercial and consumer loans and commercial OREO were sold in the first quarter, producing a reported $12.2 million favorable pretax impact. The Bank bears credit risk on remaining formerly covered assets; specified recoveries remain payable to the FDIC through May 21, 2017.
Outlook, commentary and risks
- Management identified continued organic loan and deposit growth in Florida, the Tri-State area and national lending platforms as opportunities, and said it continues to evaluate acquisitions. No specific earnings or growth guidance was provided.
- Management expects low interest rates and competition to continue pressuring margins as covered, higher-yielding assets run off. New-loan growth and its funding needs will also affect liquidity.
- Material risks include credit losses on the growing, largely non-covered loan portfolio; concentration in Florida and the New York metropolitan area; interest-rate and liquidity risk; real-estate market exposure; and operational, cyber, compliance and regulatory risks.
- The company’s railcar operating-lease portfolio grew; a significant portion of the fleet serves energy-related uses. Management said it was monitoring the effect of lower oil prices and reported no impairment indicators in its latest review.
- Basel III capital rules took effect for the Company and Bank on January 1, 2015, with phased implementation through 2019. The filing said adoption would not have changed their capital categories as of December 31, 2014. The Company also discussed Volcker Rule compliance and potential implications for certain Re-Remic securities.
- The 2014 fourth quarter produced net income of $46.8 million, versus $52.4 million in the 2013 fourth quarter. Fourth-quarter 2014 loan-loss provision was $20.5 million, compared with $12.5 million a year earlier.
- Annual common dividends were $0.84 per share, unchanged from 2013. Payment remains subject to Board discretion and regulatory limits on Bank dividends.
Unusual items and reporting
- The 2014 covered-commercial loan and OREO sale had a $12.2 million favorable pretax impact. The indirect-auto portfolio sale generated a reported $1.8 million net pretax benefit, including allowance release and exit costs; substantially all of that business was discontinued.
- The 2014 tax rate benefited from state tax changes and releases of reserves for uncertain state tax positions. Unrecognized tax benefits were $36.6 million at year-end, including $21.3 million of state tax benefits that would affect the effective tax rate if recognized.
- The available-for-sale securities portfolio had $111 million of net unrealized gains. The filing reported no other-than-temporary impairment in 2014; most securities were rated AAA or AA or backed by government-related entities.
- KPMG issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded internal controls were effective. Management assessed pending legal proceedings as unlikely to have a material effect.
Important facts for investors to verify
- Whether loan growth is being achieved with underwriting quality maintained, and whether the higher provision reflects growth, portfolio risk or methodology changes.
- How quickly the margin declines as acquired high-yield assets run off, and what new-loan yields and funding costs imply for future earnings.
- The performance and reserve adequacy of the growing non-covered commercial portfolio, including commercial-finance and real-estate exposures.
- The timing, collectability and accounting estimates underlying the $974.7 million FDIC indemnification asset, and obligations tied to the terminated commercial loss-share agreement.
- Deposit mix, large time-deposit maturities, public and brokered deposits, FHLB reliance, and liquidity under stress scenarios.
- The effect of Basel III phase-in, dividends and capital distributions, and any required actions concerning Re-Remics under Volcker Rule requirements.
- The reported tax benefits and uncertain state tax positions, as well as the sustainability of earnings after unusual transactions and tax effects.