Bankunited, Inc. current report, 23 January 2014

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Business Context and Reporting Period

BankUnited, Inc. filed this Form 8-K on January 28, 2014, to report financial results for the quarter and full year ended December 31, 2013. The Company is a bank holding company headquartered in Miami Lakes, Florida, operating primarily in Florida and the New York metropolitan area. The reporting period reflects the Company's transition from managing legacy "covered assets" acquired from the FDIC to growing a new loan portfolio.

Key Financial Metrics

Profitability and Earnings

  • Quarter Ended Dec 31, 2013: Net income of $52.4 million ($0.50 per diluted share).
  • Year Ended Dec 31, 2013: Net income of $208.9 million ($2.01 per diluted share).
  • Return on Average Assets (ROAA): 1.55% for the full year 2013.
  • Return on Average Equity (ROAE): 11.16% for the full year 2013.
  • Effective Tax Rate: 34% for the year ended 2013, down from 39% in 2012.

Balance Sheet and Liquidity

  • Total Assets: $15.0 billion at December 31, 2013.
  • Total Deposits: $10.5 billion, an increase of $2.0 billion from the prior year. Demand deposits comprised 27% of total deposits.
  • Total Loans: $9.1 billion (net of premiums/discounts), up from $5.6 billion in 2012.
  • New Loans: $7.6 billion at year-end, representing significant growth from $3.7 billion in 2012.
  • Covered Loans: Declined to $1.5 billion (16.4% of total portfolio) from $1.9 billion in 2012.
  • Capital Ratios: Tier 1 leverage at 12.4%; Tier 1 risk-based capital at 21.1%; Total risk-based capital at 21.9%.

Income Statement Highlights

  • Net Interest Income: $646.2 million for the year 2013 (up from $597.6 million in 2012).
  • Net Interest Margin (NIM): 5.73% for the year 2013, down from 6.05% in 2012. Quarterly NIM was 5.24% vs 6.72% in Q4 2012.
  • Cost of Deposits: 0.65% for the year 2013, down from 0.81% in 2012.
  • Non-Interest Income: $31.1 million for the year 2013, significantly lower than $89.2 million in 2012 due to the shift from accretion to amortization of the FDIC indemnification asset.
  • Non-Interest Expense: $327.4 million for the year 2013, slightly higher than $323.1 million in 2012.

Material Changes vs. Prior Period

  • Earnings Decline (Quarterly): Q4 2013 net income decreased 16% to $52.4 million from $62.5 million in Q4 2012. This was driven by a lower net interest margin and reduced non-interest income.
  • Net Interest Margin Compression: The NIM decline is attributed to the origination of new loans at yields (3.61% in Q4) significantly lower than the high yields on the legacy covered loan portfolio. Additionally, proceeds from the sale of zero-carrying-value ACI loans, which boosted 2012 income, were lower in 2013.
  • Non-Interest Income Shift: The Company began amortizing the FDIC indemnification asset in 2013, resulting in a negative impact of $36.9 million for the year, compared to positive accretion of $15.3 million in 2012.
  • Loan Portfolio Growth: New loans grew by $3.9 billion during 2013, while covered loans declined. The portfolio mix shifted toward commercial real estate and commercial loans.
  • Asset Quality Improvement: The ratio of non-performing loans to total loans improved to 0.39% from 0.62% in 2012. Non-performing assets totaled $76.2 million, down from $110.6 million.

Outlook, Risks, and Management Commentary

  • Margin Outlook: Management anticipates the net interest margin to continue trending downward as the new loan portfolio, originated at lower market rates, comprises a larger percentage of total loans.
  • FDIC Indemnification: As expected cash flows from covered assets improve, the yield on the FDIC indemnification asset has turned negative, reducing non-interest income. This is a mitigating factor against gains from the resolution of covered assets.
  • Expansion: Increased occupancy and equipment expenses reflect the Company's expansion into New York and branch network growth in Florida.
  • Regulatory Capital: The Company and its subsidiary continue to exceed all regulatory guidelines for "well capitalized" status.
  • Forward-Looking Statements: The filing includes standard disclaimers that future results may vary due to risks including economic conditions, interest rate fluctuations, and the resolution of covered assets.

Investor Verification Checklist

  • Verify the sustainability of the net interest margin as the high-yield covered loan portfolio continues to shrink relative to the new loan portfolio.
  • Monitor the trajectory of the FDIC indemnification asset amortization and its impact on non-interest income.
  • Assess the credit quality of the rapidly growing new loan portfolio ($7.6 billion) compared to the legacy covered assets.
  • Review the specific reserves recognized on impaired loans, particularly the commercial relationship mentioned in the provision for loan losses.
  • Confirm the impact of the Volcker Rule on future securities gains, as the Company liquidated certain positions in Q4 2013.