BANKUNITED, INC. The following discussion and analysis is intended to focus on significant
matters impacting and changes in the financial condition and results of
operations of the Company during the three months ended
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," "future" 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, including as impacted by external circumstances outside the Company's direct control, such as adverse events impacting the financial services industry. 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 2022 Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-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. Overview Recent Industry Developments During March and April of 2023, three highly publicized regional bank closures led to industry-wide concerns and volatility related to bank valuations, liquidity, deposit outflows, unrealized securities losses and eroding customer confidence in the banking system. Despite these recent developments, our business is stable, our liquidity position is strong and our capital base remains robust. The Company took the following actions in response to these industry-wide developments:
•Activated our contingency funding plan, enhancing daily monitoring and reporting of liquidity trends and deposit flows, and optimized same day available liquidity by increasing cash levels and pledging additional assets to the FHLB and FRB;
•Equipped our relationship managers and branch personnel with information they could use in their outreach to customers;
•Supported our customers by offering our pre-existing ICS reciprocal insured deposit program to those with concerns about deposit insurance;
•Held regular company-wide calls to provide timely information to our employees;
•Maintained a regular cadence of communication with funding sources, counterparties and regulators;
•Made senior management available to customers as needed; and
•Are re-evaluating the Bank's concentration limits around certain types of larger deposits.
Quarterly Highlights
In evaluating our financial performance, we consider the level of and trends in
net interest income, the net interest margin, the cost of deposits, levels and
composition of non-interest income and non-interest expense, performance ratios
such as the return on average equity and return on average assets and asset
quality ratios, including the ratio of non-performing loans to total loans,
non-performing assets to total assets, trends in criticized and classified
assets and portfolio delinquency and charge-off trends. We consider growth in
and the composition of earning assets and deposits, the composition and level of
available liquidity, our interest rate risk profile, trends in funding mix and
cost of funds. We analyze these ratios and trends against our own historical
performance, our budgeted performance, our risk appetite and the financial
condition and performance of comparable financial institutions.
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--------------------------------------------------------------------------------Quarterly highlights include: •Net income for the three months endedMarch 31, 2023 was$52.9 million , or$0.70 per diluted share, compared to$64.2 million or$0.82 per diluted share for the immediately preceding three months endedDecember 31, 2022 and$67.2 million , or$0.79 per diluted share, for the three months endedMarch 31, 2022 . •CET1 was 10.8% at the holding company and 12.5% at the Bank atMarch 31, 2023 . Pro-forma CET1 at the holding company, including accumulated other comprehensive income, was 9.4% atMarch 31, 2023 . •Our liquidity position is strong. AtMarch 31, 2023 , the Bank had total same day available liquidity of approximately$9.4 billion . As ofApril 21, 2023 , available liquidity had increased to approximately$12.3 billion . AtMarch 31, 2023 , the Bank's ratio of estimated insured and collateralized deposits to total deposits was 62% and its available liquidity to estimated uninsured, uncollateralized deposits ratio was 95%. The ratio of available liquidity to estimated uninsured, uncollateralized deposits improved to 128% atApril 21, 2023 . •During the week immediately following the onset of recent events impacting the banking sector, the Bank experienced elevated deposit outflows; deposit flows stabilized thereafter. Total deposits declined by$1.79 billion during the three months endedMarch 31, 2023 , while non-interest bearing demand deposits declined by$671 million . Net deposit outflows the week ofMarch 13, 2023 totaled$1.75 billion . Outflows totaling$1.9 billion that week were attributable to a small number of larger institutional customers. For the weeks ofMarch 20 andMarch 27, 2023 , there were net deposit inflows totaling$245 million .
•Non-interest bearing demand deposits were 29% of total deposits at both
•Net interest income and the net interest margin for the three months endedMarch 31, 2023 were negatively impacted by an increase in the cost of funds which more than offset the increased yield on interest-earning assets. A greater than anticipated decline in average non-interest bearing deposits and an increase in on-balance sheet liquidity led to an increase in higher cost deposits and FHLB advances. The net interest margin, calculated on a tax-equivalent basis, was 2.62% for the three months endedMarch 31, 2023 , compared to 2.81% for the three months endedDecember 31, 2022 and 2.50% for the three months endedMarch 31, 2022 . Net interest income decreased by$15.2 million , compared to the three months endedDecember 31, 2022 and increased by$19.2 million compared to the three months endedMarch 31, 2022 . •In response to the rising interest rate environment, tightening liquidity conditions and recent events impacting the banking sector, the average cost of total deposits rose to 2.05% for the three months endedMarch 31, 2023 , from 1.42% for the immediately preceding three months endedDecember 31, 2022 . The yield on average interest earning assets increased to 5.05% for the three months endedMarch 31, 2023 , from 4.60% for the immediately preceding three months. •For the three months endedMarch 31, 2023 , the provision for credit losses was$19.8 million compared to provisions of$39.6 million and$7.8 million for the three months endedDecember 31, 2022 andMarch 31, 2022 , respectively. The ratio of the ACL to total loans increased to 0.64%, atMarch 31, 2023 from 0.59% atDecember 31, 2022 .
•Non-interest income for the three months ended
•Total loans was flat quarter-over-quarter, with a$111 million decline in residential offsetting net growth in the commercial segments of$118 million . The core C&I and CRE portfolio segments grew by$144 million . •The pre-tax net unrealized loss on investment securities AFS improved by$100 million during the three months endedMarch 31, 2023 to$574 million from$674 million atDecember 31, 2022 . The duration of the AFS portfolio was 1.95 atMarch 31, 2023 . Securities held to maturity totaled only$10 million atMarch 31, 2023 .
•The Company announced an increase of
•During the three months ended
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•Book value and tangible book value per common share improved to $33.34 and
$32.30 , respectively, at March 31, 2023 , from $32.19 and $31.16 , respectively at
December 31, 2022 .
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 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, the shape of the yield
curve, levels of non-performing assets and pricing pressure from competitors.
The mix of interest earning assets is influenced by loan demand, market and
competitive conditions in our primary lending markets, by management's continual
assessment of the rate of return and relative risk associated with various
classes of earning assets and liquidity considerations. The mix of interest
bearing liabilities is influenced by the Company's liquidity profile,
management's assessment of the desire for lower cost funding sources weighed
against relationships with customers and growth expectations, our ability to
attract and retain core deposit relationships, competition for deposits in the
Company's markets and the availability and pricing of other sources of funds.
For the quarter ended March 31, 2023 , the mix of interest bearing liabilities
was negatively impacted by a higher rate environment, the quantitative
tightening policy stance of the FRB which has led to a decline in deposit levels
across the banking industry and deposit outflows related to events that impacted
the banking sector in March, 2023. These factors contributed to a decline in
average non-interest bearing demand deposits and to an increase in higher cost
funding sources, including wholesale funding such as FHLB advances.
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The following table presents, for the periods indicated, information about
(i) average balances, the total dollar amount of taxable equivalent 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. Non-accrual loans are
included in the average balances presented in this table; however, interest
income foregone on non-accrual loans is not included. Interest income, yields,
spread and margin have been calculated on a tax-equivalent basis for loans and
investment securities that are exempt from federal income taxes, at a federal
tax rate of 21% (dollars in thousands):
Three Months Ended March 31,
March 31, 2023 December 31, 2022 March 31, 2022
Average Yield/ Average Yield/ Average Yield/
Balance Interest (1) Rate (1)(2) Balance Interest (1) Rate (1)(2) Balance Interest (1) Rate (1)(2)
Assets:
Interest earning assets:
Loans $ 24,724,296 $ 312,125 5.10 % $ 24,624,062 $ 292,272 4.72 % $ 23,349,143 $ 194,551 3.36 %
Investment securities (3) 9,672,514 119,666 4.95 % 9,788,969 106,034 4.33 % 10,083,083 43,719 1.73 %
Other interest earning
assets 1,039,563 12,863 5.02 % 710,315 7,345 4.10 % 674,640 1,354 0.81 %
Total interest earning
assets 35,436,373 444,654 5.05 % 35,123,346 405,651 4.60 % 34,106,866 239,624 2.83 %
Allowance for credit
losses (151,071) (137,300) (129,028)
Non-interest earning
assets 1,793,000 1,837,156 1,674,476
Total assets $ 37,078,302 $ 36,823,202 $ 35,652,314
Liabilities and
Stockholders' Equity:
Interest bearing
liabilities:
Interest bearing demand
deposits $ 2,283,505 10,545
1.87 % $ 2,183,854 6,704 1.22 % $ 3,078,037 1,364 0.18 %
Savings and money market
deposits 12,145,922 91,724 3.06 % 12,054,892 68,001 2.24 % 13,401,332 6,931 0.21 %
Time deposits 4,526,480 31,361 2.81 % 3,960,111 19,698 1.97 % 3,319,585 3,562 0.44 %
Total interest bearing
deposits 18,955,907 133,630 2.86 % 18,198,857 94,403 2.06 % 19,798,954 11,857 0.24 %
Federal funds purchased 143,580 1,611 4.49 % 175,637 1,677 3.74 % 187,539 58 0.12 %
FHLB advances 6,465,000 68,039 4.27 % 6,125,435 53,084 3.44 % 2,248,889 6,146 1.11 %
Notes and other
borrowings 720,906 9,262 5.14 % 721,044 9,260 5.14 % 721,405 9,261 5.13 %
Total interest bearing
liabilities 26,285,393 212,542 3.28 % 25,220,973 158,424 2.49 % 22,956,787 27,322 0.48 %
Non-interest bearing
demand deposits 7,458,221 8,237,885 9,047,864
Other non-interest
bearing liabilities 821,419 879,207 623,200
Total liabilities 34,565,033 34,338,065 32,627,851
Stockholders' equity 2,513,269 2,485,137 3,024,463
Total liabilities and
stockholders' equity $ 37,078,302 $ 36,823,202 $ 35,652,314
Net interest income $ 232,112 $ 247,227 $ 212,302
Interest rate spread 1.77 % 2.11 % 2.35 %
Net interest margin 2.62 % 2.81 % 2.50 %
(1)On a tax-equivalent basis where applicable. The tax-equivalent adjustment for
tax-exempt loans was $3.3 million for the three months ended March 31, 2023 and
$3.0 million for both the three months ended December 31, 2022 and March 31,
2022 . The tax-equivalent adjustment for tax-exempt investment securities was
$0.9 million for both the three months ended March 31, 2023 and December 31,
2022 , and $0.7 million for the three months ended March 31, 2022 .
(2)Annualized
(3)At fair value except for securities held to maturity.
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Three months ended
Net interest income, calculated on a tax-equivalent basis, was$232.1 million for the three months endedMarch 31, 2023 , compared to$247.2 million for the three months endedDecember 31, 2022 , a decrease of$15.1 million . The decrease in net interest income was comprised of increases in tax-equivalent interest income and interest expense of$39.0 million and$54.1 million , respectively, for the three months endedMarch 31, 2023 , compared to the three months endedDecember 31, 2022 . Overall, the net interest margin was negatively impacted by an increase in the cost of interest-bearing deposits and FHLB advances, more than offsetting the increased yield on interest earnings assets. A decline in average non-interest bearing deposits and an increase in on-balance sheet liquidity contributed to an increase in higher-cost funding. The net interest margin, calculated on a tax-equivalent basis, was 2.62% for the three months endedMarch 31, 2023 , compared to 2.81% for the three months endedDecember 31, 2022 . More detail about factors impacting the net interest margin for the three months endedMarch 31, 2023 compared to the three months endedDecember 31, 2022 included: •The tax-equivalent yield on investment securities increased to 4.95% for the three months endedMarch 31, 2023 , from 4.33% for the three months endedDecember 31, 2022 . This increase resulted primarily from the reset of coupon rates on variable rate securities. •The tax-equivalent yield on loans increased to 5.10% for the three months endedMarch 31, 2023 , from 4.72% for the three months endedDecember 31, 2022 . Factors contributing to this increase were the resetting of variable rate loans at higher coupon rates and originations of new loans at higher rates. •The average rate paid on interest bearing deposits increased to 2.86% for the three months endedMarch 31, 2023 , from 2.06% for the three months endedDecember 31, 2022 , in response to the rising interest rate environment, tightening liquidity conditions and the shift from non-interest bearing deposits to deposits priced at current, higher market rates. •The average rate paid on FHLB advances increased to 4.27% for the three months endedMarch 31, 2023 , from 3.44% for the three months endedDecember 31, 2022 , primarily due to higher prevailing rates. •Average non-interest bearing demand deposits declined by$780 million while average cash balances increased by$313 million for the three months endedMarch 31, 2023 . Correspondingly, the increase in average interest-bearing sources of funds added to the balance sheet at higher current rates totaled$1.1 billion for the three months endedMarch 31, 2023 . The estimated impact of this shift on the net interest margin for the three months endedMarch 31, 2023 was 0.14%.
Three months ended
Net interest income, calculated on a tax-equivalent basis, was$232.1 million for the three months endedMarch 31, 2023 , compared to$212.3 million for the three months endedMarch 31, 2022 , an increase of$19.8 million . The increase in net interest income was comprised of increases in tax-equivalent interest income and interest expense of$205.0 million and$185.2 million , respectively, for the three months endedMarch 31, 2023 , compared to the three months endedMarch 31, 2022 . The increase in tax equivalent interest income was driven primarily by increases in interest income from loans and investment securities of$117.6 million and$75.9 million , respectively, for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 . The increase in interest expense was driven by increases in interest expense on deposits and borrowings of$121.8 million and$63.4 million , respectively, for the three months endedMarch 31, 2023 , compared to the three months endedMarch 31, 2022 . Increases in interest income for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 reflected increases in both the average balance of and the yields on loans and rising yields on investment securities. Increases in interest expense for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 reflected the increase in the cost of interest-bearing deposits partially offset by a decline in the average balance and an increase in both the cost and average balance of FHLB advances. A decline in average non-interest bearing deposits and an increase in on-balance sheet liquidity also contributed to the increase in interest expense. The net interest margin, calculated on a tax-equivalent basis, was 2.62% for the three months endedMarch 31, 2023 compared to 2.50% for the three months endedMarch 31, 2022 . Offsetting factors impacting the net interest margin for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 included: •The tax-equivalent yield on loans expanded to 5.10% for the three months endedMarch 31, 2023 , from 3.36% for the three months endedMarch 31, 2022 . Factors contributing to this increase were the resetting of variable rate loans at higher coupon rates and originations of new loans at higher rates. 36 -------------------------------------------------------------------------------- •The tax-equivalent yield on investment securities increased to 4.95% for the three months endedMarch 31, 2023 from 1.73% for the three months endedMarch 31, 2022 . This increase resulted primarily from the reset of coupon rates on variable rate securities as well as purchases of securities at higher yields. •The average rate paid on interest bearing deposits increased to 2.86% for the three months endedMarch 31, 2023 from 0.24% for the three months endedMarch 31, 2022 , primarily in response to the rising interest rate environment and tightening liquidity conditions.
•The average rate paid on FHLB advances increased to 4.27% for the three months
ended
Provision for Credit Losses
The provision for credit losses is a charge or credit to earnings required to maintain the ACL at a level consistent with management's estimate of expected credit losses on financial assets carried at amortized cost at the balance sheet date. The amount of the provision is impacted by changes in current economic conditions as well as in management's reasonable and supportable economic forecast, loan originations and runoff, changes in portfolio mix, risk rating migration and portfolio seasoning, changes in specific reserves, changes in expected prepayment speeds and other assumptions. The provision for credit losses also includes amounts related to off-balance sheet credit exposures and may include amounts related to accrued interest receivable and AFS debt securities.
The following table presents the components of the provision for credit losses for the periods indicated (in thousands):
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