BankUnited, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. BankUnited is a bank holding company operating through its national bank, serving customers in Florida, the New York metropolitan area, and Dallas, with additional national commercial lending and deposit platforms.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total interest income | $463.4 million | $267.0 million | $903.8 million | $502.9 million |
| Net interest income, before credit provision | $213.9 million | $225.4 million | $441.8 million | $434.1 million |
| Provision for credit losses | $15.5 million | $24.0 million | $35.3 million | $31.8 million |
| Non-interest income | $25.5 million | $13.5 million | $42.0 million | $27.8 million |
| Non-interest expense | $145.2 million | $127.4 million | $298.0 million | $253.7 million |
| Net income | $58.0 million | $65.8 million | $110.9 million | $132.9 million |
| Diluted earnings per share | $0.78 | $0.82 | $1.48 | $1.60 |
Tax-equivalent net interest margin was 2.47% in Q2, versus 2.62% in Q1 2023 and 2.63% in Q2 2022; the six-month margin was 2.55%, versus 2.57% a year earlier. Q2 interest income rose year over year, but higher deposit and borrowing costs more than offset that increase, reducing net interest income. The effective tax rate was 26.2% for Q2 and 26.3% for the first half.
Balance sheet, liquidity, capital, and credit
- At June 30, total assets were $35.87 billion, down from $37.03 billion at December 31, 2022. Loans were $24.63 billion, compared with $24.89 billion; deposits were $25.84 billion, compared with $27.51 billion.
- Deposits increased $116 million during Q2, but declined $1.67 billion year to date. Non-interest-bearing demand deposits declined $733 million year to date. FHLB advances were $5.98 billion at quarter-end, versus $5.42 billion at year-end; they declined $1.6 billion from Q1.
- Reported cash and cash equivalents were $301 million. Management reported $14.7 billion of same-day available liquidity, including $4.6 billion of FHLB capacity, $8.9 billion of Federal Reserve borrowing capacity, and $871 million of unencumbered securities. Available liquidity equaled 167% of estimated uninsured, uncollateralized deposits; 66% of deposits were insured or collateralized.
- For the six months, operating cash flow was $424 million, compared with $1.06 billion in 2022. Investing activities provided $691 million, while financing activities used $1.39 billion. Cash and cash equivalents declined $271 million from the start of the year.
- Stockholders’ equity was $2.53 billion. CET1 ratios were 11.15% at the holding company and 12.99% at the Bank; including AOCI, management reported pro forma CET1 of 9.7% and 11.5%, respectively. Book value and tangible book value per share were $33.94 and $32.90.
- The allowance for credit losses was $166.8 million, or 0.68% of loans, versus $147.9 million, or 0.59%, at year-end. The annualized six-month net charge-off ratio was 0.09%. Non-performing assets were 0.34% of assets, compared with 0.29% at year-end; non-performing loans were 0.48% of loans, versus 0.42%.
- Commercial real estate loans were $5.70 billion, 23% of loans, with a reported weighted-average LTV of 57.1% and DSCR of 1.88. Commercial criticized/classified loans totaled $854 million, up from $741 million at year-end; special-mention balances rose to $233 million from $51 million.
Material changes and management commentary
- Q2 net income rose from $52.9 million in Q1 but remained below Q2 2022. Management attributed the quarter’s margin pressure chiefly to higher deposit and wholesale funding costs, increased competition for deposits, and elevated liquidity needs following banking-sector events in March 2023.
- Average deposit cost rose to 2.46% in Q2 from 2.05% in Q1; average yield on interest-earning assets increased to 5.30% from 5.05%. Management said loan and deposit pipelines were growing and deposit flows had stabilized, while noting continued market uncertainty.
- The securities portfolio’s net unrealized loss improved to $599.4 million from $674.2 million at year-end. The company said these losses primarily reflected interest rates and market spreads, not credit impairment, and stated it did not anticipate needing to sell securities to meet liquidity needs. AFS securities were substantially pledgeable.
- Non-interest expense increased year over year, including higher compensation, technology, deposit insurance, and other expenses. First-half other expense included $4.4 million of operational losses. First-half marketable equity securities losses were $13.2 million.
- The ACL increase reflected a less favorable economic forecast, greater weighting of a downside scenario, and specific reserves. Management cautioned that credit-loss estimates involve substantial judgment and could change materially.
Outlook, risks, and contingencies
The filing provides no specific earnings, margin, or growth guidance. Management described liquidity and capital as strong, but identified uncertainty around regional-bank confidence and deposit behavior, funding costs, net interest margin, real estate values, borrower credit quality, and potential regulatory changes or higher FDIC assessments. Interest-rate sensitivity modeling showed Q2 forecast net interest income declining 4% in year one and 1% in year two under a parallel 200-basis-point increase; modeled economic value of equity declined 16% under that scenario. These are model estimates, not forecasts of actual results.
Outstanding lending-related commitments were $5.97 billion, primarily unfunded lines of credit. Management considered the likelihood of material adverse effects from ordinary-course legal proceedings remote. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposits remain stable and the reported $14.7 billion of same-day liquidity and 167% coverage ratio are sustained.
- How deposit repricing and wholesale funding affect net interest margin, earnings, and the pace of FHLB advance repayments.
- Whether criticized commercial exposures, especially office and other CRE, lead to further delinquencies, charge-offs, or ACL increases.
- The sensitivity of capital and liquidity to AOCI and the substantial unrealized losses in AFS securities, including assumptions around pledged assets and any need to sell securities.
- Whether the higher operating expense base, operational losses, and customer rebate costs persist or change.