Bankunited, Inc. quarterly report, Q3 FY2023

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Business context and reporting period

BankUnited, Inc. is a bank holding company whose principal subsidiary provides banking and related services in Florida, the New York metropolitan area and Dallas, alongside national commercial lending platforms. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022 unless stated otherwise. Amounts below are in U.S. dollars.

Financial and operating performance

  • Profit: Third-quarter net income was $47.0 million, or $0.63 per diluted share, versus $87.9 million, or $1.12, in Q3 2022. For the first nine months, net income was $157.9 million, or $2.11 per diluted share, versus $220.8 million, or $2.71.
  • Interest income and margins: Q3 interest income was $470.5 million, while interest expense was $255.7 million; net interest income before credit-loss provision was $214.8 million, down from $235.8 million a year earlier. Tax-equivalent net interest margin was 2.56%, up from 2.47% in Q2 2023 but below 2.76% in Q3 2022. Nine-month tax-equivalent margin was 2.55%, versus 2.63%.
  • Other income and expenses: Q3 non-interest income was $27.7 million and non-interest expense was $147.1 million. For the first nine months, those totals were $69.7 million and $445.1 million, respectively. Nine-month expenses included higher deposit insurance costs and customer rebate and commission program costs.
  • Credit costs and asset quality: Q3 provision for credit losses was $33.0 million versus $3.7 million a year earlier; the nine-month provision was $68.4 million versus $35.5 million. The allowance for credit losses (ACL) was $196.1 million, or 0.80% of loans, versus $147.9 million, or 0.59%, at year-end 2022. Non-performing assets were $140.5 million, or 0.40% of assets, compared with $107.0 million, or 0.29%, at year-end. The nine-month annualized net charge-off ratio was 0.07%.
  • Balance sheet and funding: Total assets were $35.4 billion; loans were $24.4 billion gross and deposits were $26.1 billion. Since year-end, assets declined from $37.0 billion, loans from $24.9 billion and deposits from $27.5 billion. FHLB advances were $5.2 billion, down from $5.4 billion; notes and other borrowings were $715.2 million. Federal funds purchased were zero at quarter-end.
  • Liquidity and capital: Management reported $14.4 billion of same-day available liquidity, liquidity equal to 161% of estimated uninsured, uncollateralized deposits, and 66% of deposits insured or collateralized. CET1 ratios were 11.42% at the holding company and 13.17% at the Bank; including AOCI, management reported pro forma ratios of 9.8% and 11.5%, respectively.
  • Cash flow and equity: Nine-month operating cash flow was $593.7 million, investing cash flow was positive $1.15 billion and financing cash flow was negative $1.92 billion. Cash and cash equivalents ended at $391.9 million, down from $572.6 million at year-end. Stockholders’ equity was $2.52 billion. The company repurchased $55.2 million of shares and declared $0.81 per share in dividends during the first nine months.

Material changes and management commentary

  • Management attributed lower year-over-year earnings primarily to the sharp rise in funding costs and increased credit-loss provisions. Loan and securities yields rose, but higher deposit and wholesale funding costs more than offset the added interest income.
  • In Q3, deposits increased $274 million, including $484 million in non-brokered deposits; non-interest-bearing demand deposits increased $52 million. Residential loans fell $225 million, while core C&I and CRE loans grew by a combined $147 million. Securities declined $257 million and FHLB advances declined $810 million. The loans-to-deposits ratio fell to 93.3% from 95.3% in Q2.
  • Management said deposit flows and liquidity had stabilized since the March 2023 regional-bank failures, and described loan and deposit pipelines as healthy, liquidity as strong and capital as robust. It also noted that wholesale funding remained elevated and reducing it remained a near-term priority.
  • The AFS securities portfolio had a net unrealized loss of approximately $644 million at September 30, improving from approximately $674 million at year-end. Management attributed losses primarily to higher interest rates and wider spreads, and said it did not intend, and did not expect to be required, to sell securities in significant loss positions before recovery. Most securities were reported as pledgeable at the FHLB or FRB.
  • Commercial criticized and classified loans totaled $991.9 million, up from $740.5 million at year-end; special-mention balances increased notably. CRE represented 23.5% of loans and 168% of the Bank’s risk-based capital. Its weighted-average LTV was 55.8% and DSCR was 1.80; 32% of CRE exposure was office property.

Outlook, risks and contingencies

The filing provides no specific earnings or financial guidance. Management’s forward-looking commentary is subject to uncertainty around interest rates, the economy, deposit behavior, funding costs, credit quality and liquidity. The ACL is judgmental and may change materially as forecasts, borrower conditions, portfolio mix and collateral values change. Management cited a less favorable economic forecast as the principal driver of the Q3 reserve increase.

  • The filing identifies risks from renewed deposit outflows or loss of confidence in regional banks, higher funding costs, restrictive monetary policy, and possible regulatory changes or increased capital and liquidity requirements.
  • The FDIC had proposed a special assessment on certain uninsured deposits. If levied as proposed, the company estimated an approximately $33 million assessment, expected to be recognized in the period finalized; the filing does not establish that it had been finalized.
  • Outstanding lending-related commitments totaled $5.47 billion, including $5.00 billion of unfunded credit lines. These contractual commitments do not necessarily represent future funding needs because some may expire unused.
  • Management considered the likelihood of a material adverse outcome from ordinary-course legal proceedings remote. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. Whether deposit growth and lower wholesale funding persist, and how uninsured and collateralized deposit levels evolve.
  2. Whether NIM and net interest income can improve as asset yields reset and deposit costs change.
  3. Whether criticized/classified loans, non-performing assets and the ACL continue to rise, particularly in C&I, CRE and franchise finance.
  4. Whether the proposed FDIC special assessment is finalized and the actual amount and timing of any expense.
  5. How the unrealized securities losses, AOCI and regulatory capital would respond to interest-rate changes or any need to sell or pledge assets.