BankUnited, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. BankUnited is a bank holding company operating through BankUnited, N.A., with banking centers in Florida, the New York metropolitan area and Dallas, as well as national commercial lending platforms.
Financial performance and position
- Q3 earnings: Net income was $87.9 million, or $1.12 per diluted share, versus $86.9 million, or $0.94 per diluted share, in Q3 2021 and $65.8 million in Q2 2022. Q3 2022 pretax income was $117.1 million.
- Year-to-date earnings: Nine-month net income was $220.8 million, or $2.71 per diluted share, down from $289.7 million, or $3.12 per diluted share, in 2021. The prior-year period included a $67.4 million provision recovery.
- Interest income and margin: Q3 GAAP net interest income was $235.8 million, up from $195.1 million a year earlier. Tax-equivalent net interest income was $239.9 million; the tax-equivalent net interest margin was 2.76%, up from 2.33% a year earlier and 2.63% in Q2. For the first nine months, GAAP net interest income was $669.9 million and tax-equivalent margin was 2.63%, versus 2.36% in 2021.
- Other income and expenses: Q3 non-interest income was $23.1 million, compared with $25.5 million in Q3 2021. Q3 non-interest expense rose to $138.1 million from $118.0 million; the company cited investment in people and technology, labor and benefit costs, and a $2.3 million technology investment write-off.
- Balance sheet at September 30: Total assets were $36.6 billion, loans $24.3 billion, and deposits $27.3 billion. Total stockholders’ equity was $2.48 billion; book value per share was $31.97 and tangible book value per share was $30.97.
- Funding and debt: Deposits declined $2.09 billion from year-end 2021 to $27.35 billion. FHLB advances increased to $5.30 billion from $1.91 billion; notes and other borrowings were $721 million. Estimated uninsured deposits were $18.9 billion.
- Cash flow and liquidity: Nine-month operating cash flow was $1.32 billion, and cash and cash equivalents ended at $726 million. Management reported available-liquidity-to-volatile-liabilities and liquidity stress-test ratios of 222% and 168%, respectively, above its 100% policy thresholds, and said liquidity was sufficient for expected needs over the next 12 months.
- Capital: At September 30, the company reported CET1 and total risk-based capital ratios of 11.35% and 13.01%; the Bank reported 12.94% and 13.40%. Management said both exceeded applicable well-capitalized guidelines and internal targets.
Material changes and credit quality
- Loans grew $502 million from December 31, 2021; excluding PPP runoff, growth was $740 million. C&I and owner-occupied commercial real estate loans grew, while mortgage warehouse lending fell $469 million as mortgage activity weakened.
- Q3 deposits fell $1.1 billion. Non-interest-bearing demand deposits declined $851 million during the quarter and represented 32% of deposits, versus 34% at Q2-end. Time deposits increased $976 million as the company extended deposit maturities.
- The allowance for credit losses was $130.7 million, or 0.54% of loans, versus $126.5 million, or 0.53%, at year-end 2021. Nine-month provision expense was $35.5 million, compared with a $67.4 million recovery in 2021.
- Non-performing loans were $156.4 million, or 0.64% of loans, versus $205.9 million, or 0.87%, at year-end 2021. Criticized and classified commercial loans declined during Q3, though management said levels remained elevated relative to pre-pandemic levels.
Outlook, risks and unusual items
- The filing provides no specific earnings or margin guidance. Management described rising rates and Federal Reserve quantitative tightening as affecting asset yields, deposit costs, market values and deposit levels; it noted uncertainty about future deposit trends.
- Available-for-sale securities had $637.5 million of gross unrealized losses at September 30, primarily attributed to rising rates and wider spreads. The related after-tax securities loss contributed to accumulated other comprehensive loss of $407.7 million, versus a loss of $15.9 million at year-end 2021. Management said it did not intend to sell securities in significant loss positions and did not expect to be required to sell them before recovery; it identified no credit-loss impairment in the securities portfolio.
- The Q3 credit-loss provision included $5 million for potential Hurricane Ian impacts. The company reported $2.3 billion of loans in the affected assessment area; as of October 25, borrowers representing about 75% of that exposure had been contacted. Management reported no severe borrower impacts and did not expect the storm to materially affect financial condition or results.
- Interest-rate modeling showed forecast net interest income increased 1.2% in year one and 3.4% in year two under a +100-basis-point shock, but declined 4.0% and 4.2% under a -100-basis-point shock. Results depend on assumptions and customer behavior. The company also had $12.7 billion of instruments referencing LIBOR, including $5.2 billion of loans, and identified SOFR as its preferred alternative reference rate.
- Other notable items: the company recorded a $16.1 million net loss on investment securities for the first nine months, including market-value losses on marketable equity securities; repurchased $336.5 million of shares year to date; and received Board authorization for a further $150 million repurchase program in September. Management assessed the impact of pending legal proceedings as unlikely to be material.
Key facts for investors to verify
- Whether deposit outflows continue and how rising deposit costs affect net interest margin and funding mix.
- How the securities portfolio’s unrealized losses, liquidity needs and potential sales develop as interest rates and spreads change.
- Whether credit quality, criticized assets, charge-offs and the allowance remain stable under the company’s economic assumptions.
- The realized effects of Hurricane Ian on the $2.3 billion of loans in the affected assessment area.
- Progress on LIBOR transition, capital levels, and execution of the new share repurchase authorization.