Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of BankUnited, Inc. and its subsidiary (the "Company", "we", "us" and "our") and should be read in conjunction with the consolidated financial statements, accompanying footnotes and supplemental financial data included herein. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Forward-looking Statements" and "Risk Factors." We assume no obligation to update any of these forward-looking statements.
Overview
The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2022 and 2021 and results of operations for each of the years then ended. Refer to Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with the SEC on February 24, 2022 for a discussion and analysis of the more significant factors that affected periods prior to 2021.
Performance 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, trends in funding mix and cost of funds. We analyze these ratios and trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable financial institutions.
Performance highlights include:
•Net income for year ended December 31, 2022 was $285.0 million, or $3.54 per diluted share, compared to $415.0 million, or $4.52 per diluted share, for the year ended December 31, 2021. For the year ended December 31, 2022, the return on average stockholders' equity was 10.6% and the return on average assets was 0.79%.
•Pre-tax, pre-provision net revenue ("PPNR") was $450.3 million for the year ended December 31, 2022, compared to $382.3 million for the year ended December 31, 2021. PPNR for the year ended December 31, 2021 was impacted by certain notable items, further discussed below in the sections titled "Results of Operations - Non-Interest Income" and "Results of Operations - Non-Interest Expense".
•Loans, excluding the runoff of PPP loans, grew by $1.4 billion for the year ended December 31, 2022. The core C&I and commercial real estate portfolio segments grew by a total of $1.6 billion, offset by declines in other commercial segments. Given the market-wide decline in mortgage origination activity, mortgage warehouse loans declined by $567 million. The residential segment grew by $532 million for the year ended December 31, 2022.
•The net interest margin, calculated on a tax-equivalent basis, expanded to 2.68% for the year ended December 31, 2022, from 2.38% for the year ended December 31, 2021. Net interest income increased by $117.3 million compared to the year ended December 31, 2021. The following chart provides a comparison of net interest margin, the interest rate spread, the average yield on interest earning assets and the average rate paid on interest bearing liabilities for the years ended December 31, 2022 and 2021 (on a tax equivalent basis):
•In response to the rising interest rate environment and tightening liquidity, particularly over the latter half of the year, the average cost of total deposits rose to 0.65% for the year ended December 31, 2022, from 0.24% for the year ended December 31, 2021. The yield on average interest earning assets increased to 3.59% for the year ended December 31, 2022, from 2.86% for the year ended December 31, 2021.
•For the year ended December 31, 2022, the Company recorded a provision for credit losses of $75.2 million, compared to a recovery of the provision for credit losses of $(67.1) million for the year ended December 31, 2021. The recovery recorded for the year ended December 31, 2021 was reflective of emergence of the economy from the COVID-19 pandemic while the provision for the year ended December 31, 2022 reflected a heightened level of uncertainty around the future trajectory of the economy. The ratio of the ACL to total loans increased to 0.59% at December 31, 2022, from 0.53% at December 31, 2021.
•Total deposits declined by $1.9 billion and non-interest bearing demand deposits declined by $938 million during the year ended December 31, 2022, consistent with the broader outflow of deposits from the banking system as the Federal Reserve increased its benchmark interest rate and adopted a policy stance of quantitative tightening. Time deposits grew by $884 million during the year ended December 31, 2022, reflecting a strategy to extend the term of deposits. The following charts illustrate the composition of deposits at the dates indicated:
•The positive trend in levels of criticized and classified loans continued during the year ended December 31, 2022, declining by $722 million; the annualized net charge-off ratio was 0.22% compared to 0.29% for the year ended December 31, 2021. The ratio of non-performing loans to total loans was 0.42% at December 31, 2022, compared to 0.87% at December 31, 2021. The guaranteed portion of SBA loans on non-accrual status represented 0.16% of total loans and 38% of non-performing loans at December 31, 2022.
•Results for the year ended December 31, 2022 were impacted by declines in the fair value of investment securities. Accumulated Other Comprehensive Loss increased by $422 million for the year, primarily due to an increase in unrealized losses on investment securities available for sale. Unrealized losses were generally attributable to rising interest rates and widening spreads related to the Federal Reserve's quantitative tightening and benchmark interest rate increases. None of the unrealized losses were attributable to credit loss impairments. Non-interest income was impacted by a $19.7 million decline in the fair value of certain preferred stock investments.
•Book value per common share and tangible book value per common share was $32.19 and $31.16, respectively, at December 31, 2022, compared to $35.47 and $34.56, respectively at December 31, 2021.
•During the year ended December 31, 2022, the Company repurchased approximately 10.3 million shares of its common stock for an aggregate purchase price of $401.3 million, at a weighted average price of $39.13 per share.
•In the first quarter of 2022, the Company increased its quarterly cash dividend by $0.02, to $0.25 per share, reflecting a 9% increase from the previous quarterly cash dividend of $0.23 per share and maintained that quarterly dividend level through 2022.
•During the year ended December 31, 2022, we opened a new wholesale banking office in Atlanta and a new banking center in Dallas.
•The Company's and the Bank's capital ratios exceeded all regulatory "well capitalized" guidelines. The charts below present the Company's and the Bank's regulatory capital ratios compared to regulatory guidelines at the dates indicated:
BankUnited, Inc.
BankUnited, N.A
Strategic Priorities
Our vision is to build a leading regional commercial and small business bank, with a distinctive value proposition based on strong service-oriented relationships, robust digital enabled customer experiences, and operational excellence with an entrepreneurial work environment that empowers employees to deliver their best. Management has identified the following strategic priorities for our Company:
•Building a scalable middle market and small business franchise by growing core customer relationships on both sides of the balance sheet;
•Maximizing risk adjusted returns through a combination of sustainable, diversified and prudently managed organic growth and capital optimization;
•Transitioning the left side of the balance sheet to a mix of assets with higher risk-adjusted returns;
•Growth of depository relationship with an emphasis on new non-interest bearing deposit relationships;
•Playing where we can win - focusing on niche business segments where our delivery model is a differentiator;
•Investing in people, processes and technology to support organic growth;
•Using technology to enable success by investing in digital capabilities and nimble architecture;
•Retaining the ability to pivot nimbly when opportunities arise;
•Maintaining an efficient, effective and scalable support model through operational excellence;
•While our primary growth strategy is organic, we will continue to monitor the M&A landscape.
Some of the challenges confronting our Company, certain of which may impact the banking industry more broadly, include:
•The ultimate impact of monetary policy on liquidity remains uncertain and competition for deposits is intense. This may impact our ability to grow deposits and/or lead to increases in the cost of deposits.
•Economic conditions may not turn out to be as favorable as current consensus forecasts indicate. A more severe economic downturn could limit the demand for our products and services or lead to an increase in credit losses.
•Achieving planned commercial loan growth may be challenging in an uncertain and competitive environment.
•Talent attraction and retention are a focus given current labor market dynamics and trends.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates. The most significant estimate impacting the Company's financial statements is the ACL.
Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below involve a heightened level of management judgment due to the complexity, subjectivity and sensitivity involved in their application.
Note 1 to the consolidated financial statements contains a further discussion of our significant accounting policies.
ACL
The ACL represents management's estimate of current expected credit losses, or the amount of amortized cost basis not expected to be collected, on our loan portfolio and the amount of credit loss impairment on our AFS securities portfolio. Determining the amount of the ACL is considered a critical accounting estimate because of its complexity and because it requires extensive judgment and estimation. Estimates that are particularly susceptible to change that may have a material impact on the amount of the ACL include:
•our evaluation of current conditions;
•our determination of a reasonable and supportable economic forecast and selection of the reasonable and supportable forecast period;
•our evaluation of historical loss experience;
•our evaluation of changes in composition and characteristics of the loan portfolio, including internal risk ratings;
•our estimate of expected prepayments;
•the value of underlying collateral, which may impact loss severity and certain cash flow assumptions for collateral-dependent, criticized and classified loans;
•our selection and evaluation of qualitative factors; and
•our estimate of expected cash flows on AFS debt securities in unrealized loss positions.
Our selection of models and modeling techniques may also have a material impact on the estimate.
Note 1 to the consolidated financial statements describes the methodology used to determine the ACL.
Recent Accounting Pronouncements
See Note 1 to the consolidated financial statements for a discussion of recent accounting pronouncements.
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.
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Average Balance | | Interest (1) | | Yield/ Rate (1) | | Average Balance | | Interest (1) | | Yield/ Rate (1) | | Average Balance | | Interest (1) | | Yield/ Rate (1) |
Assets: | | | | | | | | | | | | | | | | | |
Interest earning assets: | | | | | | | | | | | | | | | | | |
Loans | $ | 23,937,857 | | | $ | 947,386 | | | 3.96 | % | | $ | 23,083,973 | | | $ | 814,101 | | | 3.53 | % | | $ | 23,385,832 | | | $ | 879,082 | | | 3.76 | % |
Investment securities (2) | 10,081,701 | | | 283,081 | | | 2.81 | % | | 9,873,178 | | | 155,353 | | | 1.57 | % | | 8,739,023 | | | 196,954 | | | 2.25 | % |
Other interest earning assets | 675,068 | | | 15,709 | | | 2.33 | % | | 1,093,869 | | | 6,010 | | | 0.55 | % | | 672,634 | | | 9,578 | | | 1.42 | % |
Total interest earning assets | 34,694,626 | | | 1,246,176 | | | 3.59 | % | | 34,051,020 | | | 975,464 | | | 2.86 | % | | 32,797,489 | | | 1,085,614 | | | 3.31 | % |
Allowance for credit losses | (132,033) | | | | | | | (197,212) | | | | | | | (236,704) | | | | | |
Non-interest earning assets | 1,721,570 | | | | | | | 1,770,685 | | | | | | | 1,860,322 | | | | | |
Total assets | $ | 36,284,163 | | | | | | | $ | 35,624,493 | | | | | | | $ | 34,421,107 | | | | | |
Liabilities and Stockholders' Equity: | | | | | | | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | | | | | | | |
Interest bearing demand deposits | $ | 2,538,906 | | | 13,919 | | | 0.55 | % | | $ | 3,027,649 | | | 8,550 | | | 0.28 | % | | $ | 2,582,951 | | | 19,445 | | | 0.75 | % |
Savings and money market deposits | 12,874,240 | | | 130,705 | | | 1.02 | % | | 13,339,651 | | | 43,082 | | | 0.32 | % | | 10,843,894 | | | 85,572 | | | 0.79 | % |
Time deposits | 3,338,671 | | | 35,348 | | | 1.06 | % | | 3,490,082 | | | 15,964 | | | 0.46 | % | | 6,617,939 | | | 94,963 | | | 1.43 | % |
Total interest bearing deposits | 18,751,817 | | | 179,972 | | | 0.96 | % | | 19,857,382 | | | 67,596 | | | 0.34 | % | | 20,044,784 | | | 199,980 | | | 1.00 | % |
Federal funds purchased | 157,979 | | | 2,723 | | | 1.72 | % | | 33,945 | | | 30 | | | 0.09 | % | | 71,858 | | | 418 | | | 0.58 | % |
FHLB advances | 4,383,507 | | | 97,763 | | | 2.23 | % | | 2,622,723 | | | 59,116 | | | 2.25 | % | | 4,295,882 | | | 85,491 | | | 1.99 | % |
Notes and other borrowings | 721,223 | | | 37,033 | | | 5.13 | % | | 721,803 | | | 37,018 | | | 5.13 | % | | 592,521 | | | 29,962 | | | 5.06 | % |
Total interest bearing liabilities | 24,014,526 | | | 317,491 | | | 1.32 | % | | 23,235,853 | | | 163,760 | | | 0.70 | % | | 25,005,045 | | | 315,851 | | | 1.26 | % |
Non-interest bearing demand deposits | 8,861,111 | | | | | | | 8,480,964 | | | | | | | 5,760,309 | | | | | |
Other non-interest bearing liabilities | 708,473 | | | | | | | 784,031 | | | | | | | 786,337 | | | | | |
Total liabilities | 33,584,110 | | | | | | | 32,500,848 | | | | | | | 31,551,691 | | | | | |
Stockholders' equity | 2,700,053 | | | | | | | 3,123,645 | | | | | | | 2,869,416 | | | | | |
Total liabilities and stockholders' equity | $ | 36,284,163 | | | | | | | $ | 35,624,493 | | | | | | | $ | 34,421,107 | | | | | |
Net interest income | | | $ | 928,685 | | | | | | | $ | 811,704 | | | | | | | $ | 769,763 | | | |
Interest rate spread | | | | | 2.27 | % | | | | | | 2.16 | % | | | | | | 2.05 | % |
Net interest margin | | | | | 2.68 | % | | | | | | 2.38 | % | | | | | | 2.35 | % |
(1)On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $12.7 million, $13.3 million and $14.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. The tax-equivalent adjustment for tax-exempt investment securities was $3.0 million, $2.7 million and $3.1 million for the years ended December 31, 2022, 2021 and 2020, respectively.
(2) At fair value except for securities held to maturity.
Increases and decreases in interest income, calculated on a tax-equivalent basis, and interest expense result from changes in average balances (volume) of interest earning assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest earning assets and the interest incurred on our interest bearing liabilities for the years indicated. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous year's volume. Changes applicable to both volume and rate have been allocated to volume (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 Compared to 2021 | | 2021 Compared to 2020 |
| Change Due to Volume | | Change Due to Rate | | Increase | | Change Due to Volume | | Change Due to Rate | | Increase (Decrease) |
Interest Income Attributable to: | | | | | | | | | | | |
Loans | $ | 34,024 | | | $ | 99,261 | | | $ | 133,285 | | | $ | (11,194) | | | $ | (53,787) | | | $ | (64,981) | |
Investment securities | 5,301 | | | 122,427 | | | 127,728 | | | 17,824 | | | (59,425) | | | (41,601) | |
Other interest earning assets | (9,772) | | | 19,471 | | | 9,699 | | | 2,284 | | | (5,852) | | | (3,568) | |
Total interest earning assets | 29,553 | | | 241,159 | | | 270,712 | | | 8,914 | | | (119,064) | | | (110,150) | |
Interest Expense Attributable to: | | | | | | | | | | | |
Interest bearing demand deposits | (2,806) | | | 8,175 | | | 5,369 | | | 1,245 | | | (12,140) | | | (10,895) | |
Savings and money market deposits | (5,755) | | | 93,378 | | | 87,623 | | | 8,476 | | | (50,966) | | | (42,490) | |
Time deposits | (1,556) | | | 20,940 | | | 19,384 | | | (14,805) | | | (64,194) | | | (78,999) | |
Total interest bearing deposits | (10,117) | | | 122,493 | | | 112,376 | | | (5,084) | | | (127,300) | | | (132,384) | |
Federal funds purchased | 2,140 | | | 553 | | | 2,693 | | | (36) | | | (352) | | | (388) | |
FHLB advances | 39,172 | | | (525) | | | 38,647 | | | (37,544) | | | 11,169 | | | (26,375) | |
Notes and other borrowings | 15 | | | — | | | 15 | | | 6,641 | | | 415 | | | 7,056 | |
Total interest expense | 31,210 | | | 122,521 | | | 153,731 | | | (36,023) | | | (116,068) | | | (152,091) | |
Increase (decrease) in net interest income | $ | (1,657) | | | $ | 118,638 | | | $ | 116,981 | | | $ | 44,937 | | | $ | (2,996) | | | $ | 41,941 | |
Net interest income, calculated on a tax-equivalent basis, was $928.7 million for the year ended December 31, 2022, compared to $811.7 million for the year ended December 31, 2021, an increase of $117.0 million. The increase in net interest income was comprised of increases in tax-equivalent interest income and interest expense of $270.7 million and $153.7 million, respectively, for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase in tax equivalent interest income was driven primarily by increases in interest income from loans and investment securities of $133.3 million and $127.7 million, respectively, for the year ended December 31, 2022 compared to the year ended December 31, 2021. These increases reflected increases in both the average balance of and yields on loans and investment securities in a rising interest rate environment. The increase in interest expense for the year ended December 31, 2022, compared to the year ended December 31, 2021, reflected the increased cost of interest bearing deposits related to the rising rate environment, partially offset by declines in the related average balances. Interest expense on FHLB advances also increased mainly due to an increase in the average balance.
The net interest margin, calculated on a tax-equivalent basis, was 2.68% for the year ended December 31, 2022, compared to 2.38% for the year ended December 31, 2021. Offsetting factors impacting the net interest margin for the year ended December 31, 2022 compared to the year ended December 31, 2021 included:
•The tax-equivalent yield on loans expanded to 3.96% for the year ended December 31, 2022, from 3.53% for the year ended December 31, 2021. 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 tax-equivalent yield on investment securities increased to 2.81% for the year ended December 31, 2022, from 1.57% for the year ended December 31, 2021. The reset of coupon rates on variable rate securities, purchases of higher-yielding securities and slowing prepayment speeds on securities purchased at a premium contributed to the increases in yield.
•The average rate paid on interest bearing deposits increased to 0.96% for the year ended December 31, 2022, from 0.34% for the year ended December 31, 2021, primarily in response to the rising interest rate environment.
•The average rate paid on FHLB advances decreased to 2.23% for the year ended December 31, 2022, from 2.25% for the year ended December 31, 2021. The average rate paid decreased as a result of the impact of cash flow hedging on these borrowings and the impact of higher-cost cash flow hedges discontinued in the fourth quarter of 2021.
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 (recovery of) credit losses for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
Amount related to funded portion of loans | | | | | $ | 73,814 | | | $ | (64,456) | | | $ | 182,339 | |
Amount related to off-balance sheet credit exposures | | | | | 1,467 | | | (1,235) | | | (5,572) | |
Amount related to accrued interest receivable | | | | | (127) | | | (1,064) | | | 1,300 | |
Amount related to AFS debt securities | | | | | — | | | (364) | | | 364 | |
Total provision for (recovery of) credit losses | | | | | $ | 75,154 | | | $ | (67,119) | | | $ | 178,431 | |
The most significant factors impacting the provision for credit losses for the year ended December 31, 2022 included actual and forecasted economic conditions, including uncertainty about the trajectory of the economy and increases in certain specific reserves. Volatility in the provision for credit losses over the periods presented was in part related to the COVID-19 pandemic and its actual and forecasted impact on economic conditions as reserves were increased in 2020 upon onset of the pandemic, and then partially released in 2021 as the economy began to recover.
The provision for credit losses may continue to be volatile and the level of the ACL may change materially from current levels. Future levels of the ACL could be significantly impacted, in either direction, by changes in factors such as economic conditions or the economic outlook, in composition of the loan portfolio, in the financial condition of our borrowers and collateral values.
The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. See “Analysis of the Allowance for Credit Losses” below for more information about how we determine the appropriate level of the ACL and about factors that impacted the ACL and provision for credit losses.
Non-Interest Income
The following table presents a comparison of the categories of non-interest income for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Years Ended December 31, |
| | | | | | | | | 2022 | | 2021 | | 2020 |
Deposit service charges and fees | | | | | | | | | $ | 23,402 | | | $ | 21,685 | | | $ | 16,496 | |
Gain on sale of loans: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
GNMA early buyout loans | | | | | | | | | (2,573) | | | 5,636 | | | 11,274 | |
Other | | | | | | | | | 3 | | | 18,758 | | | 1,896 | |
Gain (loss) on sale of loans, net | | | | | | | | | (2,570) | | | 24,394 | | | 13,170 | |
Gain (loss) on investment securities: | | | | | | | | | | | | | |
Net realized gain on sale of securities AFS | | | | | | | | | 3,927 | | | 9,010 | | | 14,001 | |
Net unrealized gain (loss) on marketable equity securities | | | | | | | | | (19,732) | | | (2,564) | | | 3,766 | |
Gain (loss) on investment securities, net | | | | | | | | | (15,805) | | | 6,446 | | | 17,767 | |
Lease financing | | | | | | | | | 54,111 | | | 53,263 | | | 59,112 | |
Other non-interest income | | | | | | | | | 18,498 | | | 28,365 | | | 26,676 | |
| | | | | | | | | $ | 77,636 | | | $ | 134,153 | | | $ | 133,221 | |
Gain on sale of loans for the year ended December 31, 2021 included a gain of $18.2 million on the sale of a portfolio of single-family residential loans in the fourth quarter of 2021.
The unrealized losses on marketable equity securities reflected in the table above were attributable to the decline in the fair value of certain preferred stock investments resulting from rising market interest rates and widening spreads.
The most significant factor leading to the decrease in other non-interest income for the year ended December 31, 2022, compared to the year ended December 31, 2021, was a decline in BOLI revenue related to the rising interest rate environment.
Non-Interest Expense
The following table presents the components of non-interest expense for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Years Ended December 31, |
| | | | | | | | | 2022 | | 2021 | | 2020 |
Employee compensation and benefits | | | | | | | | | $ | 265,548 | | | $ | 243,532 | | | $ | 217,156 | |
Occupancy and equipment | | | | | | | | | 45,400 | | | 47,944 | | | 48,237 | |
Deposit insurance expense | | | | | | | | | 17,999 | | | 18,695 | | | 21,854 | |
Professional fees | | | | | | | | | 11,730 | | | 14,386 | | | 11,708 | |
Technology | | | | | | | | | 77,103 | | | 67,500 | | | 58,108 | |
Discontinuance of cash flow hedges | | | | | | | | | — | | | 44,833 | | | — | |
Depreciation and impairment of operating lease equipment | | | | | | | | | 50,388 | | | 53,764 | | | 49,407 | |
| | | | | | | | | | | | | |
Other non-interest expense | | | | | | | | | 72,142 | | | 56,921 | | | 50,719 | |
Total non-interest expense | | | | | | | | | $ | 540,310 | | | $ | 547,575 | | | 457,189 | |
Employee compensation and benefits
Employee compensation and benefits increased by $22.0 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. The most significant factor leading to this increase was a combination of higher headcount and salary increases. Higher variable compensation and medical benefits also contributed to the increase.
Professional fees
Professional fees for the year ended December 31, 2021 included $4.2 million related to a tax settlement with the state of Florida.
Technology
The increase in technology expense is reflective of our investment in a variety of technology initiatives in support of future growth of the franchise, such as cloud migration and digital capabilities.
Discontinuance of cash flow hedges
During the fourth quarter of 2021, we recognized a loss of $44.8 million on discontinuance of derivative positions designated as cash flow hedges with a notional amount totaling $401 million following the Company's determination that the hedged forecasted transactions were no longer probable of occurring.
Other non-interest expense
Other non-interest expense increased by $15.2 million for the year ended December 31, 2022, compared to the year ended December 31, 2021. Contributing to the increase were increases in advertising and public relations, travel, entertainment and business development corresponding to a return to pre-COVID levels of activity, and the cost of certain customer deposit rebate programs.
Income Taxes
The provision for income taxes for the years ended December 31, 2022 and 2021 was $90.2 million and $34.4 million, respectively. The Company's effective income tax rate was 24.03% and 7.66% for the years ended December 31, 2022 and 2021, respectively. The effective income tax rate for the year ended December 31, 2021 was impacted by a settlement with the Florida Department of Revenue related to certain tax matters for the 2009-2019 tax years and a reduction in the liability for unrecognized tax benefits arising primarily from expiration of statues of limitations in federal and certain state jurisdictions.
See Note 9 to the consolidated financial statements for information about income taxes.
Analysis of Financial Condition
Total loans, excluding the runoff of PPP loans, grew by $1.4 billion for 2022, with the highest growth in the core C&I and commercial real estate portfolios. Total deposits declined by $1.9 billion in 2022, while FHLB advances grew by $3.5 billion. Non-interest bearing demand deposits decreased by $938 million; growth in non-interest bearing demand deposits has been pressured by the rising interest rate environment and quantitative tightening by the Federal Reserve. Contributing to the decline in both total deposits and non-interest bearing demand deposits in 2022 was a reduction in deposits held by customers serving the residential real estate sector, as the level of mortgage loan origination activity declined significantly in light of rapidly rising interest rates.
Average interest-earning assets increased by $644 million to $34.7 billion for the year ended December 31, 2022, from $34.1 billion for the year ended December 31, 2021, reflecting increases in average balances of both loans and investment securities. During the year ended December 31, 2022, average interest bearing liabilities increased by $779 million and average non-interest bearing demand deposits increased by $380 million.
Investment Securities
The following table shows the amortized cost and carrying value, which, with the exception of investment securities held to maturity, is fair value, of investment securities at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| December 31, 2022 | | December 31, 2021 | | |
| Amortized Cost | | Carrying Value | | Amortized Cost | | Carrying Value | | | | |
U.S. Treasury securities | $ | 148,956 | | | $ | 135,841 | | | $ | 114,385 | | | $ | 111,660 | | | | | |
U.S. Government agency and sponsored enterprise residential MBS | 2,036,693 | | | 1,983,168 | | | 2,093,283 | | | 2,097,796 | | | | | |
U.S. Government agency and sponsored enterprise commercial MBS | 600,517 | | | 525,094 | | | 861,925 | | | 856,899 | | | | | |
| | | | | | | | | | | |
Private label residential MBS and CMOs | 2,864,589 | | | 2,530,663 | | | 2,160,136 | | | 2,149,420 | | | | | |
Private label commercial MBS | 2,645,168 | | | 2,524,354 | | | 2,604,690 | | | 2,604,010 | | | | | |
Single family real estate-backed securities | 502,194 | | | 470,441 | | | 474,845 | | | 476,968 | | | | | |
Collateralized loan obligations | 1,166,838 | | | 1,136,463 | | | 1,079,217 | | | 1,078,286 | | | | | |
Non-mortgage asset-backed securities | 102,194 | | | 95,976 | | | 151,091 | | | 152,510 | | | | | |
State and municipal obligations | 122,181 | | | 116,661 | | | 205,718 | | | 222,277 | | | | | |
SBA securities | 139,320 | | | 135,782 | | | 184,296 | | | 183,595 | | | | | |
| | | | | | | | | | | |
Investment securities held to maturity | 10,000 | | | 10,000 | | | 10,000 | | | 10,000 | | | | | |
| $ | 10,338,650 | | | 9,664,443 | | | $ | 9,939,586 | | | 9,943,421 | | | | | |
Marketable equity securities | | | 90,884 | | | | | 120,777 | | | | | |
| | | $ | 9,755,327 | | | | | $ | 10,064,198 | | | | | |
Our investment strategy has focused on insuring adequate liquidity, maintaining a suitable balance of high credit quality, diverse assets, managing interest rate risk, and generating acceptable returns given our established risk parameters. We have sought to maintain liquidity by investing a significant portion of the portfolio in high quality liquid securities including U.S. Treasury and U.S. Government Agency and sponsored enterprise securities. Investment grade municipal securities provide liquidity and attractive tax-equivalent yields. We have also invested in highly rated structured products, including private-label commercial and residential MBS, collateralized loan obligations, single family real estate-backed securities and non-mortgage asset-backed securities that, while somewhat less liquid, provide us with attractive yields. Relatively short effective portfolio duration helps mitigate interest rate risk. Based on the Company’s assumptions, the estimated weighted average life of the investment portfolio as of December 31, 2022 was 4.9 years and the effective duration of the portfolio was 2.0 years.
The investment securities available for sale portfolio was in a net unrealized loss position of $674.2 million at December 31, 2022, compared to a net unrealized gain position of $3.8 million at December 31, 2021. Net unrealized losses at December 31, 2022 included $2.9 million of gross unrealized gains and $677.1 million of gross unrealized losses. Investment securities available for sale in unrealized loss positions at December 31, 2022 had an aggregate fair value of $9.3 billion. The unrealized losses resulted primarily from rising interest rates and widening spreads related to the Federal Reserve's quantitative tightening and benchmark interest rate increases. Continuing uncertainty with respect to the trajectory of the economy and geopolitical events have also led to market uncertainty, producing some yield curve dislocations. None of the unrealized losses were attributable to credit loss impairments.
The ratings distribution of our AFS securities portfolio at December 31, 2022 is depicted in the chart below:
We evaluate the credit quality of individual securities in the portfolio quarterly to determine whether we expect to recover the amortized cost basis of the investments in unrealized loss positions. This evaluation considers, but is not necessarily limited to, the following factors, the relative significance of which varies depending on the circumstances pertinent to each individual security:
•Whether we intend to sell the security prior to recovery of its amortized cost basis;
•Whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis;
•The extent to which fair value is less than amortized cost;
•Adverse conditions specifically related to the security, an industry or geographic area;
•Changes in the financial condition of the issuer or underlying loan obligors;
•The payment structure and remaining payment terms of the security, including levels of subordination or over-collateralization;
•Failure of the issuer to make scheduled payments;
•Changes in credit ratings;
•Relevant market data;
•Estimated prepayments, defaults, and the value and performance of underlying collateral at the individual security level.
We do not intend to sell securities in significant unrealized loss positions at December 31, 2022. Based on an assessment of our liquidity position and internal and regulatory guidelines for permissible investments and concentrations, it is not more likely than not that we will be required to sell securities in significant unrealized loss positions prior to recovery of amortized cost basis, which may be at maturity.
We regularly engage with bond managers to monitor trends in underlying collateral, including potential downgrades and subsequent cash flow diversions, liquidity, ratings migration, and any other relevant developments.
The following table presents subordination levels and average internal stress scenario losses for select non-agency portfolio segments at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Subordination | | Weighted Average Stress Scenario Loss |
| Rating | | Percent of Total | | Minimum | | Maximum | | Average | |
Private label CMBS | AAA | | 84.9 | % | | 30.0 | | 98.1 | | 44.3 | | 6.8 |
| AA | | 11.0 | % | | 29.3 | | 95.8 | | 41.7 | | 7.5 |
| A | | 4.1 | % | | 25.1 | | 69.5 | | 38.7 | | 8.8 |
Weighted average | | | 100.0 | % | | 29.7 | | 96.7 | | 43.8 | | 7.0 |
| | | | | | | | | | | |
CLOs | AAA | | 79.5 | % | | 41.4 | | 59.4 | | 45.8 | | 9.9 |
| AA | | 17.0 | % | | 31.0 | | 40.8 | | 34.7 | | 8.7 |
| A | | 3.5 | % | | 25.6 | | 29.4 | | 27.1 | | 10.3 |
Weighted average | | | 100.0 | % | | 39.1 | | 55.2 | | 43.2 | | 9.7 |
| | | | | | | | | | | |
Private label residential MBS and CMO | AAA | | 94.1 | % | | 3.0 | | 98.2 | | 17.5 | | 2.3 |
| AA | | 0.9 | % | | 18.9 | | 33.2 | | 24.0 | | 5.3 |
| A | | 5.0 | % | | 22.1 | | 25.5 | | 23.0 | | 5.4 |
Weighted average | | | 100.0 | % | | 4.1 | | 94.0 | | 17.9 | | 2.5 |
| | | | | | | | | | | |
Single family real estate-backed securities | AAA | | 67.3 | % | | 34.6 | | 72.6 | | 53.2 | | 5.8 |
| AA | | 12.8 | % | | 51.6 | | 55.4 | | 53.6 | | 9.4 |
| NR | | 19.9 | % | | 39.8 | | 39.8 | | 39.8 | | 10.6 |
Weighted average | | | 100.0 | % | | 37.8 | | 63.9 | | 50.6 | | 7.2 |
For further discussion of our analysis of impaired investment securities AFS for credit loss impairment see Note 3 to the consolidated financial statements.
We use third-party pricing services to assist us in estimating the fair value of investment securities. We perform a variety of procedures to ensure that we have a thorough understanding of the methodologies and assumptions used by the pricing services including obtaining and reviewing written documentation of the methods and assumptions employed, conducting interviews with valuation desk personnel and reviewing model results and detailed assumptions used to value selected securities as considered necessary. Our classification of prices within the fair value hierarchy is based on an evaluation of the nature of the significant assumptions impacting the valuation of each type of security in the portfolio. We have established a robust price challenge process that includes a review by our treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from our expectations based on recent observed trading activity and other information available in the marketplace that would impact the value of the security is challenged. Responses to the price challenges, which generally include specific information about inputs and assumptions incorporated in the valuation and their sources, are reviewed in detail. If considered necessary to resolve any discrepancies, a price will be obtained from additional independent valuation sources. We do not typically adjust the prices provided, other than through this established challenge process. Our primary pricing services utilize observable inputs when available, and employ unobservable inputs and proprietary models only when observable inputs are not available. As a matter of course, the services validate prices by comparison to recent trading activity whenever such activity exists. Quotes obtained from the pricing services are typically non-binding.
The majority of our investment securities are classified within level 2 of the fair value hierarchy. U.S. Treasury securities and marketable equity securities are classified within level 1 of the hierarchy.
For additional discussion of the fair values of investment securities, see Note 14 to the consolidated financial statements.
The following table shows the weighted average prospective yields, categorized by scheduled maturity, for AFS investment securities as of December 31, 2022. Scheduled maturities have been adjusted for anticipated prepayments when applicable. Yields on tax-exempt securities have been calculated on a tax-equivalent basis, based on a federal income tax rate of 21%:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Within One Year | | | | After One Year Through Five Years | | | | After Five Years Through Ten Years | | | | After Ten Years | | | | Total |
| | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | | 0.59 | % | | | | — | % | | | | — | % | | | | — | % | | | | 0.59 | % |
U.S. Government agency and sponsored enterprise residential MBS | | | 4.61 | % | | | | 4.67 | % | | | | 4.72 | % | | | | 4.29 | % | | | | 4.65 | % |
U.S. Government agency and sponsored enterprise commercial MBS | | | 3.22 | % | | | | 4.70 | % | | | | 2.99 | % | | | | 2.53 | % | | | | 3.23 | % |
Private label residential MBS and CMOs | | | 3.65 | % | | | | 3.67 | % | | | | 3.67 | % | | | | 4.09 | % | | | | 3.79 | % |
Private label commercial MBS | | | 5.54 | % | | | | 5.95 | % | | | | 1.93 | % | | | | 3.30 | % | | | | 5.66 | % |
Single family real estate-backed securities | | | 1.36 | % | | | | 4.07 | % | | | | 1.36 | % | | | | — | % | | | | 4.07 | % |
Collateralized loan obligations | | | 6.25 | % | | | | 6.57 | % | | | | 6.77 | % | | | | — | % | | | | 6.54 | % |
Non-mortgage asset-backed securities | | | 3.36 | % | | | | 3.58 | % | | | | 5.30 | % | | | | — | % | | | | 4.49 | % |
State and municipal obligations | | | 3.17 | % | | | | 4.12 | % | | | | 4.49 | % | | | | 3.99 | % | | | | 4.18 | % |
SBA securities | | | 4.23 | % | | | | 4.14 | % | | | | 4.02 | % | | | | 3.86 | % | | | | 4.13 | % |
| | | | | | | | | | | | | | | | | | | |
| | | 4.45 | % | | | | 5.14 | % | | | | 3.94 | % | | | | 3.88 | % | | | | 4.70 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Loans
The loan portfolio comprises the Company’s primary interest-earning asset. The following table shows the composition of the loan portfolio at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | | | |
| | | | | | | |
| Total | | Percent of Total | | Total | | Percent of Total | | | | |
Residential and other consumer loans | $ | 8,900,714 | | | 35.7 | % | | $ | 8,368,380 | | | 35.2 | % | | | | |
| | | | | | | | | | | |
Non-owner occupied commercial real estate | 5,405,597 | | | 21.7 | % | | 5,536,348 | | | 23.3 | % | | | | |
Construction and land | 294,360 | | | 1.2 | % | | 165,390 | | | 0.7 | % | | | | |
Owner occupied commercial real estate | 1,890,813 | | | 7.6 | % | | 1,944,658 | | | 8.2 | % | | | | |
Commercial and industrial | 6,414,351 | | | 25.9 | % | | 4,790,275 | | | 20.2 | % | | | | |
PPP | 3,370 | | | — | % | | 248,505 | | | 1.0 | % | | | | |
Pinnacle | 912,122 | | | 3.7 | % | | 919,641 | | | 3.9 | % | | | | |
Bridge - franchise finance | 253,774 | | | 1.0 | % | | 342,124 | | | 1.4 | % | | | | |
Bridge - equipment finance | 286,147 | | | 1.1 | % | | 357,599 | | | 1.5 | % | | | | |
Mortgage warehouse lending | 524,740 | | | 2.1 | % | | 1,092,133 | | | 4.6 | % | | | | |
Total loans | 24,885,988 | | | 100.0 | % | | 23,765,053 | | | 100.0 | % | | | | |
Allowance for credit losses | (147,946) | | | | | (126,457) | | | | | | | |
Loans, net | $ | 24,738,042 | | | | | $ | 23,638,596 | | | | | | | |
For the year ended December 31, 2022, total loans grew by $1.1 billion, while total loans, excluding PPP loans, grew by $1.4 billion.
Growth in residential and other consumer loans for the year ended December 31, 2022 totaled $532 million. Commercial and industrial loans, including owner-occupied commercial real estate, grew by $1.6 billion for the year ended December 31, 2022. Most of the remaining commercial portfolio segments showed declines during the year ended December 31, 2022. MWL declined by $567 million for this period, as rising rates have led to lower refinancing and mortgage origination activity. PPP loans declined by $245 million during the year ended December 31, 2022, resulting primarily from full or partial forgiveness from the SBA.
Residential mortgages and other consumer loans
The following table shows the composition of residential and other consumer loans at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
1-4 single family residential | $ | 7,122,837 | | | $ | 6,338,225 | |
Government insured residential | 1,771,880 | | | 2,023,221 | |
Other consumer loans | 5,997 | | | 6,934 | |
| $ | 8,900,714 | | | $ | 8,368,380 | |
The 1-4 single family residential loan portfolio, excluding government insured residential loans, is primarily comprised of loans purchased through established correspondent channels. 1-4 single family residential mortgage loans are primarily closed-end, first lien jumbo mortgages for the purchase or re-finance of owner occupied property. The loans have terms ranging from 10 to 30 years, with either fixed or adjustable interest rates. At December 31, 2022, $1.1 billion or 16% were secured by investor-owned properties.
The Company acquires non-performing FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations (collectively, "government insured pool buyout loans" or "buyout loans"). Buyout loans that re-perform, either through modification or self-cure, may be eligible for re-securitization. The Company and the servicer share in the economics of the sale of these loans into new securitizations. During the years ended December 31, 2022 and 2021, the Company purchased $480 million and $1.6 billion, respectively, of government insured residential loans. The balance of buyout loans totaled $1.7 billion at December 31, 2022. The Company is not the servicer of these loans.
The following charts present the distribution of the 1-4 single family residential mortgage portfolio at the dates indicated:
See Note 4 to the consolidated financial statements for information about geographic concentrations in the 1-4 single family residential portfolio.
The following table presents a breakdown of the 1-4 single family residential mortgage portfolio, excluding government insured residential loans, categorized between fixed rate loans and ARMs at the dates indicated below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Total | | Percent of Total | | Total | | Percent of Total |
Fixed rate loans | $ | 3,990,599 | | | 56.0 | % | | $ | 3,298,689 | | | 52.0 | % |
ARM loans | 3,132,238 | | | 44.0 | % | | 3,039,536 | | | 48.0 | % |
| $ | 7,122,837 | | | 100.0 | % | | $ | 6,338,225 | | | 100.0 | % |
Commercial loans and leases
Commercial loans include a diverse portfolio of commercial and industrial loans and lines of credit, loans secured by owner-occupied commercial real-estate, multi-family properties and other income-producing non-owner occupied commercial real estate, a limited amount of construction and land loans, SBA loans, mortgage warehouse lines of credit, PPP loans, municipal loans and leases originated by Pinnacle and franchise and equipment finance loans and leases originated by Bridge.
The following charts present the distribution of the commercial loan portfolio at the dates indicated (dollars in millions):
(1) Included in C&I are $3 million and $249 million of PPP loans at December 31, 2022 and 2021, respectively. Commercial real estate loans include term loans secured by non-owner occupied income producing properties including rental apartments, mixed-use properties, industrial properties, retail shopping centers, free-standing single-tenant buildings, office buildings, warehouse facilities, hotels and real estate secured lines of credit.
The following table presents the distribution of commercial real estate loans by property type, along with weighted average DSCRs and LTVs at December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Amortized Cost | | Percent of Total | | FL | | New York Tri State | | Other | | Weighted Average DSCR | | Weighted Average LTV |
Office | $ | 1,874,614 | | | 33 | % | | 59 | % | | 22 | % | | 19 | % | | 1.75 | | 64.3 | % |
Warehouse/Industrial | 1,216,506 | | | 21 | % | | 62 | % | | 18 | % | | 20 | % | | 2.05 | | 52.6 | % |
Multifamily | 945,404 | | | 17 | % | | 48 | % | | 52 | % | | — | % | | 2.13 | | 45.9 | % |
Retail | 869,922 | | | 15 | % | | 64 | % | | 27 | % | | 9 | % | | 1.88 | | 61.7 | % |
Hotel | 407,462 | | | 7 | % | | 86 | % | | 6 | % | | 8 | % | | 2.13 | | 55.1 | % |
Construction and Land | 294,360 | | | 5 | % | | 49 | % | | 49 | % | | 2 | % | | N/A | | N/A |
Other | 91,689 | | | 2 | % | | 75 | % | | 9 | % | | 16 | % | | 2.45 | | 47.7 | % |
| $ | 5,699,957 | | | 100 | % | | 61 | % | | 26 | % | | 13 | % | | 1.95 | | 57.0 | % |
Geographic distribution in the table above is based on location of the underlying collateral property. LTVs and DSCRs are based on the most recent available information; if current information is not available, values may be adjusted by our models based on current sub-market conditions. DSCRs are calculated based on current contractually required payments, which may in some cases may be interest only.
The Company’s commercial real estate underwriting standards most often provide for loan terms of five to seven years, with amortization schedules of no more than thirty years. The multi-family portfolio includes $419 million of New York loans collateralized by properties with some or all of the units subject to rent regulation at December 31, 2022.
Commercial and industrial loans are typically made to small, middle market and larger corporate businesses and not-for-profit entities and include equipment loans, secured and unsecured working capital facilities, formula-based loans, subscription finance lines of credit, trade finance, SBA product offerings, business acquisition finance credit facilities, credit facilities to
institutional real estate entities such as REITs and commercial real estate investment funds, and commercial credit cards. These loans may be structured as term loans, typically with maturities of five to seven years, or revolving lines of credit which may have multi-year maturities. In addition to financing provided by Pinnacle, the Bank provides financing to state and local governmental entities generally within our geographic markets. Commercial loans included loans meeting the regulatory definition of shared national credits totaling $4.7 billion at December 31, 2022, the majority of which were relationship based loans to borrowers in our primary geographic footprint. The Bank makes loans secured by owner-occupied commercial real estate that typically have risk profiles more closely aligned with that of commercial and industrial loans than with other types of commercial real estate loans.
The following table presents the exposure in the C&I portfolio, excluding PPP loans, by industry, at December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | |
| | | | | |
| Amortized Cost | | Percent of Total | | | | |
Finance and Insurance | $ | 1,792,128 | | | 21.6 | % | | | | |
Educational Services | 751,264 | | | 9.0 | % | | | | |
Manufacturing | 647,016 | | | 7.8 | % | | | | |
Wholesale Trade | 644,539 | | | 7.8 | % | | | | |
Information | 582,590 | | | 7.0 | % | | | | |
Utilities | 538,290 | | | 6.5 | % | | | | |
Real Estate and Rental and Leasing | 509,498 | | | 6.1 | % | | | | |
Health Care and Social Assistance | 483,709 | | | 5.8 | % | | | | |
Transportation and Warehousing | 401,854 | | | 4.8 | % | | | | |
Construction | 337,363 | | | 4.1 | % | | | | |
Retail Trade | 329,949 | | | 4.0 | % | | | | |
Professional, Scientific, and Technical Services | 299,245 | | | 3.6 | % | | | | |
Other Services (except Public Administration) | 234,786 | | | 2.8 | % | | | | |
Public Administration | 221,387 | | | 2.7 | % | | | | |
Administrative and Support and Waste Management | 172,872 | | | 2.1 | % | | | | |
Accommodation and Food Services | 154,863 | | | 1.9 | % | | | | |
Arts, Entertainment, and Recreation | 152,267 | | | 1.8 | % | | | | |
Other | 51,544 | | | 0.6 | % | | | | |
| $ | 8,305,164 | | | 100.0 | % | | | | |
Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides equipment and franchise financing on a national basis using both loan and lease structures. Pinnacle provides essential-use equipment financing to state and local governmental entities directly and through vendor programs and alliances. Pinnacle offers a full array of financing structures including equipment lease purchase agreements and direct (private placement) bond re-fundings and loan agreements. Bridge has two operating divisions. The franchise finance division offers franchise acquisition, expansion and equipment financing, typically to experienced operators in well-established concepts. The franchise finance portfolio is made up primarily of quick service restaurant and fitness concepts comprising 43% and 52% of the portfolio, respectively. The equipment finance division provides primarily transportation equipment financing through a variety of loan and lease structures.
The following table presents the franchise portfolio by concept at December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | |
| Amortized Cost | | Percent of Bridge -Franchise Finance | | | | |
Restaurant concepts: | | | | | | | |
Burger King | $ | 34,034 | | | 13.4 | % | | | | |
Ram Restaurant and Brewery | 12,643 | | | 5.0 | % | | | | |
Dunkin Donuts | 12,453 | | | 4.9 | % | | | | |
Other | 51,049 | | | 20.1 | % | | | | |
| $ | 110,179 | | | 43.4 | % | | | | |
Non-restaurant concepts: | | | | | | | |
Planet Fitness | $ | 89,782 | | | 35.4 | % | | | | |
Other Fitness Concepts | 43,161 | | | 17.0 | % | | | | |
Other | 10,652 | | | 4.2 | % | | | | |
| 143,595 | | | 56.6 | % | | | | |
| $ | 253,774 | | | 100.0 | % | | | | |
See Note 4 to the consolidated financial statements for information about the geographic distribution of the loan portfolio.
Loan Maturities
The following table sets forth, as of December 31, 2022, the maturity distribution of our loan portfolio by category, excluding government insured residential loans. Commercial and other consumer loans are presented by contractual maturity, including scheduled payments for amortizing loans. Contractual maturities of residential loans have been adjusted for an estimated rate of voluntary prepayments, based on historical trends, current interest rates, types of loans and refinance patterns (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year or Less | | After One Through Five Years | | After Five Years Through Fifteen Years | | After Fifteen Years | | Total |
| | | | | | | | | |
| | | | | | | | | |
Residential and other consumer | $ | 798,187 | | | $ | 2,867,688 | | | $ | 2,720,638 | | | $ | 742,321 | | | $ | 7,128,834 | |
| | | | | | | | | |
| | | | | | | | | |
Commercial: | | | | | | | | | |
| | | | | | | | | |
Non-owner occupied commercial real estate | 725,317 | | | 3,425,401 | | | 1,224,827 | | | 30,052 | | | 5,405,597 | |
Construction and land | 2,968 | | | 231,928 | | | 41,326 | | | 18,138 | | | 294,360 | |
Owner occupied commercial real estate | 66,705 | | | 647,659 | | | 1,042,902 | | | 133,547 | | | 1,890,813 | |
Commercial and industrial (1) | 1,115,125 | | | 4,397,116 | | | 836,904 | | | 68,576 | | | 6,417,721 | |
| | | | | | | | | |
Pinnacle | 39,241 | | | 299,720 | | | 523,582 | | | 49,579 | | | 912,122 | |
Bridge - franchise finance | 35,165 | | | 182,762 | | | 35,847 | | | — | | | 253,774 | |
Bridge - equipment finance | 14,644 | | | 164,738 | | | 106,765 | | | — | | | 286,147 | |
Mortgage warehouse lending | 511,348 | | | 13,392 | | | — | | | — | | | 524,740 | |
| 2,510,513 | | | 9,362,716 | | | 3,812,153 | | | 299,892 | | | 15,985,274 | |
| $ | 3,308,700 | | | $ | 12,230,404 | | | $ | 6,532,791 | | | $ | 1,042,213 | | | $ | 23,114,108 | |
(1)Includes PPP loans.
The following table shows the distribution of those loans that mature in more than one year between fixed and adjustable interest rate loans as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
| Interest Rate Type | | |
| Fixed | | Adjustable | | Total |
| | | | | |
| | | | | |
Residential and other consumer | $ | 3,711,961 | | | $ | 2,618,686 | | | $ | 6,330,647 | |
| | | | | |
Commercial: | | | | | |
| | | | | |
Non-owner occupied commercial real estate | 2,262,373 | | | 2,417,907 | | | 4,680,280 | |
Construction and land | 17,439 | | | 273,953 | | | 291,392 | |
Owner occupied commercial real estate | 1,281,783 | | | 542,325 | | | 1,824,108 | |
Commercial and industrial (1) | 761,245 | | | 4,541,351 | | | 5,302,596 | |
| | | | | |
Pinnacle | 872,881 | | | — | | | 872,881 | |
Bridge - franchise finance | 123,093 | | | 95,516 | | | 218,609 | |
Bridge - equipment finance | 240,241 | | | 31,262 | | | 271,503 | |
Mortgage warehouse lending | — | | | 13,392 | | | 13,392 | |
| 5,559,055 | | | 7,915,706 | | | 13,474,761 | |
| $ | 9,271,016 | | | $ | 10,534,392 | | | $ | 19,805,408 | |
(1)Includes PPP loans
Excluded from the tables above are government insured residential loans. Resolution of these loans is generally accomplished through the re-securitization and sale of the loans after they re-perform, either through modification or self-cure, or through pursuit of the applicable guarantee.
Operating lease equipment, net
Operating lease equipment, net of accumulated depreciation, totaled $540 million at December 31, 2022, including off-lease equipment, net of accumulated depreciation of $63 million.
The chart below presents operating lease equipment by type at the dates indicated:
At December 31, 2022, the breakdown of carrying values of operating lease equipment, excluding equipment off-lease, by the year leases are scheduled to expire was as follows (in thousands):
| | | | | |
Years Ending December 31: | |
2023 | $ | 107,475 | |
2024 | 45,053 | |
2025 | 59,262 | |
2026 | 70,400 | |
2027 | 25,746 | |
Thereafter through 2034 | 168,428 | |
| $ | 476,364 | |
Asset Quality
Commercial Loans
We have a robust credit risk management framework, an experienced team to lead the workout and recovery process for the commercial and commercial real estate portfolios and a dedicated internal credit review function. Loan performance is monitored by our credit administration, portfolio management and workout and recovery departments. Generally, commercial relationships with balances in excess of defined thresholds are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. The defined thresholds range from $1 million to $3 million. Homogenous groups of smaller balance commercial loans may be monitored collectively. The credit quality and risk rating of commercial loans as well as our underwriting and portfolio management practices are regularly reviewed by our internal independent credit review department.
We believe internal risk rating is the best indicator of the credit quality of commercial loans. The Company utilizes a 16-grade internal asset risk classification system as part of its efforts to monitor and maintain commercial asset quality. The special mention rating is considered a transitional rating for loans exhibiting potential credit weaknesses that could result in deterioration of repayment prospects at some future date if not checked or corrected and that deserve management’s close attention. These borrowers may exhibit declining cash flows or revenues or increasing leverage. Loans with well-defined credit weaknesses that may result in a loss if the deficiencies are not corrected are assigned a risk rating of substandard. These borrowers may exhibit payment defaults, inadequate cash flows from current operations, operating losses, increasing balance sheet leverage, project cost overruns, unreasonable construction delays, exhausted interest reserves, declining collateral values, frequent overdrafts or past due real estate taxes. Loans with weaknesses so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors have not been charged off, are assigned an internal risk rating of doubtful.
The following table summarizes the Company's commercial credit exposure, based on internal risk rating, at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | December 31, 2021 | | December 31, 2020 | | | | |
| | | | | | | | | | | | | | | |
| Amortized Cost | | Percent of Commercial Loans | | | | | | Amortized Cost | | Percent of Commercial Loans | | Amortized Cost | | Percent of Commercial Loans | | | | | | | | |
Pass | $ | 15,244,761 | | | 95.4 | % | | | | | | $ | 13,934,369 | | | 90.5 | % | | $ | 14,832,025 | | | 84.6 | % | | | | | | | | |
Special mention | 51,433 | | | 0.3 | % | | | | | | 148,593 | | | 1.0 | % | | 711,516 | | | 4.1 | % | | | | | | | | |
Substandard accruing | 605,965 | | | 3.8 | % | | | | | | 1,136,378 | | | 7.4 | % | | 1,758,654 | | | 10.0 | % | | | | | | | | |
Substandard non-accruing | 75,125 | | | 0.5 | % | | | | | | 129,579 | | | 0.8 | % | | 203,758 | | | 1.2 | % | | | | | | | | |
Doubtful | 7,990 | | | — | % | | | | | | 47,754 | | | 0.3 | % | | 11,867 | | | 0.1 | % | | | | | | | | |
| $ | 15,985,274 | | | 100.0 | % | | | | | | $ | 15,396,673 | | | 100.0 | % | | $ | 17,517,820 | | | 100.0 | % | | | | | | | | |
The table above clearly reflects the ongoing trend of improvement in the risk rating profile of the portfolio as the impact of the COVID-19 pandemic has waned; however, our internal risk ratings at December 31, 2022 continued to be influenced by the impact of the pandemic as sustained operating cash flows of some borrowers have yet to fully recover. Management took what it believed to be a proactive and objective approach to risk rating the commercial loan portfolio at the onset of the pandemic. Levels of criticized and classified loans therefore increased over the course of 2020 and have declined throughout 2021 and 2022.
The following table provides additional information about special mention and substandard accruing loans, at the dates indicated (dollars in thousands). Non-performing loans are discussed further in the section entitled "Non-performing Assets" below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | December 31, 2021 |
| Amortized Cost | | % of Loan Segment | | | | | | | | | | | | | | | | | | Amortized Cost | | % of Loan Segment |
Special mention: | | | | | | | | | | | | | | | | | | | | | | | |
CRE | | | | | | | | | | | | | | | | | | | | | | | |
Hotel | $ | 709 | | | 0.2 | % | | | | | | | | | | | | | | | | | | $ | 760 | | | 0.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Office | 18,006 | | | 1.0 | % | | | | | | | | | | | | | | | | | | 27,001 | | | 1.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Other | — | | | — | % | | | | | | | | | | | | | | | | | | 4,501 | | | 3.7 | % |
| 18,715 | | | | | | | | | | | | | | | | | | | | | 32,262 | | | |
Owner occupied commercial real estate | 24,101 | | | 1.3 | % | | | | | | | | | | | | | | | | | | 14,010 | | | 0.7 | % |
Commercial and industrial | 1,017 | | | — | % | | | | | | | | | | | | | | | | | | 102,321 | | | 2.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Bridge - franchise finance | 7,600 | | | 3.0 | % | | | | | | | | | | | | | | | | | | — | | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ | 51,433 | | | | | | | | | | | | | | | | | | | | | $ | 148,593 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Substandard accruing: | | | | | | | | | | | | | | | | | | | | | | | |
CRE | | | | | | | | | | | | | | | | | | | | | | | |
Hotel | $ | 14,538 | | | 3.6 | % | | | | | | | | | | | | | | | | | | $ | 200,486 | | | 36.7 | % |
Retail | 72,421 | | | 8.4 | % | | | | | | | | | | | | | | | | | | 140,081 | | | 13.0 | % |
Multi-family | 146,235 | | | 15.5 | % | | | | | | | | | | | | | | | | | | 173,536 | | | 15.0 | % |
Office | 73,042 | | | 3.9 | % | | | | | | | | | | | | | | | | | | 83,121 | | | 4.6 | % |
Industrial | 976 | | | 0.1 | % | | | | | | | | | | | | | | | | | | 1,009 | | | 0.1 | % |
Other | 7,989 | | | 2.6 | % | | | | | | | | | | | | | | | | | | 5,803 | | | 2.2 | % |
| 315,201 | | | | | | | | | | | | | | | | | | | | | 604,036 | | | |
Owner occupied commercial real estate | 73,501 | | | 3.9 | % | | | | | | | | | | | | | | | | | | 160,159 | | | 8.2 | % |
Commercial and industrial | 171,613 | | | 2.7 | % | | | | | | | | | | | | | | | | | | 250,644 | | | 5.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Bridge - franchise finance | 44,295 | | | 17.5 | % | | | | | | | | | | | | | | | | | | 80,864 | | | 23.6 | % |
Bridge - equipment finance | 1,355 | | | 0.5 | % | | | | | | | | | | | | | | | | | | 40,675 | | | 11.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ | 605,965 | | | | | | | | | | | | | | | | | | | | | $ | 1,136,378 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
Operating Lease Equipment, net
Operating leases with a carrying value of assets under lease totaling $19 million, were internally risk rated substandard at December 31, 2022. On a quarterly basis, management performs an impairment analysis on assets with indicators of potential impairment. Potential impairment indicators include evidence of changes in residual value, macro-economic conditions, an extended period of time off-lease, criticized or classified status, or management's intention to sell the asset at an amount potentially below its carrying value. During the year ended December 31, 2021, impairment charges recognized related to operating lease equipment totaled $2.8 million. There were no impairment charges recognized during the year ended December 31, 2022.
Bridge had exposure to the energy industry of $250 million at December 31, 2022. The majority of the energy exposure was in the operating lease equipment portfolio where energy exposure totaled $219 million.
Residential Loans
Our residential mortgage portfolio, excluding GNMA buyout loans, consists primarily of loans purchased through established correspondent channels. Most of our purchases are of performing jumbo mortgage loans which have FICO scores above 700, primarily are owner-occupied and full documentation, and have a current LTV of 80% or less although loans with LTVs higher than 80% may be extended to selected credit-worthy borrowers. We perform due diligence on the purchased loans for credit, compliance, counterparty, payment history and property valuation.
We have a dedicated residential credit risk management function, and the residential portfolio is monitored by our internal credit review function. Residential mortgage loans are not individually risk rated. Delinquency status is the primary measure we use to monitor the credit quality of these loans. We also consider original LTV and most recently available FICO score to be
significant indicators of credit quality for the 1-4 single family residential portfolio, excluding government insured residential loans.
The following charts present information about the 1-4 single family residential portfolio, excluding government insured loans, by FICO distribution, LTV distribution and vintage at December 31, 2022:
FICO scores are generally updated semi-annually and were most recently updated in the third quarter of 2022. LTVs are typically based on valuation at origination since we do not routinely update residential appraisals.
At December 31, 2022, the majority of the 1-4 single family residential loan portfolio, excluding government insured residential loans, was owner-occupied, with 79% primary residence, 5% second homes and 16% investment properties.
1-4 single family residential loans excluding government insured residential loans past due more than 30 days totaled $62 million and $76 million at December 31, 2022 and 2021, respectively. The amount of these loans 90 days or more past due was $15 million and $17 million at December 31, 2022 and 2021, respectively.
Note 4 to the consolidated financial statements presents additional information about key credit quality indicators and delinquency status of the loan portfolio.
Non-Performing Assets
Non-performing assets generally consist of (i) non-accrual loans, including loans that have been modified in TDRs and placed on non-accrual status, (ii) accruing loans that are more than 90 days contractually past due as to interest or principal, excluding PCD loans for which management has a reasonable basis for an expectation about future cash flows and government insured residential loans, and (iii) OREO and other non-performing assets.
The following table and charts summarize the Company's non-performing loans and non-performing assets at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | |
| December 31, 2022 | | | | December 31, 2021 |
| | | | | |
Non-accrual loans: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Residential and other consumer | 21,311 | | | | | 28,553 | |
Commercial: | | | | | |
| | | | | |
Non-owner occupied commercial real estate | 16,657 | | | | | 50,116 | |
Construction and land | 5,695 | | | | | 5,164 | |
Owner occupied commercial real estate | 17,751 | | | | | 20,453 | |
Commercial and industrial | 29,722 | | | | | 68,720 | |
| | | | | |
Bridge - franchise finance | 13,290 | | | | | 32,879 | |
| | | | | |
Total commercial loans | 83,115 | | | | | 177,332 | |
Total non-accrual loans | 104,426 | | | | | 205,885 | |
Loans past due 90 days and still accruing | 593 | | | | | 24 | |
Total non-performing loans | 105,019 | | | | | 205,909 | |
OREO and other non-performing assets | 1,932 | | | | | 2,275 | |
Total non-performing assets | $ | 106,951 | | | | | $ | 208,184 | |
| | | | | |
Non-performing loans to total loans (1) | 0.42 | % | | | | 0.87 | % |
Non-performing assets to total assets (1) | 0.29 | % | | | | 0.58 | % |
ACL to total loans | 0.59 | % | | | | 0.53 | % |
ACL to non-performing loans | 140.88 | % | | | | 61.41 | % |
Net charge-offs to average loans | 0.22 | % | | | | 0.29 | % |
(1) Non-performing loans and assets include the guaranteed portion of non-accrual SBA loans totaling $40.3 million or 0.16% of total loans and 0.11% of total assets, at December 31, 2022, and $46.1 million or 0.19% of total loans and 0.13% of total assets, at December 31, 2021.
Contractually delinquent government insured residential loans are typically GNMA early buyout loans and are excluded from non-performing loans as defined in the table above due to their government guarantee. The carrying value of such loans contractually delinquent by 90 days or more was $493 million and $730 million at December 31, 2022 and 2021, respectively.
See "Results of Operations - Provision for Credit Losses" above and “Analysis of the Allowance for Credit Losses” below for further discussion of trends in the Provision for Credit Losses and the ACL.
The following chart presents trends in non-performing loans and non-performing assets. Levels of non-performing loans and non-performing assets have returned to below pre-pandemic levels.
The following chart presents trends in non-performing loans by portfolio sub-segment (in millions):
Commercial loans are placed on non-accrual status when (i) management has determined that full repayment of all contractual principal and interest is in doubt, or (ii) the loan is past due 90 days or more as to principal or interest unless the loan is well secured and in the process of collection. Residential and consumer loans, other than government insured pool buyout loans, are generally placed on non-accrual status when they are 90 days past due. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged to interest income. Commercial loans are returned to accrual status only after all past due principal and interest has been collected and full repayment of remaining contractual principal and
interest is reasonably assured. Residential loans are generally returned to accrual status when less than 90 days past due. Past due status of loans is determined based on the contractual next payment due date. Loans less than 30 days past due are reported as current.
TDRs
A loan modification is considered a TDR if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise grant. These concessions may take the form of temporarily or permanently reduced interest rates, payment abatement periods, restructuring of payment terms or extensions of maturity at below market terms. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy.
Under inter-agency and authoritative guidance and consistent with the CARES Act, short-term deferrals or modifications related to COVID-19 were typically not categorized as TDRs. Additionally, section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act, effectively suspended the guidance related to TDRs codified in ASC 310-40 until January 1, 2022, the date the CARES Act expired.
The following table summarizes loans that had been modified in TDRs at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
| Number of TDRs | | Amortized Cost | | Related Specific Allowance | | Number of TDRs | | Amortized Cost | | Related Specific Allowance |
Residential and other consumer (1) | 2,907 | | | $ | 464,118 | | | $ | 137 | | | 449 | | | $ | 79,524 | | | $ | 87 | |
Commercial | 38 | | | 57,832 | | | 11,743 | | | 16 | | | 29,309 | | | 1,377 | |
| 2,945 | | | $ | 521,950 | | | $ | 11,880 | | | 465 | | | $ | 108,833 | | | $ | 1,464 | |
(1) Includes 2,883 government insured residential loans modified in TDRs totaling $456 million at December 31, 2022, and 435 government insured residential loans modified in TDRs totaling $76 million at December 31, 2021.
See Note 4 to the consolidated financial statements for additional information about TDRs.
Loss Mitigation Strategies
Criticized or classified commercial loans in excess of certain thresholds are reviewed quarterly by the Criticized Asset Committee, which evaluates the appropriate strategy for collection to mitigate the amount of credit losses and considers the appropriate risk rating for these loans. Criticized asset reports for each relationship are presented by the assigned relationship manager and credit officer to the Criticized Asset Committee until such time as the relationships are returned to a satisfactory credit risk rating or otherwise resolved. The Criticized Asset Committee may require the transfer of a loan to our workout and recovery department, which is tasked to effectively manage the loan with the goal of minimizing losses and expenses associated with restructure, collection and/or liquidation of collateral. Commercial loans with a risk rating of substandard, loans on non-accrual status, loans modified as TDRs and assets classified as OREO or repossessed assets are usually transferred to workout and recovery. Oversight of the workout and recovery department is provided by the Criticized Asset Committee.
Our servicers evaluate each residential loan in default to determine the most effective loss mitigation strategy, which may be modification, short sale, or foreclosure, and pursue the alternative most suitable to the consumer and to mitigate losses to the bank.
Analysis of the Allowance for Credit Losses
The ACL is management's estimate of the amount of expected credit losses over the life of the loan portfolio, or the amount of amortized cost basis not expected to be collected, at the balance sheet date. This estimate encompasses information about historical events, current conditions and reasonable and supportable economic forecasts. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Given the current level of economic uncertainty, the complexity of the ACL estimate and level of management judgment required, we believe it is possible that the ACL estimate could change, potentially materially, in future periods. Changes in the ACL may result from changes in current economic conditions, our economic forecast, loan portfolio composition and circumstances not currently known to us that may impact the financial condition and operations of our borrowers, among other factors.
Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. For loans that do not share similar risk characteristics with other loans such as collateral dependent loans and TDRs, expected credit
losses are estimated on an individual basis. Expected credit losses are estimated over the contractual terms of the loans, adjusted for expected prepayments, generally excluding expected extensions, renewals, and modifications.
For the substantial majority of portfolio segments and subsegments, including residential loans other than government insured loans, and most commercial and commercial real estate loans, expected losses are estimated using econometric models.
See Note 1 to the consolidated financial statements for more detailed information about our ACL methodology and related accounting policies.
At December 31, 2022 and 2021, we used a single externally provided baseline scenario in calculating the quantitative portion of the ACL. At December 31, 2022, we incorporated a downside scenario to inform the amount of qualitative reserves.
The following table provides an analysis of the ACL, provision for (recovery of) credit losses related to the funded portion of loans and net charge-offs by loan segment for the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Residential and Other Consumer Loans | | | | Non-owner Occupied Commercial Real Estate | | Construction and Land | | Owner Occupied Commercial Real Estate | | Commercial and Industrial | | Pinnacle | | Bridge - Franchise Finance | | Bridge - Equipment Finance | | Total |
Balance at December 31, 2019 | $ | 11,154 | | | | | $ | 28,264 | | | $ | 764 | | | $ | 8,066 | | | $ | 43,485 | | | $ | 720 | | | $ | 9,163 | | | $ | 7,055 | | | $ | 108,671 | |
Impact of adoption of ASU 2016-13 | 8,098 | | | | | (14,222) | | | 1,854 | | | 23,240 | | | 8,841 | | | (309) | | | (133) | | | (64) | | | 27,305 | |
Balance at January 1, 2020 | 19,252 | | | | | 14,042 | | | 2,618 | | | 31,306 | | | 52,326 | | | 411 | | | 9,030 | | | 6,991 | | | 135,976 | |
Provision for (recovery of) credit losses | (556) | | | | | 97,424 | | | 666 | | | (1,463) | | | 35,390 | | | (107) | | | 44,976 | | | 6,009 | | | 182,339 | |
Charge-offs | (31) | | | | | (10,324) | | | — | | | (1,178) | | | (33,188) | | | — | | | (18,125) | | | (6,756) | | | (69,602) | |
Recoveries | 54 | | | | | 192 | | | — | | | 132 | | | 7,669 | | | — | | | 450 | | | 113 | | | 8,610 | |
Balance at December 31, 2020 | 18,719 | | | | | 101,334 | | | 3,284 | | | 28,797 | | | 62,197 | | | 304 | | | 36,331 | | | 6,357 | | | 257,323 | |
Provision for (recovery of) credit losses | (9,241) | | | | | (65,543) | | | (2,253) | | | (6,844) | | | 31,180 | | | (134) | | | (8,857) | | | (2,764) | | | (64,456) | |
Charge-offs | (304) | | | | | (9,167) | | | — | | | (471) | | | (50,563) | | | — | | | (10,745) | | | — | | | (71,250) | |
Recoveries | 13 | | | | | 1,156 | | | — | | | 156 | | | 3,498 | | | — | | | 17 | | | — | | | 4,840 | |
Balance at December 31, 2021 | 9,187 | | | | | 27,780 | | | 1,031 | | | 21,638 | | | 46,312 | | | 170 | | | 16,746 | | | 3,593 | | | 126,457 | |
Provision for (recovery of) credit losses | 2,858 | | | | | 635 | | | 1,736 | | | 952 | | | 61,337 | | | 3 | | | 7,542 | | | (1,249) | | | 73,814 | |
Charge-offs | (412) | | | | | (9,188) | | | (343) | | | (2,870) | | | (36,051) | | | — | | | (13,191) | | | — | | | (62,055) | |
Recoveries | 108 | | | | | 3,100 | | | — | | | 823 | | | 5,049 | | | — | | | 650 | | | — | | | 9,730 | |
Balance at December 31, 2022 | $ | 11,741 | | | | | $ | 22,327 | | | $ | 2,424 | | | $ | 20,543 | | | $ | 76,647 | | | $ | 173 | | | $ | 11,747 | | | $ | 2,344 | | | $ | 147,946 | |
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Net Charge-offs to Average Loans | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2020 | — | % | | | | 0.15 | % | | — | % | | 0.05 | % | | 0.42 | % | | — | % | | 2.86 | % | | 1.13 | % | | 0.26 | % |
Years Ended December 31, 2021 | — | % | | | | 0.13 | % | | — | % | | 0.02 | % | | 0.82 | % | | — | % | | 2.34 | % | | — | % | | 0.29 | % |
Years Ended December 31, 2022 | — | % | | | | 0.11 | % | | 0.16 | % | | 0.11 | % | | 0.50 | % | | — | % | | 4.49 | % | | — | % | | 0.22 | % |
The following table shows the distribution of the ACL at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | December 31, 2021 | | December 31, 2020 |
| Total | | %(1) | | | | | | | | | | Total | | %(1) | | Total | | %(1) |
Residential and other consumer | $ | 11,741 | | | 35.7 | % | | | | | | | | | | $ | 9,187 | | | 35.2 | % | | $ | 18,719 | | | 26.6 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Non-owner occupied commercial real estate | 22,327 | | | 21.7 | % | | | | | | | | | | 27,780 | | | 23.3 | % | | 101,334 | | | 27.7 | % |
Construction and land | 2,424 | | | 1.2 | % | | | | | | | | | | 1,031 | | | 0.7 | % | | 3,284 | | | 1.2 | % |
CRE | 24,751 | | | | | | | | | | | | | 28,811 | | | | | 104,618 | | | |
| | | | | | | | | | | | | | | | | | | |
Owner occupied commercial real estate | 20,543 | | | 7.6 | % | | | | | | | | | | 21,638 | | | 8.2 | % | | 28,797 | | | 8.4 | % |
Commercial and industrial | 76,647 | | | 28.0 | % | | | | | | | | | | 46,312 | | | 25.8 | % | | 62,197 | | | 27.2 | % |
Pinnacle | 173 | | | 3.7 | % | | | | | | | | | | 170 | | | 3.9 | % | | 304 | | | 4.6 | % |
Bridge - franchise finance | 11,747 | | | 1.0 | % | | | | | | | | | | 16,746 | | | 1.4 | % | | 36,331 | | | 2.3 | % |
Bridge - equipment finance | 2,344 | | | 1.1 | % | | | | | | | | | | 3,593 | | | 1.5 | % | | 6,357 | | | 2.0 | % |
| 111,454 | | | | | | | | | | | | | 88,459 | | | | | 133,986 | | | |
| $ | 147,946 | | | 100.0 | % | | | | | | | | | | $ | 126,457 | | | 100.0 | % | | $ | 257,323 | | | 100.0 | % |
(1)Represents percentage of loans receivable in each category to total loans receivable.
The following table presents the ACL as a percentage of loans at the dates indicated:
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| December 31, 2022 | | | | | | December 31, 2021 | | December 31, 2020 | | | | |
| | | | | | | | | | | | | |
Residential and other consumer | 0.13 | % | | | | | | 0.11 | % | | 0.29 | % | | | | |
Commercial: | | | | | | | | | | | | | |
CRE | 0.43 | % | | | | | | 0.51 | % | | 1.52 | % | | | | |
Commercial and industrial | 1.10 | % | | | | | | 0.84 | % | | 1.07 | % | | | | |
Pinnacle | 0.02 | % | | | | | | 0.02 | % | | 0.03 | % | | | | |
Bridge - franchise finance | 4.63 | % | | | | | | 4.90 | % | | 6.61 | % | | | | |
Bridge - equipment finance | 0.82 | % | | | | | | 1.00 | % | | 1.34 | % | | | | |
Total commercial | 0.85 | % | | | | | | 0.76 | % | | 1.36 | % | | | | |
| 0.59 | % | | | | | | 0.53 | % | | 1.08 | % | | | | |
Significant offsetting factors contributing to the change in the ACL during the year ended December 31, 2022 are depicted in the chart below (in millions):
Changes in the ACL during the year ended December 31, 2022
As depicted in the chart above, the primary reasons for the increase in the ACL from December 31, 2021 to December 31, 2022 were increases in specific reserves and qualitative overlay related primarily to economic uncertainty, partially offset by net charge-offs. The ACL as a percentage of loans was 0.59% at December 31, 2022, compared to 0.53% at December 31, 2021.
The ACL for residential and other consumer segment increased by $2.6 million during the year ended December 31, 2022, from 0.11% to 0.13% of loans. The increase in the ACL for this segment was primarily driven by the economic forecast, particularly a decline in the HPI and increases in forecasted mortgage and unemployment rates.
The ACL for the CRE portfolio sub-segment, including non-owner occupied CRE and construction and land, decreased by $4.1 million during the year ended December 31, 2022, from 0.51% to 0.43% of loans. The decrease in the ACL for CRE was driven mainly by net charge-offs and improvements in the credit quality of existing loans as reflected in the reduction in criticized and classified loans.
The ACL for the commercial and industrial sub-segment, including owner-occupied commercial real estate, increased by $29.2 million during the year ended December 31, 2022, from 0.84% to 1.10% of loans. The increase was mainly driven by (i) increases in specific reserves; (ii) an increase in qualitative loss factors mainly related to economic uncertainty and (iii) loan growth; partially offset by net charge-offs and the reduction in the levels of criticized and classified loans.
The ACL for the BFG franchise finance portfolio segment decreased by $5.0 million during the year ended December 31, 2022, from 4.90% to 4.63% of loans primarily due to (i) a decline in the amortized cost basis of the portfolio; (ii) net charge-offs; and to a lesser extent, (iii) a decrease in qualitative loss factors.
The estimate of the ACL at December 31, 2022 was informed by forecasted economic scenarios published in December 2022, a wide variety of additional economic data, information about borrower financial condition and collateral values and other relevant information. The economic forecast used in modeling the quantitative ACL as of December 31, 2022, was a
third-party provided baseline forecast. Some of the assumptions and data points informing the reasonable and supportable economic forecast used in estimating the quantitative ACL at December 31, 2022 included:
•Labor market assumptions, which reflected national unemployment at 3.8% for the first quarter of 2023, and 4.2% and 3.9% by the end of 2023 and 2024, respectively;
•Annualized growth in GDP at 0.1% for the first quarter of 2023, and averaging 0.9% and 2.0% for 2023 and 2024, respectively;
•S&P 500 declining by 14% in the first quarter of 2023 with gains of 7.9% and 0.3% by the end of 2023 and 2024, respectively;
•HPI decline of 1.1% in the first quarter of 2023, and declines of 3.8% and 3.3% by the end of 2023 and 2024, respectively.
Additional variables and assumptions not explicitly stated, including but not limited to residential and commercial property forecasts, also contributed to the overall impact economic conditions and the economic forecast had on the ACL estimate. Furthermore, while the variables presented above are at the national level, many of the variables are regionalized at the market and submarket level in the models.
For additional information about the ACL, see Note 4 to the consolidated financial statements.
Deposits
A further breakdown of deposits at the dates indicated is shown below:
The estimated amount of uninsured deposits at December 31, 2022 and 2021 was $19.2 billion and $20.2 billion, respectively. Time deposit accounts with balances of $250,000 or more totaled $730 million and $603 million at December 31, 2022 and 2021, respectively. The following table shows scheduled maturities of uninsured time deposits as of December 31, 2022 (in thousands):
| | | | | |
Three months or less | $ | 97,887 | |
Over three through six months | 75,758 | |
Over six through twelve months | 469,681 | |
Over twelve months | 9,626 | |
| $ | 652,952 | |
Borrowings
In addition to deposits, we utilize FHLB advances as a funding source; the advances provide us with additional flexibility in managing both term and cost of funding and in managing interest rate risk. FHLB advances are secured by qualifying residential first mortgage and commercial real estate loans and MBS. The following table presents information about the contractual balance of outstanding FHLB advances, as of December 31, 2022 (dollars in thousands):
| | | | | | | | | | | |
| Amount | | Weighted Average Rate |
Maturing in: | | | |
2023 - One month or less | $ | 4,320,000 | | | 4.19 | % |
2023 - Over one month | 1,100,000 | | | 4.56 | % |
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Total contractual balance outstanding | $ | 5,420,000 | | | |
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The table above reflects contractual maturities of outstanding advances and does not incorporate the impact that interest rate swaps designated as cash flow hedges have on the duration or cost of borrowings.
The table below presents information about outstanding interest rate swaps hedging the variability of interest cash flows on the FHLB advances included in the table above, as of December 31, 2022 (dollars in thousands):
| | | | | | | | | | | |
| Notional Amount | | Weighted Average Rate |
Cash flow hedges maturing in: | | | |
2023 | $ | 255,000 | | | 2.35 | % |
2024 | 535,000 | | | 2.40 | % |
2025 | 425,000 | | | 2.28 | % |
2026 | 130,000 | | | 1.93 | % |
| | | |
Thereafter | 25,000 | | | 2.50 | % |
| $ | 1,370,000 | | | 2.31 | % |
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During the year ended December 31, 2021, derivative positions designated as cash flow hedges with a notional amount totaling $401 million, at a weighted average pay rate of 3.24%, were discontinued following the Company's determination that the related forecasted transactions were not probable of occurring.
The Bank utilizes federal funds purchased to manage the daily cash position. See Note 7 to the consolidated financial statements for more information about the Company's FHLB advances and notes. Additionally, see Note 10 to the consolidated financial statements for more information about derivative instruments the Company uses to manage risk.
Liquidity and Capital Resources
Liquidity
Liquidity involves our ability to generate adequate funds to support planned interest earning asset growth, meet deposit withdrawal and credit line usage requests, maintain reserve requirements, conduct routine operations, pay dividends, service outstanding debt and meet other contractual obligations.
BankUnited's ongoing liquidity needs have historically been met primarily by cash flows from operations, deposit growth, the investment portfolio and FHLB advances. FRB discount window borrowings, reverse repurchase agreement capacity and a letter of credit with the FHLB provide additional sources of contingent liquidity. For the years ended December 31, 2022, 2021 and 2020, net cash provided by operating activities was $1.3 billion, $1.2 billion and $864 million, respectively.
Available liquidity includes cash, borrowing capacity at the Federal Home Loan Bank of Atlanta and the Federal Reserve Discount Window, Federal Funds lines of credit and unpledged agency securities. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Bank's amortizing securities and loan portfolios, and the sale of investment securities. Management also has the ability to exert substantial control over the rate and timing of loan production, and resultant requirements for liquidity to fund new loans.
The ALM policy establishes limits or operating thresholds and guidelines for a number of measures of liquidity which are monitored at least monthly by the ALCO and quarterly by the Board of Directors. The primary measures used to dimension liquidity risk are the ratio of available liquidity to volatile liabilities and a liquidity stress test coverage ratio. Other measures employed to monitor and manage liquidity include but are not limited to a 30-day total liquidity ratio, a one-year liquidity ratio,
a wholesale funding ratio, concentrations of large deposits, a measure of on-balance sheet available liquidity, the ratio of FHLB advances to total assets and the ratio of non-interest bearing deposits to total deposits, which is reflective of the quality and cost, rather than the quantity, of available liquidity. At December 31, 2022, BankUnited was in compliance with the limits prescribed by the ALM policy.
The ALM policy stipulates that BankUnited’s liquidity is within policy limits if the available liquidity/volatile liabilities ratio and liquidity stress test ratios exceed 100%. At December 31, 2022, BankUnited’s available liquidity/volatile liabilities ratio was 176% and the liquidity stress test ratio was 188%. The Company has a comprehensive contingency liquidity funding plan and conducts a quarterly liquidity stress test, the results of which are reported to the risk committee of the Board of Directors.
As a holding company, BankUnited, Inc. is a corporation separate and apart from its banking subsidiary, and therefore, provides for its own liquidity. BankUnited, Inc.’s main sources of funds include management fees and dividends from the Bank, access to capital markets and, to a lesser extent, its own securities portfolio. There are regulatory limitations that may affect the ability of the Bank to pay dividends to BankUnited, Inc. Management believes that such limitations will not impact our ability to meet our ongoing near-term cash obligations.
The following table presents the Company's material cash requirements for the following twelve months, as of December 31, 2022 (in thousands):
| | | | | |
| |
Interest on term deposits | $ | 61,496 | |
FHLB advances(1) | 5,435,403 | |
Notes and other borrowings(1) | 38,318 | |
Operating lease obligations | 19,432 | |
| $ | 5,554,649 | |
(1)Includes interest to be paid on the outstanding contractual obligations.
At December 31, 2022, the Company had $4.0 billion in term deposits with a contractual maturity of twelve months or less. The majority of term deposits and FHLB advances are expected to roll over into new instruments; this amount therefore does not represent future anticipated cash requirements. Additionally, as discussed in Note 15 to the consolidated financial statements, the Bank had $271 million in outstanding commitments to fund loans and $5.7 billion in unfunded commitments under existing lines of credit at December 31, 2022. Many of these commitments are expected to expire without being fully funded and, therefore, also do not necessarily represent future cash requirements.
Macro factors, including the Fed's quantitative tightening policy stance, have led to reduced deposit levels across the banking system. BankUnited's total deposits declined by $1.9 billion during the year ended December 31, 2022, and there is uncertainty as to the future impact of monetary policy on deposit levels both system-wide and at BankUnited. We believe that we have sufficient on-balance sheet and contingent liquidity, through the sources described above, to satisfy our liquidity needs and cash requirements over the next twelve months.
Capital
Pursuant to the FDIA, the federal banking agencies have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. At December 31, 2022 and 2021, the Company and the Bank had capital levels that exceeded both the regulatory well-capitalized guidelines and all internal capital ratio targets. Upon adoption of ASU 2016-13 on January 1, 2020, the Company elected the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period. See Note 13 to the consolidated financial statements for more information about the Company's and the Bank's regulatory capital ratios.
We believe we are well positioned, from a capital perspective, to withstand a severe downturn in the economy. We continue to evolve our stress testing framework and adapt it to evolving macro-economic conditions as necessary. The majority of our commercial portfolio is subject to quarterly stress test analysis. On an annual basis, we also run a rigorous stress test of our entire balance sheet incorporating the Fed's CCAR scenarios as well as additional idiosyncratic scenarios reflective of evolving macro-economic themes.
We have an active shelf registration statement on file with the SEC that allows the Company to periodically offer and sell in one or more offerings, individually or in any combination, our common stock, preferred stock and other non-equity securities. The shelf registration provides us with flexibility in issuing capital instruments and enables us to more readily access
the capital markets as needed to pursue future growth opportunities and to ensure continued compliance with regulatory capital requirements. Our ability to issue securities pursuant to the shelf registration is subject to market conditions.
Interest Rate Risk
A principal component of the Company’s risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is interest rate risk, including the risk that assets and liabilities with similar re-pricing characteristics may not reprice at the same time or to the same degree. A primary objective of the Company’s asset/liability management activities is to maximize net interest income, while maintaining acceptable levels of interest rate risk. The ALCO is responsible for establishing policies to manage exposure to interest rate risk, and to ensure procedures are established to monitor compliance with these policies. The policies established by the ALCO are approved at least annually by the Board of Directors or its Risk Committee.
Management believes that the simulation of net interest income in different interest rate environments provides the most meaningful measure of interest rate risk. Income simulation analysis is designed to capture not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them.
The income simulation model analyzes interest rate sensitivity by projecting net interest income over twelve and twenty-four month periods in a most likely rate scenario based on consensus forward interest rate curves versus net interest income in alternative rate scenarios. Management continually reviews and refines its interest rate risk management process in response to changes in the interest rate environment, the economic climate and observed customer behavior. Currently, our interest rate risk policy framework is based on modeling instantaneous rate shocks of plus and minus 100, 200, 300 and 400 basis point shifts. We also model a variety of yield curve slope and dynamic balance sheet scenarios. We continually evaluate the scenarios being modeled with a view toward adapting them to changing economic conditions, expectations and trends.
The following table presents the impact on forecasted net interest income compared to a "most likely" scenario in parallel rate shock scenarios of plus 100, 200, 300 and 400 basis points at December 31, 2022 and 2021, as well as minus 100, 200 and 300 basis points scenarios at December 31, 2022. At December 31, 2022, the most likely rate scenario incorporated a bear flattening yield curve and floored all indices at 0%. We did not apply a falling rate scenario at December 31, 2021 due to the low prevailing interest rate environment at that time.
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| Down 300 | | Down 200 | | Down 100 | | Plus 100 | | Plus 200 | | Plus 300 | | Plus 400 |
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Model Results at December 31, 2022 - increase (decrease) | | | | | | | | | | | | | |
In year 1 | (10.0) | % | | (5.1) | % | | (1.7) | % | | 0.1 | % | | (0.6) | % | | (1.4) | % | | (2.6) | % |
In year 2 | (18.3) | % | | (8.4) | % | | (3.5) | % | | 1.8 | % | | 2.3 | % | | 1.8 | % | | 0.7 | % |
Model Results at December 31, 2021 - increase | | | | | | | | | | | | | |
In year 1 | N/A | | N/A | | N/A | | 2.5 | % | | 3.9 | % | | 4.3 | % | | 4.2 | % |
In year 2 | N/A | | N/A | | N/A | | 6.6 | % | | 11.5 | % | | 15.8 | % | | 20.4 | % |
Management also simulates changes in EVE in various interest rate environments. The following table illustrates the modeled change in EVE in the indicated scenarios at December 31, 2022 and December 31, 2021:
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| Down 300 | | Down 200 | | Down 100 | | Plus 100 | | Plus 200 | | Plus 300 | | Plus 400 |
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Model Results at December 31, 2022 - increase (decrease): | (0.9) | % | | 4.5 | % | | 3.8 | % | | (5.5) | % | | (11.3) | % | | (17.3) | % | | (22.8) | % |
Model Results at December 31, 2021 - increase (decrease): | N/A | | N/A | | N/A | | 0.4 | % | | (1.0) | % | | (3.2) | % | | (5.0) | % |
All of the modeled results presented above fall within designated "low" or "moderate" risk zones as set forth in the Company's ALM policy. Many assumptions were used by the Company to calculate the impact of changes in interest rates, including the change in rates. Actual results may not be similar to the Company’s projections due to several factors including the timing and frequency of rate changes, market conditions, changes in depositor behavior and loan prepayment speeds and the shape of the yield curve. Actual results may also differ due to the Company’s actions, if any, in response to changing rates and conditions.
Derivative Financial Instruments
Interest rate derivatives designated as cash flow or fair value hedging instruments are one of the tools we use to manage interest rate risk. These derivative instruments are used to mitigate exposure to changes in interest cash flows on variable rate liabilities and to changes in the fair value of fixed rate financial instruments, in each case caused by fluctuations in benchmark interest rates, as well as to manage duration of liabilities. The fair value of derivative instruments designated as hedges is included in other assets and other liabilities in our consolidated balance sheets. Changes in fair value of derivative instruments designated as cash flow hedges are reported in accumulated other comprehensive income. Changes in the fair value of derivative instruments designated as fair value hedges are recognized in earnings, as is the offsetting gain or loss on the hedged item. At December 31, 2022, outstanding interest rate swaps, caps and collars designated as cash flow hedges had an aggregate notional amount of $2.3 billion and outstanding interest rate swaps designated as fair value hedges had an aggregate notional amount of $100 million.
Interest rate swaps and caps not designated as hedges had an aggregate notional amount of $3.9 billion at December 31, 2022. These interest rate swaps and caps were entered into as accommodations to certain of our commercial borrowers. To mitigate interest rate risk associated with these derivatives, the Company enters into offsetting derivative positions with primary dealers.
See Note 10 to the consolidated financial statements for additional information about derivative financial instruments.
LIBOR Transition
The FCA, which regulates LIBOR, discontinued the one-week and two-month LIBOR tenors effective December 31, 2021. The remaining tenors will be discontinued effective June 30, 2023. The Company has implemented and is in the process of executing a detailed plan to facilitate the transition from LIBOR to alternative reference rates, with SOFR being the preferred alternative to LIBOR. We established a cross-functional LIBOR transition working group that (i) continually assesses the Company's remaining exposure to LIBOR indexed instruments (ii) evaluated the systems, models and processes impacted by reference rate transition and implemented any necessary modifications to ensure compliance with the new reference rate framework; (iii) developed and continues to execute under a formal governance structure for the transition; and (iv) continues to monitor and report on execution under a detailed transition implementation plan. We have taken the following actions, among others, to facilitate the transition to alternative reference rates by the Bank and our customers:
• Evaluated the fallback language in all financial instruments referencing LIBOR, and effective January 2021, adopted the ARRC recommended hardwired approach fallback provisions incorporating SOFR pursuant to a waterfall for all bilateral commercial loans which provide for the determination of replacement rates for LIBOR-linked financial products;
• Adhered to the 2020 ISDA IBOR Fallbacks Protocol to amend fallback language in all of our existing derivative counterparty agreements;
• Adopted primarily SOFR based products and pricing for newly originated commercial loans and interest rate swaps for borrowers, purchases of residential mortgage loans and investment securities and derivative hedging instruments;
• Effective 12/31/2021, ceased originating LIBOR indexed loans and implemented SOFR as the preferred alternative to LIBOR;
•Completed testing and implementation of replacement indices in applicable systems and models;
•Established detailed operational protocols for the implementation of fallback language in existing LIBOR instruments maturing after June 30, 2023;
•Provided ongoing education to client-facing associates and customers; and
•Adopted and continue to execute a detailed remediation plan for bilateral and agent loans maturing after June 30, 2023, while actively monitoring LIBOR-based loans scheduled to mature prior to June 30, 2023.
The following table presents information about the Company's exposure to instruments that reference LIBOR, as of December 31, 2022 (in thousands): | | | | | | | | | | | | | | | | | |
| Maturing | | |
| Prior to June 30, 2023 | | After June 30, 2023 | | Total |
Investment securities | $ | — | | | $ | 3,686,709 | | | $ | 3,686,709 | |
| | | | | |
Loans | 101,871 | | | 4,080,601 | | | 4,182,472 | |
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Interest rate derivative contracts (1) | 262,578 | | | 2,700,534 | | | 2,963,112 | |
| $ | 364,449 | | | $ | 10,467,844 | | | $ | 10,832,293 | |
(1)Represents notional amount.
Impact of the COVID-19 Pandemic
A more detailed discussion of the effects the COVID-19 pandemic had during 2020 and 2021 on our Company appears in the "Impact of the COVID-19 Pandemic and Our Response" section in the MD&A of the Company's 2021 and 2020 Annual Reports on Form 10-K.
2021 and 2022 were characterized broadly by recovery of the U.S. economy from the impact of the COVID-19 pandemic. The actual and expected impact of the pandemic on our financial condition and results of operations continues to decline. Levels of criticized and classified assets remain elevated at December 31, 2022 when compared to pre-pandemic levels although they continue to trend downward; levels of non-performing assets have returned to below pre-pandemic levels. The composition of the balance sheet at December 31, 2022 and corresponding levels of net interest income reflect the opportunity cost of the decline in commercial loans and the increase in residential loans and securities that occurred over the course of the pandemic. Historically, commercial loans have generally tended to be higher yielding assets than residential loans and securities. During the first quarter of 2022, we welcomed our employees back to the office, adopting a hybrid work model for most non-branch employees. This model will likely continue to evolve over the near to medium term.
Non-GAAP Financial Measures
PPNR is a non-GAAP financial measure. Management believes this measure is relevant to understanding the performance of the Company attributable to elements other than the provision for credit losses and the ability of the Company to generate earnings sufficient to cover estimated credit losses, particularly in view of the volatility of the provision for credit losses. This measure also provides a meaningful basis for comparison to other financial institutions since it is commonly employed and is a measure frequently cited by investors and analysts. The following table reconciles the non-GAAP financial measurement of PPNR to the comparable GAAP financial measurement of income before income taxes for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | |
| | 2022 | | 2021 | | |
Income before income taxes (GAAP) | | $ | 375,132 | | $ | 449,385 | | |
Plus: Provision for (recovery of) credit losses | | 75,154 | | (67,119) | | |
PPNR (non-GAAP) | | $ | 450,286 | | $ | 382,266 | | |
Tangible book value per common share is a non-GAAP financial measure. Management believes this measure is relevant to understanding the capital position and performance of the Company. Disclosure of this non-GAAP financial measure also provides a meaningful basis for comparison to other financial institutions as it is a metric commonly used in the banking industry. The following table reconciles the non-GAAP financial measurement of tangible book value per common share to the comparable GAAP financial measurement of book value per common share at the dates indicated (in thousands except share and per share data):
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | | | | | | | | | |
Total stockholders’ equity | $ | 2,435,981 | | | $ | 3,037,761 | | | | | | | | | | | |
Less: goodwill and other intangible assets | 77,637 | | | 77,637 | | | | | | | | | | | |
Tangible stockholders’ equity | $ | 2,358,344 | | | $ | 2,960,124 | | | | | | | | | | | |
| | | | | | | | | | | | | |
Common shares issued and outstanding | 75,674,587 | | | 85,647,986 | | | | | | | | | | | |
| | | | | | | | | | | | | |
Book value per common share | $ | 32.19 | | | $ | 35.47 | | | | | | | | | | | |
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Tangible book value per common share | $ | 31.16 | | | $ | 34.56 | | | | | | | | | | | |
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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BankUnited, Inc. Consolidated Financial Statements for the Years ended December 31, 2022, 2021 and 2020 | |
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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Company's principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under the framework in Internal Control—Integrated Framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2022.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2022 has been audited by Deloitte and Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Report of Independent Registered Public Accounting Firm
To the stockholders and Board of Directors of BankUnited, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BankUnited, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for the years ended December 31, 2022 and 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years ended December 31, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses — Refer to Notes 1 and 4 to the financial statements
Critical Audit Matter Description
The allowance for credit losses (“ACL”) is management's estimate of the current amount of expected credit losses over the life of the loan portfolio, or the amount of amortized cost basis not expected to be collected, at the balance sheet date. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. The measurement of expected credit losses encompasses information about historical events, current conditions, and reasonable and supportable economic forecasts. Factors that may be considered in determining the amount of the ACL include but are not limited to, product or collateral type, industry, geography, internal risk rating, credit characteristics such as credit scores or collateral values, delinquency rates, historical or expected credit loss patterns and other quantitative and qualitative factors considered to have an impact on the adequacy of the ACL and the ability of borrowers to repay their loans. The adequacy of the ACL is also dependent on the effectiveness of the underlying models used in determining the estimate.
Expected credit losses are estimated over the contractual terms of the loans using econometric models, adjusted for expected prepayments. The models employ a factor-based methodology, leveraging data sets containing extensive historical loss and recovery information by industry, geography, product type, collateral type, and obligor characteristics, to estimate probability of
default (“PD”) and loss given default (“LGD”). Projected PDs and LGDs, determined based on pool level characteristics, are applied to estimated exposure at default. Measures of PD incorporate current conditions through market cycle or credit cycle adjustments. PDs and LGDs are then conditioned on the reasonable and supportable economic forecast. For criticized or classified loans, PDs are adjusted to benchmark PDs established for each risk rating if the most current financial information available is deemed not to be reflective of the borrowers' current financial condition. For non-accrual or doubtful rated distressed loans above a certain threshold, an individual assessment is performed to determine expected credit losses.
Given the complex nature of estimating the ACL, performing audit procedures to evaluate whether the ACL was appropriately recorded as of December 31, 2022 required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures to test the ACL for the loan portfolio included the following, among others:
•We tested the effectiveness of controls over the ACL including management’s controls over data transfers into and out of the models, final quantitative model results, and application of any qualitative adjustments.
•We tested the completeness and accuracy of the data used in the models.
•We evaluated the reasonableness of the qualitative adjustments within the ACL estimate.
We evaluated a sample of non-accrual and doubtful rated loans by assessing the factors utilized during the Bank's assessment of the reserves associated with the loans, assessed the appropriateness of risk ratings, and evaluated the financial performance of the borrowers as well as the associated collateral, and the timeliness of the associated reserve.
/s/ Deloitte and Touche LLP
Miami, Florida
February 22, 2023
We have served as the Company's auditor since 2021.
Report of Independent Registered Public Accounting Firm
To the stockholders and the Board of Directors of BankUnited, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of BankUnited Inc. and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated February 22, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/Deloitte and Touche LLP
Miami, Florida
February 22, 2023
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
BankUnited, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows of BankUnited, Inc. and subsidiaries (the Company) for the year ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/KPMG LLP
We served as the Company’s auditor from 2009 to 2021.
Charlotte, North Carolina
February 26, 2021
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
ASSETS | | | |
Cash and due from banks: | | | |
Non-interest bearing | $ | 16,068 | | | $ | 19,143 | |
Interest bearing | 556,579 | | | 295,714 | |
Cash and cash equivalents | 572,647 | | | 314,857 | |
Investment securities (including securities recorded at fair value of $9,745,327 and $10,054,198) | 9,755,327 | | | 10,064,198 | |
Non-marketable equity securities | 294,172 | | | 135,859 | |
| | | |
Loans | 24,885,988 | | | 23,765,053 | |
Allowance for credit losses | (147,946) | | | (126,457) | |
Loans, net | 24,738,042 | | | 23,638,596 | |
Bank owned life insurance | 308,212 | | | 309,477 | |
Operating lease equipment, net | 539,799 | | | 640,726 | |
| | | |
Goodwill | 77,637 | | | 77,637 | |
Other assets | 740,876 | | | 634,046 | |
Total assets | $ | 37,026,712 | | | $ | 35,815,396 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Liabilities: | | | |
Demand deposits: | | | |
Non-interest bearing | $ | 8,037,848 | | | $ | 8,975,621 | |
Interest bearing | 2,142,067 | | | 3,709,493 | |
Savings and money market | 13,061,341 | | | 13,368,745 | |
Time | 4,268,078 | | | 3,384,243 | |
Total deposits | 27,509,334 | | | 29,438,102 | |
Federal funds purchased | 190,000 | | | 199,000 | |
FHLB advances | 5,420,000 | | | 1,905,000 | |
Notes and other borrowings | 720,923 | | | 721,416 | |
Other liabilities | 750,474 | | | 514,117 | |
Total liabilities | 34,590,731 | | | 32,777,635 | |
| | | |
Commitments and contingencies | | | |
| | | |
Stockholders' equity: | | | |
Common stock, par value $0.01 per share, 400,000,000 shares authorized; 75,674,587 and 85,647,986 shares issued and outstanding | 757 | | | 856 | |
Paid-in capital | 321,729 | | | 707,503 | |
Retained earnings | 2,551,400 | | | 2,345,342 | |
Accumulated other comprehensive loss | (437,905) | | | (15,940) | |
Total stockholders' equity | 2,435,981 | | | 3,037,761 | |
Total liabilities and stockholders' equity | $ | 37,026,712 | | | $ | 35,815,396 | |
69
The accompanying notes are an integral part of these consolidated financial statements
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Years Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
Interest income: | | | | | | | | | |
Loans | | | | | $ | 934,642 | | | $ | 800,819 | | | $ | 864,175 | |
Investment securities | | | | | 280,100 | | | 152,619 | | | 193,856 | |
Other | | | | | 15,709 | | | 6,010 | | | 9,578 | |
Total interest income | | | | | 1,230,451 | | | 959,448 | | | 1,067,609 | |
Interest expense: | | | | | | | | | |
Deposits | | | | | 179,972 | | | 67,596 | | | 199,980 | |
Borrowings | | | | | 137,519 | | | 96,164 | | | 115,871 | |
Total interest expense | | | | | 317,491 | | | 163,760 | | | 315,851 | |
Net interest income before provision for credit losses | | | | | 912,960 | | | 795,688 | | | 751,758 | |
Provision for (recovery of) credit losses | | | | | 75,154 | | | (67,119) | | | 178,431 | |
Net interest income after provision for credit losses | | | | | 837,806 | | | 862,807 | | | 573,327 | |
Non-interest income: | | | | | | | | | |
Deposit service charges and fees | | | | | 23,402 | | | 21,685 | | | 16,496 | |
Gain (loss) on sale of loans, net | | | | | (2,570) | | | 24,394 | | | 13,170 | |
Gain (loss) on investment securities, net | | | | | (15,805) | | | 6,446 | | | 17,767 | |
Lease financing | | | | | 54,111 | | | 53,263 | | | 59,112 | |
Other non-interest income | | | | | 18,498 | | | 28,365 | | | 26,676 | |
Total non-interest income | | | | | 77,636 | | | 134,153 | | | 133,221 | |
Non-interest expense: | | | | | | | | | |
Employee compensation and benefits | | | | | 265,548 | | | 243,532 | | | 217,156 | |
Occupancy and equipment | | | | | 45,400 | | | 47,944 | | | 48,237 | |
Deposit insurance expense | | | | | 17,999 | | | 18,695 | | | 21,854 | |
Professional fees | | | | | 11,730 | | | 14,386 | | | 11,708 | |
Technology | | | | | 77,103 | | | 67,500 | | | 58,108 | |
Discontinuance of cash flow hedges | | | | | — | | | 44,833 | | | — | |
Depreciation and impairment of operating lease equipment | | | | | 50,388 | | | 53,764 | | | 49,407 | |
| | | | | | | | | |
Other non-interest expense | | | | | 72,142 | | | 56,921 | | | 50,719 | |
Total non-interest expense | | | | | 540,310 | | | 547,575 | | | 457,189 | |
Income before income taxes | | | | | 375,132 | | | 449,385 | | | 249,359 | |
Provision for income taxes | | | | | 90,161 | | | 34,401 | | | 51,506 | |
Net income | | | | | $ | 284,971 | | | $ | 414,984 | | | $ | 197,853 | |
Earnings per common share, basic | | | | | $ | 3.55 | | | $ | 4.52 | | | $ | 2.06 | |
Earnings per common share, diluted | | | | | $ | 3.54 | | | $ | 4.52 | | | $ | 2.06 | |
70
The accompanying notes are an integral part of these consolidated financial statements
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | | | | | | | | | | | | | | | | | | | |
@ | | | | | Years Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
Net income | | | | | $ | 284,971 | | | $ | 414,984 | | | $ | 197,853 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Unrealized gains (losses) on investment securities available for sale: | | | | | | | | | |
Net unrealized holding gain (loss) arising during the period | | | | | (498,864) | | | (54,228) | | | 46,045 | |
Reclassification adjustment for net securities gains realized in income | | | | | (2,906) | | | (6,712) | | | (10,431) | |
Net change in unrealized gains (losses) on securities available for sale | | | | | (501,770) | | | (60,940) | | | 35,614 | |
Unrealized gains (losses) on derivative instruments: | | | | | | | | | |
Net unrealized holding gain (loss) arising during the period | | | | | 79,871 | | | 22,207 | | | (87,402) | |
Reclassification adjustment for net (gains) losses realized in income | | | | | (66) | | | 38,545 | | | 34,463 | |
Reclassification adjustment for discontinuance of cash flow hedges | | | | | — | | | 33,400 | | | — | |
Net change in unrealized gains (losses) on derivative instruments | | | | | 79,805 | | | 94,152 | | | (52,939) | |
Other comprehensive income (loss) | | | | | (421,965) | | | 33,212 | | | (17,325) | |
Comprehensive income (loss) | | | | | $ | (136,994) | | | $ | 448,196 | | | $ | 180,528 | |
71
The accompanying notes are an integral part of these consolidated financial statements
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net income | $ | 284,971 | | | $ | 414,984 | | | $ | 197,853 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Amortization and accretion, net | (7,978) | | | (21,205) | | | (28,246) | |
Provision for (recovery of) credit losses | 75,154 | | | (67,119) | | | 178,431 | |
| | | | | |
(Gain) loss on sale of loans, net | 2,570 | | | (24,394) | | | (13,170) | |
| | | | | |
(Gain) loss on investment securities, net | 15,805 | | | (6,446) | | | (17,767) | |
Equity based compensation | 25,179 | | | 23,832 | | | 20,367 | |
Depreciation and amortization | 77,623 | | | 78,500 | | | 72,508 | |
Deferred income taxes | 1,437 | | | (9,015) | | | (27,586) | |
| | | | | |
Proceeds from sale of loans held for sale, net | 423,893 | | | 807,097 | | | 584,427 | |
| | | | | |
| | | | | |
Other: | | | | | |
(Increase) decrease in other assets | 230,382 | | | (148,806) | | | (33,383) | |
(Decrease) increase in other liabilities | 164,785 | | | 172,747 | | | (69,266) | |
Net cash provided by operating activities | 1,293,821 | | | 1,220,175 | | | 864,168 | |
| | | | | |
Cash flows from investing activities: | | | | | |
| | | | | |
Purchases of investment securities | (2,974,352) | | | (5,835,143) | | | (4,208,597) | |
Proceeds from repayments and calls of investment securities | 1,784,484 | | | 2,586,385 | | | 1,352,788 | |
Proceeds from sale of investment securities | 798,205 | | | 2,286,600 | | | 1,503,498 | |
Purchases of non-marketable equity securities | (471,763) | | | (62,137) | | | (134,938) | |
Proceeds from redemption of non-marketable equity securities | 313,450 | | | 122,143 | | | 192,737 | |
Purchases of loans | (2,283,134) | | | (4,843,231) | | | (3,157,659) | |
Loan originations and repayments, net | 613,767 | | | 3,856,932 | | | 1,819,139 | |
Proceeds from sale of loans, net | 88,103 | | | 305,929 | | | 48,721 | |
| | | | | |
| | | | | |
| | | | | |
(Acquisition) disposition of operating lease equipment, net | 52,240 | | | (44,179) | | | (19,597) | |
Other investing activities | (41,400) | | | (11,204) | | | (16,807) | |
Net cash used in investing activities | (2,120,400) | | | (1,637,905) | | | (2,620,715) | |
| | | | | (Continued) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
72
The accompanying notes are an integral part of these consolidated financial statements
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash flows from financing activities: | | | | | |
Net increase (decrease) in deposits | (1,928,768) | | | 1,942,286 | | | 3,101,225 | |
Net increase (decrease) in federal funds purchased | (9,000) | | | 19,000 | | | 80,000 | |
Additions to FHLB borrowings | 4,650,000 | | | 946,000 | | | 3,857,000 | |
Repayments of FHLB borrowings | (1,135,000) | | | (2,162,000) | | | (5,217,000) | |
Proceeds from issuance of notes, net | — | | | — | | | 293,858 | |
Dividends paid | (79,443) | | | (85,790) | | | (86,522) | |
Exercise of stock options | — | | | 25 | | | 19,611 | |
Repurchase of common stock | (401,288) | | | (318,499) | | | (100,972) | |
Other financing activities | (12,132) | | | (6,151) | | | (7,610) | |
Net cash provided by financing activities | 1,084,369 | | | 334,871 | | | 1,939,590 | |
Net increase (decrease) in cash and cash equivalents | 257,790 | | | (82,859) | | | 183,043 | |
Cash and cash equivalents, beginning of period | 314,857 | | | 397,716 | | | 214,673 | |
Cash and cash equivalents, end of period | $ | 572,647 | | | $ | 314,857 | | | $ | 397,716 | |
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Interest paid | $ | 294,144 | | | $ | 169,291 | | | $ | 336,991 | |
Income taxes (refunded) paid, net | $ | (109,069) | | | $ | 248,473 | | | $ | 8,637 | |
| | | | | |
Supplemental schedule of non-cash investing and financing activities: | | | | | |
| | | | | |
| | | | | |
Transfers from loans to loans held for sale | $ | 514,565 | | | $ | 1,064,090 | | | $ | 602,198 | |
| | | | | |
Dividends declared, not paid | $ | 19,346 | | | $ | 19,876 | | | $ | 22,309 | |
Unsettled securities trades, net | $ | — | | | $ | 22,858 | | | $ | — | |
| | | | | |
| | | | | |
Obligations incurred in acquisition of affordable housing limited partnerships | $ | 65,000 | | | $ | — | | | $ | — | |
| | | | | |
73
The accompanying notes are an integral part of these consolidated financial statements
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
Balance at December 31, 2019 | 95,128,231 | | | $ | 951 | | | $ | 1,083,920 | | | $ | 1,927,735 | | | $ | (31,827) | | | $ | 2,980,779 | |
Impact of adoption of ASU 2016-13 | — | | | — | | | — | | | (23,817) | | | — | | | (23,817) | |
Balance at January 1, 2020 | 95,128,231 | | | 951 | | | 1,083,920 | | | 1,903,918 | | | (31,827) | | | 2,956,962 | |
Comprehensive income | — | | | — | | | — | | | 197,853 | | | (17,325) | | | 180,528 | |
Dividends ($0.92 per common share) | — | | | — | | | — | | | (88,056) | | | — | | | (88,056) | |
Equity based compensation | 759,983 | | | 8 | | | 19,550 | | | — | | | — | | | 19,558 | |
Forfeiture of unvested shares and shares surrendered for tax withholding obligations | (230,537) | | | (2) | | | (4,617) | | | — | | | — | | | (4,619) | |
Exercise of stock options | 735,400 | | | 7 | | | 19,604 | | | — | | | — | | | 19,611 | |
Repurchase of common stock | (3,325,577) | | | (33) | | | (100,939) | | | — | | | — | | | (100,972) | |
Balance at December 31, 2020 | 93,067,500 | | | 931 | | | 1,017,518 | | | 2,013,715 | | | (49,152) | | | 2,983,012 | |
Comprehensive income | — | | | — | | | — | | | 414,984 | | | 33,212 | | | 448,196 | |
Dividends ($0.92 per common share) | — | | | — | | | — | | | (83,357) | | | — | | | (83,357) | |
Equity based compensation | 571,936 | | | 6 | | | 14,334 | | | — | | | — | | | 14,340 | |
Forfeiture of unvested shares and shares surrendered for tax withholding obligations | (216,095) | | | (2) | | | (5,954) | | | — | | | — | | | (5,956) | |
Exercise of stock options | 1,569 | | | — | | | 25 | | | — | | | — | | | 25 | |
Repurchase of common stock | (7,776,924) | | | (79) | | | (318,420) | | | — | | | — | | | (318,499) | |
Balance at December 31, 2021 | 85,647,986 | | | 856 | | | 707,503 | | | 2,345,342 | | | (15,940) | | | 3,037,761 | |
Comprehensive loss | — | | | — | | | — | | | 284,971 | | | (421,965) | | | (136,994) | |
Dividends ($1.00 per common share) | — | | | — | | | — | | | (78,913) | | | — | | | (78,913) | |
Equity based compensation | 496,361 | | | 6 | | | 20,705 | | | — | | | — | | | 20,711 | |
Forfeiture of unvested shares and shares surrendered for tax withholding obligations | (214,981) | | | (2) | | | (5,294) | | | — | | | — | | | (5,296) | |
| | | | | | | | | | | |
Repurchase of common stock | (10,254,779) | | | (103) | | | (401,185) | | | — | | | — | | | (401,288) | |
Balance at December 31, 2022 | 75,674,587 | | | $ | 757 | | | $ | 321,729 | | | $ | 2,551,400 | | | $ | (437,905) | | | $ | 2,435,981 | |
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The accompanying notes are an integral part of these consolidated financial statements
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
December 31, 2022
Note 1 Basis of Presentation and Summary of Significant Accounting Policies
BankUnited, Inc. is a bank holding company with one wholly-owned subsidiary, BankUnited, collectively, the Company. BankUnited, a national banking association headquartered in Miami Lakes, Florida, provides a full range of commercial lending and both commercial and consumer deposit services through 54 banking centers located in 12 Florida counties, four banking centers in the New York metropolitan area, and one banking center in Dallas, Texas. The Bank also offers certain commercial lending and deposit products through national platforms and regional wholesale banking offices.
The consolidated financial statements have been prepared in accordance with GAAP and prevailing practices in the banking industry.
The Company has a single operating segment and thus a single reportable segment. While management monitors the revenue streams of its various business units, the business units serve a similar base of primarily commercial clients, providing a similar range of products and services, managed through similar processes and platforms. The Company’s chief operating decision maker makes company-wide resource allocation decisions and assessments of performance based on a collective assessment of the Company’s operations.
Accounting Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosures of contingent assets and liabilities. Actual results could differ significantly from these estimates.
The most significant estimate impacting the Company's consolidated financial statements is the ACL.
Principles of Consolidation
The consolidated financial statements include the accounts of BankUnited, Inc. and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. VIEs are consolidated if the Company is the primary beneficiary; i.e., has (i) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The Company has variable interests in affordable housing limited partnerships that are not required to be consolidated because the Company is not the primary beneficiary.
Fair Value Measurements
Certain of the Company's assets and liabilities are reflected in the consolidated financial statements at fair value on either a recurring or non-recurring basis. Investment securities available for sale, marketable equity securities and derivative instruments are measured at fair value on a recurring basis. Assets measured at fair value or fair value less cost to sell on a non-recurring basis may include collateral dependent loans, OREO and other repossessed assets, loans held for sale, goodwill and impaired long-lived assets. These non-recurring fair value measurements typically involve lower-of-cost-or-market accounting or the measurement of impairment of certain assets.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. GAAP establishes a hierarchy that prioritizes inputs used to determine fair value measurements into three levels based on the observability and transparency of the inputs:
•Level 1 inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
•Level 2 inputs are observable inputs other than level 1 inputs, including quoted prices for similar assets and liabilities, quoted prices for identical assets and liabilities in less active markets and other inputs that can be corroborated by observable market data.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
•Level 3 inputs are unobservable inputs supported by limited or no market activity or data and inputs requiring significant management judgment or estimation.
The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs in estimating fair value. Unobservable inputs are utilized in determining fair value measurements only to the extent that observable inputs are unavailable. The need to use unobservable inputs generally results from a lack of market liquidity and diminished observability of actual trades or assumptions that would otherwise be available to value a particular asset or liability.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, both interest bearing and non-interest bearing, including amounts on deposit at the Federal Reserve Bank. Cash equivalents have original maturities of three months or less. For purposes of reporting cash flows, cash receipts and payments pertaining to FHLB advances with original maturities of three months or less are reported net.
Investment Securities
Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Debt securities that the Company may not have the intent to hold to maturity are classified as available-for-sale at the time of acquisition and carried at fair value with unrealized gains and losses, net of tax, excluded from earnings and reported in AOCI, a separate component of stockholders' equity. Securities classified as available-for-sale may be used as part of the Company's asset/liability management strategy and may be sold in response to liquidity needs, regulatory changes, changes in interest rates, prepayment risk or other market factors. The Company does not maintain a trading portfolio. Purchase premiums and discounts on debt securities are amortized as adjustments to yield over the expected lives of the securities, using the interest method which results in a constant effective yield. Premiums are amortized to the call date for callable securities. Realized gains and losses from sales of securities are recorded on the trade date and are determined using the specific identification method. The Company's policy on the ACL related to debt securities is discussed below in the section entitled "ACL".
Marketable equity securities with readily determinable fair values are reported at fair value with unrealized gains and losses included in earnings.
Non-marketable Equity Securities
The Bank, as a member of the FRB system and the FHLB, is required to maintain investments in the stock of the FRB and FHLB. No market exists for this stock, and the investment can be liquidated only through redemption by the respective institutions, at the discretion of and subject to conditions imposed by those institutions. The stock has no readily determinable fair value and is carried at cost. Historically, stock redemptions have been at par value, which equals the Company's carrying value. The Company monitors its investment in FRB and FHLB stock for impairment through review of recent financial results of the FHLB, including capital adequacy and liquidity position, dividend payment history, redemption history and information from credit agencies. The Company has not identified any indicators of impairment of the FRB or FHLB stock.
Loans Held for Sale
Loans originated or purchased with the intent to sell in the secondary market are carried at the lower of cost or fair value, determined in the aggregate. A valuation allowance is established through a charge to earnings if the aggregate fair value of such loans is lower than their cost. Gains or losses recognized upon sale are determined on the specific identification basis.
Loans not originated or otherwise acquired with the intent to sell, or loans which have been originated by the Company and subsequently held for sale, are transferred into the held for sale classification at the lower of carrying amount or fair value when they are specifically identified for sale and a formal plan exists to sell them.
Loans
Loans are reported at amortized cost, net of the ACL. Interest income is accrued based on the principal amount outstanding. Non-refundable loan origination fees, net of direct costs of originating or acquiring loans, as well as purchase premiums and
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
discounts, are deferred and recognized as adjustments to yield over the contractual lives of the related loans using the interest method which results in a constant effective yield.
Non-accrual loans
Commercial loans are placed on non-accrual status when (i) management has determined that full repayment of all contractual principal and interest is in doubt, or (ii) the loan is past due 90 days or more as to principal or interest unless the loan is well secured and in the process of collection. Residential and other consumer loans, other than government insured residential loans, are generally placed on non-accrual status when they are 90 days past due. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged to interest income. Payments received on non-accrual commercial loans are applied as a reduction of principal. Interest payments are recognized as income on a cash basis on non-accrual residential loans. Commercial loans are returned to accrual status only after all past due principal and interest has been collected and full repayment of remaining contractual principal and interest is reasonably assured. Residential and consumer loans are generally returned to accrual status when less than 90 days past due. Past due status of loans is determined based on the contractual next payment due date. Loans less than 30 days past due are reported as current.
Contractually delinquent government insured residential loans are not classified as non-accrual due to the nature of the guarantee. Contractually delinquent PCD loans are not classified as non-accrual, as long as the Company has a reasonable expectation about amounts expected to be collected.
Troubled Debt Restructurings
In certain situations, due to economic or legal reasons related to a borrower's financial difficulties, the Company may grant a concession to the borrower for other than an insignificant period of time that it would not otherwise consider. At that time, the related loan is classified as a TDR. The concessions granted may include rate reductions, principal forgiveness, payment forbearance, extensions of maturity at rates of interest below that commensurate with the risk profile of the loans, modification of payment terms and other actions intended to minimize economic loss. A TDR is generally placed on non-accrual status at the time of the modification unless the borrower was performing prior to the restructuring.
Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act on December 27, 2020, effectively suspended the guidance related to TDRs codified in ASC 310-40 through January 1, 2022. Pursuant to inter-agency and authoritative guidance and consistent with the CARES Act, short-term deferrals or modifications granted during the period this guidance was effective and related to COVID-19 typically were not categorized as TDRs.
PCD assets
PCD assets are acquired financial assets that, as of the date of acquisition, have experienced a more than insignificant deterioration in credit quality since origination. An assessment is conducted at acquisition to determine whether acquired financial assets meet the criteria to be classified as PCD assets. That assessment may be conducted at the individual asset level, or for a group of assets acquired together that have similar risk characteristics. At acquisition, the ACL related to PCD assets, representing the estimated amount of the UPB of the assets not expected to be collected, is added to the purchase price to determine the amortized cost basis and any non-credit related discount or premium is allocated to the individual assets acquired. The non-credit related discount or premium is accreted or amortized to interest income over the life of the related assets using the level yield method, as long as there is a reasonable expectation about amounts expected to be collected. Subsequent changes in the amount of expected credit losses are recognized immediately by adjusting the ACL and reflecting the periodic changes as credit loss expense or reversal of credit loss expense.
Sales-type and Direct Financing Leases
Sales-type and direct financing leases are carried at the aggregate of lease payments receivable and estimated residual value of the leased property, if applicable, less unearned income. Interest income is recognized over the term of the leases to achieve a constant periodic rate of return on the outstanding investment.
ACL
AFS Debt Securities
The Company reviews its AFS debt securities for credit loss impairment at the individual security level on at least a quarterly basis. A security is impaired if its fair value is less than its amortized cost basis. A decline in fair value below
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
amortized cost basis represents a credit loss impairment to the extent the Company does not expect to recover the amortized cost basis of the security. Impairment related to credit losses is recorded through the ACL to the extent fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through the ACL are recorded through other comprehensive income, net of applicable taxes.
In assessing whether an impairment is credit loss related, the Company compares the present value of cash flows expected to be collected to the security's amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists, and an ACL is recorded. The Company discounts expected cash flows at the effective interest rate implicit in the security at the purchase date, adjusted for expected prepayments. For floating rate securities, the Company uses the floating rate as it changes over the life of the security. In developing estimates about cash flows expected to be collected and determining whether a credit loss exists, the Company considers information about past events, current conditions and reasonable and supportable forecasts. Factors and information that the Company uses in making its assessments include, but are not necessarily limited to, the following:
•The extent to which fair value is less than amortized cost;
•Adverse conditions specifically related to the security, an industry or geographic area;
•Changes in the financial condition of the issuer or underlying loan obligors;
•The payment structure and remaining payment terms of the security, including levels of subordination or over-collateralization;
•Failure of the issuer to make scheduled payments;
•Changes in credit ratings;
•Relevant market data;
•Estimated prepayments, defaults, and the value and performance of underlying collateral at the individual security level.
The relative importance assigned to each of these factors varies depending on the facts and circumstances pertinent to the individual security being evaluated.
Timely payment of principal and interest on securities issued by the U.S. Government, U.S. government agencies and U.S. government sponsored entities is explicitly or implicitly guaranteed by the U. S. government. Therefore, the Company expects to recover the amortized cost basis of these securities.
If the Company intends to sell a security in an unrealized loss position, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, any allowance for credit losses will be written off and the amortized cost basis will be written down to the debt security’s fair value at the reporting date with any incremental impairment reported in earnings.
AFS securities will be charged off to the extent that there is no reasonable expectation of recovery of amortized cost basis. AFS securities will be placed on non-accrual status if the Company does not reasonably expect to receive interest payments in the future and interest accrued will be reversed against interest income. Securities will be returned to accrual status only when collection of interest is reasonably assured.
Loans
The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The ACL is adjusted through the provision for credit losses to the amount of amortized cost basis not expected to be collected, or in the case of PCD loans, the amount of UPB not expected to be collected, at the balance sheet date. Amortized cost basis includes UPB, unamortized premiums or discounts and deferred fees and costs, net of amounts previously charged off.
The measurement of expected credit losses encompasses information about historical events, current conditions and reasonable and supportable forecasts. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Re-evaluation of the ACL estimate in future periods, in light of
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
changes in composition and characteristics of the loan portfolio, changes in the reasonable and supportable forecast and other factors then prevailing may result in material changes in the amount of the ACL and credit loss expense in those future periods.
Loans are charged off against the ACL in the period in which they are deemed uncollectible, and recoveries are credited to the ACL when received. Expected recoveries on loans previously charged off and expected to be charged-off, not to exceed the aggregate of amounts previously charged-off and expected to be charged-off, are included in the ACL estimate. For loans secured by residential real estate, an assessment of collateral value is made at no later than 120 days delinquency; any outstanding loan balance in excess of fair value less cost to sell is charged off at no later than 180 days delinquency. Additionally, any outstanding balance in excess of fair value of collateral less cost to sell is charged off (i) within 60 days of receipt of notification of filing from the bankruptcy court, (ii) within 60 days of determination of loss if all borrowers are deceased or (iii) within 90 days of discovery of fraudulent activity. Other consumer loans are typically charged off at 120 days delinquency. Commercial loans are charged off when, in management's judgment, they are considered to be uncollectible.
Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. Factors that may be considered in aggregating loans for this purpose include but are not necessarily limited to, product or collateral type, industry, geography, internal risk rating, credit characteristics such as credit scores or collateral values, and historical or expected credit loss patterns. For loans that do not share similar risk characteristics with other loans such as collateral dependent loans and TDRs, expected credit losses are estimated on an individual basis.
Expected credit losses are estimated over the contractual terms of the loans, adjusted for expected prepayments. Expected prepayments for commercial loans are generally estimated based on the Company's historical experience. For residential loans, expected prepayments are estimated using a model that incorporates industry prepayment data, calibrated to reflect the Company's experience. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
For the substantial majority of portfolio segments and subsegments, including residential loans other than government insured loans, and most commercial and commercial real estate loans, expected losses are estimated using econometric models. The models employ a factor based methodology, leveraging data sets containing extensive historical loss and recovery information by industry, geography, product type, collateral type and obligor characteristics, to estimate PD and LGD. Measures of PD for commercial loans incorporate current conditions through market cycle or credit cycle adjustments. For residential loans, the models consider FICO, adjusted LTVs and delinquency rates. PDs and LGDs are then conditioned on the reasonable and supportable economic forecast. Projected PDs and LGDs, determined based on pool level characteristics, are applied to estimated exposure at default, considering the contractual term and payment structure of loans, adjusted for expected prepayments, to generate estimates of expected loss. For criticized or classified loans, PDs are adjusted to benchmark PDs established for each risk rating given that the most current financial information available is often not reflective of the borrowers' current financial condition. The ACL estimate incorporates a reasonable and supportable economic forecast through the use of externally developed macroeconomic scenarios applied in the models.
A single economic scenario or a probability weighted blend of economic scenarios may be used. The models ingest numerous national, regional and MSA level variables and data points.
Commercial Real Estate Model
Variables with the most significant impact on the commercial real estate model include unemployment at both national and regional levels, the CRE property forecast by property type and sub-market, 10 year treasury yield, Baa corporate yield and real GDP growth, at the national level. Increases in unemployment and yields within the commercial real estate model result in increases in the ACL. Increases in real GDP growth and improvements in the CRE property forecasts reduce the reserve.
Commercial Model
Variables with the most significant impact on the commercial model include a stock market volatility index, the S&P 500 index, unemployment at both national and regional levels, and a variety of interest rates and spreads. Increases in the unemployment rate, the stock market volatility index, and the Baa corporate yield increase the reserve, while increases in real GDP growth reduce the reserve.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Residential Model
Variables with the most significant impact on the residential model include HPI and unemployment at regional levels, real GDP growth, and a 30 year mortgage rate. Increases in the unemployment rate and the 30-year mortgage rate increase the reserve, while increases in real GDP growth and HPI reduce the reserve.
The length of the reasonable and supportable forecast period is evaluated at each reporting period and adjusted if deemed necessary. Currently, the Company uses a 2-year reasonable and supportable forecast period in estimating the ACL. After the reasonable and supportable forecast period, the models effectively revert to long-term mean losses on a straight-line basis over 12 months.
For certain less material portfolios including loans and leases to state and local government entities originated by Pinnacle, small balance commercial loans and consumer loans, the WARM method is used to estimate expected credit losses. Loss rates are applied to the exposure at default, after factoring in amortization and expected prepayments. For the Pinnacle portfolio, historical loss information is based on municipal historical default and recovery data, segmented by credit rating. For small balance commercial loans, historical loss information is based on the Company's historical loss experience over a five year period. For consumer loans, historical loss information is based on peer data; this portfolio subsegment is not significant. All loss estimates are conditioned as applicable on changes in current conditions and the reasonable and supportable economic forecast. Expected credit losses for the funded portion of mortgage warehouse lines of credit are estimated based primarily on the Company's historical loss experience, conditioned as applicable on changes in current conditions and the reasonable and supportable economic forecast. Generally, given the nature of these loans, losses would be expected to manifest within a very short time period after origination.
The Company expects to collect the amortized cost basis of government insured residential loans and PPP loans due to the nature of the government guarantee, so the ACL is zero for these loans.
Qualitative factors
Quantitative models have certain inherent limitations with respect to estimating expected losses. These limitations may be more prevalent in times of rapidly changing economic conditions and forecasts. Qualitative adjustments are made to the ACL when, based on management’s judgment, there are factors impacting expected credit losses not taken into account by the quantitative calculations. Potential qualitative adjustments are categorized as follows:
•Economic factors, including material uncertainties, trends and developments that, in management's judgment, may not have been considered in the reasonable and supportable economic forecast;
•Credit policy and staffing, including the nature and level of policy and procedural exceptions or changes in credit policy not reflected in quantitative results, changes in the quality of underwriting and portfolio management and staff and issues identified by credit review, internal audit or regulators that may not be reflected in quantitative results;
•Concentrations, considering whether the quantitative estimate adequately accounts for concentration risk in the portfolio;
•Model imprecision and model validation findings; and
•Other factors not adequately considered in the quantitative estimate or other qualitative categories identified by management that may materially impact the amount of expected credit losses.
Collateral dependent loans
Collateral dependent loans are those for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not typically share similar risk characteristics with other loans and expected credit losses are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. Estimates of expected credit losses for collateral dependent loans, whether or not foreclosure is probable, are based on the fair value of the collateral, adjusted for selling costs when repayment depends on sale of the collateral. Due to immateriality, expected credit losses for collateral dependent commercial relationships with committed balances less than $1.0 million may be estimated collectively.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Troubled debt restructurings
For TDRs or loans for which there is a reasonable expectation that a TDR will be executed that are not collateral dependent, the credit loss estimate is determined by comparing the net present value of expected cash flows to the amortized cost of the loans. Expected cash flows are discounted at the loan’s original effective interest rate for fixed rate loans and at the rate as it changes over the life of the loan for variable rate loans.
Off-balance sheet credit exposures
Expected credit losses related to off-balance sheet credit exposures are estimated over the contractual period for which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. Expected credit losses are estimated using essentially the same methodologies employed to estimate expected credit losses on the amortized cost basis of loans, taking into consideration the likelihood and amount of additional amounts expected to be funded over the terms of the commitments. The liability for credit losses on off-balance sheet credit exposures is presented within other liabilities on the consolidated balance sheets, distinct from the ACL. Adjustments to the liability are included in the provision for credit losses.
Accrued Interest Receivable
The Company has elected to present accrued interest receivable separate from the amortized cost basis of financial assets carried at amortized cost. The Company excludes accrued interest receivable balances from tabular disclosures about financial assets carried at amortized cost. The Company generally does not estimate an ACL on accrued interest receivable balances since uncollectible accrued interest is timely written off in accordance with the Company's accounting policies for non-accrual loans. Under unusual circumstances, the Company evaluates whether its non-accrual policies continue to consistently provide for timely reversal of accrued interest receivable. If considered necessary, the Company records an allowance for uncollectible accrued interest receivable, determined using essentially the same methodologies used to estimate the ACL on the amortized cost basis of the related loans. The allowance is deducted from accrued interest receivable and presented within other assets on the consolidated balance sheets, distinct from the ACL. Changes in the ACL related to accrued interest receivable are included in the provision for credit losses.
Leases
The Company determines whether a contract is or contains a lease at inception. For leases with terms greater than twelve months under which the Company is lessee, ROU assets and lease liabilities are recorded at the commencement date. Lease liabilities are initially recorded based on the present value of future lease payments over the lease term. ROU assets are initially recorded at the amount of the associated lease liabilities plus prepaid lease payments and initial direct costs, less any lease incentives received. The cost of short term leases is recognized on a straight line basis over the lease term. The lease term includes options to extend if the exercise of those options is reasonably certain and includes termination options if there is reasonable certainty the options will not be exercised. Lease payments are discounted using the Company's FHLB borrowing rate for borrowings of a similar term unless an implicit rate is defined in the contract or is determinable, which is generally not the case. Leases are classified as financing or operating leases at commencement; generally, leases are classified as finance leases when effective control of the underlying asset is transferred. The substantial majority of leases under which the Company is lessee are classified as operating leases. For operating leases, lease cost is recognized in the consolidated statements of income on a straight line basis over the lease terms. For finance leases, interest expense on lease liabilities is recognized on the effective interest method and amortization of ROU assets is recognized on a straight line basis over the lease terms. Variable lease costs are recognized in the period in which the obligation for those costs is incurred. The Company has elected not to separate lease from non-lease components of its lease contracts.
Bank Owned Life Insurance
Bank owned life insurance is carried at cash surrender value. Changes in cash surrender value are recorded in non-interest income.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Operating Lease Equipment
Operating lease equipment is carried at cost less accumulated depreciation and is depreciated to estimated residual value using the straight-line method over the lease term. Estimated residual values are re-evaluated at least annually, based primarily on current residual value appraisals. Rental revenue is recognized on a straight-line basis over the contractual term of the lease.
A review for impairment of equipment under operating lease is performed at least annually or when events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Impairment of assets is determined by comparing the carrying amount to future undiscounted net cash flows expected to be generated. If an asset is impaired, the measure of impairment is the amount by which the carrying amount exceeds the fair value of the asset.
Goodwill
Goodwill represents the excess of consideration transferred in business combinations over the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but is tested for impairment annually or more frequently if events or circumstances indicate that impairment may have occurred. The Company performs its annual goodwill impairment test in the third fiscal quarter. The Company has a single reporting unit.
When assessing goodwill for impairment, the Company may elect to perform a qualitative assessment to determine if a quantitative impairment test is necessary. If a qualitative assessment is not performed, or if the qualitative assessment indicates it is likely that the fair value of a reporting unit is less than its carrying amount, a quantitative test is performed. The quantitative impairment test compares the estimated fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, no impairment is indicated. If the fair value of the reporting unit is less than its carrying amount, impairment of goodwill is measured as the excess of the carrying amount over fair value.
OREO and Repossessed Assets
OREO and repossessed assets consists of real estate assets acquired through, or in lieu of, loan foreclosure and personal property acquired through repossession. Such assets are included in other assets in the accompanying consolidated balance sheets. These assets are held for sale and are initially recorded at estimated fair value less costs to sell, establishing a new cost basis. Subsequent to acquisition, periodic valuations are performed, and the assets are carried at the lower of the carrying amount at the date of acquisition or estimated fair value less cost to sell. Significant property improvements are capitalized to the extent that the resulting carrying value does not exceed fair value less cost to sell. Legal fees, maintenance, taxes, insurance and other direct costs of holding and maintaining these assets are expensed as incurred.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization and are included in other assets in the accompanying consolidated balance sheets. The Company measures assets held for sale at the lower of carrying amount or estimated fair value. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The lives of improvements to existing buildings are based on the lesser of the estimated remaining lives of the buildings or the estimated useful lives of the improvements. Leasehold improvements are amortized over the shorter of the expected terms of the leases at inception, considering options to extend that are reasonably assured, or their useful lives. The estimated useful lives of premises and equipment are as follows:
•buildings and improvements - 10 to 30 years;
•leasehold improvements - 5 to 20 years;
•furniture, fixtures and equipment - 5 to 7 years; and
•computer equipment - 3 to 5 years.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Software and CCA
Software and CCA are carried at cost less accumulated depreciation and amortization and are included in other assets in the accompanying consolidated balance sheets. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets, which for CCA is based on the term of the associated hosting arrangements plus any reasonably certain renewals. Direct costs associated with developing or obtaining and implementing internal use software and hosting arrangements that are service contracts incurred during the application development stage are capitalized. The estimated useful lives of software, software licensing rights and CCA implementation costs range from 3 to 5 years.
Investments in Affordable Housing Limited Partnerships
The Company has acquired investments in limited partnerships that manage or invest in qualified affordable housing projects and provide the Company with low-income housing tax credits and other tax benefits. These investments are included in other assets in the accompanying consolidated balance sheets. The Company accounts for investments in qualified affordable housing projects using the proportional amortization method if certain criteria are met. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the amortization is recognized in the income statement as a component of income tax expense. The investments are evaluated for impairment when events or changes in circumstances indicate that it may be more likely than not that the carrying amount of the investment will not be realized.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for periods in which the differences are expected to reverse. The effect of changes in tax rates on deferred tax assets and liabilities are recognized in income in the period that includes the enactment date. A valuation allowance is established for deferred tax assets when management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. In making such determinations, the Company considers all available positive and negative evidence that may impact the realization of deferred tax assets. These considerations include the amount of taxable income generated in statutory carryback periods, future reversals of existing taxable temporary differences, projected future taxable income and available tax planning strategies.
The Company recognizes tax benefits from uncertain tax positions when it is more likely than not that the related tax positions will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the tax positions. An uncertain tax position is a position taken in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law. The Company measures tax benefits related to uncertain tax positions based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. If the initial assessment fails to result in recognition of a tax benefit, the Company subsequently recognizes a tax benefit if (i) there are changes in tax law or case law that raise the likelihood of prevailing on the technical merits of the position to more-likely-than-not, (ii) the statute of limitations expires, or (iii) there is a completion of an examination resulting in a settlement of that tax year or position with the appropriate agency. The Company recognizes interest and penalties related to uncertain tax positions, as well as interest income or expense related to tax settlements, in the provision for income taxes.
Equity Based Compensation
The Company periodically grants unvested or restricted shares of common stock and other share-based awards to key employees. For equity classified awards, compensation cost is measured based on the estimated fair value of the awards at the grant date and is recognized in earnings on a straight-line basis over the requisite service period for each award. Liability-classified awards are remeasured each reporting period at fair value until the award is settled, and compensation cost is recognized in earnings on a straight-line basis over the requisite service period for each award, adjusted for changes in fair value each reporting period. Compensation cost related to awards that embody performance conditions is recognized when it is probable that the performance conditions will be achieved. The number of awards expected to vest is estimated in determining the amount of compensation cost to be recognized related to share-based payment transactions.
The fair value of unvested shares is generally based on the closing market price of the Company's common stock at the date of grant. Market conditions embedded in awards are reflected in the grant-date fair value of the awards.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Derivative Financial Instruments and Hedging Activities
Interest rate derivative contracts
The Company uses interest rate derivative contracts, such as swaps, caps, floors and collars, in the normal course of business to meet the financial needs of its customers and to manage exposure to changes in interest rates. Interest rate contracts are recorded as assets or liabilities in the consolidated balance sheets at fair value. Interest rate derivatives that are used as a risk management tool to hedge the Company's exposure to changes in interest rates have been designated as cash flow or fair value hedging instruments. The gain or loss resulting from changes in the fair value of interest rate swaps designated and qualifying as cash flow hedging instruments is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period in which the hedged transaction affects earnings. Changes in the fair value of interest rate swaps designated as fair value hedging instruments as well as the offsetting changes in the fair value of the hedged items caused by fluctuations in the designated benchmark interest rates are recognized in earnings.
The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows or fair value of the hedged item, the derivative expires or is sold, terminated, or exercised, management determines that the designation of the derivative as a hedging instrument is no longer appropriate or, for a cash flow hedge, the occurrence of the forecasted transaction is no longer probable. When hedge accounting on a cash flow hedge is discontinued, any subsequent changes in fair value of the derivative are recognized in earnings. The cumulative unrealized gain or loss related to a discontinued cash flow hedge continues to be reported in AOCI and is subsequently reclassified into earnings in the same period in which the hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period, in which case the cumulative unrealized gain or loss reported in AOCI is reclassified into earnings immediately. When hedge accounting on a fair value hedge is discontinued, adjustments to the carrying amount of the hedged item due to changes in fair value are also discontinued.
Cash flows from derivative financial instruments that are accounted for as hedges, including daily settlements of centrally cleared derivatives with the CME, are classified as operating cash flows.
Changes in the fair value of interest rate contracts not designated as, or not qualifying as, hedging instruments are recognized currently in earnings.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. A gain or loss is recognized in earnings upon completion of the sale based on the difference between the sales proceeds and the carrying value of the assets. Control over the transferred assets is deemed to have been surrendered when: (i) the assets have been legally isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Earnings per Common Share
Basic earnings per common share is calculated by dividing income allocated to common stockholders for basic earnings per common share by the weighted average number of common shares outstanding for the period, reduced by average unvested stock awards. Unvested stock awards with non-forfeitable rights to dividends, whether paid or unpaid, and stand-alone dividend participation rights are considered participating securities and are included in the computation of basic earnings per common share using the two class method whereby net income is allocated between common stock and participating securities. In periods of a net loss, no allocation is made to participating securities as they are not contractually required to fund net losses. Diluted earnings per common share is computed by dividing income allocated to common stockholders for basic earnings per common share, adjusted for earnings reallocated from participating securities, by the weighted average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options and unvested stock awards using the treasury stock method. Contingently issuable shares are included in the calculation of earnings per common share beginning on the date the contingency was resolved.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Revenue From Contracts with Customers
Revenue from contracts with customers within the scope of Topic 606 "Revenue from Contracts with Customers", is recognized in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services as the related performance obligations are satisfied. The majority of our revenues, including revenues from loans, leases, investment securities, derivative instruments and letters of credit and from transfers and servicing of financial assets, are excluded from the scope of Topic 606. Deposit service charges and fees is the most significant category of revenue within the scope of the standard. These service charges and fees consist primarily of monthly maintenance fees and other transaction based fees. Revenue is recognized when our performance obligations are complete, generally monthly for account maintenance fees or when a transaction, such as a wire transfer, is completed. Payment is typically received at the time the performance obligation is satisfied. The aggregate amount of revenue that is within the scope of Topic 606 from sources other than deposit service charges and fees is not material.
Reclassifications
Certain amounts presented for prior periods have been reclassified to conform to the current period presented.
New Accounting Pronouncements Adopted in 2022
ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity(Subtopic 815-40) . This ASU simplifies the accounting for convertible debt and convertible preferred stock by reducing the number of accounting models for these instruments, resulting in fewer embedded conversion features being separately recognized from the host contract. Additionally, this ASU revises the criteria for determining whether contracts in an entity's own equity meet the scope exception from derivative accounting, which will change the population of contracts that are recognized as assets or liabilities. The amendments in this ASU also revise certain aspects of the guidance on calculating earnings per share with respect to convertible instruments and instruments that may be settled in the entity's own shares. The Company adopted this ASU on January 1, 2022,with no material impact on the Company's consolidated financial position, results of operations, and cash flows.
ASU No. 2022-01, Fair Value Hedging—Portfolio Layer Method (Topic 815) . This ASU expands the portfolio layer method of hedge accounting prescribed in ASU No. 2017-12 to allow multiple hedged layers of a single closed portfolio and to include portfolios of both prepayable and non-prepayable financial assets. This scope expansion is consistent with the FASB’s efforts to simplify hedge accounting and allows entities to apply the same accounting method to similar hedging strategies. The ASU also specifies eligible hedging instruments in a single-layer hedge, provides additional guidance on accounting and disclosure of hedge basis adjustments and specifies how hedge basis adjustments should be considered in determining credit losses for assets in the designated closed portfolio. This ASU is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2022. The Company adopted this ASU upon its release in March 2022 with no material impact on the Company's consolidated financial position, results of operations, and cash flows.
Accounting Pronouncements Not Yet Adopted
ASU No. 2022-02, Financial Instruments—Credit Losses (Topic 326). This ASU eliminates the accounting guidance for TDRs by creditors in Subtopic310-40, Receivables - Troubled Debt Restructurings by Creditors. The ASU enhances disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty, updates certain requirements related to accounting for credit losses under ASC 326 and requires disclosure of current-period gross write offs of financing receivables by year of origination. The ASU is effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022.
The Company will adopt this ASU prospectively in the first quarter of 2023 except with respect to the recognition and measurement of TDRs, for which the modified retrospective transition method will apply. The impact of adoption of this ASU on the Company's consolidated financial position, results of operations, and cash flows is not expected to be material. Adoption will lead to additional and revised disclosures in the Company's financial statements starting in the first quarter of 2023.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Note 2 Earnings Per Common Share
The computation of basic and diluted earnings per common share is presented below for the periods indicated (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
c | | | | | 2022 | | 2021 | | 2020 |
Basic earnings per common share: | | | | | | | | | |
Numerator: | | | | | | | | | |
Net income | | | | | $ | 284,971 | | | $ | 414,984 | | | $ | 197,853 | |
Distributed and undistributed earnings allocated to participating securities | | | | | (5,075) | | | (5,991) | | | (8,882) | |
Income allocated to common stockholders for basic earnings per common share | | | | | $ | 279,896 | | | $ | 408,993 | | | $ | 188,971 | |
Denominator: | | | | | | | | | |
Weighted average common shares outstanding | | | | | 80,032,356 | | | 91,612,243 | | | 92,869,736 | |
Less average unvested stock awards | | | | | (1,224,568) | | | (1,212,055) | | | (1,163,480) | |
Weighted average shares for basic earnings per common share | | | | | 78,807,788 | | | 90,400,188 | | | 91,706,256 | |
Basic earnings per common share | | | | | $ | 3.55 | | | $ | 4.52 | | | $ | 2.06 | |
Diluted earnings per common share: | | | | | | | | | |
Numerator: | | | | | | | | | |
Income allocated to common stockholders for basic earnings per common share | | | | | $ | 279,896 | | | $ | 408,993 | | | $ | 188,971 | |
Adjustment for earnings reallocated from participating securities | | | | | (626) | | | (585) | | | (123) | |
Income used in calculating diluted earnings per common share | | | | | $ | 279,270 | | | $ | 408,408 | | | $ | 188,848 | |
Denominator: | | | | | | | | | |
Weighted average shares for basic earnings per common share | | | | | 78,807,788 | | | 90,400,188 | | | 91,706,256 | |
Dilutive effect of certain share-based awards | | | | | 94 | | | 134 | | | 24,608 | |
Weighted average shares for diluted earnings per common share | | | | | 78,807,882 | | | 90,400,322 | | | 91,730,864 | |
Diluted earnings per common share | | | | | $ | 3.54 | | | $ | 4.52 | | | $ | 2.06 | |
Potentially dilutive unvested shares totaling 2,034,960, 1,804,973 and 1,638,642 were outstanding at December 31, 2022, 2021 and 2020, respectively, but excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive.
Participating securities for the year ended December 31, 2020, included 3,023,314 dividend equivalent rights that were issued in conjunction with the IPO of the Company's common stock. These dividend equivalent rights expired in February 2021 and, while outstanding, participated in dividends on a one-for-one basis.
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Note 3 Investment Securities
Investment securities include investment securities available for sale, marketable equity securities, and investment securities held to maturity. The investment securities portfolio consisted of the following at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| December 31, 2022 |
| Amortized Cost | | Gross Unrealized | | Carrying Value (1) |
| | Gains | | Losses | |
Investment securities available for sale: | | | | | | | |
U.S. Treasury securities | $ | 148,956 | | | $ | 63 | | | $ | (13,178) | | | $ | 135,841 | |
U.S. Government agency and sponsored enterprise residential MBS | 2,036,693 | | | 1,334 | | | (54,859) | | | 1,983,168 | |
U.S. Government agency and sponsored enterprise commercial MBS | 600,517 | | | — | | | (75,423) | | | 525,094 | |
| | | | | | | |
Private label residential MBS and CMOs | 2,864,589 | | | 54 | | | (333,980) | | | 2,530,663 | |
Private label commercial MBS | 2,645,168 | | | 176 | | | (120,990) | | | 2,524,354 | |
Single family real estate-backed securities | 502,194 | | | — | | | (31,753) | | | 470,441 | |
Collateralized loan obligations | 1,166,838 | | | 151 | | | (30,526) | | | 1,136,463 | |
Non-mortgage asset-backed securities | 102,194 | | | — | | | (6,218) | | | 95,976 | |
State and municipal obligations | 122,181 | | | 695 | | | (6,215) | | | 116,661 | |
SBA securities | 139,320 | | | 381 | | | (3,919) | | | 135,782 | |
| | | | | | | |
| 10,328,650 | | | $ | 2,854 | | | $ | (677,061) | | | 9,654,443 | |
Investment securities held to maturity | 10,000 | | | | | | | 10,000 | |
| $ | 10,338,650 | | | | | | | 9,664,443 | |
Marketable equity securities | | | | | | | 90,884 | |
| | | | | | | $ | 9,755,327 | |
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| December 31, 2021 |
| Amortized Cost | | Gross Unrealized | | Carrying Value (1) |
| | Gains | | Losses | |
Investment securities available for sale: | | | | | | | |
U.S. Treasury securities | $ | 114,385 | | | $ | 173 | | | $ | (2,898) | | | $ | 111,660 | |
U.S. Government agency and sponsored enterprise residential MBS | 2,093,283 | | | 12,934 | | | (8,421) | | | 2,097,796 | |
U.S. Government agency and sponsored enterprise commercial MBS | 861,925 | | | 5,287 | | | (10,313) | | | 856,899 | |
| | | | | | | |
Private label residential MBS and CMOs | 2,160,136 | | | 3,575 | | | (14,291) | | | 2,149,420 | |
Private label commercial MBS | 2,604,690 | | | 7,843 | | | (8,523) | | | 2,604,010 | |
Single family real estate-backed securities | 474,845 | | | 5,031 | | | (2,908) | | | 476,968 | |
Collateralized loan obligations | 1,079,217 | | | 598 | | | (1,529) | | | 1,078,286 | |
Non-mortgage asset-backed securities | 151,091 | | | 1,419 | | | — | | | 152,510 | |
State and municipal obligations | 205,718 | | | 16,559 | | | — | | | 222,277 | |
SBA securities | 184,296 | | | 2,027 | | | (2,728) | | | 183,595 | |
| 9,929,586 | | | $ | 55,446 | | | $ | (51,611) | | | 9,933,421 | |
Investment securities held to maturity | 10,000 | | | | | | | 10,000 | |
| $ | 9,939,586 | | | | | | | 9,943,421 | |
Marketable equity securities | | | | | | | 120,777 | |
| | | | | | | $ | 10,064,198 | |
(1)At fair value except for securities held to maturity.
Investment securities held to maturity at December 31, 2022 and 2021 consisted of one State of Israel bond maturing in 2024. Accrued interest receivable on investments totaled $34 million and $16 million at December 31, 2022 and 2021, respectively, and is included in other assets in the accompanying consolidated balance sheets.
At December 31, 2022, contractual maturities of investment securities available for sale, adjusted for anticipated prepayments when applicable, were as follows (in thousands):
| | | | | | | | | | | |
| Amortized Cost | | Fair Value |
Due in one year or less | $ | 1,511,041 | | | $ | 1,437,407 | |
Due after one year through five years | 5,927,706 | | | 5,634,990 | |
Due after five years through ten years | 1,838,180 | | | 1,655,098 | |
Due after ten years | 1,051,723 | | | 926,948 | |
| $ | 10,328,650 | | | $ | 9,654,443 | |
The carrying value of securities pledged as collateral for FHLB advances, public deposits, interest rate swaps and to secure borrowing capacity at the FRB totaled $4.1 billion and $4.0 billion at December 31, 2022 and 2021, respectively.
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
The following table provides information about gains and losses on investment securities for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
Proceeds from sale of investment securities AFS | | | | | $ | 798,205 | | | $ | 2,286,600 | | | $ | 1,503,498 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Gross realized gains on investment securities AFS | | | | | $ | 4,058 | | | $ | 10,005 | | | $ | 14,441 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Gross realized losses on investment securities AFS | | | | | (131) | | | (995) | | | (440) | |
| | | | | | | | | |
| | | | | | | | | |
Net realized gain | | | | | 3,927 | | | 9,010 | | | 14,001 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net unrealized gains (losses) on marketable equity securities recognized in earnings | | | | | (19,732) | | | (2,564) | | | 3,766 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Gain (loss) on investment securities, net | | | | | $ | (15,805) | | | $ | 6,446 | | | $ | 17,767 | |
The following tables present the aggregate fair value and the aggregate amount by which amortized cost exceeded fair value for investment securities available for sale in unrealized loss positions aggregated by investment category and length of time that individual securities had been in continuous unrealized loss positions at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| |
| Less than 12 Months | | 12 Months or Greater | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities | $ | 29,198 | | | $ | (495) | | | $ | 86,744 | | | $ | (12,683) | | | $ | 115,942 | | | $ | (13,178) | |
U.S. Government agency and sponsored enterprise residential MBS | 1,243,286 | | | (26,789) | | | 672,322 | | | (28,070) | | | 1,915,608 | | | (54,859) | |
U.S. Government agency and sponsored enterprise commercial MBS | 236,102 | | | (5,736) | | | 288,992 | | | (69,687) | | | 525,094 | | | (75,423) | |
| | | | | | | | | | | |
Private label residential MBS and CMOs | 1,103,578 | | | (93,480) | | | 1,413,642 | | | (240,500) | | | 2,517,220 | | | (333,980) | |
Private label commercial MBS | 1,191,969 | | | (39,729) | | | 1,223,223 | | | (81,261) | | | 2,415,192 | | | (120,990) | |
Single family real estate-backed securities | 391,421 | | | (22,293) | | | 79,020 | | | (9,460) | | | 470,441 | | | (31,753) | |
Collateralized loan obligations | 596,803 | | | (14,020) | | | 494,945 | | | (16,506) | | | 1,091,748 | | | (30,526) | |
Non-mortgage asset-backed securities | 95,976 | | | (6,218) | | | — | | | — | | | 95,976 | | | (6,218) | |
State and municipal obligations | 67,444 | | | (6,154) | | | 1,114 | | | (61) | | | 68,558 | | | (6,215) | |
SBA securities | 42,900 | | | (553) | | | 74,291 | | | (3,366) | | | 117,191 | | | (3,919) | |
| | | | | | | | | | | |
| $ | 4,998,677 | | | $ | (215,467) | | | $ | 4,334,293 | | | $ | (461,594) | | | $ | 9,332,970 | | | $ | (677,061) | |
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Less than 12 Months | | 12 Months or Greater | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities | $ | 49,328 | | | $ | (591) | | | $ | 47,102 | | | $ | (2,307) | | | $ | 96,430 | | | $ | (2,898) | |
U.S. Government agency and sponsored enterprise residential MBS | 436,744 | | | (4,549) | | | 401,022 | | | (3,872) | | | 837,766 | | | (8,421) | |
U.S. Government agency and sponsored enterprise commercial MBS | 247,323 | | | (4,084) | | | 163,380 | | | (6,229) | | | 410,703 | | | (10,313) | |
| | | | | | | | | | | |
Private label residential MBS and CMOs | 1,552,946 | | | (13,933) | | | 23,355 | | | (358) | | | 1,576,301 | | | (14,291) | |
Private label commercial MBS | 1,338,288 | | | (6,085) | | | 171,490 | | | (2,438) | | | 1,509,778 | | | (8,523) | |
Single family real estate-backed securities | 154,552 | | | (2,908) | | | — | | | — | | | 154,552 | | | (2,908) | |
Collateralized loan obligations | 318,555 | | | (445) | | | 319,192 | | | (1,084) | | | 637,747 | | | (1,529) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
SBA securities | 496 | | | — | | | 99,599 | | | (2,728) | | | 100,095 | | | (2,728) | |
| | | | | | | | | | | |
| $ | 4,098,232 | | | $ | (32,595) | | | $ | 1,225,140 | | | $ | (19,016) | | | $ | 5,323,372 | | | $ | (51,611) | |
The Company monitors its investment securities available for sale for credit loss impairment on an individual security basis. No securities were determined to be credit loss impaired during the years ended December 31, 2022, and 2021. An ACL was recorded related to one private label commercial MBS security during the year ended December 31, 2020. At December 31, 2022, the Company did not have an intent to sell securities that were in unrealized loss positions and it was not more likely than not that the Company would be required to sell these securities before recovery of the amortized cost basis, which may be at maturity. In making this determination, the Company considered its current and projected liquidity position, its investment policy as to permissible holdings and concentration limits, regulatory requirements and other relevant factors.
At December 31, 2022, 595 securities available for sale were in unrealized loss positions. The amount of impairment related to 100 of these securities was considered insignificant both individually and in the aggregate, totaling approximately $1.0 million and no further analysis with respect to these securities was considered necessary.
The basis for concluding that AFS securities were not credit loss impaired and no ACL was considered necessary at December 31, 2022 is further discussed below.
Unrealized losses were generally attributable to rising interest rates and widening spreads related to the Federal Reserve's quantitative tightening and benchmark interest rate increases. Continuing uncertainty with respect to the trajectory of the economy and geopolitical events have also led to market uncertainty, producing some yield curve dislocations.
U.S. Government, U.S. Government Agency and Government Sponsored Enterprise Securities
At December 31, 2022, five U.S. treasury, 159 U.S. Government agency and sponsored enterprise residential MBS, 27 U.S. Government agency and sponsored enterprise commercial MBS, and 18 SBA securities were in unrealized loss positions. The timely payment of principal and interest on these securities is explicitly or implicitly guaranteed by the U.S. Government. As such, there is an assumption of zero credit loss and the Company expects to recover the amortized cost basis of these securities.
Private Label Securities:
None of the impaired private label securities had missed principal or interest payments or had been downgraded by a NRSRO at December 31, 2022. The Company performed an analysis comparing the present value of cash flows expected to be collected to the amortized cost basis of impaired securities. This analysis was based on a scenario that we believe to be generally more conservative than our reasonable and supportable economic forecast at December 31, 2022, and incorporated assumptions about voluntary prepayment rates, collateral defaults, delinquencies, severity and other relevant factors as described further below. Our analysis also considered the structural characteristics of each security and the level of credit enhancement provided by that structure.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Private label residential MBS and CMOs
At December 31, 2022, 120 private label residential MBS and CMOs were in unrealized loss positions. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, voluntary prepayment rates, loss severity, delinquencies and recovery lag. In developing those assumptions, we took into account collateral quality measures such as FICO, LTV, documentation, loan type, property type, agency availability criteria and performing status. We also regularly monitor sector data including home price appreciation, forbearance, delinquency and prepay trends as well as other economic data that could be indicative of stress in the sector. Our December 31, 2022 analysis projected weighted average collateral losses for impaired securities in this category of 3% compared to weighted average credit support of 18%. As of December 31, 2022, 94% of impaired securities in this category, based on carrying value, were externally rated AAA, 1% were rated AA and 5% were rated A.
Private label commercial MBS
At December 31, 2022, 109 private label commercial MBS were in unrealized loss positions. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, voluntary prepayment rates, loss severity, delinquencies and recovery lag. In developing those assumptions, we took into account collateral quality and type, loan size, loan purpose and other qualitative factors. We also regularly monitor collateral watch lists, bankruptcy data, defeasance data, special servicing trends, delinquency and other economic data that could be indicative of stress in the sector. Our December 31, 2022 analysis projected weighted average collateral losses for impaired securities in this category of 7% compared to weighted average credit support of 43%. As of December 31, 2022, 85% of impaired securities in this category, based on carrying value, were externally rated AAA, 11% were rated AA and 4% were rated A.
Single family real estate-backed securities
At December 31, 2022, 17 single family rental real estate-backed securities were in unrealized loss positions. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, loss severity, delinquencies and recovery lag. We regularly monitor sector data including home price appreciation, forbearance, delinquency and prepay trends as well as other economic data that could be indicative of stress in the sector. Our December 31, 2022 analysis projected weighted average collateral losses for this category of 7% compared to weighted average credit support of 51%. As of December 31, 2022, 67% of impaired securities in this category, based on carrying value, were externally rated AAA, 13% were rated AA and one security was not externally rated.
Collateralized loan obligations
At December 31, 2022, 26 collateralized loan obligations were in unrealized loss positions. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, loss severity, and delinquencies, calibrated to take into account idiosyncratic risks associated with the underlying collateral. In developing those assumptions, we took into account each sector’s performance pre-, during and post the 2008 financial crisis. We regularly engage with bond managers to monitor trends in underlying collateral including potential downgrades and subsequent cash flow diversions, liquidity, ratings migration, and any other relevant developments. Our December 31, 2022 analysis projected weighted average collateral losses for impaired securities in this category of 10% compared to weighted average credit support of 43%. As of December 31, 2022, 79% of the impaired securities in this category, based on carrying value, were externally rated AAA, 17% were rated AA and 4% were rated A.
Non-mortgage asset-backed securities
At December 31, 2022, seven non-mortgage asset-backed securities were in unrealized loss positions. These securities are backed by student loan collateral. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, loss severity, delinquencies, voluntary prepayment rates and recovery lag. In developing assumptions, we took into account collateral type, delineated by whether collateral consisted of loans to borrowers in school, refinancing, or a mixture. Our December 31, 2022 analysis projected weighted average collateral losses for impaired securities in this category of 4% compared to weighted average credit support of 24%. As of December 31, 2022, 49% of the impaired securities in this category, based on carrying value, were externally rated AAA, and 51% were rated AA.
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
State and Municipal Obligations
At December 31, 2022, seven state and municipal obligations were in unrealized loss positions. Our analysis of potential credit loss impairment for these securities incorporates a quantitative measure of the underlying obligor's credit worthiness provided by a third-party vendor as well as other relevant qualitative considerations. As of December 31, 2022, 84% of the impaired securities in this category, based on carrying value, were externally rated AAA and 16% were rated AA.
Note 4 Loans and Allowance for Credit Losses
Loans consisted of the following at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
| Total | | Percent of Total | | Total | | Percent of Total |
Residential and other consumer: | | | | | | | |
1-4 single family residential | $ | 7,122,837 | | | 28.6 | % | | $ | 6,338,225 | | | 26.7 | % |
Government insured residential | 1,771,880 | | | 7.1 | % | | 2,023,221 | | | 8.5 | % |
Other consumer loans | 5,997 | | | — | % | | 6,934 | | | — | % |
| 8,900,714 | | | 35.7 | % | | 8,368,380 | | | 35.2 | % |
Commercial: | | | | | | | |
| | | | | | | |
Non-owner occupied commercial real estate | 5,405,597 | | | 21.7 | % | | 5,536,348 | | | 23.3 | % |
Construction and land | 294,360 | | | 1.2 | % | | 165,390 | | | 0.7 | % |
Owner occupied commercial real estate | 1,890,813 | | | 7.6 | % | | 1,944,658 | | | 8.2 | % |
Commercial and industrial | 6,414,351 | | | 25.9 | % | | 4,790,275 | | | 20.2 | % |
PPP | 3,370 | | | — | % | | 248,505 | | | 1.0 | % |
Pinnacle | 912,122 | | | 3.7 | % | | 919,641 | | | 3.9 | % |
Bridge - franchise finance | 253,774 | | | 1.0 | % | | 342,124 | | | 1.4 | % |
Bridge - equipment finance | 286,147 | | | 1.1 | % | | 357,599 | | | 1.5 | % |
Mortgage warehouse lending | 524,740 | | | 2.1 | % | | 1,092,133 | | | 4.6 | % |
| 15,985,274 | | | 64.3 | % | | 15,396,673 | | | 64.8 | % |
Total loans | 24,885,988 | | | 100.0 | % | | 23,765,053 | | | 100.0 | % |
Allowance for credit losses | (147,946) | | | | | (126,457) | | | |
Loans, net | $ | 24,738,042 | | | | | $ | 23,638,596 | | | |
Premiums, discounts and deferred fees and costs, excluding the non-credit related discount on PCD loans, totaled $61 million and $67 million at December 31, 2022 and 2021, respectively.
The following table presents the amortized cost basis of residential PCD loans and the related amount of non-credit discount, net of the related ACL, at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
UPB | $ | 96,437 | | | $ | 124,963 | |
Non-credit discount | (44,354) | | | (59,759) | |
Total amortized cost of PCD loans | 52,083 | | | 65,204 | |
ACL related to PCD loans | (409) | | | (476) | |
PCD loans, net | $ | 51,674 | | | $ | 64,728 | |
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
During the years ended December 31, 2022, 2021 and 2020, the Company purchased residential loans totaling $2.3 billion, $4.8 billion and $3.2 billion, respectively.
At December 31, 2022 and 2021, the Company had pledged loans with a carrying value of approximately $12.4 billion and $10.6 billion, respectively, as security for FHLB advances and Federal Reserve discount window capacity.
At December 31, 2022 and 2021, accrued interest receivable on loans totaled $129 million and $98 million, respectively, and is included in other assets in the accompanying consolidated balance sheets. The amount of interest income reversed on non-accrual loans was not material for the years ended December 31, 2022, 2021 and 2020.
Allowance for credit losses
The ACL was determined utilizing a 2-year reasonable and supportable forecast period. The quantitative portion of the ACL was determined using a single third-party provided economic scenario. The qualitative component was informed by alternate scenarios. Activity in the ACL is summarized below for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Residential | | Commercial | | Total | | Residential | | Commercial | | Total | | Residential | | Commercial | | Total |
Beginning balance | $ | 9,187 | | | $ | 117,270 | | | $ | 126,457 | | | $ | 18,719 | | | $ | 238,604 | | | $ | 257,323 | | | $ | 11,154 | | | $ | 97,517 | | | $ | 108,671 | |
Impact of adoption of ASU 2016-13 | N/A | | N/A | | N/A | | N/A | | N/A | | N/A | | 8,098 | | | 19,207 | | | 27,305 | |
Balance after adoption of ASU 2016-13 | 9,187 | | | 117,270 | | | 126,457 | | | 18,719 | | | 238,604 | | | 257,323 | | | 19,252 | | | 116,724 | | | 135,976 | |
Provision (recovery) | 2,858 | | | 70,956 | | | 73,814 | | | (9,241) | | | (55,215) | | | (64,456) | | | (556) | | | 182,895 | | | 182,339 | |
Charge-offs | (412) | | | (61,643) | | | (62,055) | | | (304) | | | (70,946) | | | (71,250) | | | (31) | | | (69,571) | | | (69,602) | |
Recoveries | 108 | | | 9,622 | | | 9,730 | | | 13 | | | 4,827 | | | 4,840 | | | 54 | | | 8,556 | | | 8,610 | |
Ending balance | $ | 11,741 | | | $ | 136,205 | | | $ | 147,946 | | | $ | 9,187 | | | $ | 117,270 | | | $ | 126,457 | | | $ | 18,719 | | | $ | 238,604 | | | $ | 257,323 | |
The ACL increased by $21.5 million at December 31, 2022 compared to December 31, 2021, increasing from 0.53% to 0.59% of total loans. The provision for credit losses for the year ended December 31, 2022 was partially offset by net charge-offs. The more significant factors impacting the provision for credit losses for the year ended December 31, 2022 included increases in specific reserves and qualitative loss factors, primarily the qualitative overlay related to economic uncertainty.
The following table presents the components of the provision for (recovery of) credit losses for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2022 | | 2021 | | 2020 |
Amount related to funded portion of loans | | | | | $ | 73,814 | | | $ | (64,456) | | | $ | 182,339 | |
Amount related to off-balance sheet credit exposures | | | | | 1,467 | | | (1,235) | | | (5,572) | |
Amount related to accrued interest receivable | | | | | (127) | | | (1,064) | | | 1,300 | |
Amount related to AFS debt securities | | | | | — | | | (364) | | | 364 | |
Total provision for (recovery of) credit losses | | | | | $ | 75,154 | | | $ | (67,119) | | | $ | 178,431 | |
Credit quality information
Credit quality of loans held for investment is continuously monitored by dedicated residential credit risk management and commercial portfolio management functions. The Company also has a workout and recovery department that monitors the credit quality of criticized and classified loans and an independent internal credit review function.
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Credit quality indicators for residential loans
Management considers delinquency status to be the most meaningful indicator of the credit quality of residential loans, other than government insured residential loans. Delinquency statistics are updated at least monthly. LTV and FICO scores are also important indicators of credit quality for 1-4 single family residential loans other than government insured loans. FICO scores are generally updated semi-annually, and were most recently updated in the third quarter of 2022. LTVs are typically at origination since we do not routinely update residential appraisals. Substantially all of the government insured residential loans are government insured buyout loans, which the Company buys out of GNMA securitizations upon default. For these loans, traditional measures of credit quality are not particularly relevant considering the guaranteed nature of the loans and the underlying business model. Factors that impact risk inherent in the residential portfolio segment include national and regional economic conditions such as levels of unemployment, wages and interest rates, as well as residential property values.
1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on delinquency status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized Cost By Origination Year | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
Current | $ | 1,185,611 | | | $ | 3,149,299 | | | $ | 916,923 | | | $ | 316,023 | | | $ | 177,891 | | | $ | 1,315,063 | | | $ | 7,060,810 | |
30 - 59 Days Past Due | 12,752 | | | 16,432 | | | 3,266 | | | 2,953 | | | 1,854 | | | 5,739 | | | 42,996 | |
60 - 89 Days Past Due | 252 | | | 1,196 | | | 229 | | | 1,347 | | | — | | | 1,052 | | | 4,076 | |
90 Days or More Past Due | 2,589 | | | 2,158 | | | 2,173 | | | 360 | | | 3,069 | | | 4,606 | | | 14,955 | |
| $ | 1,201,204 | | | $ | 3,169,085 | | | $ | 922,591 | | | $ | 320,683 | | | $ | 182,814 | | | $ | 1,326,460 | | | $ | 7,122,837 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost By Origination Year | | |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
Current | $ | 2,884,761 | | | $ | 1,062,348 | | | $ | 395,453 | | | $ | 224,175 | | | $ | 342,414 | | | $ | 1,352,844 | | | $ | 6,261,995 | |
30 - 59 Days Past Due | 32,307 | | | 2,705 | | | 5,482 | | | 1,942 | | | 5,831 | | | 4,825 | | | 53,092 | |
60 - 89 Days Past Due | 605 | | | — | | | 1,750 | | | 1,988 | | | — | | | 1,307 | | | 5,650 | |
90 Days or More Past Due | 1,407 | | | — | | | 609 | | | 5,100 | | | 1,064 | | | 9,308 | | | 17,488 | |
| $ | 2,919,080 | | | $ | 1,065,053 | | | $ | 403,294 | | | $ | 233,205 | | | $ | 349,309 | | | $ | 1,368,284 | | | $ | 6,338,225 | |
1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on LTV:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized Cost By Origination Year | | |
LTV | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
Less than 61% | $ | 282,940 | | | $ | 1,301,279 | | | $ | 354,720 | | | $ | 76,404 | | | $ | 42,864 | | | $ | 466,094 | | | $ | 2,524,301 | |
61% - 70% | 295,206 | | | 857,008 | | | 231,732 | | | 80,383 | | | 49,047 | | | 310,648 | | | 1,824,024 | |
71% - 80% | 620,049 | | | 975,542 | | | 336,066 | | | 158,406 | | | 86,463 | | | 510,633 | | | 2,687,159 | |
More than 80% | 3,009 | | | 35,256 | | | 73 | | | 5,490 | | | 4,440 | | | 39,085 | | | 87,353 | |
| $ | 1,201,204 | | | $ | 3,169,085 | | | $ | 922,591 | | | $ | 320,683 | | | $ | 182,814 | | | $ | 1,326,460 | | | $ | 7,122,837 | |
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost By Origination Year | | |
LTV | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
Less than 61% | $ | 1,222,510 | | | $ | 399,512 | | | $ | 89,078 | | | $ | 54,301 | | | $ | 111,540 | | | $ | 476,170 | | | $ | 2,353,111 | |
61% - 70% | 791,935 | | | 269,739 | | | 92,282 | | | 59,425 | | | 66,641 | | | 343,654 | | | 1,623,676 | |
71% - 80% | 899,400 | | | 395,726 | | | 212,649 | | | 111,276 | | | 145,413 | | | 518,817 | | | 2,283,281 | |
More than 80% | 5,235 | | | 76 | | | 9,285 | | | 8,203 | | | 25,715 | | | 29,643 | | | 78,157 | |
| $ | 2,919,080 | | | $ | 1,065,053 | | | $ | 403,294 | | | $ | 233,205 | | | $ | 349,309 | | | $ | 1,368,284 | | | $ | 6,338,225 | |
1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on FICO score:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized Cost By Origination Year | | |
FICO | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
760 or greater | $ | 805,125 | | | $ | 2,513,045 | | | $ | 721,982 | | | $ | 212,574 | | | $ | 97,076 | | | $ | 944,783 | | | $ | 5,294,585 | |
720 - 759 | 285,507 | | | 485,528 | | | 132,928 | | | 62,301 | | | 45,857 | | | 216,047 | | | 1,228,168 | |
719 or less | 110,572 | | | 170,512 | | | 67,681 | | | 45,808 | | | 39,881 | | | 165,630 | | | 600,084 | |
| $ | 1,201,204 | | | $ | 3,169,085 | | | $ | 922,591 | | | $ | 320,683 | | | $ | 182,814 | | | $ | 1,326,460 | | | $ | 7,122,837 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost By Origination Year | | |
FICO | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
760 or greater | $ | 2,230,259 | | | $ | 803,026 | | | $ | 245,942 | | | $ | 125,713 | | | $ | 254,750 | | | $ | 937,285 | | | $ | 4,596,975 | |
720 - 759 | 562,763 | | | 194,068 | | | 91,276 | | | 53,576 | | | 54,080 | | | 219,561 | | | 1,175,324 | |
719 or less | 126,058 | | | 67,959 | | | 66,076 | | | 53,916 | | | 40,479 | | | 211,438 | | | 565,926 | |
| $ | 2,919,080 | | | $ | 1,065,053 | | | $ | 403,294 | | | $ | 233,205 | | | $ | 349,309 | | | $ | 1,368,284 | | | $ | 6,338,225 | |
Credit quality indicators for commercial loans
Factors that impact risk inherent in commercial portfolio segments include but are not limited to levels of economic activity, health of the national and regional economy, interest rates, industry trends, patterns of and trends in customer behavior that influence demand for our borrowers' products and services, and commercial real estate values. Internal risk ratings are considered the most meaningful indicator of credit quality for commercial loans. Internal risk ratings are generally indicative of the likelihood that a borrower will default, are a key factor influencing the level and nature of ongoing monitoring of loans and may impact the estimation of the ACL. Internal risk ratings are updated on a continuous basis. Generally, relationships with balances in excess of defined thresholds, ranging from $1 million to $3 million, are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. Loans exhibiting potential credit weaknesses that deserve management’s close attention and that could result in deterioration of repayment prospects at some future date if not checked or corrected are categorized as special mention. Loans with well-defined credit weaknesses, including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow from current operations, project cost overruns, unreasonable construction delays, past due real estate taxes or exhausted interest reserves are assigned an internal risk rating of substandard. A loan with a weakness so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors has not been charged off, will be assigned an internal risk rating of doubtful.
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Commercial credit exposure based on internal risk rating:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Amortized Cost By Origination Year | | Revolving Loans | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | | Total |
CRE | | | | | | | | | | | | | | | |
Pass | $ | 1,256,300 | | | $ | 758,025 | | | $ | 550,133 | | | $ | 1,138,113 | | | $ | 512,125 | | | $ | 932,030 | | | $ | 196,963 | | | $ | 5,343,689 | |
Special mention | — | | | — | | | — | | | 18,006 | | | — | | | 709 | | | — | | | 18,715 | |
Substandard | 12,332 | | | 1,355 | | | 20,103 | | | 98,438 | | | 56,974 | | | 148,351 | | | — | | | 337,553 | |
| | | | | | | | | | | | | | | |
Total CRE | $ | 1,268,632 | | | $ | 759,380 | | | $ | 570,236 | | | $ | 1,254,557 | | | $ | 569,099 | | | $ | 1,081,090 | | | $ | 196,963 | | | $ | 5,699,957 | |
C&I (1) | | | | | | | | | | | | | | | |
Pass | $ | 1,880,853 | | | $ | 825,410 | | | $ | 445,988 | | | $ | 689,003 | | | $ | 416,287 | | | $ | 832,952 | | | $ | 2,900,336 | | | $ | 7,990,829 | |
Special mention | 63 | | | — | | | 208 | | | 3,880 | | | — | | | 20,657 | | | 310 | | | 25,118 | |
Substandard | 25,898 | | | 13,916 | | | 3,319 | | | 103,625 | | | 19,715 | | | 104,190 | | | 21,277 | | | 291,940 | |
Doubtful | — | | | — | | | — | | | — | | | 647 | | | — | | | — | | | 647 | |
Total C&I | $ | 1,906,814 | | | $ | 839,326 | | | $ | 449,515 | | | $ | 796,508 | | | $ | 436,649 | | | $ | 957,799 | | | $ | 2,921,923 | | | $ | 8,308,534 | |
Pinnacle | | | | | | | | | | | | | | | |
Pass | $ | 179,223 | | | $ | 110,510 | | | $ | 66,592 | | | $ | 66,514 | | | $ | 29,783 | | | $ | 459,500 | | | $ | — | | | $ | 912,122 | |
| | | | | | | | | | | | | | | |
Total Pinnacle | $ | 179,223 | | | $ | 110,510 | | | $ | 66,592 | | | $ | 66,514 | | | $ | 29,783 | | | $ | 459,500 | | | $ | — | | | $ | 912,122 | |
Bridge - Equipment Finance | | | | | | | | | | | | | | | |
Pass | $ | 27,386 | | | $ | 55,015 | | | $ | 16,488 | | | $ | 90,286 | | | $ | 33,264 | | | $ | 62,353 | | | $ | — | | | $ | 284,792 | |
Substandard | — | | | — | | | — | | | 1,355 | | | — | | | — | | | — | | | 1,355 | |
| | | | | | | | | | | | | | | |
Total Bridge - Equipment Finance | $ | 27,386 | | | $ | 55,015 | | | $ | 16,488 | | | $ | 91,641 | | | $ | 33,264 | | | $ | 62,353 | | | $ | — | | | $ | 286,147 | |
Bridge - Franchise Finance | | | | | | | | | | | | | | | |
Pass | $ | 81,146 | | | $ | 19,251 | | | $ | 38,293 | | | $ | 34,483 | | | $ | 8,617 | | | $ | 6,799 | | | $ | — | | | $ | 188,589 | |
Special mention | — | | | — | | | — | | | 5,432 | | | 2,168 | | | — | | | — | | | 7,600 | |
Substandard | — | | | 1,617 | | | 1,295 | | | 22,058 | | | 17,148 | | | 8,124 | | | — | | | 50,242 | |
Doubtful | — | | | — | | | 1,013 | | | 2,447 | | | 3,883 | | | — | | | — | | | 7,343 | |
Total Bridge - Franchise Finance | $ | 81,146 | | | $ | 20,868 | | | $ | 40,601 | | | $ | 64,420 | | | $ | 31,816 | | | $ | 14,923 | | | $ | — | | | $ | 253,774 | |
Mortgage Warehouse Lending | | | | | | | | | | | | | | | |
Pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 524,740 | | | $ | 524,740 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total Mortgage Warehouse Lending | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 524,740 | | | $ | 524,740 | |
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Amortized Cost By Origination Year | | Revolving Loans | | |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | | Total |
CRE | | | | | | | | | | | | | | | |
Pass | $ | 869,852 | | | $ | 619,056 | | | $ | 1,283,401 | | | $ | 676,151 | | | $ | 455,965 | | | $ | 986,427 | | | $ | 119,308 | | | $ | 5,010,160 | |
Special mention | 985 | | | — | | | 29,573 | | | — | | | — | | | 1,704 | | | — | | | 32,262 | |
Substandard | — | | | 14,227 | | | 187,284 | | | 55,944 | | | 115,944 | | | 285,917 | | | — | | | 659,316 | |
| | | | | | | | | | | | | | | |
Total CRE | $ | 870,837 | | | $ | 633,283 | | | $ | 1,500,258 | | | $ | 732,095 | | | $ | 571,909 | | | $ | 1,274,048 | | | $ | 119,308 | | | $ | 5,701,738 | |
C&I (1) | | | | | | | | | | | | | | | |
Pass | $ | 1,280,160 | | | $ | 666,437 | | | $ | 870,797 | | | $ | 406,145 | | | $ | 353,590 | | | $ | 669,308 | | | $ | 2,120,693 | | | $ | 6,367,130 | |
Special mention | 6,051 | | | 19,861 | | | 39,647 | | | 17,185 | | | 1,854 | | | 11,640 | | | 20,093 | | | 116,331 | |
Substandard | 365 | | | 22,106 | | | 167,496 | | | 59,349 | | | 51,117 | | | 122,663 | | | 49,119 | | | 472,215 | |
Doubtful | — | | | — | | | 900 | | | — | | | — | | | — | | | 26,862 | | | 27,762 | |
Total C&I | $ | 1,286,576 | | | $ | 708,404 | | | $ | 1,078,840 | | | $ | 482,679 | | | $ | 406,561 | | | $ | 803,611 | | | $ | 2,216,767 | | | $ | 6,983,438 | |
Pinnacle | | | | | | | | | | | | | | | |
Pass | $ | 143,063 | | | $ | 113,785 | | | $ | 88,206 | | | $ | 36,761 | | | $ | 177,258 | | | $ | 360,568 | | | $ | — | | | $ | 919,641 | |
| | | | | | | | | | | | | | | |
Total Pinnacle | $ | 143,063 | | | $ | 113,785 | | | $ | 88,206 | | | $ | 36,761 | | | $ | 177,258 | | | $ | 360,568 | | | $ | — | | | $ | 919,641 | |
Bridge - Equipment Finance | | | | | | | | | | | | | | | |
Pass | $ | 73,190 | | | $ | 18,763 | | | $ | 108,990 | | | $ | 43,826 | | | $ | 23,684 | | | $ | 48,471 | | | $ | — | | | $ | 316,924 | |
| | | | | | | | | | | | | | | |
Substandard | — | | | — | | | 12,875 | | | 4,775 | | | 23,025 | | | — | | | — | | | 40,675 | |
| | | | | | | | | | | | | | | |
Total Bridge - Equipment Finance | $ | 73,190 | | | $ | 18,763 | | | $ | 121,865 | | | $ | 48,601 | | | $ | 46,709 | | | $ | 48,471 | | | $ | — | | | $ | 357,599 | |
Bridge - Franchise Finance | | | | | | | | | | | | | | | |
Pass | $ | 49,949 | | | $ | 51,057 | | | $ | 104,299 | | | $ | 10,199 | | | $ | 7,039 | | | $ | 5,838 | | | $ | — | | | $ | 228,381 | |
| | | | | | | | | | | | | | | |
Substandard | — | | | 7,351 | | | 39,588 | | | 30,134 | | | 8,660 | | | 8,018 | | | — | | | 93,751 | |
Doubtful | — | | | — | | | 7,718 | | | 12,274 | | | — | | | — | | | — | | | 19,992 | |
Total Bridge - Franchise Finance | $ | 49,949 | | | $ | 58,408 | | | $ | 151,605 | | | $ | 52,607 | | | $ | 15,699 | | | $ | 13,856 | | | $ | — | | | $ | 342,124 | |
Mortgage Warehouse Lending | | | | | | | | | | | | | | | |
Pass | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,092,133 | | | $ | 1,092,133 | |
Total Mortgage Warehouse Lending | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,092,133 | | | $ | 1,092,133 | |
(1)Includes PPP loans
At December 31, 2022 and 2021, the balance of revolving loans converted to term loans was immaterial.
The following tables summarize the Company's commercial credit exposure based on internal risk rating, in aggregate, at the dates indicated (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| | | |
| | | CRE | | | | C&I (1) | | | | | | Pinnacle | | Bridge - Franchise Finance | | Bridge - Equipment Finance | | Mortgage Warehouse Lending | | Total |
Pass | | | $ | 5,343,689 | | | | | $ | 7,990,829 | | | | | | | $ | 912,122 | | | $ | 188,589 | | | $ | 284,792 | | | $ | 524,740 | | | $ | 15,244,761 | |
Special mention | | | 18,715 | | | | | 25,118 | | | | | | | — | | | 7,600 | | | — | | | — | | | 51,433 | |
Substandard-accruing | | | 315,201 | | | | | 245,114 | | | | | | | — | | | 44,295 | | | 1,355 | | | — | | | 605,965 | |
Substandard non-accruing | | | 22,352 | | | | | 46,826 | | | | | | | — | | | 5,947 | | | — | | | — | | | 75,125 | |
Doubtful | | | — | | | | | 647 | | | | | | | — | | | 7,343 | | | — | | | — | | | 7,990 | |
| | | $ | 5,699,957 | | | | | $ | 8,308,534 | | | | | | | $ | 912,122 | | | $ | 253,774 | | | $ | 286,147 | | | $ | 524,740 | | | $ | 15,985,274 | |
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 |
| | | |
| | | CRE | | | | C&I (1) | | | | | | Pinnacle | | Bridge - Franchise Finance | | Bridge - Equipment Finance | | Mortgage Warehouse Lending | | Total |
Pass | | | $ | 5,010,160 | | | | | $ | 6,367,130 | | | | | | | $ | 919,641 | | | $ | 228,381 | | | $ | 316,924 | | | $ | 1,092,133 | | | $ | 13,934,369 | |
Special mention | | | 32,262 | | | | | 116,331 | | | | | | | — | | | — | | | — | | | — | | | 148,593 | |
Substandard-accruing | | | 604,036 | | | | | 410,803 | | | | | | | — | | | 80,864 | | | 40,675 | | | — | | | 1,136,378 | |
Substandard non-accruing | | | 55,280 | | | | | 61,412 | | | | | | | — | | | 12,887 | | | — | | | — | | | 129,579 | |
Doubtful | | | — | | | | | 27,762 | | | | | | | — | | | 19,992 | | | — | | | — | | | 47,754 | |
| | | $ | 5,701,738 | | | | | $ | 6,983,438 | | | | | | | $ | 919,641 | | | $ | 342,124 | | | $ | 357,599 | | | $ | 1,092,133 | | | $ | 15,396,673 | |
(1)Includes PPP loans
The COVID-19 pandemic led to an increase in the level of criticized and classified commercial loans compared to pre-pandemic levels; while criticized and classified assets are evidencing a declining trend, those levels remain elevated.
Past Due and Non-Accrual Loans:
The following table presents an aging of loans at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
| Current | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | 90 Days or More Past Due | | Total | | Current | | 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | 90 Days or More Past Due | | Total |
1-4 single family residential | $ | 7,060,810 | | | $ | 42,996 | | | $ | 4,076 | | | $ | 14,955 | | | $ | 7,122,837 | | | $ | 6,261,995 | | | $ | 53,092 | | | $ | 5,650 | | | $ | 17,488 | | | $ | 6,338,225 | |
Government insured residential | 1,025,523 | | | 159,461 | | | 94,294 | | | 492,602 | | | 1,771,880 | | | 1,034,686 | | | 143,672 | | | 115,028 | | | 729,835 | | | 2,023,221 | |
| | | | | | | | | | | | | | | | | | | |
Other consumer loans | 5,948 | | | 20 | | | — | | | 29 | | | 5,997 | | | 6,919 | | | 15 | | | — | | | — | | | 6,934 | |
| | | | | | | | | | | | | | | | | | | |
Non-owner occupied commercial real estate | 5,391,746 | | | 332 | | | 4,773 | | | 8,746 | | | 5,405,597 | | | 5,495,034 | | | 8,744 | | | 11,249 | | | 21,321 | | | 5,536,348 | |
Construction and land | 289,083 | | | 3,996 | | | — | | | 1,281 | | | 294,360 | | | 160,183 | | | 492 | | | 4,369 | | | 346 | | | 165,390 | |
Owner occupied commercial real estate | 1,881,115 | | | 927 | | | — | | | 8,771 | | | 1,890,813 | | | 1,930,932 | | | — | | | 1,402 | | | 12,324 | | | 1,944,658 | |
Commercial and industrial | 6,396,429 | | | 1,581 | | | 1,028 | | | 15,313 | | | 6,414,351 | | | 4,763,976 | | | 2,114 | | | 11,016 | | | 13,169 | | | 4,790,275 | |
PPP | 2,777 | | | — | | | — | | | 593 | | | 3,370 | | | 247,740 | | | 765 | | | — | | | — | | | 248,505 | |
Pinnacle | 912,122 | | | — | | | — | | | — | | | 912,122 | | | 919,641 | | | — | | | — | | | — | | | 919,641 | |
Bridge - franchise finance | 243,574 | | | 1,321 | | | — | | | 8,879 | | | 253,774 | | | 331,397 | | | — | | | 6,735 | | | 3,992 | | | 342,124 | |
Bridge - equipment finance | 286,147 | | | — | | | — | | | — | | | 286,147 | | | 357,599 | | | — | | | — | | | — | | | 357,599 | |
Mortgage warehouse lending | 524,740 | | | — | | | — | | | — | | | 524,740 | | | 1,092,133 | | | — | | | — | | | — | | | 1,092,133 | |
| $ | 24,020,014 | | | $ | 210,634 | | | $ | 104,171 | | | $ | 551,169 | | | $ | 24,885,988 | | | $ | 22,602,235 | | | $ | 208,894 | | | $ | 155,449 | | | $ | 798,475 | | | $ | 23,765,053 | |
Included in the table above is the guaranteed portion of SBA loans past due by 90 days or more totaling $30.8 million and $31.3 million at December 31, 2022 and 2021, respectively.
Loans contractually delinquent by 90 days or more and still accruing totaled $494 million and $730 million at December 31, 2022 and 2021, respectively, substantially all of which were government insured residential loans. These loans are government insured pool buyout loans, which the Company buys out of GNMA securitizations upon default.
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
The following table presents information about loans on non-accrual status at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
| Amortized Cost | | Amortized Cost With No Related Allowance | | Amortized Cost | | Amortized Cost With No Related Allowance |
Residential and other consumer | $ | 21,311 | | | $ | — | | | $ | 28,553 | | | $ | 1,684 | |
Commercial: | | | | | | | |
| | | | | | | |
Non-owner occupied commercial real estate | 16,657 | | | 2,915 | | | 50,116 | | | 31,794 | |
Construction and land | 5,695 | | | 3,996 | | | 5,164 | | | 4,369 | |
Owner occupied commercial real estate | 17,751 | | | 9,021 | | | 20,453 | | | 4,457 | |
Commercial and industrial | 29,722 | | | 6,621 | | | 68,720 | | | 10,083 | |
| | | | | | | |
Bridge - franchise finance | 13,290 | | | 1,668 | | | 32,879 | | | 16,808 | |
| | | | | | | |
| $ | 104,426 | | | $ | 24,221 | | | $ | 205,885 | | | $ | 69,195 | |
Included in the table above is the guaranteed portion of non-accrual SBA loans totaling $40.3 million and $46.1 million at December 31, 2022 and 2021, respectively. The amount of interest income recognized on non-accrual loans was insignificant for the years ended December 31, 2022, 2021 and 2020. The amount of additional interest income that would have been recognized on non-accrual loans had they performed in accordance with their contractual terms was approximately $5.9 million,$8.0 million and $10.9 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Collateral dependent loans:
The following table presents the amortized cost basis of collateral dependent loans at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Amortized Cost | | Extent to Which Secured by Collateral | | Amortized Cost | | Extent to Which Secured by Collateral |
Residential and other consumer | $ | 730 | | | $ | 730 | | | $ | 2,317 | | | $ | 2,295 | |
Commercial: | | | | | | | |
| | | | | | | |
Non-owner occupied commercial real estate | 15,144 | | | 14,011 | | | 39,866 | | | 39,351 | |
Construction and land | 4,342 | | | 4,342 | | | 4,715 | | | 4,715 | |
Owner occupied commercial real estate | 14,906 | | | 14,906 | | | 15,198 | | | 15,155 | |
Commercial and industrial | 11,498 | | | 10,438 | | | 45,015 | | | 37,020 | |
| | | | | | | |
Bridge - franchise finance | 11,445 | | | 3,729 | | | 26,055 | | | 18,740 | |
| | | | | | | |
Total commercial | 57,335 | | | 47,426 | | | 130,849 | | | 114,981 | |
| $ | 58,065 | | | $ | 48,156 | | | $ | 133,166 | | | $ | 117,276 | |
Collateral for the non-owner occupied commercial real estate and owner-occupied commercial real estate loan classes generally consists of commercial real estate. Collateral for construction and land loans is typically residential or commercial real estate. Collateral for commercial and industrial loans generally consists of equipment, accounts receivable, inventory and other business assets; owner-occupied commercial real estate loans may also be collateralized by these types of assets. Bridge franchise finance loans may be collateralized by franchise value or by equipment. Residential loans are collateralized by residential real estate. There were no significant changes to the extent to which collateral secures collateral dependent loans during the years ended December 31, 2022 and 2021.
Foreclosure of residential real estate
The recorded investment in residential loans in the process of foreclosure was $413 million, of which $400 million was government insured, at December 31, 2022 and $208 million, of which $202 million was government insured, at December 31, 2021. The carrying amount of foreclosed residential real estate included in other assets in the accompanying consolidated balance sheet was insignificant at December 31, 2022 and 2021.
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Troubled debt restructurings
The following tables summarize loans that were modified in TDRs during the periods indicated, as well as loans modified during the twelve months preceding December 31, 2022, 2021 and 2020 that experienced payment defaults during those periods (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Year Ended December 31, 2022 | | | | | | | | |
| Loans Modified in TDRs During the Period | | TDRs Experiencing Payment Defaults During the Period | | | | | | | | |
| Number of TDRs | | Amortized Cost | | Number of TDRs | | Amortized Cost | | | | | | | | |
1-4 single family residential | 10 | | | $ | 5,359 | | | — | | | $ | — | | | | | | | | | |
Government insured residential | 2,589 | | | 405,096 | | | 1,190 | | | 187,708 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Owner occupied commercial real estate | 2 | | | 2,122 | | | 1 | | | 1,705 | | | | | | | | | |
Commercial and industrial | 19 | | | 36,930 | | | 3 | | | 1,998 | | | | | | | | | |
| | | | | | | | | | | | | | | |
Bridge - franchise finance | 4 | | | 6,329 | | | 4 | | | 6,329 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 2,624 | | | $ | 455,836 | | | 1,198 | | | $ | 197,740 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| Year Ended December 31, 2021 |
| Loans Modified in TDRs During the Period | | TDRs Experiencing Payment Defaults During the Period |
| Number of TDRs | | Amortized Cost | | Number of TDRs | | Amortized Cost |
| | | | | | | |
Government insured residential | 239 | | | $ | 45,143 | | | 84 | | | $ | 14,317 | |
| | | | | | | |
| | | | | | | |
Non-owner occupied commercial real estate | 1 | | | 2,767 | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| 240 | | | $ | 47,910 | | | 84 | | | $ | 14,317 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Loans Modified in TDRs During the Period | | TDRs Experiencing Payment Defaults During the Period |
| Number of TDRs | | Amortized Cost | | Number of TDRs | | Amortized Cost |
1-4 single family residential | 1 | | | $ | 201 | | | — | | | $ | — | |
Government insured residential | 201 | | | 34,100 | | | 86 | | | 14,368 | |
| | | | | | | |
| | | | | | | |
Non-owner occupied commercial real estate | 1 | | | 4,122 | | | 1 | | | 4,122 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Bridge - franchise finance | 8 | | | 12,964 | | | 8 | | | 12,964 | |
| | | | | | | |
| 211 | | | $ | 51,387 | | | 95 | | | $ | 31,454 | |
TDRs during the years ended December 31, 2022, 2021 and 2020 generally included interest rate reductions and extensions of maturity. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy. The total amount of such loans is not material.
For the years ended December 31, 2021 and 2020, certain loan modifications that otherwise may have been reported as TDRs and that were within the scope of the CARES Act and interagency regulatory guidance issued in response to the COVID-19 pandemic were not reported as TDRs.
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Geographic Concentrations
The following table presents the five states with the largest geographic concentrations of 1-4 single family residential loans, excluding government insured residential loans, at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
| Total | | Percent of Total | | Total | | Percent of Total |
California | $ | 2,273,548 | | | 31.9 | % | | $ | 2,056,100 | | | 32.4 | % |
New York | 1,416,909 | | | 19.9 | % | | 1,293,825 | | | 20.4 | % |
Florida | 518,297 | | | 7.3 | % | | 494,043 | | | 7.8 | % |
Illinois | 360,389 | | | 5.1 | % | | 306,388 | | | 4.8 | % |
Virginia | 314,408 | | | 4.4 | % | | 280,898 | | | 4.4 | % |
Others | 2,239,286 | | | 31.4 | % | | 1,906,971 | | | 30.2 | % |
| $ | 7,122,837 | | | 100.0 | % | | $ | 6,338,225 | | | 100.0 | % |
The following table presents the largest geographic concentrations of commercial real estate loans and commercial and industrial loans, including owner occupied commercial real estate, at the dates indicated. Commercial real estate loans are categorized based on the location of the underlying collateral, while commercial and industrial loans are generally categorized based on the location of the borrowers' businesses (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Commercial Real Estate | | Percent of Total | | Commercial | | Percent of Total | | Commercial Real Estate | | Percent of Total | | Commercial | | Percent of Total |
Florida | $ | 3,432,109 | | | 60.2 | % | | $ | 3,117,076 | | | 37.5 | % | | $ | 3,309,614 | | | 58.0 | % | | $ | 3,369,262 | | | 48.2 | % |
New York Tri-state | 1,535,095 | | | 26.9 | % | | 2,723,127 | | | 32.8 | % | | 1,873,055 | | | 32.9 | % | | 1,960,474 | | | 28.1 | % |
Other | 732,753 | | | 12.9 | % | | 2,468,331 | | | 29.7 | % | | 519,069 | | | 9.1 | % | | 1,653,702 | | | 23.7 | % |
| $ | 5,699,957 | | | 100.0 | % | | $ | 8,308,534 | | | 100.0 | % | | $ | 5,701,738 | | | 100.0 | % | | $ | 6,983,438 | | | 100.0 | % |
The following table presents the five states with the largest concentration of commercial loans and leases originated through Bridge and Pinnacle at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| December 31, 2022 | | December 31, 2021 |
| Total | | Percent of Total | | Total | | Percent of Total |
Florida | $ | 222,311 | | | 15.3 | % | | $ | 213,620 | | | 13.2 | % |
California | 150,928 | | | 10.4 | % | | 199,635 | | | 12.3 | % |
Texas | 84,160 | | | 5.8 | % | | 110,660 | | | 6.8 | % |
Georgia | 64,137 | | | 4.4 | % | | 69,415 | | | 4.3 | % |
Utah | 60,156 | | | 4.1 | % | | 68,954 | | | 4.3 | % |
All Others | 870,351 | | | 60.0 | % | | 957,080 | | | 59.1 | % |
| $ | 1,452,043 | | | 100.0 | % | | $ | 1,619,364 | | | 100.0 | % |
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
Note 5 Leases
Leases under which the Company is the lessee
The Company leases branches, office space and a small amount of equipment under either operating or finance leases with remaining terms ranging from one to 14 years, some of which include extension options.
The following table presents ROU assets and lease liabilities at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
ROU assets: | | | |
Operating leases | $ | 72,211 | | | $ | 80,646 | |
Finance leases | 23,866 | | | 26,216 | |
| $ | 96,077 | | | $ | 106,862 | |
Lease liabilities: | | | |
Operating leases | $ | 80,909 | | | $ | 89,535 | |
Finance leases | 28,389 | | | 30,216 | |
| $ | 109,298 | | | $ | 119,751 | |
ROU assets and lease liabilities for operating leases are included in "other assets" and "other liabilities", respectively, in the accompanying consolidated balance sheets. ROU assets and lease liabilities for finance leases are included in "other assets" and "notes and other borrowings", respectively.
The weighted average remaining lease term and weighted average discount rate at the dates indicated were:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Weighted average remaining lease term: | | | |
Operating leases | 6.6 years | | 6.9 years |
Finance leases | 11.0 years | | 11.9 years |
Weighted average discount rate: | | | |
Operating leases | 3.1 | % | | 2.9 | % |
Finance leases | 2.9 | % | | 2.9 | % |
The following table presents the components of lease expense for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
Operating lease cost: | | | | | | | |
Fixed costs | | | $ | 18,364 | | | $ | 19,646 | | | $ | 20,112 | |
Impairment of ROU assets | | | 134 | | | 183 | | | 108 | |
Total operating lease cost | | | $ | 18,498 | | | $ | 19,829 | | | $ | 20,220 | |
| | | | | | | |
Finance lease cost: | | | | | | | |
Amortization of ROU assets | | | $ | 2,350 | | | $ | 2,903 | | | $ | 2,841 | |
Interest on lease liabilities | | | 823 | | | 866 | | | 921 | |
Total finance lease cost | | | $ | 3,173 | | | $ | 3,769 | | | $ | 3,762 | |
| | | | | | | |
Variable lease cost | | | $ | 3,589 | | | $ | 4,147 | | | $ | 4,761 | |
Short-term lease costs were immaterial for the years ended December 31, 2022, 2021 and 2020.
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
The following table presents additional information related to operating and finance leases for the dates and periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| | | Years Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows from finance leases | | | $ | 823 | | | $ | 866 | | | $ | 921 | |
Operating cash flows from operating leases | | | 18,473 | | | 20,056 | | | 20,589 | |
Financing cash flows from finance leases | | | 2,652 | | | 3,215 | | | 2,980 | |
| | | $ | 21,948 | | | $ | 24,137 | | | $ | 24,490 | |
| | | | | | | |
Lease liabilities recognized from obtaining ROU assets: | | | | | | | |
| | | | | | | |
Operating leases | | | $ | 9,086 | | | $ | 13,325 | | | $ | 9,647 | |
Finance leases | | | — | | | — | | | 373 | |
| | | $ | 9,086 | | | $ | 13,325 | | | $ | 10,020 | |
Future lease payment obligations under leases with terms in excess of one year and a reconciliation to lease liabilities as of December 31, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
Years ending December 31: | | | | | |
2023 | $ | 17,292 | | | $ | 2,666 | | | $ | 19,958 | |
2024 | 15,684 | | | 2,701 | | | 18,385 | |
2025 | 13,162 | | | 2,774 | | | 15,936 | |
2026 | 11,838 | | | 2,849 | | | 14,687 | |
2027 | 9,573 | | | 2,926 | | | 12,499 | |
Thereafter | 21,969 | | | 19,447 | | | 41,416 | |
Total future minimum lease payments | 89,518 | | | 33,363 | | | 122,881 | |
Less: interest component | (8,609) | | | (4,974) | | | (13,583) | |
Lease liabilities | $ | 80,909 | | | $ | 28,389 | | | $ | 109,298 | |
Leases under which the Company is the lessor
Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides equipment financing using a variety of loan and lease structures. Pinnacle provides essential use equipment financing to state and local governmental entities. Bridge provides primarily transportation equipment financing.
Direct or Sales Type Financing Leases
The following table presents the components of the investment in direct or sales type financing leases, included in loans in the consolidated balance sheets at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Total minimum lease payments to be received | $ | 684,847 | | | $ | 703,395 | |
Estimated unguaranteed residual value of leased assets | 4,024 | | | 5,109 | |
Gross investment in direct or sales type financing leases | 688,871 | | | 708,504 | |
Unearned income | (57,622) | | | (59,511) | |
Initial direct costs | 2,384 | | | 2,783 | |
| $ | 633,633 | | | $ | 651,776 | |
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
At December 31, 2022, future minimum lease payments to be received under direct or sales type financing leases were as follows (in thousands):
| | | | | |
Years Ending December 31: | |
2023 | $ | 180,586 | |
2024 | 144,304 | |
2025 | 102,300 | |
2026 | 63,407 | |
2027 | 43,253 | |
Thereafter | 150,997 | |
| $ | 684,847 | |
Operating Lease Equipment
Operating lease equipment consists primarily of railcars, non-commercial aircraft and other transportation equipment leased to commercial end users. Original lease terms generally range from three to ten years. Asset risk is evaluated and managed by a dedicated internal staff of seasoned equipment finance professionals with a broad depth and breadth of experience in the leasing business. The Company has partnered with an industry leading, experienced service provider who provides fleet management and servicing relating to the railcar fleet. Residual risk is managed by setting appropriate residual values at inception and systematic reviews of residual values based on independent appraisals, performed at least annually.
The following table presents the components of operating lease equipment at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Operating lease equipment | $ | 772,267 | | | $ | 848,304 | |
Less: accumulated depreciation | (232,468) | | | (207,578) | |
Operating lease equipment, net | $ | 539,799 | | | $ | 640,726 | |
The Company did not recognize any impairment during the year ended December 31, 2022. Impairment was recognized in the amounts of $2.8 million and $0.7 million during the years ended December 31, 2021 and 2020, respectively. These impairment charges are included in "depreciation and impairment of operating lease equipment" in the accompanying consolidated statements of income.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
At December 31, 2022, scheduled minimum rental payments under operating leases were as follows (in thousands):
| | | | | |
Years Ending December 31: | |
2023 | $ | 42,510 | |
2024 | 37,490 | |
2025 | 31,585 | |
2026 | 20,523 | |
2027 | 16,563 | |
Thereafter | 34,156 | |
| $ | 182,827 | |
The following table summarizes income recognized for operating and direct or sales type finance leases for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | |
| 2022 | | 2021 | | 2020 | | Location of Lease Income on Consolidated Statements of Income |
Operating leases | $ | 54,111 | | | $ | 53,263 | | | $ | 59,112 | | | Non-interest income from lease financing |
Direct or sales type finance leases | 17,881 | | | 18,329 | | | 20,995 | | | Interest income on loans |
| $ | 71,992 | | | $ | 71,592 | | | $ | 80,107 | | | |
Note 6 Deposits
The following table presents average balances and weighted average rates paid on deposits for the periods indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Average Balance | | Average Rate Paid | | Average Balance | | Average Rate Paid | | Average Balance | | Average Rate Paid |
Demand deposits: | | | | | | | | | | | |
Non-interest bearing | $ | 8,861,111 | | | — | % | | $ | 8,480,964 | | | — | % | | $ | 5,760,309 | | | — | % |
Interest bearing | 2,538,906 | | | 0.55 | % | | 3,027,649 | | | 0.28 | % | | 2,582,951 | | | 0.75 | % |
Savings and money market | 12,874,240 | | | 1.02 | % | | 13,339,651 | | | 0.32 | % | | 10,843,894 | | | 0.79 | % |
Time | 3,338,671 | | | 1.06 | % | | 3,490,082 | | | 0.46 | % | | 6,617,939 | | | 1.43 | % |
| $ | 27,612,928 | | | 0.65 | % | | $ | 28,338,346 | | | 0.24 | % | | $ | 25,805,093 | | | 0.77 | % |
Time deposit accounts with balances greater than $250,000 totaled $730 million and $603 million at December 31, 2022 and 2021, respectively.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
The following table presents maturities of time deposits as of December 31, 2022 (in thousands):
| | | | | |
Maturing in: | |
2023 | $ | 3,558,865 | |
2024 | 304,953 | |
2025 | 92,526 | |
2026 | 310,637 | |
2027 | 1,097 | |
| |
| $ | 4,268,078 | |
Included in deposits at December 31, 2022 are public funds deposits of $3.5 billion and brokered deposits of $4.6 billion. Investment securities AFS with a carrying value of $947 million and a FHLB letter of credit in the amount of $600 million, were pledged as security for public funds deposits at December 31, 2022.
Interest expense on deposits for the periods indicated was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Interest bearing demand | $ | 13,919 | | | $ | 8,550 | | | $ | 19,445 | |
Savings and money market | 130,705 | | | 43,082 | | | 85,572 | |
Time | 35,348 | | | 15,964 | | | 94,963 | |
| $ | 179,972 | | | $ | 67,596 | | | $ | 199,980 | |
Certain of our non-interest bearing demand deposit accounts participate in various customer rebate programs. During the years ended December 31, 2022, 2021 and 2020, deposit costs related to these programs totaled $15.4 million, $8.1 million and $11.0 million, respectively. These expenses are included in "other non-interest expense" in the accompanying consolidated statements of income.
Note 7 Borrowings
The following table presents information about outstanding FHLB advances as of December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Range of Interest Rates | | |
| Amount | | Minimum | | Maximum | | Weighted Average Rate |
Maturing in: | | | | | | | |
2023 - One month or less | $ | 4,320,000 | | | 3.79 | % | | 4.48 | % | | 4.19 | % |
2023 - Over one month | 1,100,000 | | | 4.48 | % | | 4.73 | % | | 4.56 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total contractual balance outstanding | $ | 5,420,000 | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The table above reflects contractual maturities of outstanding advances and does not incorporate the impact that interest rate swaps designated as cash flow hedges have on the duration of borrowings.
The terms of the Company's security agreement with the FHLB require a specific assignment of collateral consisting of qualifying first mortgage loans, commercial real estate loans and mortgage-backed securities with unpaid principal amounts discounted at various stipulated percentages at least equal to 100% of outstanding FHLB advances. As of December 31, 2022, the Company had pledged investment securities and real estate loans with an aggregate carrying amount of approximately $13.8 billion as collateral for advances from the FHLB.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
Notes and other borrowings consisted of the following at the dates indicated (dollars in thousands):
| | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | |
Senior notes: | | | | |
Principal amount of 4.875% senior notes maturing on November 17, 2025 | $ | 400,000 | | | $ | 400,000 | | |
Unamortized discount and debt issuance costs | (2,586) | | | (3,400) | | |
| 397,414 | | | 396,600 | | |
Subordinated notes: | | | | |
Principal amount of 5.125% subordinated notes maturing on June 11, 2030 | 300,000 | | | 300,000 | | |
Unamortized discount and debt issuance costs | (4,880) | | | (5,400) | | |
| 295,120 | | | 294,600 | | |
Total notes | 692,534 | | | 691,200 | | |
Finance leases | 28,389 | | | 30,216 | | |
Notes and other borrowings | $ | 720,923 | | | $ | 721,416 | | |
| | | | |
| | | | |
| | | | |
| | | | |
The senior notes pay interest semiannually and have an effective interest rate of 5.12%, after consideration of issuance discount and costs. The notes may be redeemed by the Company, in whole or in part, at any time prior to August 17, 2025 at the greater of a) 100% of the principal balance or b) the sum of the present values of the remaining scheduled payments of principal and interest on the securities discounted to the redemption date at i) the rate on a United States Treasury security with a maturity comparable to the remaining maturity of the senior notes that would be used to price new issues of corporate debt securities with a maturity comparable to the remaining maturity of the senior notes plus ii) 40 basis points. The senior notes may be redeemed at any time after August 17, 2025 at 100% of principal plus accrued and unpaid interest.
The subordinated notes pay interest semiannually and have an effective interest rate of 5.39%, after consideration of issuance discount and costs. The notes may be redeemed by the Company, in whole or in part, on or after March 11, 2030 at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest, subject to the approval of the Federal Reserve. The notes qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations.
At December 31, 2022, BankUnited had available borrowing capacity at the FHLB of approximately $4.0 billion, unused borrowing capacity at the FRB of approximately $1.4 billion, unused Federal funds lines of credit with other financial institutions totaling $50 million, and $600 million unused FHLB letter of credit.
Note 8 Premises, Equipment and Software
Premises and equipment and capitalized software costs are included in other assets in the accompanying consolidated balance sheets and are summarized as follows at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Buildings and improvements | $ | 1,019 | | | $ | 430 | |
Leasehold improvements | 74,607 | | | 70,228 | |
Furniture, fixtures and equipment | 34,835 | | | 34,688 | |
Computer equipment | 19,380 | | | 19,018 | |
Software, software licensing rights and capitalized costs of CCA | 95,491 | | | 84,386 | |
Aircraft and automobiles | 11,645 | | | 11,629 | |
| | | |
| 236,977 | | | 220,379 | |
Less: accumulated depreciation | (170,707) | | | (163,645) | |
Premises, equipment and software, net | $ | 66,270 | | | $ | 56,734 | |
| | | |
| | | |
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
Depreciation and amortization expense related to premises, equipment and software was $17.5 million, $16.7 million and $15.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Note 9 Income Taxes
The components of the provision for income taxes were as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Current: | | | | | |
Federal | $ | 76,431 | | | $ | 61,814 | | | $ | 63,083 | |
State | 12,293 | | | (18,398) | | | 16,009 | |
| 88,724 | | | 43,416 | | | 79,092 | |
Deferred: | | | | | |
Federal | (7,191) | | | 4,348 | | | (22,387) | |
State | 8,628 | | | (13,363) | | | (5,199) | |
| 1,437 | | | (9,015) | | | (27,586) | |
| $ | 90,161 | | | $ | 34,401 | | | $ | 51,506 | |
A reconciliation of expected income tax expense at the statutory federal income tax rate of 21% to the Company's effective income tax rate for the periods indicated follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Tax expense calculated at the statutory federal income tax rate | $ | 78,778 | | | 21.00 | % | | $ | 94,371 | | | 21.00 | % | | $ | 52,366 | | | 21.00 | % |
Increases (decreases) resulting from: | | | | | | | | | | | |
Income not subject to tax | (10,577) | | | (2.82) | % | | (13,203) | | | (2.94) | % | | (15,722) | | | (6.30) | % |
State income taxes, net of federal tax benefit | 22,610 | | | 6.03 | % | | 22,197 | | | 4.94 | % | | 13,413 | | | 5.38 | % |
Uncertain tax positions - lapse of statute of limitations | (1,093) | | | (0.29) | % | | (25,633) | | | (5.70) | % | | (3,734) | | | (1.50) | % |
Discrete income tax benefit | — | | | — | % | | (43,949) | | | (9.78) | % | | — | | | — | % |
Other, net | 443 | | | 0.11 | % | | 618 | | | 0.14 | % | | 5,183 | | | 2.08 | % |
| $ | 90,161 | | | 24.03 | % | | $ | 34,401 | | | 7.66 | % | | $ | 51,506 | | | 20.66 | % |
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
During the year ended December 31, 2021, the Bank reached a settlement with the Florida Department of Revenue related to certain tax matters for the 2009-2019 tax years and recorded a tax benefit of $43.9 million, net of federal impact.
The components of deferred tax assets and liabilities were as follows at the dates indicated (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Deferred tax assets: | | | |
Excess of tax basis over carrying value of acquired loans | $ | 6,243 | | | $ | 22,737 | |
Allowance for credit losses | 38,211 | | | 33,577 | |
Net operating loss and tax credit carryforwards | 9,692 | | | 19,466 | |
Net unrealized loss on investment securities available for sale and cash flow hedges | 153,858 | | | 5,456 | |
Capitalized costs | 18,380 | | | 26,854 | |
Lease liability | 20,655 | | | 23,137 | |
Deferred compensation | 9,873 | | | 8,688 | |
Accrued expenses | 11,464 | | | 11,185 | |
Other | 25,104 | | | 18,958 | |
Gross deferred tax assets | 293,480 | | | 170,058 | |
Deferred tax liabilities: | | | |
| | | |
Lease financing, due to differences in depreciation | 131,018 | | | 151,978 | |
ROU asset | 31,253 | | | 33,136 | |
Other | 7,005 | | | 7,706 | |
Gross deferred tax liabilities | 169,276 | | | 192,820 | |
Net deferred tax asset (liability) | $ | 124,204 | | | $ | (22,762) | |
Based on the evaluation of available evidence, the Company has concluded that it is more likely than not that the existing deferred tax assets will be realized. The primary factors supporting this conclusion are the Company's history of reported pre-tax income and the amount of future taxable income that will result from the scheduled reversal of existing deferred tax liabilities.
At December 31, 2022, remaining net operating loss and tax credit carryforwards included Florida net operating loss carryforwards in the amount of $111.5 million. Florida net operating loss carryforwards consisted of $95.2 million expiring from 2030 through 2037 and $16.3 million that can be carried forward indefinitely.
The Company has investments in affordable housing limited partnerships which generate federal Low Income Housing Tax Credits and other tax benefits. The balance of these investments, included in other assets in the accompanying consolidated balance sheet, was $100 million and $43 million at December 31, 2022 and 2021, respectively. Unfunded commitments for affordable housing investments, included in other liabilities in the accompanying consolidated balance sheet, were $62 million and $3 million at December 31, 2022 and 2021, respectively. The maximum exposure to loss as a result of the Company's involvement with these limited partnerships at December 31, 2022 was approximately $145 million. While the Company believes the likelihood of potential losses from these investments is remote, the maximum exposure was determined by assuming a scenario where the projects completely fail and do not meet certain government compliance requirements resulting in recapture of the related tax credits and full impairment of the remaining unamortized investment. These investments did not have a material impact on income tax expense for the years ended December 31, 2022, 2021 and 2020.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
The Company has a liability for unrecognized tax benefits relating to uncertain federal and state tax positions in several jurisdictions. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits at the dates indicated follows (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
Balance, beginning of period | $ | 347,809 | | | $ | 414,203 | | | $ | 407,126 | |
Additions for tax positions related to the current year | 3,086 | | | 2,175 | | | 2,117 | |
Additions for tax positions related to prior periods | 12,433 | | | 12,887 | | | 2,456 | |
| | | | | |
Reductions due to settlements with taxing authorities | — | | | (43,782) | | | (3,080) | |
Reductions due to lapse of the statute of limitations | (795) | | | (30,394) | | | (520) | |
| 362,533 | | | 355,089 | | | 408,099 | |
Interest and penalties | 7,347 | | | (7,280) | | | 6,104 | |
Balance, end of period | $ | 369,880 | | | $ | 347,809 | | | $ | 414,203 | |
As of December 31, 2022, 2021 and 2020, the Company had $342.6 million, $329.3 million and $369.1 million of unrecognized federal and state tax benefits, net of federal tax benefits, that if recognized would have impacted the effective tax rate. Unrecognized tax benefits related to federal and state income tax contingencies that may decrease during the 12 months subsequent to December 31, 2022 as a result of settlements with taxing authorities range from zero to $309.0 million.
Interest and penalties related to unrecognized tax benefits are included in the provision for income taxes in the consolidated statements of income. At December 31, 2022 and 2021, accrued interest and penalties included in the consolidated balance sheets, net of federal tax benefits, were $16.5 million and $10.6 million, respectively. The total amount of interest and penalties, net of federal tax benefits, recognized through income tax expense was $5.9 million, $(5.7) million and $4.9 million during the years ended December 31, 2022, 2021 and 2020, respectively.
The Company and its subsidiaries file a consolidated federal income tax return as well as combined state income tax returns where combined filings are required. The federal tax returns for years 2018 through 2021 remain subject to examination in the U.S. Federal jurisdiction. State tax returns for years 2016 through 2021 remain subject to examination by certain states.
Note 10 Derivatives and Hedging Activities
The Company has entered into interest rate swaps, caps and collars designated as cash flow hedges with the objective of limiting the variability of interest payment cash flows. The Company has also entered into interest rate swaps designated as fair value hedges designed to hedge changes in the fair value of outstanding fixed rate instruments caused by fluctuations in the benchmark interest rate.
The Company enters into interest rate derivative contracts with certain of its commercial borrowers to enable those borrowers to manage their exposure to interest rate fluctuations. To mitigate interest rate risk associated with these derivative contracts, the Company enters into offsetting derivative contract positions with primary dealers. These interest rate derivative contracts are not designated as hedging instruments; therefore, changes in the fair value of these derivatives are recognized immediately in earnings. For the years ended December 31, 2022, 2021 and 2020, the impact on earnings related to changes in fair value of these derivatives was not material.
The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. The Company manages dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements, central clearing mechanisms and counterparty limits. The agreements contain bilateral collateral arrangements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company manages the risk of default by its commercial borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company does not currently anticipate any significant losses from failure of interest rate derivative counterparties to honor their obligations.
The CME legally characterizes variation margin payments for centrally cleared derivatives as settlements of the derivatives' exposures rather than collateral. As a result, the variation margin payment and the related derivative instruments are considered
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
a single unit of account for accounting and financial reporting purposes. The Company's clearing agent for interest rate derivative contracts centrally cleared through the CME settles the variation margin daily with the CME; therefore, those interest rate derivative contracts the Company clears through the CME are reported at a fair value of zero at both December 31, 2022 and 2021.
The following tables set forth certain information concerning the Company’s interest rate contract derivative financial instruments and related hedged items at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| |
| | | Weighted Average Pay Rate / Strike Price | | Weighted Average Receive Rate / Strike Price | | Weighted Average Remaining Life in Years | | | | | | |
| | | | | | Notional Amount | | Balance Sheet Location | | Fair Value |
| Hedged Item | | | | | | | Asset | | Liability |
Derivatives designated as cash flow hedges: | | | | | | | | | | | | | | | |
Pay-fixed interest rate swaps | Variability of interest cash flows on variable rate borrowings | | 2.32% | | 3-Month LIBOR | | 2.2 | | $ | 695,000 | | | Other assets | | $ | 941 | | | $ | — | |
Pay-fixed interest rate swaps | Variability of interest cash flows on variable rate borrowings | | 2.31% | | Daily SOFR | | 1.7 | | 675,000 | | | | | — | | | — | |
Pay-fixed interest rate swaps | Variability of interest cash flows on variable rate liabilities | | 1.22% | | Fed Funds Effective Rate | | 1.7 | | 400,000 | | | | | — | | | — | |
Pay-variable interest rate swaps | Variability of interest cash flows on variable rate loans | | Term SOFR | | 3.72% | | 3.3 | | 200,000 | | | Other liabilities | | — | | | (1,514) | |
Interest rate caps purchased, indexed to Fed Funds effective rate | Variability of interest cash flows on variable rate liabilities | | 0.88% | | | | 2.5 | | 200,000 | | | Other assets | | 15,673 | | | — | |
Interest rate collar, indexed to 1-month SOFR(1) | Variability of interest cash flows on variable rate loans | | 5.58% | | 1.50% | | 3.7 | | 125,000 | | | Other liabilities | | — | | | (203) | |
Derivatives designated as fair value hedges: | | | | | | | | | | | | | | | |
Pay-fixed interest rate swaps | Variability of fair value of fixed rate loans | | 1.94% | | Daily SOFR | | 1.6 | | 100,000 | | | | | — | | | — | |
Derivatives not designated as hedges: | | | | | | | | | | | | | | | |
Pay-fixed interest rate swaps | | | 3.55% | | 1-Month LIBOR | | 3.6 | | 1,113,494 | | | Other assets / Other liabilities | | 20,712 | | | (339) | |
Pay-variable interest rate swaps | | | 1-Month LIBOR | | 3.55% | | 3.6 | | 1,113,494 | | | Other assets / Other liabilities | | 339 | | | (73,090) | |
Pay-fixed interest rate swaps | | | 4.17% | | Term SOFR | | 5.9 | | 803,225 | | | Other assets / Other liabilities | | 47,230 | | | (1,856) | |
Pay-variable interest rate swaps | | | Term SOFR | | 4.17% | | 5.9 | | 803,225 | | | Other assets / Other liabilities | | 1,856 | | | (47,230) | |
Interest rate caps purchased, indexed to 1-month LIBOR | | | | | 2.25% | | 2.7 | | 42,920 | | | Other assets | | 1,988 | | | — | |
Interest rate caps sold, indexed to 1-month LIBOR | | | 2.25% | | | | 2.7 | | 42,920 | | | Other liabilities | | — | | | (1,988) | |
| | | | | | | | | $ | 6,314,278 | | | | | $ | 88,739 | | | $ | (126,220) | |
(1)The interest rate collar consists of a combination of zero-premium interest rate options. The Company sold a pay-variable cap with a strike price of 5.58%; sold a 0% floor; and purchased a receive-variable floor with a strike price of 1.50%.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| |
| | | Weighted Average Pay Rate / Strike Price | | Weighted Average Receive Rate / Strike Price | | Weighted Average Remaining Life in Years | | | | | | |
| | | | | | Notional Amount | | Balance Sheet Location | | Fair Value |
| Hedged Item | | | | | | | Asset | | Liability |
Derivatives designated as cash flow hedges: | | | | | | | | | | | | | | | |
Pay-fixed interest rate swaps | Variability of interest cash flows on variable rate borrowings | | 2.35% | | 3-Month LIBOR | | 2.6 | | $ | 905,000 | | | Other liabilities | | $ | — | | | $ | (2,687) | |
Pay-fixed forward-starting interest rate swaps | Variability of interest cash flows on variable rate liabilities | | 0.87% | | Fed Funds Effective Rate | | 2.5 | | 200,000 | | | Other liabilities | | — | | | — | |
Interest rate caps purchased, indexed to Fed Funds effective rate | Variability of interest cash flows on variable rate liabilities | | 1.00% | | | | 3.5 | | 200,000 | | | Other assets | | 3,260 | | | — | |
Derivatives not designated as hedges: | | | | | | | | | | | | | | | |
Pay-fixed interest rate swaps | | | 3.57% | | Indexed to 1-month LIBOR | | 5.0 | | 1,668,517 | | | Other assets / Other liabilities | | 3,369 | | | (15,347) | |
Pay-variable interest rate swaps | | | Indexed to 1-month LIBOR | | 3.57% | | 5.0 | | 1,668,517 | | | Other assets / Other liabilities | | 51,947 | | | (6,837) | |
Interest rate caps purchased, indexed to 1-month LIBOR | | | | | 1.00% | | 4.0 | | 25,000 | | | Other assets | | 443 | | | — | |
Interest rate caps sold, indexed to 1-month LIBOR | | | 1.00% | | | | 4.0 | | 25,000 | | | Other liabilities | | — | | | (443) | |
| | | | | | | | | $ | 4,692,034 | | | | | $ | 59,019 | | | $ | (25,314) | |
The following table provides information about the amount of loss related to derivatives designated as cash flow hedges reclassified from AOCI into interest expense for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Years Ended December 31, |
| | | | | | | | | 2022 | | 2021 | | 2020 |
Location of gain (loss) reclassified from AOCI into income: | | | | | | | | | | | | | | |
Interest expense on borrowings | | | | | | | | | | $ | (4,224) | | | $ | (51,739) | | | $ | (46,259) | |
Interest expense on deposits | | | | | | | | | | 4,357 | | | — | | | — | |
Interest income on loans | | | | | | | | | | (43) | | | — | | | — | |
| | | | | | | | | | $ | 90 | | | $ | (51,739) | | | $ | (46,259) | |
During the year ended December 31, 2021, derivative positions designated as cash flow hedges with a notional amount totaling $401 million were discontinued following the Company's determination that the hedged forecasted transactions were not probable of occurring. A loss of $33.4 million, net of tax, was reclassified from AOCI into earnings as a result of the discontinuance of the cash flow hedges. During the years ended December 31, 2022, and 2020, no derivative positions designated as cash flow hedges were discontinued and none of the gains and losses reported in AOCI were reclassified into earnings as a result of the discontinuance of cash flow hedges or because of the early extinguishment of debt. As of December 31, 2022, the amount of net gain expected to be reclassified from AOCI into earnings during the next twelve months was $41.2 million. See Note 11 to the consolidated financial statements for additional information about the reclassification adjustments from AOCI into earnings.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
The amount of gain (loss) related to derivatives designated as fair value hedges recognized in earnings was insignificant for the years ended December 31, 2022, 2021 and 2020. The following table provides information about the hedged items related to derivatives designated as fair value hedges at the date indicated (in thousands):
| | | | | | | | | | | | | |
| December 31, 2022 | | | | Location in Consolidated Balance Sheets |
Contractual balance outstanding of hedged item (1) | $ | 100,000 | | | | | Loans |
Cumulative fair value hedging adjustments | $ | (3,923) | | | | | Loans |
(1)This amount is included in the amortized cost basis of a closed portfolio of loans used to designate hedging relationships in a portfolio layer method hedge in which the hedged item is anticipated to be outstanding for the designated hedge period. At December 31, 2022, the amortized cost basis of the closed portfolio used in this hedging relationship was $1.0 billion.
Some of the Company’s ISDA master agreements with financial institution counterparties contain provisions that permit either counterparty to terminate the agreements and require settlement in the event that regulatory capital ratios fall below certain designated thresholds, upon the initiation of other defined regulatory actions or upon suspension or withdrawal of the Bank’s credit rating. Currently, there are no circumstances that would trigger these provisions of the agreements.
The Company does not offset assets and liabilities under master netting agreements for financial reporting purposes. Information on interest rate swaps and caps subject to these agreements is as follows at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| |
| | | Gross Amounts Offset in Balance Sheet | | Net Amounts Presented in Balance Sheet | | Gross Amounts Not Offset in Balance Sheet | | |
| Gross Amounts Recognized | | | | Derivative Instruments | | Collateral Pledged | | Net Amount |
Derivative assets | $ | 86,544 | | | $ | — | | | $ | 86,544 | | | $ | (3,912) | | | $ | (79,447) | | | $ | 3,185 | |
Derivative liabilities | (3,912) | | | — | | | (3,912) | | | 3,912 | | | — | | | — | |
| $ | 82,632 | | | $ | — | | | $ | 82,632 | | | $ | — | | | $ | (79,447) | | | $ | 3,185 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| |
| | | Gross Amounts Offset in Balance Sheet | | Net Amounts Presented in Balance Sheet | | Gross Amounts Not Offset in Balance Sheet | | |
| Gross Amounts Recognized | | | | Derivative Instruments | | Collateral Pledged | | Net Amount |
Derivative assets | $ | 7,072 | | | $ | — | | | $ | 7,072 | | | $ | (3,104) | | | $ | (3,915) | | | $ | 53 | |
Derivative liabilities | (18,034) | | | — | | | (18,034) | | | 3,104 | | | 14,557 | | | (373) | |
| $ | (10,962) | | | $ | — | | | $ | (10,962) | | | $ | — | | | $ | 10,642 | | | $ | (320) | |
The difference between the amounts reported for interest rate swaps subject to master netting agreements and the total fair value of interest rate contract derivative financial instruments reported in the consolidated balance sheets is related to interest rate derivative contracts not subject to master netting agreements.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Note 11 Stockholders’ Equity
Accumulated Other Comprehensive Income
Changes in other comprehensive income are summarized as follows for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| |
| Before Tax | | Tax Effect | | Net of Tax |
Unrealized losses on investment securities available for sale: | | | | | |
Net unrealized holding loss arising during the period | $ | (674,115) | | | $ | 175,251 | | | $ | (498,864) | |
Amounts reclassified to gain on investment securities available for sale, net | (3,927) | | | 1,021 | | | (2,906) | |
Net change in unrealized loss on investment securities available for sale | (678,042) | | | 176,272 | | | (501,770) | |
Unrealized gains on derivative instruments: | | | | | |
Net unrealized holding gains arising during the period | 107,764 | | | (27,893) | | | 79,871 | |
Amounts reclassified to interest expense on deposits | (4,357) | | | 1,133 | | | (3,224) | |
Amounts reclassified to interest expense on borrowings | 4,224 | | | (1,098) | | | 3,126 | |
Amounts reclassified to interest income on loans | 43 | | | (11) | | | 32 | |
Net change in unrealized gains on derivative instruments | 107,674 | | | (27,869) | | | 79,805 | |
Other comprehensive loss | $ | (570,368) | | | $ | 148,403 | | | $ | (421,965) | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Before Tax | | Tax Effect | | Net of Tax |
Unrealized losses on investment securities available for sale: | | | | | |
Net unrealized holding losses arising during the period | $ | (72,789) | | | $ | 18,561 | | | $ | (54,228) | |
Amounts reclassified to gain on investment securities available for sale, net | (9,010) | | | 2,298 | | | (6,712) | |
Net change in unrealized losses on investment securities available for sale | (81,799) | | | 20,859 | | | (60,940) | |
Unrealized losses on derivative instruments: | | | | | |
Net unrealized holding gains arising during the period | 29,808 | | | (7,601) | | | 22,207 | |
Amounts reclassified to interest expense on borrowings | 51,739 | | | (13,194) | | | 38,545 | |
Reclassification adjustment for discontinuance of cash flow hedges | 44,833 | | | (11,433) | | | 33,400 | |
Net change in unrealized gains on derivative instruments | 126,380 | | | (32,228) | | | 94,152 | |
Other comprehensive income | $ | 44,581 | | | $ | (11,369) | | | $ | 33,212 | |
| | | | | | | | | | | | | | | | | |
| |
| Year Ended December 31, 2020 |
| Before Tax | | Tax Effect | | Net of Tax |
Unrealized gains on investment securities available for sale: | | | | | |
Net unrealized holding gain arising during the period | $ | 61,291 | | | $ | (15,246) | | | $ | 46,045 | |
Amounts reclassified to gain on investment securities available for sale, net | (14,001) | | | 3,570 | | | (10,431) | |
Net change in unrealized gains on investment securities available for sale | 47,290 | | | (11,676) | | | 35,614 | |
Unrealized losses on derivative instruments: | | | | | |
Net unrealized holding loss arising during the period | (116,168) | | | 28,766 | | | (87,402) | |
Amounts reclassified to interest expense on borrowings | 46,259 | | | (11,796) | | | 34,463 | |
Net change in unrealized losses on derivative instruments | (69,909) | | | 16,970 | | | (52,939) | |
Other comprehensive loss | $ | (22,619) | | | $ | 5,294 | | | $ | (17,325) | |
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
The categories of AOCI and changes therein are presented below for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| |
| Unrealized Gain (Loss) on Investment Securities Available for Sale | | Unrealized Gain (Loss) on Derivative Instruments | | Total |
Balance at December 31, 2019 | $ | 28,185 | | | $ | (60,012) | | | $ | (31,827) | |
| | | | | |
Other comprehensive loss | 35,614 | | | (52,939) | | | (17,325) | |
Balance at December 31, 2020 | 63,799 | | | (112,951) | | | (49,152) | |
Other comprehensive income | (60,940) | | | 94,152 | | | 33,212 | |
Balance at December 31, 2021 | 2,859 | | | (18,799) | | | (15,940) | |
| | | | | |
Other comprehensive loss | (501,770) | | | 79,805 | | | (421,965) | |
Balance at December 31, 2022 | $ | (498,911) | | | $ | 61,006 | | | $ | (437,905) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Note 12 Equity Based and Other Compensation Plans
Description of Equity Based Compensation Plans
In connection with the IPO of the Company's common stock in 2011, the Company adopted the 2010 Plan. In 2014, the Board of Directors and the Company's stockholders approved the 2014 Plan. The 2010 and 2014 Plans are administered by the Board of Directors or a committee thereof and provide for the grant of non-qualified stock options, SARs, restricted shares, deferred shares, performance shares, unrestricted shares and other share-based awards to selected employees, directors or independent contractors of the Company and its affiliates. As of December 31, 2022, no further awards are available for issuance under the 2010 plan.The number of shares of common stock authorized for award under the 2014 Plan is 6,200,000, of which 1,531,813 shares remain available for issuance as of December 31, 2022. Shares of common stock delivered under the plans may consist of authorized but unissued shares or previously issued shares reacquired by the Company. Unvested awards become fully vested in the event of a change in control, subject to a double trigger, as defined.
Compensation Expense Related to Equity Based Awards
The following table summarizes compensation cost related to equity based awards for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Compensation cost of equity based awards: | | | | | |
RSAs | $ | 16,203 | | | $ | 13,334 | | | $ | 15,236 | |
Executive share-based awards | 4,239 | | | 7,942 | | | 3,133 | |
Non-executive RSUs | 4,886 | | | 2,707 | | | 2,145 | |
Total compensation cost of equity based awards | 25,328 | | | 23,983 | | | 20,514 | |
Related tax benefits | (6,585) | | | (6,116) | | | (4,854) | |
Compensation cost of equity based awards, net of tax | $ | 18,743 | | | $ | 17,867 | | | $ | 15,660 | |
Non-Executive Share-Based Awards
RSAs
RSAs are generally valued at the closing price of the Company's common stock on the date of grant. All awards vest in equal annual installments over a period of four years from the date of grant except awards granted to the Company's Board of Directors, which vest over a period of one year.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Non-executive RSUs
The Company issues RSUs based on results of the Company's annual incentive compensation arrangements for certain employees other than those eligible for the executive share-based awards discussed below. These incentive compensation plans provide for a combination of cash payments and RSUs following the end of each annual performance period. The dollar value of share awards to be granted is based on the achievement of performance criteria established in the incentive arrangements. The number of shares of common stock to be awarded is variable based on the closing price of the Company's stock on the date of grant; therefore, these awards are initially classified as liability instruments, with compensation cost recognized from the beginning of the performance period. Awards vest in equal installments over a period of four years from the date of grant.
Annual awards of RSUs represent a fixed number of shares and vest on December 31st in equal tranches over four years. Upon vesting, the non-executive RSUs will be converted to common stock on a one-for-one basis, or may be settled in cash at the Company's option. To date, all such awards have been settled in shares. The non-executive RSUs do not accumulate dividends prior to vesting.
A summary of activity related to non-executive share-based awards for the periods indicated follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| RSA | | Non-Executive RSU |
| Number of Share Awards | | Weighted Average Grant Date Fair Value | | Number of Share Awards | | Weighted Average Grant Date Fair Value |
Unvested share awards outstanding, December 31, 2019 | 1,050,455 | | | $ | 38.24 | | | — | | | $ | — | |
Granted | 660,587 | | | 29.72 | | | — | | | — | |
Vested | (479,057) | | | 38.94 | | | — | | | — | |
Canceled or forfeited | (70,150) | | | 34.78 | | | — | | | — | |
Unvested share awards outstanding, December 31, 2020 | 1,161,835 | | | 33.32 | | | — | | | — | |
Granted | 571,936 | | | 42.17 | | | — | | | — | |
Vested | (479,790) | | | 34.01 | | | — | | | — | |
Canceled or forfeited | (74,297) | | | 35.91 | | | — | | | — | |
Unvested share awards outstanding, December 31, 2021 | 1,179,684 | | | 37.17 | | | — | | | — | |
Granted | 496,361 | | | 41.75 | | | 294,331 | | | 41.87 | |
Vested | (391,693) | | | 36.72 | | | — | | | — | |
Canceled or forfeited | (90,037) | | | 39.38 | | | (36,355) | | | 41.87 | |
Unvested share awards outstanding, December 31, 2022 | 1,194,315 | | | $ | 39.05 | | | 257,976 | | | $ | 41.87 | |
The following table summarizes the closing price of the Company's stock on the date of grant for shares granted and the aggregate grant date fair value of shares vesting for the periods indicated (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | |
| | |
| Years Ended December 31, | |
| 2022 | | 2021 | | 2020 | |
Range of the closing price on date of grant | $39.39 - $43.67 | | $42.01 - $47.52 | | $13.99 - $30.90 | |
Aggregate grant date fair value of shares vesting | $ | 14,383 | | | $ | 16,319 | | | $ | 18,654 | | |
The total unrecognized compensation cost of $34.8 million for all RSAs and non-executive RSUs outstanding at December 31, 2022, will be recognized over a weighted average remaining period of 2.5 years.
Executive share-based awards
Certain of the Company's executives are eligible to receive annual awards of RSUs and PSUs (collectively, the "share units"). Annual awards of RSUs represent a fixed number of shares and vest on December 31st in equal tranches over four years. PSUs are initially granted based on a target value. The number of PSUs that ultimately vest at the end of the performance measurement period will be based on the achievement of performance criteria pre-established by the Compensation Committee of the Board of Directors. Upon vesting, the share units will be converted to common stock on a one-for-one basis, or may be
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
settled in cash at the Company's option. The share units will accumulate dividends declared on the Company's common stock from the date of grant to be paid subsequent to vesting.
As a result of the majority of previous settlements being in cash, all executive RSUs and PSUs have been determined to be liability instruments and are remeasured at fair value each reporting period until the awards are settled. The RSUs are valued based on the closing price of the Company's common stock at the reporting date. The PSUs are valued based on the closing price of the Company's common stock at the reporting date net of a discount related to any applicable market conditions, considering the probability of meeting the defined performance conditions. Compensation cost related to PSUs is recognized during the performance period based on the probable outcome of the respective performance conditions.
A summary of activity related to executive share-based awards for the periods indicated follows:
| | | | | | | | | | | |
| RSU | | PSU |
Unvested executive share-based awards outstanding, December 31, 2019 | 112,116 | | | 125,088 | |
Granted | 106,731 | | | 106,731 | |
Vested | (62,292) | | | (52,026) | |
Unvested executive share-based awards outstanding, December 31, 2020 | 156,555 | | | 179,793 | |
Granted | 63,814 | | | 63,814 | |
Vested | (100,881) | | | — | |
Unvested executive share-based awards outstanding, December 31, 2021 | 119,488 | | | 243,607 | |
Granted | 66,990 | | | 66,990 | |
Vested | (77,648) | | | (73,062) | |
Unvested executive share-based awards outstanding, December 31, 2022 | 108,830 | | | 237,535 | |
The total liability for these executive share-based awards was $9.5 million at December 31, 2022. The total unrecognized compensation cost of $7.4 million for unvested executive share-based awards at December 31, 2022 will be recognized over a weighted average remaining period of 1.9 years.
Option Awards
A summary of activity related to stock option awards for the periods indicated follows:
| | | | | | | | | | | |
| Number of Option Awards | | Weighted Average Exercise Price |
Option awards outstanding, December 31, 2019 | 737,753 | | | $ | 26.64 | |
Exercised | (735,400) | | | 26.67 | |
Canceled or forfeited | (784) | | | 22.18 | |
Option awards outstanding, December 31, 2020 | 1,569 | | | 15.94 | |
Exercised | (1,569) | | | 15.94 | |
Canceled or forfeited | — | | | — | |
Option awards outstanding, December 31, 2021 | — | | | — | |
| | | |
| | | |
| | | |
The intrinsic value and related tax benefit of the options exercised was immaterial for the years ended December 31, 2021 and 2020.
Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan for a group of key management or highly compensated employees whereby a participant, upon election, may defer a portion of eligible compensation. The deferred compensation plan provides for discretionary Company contributions. Generally, the Company has elected not to make contributions. The Company credits each participant's account with income based on either an annual interest rate determined by the Company's Compensation Committee or returns of selected investment portfolios, as elected by the participant. A participant's elective
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
deferrals and interest thereon are at all times 100% vested. Company contributions and interest thereon will become 100% vested upon the earlier of a change in control, as defined, or the participant's death, disability, attainment of normal retirement age or the completion of two years of service. Participant deferrals and any associated earnings will be paid upon separation from service or based on a specified distribution schedule, as elected by the participant. Deferred compensation expense was $1.4 million, $2.2 million and $2.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. Deferred compensation liabilities of $37 million and $33 million were included in other liabilities in the accompanying consolidated balance sheets at December 31, 2022 and 2021, respectively.
BankUnited 401(k) Plan
Under the terms of the 401(k) Plan sponsored by the Company, eligible employees may contribute a portion of compensation not exceeding the limits set by law. Employees are eligible to participate in the plan after one month of service. The 401(k) Plan allows a matching employer contribution equal to 100% of elective deferrals that do not exceed 1% of compensation, plus 70% of elective deferrals that exceed 1% but are less than 6% of compensation. Matching contributions are fully vested after two years of service. For the years ended December 31, 2022, 2021 and 2020, BankUnited made matching contributions to the 401(k) Plan of approximately $6.2 million, $6.1 million and $5.7 million, respectively.
Note 13 Regulatory Requirements and Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated pursuant to regulation. The capital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings and other factors. Banking regulations identify five capital categories for insured depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2022 and 2021, all capital ratios of the Company and the Bank exceeded the "well capitalized" levels under the regulatory framework for prompt corrective action. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, common equity tier 1 and tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital to average tangible assets (leverage ratio).
The following tables provide information regarding regulatory capital for the Company at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Actual | | Required to be Considered Well Capitalized | | Required to be Considered Adequately Capitalized | | Required to be Considered Adequately Capitalized Including Capital Conservation Buffer |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
BankUnited, Inc.: | | | | | | | | | | | | | | | |
Tier 1 leverage | $ | 2,806,713 | | | 7.49 | % | | N/A (1) | | N/A (1) | | $ | 1,498,309 | | | 4.00 | % | | N/A (1) | | N/A (1) |
CET1 risk-based capital | $ | 2,806,713 | | | 11.00 | % | | $ | 1,658,842 | | | 6.50 | % | | $ | 1,148,429 | | | 4.50 | % | | $ | 1,786,445 | | | 7.00 | % |
Tier 1 risk-based capital | $ | 2,806,713 | | | 11.00 | % | | $ | 2,041,652 | | | 8.00 | % | | $ | 1,531,239 | | | 6.00 | % | | $ | 2,169,255 | | | 8.50 | % |
Total risk-based capital | $ | 3,236,797 | | | 12.68 | % | | $ | 2,552,065 | | | 10.00 | % | | $ | 2,041,652 | | | 8.00 | % | | $ | 2,679,668 | | | 10.50 | % |
BankUnited: | | | | | | | | | | | | | | | |
Tier 1 leverage | $ | 3,148,656 | | | 8.43 | % | | $ | 1,866,432 | | | 5.00 | % | | $ | 1,493,145 | | | 4.00 | % | | N/A | | N/A |
CET1 risk-based capital | $ | 3,148,656 | | | 12.40 | % | | $ | 1,650,104 | | | 6.50 | % | | $ | 1,142,380 | | | 4.50 | % | | $ | 1,777,035 | | | 7.00 | % |
Tier 1 risk-based capital | $ | 3,148,656 | | | 12.40 | % | | $ | 2,030,897 | | | 8.00 | % | | $ | 1,523,173 | | | 6.00 | % | | $ | 2,157,828 | | | 8.50 | % |
Total risk-based capital | $ | 3,278,740 | | | 12.92 | % | | $ | 2,538,621 | | | 10.00 | % | | $ | 2,030,897 | | | 8.00 | % | | $ | 2,665,552 | | | 10.50 | % |
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Actual | | Required to be Considered Well Capitalized | | Required to be Considered Adequately Capitalized | | Required to be Considered Adequately Capitalized Including Capital Conservation Buffer |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
BankUnited, Inc.: | | | | | | | | | | | | | | | |
Tier 1 leverage | $ | 2,991,085 | | | 8.37 | % | | N/A (1) | | N/A (1) | | $ | 1,429,955 | | | 4.00 | % | | N/A (1) | | N/A (1) |
CET1 risk-based capital | $ | 2,991,085 | | | 12.60 | % | | $ | 1,542,833 | | | 6.50 | % | | $ | 1,068,115 | | | 4.50 | % | | $ | 1,661,512 | | | 7.00 | % |
Tier 1 risk-based capital | $ | 2,991,085 | | | 12.60 | % | | $ | 1,898,871 | | | 8.00 | % | | $ | 1,424,153 | | | 6.00 | % | | $ | 2,017,551 | | | 8.50 | % |
Total risk-based capital | $ | 3,391,066 | | | 14.29 | % | | $ | 2,373,589 | | | 10.00 | % | | $ | 1,898,871 | | | 8.00 | % | | $ | 2,492,268 | | | 10.50 | % |
BankUnited: | | | | | | | | | | | | | | | |
Tier 1 leverage | $ | 3,419,728 | | | 9.60 | % | | $ | 1,781,140 | | | 5.00 | % | | $ | 1,424,912 | | | 4.00 | % | | N/A | | N/A |
CET1 risk-based capital | $ | 3,419,728 | | | 14.49 | % | | $ | 1,534,040 | | | 6.50 | % | | $ | 1,062,028 | | | 4.50 | % | | $ | 1,652,043 | | | 7.00 | % |
Tier 1 risk-based capital | $ | 3,419,728 | | | 14.49 | % | | $ | 1,888,049 | | | 8.00 | % | | $ | 1,416,037 | | | 6.00 | % | | $ | 2,006,052 | | | 8.50 | % |
Total risk-based capital | $ | 3,519,709 | | | 14.91 | % | | $ | 2,360,062 | | | 10.00 | % | | $ | 1,888,049 | | | 8.00 | % | | $ | 2,478,065 | | | 10.50 | % |
(1) There is no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company.
Upon the adoption of ASU 2016-13 effective January 1, 2020, the Company elected the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period.
BankUnited is subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above certain minimums, and to remain "well-capitalized" under the prompt corrective action regulations. The Company does not expect that any of these laws, regulations or policies will materially affect the ability of BankUnited to pay dividends in the foreseeable future.
Note 14 Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis
The following is a description of the methodologies used to estimate the fair values of assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which those measurements are typically classified.
Investment securities available for sale and marketable equity securities—Fair value measurements are based on quoted prices in active markets when available; these measurements are classified within level 1 of the fair value hierarchy. These securities typically include U.S. Treasury securities and certain preferred stocks. If quoted prices in active markets are not available, fair values are estimated using quoted prices of securities with similar characteristics, quoted prices of identical securities in less active markets, discounted cash flow techniques, or matrix pricing models. These securities are generally classified within level 2 of the fair value hierarchy and include U.S. Government agency securities, U.S. Government agency and sponsored enterprise MBS, preferred stock investments for which level 1 valuations are not available, non-mortgage asset-backed securities, single family real estate-backed securities, private label residential MBS and CMOs, private label commercial MBS, collateralized loan obligations and state and municipal obligations. Pricing of these securities is generally primarily spread driven. Observable inputs that may impact the valuation of these securities include benchmark yield curves, credit spreads, reported trades, dealer quotes, bids, issuer spreads, current rating, historical constant prepayment rates, historical voluntary prepayment rates, structural and waterfall features of individual securities, published collateral data, and for certain securities, historical constant default rates and default severities.
The Company uses third-party pricing services in determining fair value measurements for investment securities. To obtain an understanding of the methodologies and assumptions used, management reviews written documentation provided by the pricing services, conducts interviews with valuation desk personnel and reviews model results and detailed assumptions used to value selected securities as considered necessary. Management has established a robust price challenge process that includes a review by the treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from expectations is challenged. If considered necessary to resolve any discrepancies, a price
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
will be obtained from an additional independent valuation source. The Company does not typically adjust the prices provided, other than through this established challenge process. The results of price challenges are subject to review by executive management. Any price discrepancies are resolved based on careful consideration of the assumptions and inputs employed by each of the pricing sources.
Derivative financial instruments—Fair values of interest rate swaps, caps and collars are determined using widely accepted discounted cash flow modeling techniques. These discounted cash flow models use projections of future cash payments and receipts that are discounted at mid-market rates. Observable inputs that may impact the valuation of these instruments include benchmark swap rates and benchmark forward yield curves. These fair value measurements are generally classified within level 2 of the fair value hierarchy.
The following tables present assets and liabilities measured at fair value on a recurring basis at the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| |
| Level 1 | | Level 2 | | Total |
Investment securities available for sale: | | | | | |
U.S. Treasury securities | $ | 135,841 | | | $ | — | | | $ | 135,841 | |
U.S. Government agency and sponsored enterprise residential MBS | — | | | 1,983,168 | | | 1,983,168 | |
U.S. Government agency and sponsored enterprise commercial MBS | — | | | 525,094 | | | 525,094 | |
| | | | | |
Private label residential MBS and CMOs | — | | | 2,530,663 | | | 2,530,663 | |
Private label commercial MBS | — | | | 2,524,354 | | | 2,524,354 | |
Single family real estate-backed securities | — | | | 470,441 | | | 470,441 | |
Collateralized loan obligations | — | | | 1,136,463 | | | 1,136,463 | |
Non-mortgage asset-backed securities | — | | | 95,976 | | | 95,976 | |
State and municipal obligations | — | | | 116,661 | | | 116,661 | |
SBA securities | — | | | 135,782 | | | 135,782 | |
| | | | | |
Marketable equity securities | 90,884 | | | — | | | 90,884 | |
| | | | | |
Derivative assets | — | | | 88,739 | | | 88,739 | |
Total assets at fair value | $ | 226,725 | | | $ | 9,607,341 | | | $ | 9,834,066 | |
Derivative liabilities | $ | — | | | $ | (126,220) | | | $ | (126,220) | |
Total liabilities at fair value | $ | — | | | $ | (126,220) | | | $ | (126,220) | |
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| |
| Level 1 | | Level 2 | | Total |
Investment securities available for sale: | | | | | |
U.S. Treasury securities | $ | 111,660 | | | $ | — | | | $ | 111,660 | |
U.S. Government agency and sponsored enterprise residential MBS | — | | | 2,097,796 | | | 2,097,796 | |
U.S. Government agency and sponsored enterprise commercial MBS | — | | | 856,899 | | | 856,899 | |
| | | | | |
Private label residential MBS and CMOs | — | | | 2,149,420 | | | 2,149,420 | |
Private label commercial MBS | — | | | 2,604,010 | | | 2,604,010 | |
Single family real estate-backed securities | — | | | 476,968 | | | 476,968 | |
Collateralized loan obligations | — | | | 1,078,286 | | | 1,078,286 | |
Non-mortgage asset-backed securities | — | | | 152,510 | | | 152,510 | |
State and municipal obligations | — | | | 222,277 | | | 222,277 | |
SBA securities | — | | | 183,595 | | | 183,595 | |
| | | | | |
Marketable equity securities | 120,777 | | | — | | | 120,777 | |
Servicing rights | — | | | 5,152 | | | 5,152 | |
Derivative assets | — | | | 59,019 | | | 59,019 | |
Total assets at fair value | $ | 232,437 | | | $ | 9,885,932 | | | $ | 10,118,369 | |
Derivative liabilities | $ | — | | | $ | (25,314) | | | $ | (25,314) | |
Total liabilities at fair value | $ | — | | | $ | (25,314) | | | $ | (25,314) | |
Assets and liabilities measured at fair value on a non-recurring basis
Following is a description of the methodologies used to estimate the fair values of assets and liabilities that may be measured at fair value on a non-recurring basis, and the level within the fair value hierarchy in which those measurements are typically classified.
Collateral dependent loans and OREO—The carrying amount of collateral dependent loans is typically based on the fair value of the underlying collateral, which may be real estate, enterprise value or other business assets, less estimated costs to sell when repayment is expected to come from the sale of the collateral. The carrying value of OREO is initially measured based on the fair value of the real estate acquired in foreclosure and subsequently adjusted to the lower of cost or estimated fair value, less estimated cost to sell. Fair values of real estate collateral and OREO are typically based on third-party real estate appraisals which utilize market and income approaches to valuation incorporating both observable and unobservable inputs.
Fair value measurements related to collateral dependent loans and OREO are generally classified within level 3 of the fair value hierarchy.
Operating lease equipment—Fair values of impaired operating lease equipment are typically based upon discounted cash flow analyses, considering expected lease rates and estimated end of life residual values, typically obtained from independent appraisals. These fair value measurements are classified within level 3 of the fair value hierarchy.
The following table presents the net carrying value of assets classified within level 3 of the fair value hierarchy at the dates indicated, for which non-recurring changes in fair value were recorded during the period then ended (in thousands):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
Collateral dependent loans | $ | 31,789 | | | $ | 70,433 | |
| | | |
OREO | 693 | | | 2,788 | |
Operating lease equipment | — | | | 11,429 | |
| $ | 32,482 | | | $ | 84,650 | |
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
The following table presents the carrying value and fair value of financial instruments and the level within the fair value hierarchy in which those measurements are classified at the dates indicated (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | December 31, 2021 |
| | | | | |
| Level | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Assets: | | | | | | | | | |
Cash and cash equivalents | 1 | | $ | 572,647 | | | $ | 572,647 | | | $ | 314,857 | | | $ | 314,857 | |
Investment securities | 1/2 | | $ | 9,755,327 | | | $ | 9,755,190 | | | $ | 10,064,198 | | | $ | 10,064,887 | |
Non-marketable equity securities | 2 | | $ | 294,172 | | | $ | 294,172 | | | $ | 135,859 | | | $ | 135,859 | |
| | | | | | | | | |
Loans, net | 3 | | $ | 24,738,042 | | | $ | 23,342,950 | | | $ | 23,638,596 | | | $ | 24,088,190 | |
Derivative assets | 2 | | $ | 88,739 | | | $ | 88,739 | | | $ | 59,019 | | | $ | 59,019 | |
Liabilities: | | | | | | | | | |
Demand, savings and money market deposits | 2 | | $ | 23,241,256 | | | $ | 23,241,256 | | | $ | 26,053,859 | | | $ | 26,053,859 | |
Time deposits | 2 | | $ | 4,268,078 | | | $ | 4,231,167 | | | $ | 3,384,243 | | | $ | 3,388,435 | |
Federal funds purchased | 2 | | $ | 190,000 | | | $ | 190,000 | | | $ | 199,000 | | | $ | 199,000 | |
FHLB advances | 2 | | $ | 5,420,000 | | | $ | 5,419,588 | | | $ | 1,905,000 | | | $ | 1,905,629 | |
Notes and other borrowings | 2 | | $ | 720,923 | | | $ | 698,359 | | | $ | 721,416 | | | $ | 813,095 | |
Derivative liabilities | 2 | | $ | 126,220 | | | $ | 126,220 | | | $ | 25,314 | | | $ | 25,314 | |
Note 15 Commitments and Contingencies
The Company issues off-balance sheet financial instruments to meet the financing needs of its customers. These financial instruments include commitments to fund loans, unfunded commitments under existing lines of credit, and commercial and standby letters of credit. These commitments expose the Company to varying degrees of credit and market risk which are essentially the same as those involved in extending loans to customers, and are subject to the same credit policies used in underwriting loans. Collateral may be obtained based on the Company’s credit evaluation of the counterparty. The Company’s maximum exposure to credit loss is represented by the contractual amount of these commitments.
Commitments to fund loans
These are agreements to lend funds to customers as long as there is no violation of any condition established in the contract. Commitments to fund loans generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of these commitments are expected to expire without being funded and, therefore, the total commitment amounts do not necessarily represent future liquidity requirements.
Unfunded commitments under lines of credit
Unfunded commitments under lines of credit include commercial, commercial real estate and an insignificant amount of consumer lines of credit to existing customers, for many of which additional extensions of credit are subject to borrowing base requirements. Some of these commitments may mature without being fully funded, so may not necessarily represent future liquidity requirements.
Commercial and standby letters of credit
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support trade transactions or guarantee arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Total lending related commitments outstanding at December 31, 2022 were as follows (in thousands):
| | | | | |
Commitments to fund loans | $ | 271,274 | |
| |
Unfunded commitments under lines of credit | 5,682,316 | |
Commercial and standby letters of credit | 130,247 | |
| $ | 6,083,837 | |
Legal Proceedings
The Company is involved as plaintiff or defendant in various legal actions arising in the normal course of business. In the opinion of management, based upon advice of legal counsel, the likelihood is remote that the impact of these proceedings, either individually or in the aggregate, would be material to the Company’s consolidated financial position, results of operations or cash flows.
Note 16 Condensed Financial Statements of BankUnited, Inc.
Condensed financial statements of BankUnited, Inc. are presented below (in thousands):
Condensed Balance Sheets
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Assets: | | | |
Cash and cash equivalents | $ | 266,282 | | | $ | 164,212 | |
Marketable equity securities, at fair value | 90,884 | | | 120,777 | |
Investment in BankUnited, N.A. | 2,777,082 | | | 3,465,136 | |
| | | |
Other assets | 39,682 | | | 6,673 | |
Total assets | $ | 3,173,930 | | | $ | 3,756,798 | |
Liabilities and Stockholders' Equity: | | | |
Notes payable | $ | 692,534 | | | $ | 691,200 | |
Other liabilities | 45,415 | | | 27,837 | |
Stockholders' equity | 2,435,981 | | | 3,037,761 | |
Total liabilities and stockholders' equity | $ | 3,173,930 | | | $ | 3,756,798 | |
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Condensed Statements of Income
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Income: | | | | | |
Interest and dividends on investment securities | $ | 5,047 | | | $ | 4,958 | | | $ | 4,214 | |
Service fees from subsidiary | 17,185 | | | 13,014 | | | 15,935 | |
Equity in earnings of subsidiary | 338,911 | | | 455,672 | | | 224,734 | |
Gain (loss) on investment securities | (19,732) | | | (2,530) | | | 3,822 | |
Total | 341,411 | | | 471,114 | | | 248,705 | |
Expense: | | | | | |
Interest on borrowings | 36,210 | | | 36,143 | | | 29,041 | |
Employee compensation and benefits | 29,189 | | | 26,730 | | | 24,867 | |
Other | 3,857 | | | 3,744 | | | 3,711 | |
Total | 69,256 | | | 66,617 | | | 57,619 | |
Income before income taxes | 272,155 | | | 404,497 | | | 191,086 | |
Benefit for income taxes | (12,816) | | | (10,487) | | | (6,767) | |
Net income | $ | 284,971 | | | $ | 414,984 | | | $ | 197,853 | |
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Condensed Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net income | $ | 284,971 | | | $ | 414,984 | | | $ | 197,853 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Equity in undistributed earnings of subsidiaries | 266,089 | | | (143,672) | | | (224,734) | |
Equity based compensation | 25,179 | | | 23,832 | | | 20,367 | |
Other | 1,858 | | | 8,810 | | | 10,171 | |
Net cash provided by operating activities | 578,097 | | | 303,954 | | | 3,657 | |
Cash flows from investing activities: | | | | | |
| | | | | |
Purchase of marketable equity securities | — | | | (35,000) | | | (53,266) | |
Proceeds from repayments, sale, maturities and calls of investment securities | 10,000 | | | 15,728 | | | 13,426 | |
| | | | | |
Other | — | | | (11) | | | — | |
Net cash provided by (used in) investing activities | 10,000 | | | (19,283) | | | (39,840) | |
Cash flows from financing activities: | | | | | |
Proceeds from issuance of notes payable | — | | | — | | | 293,858 | |
Dividends paid | (79,443) | | | (85,790) | | | (86,522) | |
Proceeds from exercise of stock options | — | | | 25 | | | 19,611 | |
Repurchase of common stock | (401,288) | | | (318,499) | | | (100,972) | |
Other | (5,296) | | | (5,956) | | | (4,620) | |
Net cash provided by (used in) financing activities | (486,027) | | | (410,220) | | | 121,355 | |
Net increase (decrease) in cash and cash equivalents | 102,070 | | | (125,549) | | | 85,172 | |
Cash and cash equivalents, beginning of period | 164,212 | | | 289,761 | | | 204,589 | |
Cash and cash equivalents, end of period | $ | 266,282 | | | $ | 164,212 | | | $ | 289,761 | |
Supplemental schedule of non-cash investing and financing activities: | | | | | |
Dividends declared, not paid | $ | 19,346 | | | $ | 19,876 | | | $ | 22,309 | |
Dividends received by BankUnited, Inc. from the Bank totaled $605 million and $312 million for the years ended December 31, 2022, and 2021, respectively. No dividends were received by BankUnited, Inc. from the Bank during the year ended December 31, 2020.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022
Note 17 Quarterly Financial Information (Unaudited)
Financial information by quarter for the periods indicated follows (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter | | Total |
Interest income | $ | 401,490 | | | $ | 326,024 | | | $ | 266,973 | | | $ | 235,964 | | | $ | 1,230,451 | |
Interest expense | 158,424 | | | 90,188 | | | 41,557 | | | 27,322 | | | 317,491 | |
Net interest income before provision for credit losses | 243,066 | | | 235,836 | | | 225,416 | | | 208,642 | | | 912,960 | |
Provision for credit losses | 39,608 | | | 3,720 | | | 23,996 | | | 7,830 | | | 75,154 | |
Net interest income after provision for credit losses | 203,458 | | | 232,116 | | | 201,420 | | | 200,812 | | | 837,806 | |
Non-interest income | 26,813 | | | 23,072 | | | 13,450 | | | 14,301 | | | 77,636 | |
Non-interest expense | 148,479 | | | 138,105 | | | 127,402 | | | 126,324 | | | 540,310 | |
Income before income taxes | 81,792 | | | 117,083 | | | 87,468 | | | 88,789 | | | 375,132 | |
Provision for income taxes | 17,585 | | | 29,233 | | | 21,704 | | | 21,639 | | | 90,161 | |
Net income | $ | 64,207 | | | $ | 87,850 | | | $ | 65,764 | | | $ | 67,150 | | | $ | 284,971 | |
Earnings per common share, basic | $ | 0.83 | | | $ | 1.13 | | | $ | 0.82 | | | $ | 0.79 | | | $ | 3.55 | |
Earnings per common share, diluted | $ | 0.82 | | | $ | 1.12 | | | $ | 0.82 | | | $ | 0.79 | | | $ | 3.54 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter | | Total |
Interest income | $ | 237,873 | | | $ | 234,345 | | | $ | 241,801 | | | $ | 245,429 | | | $ | 959,448 | |
Interest expense | 31,858 | | | 39,223 | | | 43,490 | | | 49,189 | | | 163,760 | |
Net interest income before provision for credit losses | 206,015 | | | 195,122 | | | 198,311 | | | 196,240 | | | 795,688 | |
Provision for (recovery of) credit losses | 246 | | | (11,842) | | | (27,534) | | | (27,989) | | | (67,119) | |
Net interest income after provision for credit losses | 205,769 | | | 206,964 | | | 225,845 | | | 224,229 | | | 862,807 | |
Non-interest income | 45,622 | | | 25,478 | | | 32,757 | | | 30,296 | | | 134,153 | |
Non-interest expense | 187,860 | | | 118,042 | | | 118,452 | | | 123,221 | | | 547,575 | |
Income before income taxes | 63,531 | | | 114,400 | | | 140,150 | | | 131,304 | | | 449,385 | |
Provision (benefit) for income taxes | (61,724) | | | 27,459 | | | 36,176 | | | 32,490 | | | 34,401 | |
Net income | $ | 125,255 | | | $ | 86,941 | | | $ | 103,974 | | | $ | 98,814 | | | $ | 414,984 | |
Earnings per common share, basic | $ | 1.42 | | | $ | 0.94 | | | $ | 1.12 | | | $ | 1.06 | | | $ | 4.52 | |
Earnings per common share, diluted | $ | 1.41 | | | $ | 0.94 | | | $ | 1.11 | | | $ | 1.06 | | | $ | 4.52 | |
During the fourth quarter of 2021, the Bank reached a settlement with the Florida Department of Revenue related to certain tax matters for the 2009-2019 tax years and recorded a tax benefit of $43.9 million, net of federal impact. Unrelated to the Florida settlement, the Bank recorded an additional $25.2 million tax benefit related to a reduction in the liability for unrecognized tax benefits arising from expiration of statutes of limitation in the Federal and certain state jurisdictions. See Note 9 to the consolidated financial statements for information about income taxes.
During the fourth quarter of 2021, derivative positions designated as cash flow hedges were discontinued resulting in a $(44.8) million loss impacting pre-tax earnings. See Note 10 to the consolidated financial statements for more information about derivative instruments.