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Registrant’s telephone number, including area code: (i305) i569-2000
Securities registered pursuant to Section 12(b) of the Act:
Class
Trading
Symbol
Name of Exchange on Which Registered
iCommon Stock, $0.01 Par Value
iBKU
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No o
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYesý No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Emerging growth company
i☐
Non-accelerated filer
☐
Smaller reporting company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes oiNo ☒
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of outstanding shares of the registrant common stock, $0.01 par value, as of April 23, 2024 was i74,756,756.
Note 1 Basis
of Presentation and Summary of Significant Accounting Policies
BankUnited, Inc. is a national 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 banking services to individual and corporate customers through banking centers in Florida, the New York metropolitan area and Dallas, Texas. The Bank also offers certain commercial lending and deposit products through national platforms and regional wholesale banking offices.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation
S-X of the SEC. Accordingly, these financial statements do not include all of the information and footnotes required for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in BKU’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2024, are not necessarily indicative of the results that may be expected in future periods.
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.
i
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.
i
New
Accounting Pronouncements Adopted During the Three Months Ended March 31, 2024
ASU No. 2023-02—Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures using the Proportional Amortization Method (A Consensus of the Emerging Issues Task Force). This ASU was issued to expand the use of the proportional amortization method of accounting for equity investments in tax credit programs beyond those in LIHTC programs. The ASU allows entities to elect the proportional amortization method, on a tax-credit-program-by-tax-credit-program basis, for all equity investments in tax credit programs meeting the eligibility criteria established. The Company adopted this ASU in the first quarter of 2024. There
was no impact upon adoption. Currently, all of the Company's equity investments in tax credit programs are in LIHTC programs already accounted for using the proportional amortization method.
Accounting Pronouncements Not Yet Adopted
ASU No. 2023-07—Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU augments reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements.
This ASU is effective for the Company for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. This ASU will have no impact on the Company's consolidated financial position, results of operations, and cash flows. Adoption may lead to additional and revised disclosures in the Company's financial statements starting with the 2024 Annual Report on Form 10-K.
ASU No. 2023-09—Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires entities to provide additional disclosures, primarily related to the income tax rate reconciliation and income taxes paid. The guidance also eliminates certain existing disclosure requirements related to uncertain tax positions among others. This ASU is effective for the
Company for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. The adoption of this ASU will have no impact on the Company's consolidated financial position, results of operations, and cash flows. Adoption will lead to additional and revised disclosures in the Company's financial statements.
i
Note
2 Earnings Per Common Share
i
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):
Three
Months Ended March 31,
c
2024
2023
Basic earnings per common share:
Numerator:
Net
income
$
i47,980
$
i52,882
Distributed
and undistributed earnings allocated to participating securities
(i680)
(i798)
Income
allocated to common stockholders for basic earnings per common share
$
i47,300
$
i52,084
Denominator:
Weighted
average common shares outstanding
i74,509,107
i74,755,002
Less
average unvested stock awards
(i1,127,838)
(i1,193,881)
Weighted
average shares for basic earnings per common share
i73,381,269
i73,561,121
Basic
earnings per common share
$
i0.64
$
i0.71
Diluted
earnings per common share:
Numerator:
Income allocated to common stockholders for basic earnings per common share
$
i47,300
$
i52,084
Adjustment
for earnings reallocated from participating securities
i1
i3
Income
used in calculating diluted earnings per common share
$
i47,301
$
i52,087
Denominator:
Weighted
average shares for basic earnings per common share
i73,381,269
i73,561,121
Dilutive
effect of certain share-based awards
i255,824
i447,581
Weighted
average shares for diluted earnings per common share
i73,637,093
i74,008,702
Diluted
earnings per common share
$
i0.64
$
i0.70
/
Potentially
dilutive unvested shares totaling i1,142,702 and i1,190,511
were outstanding at March 31, 2024 and 2023, respectively, but excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive.
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):
U.S.
Government agency and sponsored enterprise residential MBS
i1,962,658
i1,810
(i40,261)
i1,924,207
U.S.
Government agency and sponsored enterprise commercial MBS
i561,557
i107
(i63,805)
i497,859
Private
label residential MBS and CMOs
i2,596,231
i268
(i300,769)
i2,295,730
Private
label commercial MBS
i2,282,833
i678
(i84,768)
i2,198,743
Single
family real estate-backed securities
i383,984
i—
(i17,729)
i366,255
Collateralized
loan obligations
i1,122,799
i735
(i10,710)
i1,112,824
Non-mortgage
asset-backed securities
i106,095
i156
(i3,471)
i102,780
State
and municipal obligations
i107,176
i715
(i5,273)
i102,618
SBA
securities
i106,237
i41
(i3,254)
i103,024
i9,369,428
$
i5,042
$
(i539,838)
i8,834,632
Investment
securities held to maturity
i10,000
i10,000
$
i9,379,428
i8,844,632
Marketable
equity securities
i32,722
$
i8,877,354
(1)At
fair value except for securities held to maturity.
Investment securities held to maturity at March 31, 2024 and December 31, 2023, consisted of iione/
State of Israel bond maturing in October 2024. Accrued interest receivable on investments totaled $i38 million and $i37 million at March 31, 2024 and December 31, 2023, respectively, and is included
in other assets in the accompanying consolidated balance sheets.
i
At March 31, 2024, 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
$
i964,667
$
i933,002
Due
after one year through five years
i5,211,147
i5,061,309
Due
after five years through ten years
i1,952,118
i1,774,119
Due
after ten years
i1,251,871
i1,113,005
$
i9,379,803
$
i8,881,435
/
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 $ii7.7/
billion at both March 31, 2024 and December 31, 2023, respectively.
Gross
realized losses on investment securities AFS
(i55)
(i20)
Net
realized gain (loss)
(i28)
i752
Net
gain (loss) on marketable equity securities recognized in earnings
i803
(i13,301)
Gain
(loss) on investment securities, net
$
i775
$
(i12,549)
/i
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):
U.S.
Government agency and sponsored enterprise residential MBS
i82,382
(i430)
i1,646,081
(i39,831)
i1,728,463
(i40,261)
U.S.
Government agency and sponsored enterprise commercial MBS
i3,332
(i6)
i481,651
(i63,799)
i484,983
(i63,805)
Private
label residential MBS and CMOs
i—
i—
i2,255,461
(i300,769)
i2,255,461
(i300,769)
Private
label commercial MBS
i51,434
(i323)
i2,054,378
(i84,445)
i2,105,812
(i84,768)
Single
family real estate-backed securities
i—
i—
i366,255
(i17,729)
i366,255
(i17,729)
Collateralized
loan obligations
i184,652
(i348)
i880,609
(i10,362)
i1,065,261
(i10,710)
Non-mortgage
asset-backed securities
i—
i—
i79,697
(i3,471)
i79,697
(i3,471)
State
and municipal obligations
i24,765
(i1,049)
i32,380
(i4,224)
i57,145
(i5,273)
SBA
securities
i8,194
(i46)
i89,763
(i3,208)
i97,957
(i3,254)
$
i364,700
$
(i2,229)
$
i7,986,044
$
(i537,609)
$
i8,350,744
$
(i539,838)
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 three months ended March 31, 2024 and 2023. At March 31, 2024, the Company did not have an intent to sell securities that were in significant 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 including its ability to pledge securities to generate liquidity, its investment policy as to permissible holdings and concentration limits, regulatory requirements and other relevant factors. We have not sold, and do not anticipate the need to sell, securities in unrealized loss positions to generate liquidity.
At March 31, 2024, i540 securities available for sale were in unrealized loss positions.
The amount of impairment related to i138 of these securities was considered insignificant both individually and in the aggregate, totaling approximately $i1.3
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 March 31, 2024, is further discussed below.
Unrealized losses were primarily attributable to a sustained higher interest rate environment. In some cases, wider spreads compared to levels at which securities were purchased. market volatility and yield curve dislocations also contributed to unrealized losses. The investment securities AFS portfolio was in a net unrealized loss position of $i498.4
million at March 31, 2024, compared to $i534.8 million at December 31, 2023, improving by $i36.4
million during the three months ended March 31, 2024. While the majority of securities in the portfolio were floating rate at March 31, 2024, fixed rate securities accounted for the majority of unrealized losses.
U.S. Government, U.S. Government Agency and Government Sponsored Enterprise Securities
At March 31, 2024, isix
U.S. treasury, i104 U.S. Government agency and sponsored enterprise residential MBS, i27 U.S. Government agency and sponsored
enterprise commercial MBS, and i22 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.
None of the impaired private label securities had missed principal or interest payments or had been downgraded by a NRSRO at March 31, 2024. 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 March 31, 2024, 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.
Private label residential MBS and CMOs
At March 31, 2024, i115
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, special servicing and prepay trends as well as other economic data that could be indicative of stress in the sector. Underlying delinquencies in this sector remain low. Our March 31, 2024 analysis projected weighted average collateral losses for impaired securities in this category of i2%
compared to weighted average credit support of i18%. As of March 31, 2024, i95% of impaired securities in this category, based on carrying value, were externally rated AAA, i4%
were rated AA and i1% were rated A.
Private label commercial MBS
At March 31, 2024, i88
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 concentrations, collateral watch lists, bankruptcy data, defeasance data, special servicing trends, delinquency and other economic data that could be indicative of stress in the sector. We consider collateral, deal, sector and tranche level performance as well as maturity and refinance risk. While we have observed some deterioration in collateral performance in this segment, particularly in the office, retail and hospitality sectors, the high credit quality of these securities and adequacy of subordination to cover projected collateral
losses supports the conclusion that there is no credit loss impairment. Our March 31, 2024 analysis projected weighted average collateral losses for impaired securities in this category of i6% compared to weighted average credit support of i43%.
As of March 31, 2024, i84% of impaired securities in this category, based on carrying value, were externally rated AAA, i12% were rated AA and i4%
were rated A.
Single family real estate-backed securities
At March 31, 2024, i11 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. We consider collateral, deal, sector and tranche level performance as well as maturity and refinance risk. Our March 31, 2024 analysis projected weighted average collateral losses for this category of i7% compared to weighted average credit support of i55%.
As of March 31, 2024, i54% of impaired securities in this category, based on carrying value, were externally rated AAA, i18% were rated AA and ione
security was not externally rated.
At March 31, 2024, i15
collateralized loan obligations were in unrealized loss positions. Unrealized losses totaled less than 1% of total amortized cost of this segment at March 31, 2024. 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. While we have observed some deterioration in underlying collateral performance due in large part to rising costs, the high credit quality of these securities and
adequacy of subordination to cover projected collateral losses supports the conclusion that there is no credit loss impairment. Our March 31, 2024 analysis projected weighted average collateral losses for impaired securities in this category of i11% compared to weighted average credit support of i42%.
As of March 31, 2024, i80% of the impaired securities in this category, based on carrying value, were externally rated AAA, i12% were rated AA and i8%
were rated A.
Non-mortgage asset-backed securities
At March 31, 2024, isix 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 March 31, 2024 analysis projected weighted average collateral losses for impaired securities in this category of i4% compared to weighted average credit support of i26%.
As of March 31, 2024, i36% of the impaired securities in this category, based on carrying value, were externally rated AAA, and i64% were rated AA.
State and Municipal Obligations
At
March 31, 2024, ieight 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 March 31, 2024, i87%
of the impaired securities in this category, based on carrying value, were externally rated AAA and i13% were rated AA.
Premiums,
discounts and deferred fees and costs, excluding the non-credit related discount on PCD loans, totaled $i41 million and $i45 million at March 31, 2024 and December 31,
2023, respectively.
i
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):
Included
in loans, net are direct or sales type finance leases totaling $i583 million and $i602 million at March 31,
2024 and December 31, 2023, respectively. The amount of income recognized from direct or sales type finance leases for the three months ended March 31, 2024 and 2023 totaled $i4.0 million and $i4.3
million, respectively, and is included in interest income on loans in the consolidated statements of income.
During the three months ended March 31, 2024 and 2023, the Company purchased residential loans totaling $i67 million and $i187
million, respectively.
At March 31, 2024 and December 31, 2023, the Company had pledged loans with a carrying value of approximately $i16.2 billion and $i16.5 billion,
respectively, as security for FHLB advances and Federal Reserve discount window capacity.
Accrued interest receivable on loans totaled $ii138/
million at both March 31, 2024 and December 31, 2023, 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 three months ended March 31, 2024 and 2023.
The
ACL was determined utilizing a 2-year reasonable and supportable forecast period. The quantitative portion of the ACL was determined using three weighted third-party provided economic scenarios.
The ACL increased by $i14.9 million, from i0.82%
to i0.90% of total loans, at March 31, 2024, compared to December 31, 2023. The more significant factors impacting the provision for credit losses and increase in the ACL for the three months ended March 31, 2024, were an increase in qualitative loss factors and risk rating migration, partially offset by an improved economic forecast.
i
The
following table presents gross charge-offs during the three months ended March 31, 2024, by year of origination (in thousands):
2024
2023
2022
2021
2020
Prior
to 2020
Revolving Loans
Total
CRE
$
i—
$
i—
$
i—
$
i—
$
i—
$
i486
$
i—
$
i486
C&I
i—
i191
i3,186
i29
i—
i591
i79
i4,076
Franchise
and equipment finance
i—
i—
i—
i—
i—
i790
i—
i790
Residential
i—
i—
i—
i—
i—
i34
i—
i34
$
i—
$
i191
$
i3,186
$
i29
$
i—
$
i1,901
$
i79
$
i5,386
/
The
following table presents the components of the provision for credit losses for the periods indicated (in thousands):
Amount
related to off-balance sheet credit exposures
(i520)
i2,193
Total
provision for credit losses
$
i15,285
$
i19,788
i
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.
Factors that impact risk inherent in commercial portfolio segments include but are not limited to levels of economic activity or potential disruptions in economic activity, health of the national, regional and to a lesser extent global economy, interest rates, industry trends, demographic trends, inflationary trends, including particularly for commercial real estate loans the cost of insurance, patterns of and trends in customer behavior that influence demand for our borrowers' products and services, and commercial real estate values and related market dynamics. Particularly for the office sector, the evolving impact of hybrid and remote
work on vacancies and valuations is a factor. Internal risk ratings are considered the most meaningful indicator of credit quality for commercial loans. Internal risk ratings are one indicator 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 $i1
million to $i3 million, are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. 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.
Commercial credit exposure based on internal risk rating (in thousands):
Management considers delinquency status to be the most meaningful indicator of the credit quality of residential loans, other than government insured residential loans. Delinquency status is 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 first quarter of 2024. 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.
Included
in the table above is the guaranteed portion of SBA loans past due by 90 days or more totaling $i37.8 million ($i29.5 million
of C&I and $i8.3 million of CRE) and $i39.7 million at March 31,
2024 and December 31, 2023, respectively.
Loans contractually delinquent by 90 days or more and still accruing totaled $i256 million and $i278
million at March 31, 2024 and December 31, 2023, 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.
Included
in the table above is the guaranteed portion of non-accrual SBA loans totaling $i40.0 million and $i41.8 million at March 31,
2024 and December 31, 2023, respectively. The amount of interest income recognized on non-accrual loans was insignificant for the three months ended March 31, 2024 and 2023. 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 $i2.5 million and $i1.9
million for the three months ended March 31, 2024 and 2023, respectively.
Collateral dependent loans:
i
The following table presents the amortized cost basis of collateral dependent loans at the dates indicated (in thousands):
Collateral
for the CRE loan class generally consists of commercial real estate, or for certain construction loans, residential real estate. Collateral for C&I loans generally consists of equipment, accounts receivable, inventory and other business assets and for owner-occupied commercial real estate loans, may also include commercial real estate. Franchise and equipment 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 secured collateral dependent loans during the three months ended March 31, 2024.
Foreclosure of residential real estate
The recorded investment in residential loans in the process of foreclosure was $i238
million, of which $i225 million was government insured at March 31, 2024, and $i262 million, of which $i250
million was government insured at December 31, 2023. The carrying amount of foreclosed residential real estate included in other assets in the accompanying consolidated balance sheet was insignificant at March 31, 2024 and December 31, 2023.
The following tables summarize loans that were modified for borrowers experiencing financial difficulty, by type of modification, during the periods indicated (dollars in thousands):
Reduced weighted average contractual interest rate from i3.8% to i3.1%.
Government
insured residential
Reduced weighted average contractual interest rate from i4.8% to i3.8%.
Term
Extension:
C&I
Added a weighted average i0.7 years to the term of the modified loans.
Government
insured residential
Added a weighted average i9.6 years to the term of the modified loans.
Combination - Interest Rate Reduction and Term Extension:
Government insured residential
Reduced
weighted average contractual interest rate from i5.8% to i4.9% and added a weighted average
i6.9 years to the term of the modified loans.
The
following tables present the aging at March 31, 2024, of loans that were modified within the previous 12 months, and at March 31, 2023, of loans that were modified since January 1, 2023, the date of adoption of ASU 2022-02 (in thousands):
The Company’s effective income
tax rate was i28.6% and i26.4% for the three months ended March 31, 2024 and 2023, respectively. The effective income tax rates differed from the
statutory federal income tax rate of ii21/%
for the three months ended March 31, 2024 and 2023 primarily due to the impact of state income taxes, partially offset by the benefit of income not subject to federal tax. The effective income tax rate for the three months ended March 31, 2024, also included the impact of a discrete item related to equity based compensation.
/
Note 6 iDerivative
Financial Instruments
Derivatives designated as hedging instruments
The Company has entered into interest rate derivatives designated as (i) cash flow hedges with the objective of limiting the variability of interest payment cash flows and (ii) fair value hedges designed to hedge changes in the fair value of outstanding fixed rate instruments caused by fluctuations in the benchmark interest rate. 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.
i
The
following table summarizes the Company's derivatives designated as hedging instruments as of the dates indicated (in thousands):
(1)The
fair values of derivatives are included in other assets or other liabilities in the consolidated balance sheets.
/
Derivatives designated as cash flow hedges
i
The following table provides information about the amount of gain (loss) related to derivatives designated as cash
flow hedges reclassified from AOCI into interest income or expense for the periods indicated (in thousands):
Location
of gain (loss) reclassified from AOCI into income:
Interest expense on borrowings
$
i15,712
$
i7,497
Interest
expense on deposits
i4,926
i5,049
Interest
income on loans
(i816)
(i392)
$
i19,822
$
i12,154
/
During
the three months ended March 31, 2024 and 2023, 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 March 31, 2024, the amount of net gain expected to be reclassified from AOCI into earnings during the next twelve months was $i39.4
million, based on the forward curve. See Note 7 to the consolidated financial statements for additional information about the reclassification adjustments from AOCI into earnings.
The
amount of gain (loss) related to derivatives designated as fair value hedges recognized in earnings was insignificant for all applicable periods. iThe following table provides information about the hedged items related to derivatives designated as fair value hedges at the date indicated (in thousands):
Contractual balance outstanding of hedged item (1)
$
i100,000
$
i100,000
Loans
Cumulative
fair value hedging adjustments
$
(i1,022)
$
(i1,656)
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. The amortized cost basis of the closed portfolio used in this hedging relationship was $i976 million and $i992 million,
respectively, at March 31, 2024 and December 31, 2023.
Derivatives not designated as hedging instruments
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. The Company also purchases and sells credit protection under RPAs with the objective of sharing with financial institution counterparties some of the credit exposure related to interest rate derivative contracts entered into with commercial borrowers related to participations purchased or sold. The Company will make or receive payments under these agreements if a customer defaults on an obligation to perform under certain interest rate derivative contracts. 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. The impact on earnings related to changes in fair value of these derivatives was not material for the three months ended March 31, 2024 and 2023.
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.
i
The
following table summarizes the Company's derivatives not designated as hedging instruments as of the dates indicated (in thousands):
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.
Master netting agreements
i
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):
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.
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 quarterly basis. Any price evidencing unexpected quarter over quarter fluctuations or deviations from expectations is challenged. If considered necessary to resolve any discrepancies, a price 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 derivatives 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.
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.
i
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):
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):
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.
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 and commercial real estate 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.
i
Total lending related commitments outstanding at March 31, 2024 were as
follows (in thousands):
Commitments to fund loans
$
i200,034
Unfunded commitments under lines of credit
i5,068,914
Commercial
and standby letters of credit
i142,032
$
i5,410,980
/
Legal
Proceedings
The Company is involved 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 adverse 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.
i
Note 10 Deposits
i
The
following table presents average balances and weighted average rates paid on deposits for the periods indicated (dollars in thousands):
Certain
of our depositors participate in various customer rebate programs. During the three months ended March 31, 2024 and 2023, costs related to those programs totaled $i14.0 million and $i8.5
million, respectively. These expenses are included in "other non-interest expense" in the accompanying consolidated statements of income.
32
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to focus on significant matters impacting and changes in the financial condition and results of operations of the
Company during the three months ended March 31, 2024 and should be read in conjunction with the consolidated financial statements and notes hereto included in this Quarterly Report on Form 10-Q and BKU's 2023 Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Annual Report on Form 10-K").
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the Company’s current views with respect to, among other things, future events and financial performance. Words such as “anticipates,”“expects,”“intends,”“plans,”“believes,”“seeks,”“estimates,”"future" and similar expressions identify forward-looking statements. These forward-looking statements are based on the historical performance of the Company or on the Company’s current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations so contemplated will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to the Company’s operations, financial results, financial condition, business
prospects, growth strategy and liquidity, including as impacted by external circumstances outside the Company's direct control, such as adverse events impacting the financial services industry. If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, the Company’s actual results may vary materially from those indicated in these statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, the risk factors described in Part I, Item 1A of the 2023 Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q or
Current Report on Form 8-K. The Company does not undertake any obligation to publicly update or review any forward looking statement, whether as a result of new information, future developments or otherwise.
Overview
Net income for the three months ended March 31, 2024, was $48.0 million, or $0.64 per diluted share, compared to $52.9 million, or $0.70 per diluted share for the three months ended March 31, 2023. For the three months ended March 31, 2024, the annualized return on average stockholders' equity was 7.31% and the annualized
return on average assets was 0.54%.
In evaluating our financial performance, we consider the level of and trends in net interest income, the net interest margin, the cost of deposits, trends in 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 the composition of earning assets and the funding mix, the composition and level of available liquidity and our interest rate risk profile. We analyze these ratios and trends against our own historical performance, our expected performance, our risk appetite and the financial condition and performance of comparable financial institutions.
In
response to evolving macro-environmental factors, we have established the following near-term strategic priorities for our Company:
•Improve the Bank's funding profile by growing core deposits and paying down higher cost wholesale funding;
•Improve the asset mix by re-positioning the balance sheet away from typically lower yielding transactional business such as residential mortgages and organically growing core commercial loans;
•Improve the net interest margin, largely a function of more profitable balance sheet composition;
•Maintain robust liquidity and capital;
•Continue
to manage credit;
•Manage the rate of growth in operating expenses.
The three months ended March 31, 2024 embodied strong execution on these key strategic priorities:
◦The funding mix continued to improve as non-interest bearing demand deposits grew by $404 million for the three months ended March 31, 2024. Non-brokered deposits grew by $644 million and total deposits grew by $489 million. Non-interest bearing demand deposits represented 27% of total deposits at March 31, 2024, up from 26% at December 31, 2023.
33
◦Wholesale
funding, including FHLB advances and brokered deposits, declined by $1.4 billion for the three months ended March 31, 2024.
◦Total loans declined by $407 million for the three months ended March 31, 2024. Strategically, the residential loan portfolio declined by $152 million. The C&I and commercial real estate portfolios declined by $226 million. This decline was related to expected seasonality as well as some notable unexpected paydowns and the decision to exit some non-relationship shared national credits.
◦The net interest margin, calculated on a tax-equivalent basis was relatively stable at 2.57% compared to 2.60% for the three months ended December 31, 2023. The net
interest margin was 2.62% for the three months ended March 31, 2023.
◦Credit is favorable. The annualized net charge-off ratio for the three months ended March 31, 2024, was 0.02%. The NPA ratio at March 31, 2024 declined to 0.34%, including 0.11% related to the guaranteed portion of non-performing SBA loans, from 0.37%, including 0.12% related to the guaranteed portion of non-performing SBA loans at December 31, 2023.
◦Liquidity is ample. Total same day available liquidity was $14.8 billion, the available liquidity to uninsured, uncollateralized deposits ratio was 156% and an estimated 65% of our deposits were insured or collateralized
at March 31, 2024.
◦Our capital position is robust. At March 31, 2024, CET1 was 11.6% and pro-forma CET1, including accumulated other comprehensive income, was 10.3%. The ratio of tangible common equity/tangible assets increased to 7.3%.
Quarterly Highlights:
•The average cost of total deposits increased to 3.18% for the three months ended March 31, 2024, from 2.96% for the immediately preceding three months ended December 31, 2023, and 2.05% for the three months ended March 31, 2023. The cost of deposits is showing signs of stabilizing.
On a spot basis, the cost of total deposits was 3.17% at March 31, 2024 compared to 3.18% at December 31, 2023.
•Commercial real estate exposure is modest. Commercial real estate loans totaled 24% of loans at March 31, 2024, representing 166% of the Bank's total risk-based capital. By comparison, based on call report data as of December 31, 2023, (the most recent date available) for banks with between $10 billion and $100 billion in assets, the median level of CRE to total loans was 35% and the median level of CRE to total risk based capital
was 225%.
•At March 31, 2024, the ratio of the ACL to total loans was 0.90% compared to 0.82% at December 31, 2023. The ACL to loans ratio for commercial portfolio sub-segments including C&I, CRE, franchise finance and equipment finance was 1.42% at March 31, 2024 and the ACL to loans ratio for CRE office loans was 2.26%.
•Non-interest expense for the three months ended March 31, 2024 included an additional $5.2 million related to the FDIC special assessment announced in the fourth quarter of 2023.
•The net unrealized pre-tax loss on the AFS securities portfolio
continued to improve, declining by $36 million for the three months ended March 31, 2024, now representing 5% of amortized cost. The duration of our AFS securities portfolio remained short at 1.85 at March 31, 2024. HTM securities were not significant.
•Book value and tangible book value per common share grew to $35.31 and $34.27, respectively, at March 31, 2024, from $34.66 and $33.62, respectively, at December 31, 2023.
•The Company increased its quarterly cash dividend by $0.02, to $0.29 per share, reflecting a 7% increase from the previous quarterly
cash dividend of $0.27 per share.
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 and monetary policy, the shape of the yield curve, levels of non-performing assets and pricing pressure from competitors.
34
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 funding sources is influenced by the Company's liquidity profile, management's assessment of the desire for lower cost funding sources weighed against relationships with customers, 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):
(1)On
a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $3.2 million for the three months ended March 31, 2024 and $3.3 million for both the three months ended December 31, 2023, and March 31, 2023. The tax-equivalent adjustment for tax-exempt investment securities was $0.8 million for the three months ended March 31, 2024, and $0.9 million for both the three months ended December 31, 2023 and March 31, 2023.
(2)Annualized.
(3)At fair value except for securities held to maturity.
Net interest income, calculated on a tax-equivalent basis, was $218.9 million for the three months ended March 31, 2024, compared to $221.4 million for the three months ended December 31, 2023, a decrease of $2.5 million. The decrease in net interest income was comprised of decreases in tax-equivalent interest income of $1.9 million and increases in interest expense totaling $0.6 million, for the three months ended March 31, 2024, compared to the three months ended December
31, 2023. The net interest margin, calculated on a tax-equivalent basis, was 2.57% for the three months ended March 31, 2024, compared to 2.60% for the three months ended December 31, 2023.
Factors impacting the net interest margin for the three months ended March 31, 2024, compared to the three months ended December 31, 2023, included:
•The tax-equivalent yield on loans increased to 5.78% for the three months ended March 31, 2024, from 5.69% for the three months ended December
31, 2023. This increase reflects the originations of new loans at higher rates, paydowns of lower rate loans and balance sheet repositioning.
•The tax-equivalent yield on investment securities decreased to 5.59% for the three months ended March 31, 2024, from 5.73% for the three months ended December 31, 2023. The primary driver of this decrease was routine accounting adjustments recorded in the three months ended December 31, 2023 related to prepayment speeds on certain securities; these adjustments positively impacted the yield for the three months ended December 31, 2023.
•The average
rate paid on interest bearing deposits increased to 4.21% for the three months ended March 31, 2024, from 4.04% for the three months ended December 31, 2023. An increase in municipal money market deposits late in the fourth quarter of 2023 and CD repricing were contributing factors.
•The average rate paid on FHLB advances decreased to 4.18% for the three months ended March 31, 2024 from 4.58% for the three months ended December 31, 2023, primarily due to repayment of higher rate advances.
Net interest income, calculated on a tax-equivalent basis, was $218.9 million for the three months ended March 31, 2024, compared to $232.1 million for the three months ended March 31, 2023, a decrease of $13.2 million, comprised of increases in tax-equivalent interest income and interest expense of $40.9 million and $54.1 million, respectively. The increase in interest income for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, reflected rising yields on interest earning assets that more than offset the decline in average interest earning assets. Similarly, the increase in interest expense for the three months
ended March 31, 2024 compared to the three months ended March 31, 2023, resulted from an increase in the cost of interest bearing liabilities that more than offset the decline in average interest bearing liabilities.
The net interest margin, calculated on a tax-equivalent basis, was 2.57% for the three months ended March 31, 2024, compared to 2.62% for the three months ended March 31, 2023. The increase in cost of deposits outpaced the increase in the yield on interest earning assets for the comparative periods. Increased yields on average interest earning assets as well as the increase in the cost of deposits reflected increasing market interest rates.
Further discussion of factors impacting
the net interest margin for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 follows:
•The tax-equivalent yield on loans expanded to5.78% for the three months ended March 31, 2024, from 5.10% for the three months ended March 31, 2023. Factors contributing to this increase were the resetting of variable rate loans at higher coupon rates, runoff of lower rate loans including residential mortgages and originations of new loans at higher prevailing rates and wider spreads. Average residential loans, which
are generally lower-yielding, declined by $709 million while average commercial loans increased by $322 million for the quarter ended March 31, 2024 compared to the quarter ended March 31, 2023.
•The tax-equivalent yield on investment securities increased to 5.59% for the three months ended March 31, 2024, from 4.95% for the three months ended March 31, 2023. This increase resulted primarily from the reset of coupon rates on variable rate securities and to a lesser extent, purchases of higher-yielding securities and paydowns
and sales of lower-yielding securities.
36
•The average cost of total deposits increased to 3.18% for the three months ended March 31, 2024, from 2.05% for the three months ended March 31, 2023. This increase resulted from increases in market interest rates and a shift from non-interest bearing deposits to interest bearing deposits.
•The average rate paid on FHLB advances decreased to 4.18% for the three
months ended March 31, 2024, from 4.27% for the three months ended March 31, 2023, primarily due to repayment of higher rate advances.
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):
Amount related to off-balance sheet credit exposures
(520)
2,193
Total
provision for credit losses
$
15,285
$
19,788
The most significant factors impacting the provision for credit losses for the three months ended March 31, 2024, were an increase in qualitative loss factors, particularly related to the office CRE portfolio sub-segment, and risk rating migration, partially offset by an improved economic forecast.
The provision for credit losses may 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, but not limited to, economic conditions or the economic outlook, the composition of the loan portfolio, 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):
Net realized gain (loss) on sale of securities AFS
(28)
752
Net gain (loss) on marketable equity securities recognized in earnings
803
(13,301)
Gain
(loss) on investment securities, net
775
(12,549)
Lease financing
11,440
13,109
Other non-interest income
9,163
10,430
$
26,877
$
16,535
The
losses on marketable equity securities during the three months ended March 31, 2023, were attributable to losses related to certain preferred equity investments.
The decrease in lease financing revenue for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was attributable to the impact of the sale of some operating lease equipment, reducing the size of the portfolio.
37
Non-Interest Expense
The
following table presents the components of non-interest expense for the periods indicated (in thousands):
The increases in deposit insurance expense was primarily attributable to an additional $5.2 million related to an FDIC special assessment during the three months ended March 31, 2024.
The decline in depreciation of operating lease equipment for the three months ended March 31, 2024, compared to the three months ended March
31, 2023, is primarily attributed to the reduction in operating lease equipment, corresponding to the decline in lease financing revenue.
Income Taxes
See Note 5 to the consolidated financial statements for information about income taxes.
Analysis of Financial Condition
Our funding profile has continued to improve. Total deposits grew by $489 million during the three months ended March 31, 2024, to $27.0 billion; non-brokered deposits grew by $644 million. Most of the increase in total deposits was in non-interest bearing demand deposits, which grew by $404 million, to 27% of total deposits. During the three months ended March
31, 2024, FHLB advances declined by $1.2 billion, as we paid down higher rate advances.
Total loans declined by $407 million during the three months ended March 31, 2024. As we continue to reposition the left side of the balance sheet, residential loans declined by $152 million; franchise, equipment, and municipal finance declined by an aggregate $53 million. The C&I and CRE portfolios declined by $226 million; while production was in line with expectations, seasonality, some unexpected paydowns and exits of some shared national credits contributed to this decline.
38
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):
U.S.
Government agency and sponsored enterprise residential MBS
2,193,543
2,161,292
1,962,658
1,924,207
U.S. Government agency and sponsored enterprise commercial MBS
559,069
494,207
561,557
497,859
Private
label residential MBS and CMOs
2,543,764
2,250,219
2,596,231
2,295,730
Private label commercial MBS
2,191,733
2,122,271
2,282,833
2,198,743
Single
family real estate-backed securities
356,205
341,362
383,984
366,255
Collateralized loan obligations
1,077,232
1,076,492
1,122,799
1,112,824
Non-mortgage
asset-backed securities
103,594
100,124
106,095
102,780
State and municipal obligations
113,280
106,713
107,176
102,618
SBA
securities
101,515
98,465
106,237
103,024
Investment securities held to maturity
10,000
10,000
10,000
10,000
$
9,389,803
8,891,435
$
9,379,428
8,844,632
Marketable
equity securities
33,524
32,722
$
8,924,959
$
8,877,354
Our
investment strategy is focused on ensuring 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. 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, are generally pledgeable at either the FHLB or the FRB and provide us with attractive yields. Investment grade municipal securities provide liquidity and attractive tax-equivalent yields. We remain committed to keeping the duration of our securities portfolio short;
relatively short effective portfolio duration helps mitigate interest rate risk. Based on the Company’s assumptions, the effective duration of the investment portfolio was 1.86 years and the estimated weighted average life of the portfolio was 5.5 years as of March 31, 2024.
The investment securities AFS portfolio was in a net unrealized loss position of $498.4 million at March 31, 2024, compared to a net unrealized loss position of $534.8 million at December 31, 2023, improving by $36.4 million during the three months ended March 31, 2024. Net unrealized
losses at March 31, 2024 included $6.4 million of gross unrealized gains and $504.8 million of gross unrealized losses. Investment securities available for sale in unrealized loss positions at March 31, 2024 had an aggregate fair value of $7.7 billion. The unrealized losses resulted primarily from a sustained period of higher interest rates, and in some cases, wider spreads compared to the levels at which securities were purchased. Market volatility and yield curve dislocations have also contributed to unrealized losses. None of the unrealized losses were attributable to credit loss impairments.
39
The
ratings distribution of our AFS securities portfolio at the dates indicated is depicted in the charts 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, a
sector, 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 external credit ratings;
•Relevant market data; and
•Estimated prepayments, defaults, and the value and performance of underlying collateral at the individual security level.
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.
We do not intend to sell securities in significant unrealized loss positions at March 31, 2024. 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. The substantial majority of our investment securities are able to be pledged at either the FHLB or FRB. We have not sold, and do not anticipate the need to sell, securities in unrealized loss positions to generate liquidity.
40
We
have implemented a robust credit stress testing framework with respect to our non-agency securities. The following table presents subordination levels and average internal stress scenario losses for select non-agency portfolio segments at March 31, 2024:
Subordination
Weighted
Average Stress Scenario Loss
Rating
Percent of Total
Minimum
Maximum
Average
Private label CMBS
AAA
85.4
%
30.3
97.9
44.8
6.1
AA
11.0
%
30.5
74.3
37.8
6.7
A
3.6
%
25.1
51.6
38.0
8.6
Weighted
average
100.0
%
30.1
93.7
43.8
6.3
CLOs
AAA
82.8
%
41.3
89.3
47.7
10.9
AA
13.4
%
30.8
42.8
35.8
8.4
A
3.8
%
34.0
34.3
34.1
9.7
Weighted
average
100.0
%
39.6
81.0
45.6
10.5
Private label residential MBS and CMOs
AAA
94.4
%
1.2
92.2
17.8
2.2
AA
4.1
%
20.4
34.5
25.3
5.3
A
1.5
%
28.5
30.5
29.2
5.4
Weighted
average
100.0
%
2.4
88.9
18.3
2.4
While
for some securities, we have seen an increase in stress scenario losses over the last year, the level of subordination continues to provide more than sufficient coverage of stress scenario collateral losses, further supporting our determination that none of our securities are credit loss impaired. The scenario used to project stress scenario losses is generally calibrated to the level of stress experienced in the Great Financial Crisis. 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 quarterly basis. Any price evidencing unexpected quarter over quarter 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 disclosure related to the fair values of investment securities, see Note 8 to the consolidated financial
statements.
41
The following table shows the weighted average prospective yields, categorized by scheduled maturity, for AFS investment securities as of March 31, 2024. 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
1.08
%
4.47
%
0.89
%
—
%
1.55
%
U.S. Government
agency and sponsored enterprise residential MBS
5.65
%
5.90
%
6.00
%
5.89
%
5.89
%
U.S.
Government agency and sponsored enterprise commercial MBS
2.86
%
5.97
%
3.30
%
2.86
%
3.83
%
Private
label residential MBS and CMOs
3.93
%
3.88
%
3.77
%
3.98
%
3.90
%
Private
label commercial MBS
6.46
%
6.99
%
1.90
%
3.30
%
6.64
%
Single family
real estate-backed securities
1.88
%
3.85
%
—
%
—
%
3.84
%
Collateralized
loan obligations
7.24
%
7.47
%
7.88
%
—
%
7.47
%
Non-mortgage asset-backed
securities
3.05
%
6.08
%
2.70
%
—
%
5.74
%
State and municipal obligations
2.59
%
4.20
%
4.28
%
—
%
4.22
%
SBA
securities
6.20
%
6.19
%
6.13
%
5.93
%
6.17
%
5.27
%
6.13
%
4.34
%
4.15
%
5.48
%
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):
Commercial loans include a diverse portfolio of commercial and industrial loans and lines of credit, loans secured by owner-occupied commercial real-estate, income-producing non-owner occupied commercial real estate, a smaller amount of construction loans, SBA loans, mortgage warehouse lines of credit, municipal loans and leases originated by Pinnacle and franchise and equipment finance loans and leases originated by Bridge.
42
The following charts present the distribution of the commercial loan portfolio at the dates indicated (dollars in millions):
Commercial real estate loans include term loans secured by non-owner occupied income producing properties including rental apartments, industrial properties, retail shopping centers, free-standing single-tenant buildings, medical and other office buildings, warehouse facilities, hotels and real estate secured lines of credit. 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 following tables present the distribution of commercial real estate loans by property type, along with weighted average DSCRs and LTVs at March 31, 2024 (dollars in thousands):
Amortized
Cost
Percent of Total CRE
FL
New York Tri-State
Other
Weighted Average DSCR
Weighted Average LTV
Office
$
1,790,541
31
%
59
%
24
%
17
%
1.66
65.3
%
Warehouse/Industrial
1,287,570
23
%
60
%
9
%
31
%
2.03
51.7
%
Multifamily
839,950
14
%
48
%
52
%
—
%
1.89
48.1
%
Retail
820,983
14
%
52
%
31
%
17
%
1.66
59.5
%
Hotel
488,263
8
%
79
%
3
%
18
%
2.12
46.9
%
Construction
and Land
529,645
9
%
46
%
49
%
5
%
N/A
N/A
Other
81,819
1
%
71
%
12
%
17
%
1.76
49.2
%
$
5,838,771
100
%
57
%
26
%
17
%
1.83
56.5
%
43
Florida
NY
Tri-State
Weighted Average DSCR
Weighted Average LTV
Weighted Average DSCR
Weighted Average LTV
Office
1.68
64.5
%
1.61
61.6
%
Warehouse/Industrial
2.13
50.0
%
1.83
37.2
%
Multifamily
2.46
45.3
%
1.35
50.8
%
Retail
1.82
58.6
%
1.38
61.0
%
Hotel
2.22
44.7
%
2.37
21.4
%
Other
1.94
47.3
%
1.22
67.3
%
1.99
54.7
%
1.50
55.4
%
Geographic
distribution in the tables above is based on location of the underlying collateral property. LTVs and DSCRs are based on the most recent available information; if current appraisals are not available, LTVs are adjusted by our models based on current and forecasted sub-market dynamics. DSCRs are calculated based on current contractually required payments, which in some cases may be interest only and on current levels of operating cash flows. DSCR calculations do not include pro-forma rental payments on in-place leases that are currently in initial rent abatement periods.
Included in New York tri-state multifamily loans in the tables above is approximately $121 million of rent regulated exposure as of March 31, 2024.
The following table presents the maturity profile of the CRE portfolio over the next 12 months by property type at March 31,
2024 (dollars in thousands):
Maturing in the Next 12 Months
% Maturing in the Next 12 Months
Fixed Rate or Swapped Maturing Next 12 Months
Fixed
Rate to Borrower as a % of Total Portfolio
Office
$
341,925
19
%
$
120,952
7
%
Warehouse/Industrial
87,580
7
%
77,292
6
%
Multifamily
105,983
13
%
26,041
3
%
Retail
106,151
13
%
65,665
8
%
Hotel
41,726
9
%
17,244
4
%
Construction
and Land
205,050
39
%
3,544
1
%
Other
12,626
15
%
12,626
15
%
$
901,041
15
%
$
323,364
6
%
44
The
following table present scheduled maturities of the CRE portfolio by property type at March 31, 2024 (in thousands):
2024
2025
2026
2027
2028
Thereafter
Total
Office
$
285,124
$
398,862
$
424,338
$
223,952
$
144,670
$
313,595
$
1,790,541
Warehouse/Industrial
77,331
164,897
383,656
294,282
144,975
222,429
1,287,570
Multifamily
59,582
125,327
164,167
159,249
107,955
223,670
839,950
Retail
95,458
149,292
231,254
72,613
186,213
86,153
820,983
Hotel
41,726
43,986
215,979
31,270
55,979
99,323
488,263
Construction
and Land
182,801
149,004
82,014
42,578
—
73,248
529,645
Other
12,627
6,959
27,037
9,542
1,411
24,243
81,819
$
754,649
$
1,038,327
$
1,528,445
$
833,486
$
641,203
$
1,042,661
$
5,838,771
The
office segment totaled $1.8 billion at March 31, 2024. Medical office comprised $309 million or 17% of the total office portfolio. The following charts present the sub-market geographic distribution of the Florida and NY tri-state office portfolios at March 31, 2024:
NY Tri-State by Sub-Market
Florida by Sub-Market
The New York tri-state market encompasses approximately 24% of the office segment, with $181 million of exposure in Manhattan. As of March 31, 2024, the Manhattan office portfolio was approximately 96% occupied with 4% rent rollover expected in the next twelve months. Substantially all of the Florida office portfolio is suburban.
Office loans not secured by properties in Florida or the New York tri-state area comprised 17%, or $313 million of the segment, and exhibited no particular geographic concentration. Estimated rent rollover of the total office portfolio in the next 12 months is approximately 10%. Non-performing office loans were insignificant at March 31, 2024, totaling approximately $300 thousand. Also see the section entitled "Asset Quality" below.
Commercial and Industrial
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 a small amount of 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 primary geographic markets. 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.
45
The following table presents the exposure in the C&I portfolio by industry, at March 31, 2024 (dollars in thousands):
Amortized
Cost(1)
Percent of Total
Finance and Insurance
$
1,423,871
16.4
%
Manufacturing
848,997
9.8
%
Educational
Services
742,564
8.6
%
Utilities
676,705
7.8
%
Wholesale Trade
662,536
7.6
%
Health
Care and Social Assistance
630,548
7.3
%
Information
618,358
7.1
%
Real Estate and Rental and Leasing
465,504
5.4
%
Construction
433,161
5.0
%
Transportation
and Warehousing
426,863
4.9
%
Retail Trade
335,443
3.9
%
Professional, Scientific, and Technical Services
252,752
2.9
%
Other
Services (except Public Administration)
250,096
2.9
%
Public Administration
245,234
2.8
%
Arts, Entertainment, and Recreation
226,423
2.6
%
Administrative
and Support and Waste Management
196,804
2.3
%
Accommodation and Food Services
158,260
1.8
%
Other
68,154
0.9
%
$
8,662,273
100.0
%
(1) Includes
$1.9 billion of owner occupied real estate.
Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides franchise and equipment 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 divisions. The franchise finance division portfolio includes franchise acquisition, expansion and equipment financing facilities, typically extended 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, at March 31, 2024. The equipment finance division portfolio includes primarily transportation equipment finance facilities utilizing a variety of loan and lease structures. Franchise and equipment finance have been strategically de-emphasized due to their current risk/return profile, including the lack of significant deposit business with these customers. We do not expect significant new loan originations in these segments.
Residential mortgages
The following table shows the composition of residential loans at the dates indicated (in thousands):
The
1-4 single family residential loan portfolio, excluding government insured residential loans, is primarily comprised of prime jumbo 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 March 31, 2024, $1.0 billion or 15% were secured by investor-owned properties.
46
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 upon default (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. The balance of buyout loans totaled $1.2 billion at March 31, 2024. The Company is not the servicer of these loans.
The following charts present the distribution of the 1-4 single family residential mortgage portfolio by
product type at the dates indicated:
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):
Operating lease equipment, net declined by $43 million during the three months ended March 31, 2024 to $329 million as a result of disposals. We expect the balance of operating lease equipment to continue to decline as this product offering is no longer considered core to our business strategy.
The charts below present operating lease equipment by type at the dates indicated:
Bridge had exposure to the energy industry of $147 million at March 31, 2024. The majority of the energy exposure was in the operating lease equipment portfolio where energy exposure totaled $139 million, consisting primarily of railcars serving the petroleum industry.
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. Risk ratings are updated continuously; 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.
48
The following table summarizes the Company's commercial credit exposure, based on internal risk rating, at the dates indicated (dollars in thousands):
The
$255 million increase in the substandard accruing category for the quarter ended March 31, 2024 included $187 million of CRE, $115 million of which was office exposure (including construction loans). All of these loans continue to perform. Factors contributing to risk rating migration in the office portfolio included rent abatement periods, delays in completing build-out of leased space and in some cases what we expect to be temporarily lower occupancy levels. In the current market, when office space is leased to new tenants, landlords frequently provide initial rent abatement periods. During these rent abatement periods, we do not include pro-forma rental payments to be made in the future under the terms of new leases, in operating cash flows for the purposes of determining risk ratings.
The following table provides additional information about special mention and substandard
accruing loans at the dates indicated (dollars in thousands). All of these loans are performing. Non-performing loans are discussed further in the section entitled "Non-performing Assets" below.
The
following graphs present delinquency trends by segment over the periods indicated (in millions):
Commercial Real Estate
Commercial(1)
(1)Includes
Pinnacle and franchise and equipment finance
Residential Loans
Excluding government insured loans, our residential portfolio consists largely of performing jumbo mortgage loans with FICO scores above 700, primarily owner-occupied and full documentation, with current LTV's of 80% or less. 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 March 31, 2024:
FICO Distribution
LTV Distribution
Vintage
51
The
following graph present delinquency trends for residential loans, excluding government insured residential loans, over the periods indicated (in millions):
Residential
FICO scores are generally updated semi-annually and were most recently updated in the first quarter of 2024. LTVs are typically based on valuation at origination since we do not routinely update residential appraisals.
At March 31, 2024, the majority of the 1-4 single family residential loan portfolio, excluding
government insured residential loans, was owner-occupied, with 80% primary residence, 5% second homes and 15% investment properties.
Note 4 to the consolidated financial statements presents additional information about key credit quality indicators and delinquency status of the loan portfolio.
Operating Lease Equipment, net
Operating leases with a carrying value of assets under lease totaling $24 million were internally risk rated substandard at March 31, 2024. 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. There were no impairment charges recognized during the three months ended March 31, 2024 and 2023.
Non-Performing Assets
Non-performing assets generally consist of (i) non-accrual loans, (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 presents information about the
Company's non-performing loans and non-performing assets at the dates indicated (dollars in thousands):
(1) Non-performing
loans and assets include the guaranteed portion of non-accrual SBA loans totaling $40.0 million or 0.16% of total loans and 0.11% of total assets, at March 31, 2024, and $41.8 million or 0.17% of total loans and 0.12% of total assets, at December 31, 2023.
(2) For purposes of this ratio, commercial loans includes the C&I and CRE sub-segments, as well as franchise and equipment finance. Due to their unique risk profiles, MWL and municipal finance are excluded from this ratio.
(3) Annualized for the three months ended March 31, 2024.
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 $255 million and $277 million at March 31, 2024 and December 31, 2023, respectively.
The following graphs present trends in non-performing loans to total loans and non-performing assets to total assets over the periods indicated, as well as trends in net charge-offs. Levels of non-performing loans to total loans and non-performing assets to total assets remain below pre-pandemic levels.
Non-Performing Loans to Total Loans
Non-Performing
Assets to Total Assets
Net Charges-Offs to Average Loans
The following graph presents the trend in non-performing loans by portfolio segment over the periods indicated (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 loans, other than government insured pool buyout loans, are generally placed on non-accrual status when they are 60 days past due. Additionally, certain residential loans not contractually delinquent but in forbearance may be placed on non-accrual status at management's discretion. 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 60
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.
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, 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.
52
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 a level of continued uncertainty about the general economy, evolving dynamics in some segments of the commercial real estate market, particularly the office sector, 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. If commercial real estate market dynamics in our primary markets worsen beyond
our current expectations, the ACL and the provision for credit losses will increase in the future. Changes in the ACL may result from changes in current economic conditions including but not limited to unanticipated changes in interest rates or inflationary pressures, changes in our economic forecast, loan portfolio composition, commercial and residential real estate market dynamics and other 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, 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. 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 and adjusted LTVs. 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. 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. At March 31, 2024 and December 31, 2023, we used a combination of weighted third-party provided economic scenarios in calculating the quantitative portion of the ACL. Each of these externally provided scenarios in fact represents the result of a probability weighting
of thousands of individual scenario paths.
See Note 1 to the consolidated financial statements of the Company's 2023 Annual Report on Form 10-K for more detailed information about our ACL methodology and related accounting policies.
53
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):
(1)For purposes of this ratio, commercial loans includes the C&I and CRE sub-segments, as well as franchise and equipment finance. Due to their unique risk profiles, MWL and municipal finance are excluded from this ratio.
Factors contributing to the change in the
ACL during the three months ended March 31, 2024, are depicted in the chart below (dollars in millions):
Changes in the ACL during the three months ended March 31, 2024
As depicted in the chart above, the most significant drivers of the increase in the ACL from December 31, 2023, to March 31, 2024, were (i) an increase in qualitative loss factors, with the majority related to office CRE and (ii) risk rating migration, partially offset by (iii) an overall improvement in current economic conditions and the economic forecast.
At March 31, 2024, the ratio of the ACL to loans was 0.90% compared to 0.82% at December 31, 2023. The ACL to loans ratio for commercial portfolio sub-segments including C&I, CRE, and franchise and equipment finance was 1.42% at March 31, 2024 and the ACL to loans ratio for CRE office loans was 2.26%. Further discussion of changes in the ACL for select portfolio sub-segments follows:
•The ACL for the CRE portfolio sub-segment increased by $19.7 million during the three months ended March 31, 2024, from 0.71% to 1.05% of loans. The most significant reasons for the increase in the ACL for this segment were an increase in qualitative loss factors, related primarily to office CRE, and risk rating migration.
55
•For
the commercial and industrial sub-segment, including owner-occupied commercial real estate, the ACL coverage ratio increased from 1.60% to 1.62% of loans. This increase was primarily driven by risk rating migration and qualitative loss factors, partially offset by an improved economic forecast.
•The ACL for the residential segment decreased by $1.0 million during the three months ended March 31, 2024, from 0.09% to 0.08% of loans primarily due to the improved economic forecast.
The estimate of the ACL at March 31, 2024, was informed by forecasted economic scenarios published in March 2024, a wide variety of additional economic data, information about borrower financial condition and collateral values and other relevant information. The quantitative portion of
the ACL at March 31, 2024, was modeled using a weighting of baseline, downside and upside third-party economic scenarios, with the highest weighting ascribed to the baseline scenario and lower weightings ascribed equally to the downside and upside scenarios. The economic variables that impacted the ACL for the three months ended March 31, 2024, included assumptions about interest rates and spreads, commercial property forecasts, the forecasted trajectory of regional unemployment and performance of the stock market.
Some of the high level data points informing the baseline scenario, which was the scenario most heavily weighted, used in estimating the quantitative portion of the ACL at March 31, 2024, included:
•Labor
market assumptions, which reflected national unemployment peaking at 4.1% and
•Annualized growth in national GDP troughing at 1.3% in the baseline.
The above unemployment and GDP growth assumptions are provided to give a high level overview of the nature and severity of the baseline economic forecast scenario used in estimating the ACL. Numerous additional variables and assumptions not explicitly stated, including but not limited to detailed commercial property forecasts, projected stock market volatility indices and a variety of assumptions about market interest rates and spreads 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, most of the economic 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
The Company has a diverse deposit book by industry sector. Our largest industry vertical at March 31, 2024, was the title insurance vertical, with approximately $3.1 billion in total deposits. Approximately 62% of our total deposits were commercial or municipal deposits at March 31, 2024.
The following table presents information about the Company's insured
and collateralized deposits as of March 31, 2024 (dollars in thousands):
Total deposits
$
27,027,364
Estimated amount of uninsured deposits
$
12,777,304
Less: collateralized deposits
(3,047,517)
Less: affiliate
deposits
(285,930)
Adjusted uninsured deposits
$
9,443,857
Estimated insured and collateralized deposits
$
17,583,507
Insured and collateralized deposits to total deposits
65
%
56
The
estimated amount of uninsured deposits at March 31, 2024 and 2023, was $12.8 billion and $12.4 billion, respectively. Collateralized and affiliate deposits are included in these amounts. Time deposit accounts with balances of $250,000 or more totaled $900 million and $941 million at March 31, 2024 and December 31, 2023, respectively. The following table shows scheduled maturities of uninsured time deposits as of March 31, 2024 (in thousands):
Three months or less
$
143,984
Over
three through six months
211,281
Over six through twelve months
457,653
Over twelve months
4,907
$
817,825
For additional information about Deposits, see Note 10 to the consolidated financial statements.
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 March 31, 2024 (dollars in thousands):
Amount
Weighted Average Rate
Maturing in:
2024
- One month or less
$
3,170,000
5.47
%
2024 - Over one month
735,000
5.50
%
Total
contractual balance outstanding
$
3,905,000
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 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 March 31, 2024
(dollars in thousands):
Notional Amount
Weighted Average Rate
Cash flow hedges maturing in:
2024
$
325,000
2.74
%
2025
625,000
2.74
%
2026
1,430,000
3.50
%
Thereafter
25,000
2.50
%
$
2,405,000
3.19
%
See
Note 6 to the consolidated financial statements and "Interest Rate Risk" below for more information about derivative instruments.
57
Outstanding notes payable and other borrowings consisted of the following at the dates indicated (in thousands):
Principal amount of 4.875% senior notes maturing on November 17, 2025
$
388,479
$
388,479
Unamortized discount and debt issuance costs
(1,462)
(1,676)
387,017
386,803
Subordinated
notes:
Principal amount of 5.125% subordinated notes maturing on June 11, 2030
300,000
300,000
Unamortized discount and debt issuance costs
(4,189)
(4,331)
295,811
295,669
Total
notes
682,828
682,472
Finance leases
26,150
26,501
Notes and other borrowings
$
708,978
$
708,973
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 in both normal operating and stressed environments, 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, its amortizing loan portfolio and FHLB advances. FRB discount window borrowings, repurchase agreement capacity and a letter of credit with the FHLB provide additional sources of contingent liquidity. For the three months ended March 31, 2024 and 2023,
net cash provided by operating activities was $66 million and $141 million, respectively.
Same day available liquidity includes cash, secured funding such as borrowing capacity at the Federal Home Loan Bank of Atlanta and the Federal Reserve, and unencumbered 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.
58
The
following chart presents the components of same day available liquidity at March 31, 2024 and December 31, 2023 (in millions):
Same Day Available Liquidity
At March 31, 2024, the Bank had total same day available liquidity of approximately $14.8 billion, consisting of cash of $407 million, borrowing capacity at the Federal Home Loan Bank of $5.9 billion, borrowing capacity at the FRB of $7.2 billion and unencumbered securities of $1.2 billion. The increase in
same day available liquidity as compared to December 31, 2023 reflected the decline in outstanding FHLB advances, increasing FHLB capacity. At March 31, 2024, the ratio of estimated insured and collateralized deposits to total deposits was 65%, compared to 66% at December 31, 2023, and the ratio of available liquidity to estimated uninsured, uncollateralized deposits was 156% compared to 152% at December 31, 2023. As a commercially focused bank, due to the inherent nature of commercial deposits, a significant portion of our deposits are uninsured. We continue to market and educate our customers about products that enable them to obtain FDIC insurance on certain deposits exceeding the standard single depositor insurance limit, have implemented single depositor concentration
limits and reduced or eliminated exposure to sectors or depositors that evidenced higher volatility following the events of early 2023.
Our ALM policy establishes limits or operating risk thresholds for a number of measures of liquidity which are monitored at least monthly by the ALCO and quarterly by the Board of Directors. Some of the measures currently used to dimension liquidity risk and manage liquidity are the ratio of available liquidity to uninsured/non-collateralized deposits, the ratio of wholesale funding to total assets, the ratio of available operational liquidity (which excludes availability at the FRB) to volatile liabilities, a liquidity stress test coverage ratio, the loan to deposit ratio, a one-year liquidity ratio, a measure of available on-balance sheet liquidity, the ratio of FHLB advances to total assets, large depositor concentrations 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. We also have single depositor relationship limits.
The following tables present some of the Company's liquidity measures, where applicable, their related policy limits and operating risk thresholds at the dates indicated:
Available operational liquidity/volatile liabilities
2.29x
≥1.30x
Liquidity stress test coverage ratio
1.69x
≥1.50x
FHLB
advances/total assets
13.7%
≤20%
One year liquidity ratio
2.11x
≥1.00x
Loan
to deposit ratio
89.6%
≤100%
Top 20 uninsured depositors to total deposits (excluding brokered & municipal deposits)
13.4%
≤15%
Non
interest-bearing demand deposits/total deposits
26.8%
≥20%
Available on-balance sheet liquidity
7.1%
≥5%
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.
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 March 31, 2024 and December 31,
2023, 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.
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.
The following table provides information regarding regulatory capital for the Company and the Bank as of March 31, 2024 (dollars in thousands):
Required to be Considered Adequately Capitalized Including Capital Conservation Buffer
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
BankUnited, Inc.:
Tier 1
leverage
$
2,889,807
8.05
%
N/A (1)
N/A (1)
$
1,435,445
4.00
%
N/A (1)
N/A
(1)
CET1 risk-based capital
$
2,889,807
11.58
%
$
1,622,379
6.50
%
$
1,123,186
4.50
%
$
1,747,178
7.00
%
Tier 1
risk-based capital
$
2,889,807
11.58
%
$
1,996,774
8.00
%
$
1,497,581
6.00
%
$
2,121,573
8.50
%
Total
risk-based capital
$
3,412,100
13.67
%
$
2,495,968
10.00
%
$
1,996,774
8.00
%
$
2,620,766
10.50
%
BankUnited:
Tier 1
leverage
$
3,341,838
9.32
%
$
1,792,209
5.00
%
$
1,433,767
4.00
%
N/A
N/A
CET1
risk-based capital
$
3,341,838
13.41
%
$
1,619,570
6.50
%
$
1,121,241
4.50
%
$
1,744,153
7.00
%
Tier 1
risk-based capital
$
3,341,838
13.41
%
$
1,993,317
8.00
%
$
1,494,988
6.00
%
$
2,117,900
8.50
%
Total
risk-based capital
$
3,564,131
14.30
%
$
2,491,647
10.00
%
$
1,993,317
8.00
%
$
2,616,229
10.50
%
(1)There
is no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company.
60
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. Simulation of changes in EVE in various interest rate environments is also a meaningful measure of interest rate risk.
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 a consensus forward curve 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 management policy framework is based on modeling instantaneous rate shocks to a static balance sheet, assuming that maturing instruments are replaced
with like instruments at forward rates, of plus and minus 100, 200, 300 and 400 basis point parallel shifts. In lower interest rate environments, we may not model more extreme declining rate scenarios and in certain macro-environments, we may model shocks of more than 400 basis points. Our ALM policy has established limits for the plus and minus 100 and 200 basis points shock scenarios. We also model a variety of dynamic balance sheet scenarios, various yield curve slopes, non-parallel shifts and alternative depositor behavior, beta and decay assumptions. 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, based on the consensus forward curve, in static balance sheet, parallel rate shock scenarios of plus and minus
100 and 200 basis points at March 31, 2024 and December 31, 2023:
All
of the modeled results at March 31, 2024, are within ALM policy limits. Many assumptions were used by the Company to calculate the impact of changes in interest rates on forecasted net interest income and EVE, 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, unanticipated 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 or changes in balance sheet composition.
Derivative
Financial Instruments and Hedging Activities
Management continually evaluates a variety of hedging strategies that are available to manage interest rate risk. In the current environment, we continue to evaluate potential hedging strategies to mitigate risk from a period of rapid or extreme declines in rates.
Interest rate derivatives designated as cash flow or fair value hedging instruments are 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 following table provides information about the
Company's derivatives designated as hedging instruments as of March 31, 2024 (dollars in thousands):
Weighted Average Pay Rate / Strike Price
Weighted Average
Receive Rate / Strike Price
Weighted Average Remaining Life in Years
Notional Amount
Hedged Item
Derivatives designated as cash flow hedges:
Pay-fixed
interest rate swaps
Variability of interest cash flows on variable rate borrowings
$
2,405,000
3.19%
Daily SOFR
1.8
Pay-fixed interest rate swaps
Variability of interest cash flows on variable rate liabilities
250,000
1.38%
Fed
Funds Effective Rate
0.8
Pay-variable interest rate swaps
Variability of interest cash flows on variable rate loans
200,000
Term SOFR
3.72%
2.1
Interest rate caps purchased, indexed to Fed Funds effective rate
Variability of interest cash flows on variable rate liabilities
200,000
0.88%
1.2
Interest
rate collar, indexed to 1-month SOFR(1)
Variability of interest cash flows on variable rate loans
125,000
5.58%
1.50%
2.4
Derivatives designated as fair value hedges:
Pay-fixed interest rate swaps
Variability
of fair value of fixed rate loans
100,000
1.94%
Daily SOFR
0.3
$
3,280,000
(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%.
In addition to derivative instruments, the Company has issued callable CDs to hedge interest rate risk in a falling rate environment; the amount of such instruments outstanding at March 31, 2024, was $672 million. The short duration of our AFS investment portfolio (1.85 at March 31, 2024) also provides a natural offset from an interest rate risk perspective to the longer duration of the residential
mortgage portfolio.
See Note 6 to the consolidated financial statements for additional information about derivative financial instruments.
62
Non-GAAP Financial Measures
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):
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
See the section entitled “Interest Rate Risk” included in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based
upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
During the quarter ended March 31, 2024, there were no changes in the Company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item
1. 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 currently available information and the advice of legal counsel, the likelihood is remote that any adverse 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.
Item 1A. Risk Factors
There have been no material changes in the risk factors disclosed
by the Company in its 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 20, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 5. Other Information
During the three months ended March 31, 2024, no director or officer (as defined in Exchange Act Rule 16a-1(f)) of the
Companyiiadopted/ or iiterminated/
a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized this 25th day of April 2024.
