# BankUnited, Inc. (BKU) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from BankUnited, Inc.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1504008/000150400824000006/bku-20231231.htm Accession: 0001504008-24-000006 Filing date: 2024-02-20 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/BKU/ All MD&A years: /company/BKU/mda/ Previous year: /company/BKU/mda/fy2022/ (FY 2022) Next year: /company/BKU/mda/fy2024/ (FY 2024) Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations  The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of BankUnited, Inc. and its subsidiary (the "Company", "we", "us" and "our") and should be read in conjunction with the consolidated financial statements, accompanying footnotes and supplemental financial data included herein. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Forward-looking Statements" and "Risk Factors." We assume no obligation to update any of these forward-looking statements. Management's discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2023, and results of operations for the year then ended, including in comparison to the prior year ended December 31, 2022. Refer to Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with the SEC on February 22, 2023, for a discussion and analysis of the more significant factors that affected the year ended December 31, 2022, including in comparison to the year ended December 31, 2021. Our Vision and Long term- Strategic Priorities Our vision is to build a leading regional commercial and small business bank, with a distinctive value proposition based on strong service-oriented relationships, robust digital enabled customer experiences, and operational excellence with an entrepreneurial work environment that empowers employees to deliver their best. Our strategic priorities include: •Growing core customer relationships on both sides of the balance sheet, building a scalable small business and middle-market franchise for the long-term; •Transitioning the left side of the balance sheet to a mix of assets with higher risk-adjusted returns; •Deposit growth is paramount, with particular emphasis on new non-interest bearing deposit relationships; •Playing where we can win - focusing on sectors where our delivery model is a differentiator; •Investing in organic growth capabilities - people, processes, products and technology; •Using technology to enable success by investing in digital capabilities, nimble technology architecture and data; •Retaining the ability to pivot nimbly when opportunities arise; •Maintaining an efficient, effective and scalable support model through operational excellence. •While our primary growth strategy is organic, we will continue to monitor the M&A landscape. Impact of Macro-Environmental Factors and Near-term Strategic Priorities Macro-Environmental Factors: During early 2023, three highly publicized regional bank closures created a crisis of confidence in the banking system, specifically with respect to regional and mid-size banks. This led to outflows of deposits from regional and mid-size banks, including BankUnited, to the largest money-center banks and to volatility in bank valuations. Deposit flows, liquidity and market perceptions have stabilized considerably since those events, however, pressure on bank margins and valuations, in part influenced by those events remains, as does a level of market uncertainty. The FRB has maintained its restrictive monetary policy stance, and a level of uncertainty remains about the overall trajectory of the economy. Despite these circumstances, loan and deposit pipelines are healthy, deposit flows are generally stable, our margin expanded during the second half of 2023, and non-performing asset and net charge-off ratios remain at what we consider to be low levels. We believe our liquidity position is strong and our capital levels robust. To provide context, over the course of 2020 and 2021, the COVID-19 pandemic, along with the response of the Federal government in the form of quantitative easing, low interest rates and fiscal stimulus had material, lingering impacts on the U.S. economy, the banking system and our Company. Systemic liquidity and levels of deposits in the banking system increased significantly while a high level of uncertainty remained about the overall trajectory of the U.S. economy, leading to muted demand and risk appetite for commercial lending. Subsequently, as the social health impacts of the pandemic waned, 2022 29 brought rising inflation; monetary policy response included quantitative tightening and an unprecedented and rapid rise in the Fed's benchmark interest rate, leading to an outflow of deposits and liquidity from the banking system. In summary, for BankUnited, the impact of the pandemic, accompanying economic uncertainty and the government response led to a balance sheet with a high level of lower-rate assets, particularly in the form of residential mortgages and securities. The subsequent rapid increase in interest rates and quantitative tightening led to deposit outflows, consistent with systemic trends, and an elevated level of more expensive wholesale funding. The events of early 2023 served to exacerbate the impact of deposit outflows and the increase in wholesale funding. A heightened level of focus on liquidity at regional and mid-size banks, while lessening considerably since the events of early 2023, remains. Near-Term Strategic Priorities: In response to the factors discussed above, we have established the following near-term strategic priorities: •Improve the Bank's funding profile by maintaining or growing non-interest bearing and other 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, which are generally higher-yielding, as a percent of total earning assets; •Improve the net interest margin, largely a function of improved balance sheet composition; •Maintain robust liquidity and capital; •Continue to manage credit; •Manage the rate of growth in operating expenses. We have made progress executing on these near term strategic priorities: •Since March 31, 2023, following the market reaction to the high profile closures of Silicon Valley Bank and Signature Bank, total non-brokered deposits have grown by $703 million and we have paid down FHLB advances by $2.4 billion. •Since December 31, 2022, core commercial loan portfolio sub-segments have grown by $719 million while residential loans declined by $692 million and the amortized cost of investment securities declined by $959 million. •The net interest margin, after declining from 2.62% for the first quarter of 2023 to 2.47% for the quarter ended June 30, 2023, increased to 2.56% for the quarter ended September 30, 2023, and again to 2.60% for the quarter ended December 31, 2023. •Total same day available liquidity was $13.6 billion, the available liquidity to uninsured, uncollateralized deposits ratio was 152% and an estimated 66% of our deposits were insured or collateralized at December 31, 2023. •Consolidated CET1 capital was 11.4% and pro-forma CET1, including accumulated other comprehensive income, was 10.0% at December 31, 2023. •The ratio of non-performing assets to total assets was 0.37% at December 31, 2023, well below pre-pandemic levels. The net charge-off ratio for the year ended December 31, 2023, was 0.09%. Some of the challenges we face in executing on both our near-term and longer-term strategic priorities, some of which may impact the banking industry more broadly, include: •Execution of our strategic objectives is highly dependent on our ability to grow core client relationships. Competition for deposits and loans in our markets is intense with respect to the variety and quality of products and services offered, delivery channels, service levels and pricing. The economic health of our primary markets, monetary and fiscal policy, our ability to attract and retain talent and our ability to deliver technology and product solutions will impact execution of these objectives. •The future trajectories of the macro-economy, interest rates, and monetary and fiscal policy are uncertain. The impact of these macro factors on our customers and prospective customers also impacts us. If macro conditions are less supportive than we currently anticipate, we may be less successful in executing our strategic priorities. 30 •We anticipate there will be changes to the regulatory framework governing the banking industry, in part in response to the events of early 2023. Some proposed rules have been issued, and more may be forthcoming. It is difficult to predict the nature or impact of future regulatory changes on our ability to achieve our strategic priorities. See "Item 1A - Risk Factors" for additional discussion of risks to the execution of our strategic priorities. 2023 Performance Highlights: In evaluating our financial performance, we consider the level of and trends in net interest income, the net interest margin, the cost of deposits, 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. Highlights include: •Net income for the year ended December 31, 2023, was $178.7 million, or $2.38 per diluted share, compared to $285.0 million, or $3.54 per diluted share for the year ended December 31, 2022. For the year ended December 31, 2023, the return on average stockholders' equity was 7.01% and the return on average assets was 0.49%. Income before income taxes for the year ended December 31, 2023, was negatively impacted by margin pressure and an FDIC special assessment of $35.4 million. •The net interest margin, calculated on a tax-equivalent basis was 2.56% for the year ended December 31, 2023, compared to 2.68% for the year ended December 31, 2022. An unfavorable shift in funding mix was the primary driver of a lower net interest margin. A sustained higher rate environment and quantitative tightening as well as events impacting the regional banking sector in early 2023 contributed to this shift. While lower year-over-year, the net interest margin expanded over the second half of 2023. The following chart provides a comparison of net interest margin, the interest rate spread, the average yield on interest earning assets and the average rate paid on interest bearing liabilities for the years ended December 31, 2023 and 2022 (on a tax equivalent basis): •The yield on average interest earning assets increased to 5.39% for the year ended December 31, 2023, from 3.59% for the year ended December 31, 2022, due to re-pricing of floating rate assets and the addition of new assets at higher rates and wider spreads. •Consistent with industry trends, higher interest rates and restrictive monetary policy, the average cost of total deposits increased to 2.55% for the year ended December 31, 2023, from 0.65% for the year ended December 31, 2022, although the rate of increase declined over the latter half of the year. 31 •Loan portfolio composition shifted from residential to core commercial categories during the year ended December 31, 2023. Residential loans declined from 36% to 33% of the loan portfolio, while the core C&I and CRE categories grew from 56% to 60% of the portfolio. •The following charts illustrate the composition of deposits at the dates indicated: [[GREPCENT_TABLE]] [["December 31, 2023","","December 31, 2022"]] [[/GREPCENT_TABLE]] Total deposits declined by $971 million during the year ended December 31, 2023, consistent with industry trends brought on by tighter liquidity conditions and the liquidity events of early 2023. Non-interest bearing demand deposits declined by $1.2 billion; this decline reflected the impact of higher interest rates on title industry balances and depositors generally seeking yield in a sustained higher rate environment. The shift from money market deposits to time deposits reflected deposit outflows immediately following the bank closures in March 2023 and our response. •The ratio of the ACL to total loans increased to 0.82% at December 31, 2023, from 0.59% at December 31, 2022. For the year ended December 31, 2023, the provision for credit losses was $87.6 million compared to a provision of $75.2 million for the year ended December 31, 2022. The most significant factors affecting the provision for credit losses and increase in the ACL for the year ended December 31, 2023 were changes in the economic forecast, risk rating migration, and increases in certain specific reserves. The increase in the ACL coverage ratio is consistent with the increase in criticized and classified assets, evolving commercial real estate market dynamics and shifts in portfolio composition. •The net charge-off ratio for the year ended December 31, 2023 was 0.09% compared to 0.22% for the year ended December 31, 2022. NPAs remained low, totaling $130.6 million at December 31, 2023, compared to $107.0 million at December 31, 2022. The NPA ratio at December 31, 2023 was 0.37%, including 0.12% related to the guaranteed portion of non-performing SBA loans. At December 31, 2022, the NPA ratio was 0.29%, including 0.11% related to the guaranteed portion of non-performing SBA loans. •Commercial real estate exposure is modest. Commercial real estate loans totaled 23.6% of loans at December 31, 2023, representing 169% of the Bank's total risk-based capital. At December 31, 2023, the weighted average LTV of the CRE portfolio was 56.0% and the weighted average DSCR was 1.80. 58% of the portfolio was secured by collateral properties located in Florida and 25% was secured by properties located in the New York tri-state area. 32 •Our capital position is robust. At December 31, 2023, CET1 was 11.4% at a consolidated level and pro-forma CET1, including accumulated other comprehensive income, was 10.0%. The ratio of tangible common equity/tangible assets had increased to 7.0%. The charts below present the Company's and the Bank's regulatory capital ratios at the dates indicated: BankUnited, Inc. [[GREPCENT_TABLE]] [["December 31, 2023","","December 31, 2022"]] [[/GREPCENT_TABLE]] BankUnited, N.A [[GREPCENT_TABLE]] [["December 31, 2023","","December 31, 2022"]] [[/GREPCENT_TABLE]] •The net unrealized pre-tax loss on the securities portfolio improved by $141 million for the year ended December 31, 2023, now representing 6% of amortized cost. AOCI, net of tax, improved by $50 million. The duration of our AFS securities portfolio is short at 1.96 at December 31, 2023, HTM securities are not significant. •Book value and tangible book value per common share grew to $34.66 and $33.62, respectively, at December 31, 2023, from $32.19 and $31.16, respectively, at December 31, 2022. •In the first quarter of 2023, the Company increased its quarterly cash dividend by $0.02, to $0.27 per share, reflecting an 8% increase from the previous quarterly cash dividend of $0.25 per share and maintained that quarterly dividend level through 2023. 33 •During the year ended December 31, 2023, the Company repurchased approximately 1.6 million shares of its common stock for an aggregate purchase price of $55.0 million. •Liquidity is ample. Total same day available liquidity was $13.6 billion, the available liquidity to uninsured, uncollateralized deposits ratio was 152% and an estimated 66% of our deposits were insured or collateralized at December 31, 2023. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates. The most significant estimate impacting the Company's financial statements is the ACL. Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below involve a heightened level of management judgment due to the complexity, subjectivity and sensitivity involved in their application. Note 1 to the consolidated financial statements contains a further discussion of our significant accounting policies. ACL The ACL represents management's estimate of current expected credit losses, or the amount of amortized cost basis not expected to be collected, on our loan portfolio and the amount of credit loss impairment on our AFS securities portfolio. Determining the amount of the ACL is considered a critical accounting estimate because of its complexity and because it requires extensive judgment and estimation. Estimates that are particularly susceptible to change that may have a material impact on the amount of the ACL include: •our evaluation of current conditions; •our determination of a reasonable and supportable economic forecast or weighting of various forecast paths and selection of the reasonable and supportable forecast period; •our evaluation of historical loss experience and selection of historical loss data used in formulating our ACL estimate; since we have limited company specific historical loss data, our modeling techniques also leverage broad external data sets for this purpose; •our evaluation of changes in composition and characteristics of the loan portfolio, including internal risk ratings; •our estimate of expected prepayments; •the value of underlying collateral, which may impact loss severity and certain cash flow assumptions for collateral-dependent, criticized and classified loans; in the current environment, especially with respect to certain commercial real estate sectors like office, current and projected collateral values may be particularly challenging to estimate; •our selection and evaluation of qualitative factors; and •our estimate of expected cash flows on AFS debt securities in unrealized loss positions. Our selection of models and modeling techniques may also have a material impact on the estimate. Note 1 to the consolidated financial statements describes the methodology used to determine the ACL. Recent Accounting Pronouncements See Note 1 to the consolidated financial statements for a discussion of recent accounting pronouncements. 34 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. 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 and growth expectations, our ability to attract and retain core deposit relationships, competition for deposits in the Company's markets and the availability and pricing of other sources of funds. For the year ended December 31, 2023, the funding mix and net interest margin were negatively impacted by the higher interest rate environment and restrictive monetary policy stance of the FRB which have led to a decline in deposit levels across the banking system, increased competition for deposits and higher deposit costs. Deposit outflows related to events that impacted the banking sector in March 2023 also negatively impacted the cost of funds and net interest margin. These factors contributed to declines in average non-interest bearing demand deposits and to an increase in higher cost funding sources, including higher cost time deposits and wholesale funding such as FHLB advances. Over the latter half of 2023, however, we have seen margin expansion as wholesale funding levels have declined and yields on interest earning assets have increased. 35 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): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2023","","2022","","2021"],["","Average Balance","","Interest (1)","","Yield/Rate (1)","","Average Balance","","Interest (1)","","Yield/Rate (1)","","Average Balance","","Interest (1)","","Yield/Rate (1)"],["Loans","$","24,558,430","","","$","1,331,578","","","5.42","%","","$","23,937,857","","","$","947,386","","","3.96%","","$","23,083,973","","","$","814,101","","","3.53","%"],["Investment securities (2)","9,228,718","","","491,851","","","5.33","%","","10,081,701","","","283,081","","","2.81%","","9,873,178","","","155,353","","","1.57","%"],["Other interest earning assets","986,186","","","51,152","","","5.19","%","","675,068","","","15,709","","","2.33%","","1,093,869","","","6,010","","","0.55","%"],["Total interest earning assets","34,773,334","","","1,874,581","","","5.39","%","","34,694,626","","","1,246,176","","","3.59%","","34,051,020","","","975,464","","","2.86","%"],["Allowance for credit losses","(171,618)","","","","","","","(132,033)","","","","","","","(197,212)"],["Non-interest earning assets","1,749,981","","","","","","","1,721,570","","","","","","","1,770,685"],["Total assets","$","36,351,697","","","","","","","$","36,284,163","","","","","","","$","35,624,493"],["Liabilities and Stockholders' Equity:"],["Interest bearing liabilities:"],["Interest bearing demand deposits","$","2,905,968","","","$","86,759","","","2.99","%","","$","2,538,906","","","$","13,919","","","0.55","%","","$","3,027,649","","","$","8,550","","","0.28","%"],["Savings and money market deposits","10,704,470","","","382,432","","","3.57","%","","12,874,240","","","130,705","","","1.02","%","","13,339,651","","","43,082","","","0.32","%"],["Time deposits","5,169,458","","","191,114","","","3.70","%","","3,338,671","","","35,348","","","1.06","%","","3,490,082","","","15,964","","","0.46","%"],["Total interest bearing deposits","18,779,896","","","660,305","","","3.52","%","","18,751,817","","","179,972","","","0.96","%","","19,857,382","","","67,596","","","0.34","%"],["Federal funds purchased","35,403","","","1,611","","","4.55","%","","157,979","","","2,723","","","1.72","%","","33,945","","","30","","","0.09","%"],["FHLB advances","6,331,685","","","285,026","","","4.50","%","","4,383,507","","","97,763","","","2.23","%","","2,622,723","","","59,116","","","2.25","%"],["Notes and other borrowings","716,633","","","36,835","","","5.14","%","","721,223","","","37,033","","","5.13","%","","721,803","","","37,018","","","5.13","%"],["Total interest bearing liabilities","25,863,617","","","983,777","","","3.80","%","","24,014,526","","","317,491","","","1.32","%","","23,235,853","","","163,760","","","0.70","%"],["Non-interest bearing demand deposits","7,091,029","","","","","","","8,861,111","","","","","","","8,480,964"],["Other non-interest bearing liabilities","848,023","","","","","","","708,473","","","","","","","784,031"],["Total liabilities","33,802,669","","","","","","","33,584,110","","","","","","","32,500,848"],["Stockholders' equity","2,549,028","","","","","","","2,700,053","","","","","","","3,123,645"],["Total liabilities and stockholders' equity","$","36,351,697","","","","","","","$","36,284,163","","","","","","","$","35,624,493"],["Net interest income","","","$","890,804","","","","","","","$","928,685","","","","","","","$","811,704"],["Interest rate spread","","","","","1.59","%","","","","","","2.27","%","","","","","","2.16","%"],["Net interest margin","","","","","2.56","%","","","","","","2.68","%","","","","","","2.38","%"]] [[/GREPCENT_TABLE]] (1)On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $13.4 million, $12.7 million and $13.3 million for the years ended December 31, 2023, 2022 and 2021, respectively. The tax-equivalent adjustment for tax-exempt investment securities was $3.6 million, $3.0 million and $2.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. (2)At fair value except for securities held to maturity. 36 Increases and decreases in interest income, calculated on a tax-equivalent basis, and interest expense result from changes in average balances (volume) of interest earning assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest earning assets and the interest incurred on our interest bearing liabilities for the years indicated. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous year's volume. Changes applicable to both volume and rate have been allocated to volume (in thousands): [[GREPCENT_TABLE]] [["","2023 Compared to 2022","","2022 Compared to 2021"],["","Change Due to Volume","","Change Due to Rate","","Increase (Decrease)","","Change Due to Volume","","Change Due to Rate","","Increase (Decrease)"],["Interest Income Attributable to:"],["Loans","$","34,699","","","$","349,493","","","$","384,192","","","$","34,024","","","$","99,261","","","$","133,285"],["Investment securities","(45,289)","","","254,059","","","208,770","","","5,301","","","122,427","","","127,728"],["Other interest earning assets","16,136","","","19,307","","","35,443","","","(9,772)","","","19,471","","","9,699"],["Total interest earning assets","5,546","","","622,859","","","628,405","","","29,553","","","241,159","","","270,712"],["Interest Expense Attributable to:"],["Interest bearing demand deposits","10,891","","","61,949","","","72,840","","","(2,806)","","","8,175","","","5,369"],["Savings and money market deposits","(76,566)","","","328,293","","","251,727","","","(5,755)","","","93,378","","","87,623"],["Time deposits","67,625","","","88,141","","","155,766","","","(1,556)","","","20,940","","","19,384"],["Total interest bearing deposits","1,950","","","478,383","","","480,333","","","(10,117)","","","122,493","","","112,376"],["Federal funds purchased","(5,583)","","","4,471","","","(1,112)","","","2,140","","","553","","","2,693"],["FHLB advances","87,757","","","99,506","","","187,263","","","39,172","","","(525)","","","38,647"],["Notes and other borrowings","(270)","","","72","","","(198)","","","15","","","\u2014","","","15"],["Total interest expense","83,854","","","582,432","","","666,286","","","31,210","","","122,521","","","153,731"],["Increase (decrease) in tax-equivalent net interest income","$","(78,308)","","","$","40,427","","","$","(37,881)","","","$","(1,657)","","","$","118,638","","","$","116,981"]] [[/GREPCENT_TABLE]] Net interest income, calculated on a tax-equivalent basis, was $890.8 million for the year ended December 31, 2023, compared to $928.7 million for the year ended December 31, 2022, a decrease of $37.9 million, comprised of increases in tax-equivalent interest income and interest expense of $628.4 million and $666.3 million, respectively. The increase in interest income for the year ended December 31, 2023, compared to the year ended December 31, 2022, reflected (i) an increase in both the average balances of and yields on loans; (ii) rising yields on investment securities that more than offset declines in average balances; and (iii) to a lesser extent, higher yields on and average balances of other interest earning assets. Increased yields on average interest earning assets were mainly reflective of the increase in market interest rates, which impacted both coupon rate resets on existing floating rate assets and the rates on new assets added to the balance sheet. The increase in interest expense for the year ended December 31, 2023, compared to the year ended December 31, 2022, reflected primarily (i) an increase in the cost of interest-bearing deposits and (ii) increases in both the cost and average balance of FHLB advances. The net interest margin, calculated on a tax-equivalent basis, was 2.56% for the year ended December 31, 2023, compared to 2.68% for the year ended December 31, 2022. Offsetting factors impacting the net interest margin for the year ended December 31, 2023, compared to the year ended December 31, 2022, included: •The most significant factor leading to the year-over-year decline in the net interest margin was an unfavorable shift in the funding mix for the year ended December 31, 2023, as compared to the year ended December 31, 2022. Average non-interest bearing demand deposits declined, both in absolute terms and as a percentage of average total liabilities, while FHLB advances grew, both in absolute terms and as a percentage of average total liabilities. Within interest-bearing deposits, there was a shift toward higher cost time deposits, largely in response to the events of March 2023. Two significant factors impacting the decline in average non-interest bearing deposits were (i) the impact of rising residential mortgage rates on levels of activity in the residential real estate sector leading to a decline in balances in the title insurance industry vertical and (ii) depositors seeking yield in a higher rate environment. In part, the increase in average FHLB advances reflected the impact of deposit outflows immediately following the events of March 2023. •The tax-equivalent yield on loans expanded to 5.42% for the year ended December 31, 2023, from 3.96% for the year ended December 31, 2022. Factors contributing to this increase were the resetting of variable rate loans at higher coupon rates and originations of new loans at higher prevailing rates and wider spreads. 37 •The tax-equivalent yield on investment securities increased to 5.33% for the year ended December 31, 2023, from 2.81% for the year ended December 31, 2022. 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. •The average rate paid on interest bearing deposits increased to 3.52% for the year ended December 31, 2023, from 0.96% for the year ended December 31, 2022, in response to the higher rate environment, tighter liquidity conditions and resulting competition for deposits. •The average rate paid on FHLB advances increased to 4.50% for the year ended December 31, 2023, from 2.23% for the year ended December 31, 2022, primarily due to rising rates. 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): [[GREPCENT_TABLE]] [["","","","Years Ended December 31,"],["","","","","","2023","","2022","","2021"],["Amount related to funded portion of loans","","","","","$","78,924","","","$","73,814","","","$","(64,456)"],["Amount related to off-balance sheet credit exposures","","","","","8,683","","","1,467","","","(1,235)"],["Other","","","","","\u2014","","","(127)","","","(1,428)"],["Total provision for (recovery of) credit losses","","","","","$","87,607","","","$","75,154","","","$","(67,119)"]] [[/GREPCENT_TABLE]] The most significant factors impacting the provision for credit losses for the year ended December 31, 2023, included changes in the economic forecast, new commercial loan production, risk rating migration and an increase in certain specific reserves. The provision for credit losses may be volatile and the level of the ACL may change materially from current levels. Future levels of the ACL could be significantly impacted, in either direction, by changes in factors such as, but not limited to, economic conditions or the economic outlook, the composition of the loan portfolio, the financial condition of our borrowers and collateral values. The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. See “Analysis of the Allowance for Credit Losses” below for more information about how we determine the appropriate level of the ACL and about factors that impacted the ACL and provision for credit losses. 38 Non-Interest Income The following table presents a comparison of the categories of non-interest income for the periods indicated (in thousands): [[GREPCENT_TABLE]] [["","","","Years Ended December 31,"],["","","","","","2023","","2022","","2021"],["Deposit service charges and fees","","","","","$","21,682","","","$","23,402","","","$","21,685"],["Gain (loss) on sale of loans, net","","","","","(3,711)","","","(2,570)","","","24,394"],["Gain (loss) on investment securities:"],["Net realized gain on sale of securities AFS","","","","","1,815","","","3,927","","","9,010"],["Net loss on marketable equity securities recognized in earnings","","","","","(11,867)","","","(19,732)","","","(2,564)"],["Gain (loss) on investment securities, net","","","","","(10,052)","","","(15,805)","","","6,446"],["Lease financing","","","","","45,882","","","54,111","","","53,263"],["Other non-interest income","","","","","33,037","","","18,498","","","28,365"],["","","","","","$","86,838","","","$","77,636","","","$","134,153"]] [[/GREPCENT_TABLE]] The losses on marketable equity securities during the years ended December 31, 2023 and 2022, were attributable to losses related to certain preferred equity investments. The decrease in lease financing revenue for the year ended December 31, 2023, compared to the year ended December 31, 2022, was attributable to (i) a net loss of $2.0 million on sale of operating lease equipment recognized during the year ended December 31, 2023, compared to a net gain of $2.3 million recognized during the year ended December 31, 2022, a variance of $4.3 million; and (ii) the impact of the sale of some operating lease equipment, reducing the size of the portfolio. The most significant factors leading to the increase in other non-interest income for the year ended December 31, 2023, compared to the year ended December 31, 2022, were increases in BOLI income, particularly as related to the BOLI assets supporting our deferred compensation plan, lending related fees and revenue from our customer derivative program. Non-Interest Expense The following table presents the components of non-interest expense for the periods indicated (in thousands): [[GREPCENT_TABLE]] [["","","","Years Ended December 31,"],["","","","","","2023","","2022","","2021"],["Employee compensation and benefits","","","","","$","280,744","","","$","265,548","","","$","243,532"],["Occupancy and equipment","","","","","43,345","","","45,400","","","47,944"],["Deposit insurance expense","","","","","66,747","","","17,999","","","18,695"],["Professional fees","","","","","14,184","","","11,730","","","14,386"],["Technology","","","","","79,984","","","77,103","","","67,500"],["Discontinuance of cash flow hedges","","","","","\u2014","","","\u2014","","","44,833"],["Depreciation and impairment of operating lease equipment","","","","","44,446","","","50,388","","","53,764"],["Other non-interest expense","","","","","106,501","","","72,142","","","56,921"],["Total non-interest expense","","","","","$","635,951","","","$","540,310","","","$","547,575"]] [[/GREPCENT_TABLE]] Year-over-year increases in employee compensation and benefits reflected labor market dynamics. Increases in deposit insurance expense were primarily attributable to an increase in the assessment rate and a $35.4 million special assessment during the year ended December 31, 2023. The decline in depreciation and impairment of operating lease equipment for the year ended December 31, 2023, compared to the year ended December 31, 2022, is primarily attributed to the decline in operating lease equipment. The most significant factor impacting the increase in other non-interest expense for the year ended December 31, 2023, compared to the year ended December 31, 2022, was costs related to certain depositor rebate and commission programs, some of which are correlated with changes in interest rates. See Note 6 to the consolidated financial statements for more information about these costs. 39 Income Taxes The provision for income taxes for the years ended December 31, 2023, 2022 and 2021 was $58.4 million, $90.2 million and $34.4 million, respectively. The Company's effective income tax rate was 24.64%, 24.03% and 7.66% for the years ended 2023, 2022 and 2021, respectively. The effective income tax rate for the year ended December 31, 2021 was impacted by a settlement with the Florida Department of Revenue related to certain tax matters for the 2009-2019 tax years and a reduction in the liability for unrecognized tax benefits arising primarily from expiration of statues of limitations in federal and certain state jurisdictions. See Note 9 to the consolidated financial statements for more information about income taxes including a reconciliation of the Company's effective income tax rate to the statutory federal rate. Analysis of Financial Condition For the year ended December 31, 2023, compared to the year ended December 31, 2022, average non-interest bearing demand deposits declined by $1.8 billion, while average interest bearing deposits remained relatively flat, increasing by $28 million. Correspondingly, average FHLB advances grew by $1.9 billion. The year-over-year decline in average non-interest bearing demand deposits reflected the impact on the title insurance industry vertical of lower levels of activity in the residential mortgage sector brought on by rising mortgage rates, and was consistent with broader industry deposit trends evidencing restrictive monetary policy as customers sought higher yields on their cash balances. Within the interest-bearing categories, average interest bearing non-maturity deposits declined by $1.8 billion, while average time deposits increased by $1.8 billion. This shift reflected deposit outflows from a relatively small number of larger money-market relationships immediately after the initial regional bank closures in March 2023, followed by a strategic shift toward less volatile time deposits in a challenging liquidity environment. While average interest-earning assets remained relatively flat, increasing by $79 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, average loans grew by $621 million and average investment securities declined by $853 million. This shift reflected our near-term strategic priorities with respect to improving the asset mix. The increase of $311 million in other interest earning assets was due to higher levels of cash held at the FRB in response to the events of March 2023. Investment Securities The following table shows the amortized cost and carrying value, which, with the exception of investment securities held to maturity, is fair value, of investment securities at the dates indicated (in thousands): [[GREPCENT_TABLE]] [["","December 31, 2023","","December 31, 2022"],["","Amortized Cost","","Carrying Value","","Amortized Cost","","Carrying Value"],["U.S. Treasury securities","$","139,858","","","$","130,592","","","$","148,956","","","$","135,841"],["U.S. Government agency and sponsored enterprise residential MBS","1,962,658","","","1,924,207","","","2,036,693","","","1,983,168"],["U.S. Government agency and sponsored enterprise commercial MBS","561,557","","","497,859","","","600,517","","","525,094"],["Private label residential MBS and CMOs","2,596,231","","","2,295,730","","","2,864,589","","","2,530,663"],["Private label commercial MBS","2,282,833","","","2,198,743","","","2,645,168","","","2,524,354"],["Single family real estate-backed securities","383,984","","","366,255","","","502,194","","","470,441"],["Collateralized loan obligations","1,122,799","","","1,112,824","","","1,166,838","","","1,136,463"],["Non-mortgage asset-backed securities","106,095","","","102,780","","","102,194","","","95,976"],["State and municipal obligations","107,176","","","102,618","","","122,181","","","116,661"],["SBA securities","106,237","","","103,024","","","139,320","","","135,782"],["Investment securities held to maturity","10,000","","","10,000","","","10,000","","","10,000"],["","$","9,379,428","","","8,844,632","","","$","10,338,650","","","9,664,443"],["Marketable equity securities","","","32,722","","","","","90,884"],["","","","$","8,877,354","","","","","$","9,755,327"]] [[/GREPCENT_TABLE]] 40 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. Investment grade municipal securities provide liquidity and attractive tax-equivalent yields. We have also invested in highly-rated structured products, including private-label commercial and residential MBS, collateralized loan obligations, single family real estate-backed securities and non-mortgage asset-backed securities that, while somewhat less liquid, are generally pledgeable at either the FHLB or the FRB and provide us with attractive 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 estimated weighted average life of the investment portfolio as of December 31, 2023 was 5.6 years and the effective duration of the investment portfolio was 1.97 years. The investment securities AFS portfolio was in a net unrealized loss position of $534.8 million at December 31, 2023, compared to a net unrealized loss position of $674.2 million at December 31, 2022, improving by $139.4 million during the year ended December 31, 2023. Net unrealized losses at December 31, 2023 included $5.0 million of gross unrealized gains and $539.8 million of gross unrealized losses. Investment securities available for sale in unrealized loss positions at December 31, 2023 had an aggregate fair value of $8.4 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. The ratings distribution of our AFS securities portfolio at the dates indicated are depicted in the charts below: [[GREPCENT_TABLE]] [["December 31, 2023","","December 31, 2022"]] [[/GREPCENT_TABLE]] 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; 41 •Changes in the financial condition of the issuer or underlying loan obligors; •The payment structure and remaining payment terms of the security, including levels of subordination or over-collateralization; •Failure of the issuer to make scheduled payments; •Changes in credit ratings; •Relevant market data; 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 December 31, 2023. 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. While the events of early 2023 impacting the banking sector have impacted the liquidity profile of many banks, including BankUnited, the substantial majority of our investment securities are pledgeable 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. 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 December 31, 2023: [[GREPCENT_TABLE]] [["","","","","","Subordination","","Weighted Average Stress Scenario Loss"],["","Rating","","Percent of Total","","Minimum","","Maximum","","Average"],["Private label CMBS","AAA","","85.8","%","","30.2","","99.9","","43.9","","7.1"],["","AA","","10.6","%","","29.5","","74.4","","37.0","","7.7"],["","A","","3.6","%","","25.1","","51.5","","37.3","","9.1"],["Weighted average","","","100.0","%","","29.9","","95.5","","43.0","","7.2"],["CLOs","AAA","","80.2","%","","40.2","","74.2","","47.1","","15.7"],["","AA","","16.2","%","","30.8","","47.0","","37.3","","13.0"],["","A","","3.6","%","","31.5","","33.2","","32.2","","14.4"],["Weighted average","","","100.0","%","","38.4","","68.3","","45.0","","15.2"],["Private label residential MBS and CMOs","AAA","","94.0","%","","3.0","","92.0","","17.7","","2.2"],["","AA","","4.2","%","","20.2","","34.2","","24.8","","5.3"],["","A","","1.8","%","","27.3","","28.2","","27.7","","5.7"],["Weighted average","","","100.0","%","","4.2","","88.4","","18.2","","2.4"]] [[/GREPCENT_TABLE]] While for certain portfolio segments, 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 42 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 14 to the consolidated financial statements. The following table shows the weighted average prospective yields, categorized by scheduled maturity, for AFS investment securities as of December 31, 2023. 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%: [[GREPCENT_TABLE]] [["","","","Within One Year","","","","After One Year Through Five Years","","","","After Five Years Through Ten Years","","","","After Ten Years","","","","Total"],["U.S. Treasury securities","","","0.52","%","","","","4.45","%","","","","0.89","%","","","","\u2014","%","","","","1.57","%"],["U.S. Government agency and sponsored enterprise residential MBS","","","5.53","%","","","","5.73","%","","","","5.94","%","","","","5.79","%","","","","5.77","%"],["U.S. Government agency and sponsored enterprise commercial MBS","","","3.64","%","","","","6.03","%","","","","3.38","%","","","","2.59","%","","","","3.87","%"],["Private label residential MBS and CMOs","","","3.93","%","","","","3.88","%","","","","3.77","%","","","","3.95","%","","","","3.88","%"],["Private label commercial MBS","","","6.41","%","","","","7.01","%","","","","2.17","%","","","","3.30","%","","","","6.67","%"],["Single family real estate-backed securities","","","4.46","%","","","","3.36","%","","","","1.36","%","","","","\u2014","%","","","","3.72","%"],["Collateralized loan obligations","","","7.19","%","","","","7.49","%","","","","7.86","%","","","","\u2014","%","","","","7.48","%"],["Non-mortgage asset-backed securities","","","3.04","%","","","","6.01","%","","","","4.96","%","","","","\u2014","%","","","","5.70","%"],["State and municipal obligations","","","2.59","%","","","","4.18","%","","","","4.29","%","","","","\u2014","%","","","","4.21","%"],["SBA securities","","","6.19","%","","","","6.18","%","","","","6.13","%","","","","5.94","%","","","","6.16","%"],["","","","5.10","%","","","","6.16","%","","","","4.36","%","","","","4.06","%","","","","5.45","%"]] [[/GREPCENT_TABLE]] 43 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): [[GREPCENT_TABLE]] [["","December 31, 2023","","December 31, 2022"],["","Total","","Percent of Total","","Total","","Percent of Total"],["1-4 single family residential","$","6,903,013","","","28.0","%","","$","7,128,834","","","28.6","%"],["Government insured residential","1,306,014","","","5.3","%","","1,771,880","","","7.1","%"],["Total residential","8,209,027","","","33.3","%","","8,900,714","","","35.7","%"],["Non-owner occupied commercial real estate","5,323,241","","","21.6","%","","5,405,597","","","21.7","%"],["Construction and land","495,992","","","2.0","%","","294,360","","","1.2","%"],["Owner occupied commercial real estate","1,935,743","","","7.9","%","","1,890,813","","","7.6","%"],["Commercial and industrial","6,971,981","","","28.3","%","","6,417,721","","","25.9","%"],["Total \"Core\" C&I and CRE","14,726,957","","","59.8","%","","14,008,491","","","56.4","%"],["Pinnacle - municipal finance","884,690","","","3.6","%","","912,122","","","3.7","%"],["Franchise finance","182,408","","","0.7","%","","253,774","","","1.0","%"],["Equipment finance","197,939","","","0.8","%","","286,147","","","1.1","%"],["Mortgage warehouse lending","432,663","","","1.8","%","","524,740","","","2.1","%"],["Total commercial","16,424,657","","","66.7","%","","15,985,274","","","64.3","%"],["Total loans","24,633,684","","","100.0","%","","24,885,988","","","100.0","%"],["Allowance for credit losses","(202,689)","","","","","(147,946)"],["Loans, net","$","24,430,995","","","","","$","24,738,042"]] [[/GREPCENT_TABLE]] Consistent with our near-term strategic objectives related to improving the asset mix, for the year ended December 31, 2023, the core C&I and CRE portfolio segments grew by $719 million, while residential loans declined by $692 million. In the aggregate, municipal, franchise and equipment finance declined by $187 million; growth in these segments has been de-emphasized due to their current risk/return profile. These trends are expected to continue over the course of 2024. Mortgage warehouse balances declined by $92 million over the course of 2023, mainly because of the sustained higher interest rate environment. If mortgage rates moderate over the course of 2024, we may see growth in this portfolio segment. Overall, we intend to strategically emphasize the origination of relationship-based loans that are accompanied by deposit business. Commercial loans and leases Commercial loans include a diverse portfolio of commercial and industrial loans and lines of credit, loans secured by owner-occupied commercial real-estate, income-producing non-owner occupied commercial real estate, a smaller amount of construction and land loans, SBA loans, mortgage warehouse lines of credit, municipal loans and leases originated by Pinnacle and franchise and equipment finance loans and leases originated by Bridge. 44 The following charts present the distribution of the commercial loan portfolio at the dates indicated (dollars in millions): [[GREPCENT_TABLE]] [["December 31, 2023","","December 31, 2022"]] [[/GREPCENT_TABLE]] Commercial Real Estate: Commercial real estate loans include term loans secured by non-owner occupied income producing properties including rental apartments, industrial properties, retail shopping centers, free-standing single-tenant buildings, medical and other office buildings, warehouse facilities, hotels and real estate secured lines of credit. The Company’s commercial real estate underwriting standards most often provide for loan terms of five to seven years, with amortization schedules of no more than thirty years. The following tables present the distribution of commercial real estate loans by property type, along with weighted average DSCRs and LTVs at December 31, 2023 and 2022 (dollars in thousands): [[GREPCENT_TABLE]] [["","December 31, 2023"],["","Amortized Cost","","Percent of Total","","FL","","New York Tri-State","","Other","","Weighted Average DSCR","","Weighted Average LTV"],["Office","$","1,752,801","","","30","%","","60","%","","24","%","","16","%","","1.67","","65.0","%"],["Warehouse/Industrial","1,341,229","","","24","%","","56","%","","8","%","","36","%","","2.04","","52.0","%"],["Multifamily","838,692","","","14","%","","50","%","","50","%","","\u2014","%","","1.98","","45.5","%"],["Retail","818,409","","","14","%","","54","%","","29","%","","17","%","","1.67","","58.8","%"],["Hotel","491,853","","","8","%","","78","%","","3","%","","19","%","","1.89","","49.0","%"],["Construction and Land","495,992","","","9","%","","56","%","","42","%","","2","%","","N/A","","N/A"],["Other","80,257","","","1","%","","71","%","","13","%","","16","%","","1.94","","47.4","%"],["","$","5,819,233","","","100","%","","58","%","","25","%","","17","%","","1.80","","56.0","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","December 31, 2022"],["","Amortized Cost","","Percent of Total","","FL","","New York Tri-State","","Other","","Weighted Average DSCR","","Weighted Average LTV"],["Office","$","1,874,614","","","33","%","","59","%","","22","%","","19","%","","1.75","","64.3","%"],["Warehouse/Industrial","1,216,506","","","21","%","","62","%","","18","%","","20","%","","2.05","","52.6","%"],["Multifamily","945,404","","","17","%","","48","%","","52","%","","\u2014","%","","2.13","","45.9","%"],["Retail","869,922","","","15","%","","64","%","","27","%","","9","%","","1.88","","61.7","%"],["Hotel","407,462","","","7","%","","86","%","","6","%","","8","%","","2.13","","55.1","%"],["Construction and Land","294,360","","","5","%","","49","%","","49","%","","2","%","","N/A","","N/A"],["Other","91,689","","","2","%","","75","%","","9","%","","16","%","","2.45","","47.7","%"],["","$","5,699,957","","","100","%","","61","%","","26","%","","13","%","","1.95","","57.0","%"]] [[/GREPCENT_TABLE]] 45 The geographic mix of the portfolio has remained relatively consistent year-over-year, with the majority in Florida. Office exposure has declined, both in total and as a percentage of the CRE portfolio. Weighted average LTVs have remained largely consistent year-over-year, while we have seen some decline in weighted average DSCRs, largely due to increasing costs, including higher interest rates. Both weighted average DSCRs and weighted average LTVs remain favorable. The following table presents weighted average DSCR and weighted average LTV for the Florida and New York tri-state CRE portfolios, by property type, at December 31, 2023: [[GREPCENT_TABLE]] [["","Florida","","NY Tri-State"],["","Weighted Average DSCR","","Weighted Average LTV","","Weighted Average DSCR","","Weighted Average LTV"],["Office","1.68","","","64.5","%","","1.62","","","62.9","%"],["Warehouse/Industrial","2.19","","","50.5","%","","1.91","","","37.0","%"],["Multifamily","2.68","","","42.1","%","","1.36","","","48.5","%"],["Retail","1.86","","","56.2","%","","1.26","","","63.6","%"],["Hotel","1.95","","","46.9","%","","1.83","","","20.2","%"],["Other","2.17","","","44.3","%","","1.24","","","66.3","%"],["","1.96","","","55.0","%","","1.46","","","54.1","%"]] [[/GREPCENT_TABLE]] 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. Included in New York tri-state multifamily loans in the tables above is approximately $121 million of rent regulated exposure as of December 31, 2023. The office portfolio outside of Florida and the New York tri-state area exhibits no particular geographic concentration. The following table presents the maturity profile of the CRE portfolio over the next 12 months by property type at December 31, 2023 (dollars in thousands): [[GREPCENT_TABLE]] [["","Maturing in the Next 12 Months","","% Maturing in the Next 12 Months","","Fixed Rate or Swapped Maturing Next 12 Months","","","","Fixed Rate to Borrower as a % of Total Portfolio"],["Office","$","314,485","","","18","%","","$","187,162","","","","","11","%"],["Warehouse/Industrial","170,547","","","13","%","","81,405","","","","","6","%"],["Multifamily","111,023","","","13","%","","64,208","","","","","8","%"],["Retail","121,309","","","15","%","","64,066","","","","","8","%"],["Hotel","43,209","","","9","%","","43,209","","","","","9","%"],["Construction and Land","179,844","","","36","%","","503","","","","","\u2014","%"],["Other","12,765","","","16","%","","12,765","","","","","16","%"],["","$","953,182","","","16","%","","$","453,318","","","","","8","%"]] [[/GREPCENT_TABLE]] 46 The following table present scheduled maturities of the CRE portfolio by property type at December 31, 2023 (in thousands): [[GREPCENT_TABLE]] [["","2024","","2025","","2026","","2027","","2028","","Thereafter","","Total"],["Office","$","314,485","","","$","400,230","","","$","358,476","","","$","224,122","","","$","145,001","","","$","310,487","","","$","1,752,801"],["Warehouse/Industrial","170,547","","","155,441","","","382,337","","","261,630","","","160,358","","","210,916","","","1,341,229"],["Multifamily","111,023","","","79,492","","","165,016","","","133,925","","","128,393","","","220,843","","","838,692"],["Retail","121,309","","","136,037","","","232,272","","","67,381","","","186,864","","","74,546","","","818,409"],["Hotel","43,209","","","44,355","","","217,334","","","30,142","","","54,971","","","101,842","","","491,853"],["Construction and Land","179,844","","","115,151","","","66,371","","","33,932","","","\u2014","","","100,694","","","495,992"],["Other","12,765","","","7,052","","","27,188","","","9,595","","","1,421","","","22,236","","","80,257"],["","$","953,182","","","$","937,758","","","$","1,448,994","","","$","760,727","","","$","677,008","","","$","1,041,564","","","$","5,819,233"]] [[/GREPCENT_TABLE]] The office segment totaled $1.8 billion at December 31, 2023. The following charts present the sub-market geographic distribution of the Florida and NY tri-state office portfolios at December 31, 2023: [[GREPCENT_TABLE]] [["NY Tri-State by Sub-Market","","Florida by Sub-Market"]] [[/GREPCENT_TABLE]] The New York tri-state market encompasses approximately 24% of the office segment, with $180 million of exposure in Manhattan. As of December 31, 2023, the Manhattan office portfolio was approximately 96% occupied with 3% 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 16% of the segment and exhibit no particular geographic concentration. Some of these loans were made to high quality sponsors in our FL or NY tri-state customer base. Estimated rent rollover of the total office portfolio in the next 12 months is approximately 11%. Approximately 18% is secured by medical office buildings. Non-performing office loans were insignificant at December 31, 2023, totaling approximately $300 thousand. Office loans rated below pass at December 31, 2023, totaled $146 million. Also see the section entitled "Asset Quality" below. Commercial and Industrial Commercial and industrial loans are typically made to small, middle market and larger corporate businesses and not-for-profit entities and include equipment loans, secured and unsecured working capital facilities, formula-based loans, subscription finance lines of credit, trade finance, SBA product offerings, business acquisition finance credit facilities, credit facilities to institutional real estate entities such as REITs and commercial real estate investment funds, and a small amount of commercial credit cards. These loans may be structured as term loans, typically with maturities of five to seven years, or revolving lines of credit which may have multi-year maturities. In addition to financing provided by Pinnacle, the Bank provides financing to state 47 and local governmental entities generally within our primary geographic markets. The Bank makes loans secured by owner-occupied commercial real estate that typically have risk profiles more closely aligned with that of commercial and industrial loans than with other types of commercial real estate loans. The following table presents the exposure in the C&I portfolio by industry, at December 31, 2023 (dollars in thousands): [[GREPCENT_TABLE]] [["","Amortized Cost(1)","","Percent of Total"],["Finance and Insurance","$","1,695,374","","","19.0","%"],["Manufacturing","874,583","","","9.8","%"],["Educational Services","753,427","","","8.5","%"],["Wholesale Trade","693,724","","","7.8","%"],["Utilities","653,901","","","7.3","%"],["Health Care and Social Assistance","605,445","","","6.8","%"],["Information","590,143","","","6.6","%"],["Real Estate and Rental and Leasing","538,824","","","6.0","%"],["Transportation and Warehousing","420,411","","","4.7","%"],["Construction","381,641","","","4.3","%"],["Retail Trade","319,890","","","3.6","%"],["Professional, Scientific, and Technical Services","300,201","","","3.4","%"],["Public Administration","245,441","","","2.8","%"],["Other Services (except Public Administration)","230,691","","","2.6","%"],["Administrative and Support and Waste Management","194,089","","","2.2","%"],["Arts, Entertainment, and Recreation","187,689","","","2.1","%"],["Accommodation and Food Services","155,066","","","1.7","%"],["Other","67,184","","","0.8","%"],["","$","8,907,724","","","100.0","%"]] [[/GREPCENT_TABLE]] (1)    Includes $1.9 billion of owner occupied real estate. Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides equipment and franchise financing on a national basis using both loan and lease structures. Pinnacle provides essential-use equipment financing to state and local governmental entities directly and through vendor programs and alliances. Pinnacle offers a full array of financing structures including equipment lease purchase agreements and direct (private placement) bond re-fundings and loan agreements. Bridge has two operating divisions. The franchise finance division offers franchise acquisition, expansion and equipment financing, typically to experienced operators in well-established concepts. The franchise finance portfolio is made up primarily of quick service restaurant and fitness concepts comprising 43% and 53% of the portfolio, respectively. The equipment finance division provides primarily transportation equipment financing through a variety of loan and lease structures. Franchise and equipment finance have been 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. Commercial loans included loans meeting the regulatory definition of shared national credits totaling $4.8 billion at December 31, 2023. Residential mortgages The following table shows the composition of residential loans at the dates indicated (in thousands): [[GREPCENT_TABLE]] [["","December 31, 2023","","December 31, 2022"],["1-4 single family residential","$","6,903,013","","","$","7,128,834"],["Government insured residential","1,306,014","","","1,771,880"],["","$","8,209,027","","","$","8,900,714"]] [[/GREPCENT_TABLE]] 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 48 terms ranging from 10 to 30 years, with either fixed or adjustable interest rates. At December 31, 2023, $1.1 billion or 15% were secured by investor-owned properties. The Company acquires non-performing FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations 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 $1.3 billion at December 31, 2023. The Company is not the servicer of these loans. The following charts present the distribution of the 1-4 single family residential mortgage portfolio by product type at the dates indicated: [[GREPCENT_TABLE]] [["December 31, 2023","","December 31, 2022"]] [[/GREPCENT_TABLE]] See Note 4 to the consolidated financial statements for information about the geographic distribution of the 1-4 single family residential portfolio. The following table presents a breakdown of the 1-4 single family residential mortgage portfolio, excluding government insured residential loans, categorized between fixed rate loans and ARMs at the dates indicated (dollars in thousands): [[GREPCENT_TABLE]] [["","December 31, 2023","","December 31, 2022"],["","Total","","Percent of Total","","Total","","Percent of Total"],["Fixed rate loans","$","3,757,442","","","54","%","","$","3,995,298","","","56","%"],["ARM loans","3,145,571","","","46","%","","3,133,536","","","44","%"],["","$","6,903,013","","","100","%","","$","7,128,834","","","100","%"]] [[/GREPCENT_TABLE]] 49 Loan Maturities The following table sets forth, as of December 31, 2023, the maturity distribution of our loan portfolio by category, excluding government insured residential loans. Commercial loans are presented by contractual maturity, including scheduled payments for amortizing loans. Contractual maturities of residential loans have been adjusted for an estimated rate of voluntary prepayments, based on historical trends, current interest rates, types of loans and refinance patterns (in thousands): [[GREPCENT_TABLE]] [["","One Year or Less","","After One Through Five Years","","After Five Years Through Fifteen Years","","After Fifteen Years","","Total"],["Residential","$","725,770","","","$","2,639,694","","","$","2,612,246","","","$","925,303","","","$","6,903,013"],["Commercial:"],["Non-owner occupied commercial real estate","875,526","","","3,622,376","","","818,365","","","6,974","","","5,323,241"],["Construction and land","179,588","","","219,476","","","94,648","","","2,280","","","495,992"],["Owner occupied commercial real estate","231,979","","","768,877","","","877,384","","","57,503","","","1,935,743"],["Commercial and industrial","1,725,045","","","4,539,480","","","703,015","","","4,441","","","6,971,981"],["Pinnacle","206,588","","","373,175","","","295,986","","","8,941","","","884,690"],["Franchise finance","60,584","","","75,644","","","46,180","","","\u2014","","","182,408"],["Equipment finance","13,059","","","173,126","","","11,754","","","\u2014","","","197,939"],["Mortgage warehouse lending","427,521","","","5,142","","","\u2014","","","\u2014","","","432,663"],["","3,719,890","","","9,777,296","","","2,847,332","","","80,139","","","16,424,657"],["","$","4,445,660","","","$","12,416,990","","","$","5,459,578","","","$","1,005,442","","","$","23,327,670"]] [[/GREPCENT_TABLE]] The following table shows the distribution of those loans that mature in more than one year between fixed and adjustable interest rate loans as of December 31, 2023 (in thousands): [[GREPCENT_TABLE]] [["","Interest Rate Type"],["","Fixed","","Adjustable","","Total"],["Residential","$","3,603,716","","","$","2,573,527","","","$","6,177,243"],["Commercial:"],["Non-owner occupied commercial real estate","1,802,723","","","2,644,992","","","4,447,715"],["Construction and land","16,071","","","300,333","","","316,404"],["Owner occupied commercial real estate","1,026,297","","","677,467","","","1,703,764"],["Commercial and industrial","611,771","","","4,635,165","","","5,246,936"],["Pinnacle","678,102","","","\u2014","","","678,102"],["Franchise finance","40,343","","","81,481","","","121,824"],["Equipment finance","171,585","","","13,295","","","184,880"],["Mortgage warehouse lending","\u2014","","","5,142","","","5,142"],["","4,346,892","","","8,357,875","","","12,704,767"],["","$","7,950,608","","","$","10,931,402","","","$","18,882,010"]] [[/GREPCENT_TABLE]] Excluded from the tables above are government insured residential loans. Resolution of these loans is generally accomplished through the re-securitization and sale of the loans after they re-perform, either through modification or self-cure, or through pursuit of the applicable guarantee. Operating lease equipment, net The following table presents the components of operating lease equipment at the dates indicated (in thousands): [[GREPCENT_TABLE]] [["","December 31, 2023","","","","December 31, 2022"],["Operating lease equipment","$","582,147","","","","","$","772,267"],["Less: accumulated depreciation","(210,238)","","","","","(232,468)"],["Operating lease equipment, net","$","371,909","","","","","$","539,799"]] [[/GREPCENT_TABLE]] 50 The table above includes off-lease equipment, net of accumulated depreciation, totaling $48 million and $63 million at December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, $97 million of certain operating lease equipment was sold and $26 million was transferred into equipment held for sale. 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 chart below presents operating lease equipment by type at the dates indicated: [[GREPCENT_TABLE]] [["December 31, 2023","","December 31, 2022"]] [[/GREPCENT_TABLE]] Bridge had exposure to the energy industry of $154 million at December 31, 2023. The majority of the energy exposure was in the operating lease equipment portfolio where energy exposure totaled $146 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 $3 million. Homogenous groups of smaller balance commercial loans may be monitored collectively. The credit quality and risk rating of commercial loans as well as our underwriting and portfolio management practices are regularly reviewed by our internal independent credit review department. We believe internal risk rating is the best indicator of the credit quality of commercial loans. The Company utilizes a 16-grade internal asset risk classification system as part of its efforts to monitor and maintain commercial asset quality. The special mention rating is considered a transitional rating for loans exhibiting potential credit weaknesses that could result in deterioration of repayment prospects at some future date if not checked or corrected and that deserve management’s close attention. These borrowers may exhibit declining cash flows or revenues or increasing leverage. Loans with well-defined credit weaknesses that may result in a loss if the deficiencies are not corrected are assigned a risk rating of substandard. These borrowers may exhibit payment defaults, inadequate cash flows from current operations, operating losses, increasing balance sheet leverage, project cost overruns, unreasonable construction delays, exhausted interest reserves, declining collateral values, frequent overdrafts or past due real estate taxes. Loans with weaknesses so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors have not been charged off, are assigned an internal risk rating of doubtful. 51 The following table summarizes the Company's commercial credit exposure, based on internal risk rating, at the dates indicated (dollars in thousands): [[GREPCENT_TABLE]] [["","December 31, 2023","","","","December 31, 2022"],["","Amortized Cost","","Percent of Commercial Loans","","","","","","Amortized Cost","","Percent of Commercial Loans"],["Pass","$","15,287,548","","","93.2","%","","","","","","$","15,244,761","","","95.4","%"],["Special mention","319,905","","","1.9","%","","","","","","51,433","","","0.3","%"],["Substandard accruing","711,266","","","4.3","%","","","","","","605,965","","","3.8","%"],["Substandard non-accruing","86,903","","","0.5","%","","","","","","75,125","","","0.5","%"],["Doubtful","19,035","","","0.1","%","","","","","","7,990","","","\u2014","%"],["","$","16,424,657","","","100.0","%","","","","","","$","15,985,274","","","100.0","%"]] [[/GREPCENT_TABLE]] The increase in criticized and classified assets compared to the prior year-end was driven primarily by higher operating costs, including insurance and interest, and for some CRE office loans, higher vacancy rates. Evolving dynamics in certain real estate sectors and markets, particularly the office sector, could lead to future increases in criticized/classified and non-performing loans. The following table provides additional information about special mention and substandard accruing loans, at the dates indicated (dollars in thousands). All of these loans are performing. Non-performing loans are discussed further in the section entitled "Non-performing Assets" below. [[GREPCENT_TABLE]] [["","December 31, 2023","","","","","","","","","","December 31, 2022"],["","Amortized Cost","","% of Loan Segment","","","","","","","","","","","","","","","","","","Amortized Cost","","% of Loan Segment"],["Special mention:"],["CRE"],["Hotel","$","15,712","","","3.2","%","","","","","","","","","","","","","","","","","","$","709","","","0.2","%"],["Retail","36,000","","","4.4","%","","","","","","","","","","","","","","","","","","\u2014","","","\u2014","%"],["Office","45,840","","","2.6","%","","","","","","","","","","","","","","","","","","18,006","","","1.0","%"],["","97,552","","","","","","","","","","","","","","","","","","","","","18,715"],["Owner occupied commercial real estate","22,150","","","1.1","%","","","","","","","","","","","","","","","","","","24,101","","","1.3","%"],["Commercial and industrial","197,924","","","2.8","%","","","","","","","","","","","","","","","","","","1,017","","","\u2014","%"],["Franchise finance","2,279","","","1.2","%","","","","","","","","","","","","","","","","","","7,600","","","3.0","%"],["","$","319,905","","","","","","","","","","","","","","","","","","","","","$","51,433"],["Substandard accruing:"],["CRE"],["Hotel","$","41,805","","","8.5","%","","","","","","","","","","","","","","","","","","$","14,538","","","3.6","%"],["Retail","53,205","","","6.5","%","","","","","","","","","","","","","","","","","","72,421","","","8.4","%"],["Multi-family","115,755","","","13.8","%","","","","","","","","","","","","","","","","","","146,235","","","15.5","%"],["Office","100,307","","","5.7","%","","","","","","","","","","","","","","","","","","73,042","","","3.9","%"],["Construction and land","76,883","","","15.5","%","","","","","","","","","","","","","","","","","","8,872","","","3.0","%"],["Other","2,769","","","3.4","%","","","","","","","","","","","","","","","","","","93","","","0.1","%"],["","390,724","","","","","","","","","","","","","","","","","","","","","315,201"],["Owner occupied commercial real estate","71,908","","","3.7","%","","","","","","","","","","","","","","","","","","73,501","","","3.9","%"],["Commercial and industrial","208,984","","","3.0","%","","","","","","","","","","","","","","","","","","171,613","","","2.7","%"],["Franchise finance","16,864","","","9.2","%","","","","","","","","","","","","","","","","","","44,295","","","17.5","%"],["Equipment finance","22,786","","","11.5","%","","","","","","","","","","","","","","","","","","1,355","","","0.5","%"],["","$","711,266","","","","","","","","","","","","","","","","","","","","","$","605,965"]] [[/GREPCENT_TABLE]] 52 The following graphs present trends in criticized and classified loans by segment over the periods indicated (in millions): [[GREPCENT_TABLE]] [["Commercial Real Estate(1)","","Commercial(1)(2)"]] [[/GREPCENT_TABLE]] (1)Excludes SBA (2)Includes Pinnacle, franchise finance and equipment finance The following charts present criticized and classified CRE loans by property type at the dates indicated (in millions): [[GREPCENT_TABLE]] [["December 31, 2023","","December 31, 2022"]] [[/GREPCENT_TABLE]] 53 The following graphs present delinquency trends by segment over the periods indicated (in millions): [[GREPCENT_TABLE]] [["Commercial Real Estate","","Commercial(1)"]] [[/GREPCENT_TABLE]] (1)Includes Pinnacle, franchise finance and equipment finance Operating Lease Equipment, net Operating leases with a carrying value of assets under lease totaling $24 million were internally risk rated substandard at December 31, 2023. On a quarterly basis, management performs an impairment analysis on assets with indicators of potential impairment. Potential impairment indicators include evidence of changes in residual value, macro-economic conditions, an extended period of time off-lease, criticized or classified status, or management's intention to sell the asset at an amount potentially below its carrying value. During the years ended December 31, 2023, 2022 and 2021, impairment charges recognized related to operating lease equipment were immaterial. 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. 54 The following charts present information about the 1-4 single family residential portfolio, excluding government insured loans, by FICO distribution, LTV distribution and vintage at December 31, 2023: [[GREPCENT_TABLE]] [["FICO Distribution","","LTV Distribution","","Vintage"]] [[/GREPCENT_TABLE]] FICO scores are generally updated semi-annually and were most recently updated in the third quarter of 2023. LTVs are typically based on valuation at origination since we do not routinely update residential appraisals. At December 31, 2023, 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. The following graph presents trends in residential delinquencies, excluding government insured residential loans, over the periods indicated (in millions): 1-4 Single Family Residential Delinquent residential loans, excluding government insured residential loans, are not and have not historically been material. Delinquency status is not particularly relevant to the credit quality of government insured residential loans considering the guaranteed nature of the loans and underlying business model. Note 4 to the consolidated financial statements presents additional information about key credit quality indicators and delinquency status of the loan portfolio. Stress Testing Results The majority of our commercial portfolio is subject to quarterly stress test analysis. We continually re-evaluate our stress testing framework and adapt it to evolving macro-economic conditions, as necessary. On an annual basis, we also run a rigorous stress test of our entire balance sheet incorporating the FRB's severely adverse CCAR scenario as well as additional idiosyncratic scenarios reflective of evolving macro-economic themes. The 2023 stress test incorporating the FRB's CCAR severely adverse scenario was performed during the second quarter of 2023, based on the December 31, 2022 balance sheet. 55 The following charts summarize the results of this stress test. Additionally, we present stress results for the CRE portfolio based on the Moody's S4 recessionary scenario (dollars in millions): [[GREPCENT_TABLE]] [["","Total Loan Portfolio Stress Test Results(1)"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","CRE Portfolio Stress Test Results(2)"]] [[/GREPCENT_TABLE]] (1)Excludes Pinnacle municipal finance and mortgage warehouse lending. (2)Construction loans are included in the chart based on their applicable property type. 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 present information about the Company's non-performing loans and non-performing assets at the dates indicated (dollars in thousands): [[GREPCENT_TABLE]] [["","December 31, 2023","","","","December 31, 2022"],["Non-accrual loans:"],["Residential","$","20,513","","","","","$","21,311"],["Commercial:"],["Non-owner occupied commercial real estate","13,727","","","","","16,657"],["Construction and land","\u2014","","","","","5,695"],["Owner occupied commercial real estate","13,626","","","","","17,751"],["Commercial and industrial","54,907","","","","","29,722"],["Franchise finance","16,858","","","","","13,290"],["Equipment finance","6,820","","","","","\u2014"],["Total commercial loans","105,938","","","","","83,115"],["Total non-accrual loans","126,451","","","","","104,426"],["Loans past due 90 days and still accruing","593","","","","","593"],["Total non-performing loans","127,044","","","","","105,019"],["OREO and other non-performing assets","3,536","","","","","1,932"],["Total non-performing assets","$","130,580","","","","","$","106,951"],["Non-performing loans to total loans (1)","0.52","%","","","","0.42","%"],["Non-performing assets to total assets (1)","0.37","%","","","","0.29","%"],["ACL to total loans","0.82","%","","","","0.59","%"],["ACL to non-performing loans","159.54","%","","","","140.88","%"],["Net charge-offs to average loans","0.09","%","","","","0.22","%"]] [[/GREPCENT_TABLE]] (1)    Non-performing loans and assets include the guaranteed portion of non-accrual SBA loans totaling $41.8 million or 0.17% of total loans and 0.12% of total assets, at December 31, 2023, and $40.3 million or 0.16% of total loans and 0.11% of total assets, at December 31, 2022. 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 $277 million and $493 million at December 31, 2023 and 2022, 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. [[GREPCENT_TABLE]] [["Non-Performing Loans to Total Loans","","Non-Performing Assets to Total Assets"]] [[/GREPCENT_TABLE]] 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. 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 56 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 increases 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. 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 December 31, 2023, we used a combination of weighted third-party provided economic scenarios in calculating the quantitative portion of the ACL, and at December 31, 2022, we used a single externally provided baseline scenario, with a downside scenario informing a qualitative overlay. Each of these externally provided scenarios in fact represent the result of a probability weighting of thousands of individual scenario paths. See Note 1 to the consolidated financial statements for more detailed information about our ACL methodology and related accounting policies. 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): [[GREPCENT_TABLE]] [["","Residential","","Non-Owner Occupied Commercial Real Estate","","Construction and Land","","Owner Occupied Commercial Real Estate","","Commercial and Industrial","","Pinnacle - municipal Finance","","Franchise Finance","","Equipment Finance","","Total"],["Balance at December 31, 2020","$","18,719","","","$","101,334","","","$","3,284","","","$","28,797","","","$","62,197","","","$","304","","","$","36,331","","","$","6,357","","","$","257,323"],["Provision for (recovery of) credit losses","(9,241)","","","(65,543)","","","(2,253)","","","(6,844)","","","31,180","","","(134)","","","(8,857)","","","(2,764)","","","(64,456)"],["Charge-offs","(304)","","","(9,167)","","","\u2014","","","(471)","","","(50,563)","","","\u2014","","","(10,745)","","","\u2014","","","(71,250)"],["Recoveries","13","","","1,156","","","\u2014","","","156","","","3,498","","","\u2014","","","17","","","\u2014","","","4,840"],["Balance at December 31, 2021","9,187","","","27,780","","","1,031","","","21,638","","","46,312","","","170","","","16,746","","","3,593","","","126,457"],["Provision for (recovery of) credit losses","2,858","","","635","","","1,736","","","952","","","61,337","","","3","","","7,542","","","(1,249)","","","73,814"],["Charge-offs","(412)","","","(9,188)","","","(343)","","","(2,870)","","","(36,051)","","","\u2014","","","(13,191)","","","\u2014","","","(62,055)"],["Recoveries","108","","","3,100","","","\u2014","","","823","","","5,049","","","\u2014","","","650","","","\u2014","","","9,730"],["Balance at December 31, 2022","11,741","","","22,327","","","2,424","","","20,543","","","76,647","","","173","","","11,747","","","2,344","","","147,946"],["Impact of adoption of ASU 2022-02","(117)","","","\u2014","","","\u2014","","","5","","","(1,676)","","","\u2014","","","(6)","","","\u2014","","","(1,794)"],["Balance at January 1, 2023","11,624","","","22,327","","","2,424","","","20,548","","","74,971","","","173","","","11,741","","","2,344","","","146,152"],["Provision for (recovery of) credit losses","(4,002)","","","11,088","","","6,104","","","(5,546)","","","67,816","","","70","","","2,738","","","656","","","78,924"],["Charge-offs","\u2014","","","(1,228)","","","\u2014","","","(447)","","","(26,092)","","","\u2014","","","(7,247)","","","\u2014","","","(35,014)"],["Recoveries","9","","","623","","","\u2014","","","3,087","","","8,285","","","\u2014","","","623","","","\u2014","","","12,627"],["Balance at December 31, 2023","$","7,631","","","$","32,810","","","$","8,528","","","$","17,642","","","$","124,980","","","$","243","","","$","7,855","","","$","3,000","","","$","202,689"],["Net Charge-offs to Average Loans"],["Years Ended December 31, 2021","\u2014","%","","0.13","%","","\u2014","%","","0.02","%","","0.82","%","","\u2014","%","","2.34","%","","\u2014","%","","0.29","%"],["Years Ended December 31, 2022","\u2014","%","","0.11","%","","0.16","%","","0.11","%","","0.50","%","","\u2014","%","","4.49","%","","\u2014","%","","0.22","%"],["Years Ended December 31, 2023","\u2014","%","","0.01","%","","\u2014","%","","(0.14)","%","","0.25","%","","\u2014","%","","3.48","%","","\u2014","%","","0.09","%"]] [[/GREPCENT_TABLE]] 57 The following table shows the distribution of the ACL at the dates indicated (dollars in thousands): [[GREPCENT_TABLE]] [["","December 31, 2023","","","","","","December 31, 2022"],["","Total","","%(1)","","","","","","","","","","Total","","%(1)"],["Residential","$","7,631","","","33.3","%","","","","","","","","","","$","11,741","","","35.7","%"],["Non-owner occupied commercial real estate","32,810","","","21.6","%","","","","","","","","","","22,327","","","21.7","%"],["Construction and land","8,528","","","2.0","%","","","","","","","","","","2,424","","","1.2","%"],["CRE","41,338","","","","","","","","","","","","","24,751"],["Owner occupied commercial real estate","17,642","","","7.9","%","","","","","","","","","","20,543","","","7.6","%"],["Commercial and industrial(2)","124,980","","","30.1","%","","","","","","","","","","76,647","","","28.0","%"],["Pinnacle - municipal finance","243","","","3.6","%","","","","","","","","","","173","","","3.7","%"],["Franchise finance","7,855","","","0.7","%","","","","","","","","","","11,747","","","1.0","%"],["Equipment finance","3,000","","","0.8","%","","","","","","","","","","2,344","","","1.1","%"],["","153,720","","","","","","","","","","","","","111,454"],["","$","202,689","","","100.0","%","","","","","","","","","","$","147,946","","","100.0","%"]] [[/GREPCENT_TABLE]] (1)Represents percentage of loans receivable in each category to total loans receivable. (2)Includes mortgage warehouse lending. The following table presents the allocation of the ACL as a percentage of loans at the dates indicated: [[GREPCENT_TABLE]] [["","December 31, 2023","","","","December 31, 2022"],["Residential","0.09","%","","","","0.13","%"],["Commercial:"],["CRE","0.71","%","","","","0.43","%"],["Commercial and industrial","1.53","%","","","","1.10","%"],["Pinnacle - municipal finance","0.03","%","","","","0.02","%"],["Franchise finance","4.31","%","","","","4.63","%"],["Equipment finance","1.52","%","","","","0.82","%"],["Total commercial","1.19","%","","","","0.85","%"],["","0.82","%","","","","0.59","%"],["ACL to non-performing loans","159.54","%","","","","140.88","%"]] [[/GREPCENT_TABLE]] 58 Factors contributing to the change in the ACL during the year ended December 31, 2023, are depicted in the chart below (dollars in millions): Changes in the ACL during the year ended December 31, 2023 As depicted in the chart above, the most significant drivers of the increase in the ACL from December 31, 2022, to December 31, 2023, were the impact of changes in the economic forecast, risk rating migration and an increase in certain specific reserves. These factors were partially offset by net charge-offs and a reduction in the qualitative overlay as, in management's judgment, certain factors previously captured qualitatively are now being addressed in the quantitative modeling. The ACL as a percentage of loans increased to 0.82% at December 31, 2023, from 0.59% at December 31, 2022. This is consistent with the increase in criticized and classified assets, evolving commercial real estate market dynamics and shifts in portfolio composition. Further discussion of changes in the ACL for select portfolio sub-segments follows: •The ACL for the residential segment decreased by $4.1 million during the year ended December 31, 2023, from 0.13% to 0.09% of loans primarily due to reduction in the size of the portfolio and changes in certain assumptions. •The ACL for the CRE portfolio sub-segment, including non-owner occupied CRE and construction and land, increased by $16.6 million during the year ended December 31, 2023, from 0.43% to 0.71% of loans. The increase in the ACL for this segment was primarily driven by changes in the economic forecast, including changes in commercial property forecasts, and risk rating migration. At December 31, 2023, the ACL for the CRE office portfolio totaled $19.3 million, or 1.10% of loans, an increase from 0.45% of loans at December 31, 2022. •The ACL for the commercial and industrial sub-segment, including owner-occupied commercial real estate, increased by $45.4 million during the year ended December 31, 2023, from 1.10% to 1.53% of loans. The increase in the ACL for this segment was primarily driven by (i) changes in the economic forecast; (ii) an increase in certain specific reserves; (iii) risk rating migration; and (iv) loan growth, partially offset by net charge-offs. •The ACL for the franchise finance portfolio segment decreased by $3.9 million during the year ended December 31, 2023, from 4.63% to 4.31% of loans primarily due to net charge-offs, partially offset by an increase in specific reserves related to one relationship. 59 •The ACL for the equipment finance portfolio segment increased by $0.7 million during the year ended December 31, 2023, from 0.82% to 1.52% of loans primarily due to risk rating migration. The estimate of the ACL at December 31, 2023, was informed by forecasted economic scenarios published in December 2023, 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 December 31, 2023, was modeled using a weighting of baseline, downside and upside third-party economic scenarios, with the highest weighting ascribed to the baseline scenario and the lowest weighting ascribed to the upside scenario. The economic variables that were most impactful to the increase in the ACL for the year ended December 31, 2023, included assumptions about interest rates and spreads, commercial property forecasts and the forecasted trajectory of regional unemployment. Some of the high level data points informing the scenarios used in estimating the quantitative portion of the ACL at December 31, 2023, included: •Labor market assumptions, which reflected national unemployment peaking at 4.1% in the baseline scenario and 7.7% in the downside scenario; and •Annualized growth in national GDP troughing at 1.1% in the baseline and (3.5)% in the downside scenario. The above unemployment and GDP growth assumptions are provided to give a high level overview of the nature and severity of the economic forecast scenarios 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 A further breakdown of deposits at the dates indicated is shown below: [[GREPCENT_TABLE]] [["December 31, 2023","","December 31, 2022"]] [[/GREPCENT_TABLE]] The Company has a diverse deposit book by industry sector. Our largest industry vertical at December 31, 2023, was the title insurance vertical, with approximately $2.5 billion in total deposits. Over 75% of title sector deposits were in operating accounts. Approximately 61% of our total deposits were commercial or municipal deposits at December 31, 2023. 60 The following graph presents trends in the deposit mix and cost of deposits (in millions): [[GREPCENT_TABLE]] [["Cost of deposits","1.48%","0.43%","0.19%","1.42%","2.96%"],["Non-interest bearing as a % of total deposits","17.6%","25.5%","30.5%","29.2%","25.8%"]] [[/GREPCENT_TABLE]] The events surrounding the bank closures in early 2023, as well as a higher rate environment and tight liquidity conditions leading to increased competition for deposits, contributed to the shift in deposit mix for the year ended December 31, 2023. Total deposits declined by $971 million; non-interest bearing demand deposits declined by $1.2 billion. The decline in non-interest bearing demand deposits reflected the impact of a higher rate environment on the title industry vertical as well as depositors moving their cash to higher yielding alternatives. We did not experience a material decline in non-interest bearing demand deposits immediately following the bank closures early in 2023. Non-maturity interest-bearing deposits declined by $664 million during the year ended December 31, 2023, while time deposits grew by $896 million; these shifts within interest-bearing deposit categories were in part related to the bank failures of early 2023. Deposit outflows immediately following those events were concentrated in a few larger money market relationships; our near-term deposit gathering strategy then shifted toward time deposits. 61 Consistent with industry trends, the cost of deposits increased for the year ended December 31, 2023, as depositors were seeking yield in a higher rate environment. The following graph presents trends in the spot APY of total deposits compared to the upper bound of the federal funds target range: The following table presents information about the Company's insured and collateralized deposits as of December 31, 2023 (dollars in thousands): [[GREPCENT_TABLE]] [["Total deposits","","$","26,538,478"],["Estimated amount of uninsured deposits","","$","12,360,020"],["Less: collateralized deposits","","(3,047,517)"],["Less: affiliate deposits","","(317,858)"],["Adjusted uninsured deposits","","$","8,994,645"],["Estimated insured and collateralized deposits","","$","17,543,833"],["Insured and collateralized deposits to total deposits","","66","%"]] [[/GREPCENT_TABLE]] The estimated amount of uninsured deposits at December 31, 2023 and 2022, was $12.4 billion and $18.2 billion, respectively. Collateralized and affiliate deposits are included in these amounts. Time deposit accounts with balances of $250,000 or more totaled $941 million and $730 million at December 31, 2023 and 2022, respectively. The following table shows scheduled maturities of uninsured time deposits as of December 31, 2023 (in thousands): [[GREPCENT_TABLE]] [["Three months or less","$","332,424"],["Over three through six months","124,006"],["Over six through twelve months","383,853"],["Over twelve months","3,985"],["","$","844,268"]] [[/GREPCENT_TABLE]] For additional information about Deposits, see Note 6 to the consolidated financial statements. 62 Borrowings In addition to deposits, we utilize FHLB advances as a funding source; the advances provide us with additional flexibility in managing both term and cost of funding and in managing interest rate risk. FHLB advances are secured by qualifying residential first mortgage and commercial real estate loans and MBS. The following table presents information about the contractual balance of outstanding FHLB advances, as of December 31, 2023 (dollars in thousands): [[GREPCENT_TABLE]] [["","Amount","","Weighted Average Rate"],["Maturing in:"],["2024 - One month or less","$","4,220,000","","","5.47","%"],["2024 - Over one month","895,000","","","5.56","%"],["Total contractual balance outstanding","$","5,115,000"]] [[/GREPCENT_TABLE]] The table above reflects contractual maturities of outstanding advances and does not incorporate the impact that interest rate swaps designated as cash flow hedges have on the duration or cost of borrowings. The table below presents information about outstanding interest rate swaps hedging the variability of interest cash flows on the FHLB advances included in the table above, as of December 31, 2023 (dollars in thousands): [[GREPCENT_TABLE]] [["","Notional Amount","","Weighted Average Rate"],["Cash flow hedges maturing in:"],["2024","$","535,000","","","2.40","%"],["2025","625,000","","","2.74","%"],["2026","1,430,000","","","3.50","%"],["Thereafter","25,000","","","2.50","%"],["","$","2,615,000","","","3.08","%"]] [[/GREPCENT_TABLE]] See Note 10 to the consolidated financial statements and "Interest Rate Risk" below for more information about derivative instruments. Outstanding notes payable and other borrowings consisted of the following at the dates indicated (in thousands): [[GREPCENT_TABLE]] [["","December 31, 2023","","December 31, 2022"],["Senior notes:"],["Principal amount of 4.875% senior notes maturing on November 17, 2025","$","388,479","","","$","400,000"],["Unamortized discount and debt issuance costs","(1,676)","","","(2,586)"],["","386,803","","","397,414"],["Subordinated notes:"],["Principal amount of 5.125% subordinated notes maturing on June 11, 2030","300,000","","","300,000"],["Unamortized discount and debt issuance costs","(4,331)","","","(4,880)"],["","295,669","","","295,120"],["Total notes","682,472","","","692,534"],["Finance leases","26,501","","","28,389"],["Notes and other borrowings","$","708,973","","","$","720,923"]] [[/GREPCENT_TABLE]] During the year ended December 31, 2023, the Bank purchased $11.5 million of outstanding senior notes in the open market at a price of $10.6 million, an implied yield of approximately 9%. 63 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 years ended December 31, 2023, 2022 and 2021, net cash provided by operating activities was $657 million, $1.3 billion, and $1.2 billion, respectively. The decline in cash flows from operating activities for the year ended December 31, 2023, was primarily related to fluctuations in the daily cash settlement of derivative positions centrally cleared through the CME, a lower volume of re-securitization of early buyout loans and the fluctuation in income taxes paid (refunded). Available liquidity sources include 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. Systemic events of March 2023 impacted liquidity in the banking system, particularly for mid-size and regional banks, including BankUnited. Immediately following those events, management took a number of prudent actions to maximize BankUnited's same day available liquidity levels and enhance liquidity management. We activated our contingency funding plan, enhanced daily and intra-day deposit monitoring and reporting, pledged additional securities and loan collateral to the FHLB and FRB, temporarily increased the amount of cash held on balance sheet and enhanced communications with funding sources, customers, counterparties and other stakeholders. While deposit flows and liquidity conditions stabilized relatively quickly, we have kept in place enhanced monitoring and reporting of liquidity levels and deposit flows and have maintained higher levels of assets pledged at the FHLB and FRB. We executed strategies to grow our retail time deposit portfolio and enhanced monitoring and management at the executive level of our treasury management deposit pipeline. The following chart presents the components of same day available liquidity at December 31, 2023 and 2022 (in millions): Same Day Available Liquidity At December 31, 2023, the Bank had total same day available liquidity of approximately $13.6 billion, consisting of cash of $573 million, borrowing capacity at the Federal Home Loan Bank of $4.6 billion, borrowing capacity at the FRB of $7.4 billion and unencumbered securities of $1.1 billion. At December 31, 2023, the ratio of estimated insured and collateralized deposits to total deposits was 66%, up from 55% at December 31, 2022, and the ratio of available liquidity to estimated uninsured, uncollateralized deposits was 152% compared to 93% at December 31, 2022. As a commercially focused bank, due 64 to the inherent nature of commercial deposits, a significant portion of our deposits are uninsured. We have increased marketing and educational efforts around products that enable customers to obtain FDIC insurance on certain deposits exceeding the standard single depositor insurance limit, implemented single depositor concentration limits and reduced or eliminated exposure to sectors or depositors that evidenced higher volatility following the events of early 2023. The 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. In the current environment, many of these metrics are being monitored more frequently. Following the events of March 2023, management re-evaluated and refined these measures, and continues to evaluate further refinements as new data becomes available. 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 presents some of the Company's liquidity measures, where applicable, their related policy limits and operating risk thresholds at the dates indicated: [[GREPCENT_TABLE]] [["","","December 31, 2023","","","","Policy Limit"],["Available liquidity to uninsured/non-collateralized deposits","","152%","","","","100%"],["Wholesale funding/total assets","","31.7%","","","","37.5%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","","","","December 31, 2023","","","","Low or Moderate Risk Operating Threshold"],["Available operational liquidity/volatile liabilities","","","","","1.56x","","","","\u22651.30x"],["Liquidity stress test coverage ratio","","","","","1.77x","","","","\u22651.50x"],["FHLB advances/total assets","","","","","16.8%","","","","\u226420%"],["One year liquidity ratio","","","","","1.58x","","","","\u22651.00x"],["Loan to deposit ratio","","","","","92.1%","","","","\u2264100%"],["Top 20 uninsured depositors to total deposits (excluding brokered & municipal deposits)","","","","","14.1%","","","","\u226415%"],["Non interest-bearing demand deposits/total deposits","","","","","25.8%","","","","\u226520%"],["Available on-balance sheet liquidity","","","","","7.1%","","","","\u22655%"]] [[/GREPCENT_TABLE]] Although within policy limits, wholesale funding levels currently remain elevated at December 31, 2023; a near-term strategic priority of the Company is reducing wholesale funding. 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. 65 The following table presents the Company's material contractual cash requirements for the following twelve months, as of December 31, 2023 (in thousands): [[GREPCENT_TABLE]] [["Term deposits(1)","$","4,770,722"],["FHLB advances(1)","5,127,959"],["Notes and other borrowings(1)","37,741"],["Operating lease obligations","19,280"],["","$","9,955,702"]] [[/GREPCENT_TABLE]] (1)Includes interest to be paid on the outstanding contractual obligations. At December 31, 2023, the Company had $4.7 billion in term deposits with a contractual maturity of twelve months or less. The majority of term deposits and FHLB advances are expected to roll over into new instruments; this amount therefore does not represent future anticipated cash requirements. Additionally, as discussed in Note 15 to the consolidated financial statements, the Bank had $257 million in outstanding commitments to fund loans and $4.7 billion in unfunded commitments under existing lines of credit at December 31, 2023. Many of these commitments are expected to expire without being fully funded and, therefore, also do not necessarily represent future cash requirements. Capital Pursuant to the FDIA, the federal banking agencies have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. At December 31, 2023 and 2022, the Company and the Bank had capital levels that exceeded both the regulatory well-capitalized guidelines and all internal capital ratio targets. Upon adoption of ASU 2016-13 on January 1, 2020, the Company elected the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period. See Note 13 to the consolidated financial statements for more information about the Company's and the Bank's regulatory capital ratios. We have an active shelf registration statement on file with the SEC that allows the Company to periodically offer and sell in one or more offerings, individually or in any combination, our common stock, preferred stock and other non-equity securities. The shelf registration provides us with flexibility in issuing capital instruments and enables us to more readily access the capital markets as needed to pursue future growth opportunities and to ensure continued compliance with regulatory capital requirements. Our ability to issue securities pursuant to the shelf registration is subject to market conditions. Interest Rate Risk A principal component of the Company’s risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is interest rate risk, including the risk that assets and liabilities with similar re-pricing characteristics may not reprice at the same time or to the same degree. A primary objective of the Company’s asset/liability management activities is to maximize net interest income, while maintaining acceptable levels of interest rate risk. The ALCO is responsible for establishing policies to manage exposure to interest rate risk, and to ensure procedures are established to monitor compliance with these policies. The policies established by the ALCO are approved at least annually by the Board of Directors or its Risk Committee. Management believes that the simulation of net interest income in different interest rate environments provides the most meaningful measure of interest rate risk. Income simulation analysis is designed to capture not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them. 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 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 66 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. For example, following the events of early 2023 we modeled a variety of alternative non-maturity deposit runoff scenarios. 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 December 31, 2023 and 2022: [[GREPCENT_TABLE]] [["","","","Down 200","","Down 100","","Plus 100","","Plus 200"],["Policy Limits:"],["In year 1","","","(12)","%","","(8)","%","","(8)","%","","(12)","%"],["In year 2","","","(15)","%","","(11)","%","","(11)","%","","(15)","%"],["Model Results at December 31, 2023 - increase (decrease)"],["In year 1","","","(4.7)","%","","(1.6)","%","","1.0","%","","2.1","%"],["In year 2","","","(6.0)","%","","(2.3)","%","","1.5","%","","2.0","%"],["Model Results at December 31, 2022 - increase (decrease)"],["In year 1","","","(5.1)","%","","(1.7)","%","","0.1","%","","(0.6)","%"],["In year 2","","","(8.4)","%","","(3.5)","%","","1.8","%","","2.3","%"]] [[/GREPCENT_TABLE]] The following table illustrates the modeled change in EVE in the indicated scenarios at December 31, 2023 and 2022: [[GREPCENT_TABLE]] [["","","","Down 200","","Down 100","","Plus 100","","Plus 200"],["Policy Limits","","","(20.0)","%","","(10.0)","%","","(10.0)","%","","(20.0)","%"],["Model Results at December 31, 2023 - increase (decrease):","","","15.2","%","","9.5","%","","(8.8)","%","","(17.4)","%"],["Model Results at December 31, 2022 - increase (decrease):","","","4.5","%","","3.8","%","","(5.5)","%","","(11.3)","%"]] [[/GREPCENT_TABLE]] All of the modeled results at December 31, 2023, are within ALM policy limits. Modeled results at December 31, 2023, may not be fully comparable to modeled results at December 31, 2022. While changes in modeled results do reflect shifts in balance sheet composition, they also incorporate changes made to assumptions about depositor behavior, in response to the liquidity events of March and April. 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. As a result of the liquidity events of early 2023, we performed a comprehensive updated deposit decay and beta study and revised our standard decay and beta assumptions accordingly. Along with this exercise, we benchmarked our weighted average life and beta assumptions against information provided in the OCC's Fall 2023 Publication of Interest Rate Risk Statistics. Generally, our assumptions were conservative when compared to peer medians, as we would expect given the commercial nature and relative immaturity of our deposit base. We regularly run sensitivity analysis on our beta and decay assumptions and back-test all of the significant assumptions underlying our ALM modeling. Following the completion of the recent deposit study, we are modeling average betas of 50% for interest bearing checking and 69% for money market deposits. We are modeling weighted average lives of 5.2 years for non-interest bearing checking, 4.1 years for interest-bearing checking and 4.0 years for money market deposits. 67 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 December 31, 2023 (dollars in thousands): [[GREPCENT_TABLE]] [["","","","","","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","","$","2,615,000","","","3.08%","","Daily SOFR","","1.9"],["Pay-fixed interest rate swaps","Variability of interest cash flows on variable rate liabilities","","400,000","","","1.22%","","Fed Funds Effective Rate","","0.7"],["Pay-variable interest rate swaps","Variability of interest cash flows on variable rate loans","","200,000","","","Term SOFR","","3.72%","","2.3"],["Interest rate caps purchased, indexed to Fed Funds effective rate","Variability of interest cash flows on variable rate liabilities","","200,000","","","0.88%","","","","1.5"],["Interest rate collar, indexed to 1-month SOFR(1)","Variability of interest cash flows on variable rate loans","","125,000","","","5.58%","","1.50%","","2.7"],["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","","0.6"],["","","","$","3,640,000"]] [[/GREPCENT_TABLE]] (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 December 31, 2023, was $711 million. The short duration of our AFS investment portfolio (1.96 at December 31, 2023) also provides a natural offset from an interest rate risk perspective to the longer duration of the residential mortgage portfolio. See Note 10 to the consolidated financial statements for additional information about derivative financial instruments. LIBOR Transition The FCA, which regulated USD LIBOR, discontinued the one-week and two-month LIBOR tenors effective December 31, 2021 and remaining tenors were discontinued effective June 30, 2023. The Company executed a comprehensive roadmap to amend the terms of LIBOR-based financial instruments, generally replacing LIBOR with SOFR as the preferred alternative reference rate. As of December 31, 2023, all LIBOR-based instruments have been converted to an alternative reference rate, generally SOFR, based on their contractual provisions. 68 Non-GAAP Financial Measures Tangible book value per common share is a non-GAAP financial measure. Management believes this measure is relevant to understanding the capital position and performance of the Company. Disclosure of this non-GAAP financial measure also provides a meaningful basis for comparison to other financial institutions as it is a metric commonly used in the banking industry. The following table reconciles the non-GAAP financial measurement of tangible book value per common share to the comparable GAAP financial measurement of book value per common share at the dates indicated (in thousands, except share and per share data):  [[GREPCENT_TABLE]] [["","December 31, 2023","","","","December 31, 2022"],["Total stockholders\u2019 equity","$","2,577,921","","","","","$","2,435,981"],["Less: goodwill and other intangible assets","77,637","","","","","77,637"],["Tangible stockholders\u2019 equity","$","2,500,284","","","","","$","2,358,344"],["Common shares issued and outstanding","74,372,505","","","","","75,674,587"],["Book value per common share","$","34.66","","","","","$","32.19"],["Tangible book value per common share","$","33.62","","","","","$","31.16"]] [[/GREPCENT_TABLE]] 69