BankUnited: Strong Deposit Trends Enable Further Upside

Core Viewpoint - BankUnited (NYSE:BKU) has shown strong performance with a nearly 40% increase in shares over the past year, driven by solid deposit growth and conservative management strategies [1]. Financial Performance - In Q2, BankUnited reported earnings of $0.72, an increase from $0.64 in Q1, indicating improvement in net interest income and resilient credit quality [3]. - Net interest margin (NIM) rose by 15 basis points to 2.72%, up 25 basis points year-over-year, contributing to a sequential increase in net interest income of $11 million to $226 million [3]. - Total deposits increased by $736 million in Q2, with a significant shift towards non-brokered deposits, which rose by $1.3 billion [3]. Deposit Trends - The bank's noninterest-bearing (NIB) deposits increased by $826 million in Q2, now representing 29% of total deposits, which is beneficial in the current interest rate environment [4]. - The cost of deposits improved by 9 basis points to 3.09%, with expectations for further declines as the Federal Reserve is anticipated to cut rates [4]. Loan Growth and Quality - BankUnited's loans increased by $400 million to $24.6 billion, primarily in business lending, while maintaining a loan-to-deposit ratio of 88.7% [4]. - The bank's conservative underwriting approach has resulted in a healthy debt service coverage ratio of 1.77x for commercial real estate (CRE) loans, which constitute 24% of total loans [4]. Credit Quality and Reserves - The bank has $134 million in nonperforming loans, with an allowance for loan losses of $226 million, resulting in a 0.92% allowance to loan ratio [5]. - Management plans to build reserves moderately over the next year, given the current low coverage ratio, while maintaining a strong capital position with an 11.6% common equity tier 1 (CET1) capital ratio [5][6]. Future Outlook - BankUnited is expected to earn between $2.90 and $3.00 this year, with an exit rate closer to $3.20, suggesting shares could reach a fair value of $38.40 [7]. - The anticipated aggressive pace of Fed rate cuts may pressure loan yields, but lower deposit costs and a favorable deposit mix shift could support balance sheet growth [7].