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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
Commission File Number: 001-35039 

BankUnited, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
27-0162450
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
14817 Oak Lane
Miami Lakes
FL
33016
(Address of principal executive offices)
 
 
(Zip Code)
 
Registrant’s telephone number, including area code: (305) 569-2000 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý  No  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
☒
Accelerated filer
 ☐
Emerging growth company
☐
Non-accelerated filer
☐
Smaller reporting company
☐
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No  ☒ 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
Class
 
Trading Symbol
 
Name of Exchange on Which Registered
Common Stock, $0.01 Par Value
 
BKU
 
New York Stock Exchange

The number of outstanding shares of the registrant common stock, $0.01 par value, as of August 5, 2020 was 92,401,950.

 






BANKUNITED, INC.
Form 10-Q
For the Quarter Ended June 30, 2020
TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
PART I.
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II.
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 6.
 
 
 
 
 
 


i

GLOSSARY OF DEFINED TERMS

The following acronyms and terms may be used throughout this Form 10-Q, including the consolidated financial statements and related notes.
ACI
 
Loans acquired with evidence of deterioration in credit quality since origination (Acquired Credit Impaired)
ACL
 
Allowance for credit losses
AFS
 
Available for sale
ALCO
 
Asset/Liability Committee
ALLL
 
Allowance for loan and lease losses
AOCI
 
Accumulated other comprehensive income
APY
 
Annual Percentage Yield
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
BKU
 
BankUnited, Inc.
BankUnited
 
BankUnited, National Association
The Bank
 
BankUnited, National Association
Bridge
 
Bridge Funding Group, Inc.
Buyout loans
 
FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations
CARES Act
 
Coronavirus Aid, Relief, and Economic Security Act
CDO
 
Collateralized debt obligation
CECL
 
Current expected credit losses
CET1
 
Common Equity Tier 1 capital
CFPB
 
Consumer Financial Protection Bureau
CLO
 
Collateralized loan obligations
CMBS
 
Commercial mortgage-backed securities
CME
 
Chicago Mercantile Exchange
CMOs
 
Collateralized mortgage obligations
COVID-19
 
Coronavirus disease of 2019
CPR
 
Constant prepayment rate
CUSIP
 
Committee on Uniform Securities Identification Procedures
DIF
 
Deposit insurance fund
DSCR
 
Debt Service Coverage Ratio
EPS
 
Earnings per common share
EVE
 
Economic value of equity
FASB
 
Financial Accounting Standards Board
FDIA
 
Federal Deposit Insurance Act
FDIC
 
Federal Deposit Insurance Corporation
FHA loan
 
Loan guaranteed by the Federal Housing Administration
FHLB
 
Federal Home Loan Bank
FICO
 
Fair Isaac Corporation (credit score)
FRB
 
Federal Reserve Bank
GAAP
 
U.S. generally accepted accounting principles
GDP
 
Gross Domestic Product
GNMA
 
Government National Mortgage Association
HTM
 
Held to maturity

ii

IPO
 
Initial public offering
IRS
 
Internal Revenue Service
ISDA
 
International Swaps and Derivatives Association
LGD
 
Loss Given Default
LIBOR
 
London InterBank Offered Rate
LIHTC
 
Low Income Housing Tax Credits
LTV
 
Loan-to-value
MBS
 
Mortgage-backed securities
MSA
 
Metropolitan Statistical Area
NRSRO
 
Nationally recognized statistical rating organization
NYSE
 
New York Stock Exchange
OCC
 
Office of the Comptroller of the Currency
OCI
 
Other comprehensive income
OREO
 
Other real estate owned
PCD
 
Purchased credit-deteriorated
PD
 
Probability of default
Pinnacle
 
Pinnacle Public Finance, Inc.
PPNR
 
Pre-tax, pre-provision net revenue
PPP
 
Small Business Administration’s Paycheck Protection Program
PPPLF
 
FRB Paycheck Protection Program Liquidity Facility
Proxy Statement
 
Definitive proxy statement for the Company's 2019 annual meeting of stockholders
PSU
 
Performance Share Unit
QRMs
 
Qualified residential mortgages
REIT
 
Real Estate Investment Trust
ROU Asset
 
Right-of-use Asset
RSU
 
Restricted Share Unit
SBA
 
U.S. Small Business Administration
SBF
 
Small Business Finance Unit
SEC
 
Securities and Exchange Commission
SOFR
 
Secured Overnight Financing Rate
TDR
 
Troubled-debt restructuring
Tri-State
 
New York, New Jersey and Connecticut
UPB
 
Unpaid principal balance
USDA
 
U.S. Department of Agriculture
VA loan
 
Loan guaranteed by the U.S. Department of Veterans Affairs
WARM
 
Weighted-average remaining maturity


iii

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements and Supplementary Data
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands, except share and per share data)
 
June 30,
2020
 
December 31,
2019
ASSETS
 

 
 

Cash and due from banks:
 

 
 

Non-interest bearing
$
10,599

 
$
7,704

Interest bearing
391,632

 
206,969

Cash and cash equivalents
402,231

 
214,673

Investment securities (including securities recorded at fair value of $8,683,628 and $7,759,237)
8,693,628

 
7,769,237

Non-marketable equity securities
233,051

 
253,664

Loans held for sale
2,623

 
37,926

Loans
23,834,889

 
23,154,988

Allowance for credit losses
(266,123
)
 
(108,671
)
Loans, net
23,568,766

 
23,046,317

Bank owned life insurance
292,012

 
282,151

Operating lease equipment, net
689,965

 
698,153

Goodwill and other intangible assets
77,652

 
77,674

Other assets
785,971

 
491,498

Total assets
$
34,745,899

 
$
32,871,293

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Liabilities:
 

 
 

Demand deposits:
 

 
 

Non-interest bearing
$
5,883,362

 
$
4,294,824

Interest bearing
2,865,944

 
2,130,976

Savings and money market
10,590,315

 
10,621,544

Time
6,730,803

 
7,347,247

Total deposits
26,070,424

 
24,394,591

Federal funds purchased
100,000

 
100,000

FHLB and PPPLF borrowings
4,650,599

 
4,480,501

Notes and other borrowings
722,332

 
429,338

Other liabilities
447,491

 
486,084

Total liabilities
31,990,846

 
29,890,514

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' equity:
 

 
 

Common stock, par value $0.01 per share, 400,000,000 shares authorized; 92,420,278 and 95,128,231 shares issued and outstanding
924

 
951

Paid-in capital
991,509

 
1,083,920

Retained earnings
1,905,639

 
1,927,735

Accumulated other comprehensive loss
(143,019
)
 
(31,827
)
Total stockholders' equity
2,755,053

 
2,980,779

Total liabilities and stockholders' equity
$
34,745,899

 
$
32,871,293

 

1
The accompanying notes are an integral part of these consolidated financial statements





BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Interest income:
 
 
 
 
 

 
 

Loans
$
213,938

 
$
249,364

 
$
448,297

 
$
489,996

Investment securities
50,932

 
72,796

 
106,992

 
149,141

Other
2,908

 
5,069

 
6,628

 
9,921

Total interest income
267,778

 
327,229

 
561,917

 
649,058

Interest expense:
 
 
 
 
 
 
 
Deposits
50,187

 
99,987

 
133,009

 
197,408

Borrowings
27,254

 
36,359

 
57,995

 
69,866

Total interest expense
77,441

 
136,346

 
191,004

 
267,274

Net interest income before provision for credit losses
190,337

 
190,883

 
370,913

 
381,784

Provision for (recovery of) credit losses
25,414

 
(2,747
)
 
150,842

 
7,534

Net interest income after provision for credit losses
164,923

 
193,630

 
220,071

 
374,250

Non-interest income:
 
 
 
 
 
 
 
Deposit service charges and fees
3,701

 
4,290

 
7,887

 
8,120

Gain on sale of loans, net
4,326

 
2,121

 
7,792

 
5,057

Gain on investment securities, net
6,836

 
4,116

 
3,383

 
9,901

Lease financing
16,150

 
17,005

 
31,631

 
34,191

Other non-interest income
7,338

 
7,805

 
10,956

 
14,323

Total non-interest income
38,351

 
35,337

 
61,649

 
71,592

Non-interest expense:
 
 
 
 
 
 
 
Employee compensation and benefits
48,877

 
57,251

 
107,764

 
122,484

Occupancy and equipment
11,901

 
13,991

 
24,270

 
27,157

Deposit insurance expense
4,806

 
5,027

 
9,209

 
9,068

Professional fees
3,131

 
6,937

 
6,335

 
14,808

Technology and telecommunications
14,025

 
12,013

 
26,621

 
23,181

Depreciation of operating lease equipment
12,219

 
11,489

 
24,822

 
23,301

Other non-interest expense
11,411

 
13,377

 
26,217

 
26,776

Total non-interest expense
106,370

 
120,085

 
225,238

 
246,775

Income before income taxes
96,904

 
108,882

 
56,482

 
199,067

Provision for income taxes
20,396

 
27,431

 
10,925

 
51,644

Net income
$
76,508

 
$
81,451

 
$
45,557

 
$
147,423

Earnings per common share, basic
$
0.80

 
$
0.81

 
$
0.47

 
$
1.46

Earnings per common share, diluted
$
0.80

 
$
0.81

 
$
0.47

 
$
1.45


2
The accompanying notes are an integral part of these consolidated financial statements





BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
(In thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Net income
$
76,508

 
$
81,451

 
$
45,557

 
$
147,423

Other comprehensive income (loss), net of tax:
 
 


 
 
 
 

Unrealized gains (losses) on investment securities available for sale:
 
 


 
 
 
 

Net unrealized holding gain (loss) arising during the period
188,405

 
23,326

 
(24,755
)
 
44,943

Reclassification adjustment for net securities gains realized in income
(4,264
)
 
(2,877
)
 
(5,404
)
 
(6,050
)
Net change in unrealized gain (loss) on securities available for sale
184,141

 
20,449

 
(30,159
)
 
38,893

Unrealized losses on derivative instruments:
 
 


 
 
 
 

Net unrealized holding loss arising during the period
(11,070
)
 
(37,218
)
 
(91,884
)
 
(57,893
)
Reclassification adjustment for net (gains) losses realized in income
7,502

 
(1,241
)
 
10,851

 
(3,242
)
Net change in unrealized losses on derivative instruments
(3,568
)
 
(38,459
)
 
(81,033
)
 
(61,135
)
Other comprehensive income (loss)
180,573

 
(18,010
)
 
(111,192
)
 
(22,242
)
Comprehensive income (loss)
$
257,081

 
$
63,441

 
$
(65,635
)
 
$
125,181



3
The accompanying notes are an integral part of these consolidated financial statements


BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)


 
Six Months Ended June 30,
 
2020
 
2019
Cash flows from operating activities:
 

 
 

Net income
$
45,557

 
$
147,423

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization and accretion, net
(11,590
)
 
(22,452
)
Provision for credit losses
150,842

 
7,534

Gain on sale of loans, net
(7,792
)
 
(5,057
)
Gain on investment securities, net
(3,383
)
 
(9,901
)
Equity based compensation
7,351

 
11,251

Depreciation and amortization
35,691

 
35,555

Deferred income taxes
(769
)
 
10,813

Proceeds from sale of loans held for sale
369,807

 
209,854

Loans originated for sale, net of repayments
(17,681
)
 
(51,024
)
Other:
 
 
 
(Increase) decrease in other assets
(23,101
)
 
31,897

Decrease in other liabilities
(224,093
)
 
(128,097
)
Net cash provided by operating activities
320,839

 
237,796

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of investment securities
(2,263,847
)
 
(2,160,715
)
Proceeds from repayments and calls of investment securities
587,139

 
647,214

Proceeds from sale of investment securities
547,337

 
1,626,250

Purchase of non-marketable equity securities
(128,562
)
 
(196,137
)
Proceeds from redemption of non-marketable equity securities
149,175

 
173,400

Purchases of loans
(1,085,437
)
 
(894,235
)
Loan originations, repayments and resolutions, net
68,012

 
(51,014
)
Proceeds from sale of loans, net
11,604

 
9,560

Proceeds from sale of operating lease equipment
—

 
8,986

Acquisition of operating lease equipment
(19,118
)
 
(37,122
)
Other investing activities
(10,663
)
 
(24,950
)
Net cash used in investing activities
(2,144,360
)
 
(898,763
)
 
 
 
(Continued)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4
The accompanying notes are an integral part of these consolidated financial statements


BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)




 
Six Months Ended June 30,
 
2020
 
2019
Cash flows from financing activities:
 
 
 
Net increase in deposits
1,675,833

 
448,177

Net decrease in federal funds purchased
—

 
(76,000
)
Additions to FHLB and PPPLF borrowings
3,762,336

 
2,456,000

Repayments of FHLB and PPPLF borrowings
(3,596,310
)
 
(1,921,000
)
Proceeds from issuance of notes, net
293,858

 
—

Dividends paid
(42,702
)
 
(42,937
)
Repurchase of common stock
(100,972
)
 
(142,065
)
Other financing activities
19,036

 
(448
)
Net cash provided by financing activities
2,011,079

 
721,727

Net increase in cash and cash equivalents
187,558

 
60,760

Cash and cash equivalents, beginning of period
214,673

 
382,073

Cash and cash equivalents, end of period
$
402,231

 
$
442,833

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
209,233

 
$
258,561

Income taxes refunded (paid), net
$
4,883

 
$
(4,350
)
 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Unsettled sale of loans
$
11,058

 
$
—

Transfers from loans to other real estate owned and other repossessed assets
$
4,161

 
$
2,817

Transfers from loans to loans held for sale
$
329,308

 
$
342,310

Transfers from loans held for sale to loans
$
9,055

 
$
—

Dividends declared, not paid
$
21,909

 
$
20,621

Unsettled sales of investment securities
$
177,546

 
$
—

Unsettled purchases of investment securities
$
2,758

 
$
21,396





5
The accompanying notes are an integral part of these consolidated financial statements





BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
(In thousands, except share data)
 
Common
Shares
Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
Balance at March 31, 2020
92,406,294

 
$
924

 
$
987,757

 
$
1,851,040

 
$
(323,592
)
 
$
2,516,129

Comprehensive income
—

 
—

 
—

 
76,508

 
180,573

 
257,081

Dividends ($0.23 per common share)
—

 
—

 
—

 
(21,909
)
 
—

 
(21,909
)
Equity based compensation
56,688

 
1

 
3,762

 
—

 
—

 
3,763

Forfeiture of unvested shares and shares surrendered for tax withholding obligations
(42,704
)
 
(1
)
 
(10
)
 
—

 
—

 
(11
)
Balance at June 30, 2020
92,420,278

 
$
924

 
$
991,509

 
$
1,905,639

 
$
(143,019
)
 
$
2,755,053

 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
98,404,303

 
$
984

 
$
1,179,235

 
$
1,742,530

 
$
641

 
$
2,923,390

Comprehensive income
—

 
—

 
—

 
81,451

 
(18,010
)
 
63,441

Dividends ($0.21 per common share)
—

 
—

 
—

 
(20,621
)
 
—

 
(20,621
)
Equity based compensation
18,383

 
—

 
3,967

 
—

 
—

 
3,967

Forfeiture of unvested shares and shares surrendered for tax withholding obligations
(95,061
)
 
(1
)
 
(175
)
 
—

 
—

 
(176
)
Repurchase of common stock
(3,011,992
)
 
(30
)
 
(102,061
)
 
—

 
—

 
(102,091
)
Balance at June 30, 2019
95,315,633

 
$
953

 
$
1,080,966

 
$
1,803,360

 
$
(17,369
)
 
$
2,867,910

 
Common
Shares
Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
Balance at December 31, 2019
95,128,231

 
$
951

 
$
1,083,920

 
$
1,927,735

 
$
(31,827
)
 
$
2,980,779

Impact of adoption of ASU 2016-13
—

 
—

 
—

 
(23,817
)
 
—

 
(23,817
)
Comprehensive loss
—

 
—

 
—

 
45,557

 
(111,192
)
 
(65,635
)
Dividends ($0.46 per common share)
—

 
—

 
—

 
(43,836
)
 
—

 
(43,836
)
Equity based compensation
743,696

 
8

 
11,428

 
—

 
—

 
11,436

Forfeiture of unvested shares and shares surrendered for tax withholding obligations
(186,072
)
 
(3
)
 
(4,428
)
 
—

 
—

 
(4,431
)
Exercise of stock options
60,000

 
1

 
1,528

 
—

 
—

 
1,529

Repurchase of common stock
(3,325,577
)
 
(33
)
 
(100,939
)
 
—

 
—

 
(100,972
)
Balance at June 30, 2020
92,420,278

 
$
924

 
$
991,509

 
$
1,905,639

 
$
(143,019
)
 
$
2,755,053

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
99,141,374

 
$
991

 
$
1,220,147

 
$
1,697,822

 
$
4,873

 
$
2,923,833

Comprehensive income
—

 
—

 
—

 
147,423

 
(22,242
)
 
125,181

Dividends ($0.42 per common share)
—

 
—

 
—

 
(41,885
)
 
—

 
(41,885
)
Equity based compensation
582,353

 
6

 
9,050

 
—

 
—

 
9,056

Forfeiture of unvested shares and shares surrendered for tax withholding obligations
(286,927
)
 
(3
)
 
(6,251
)
 
—

 
—

 
(6,254
)
Exercise of stock options
3,910

 
—

 
44

 
—

 
—

 
44

Repurchase of common stock
(4,125,077
)
 
(41
)
 
(142,024
)
 
—

 
—

 
(142,065
)
Balance at June 30, 2019
95,315,633

 
$
953

 
$
1,080,966

 
$
1,803,360

 
$
(17,369
)
 
$
2,867,910

 


6
The accompanying notes are an integral part of these consolidated financial statements
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020



Note 1    Basis of Presentation and Summary of Significant Accounting Policies
BankUnited, Inc. is a national bank holding company with one wholly-owned subsidiary, BankUnited, collectively, the Company. BankUnited, a national banking association headquartered in Miami Lakes, Florida, provides a full range of banking and related services to individual and corporate customers through 74 banking centers located in 14 Florida counties and 5 banking centers located in the New York metropolitan area at June 30, 2020. The Bank also offers certain commercial lending and deposit products through national platforms.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, these do not include all of the information and footnotes required for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in BKU’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected in future periods. 
Certain amounts presented for prior periods have been reclassified to conform to the current period presentation.
Accounting Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosures of contingent assets and liabilities. Actual results could differ significantly from these estimates.
Significant estimates include the allowance for credit losses and the fair values of investment securities and other financial instruments.
New Accounting Pronouncements Adopted During the Six Months Ended June 30, 2020
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. The ASU, along with subsequent ASUs issued to clarify certain of its provisions, introduced new guidance which made substantive changes to the accounting for credit losses. The ASU introduced the CECL model which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. This includes loans, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities. The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions and reasonable and supportable forecasts, and is generally expected to result in earlier recognition of credit losses. The ASU also modified certain provisions of the previous OTTI model for AFS debt securities. Credit losses on AFS debt securities are now limited to the difference between the security's amortized cost basis and its fair value, and should be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. The Company adopted this ASU in the first quarter of 2020 using the modified retrospective transition method for the CECL model and a prospective approach for the AFS debt security model. The Company recorded a cumulative-effect adjustment to retained earnings of $23.8 million, which included $4.8 million related to off -balance sheet credit exposures, on January 1, 2020. No cumulative-effect adjustment was recorded related to AFS debt securities upon adoption. The Company has elected to phase-in the initial impact of the adoption of ASC 326 for regulatory capital purposes, allowing the impact of adoption on regulatory capital to be delayed for two years, followed by a three-year transition period. 


7
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional relief for a limited period of time to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Under this ASU, companies are provided with optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contract modifications and hedging relationships that currently utilize LIBOR as their benchmark rate, subject to certain criteria being met. The amendments in the ASU also apply to contemporaneous modifications of other contract terms related to the replacement of LIBOR. The amendments in the ASU are effective for all entities as of March 12, 2020 and will only be in effect through December 31, 2022. To date, the impact of adoption of this ASU on the Company's consolidated financial position, results of operations, and cash flows has not been material.
Accounting Pronouncements Not Yet Adopted
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by removing certain exceptions stipulated in ASC 740 and making some other targeted changes to the accounting for income taxes. This ASU is effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2020. The Company has not finalized its evaluation of the impact of adoption on its consolidated financial position, results of operations, and cash flows, but the impact is not currently expected to be material.
Updates to the Company's Significant Accounting Policies
Loans
The Company's loan portfolio contains 1-4 single family residential first mortgages, government insured residential mortgages, an insignificant amount of home equity loans and lines of credit and other consumer loans; multi-family, non-owner occupied commercial real estate, construction and land, owner-occupied commercial real estate and commercial and industrial loans, PPP loans, mortgage warehouse lines of credit and sales-type and direct financing leases. Loans are reported at amortized cost basis, net of the ACL.
Interest income is accrued based on the principal amount outstanding. Non-refundable loan origination fees, net of direct costs of originating or acquiring loans, as well as purchase premiums and discounts, are deferred and recognized as adjustments to yield over the contractual lives of the related loans using the level yield method.
Non-accrual loans
Commercial loans are placed on non-accrual status when (i) management has determined that full repayment of all contractual principal and interest is in doubt, or (ii) the loan is past due 90 days or more as to principal or interest unless the loan is well secured and in the process of collection. Residential and other consumer loans, other than government insured residential loans, are generally placed on non-accrual status when they are 90 days past due. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged to interest income. Payments received on nonaccrual commercial loans are applied as a reduction of principal. Interest payments are recognized as income on a cash basis on nonaccrual residential loans. Commercial loans are returned to accrual status only after all past due principal and interest has been collected and full repayment of remaining contractual principal and interest is reasonably assured. Residential and consumer loans are generally returned to accrual status when less than 90 days past due. Past due status of loans is determined based on the contractual next payment due date. Loans less than 30 days past due are reported as current.
Contractually delinquent government insured residential loans are not classified as non-accrual due to the nature of the guarantee. Contractually delinquent PCD loans are not classified as non-accrual as long as the Company has a reasonable expectation about amounts expected to be collected.
Troubled Debt Restructurings
In certain situations, due to economic or legal reasons related to a borrower's financial difficulties, the Company may grant a concession to the borrower for other than an insignificant period of time that it would not otherwise consider. At that time, the related loan is classified as a TDR. The concessions granted may include rate reductions, principal forgiveness, payment forbearance, extensions of maturity at rates of interest below that commensurate with the risk profile of the loans, modification of payment terms and other actions intended to minimize economic loss. A TDR is generally placed on non-accrual status at the time of the modification unless the borrower was performing prior to the restructuring.

8
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Under recently issued inter-agency and authoritative guidance and consistent with the CARES Act, short-term (generally periods of six months or less) deferrals or modifications related to COVID-19 will typically not be categorized as TDRs.
Purchased Credit Deteriorated ("PCD") assets
PCD assets are acquired financial assets that, as of the date of acquisition, have experienced a more than insignificant deterioration in credit quality since origination. An assessment is conducted at acquisition to determine whether acquired financial assets meet the criteria to be classified as PCD assets. That assessment may be conducted at the individual asset level, or for a group of assets acquired together that have similar risk characteristics. At acquisition, the ACL related to PCD assets, representing the estimated amount of the UPB of the assets not expected to be collected, is added to the purchase price to determine the amortized cost basis and any non-credit related discount or premium is allocated to the individual assets acquired. The non-credit related discount or premium is accreted or amortized to interest income over the life of the related assets using the level yield method, as long as there is a reasonable expectation about amounts expected to be collected. Subsequent changes in the amount of expected credit losses are recognized immediately by adjusting the ACL and reflecting the periodic changes as credit loss expense or reversal of credit loss expense.
Loans previously categorized as ACI loans were categorized as PCD loans on initial adoption of ASC 326. At adoption, an ACL was recognized and a corresponding adjustment was made to the assets' amortized cost basis. Prior to the adoption of ASC 326, ACI loans were accounted for on a pool basis. These pools were not maintained on adoption. The Company did not re-assess whether modifications to individual PCD loans previously accounted for in pools were TDRs at adoption.
Allowance for Credit Losses ("ACL")
AFS Debt Securities
The Company reviews its AFS debt securities for credit loss impairment at the individual security level on at least a quarterly basis. A security is impaired if its fair value is less than its amortized cost basis. A decline in fair value below amortized cost basis represents a credit loss impairment to the extent the Company does not expect to recover the amortized cost basis of the security. Impairment related to credit losses is recorded through the ACL to the extent fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through the ACL are recorded through other comprehensive income, net of applicable taxes.
In assessing whether an impairment is credit loss related, the Company compares the present value of cash flows expected to be collected to the security's amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists and an ACL is recorded. The Company discounts expected cash flows at the effective interest rate implicit in the security at the purchase date, adjusted for expected prepayments. For floating rate securities, the Company uses the floating rate as it changes over the life of the security. In developing estimates about cash flows expected to be collected and determining whether a credit loss exists, the Company considers information about past events, current conditions and reasonable and supportable forecasts. Factors and information that the Company uses in making its assessments include, but are not necessarily limited to, the following:
•
The extent to which fair value is less than amortized cost;
•
Adverse conditions specifically related to the security, an industry or geographic area;
•
Changes in the financial condition of the issuer or underlying loan obligors;
•
The payment structure and remaining payment terms of the security, including levels of subordination or over-collateralization;
•
Failure of the issuer to make scheduled payments;
•
Changes in credit ratings;
•
Relevant market data;
•
Estimated prepayments, defaults, and the value and performance of underlying collateral at the individual security level.

9
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


The relative importance assigned to each of these factors varies depending on the facts and circumstances pertinent to the individual security being evaluated.
Timely payment of principal and interest on securities issued by the U.S. Government, U.S. government agencies and U.S. government sponsored entities is explicitly or implicitly guaranteed by the U. S. government. Therefore, the Company expects to recover the amortized cost basis of these securities.
If the Company intends to sell a security in an unrealized loss position, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, any allowance for credit losses will be written off and the amortized cost basis will be written down to the debt security’s fair value at the reporting date with any incremental impairment reported in earnings.
Historically, the Company has not experienced credit losses related to AFS securities or uncollectible interest on its AFS securities. However, AFS securities would be charged off to the extent that there was no reasonable expectation of recovery of amortized cost basis. AFS securities would be placed on non-accrual status if the Company did not reasonably expect to receive interest payments in the future and interest accrued would be reversed against interest income. Securities would be returned to accrual status only when collection of interest was reasonably assured.
Loans
The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected. The ACL is adjusted through the provision for credit losses to the amount of amortized cost basis not expected to be collected, or in the case of PCD loans, the amount of UPB not expected to be collected, at the balance sheet date. Amortized cost basis includes UPB, unamortized premiums or discounts and deferred fees and costs, net of amounts previously charged off.
The measurement of expected credit losses encompasses information about historical events, current conditions and reasonable and supportable forecasts. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Re-evaluation of the ACL estimate in future periods, in light of changes in composition and characteristics of the loan portfolio, changes in the reasonable and supportable forecast and other factors then prevailing may result in material changes in the amount of the ACL and credit loss expense in those future periods.
Loans are charged off against the ACL in the period in which they are deemed uncollectible and recoveries are credited to the ACL when received. Expected recoveries on loans previously charged off, not to exceed the aggregate of amounts previously charged-off and expected to be charged-off, are included in the ACL estimate. For loans secured by residential real estate, an assessment of collateral value is made at no later than 120 days delinquency; any outstanding loan balance in excess of fair value less cost to sell is charged off at no later than 180 days delinquency. Additionally, any outstanding balance in excess of fair value of collateral less cost to sell is charged off (i) within 60 days of receipt of notification of filing from the bankruptcy court, (ii) within 60 days of determination of loss if all borrowers are deceased or (iii) within 90 days of discovery of fraudulent activity. Other consumer loans are typically charged off at 120 days delinquency. Commercial loans are charged off when, in management's judgment, they are considered to be uncollectible.
Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. Factors that may be considered in aggregating loans for this purpose include but are not necessarily limited to, product or collateral type, industry, geography, internal risk rating, credit characteristics such as credit scores or collateral values, and historical or expected credit loss patterns. For loans that do not share similar risk characteristics with other loans such as collateral dependent loans and TDRs, expected credit losses are estimated on an individual basis.
Expected credit losses are estimated over the contractual terms of the loans, adjusted for expected prepayments. Expected prepayments for commercial loans are generally estimated based on the Company's historical experience. For residential loans, expected prepayments are estimated using a model that incorporates industry prepayment data, calibrated to reflect the Company's experience. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a TDR will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
The length of the reasonable and supportable forecast is evaluated at each reporting period and adjusted if deemed necessary. At June 30, 2020, the Company changed from a 5-year to a 2-year reasonable and supportable forecast period in estimating the ACL.

10
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


For the substantial majority of portfolio segments and subsegments, including residential loans other than government insured loans, and most commercial and commercial real estate loans, expected losses are estimated using econometric models. The models employ a factor based methodology, leveraging data sets containing extensive historical loss and recovery information by industry, geography, product type, collateral type and obligor characteristics, to estimate PD and LGD. Measures of PD for commercial loans incorporate current conditions through market cycle or credit cycle adjustments. For residential loans, the models consider FICO and adjusted LTVs. PDs and LGDs are then conditioned on the reasonable and supportable economic forecast. Projected PDs and LGDs are applied to estimated exposure at default, considering the term and payment structure of the loan, to generate estimates of expected loss at the loan level. For criticized or classified loans, PDs may be adjusted to benchmark PDs appropriate to the current risk rating if the most current financial information available is deemed not to be reflective of the borrowers' current financial condition. These loan level estimates are aggregated to generate a collective estimate for groups of loans that share common risk characteristics.
For certain less material portfolios including loans and leases to state and local government entities originated by Pinnacle, small balance commercial loans and consumer loans, the WARM method is used to estimate expected credit losses. For the Pinnacle portfolio, historical loss information is based on municipal historical default and recovery data, segmented by credit rating. For small balance commercial loans, historical loss information is based on the Company's historical loss experience over a five year period. For consumer loans, historical loss information is based on peer data; this portfolio subsegment is not significant. All loss estimates are conditioned as applicable on changes in current conditions and the reasonable and supportable economic forecast. Expected credit losses for mortgage warehouse lines of credit are estimated based primarily on the Company's historical loss experience, conditioned as applicable on changes in current conditions and the reasonable and supportable economic forecast. Generally, given the nature of these loans, losses would be expected to manifest within a very short time period after origination.
The Company expects to collect the amortized cost basis of government insured residential loans and PPP loans due to the nature of the government guarantee, so the quantitative ACL is zero for these loans.
Qualitative factors
Qualitative adjustments are made to the ACL when, based on management’s judgment, there are factors impacting expected credit losses not taken into account by the quantitative calculations. Potential qualitative adjustments are categorized as follows:
•
Economic factors, including material trends and developments that, in management's judgment, may not have been considered in the reasonable and supportable economic forecast;
•
Credit policy and staffing, including the nature and level of policy and procedural exceptions or changes in credit policy not reflected in quantitative results, changes in the quality of underwriting and portfolio management and staff and issues identified by credit review, internal audit or regulators that may not be reflected in quantitative results;
•
Concentrations, considering whether the quantitative estimate adequately accounts for concentration risk in the portfolio;
•
Model imprecision and model validation findings; and
•
Other factors not adequately considered in the quantitative estimate or other qualitative categories identified by management that may materially impact the amount of expected credit losses.
Collateral dependent loans
Collateral dependent loans are those for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not typically share similar risk characteristics with other loans and expected credit losses are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. Estimates of expected credit losses for collateral dependent loans, whether or not foreclosure is probable, are based on the fair value of the collateral adjusted for selling costs when repayment depends on sale of the collateral.

11
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Troubled debt restructurings
For TDRs, or loans for which there is a reasonable expectation that a TDR will be executed, that are not collateral dependent, the credit loss estimate is determined by comparing the net present value of expected cash flows, discounted at the loan’s original effective interest rate, to the amortized cost basis of the loan.
Off-balance sheet credit exposures
Expected credit losses related to off-balance sheet credit exposures are estimated over the contractual period for which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. Expected credit losses are estimated using essentially the same methodologies employed to estimate expected credit losses on the amortized cost basis of loans, taking into consideration the likelihood and amount of additional amounts expected to be funded over the terms of the commitments. The liability for credit losses on off-balance sheet credit exposures is presented within other liabilities on the consolidated balance sheets, distinct from the ACL. Adjustments to the liability are included in the provision for credit losses.
Accrued Interest Receivable
The Company has elected to present accrued interest receivable separate from the amortized cost basis of financial assets carried at amortized cost. The Company is applying the practical expedient provided in ASC 326 to exclude accrued interest receivable balances from tabular disclosures about financial assets carried at amortized cost. The Company has elected not to estimate an ACL on accrued interest receivable balances since uncollectible accrued interest is timely written off in accordance with the Company's accounting policies for non-accrual loans.

12
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Note 2    Earnings Per Common Share
The computation of basic and diluted earnings per common share is presented below for the periods indicated (in thousands, except share and per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
c
2020
 
2019
 
2020

2019
Basic earnings per common share:
 
 
 
 
 

 
 
Numerator:
 
 
 
 
 

 
 
Net income
$
76,508

 
$
81,451

 
$
45,557

 
$
147,423

Distributed and undistributed earnings allocated to participating securities
(3,353
)
 
(3,382
)
 
(1,939
)
 
(6,074
)
Income allocated to common stockholders for basic earnings per common share
$
73,155

 
$
78,069

 
$
43,618

 
$
141,349

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
92,409,949

 
97,451,019

 
93,177,243

 
98,150,014

Less average unvested stock awards
(1,207,798
)
 
(1,174,339
)
 
(1,154,589
)
 
(1,173,137
)
Weighted average shares for basic earnings per common share
91,202,151

 
96,276,680

 
92,022,654

 
96,976,877

Basic earnings per common share
$
0.80

 
$
0.81

 
$
0.47

 
$
1.46

Diluted earnings per common share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income allocated to common stockholders for basic earnings per common share
$
73,155

 
$
78,069

 
$
43,618

 
$
141,349

Adjustment for earnings reallocated from participating securities
—

 
9

 
—

 
13

Income used in calculating diluted earnings per common share
$
73,155

 
$
78,078

 
$
43,618

 
$
141,362

Denominator:
 
 


 
 
 
 
Weighted average shares for basic earnings per common share
91,202,151

 
96,276,680

 
92,022,654

 
96,976,877

Dilutive effect of stock options and certain shared-based awards
705

 
345,899

 
126,858

 
312,821

Weighted average shares for diluted earnings per common share
91,202,856

 
96,622,579

 
92,149,512

 
97,289,698

Diluted earnings per common share
$
0.80

 
$
0.81

 
$
0.47

 
$
1.45


Participating securities include unvested shares and 3,023,314 dividend equivalent rights that were issued in conjunction with the IPO of the Company's common stock. These dividend equivalent rights expire in 2021 and participate in dividends on a one-for-one basis.
Potentially dilutive unvested shares and share units totaling 1,743,403 and 1,119,641 were outstanding at June 30, 2020 and 2019, respectively, but excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive.

13
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Note 3    Investment Securities
Investment securities include investment securities available for sale, marketable equity securities, and investment securities held to maturity. The investment securities portfolio consisted of the following at the dates indicated (in thousands):
 
June 30, 2020
 
Amortized Cost
 
Gross Unrealized
 
Carrying Value (1)
 
 
Gains
 
Losses
 
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
75,217

 
$
1,963

 
$
—

 
$
77,180

U.S. Government agency and sponsored enterprise residential MBS
2,371,729

 
13,309

 
(5,198
)
 
2,379,840

U.S. Government agency and sponsored enterprise commercial MBS
455,344

 
9,859

 
(926
)
 
464,277

Private label residential MBS and CMOs
1,101,390

 
16,670

 
(1,974
)
 
1,116,086

Private label commercial MBS
2,075,683

 
16,735

 
(48,798
)
 
2,043,620

Single family rental real estate-backed securities
608,019

 
11,381

 
(1,193
)
 
618,207

Collateralized loan obligations
1,166,929

 
—

 
(38,176
)
 
1,128,753

Non-mortgage asset-backed securities
255,854

 
6,251

 
(574
)
 
261,531

State and municipal obligations
239,502

 
19,993

 
—

 
259,495

SBA securities
247,914

 
2,286

 
(4,258
)
 
245,942

 
8,597,581

 
$
98,447

 
$
(101,097
)
 
8,594,931

Investment securities held to maturity
10,000

 
 
 
 
 
10,000

 
$
8,607,581

 
 
 
 
 
8,604,931

Marketable equity securities
 
 
 
 
 
 
88,697

 
 
 
 
 
 
 
$
8,693,628


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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


 
December 31, 2019
 
Amortized Cost
 
Gross Unrealized
 
Carrying Value (1)
 
 
Gains
 
Losses
 
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
70,243

 
$
219

 
$
(137
)
 
$
70,325

U.S. Government agency and sponsored enterprise residential MBS
2,018,853

 
9,835

 
(6,513
)
 
2,022,175

U.S. Government agency and sponsored enterprise commercial MBS
366,787

 
4,920

 
(731
)
 
370,976

Private label residential MBS and CMOs
1,001,337

 
11,851

 
(1,011
)
 
1,012,177

Private label commercial MBS
1,719,228

 
6,650

 
(1,194
)
 
1,724,684

Single family rental real estate-backed securities
467,459

 
4,016

 
(1,450
)
 
470,025

Collateralized loan obligations
1,204,905

 
322

 
(7,861
)
 
1,197,366

Non-mortgage asset-backed securities
194,171

 
1,780

 
(1,047
)
 
194,904

State and municipal obligations
257,528

 
15,774

 
—

 
273,302

SBA securities
359,808

 
4,587

 
(1,664
)
 
362,731

 
7,660,319

 
$
59,954

 
$
(21,608
)
 
7,698,665

Investment securities held to maturity
10,000

 


 


 
10,000

 
$
7,670,319

 
 
 
 
 
7,708,665

Marketable equity securities


 
 
 
 
 
60,572

 
 
 


 


 
$
7,769,237

 
 
(1)
At fair value except for securities held to maturity.
Investment securities held to maturity at June 30, 2020 and December 31, 2019 consisted of one State of Israel bond maturing in 2024. At June 30, 2020 and December 31, 2019, accrued interest receivable on investments totaled $23 million and $28 million, respectively, and is included in other assets in the accompanying consolidated balance sheets.
At June 30, 2020, contractual maturities of investment securities available for sale, adjusted for anticipated prepayments when applicable, were as follows (in thousands):
 
Amortized Cost
 
Fair Value
Due in one year or less
$
908,180

 
$
914,970

Due after one year through five years
4,875,569

 
4,830,499

Due after five years through ten years
2,304,114

 
2,332,121

Due after ten years
509,718

 
517,341

 
$
8,597,581

 
$
8,594,931

The carrying value of securities pledged as collateral for FHLB advances, public deposits, interest rate swaps and to secure borrowing capacity at the FRB totaled $4.8 billion and $2.4 billion at June 30, 2020 and December 31, 2019, respectively.

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


The following table provides information about gains and losses on investment securities for the periods indicated (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Proceeds from sale of investment securities available for sale
$
240,805


$
850,527

 
$
547,337

 
$
1,626,250

 
 
 
 
 
 
 
 
Gross realized gains:
 
 


 
 
 
 
Investment securities available for sale
$
5,723

 
$
4,631

 
$
7,255

 
$
8,956

Gross realized losses:
 
 


 
 
 
 
Investment securities available for sale
—

 
(716
)
 
(2
)
 
(724
)
Net realized gain
5,723

 
3,915

 
7,253

 
8,232

 
 
 
 
 
 
 
 
Net unrealized gains (losses) on marketable equity securities recognized in earnings
1,113

 
201

 
(3,870
)
 
1,669

 
 
 
 
 
 
 
 
Gain on investment securities, net
$
6,836

 
$
4,116

 
$
3,383

 
$
9,901


The following tables present the aggregate fair value and the aggregate amount by which amortized cost exceeded fair value for investment securities available for sale in unrealized loss positions aggregated by investment category and length of time that individual securities had been in continuous unrealized loss positions at the dates indicated (in thousands). No ACL was recorded for any investment securities available for sale in an unrealized loss position at June 30, 2020.
 
June 30, 2020
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. Government agency and sponsored enterprise residential MBS
$
604,143

 
$
(895
)
 
$
517,239

 
$
(4,303
)
 
$
1,121,382

 
$
(5,198
)
U.S. Government agency and sponsored enterprise commercial MBS
39,892

 
(108
)
 
73,856

 
(818
)
 
113,748

 
(926
)
Private label residential MBS and CMOs
205,524

 
(1,974
)
 
—

 
—

 
205,524

 
(1,974
)
Private label commercial MBS
1,302,037

 
(45,341
)
 
56,875

 
(3,457
)
 
1,358,912

 
(48,798
)
Single family rental real estate-backed securities
184,785

 
(1,193
)
 
—

 
—

 
184,785

 
(1,193
)
Collateralized loan obligations
591,422

 
(15,873
)
 
537,331

 
(22,303
)
 
1,128,753

 
(38,176
)
Non-mortgage asset-backed securities
13,857

 
(45
)
 
13,472

 
(529
)
 
27,329

 
(574
)
SBA securities
35,136

 
(326
)
 
109,837

 
(3,932
)
 
144,973

 
(4,258
)
 
$
2,976,796

 
$
(65,755
)
 
$
1,308,610

 
$
(35,342
)
 
$
4,285,406

 
$
(101,097
)

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


 
December 31, 2019
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. Treasury securities
$
20,056

 
$
(137
)
 
$
—

 
$
—

 
$
20,056

 
$
(137
)
U.S. Government agency and sponsored enterprise residential MBS
579,076

 
(3,862
)
 
243,839

 
(2,651
)
 
822,915

 
(6,513
)
U.S. Government agency and sponsored enterprise commercial MBS
99,610

 
(696
)
 
6,477

 
(35
)
 
106,087

 
(731
)
Private label residential MBS and CMOs
180,398

 
(838
)
 
41,636

 
(173
)
 
222,034

 
(1,011
)
Private label commercial MBS
648,761

 
(1,060
)
 
76,302

 
(134
)
 
725,063

 
(1,194
)
Single family rental real estate-backed securities
241,915

 
(1,445
)
 
5,460

 
(5
)
 
247,375

 
(1,450
)
Collateralized loan obligations
63,310

 
(846
)
 
682,076

 
(7,015
)
 
745,386

 
(7,861
)
Non-mortgage asset-backed securities
78,964

 
(962
)
 
7,883

 
(85
)
 
86,847

 
(1,047
)
SBA securities
10,236

 
(2
)
 
142,204

 
(1,662
)
 
152,440

 
(1,664
)
 
$
1,922,326

 
$
(9,848
)
 
$
1,205,877

 
$
(11,760
)
 
$
3,128,203

 
$
(21,608
)
The Company monitors its investment securities available for sale for credit loss impairment on an individual security basis. No securities were determined to be credit loss impaired during the three and six months ended June 30, 2020 or other than temporarily impaired during the three and six months ended June 30, 2019. The Company does not intend to sell securities that are in significant unrealized loss positions at June 30, 2020 and it is not more likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis, which may be at maturity. In making this determination, the Company considered its current and projected liquidity position, its investment policy as to permissible holdings and concentration limits, regulatory requirements and other relevant factors.
At June 30, 2020, 224 securities available for sale were in unrealized loss positions. The amount of impairment related to 64 of these securities was considered insignificant both individually and in the aggregate, totaling approximately $398 thousand and no further analysis with respect to these securities was considered necessary.
Unrealized losses at June 30, 2020, particularly in the private label CMBS and CLO asset classes, were primarily attributable to widening spreads, resulting in large part from market response to, and dislocation in the wake of, the COVID-19 pandemic.
The basis for concluding that AFS securities were not credit loss impaired and no ACL was considered necessary at June 30, 2020 is further discussed below.
U.S. Government Agency and Government Sponsored Enterprise Securities
At June 30, 2020, twenty-eight U.S. Government agency and sponsored enterprise residential MBS, five U.S. Government agency and sponsored enterprise commercial MBS and eleven SBA securities were in unrealized loss positions. The timely payment of principal and interest on these securities is explicitly or implicitly guaranteed by the U.S. Government. As such, there is an assumption of zero credit loss and the Company expects to recover the entire amortized cost basis of these securities.

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Private Label Securities:
None of the impaired securities had missed principal or interest payments or had been downgraded by a NRSRO at June 30, 2020. The Company performed an analysis comparing the present value of cash flows expected to be collected to the amortized cost basis of impaired securities. This analysis was based on a scenario that we believe to be generally more severe than our reasonable and supportable economic forecast at June 30, 2020, and incorporated assumptions about voluntary prepayment rates, collateral defaults, delinquencies, severity and other relevant factors as described further below. Our analysis also considered the structural characteristics of each security and the level of credit enhancement provided by that structure. Based on the results of this analysis, the Company expects to recover the entire amortized cost basis of its impaired AFS securities at June 30, 2020. No ACL was considered necessary at June 30, 2020.
Private label residential MBS and CMOs
At June 30, 2020,seven private label residential MBS and CMOs were in unrealized loss positions. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, voluntary prepayment rates, loss severity, delinquencies and recovery lag. In developing those assumptions, we took into account collateral quality measures such as FICO, LTV, documentation, loan type, property type, agency availability criteria and performing status. We also regularly monitor sector data including home price appreciation, forbearance, delinquency and prepay trends as well as other economic data which would indicate further stress in the sector. Our June 30, 2020 analysis projected weighted average collateral losses for this category of 4% compared to weighted average credit support of 17%. As of June 30, 2020, 88% of the impaired securities in this category, based on carrying value, were externally rated AAA, and one security representing 12% of impaired securities in this category was not externally rated; this security was internally rated investment grade.
Private label commercial MBS
At June 30, 2020, seventy private label commercial MBS were in unrealized loss positions. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, voluntary prepayment rates, loss severity, delinquencies and recovery lag. In developing those assumptions, we took into account collateral quality and type, loan size, loan purpose and other qualitative factors. We also regularly monitor collateral watchlists, bankruptcy data, special servicing trends, delinquency and other economic data which would indicate further stress in the sector. Our June 30, 2020 analysis projected weighted average collateral losses for this category of 13% compared to weighted average credit support of 42%. As of June 30, 2020, 83% of impaired securities in this category, based on carrying value were externally rated AAA, 12% were rated AA and 5% were rated A.
Single family rental real estate-backed securities
At June 30, 2020, ten single family rental real estate-backed securities were in unrealized loss positions. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, loss severity, delinquencies and recovery lag. We regularly monitor sector data including home price appreciation, forbearance, delinquency and prepay trends as well as other economic data which would indicate further stress in the sector. Our June 30, 2020 analysis projected weighted average collateral losses for this category of 13% compared to weighted average credit support of 49%. As of June 30, 2020, 87% of the impaired securities in this category, based on carrying value, were externally rated AAA and 13% were rated AA.
Collateralized loan obligations
At June 30, 2020, twenty-six collateralized loan obligations were in unrealized loss positions. Leveraged loans underlying these securities have seen pricing pressure as the market looks to evaluate ability of borrowers to maintain payments. Uncertainties surrounding the broad economy and how they may translate into rating downgrades and defaults as the COVID-19 crisis plays out have negatively impacted pricing in the leveraged loan market. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, loss severity, and delinquencies, calibrated to take into account idiosyncratic risks associated with the underlying collateral. In developing those assumptions, we took into account each sector’s performance pre, during and post the 2008 financial crisis. We regularly engage with bond managers to monitor trends in underlying collateral including potential downgrades and subsequent cash flow diversions, liquidity, ratings migration, and any other relevant developments. Our June 30, 2020 analysis projected weighted average collateral losses for this category of 21% compared to weighted average credit support of 41%. As of June 30, 2020, 84% of

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


the impaired securities in this category, based on carrying value, were externally rated AAA, 13% were rated AA and 3% were rated A.
Non-mortgage asset-backed securities
At June 30, 2020, three non-mortgage asset-backed securities were in unrealized loss positions. These securities are backed by student loan collateral. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, loss severity, delinquencies, voluntary prepayment rates and recovery lag. In developing those assumptions, we took into account collateral type, delineated by whether collateral consisted of loans to borrowers in school, refinancing, or a mixture. Our June 30, 2020 analysis projected weighted average collateral losses for this category of 14% compared to weighted average credit support of 25%. As of June 30, 2020, 50% of the impaired securities in this category, based on carrying value, were externally rated AAA and 50% were rated AA.
Note 4    Loans and Allowance for Credit Losses
Loans consisted of the following at the dates indicated (dollars in thousands):
 
June 30, 2020
 
December 31, 2019
 
Total
 
Percent of Total
 
Total
 
Percent of Total
Residential and other consumer:
 

 
 

 
 

 
 

1-4 single family residential
$
4,743,866

 
19.9
%
 
$
4,953,936

 
21.4
%
Government insured residential
826,238

 
3.5
%
 
698,644

 
3.0
%
Other consumer loans
7,703

 
0.1
%
 
8,539

 
0.1
%
 
5,577,807

 
23.5
%
 
5,661,119

 
24.5
%
Commercial:
 
 
 
 
 
 
 
Multi-family
1,893,753

 
7.9
%
 
2,217,705

 
9.6
%
Non-owner occupied commercial real estate
4,940,531

 
20.7
%
 
5,030,904

 
21.7
%
Construction and land
246,609

 
1.0
%
 
243,925

 
1.1
%
Owner occupied commercial real estate
2,041,346

 
8.6
%
 
2,062,808

 
8.9
%
Commercial and industrial
4,691,326

 
19.7
%
 
4,655,349

 
20.1
%
PPP
827,359

 
3.5
%
 
—

 
—
%
Pinnacle
1,242,506

 
5.1
%
 
1,202,430

 
5.2
%
Bridge - franchise finance
623,139

 
2.6
%
 
627,482

 
2.6
%
Bridge - equipment finance
589,785

 
2.5
%
 
684,794

 
3.0
%
Mortgage warehouse lending
1,160,728

 
4.9
%
 
768,472

 
3.3
%
 
18,257,082

 
76.5
%
 
17,493,869

 
75.5
%
Total loans
23,834,889

 
100.0
%
 
23,154,988

 
100.0
%
Allowance for credit losses
(266,123
)
 
 
 
(108,671
)
 
 
Loans, net
$
23,568,766

 
 
 
$
23,046,317

 
 
 
Premiums, discounts and deferred fees and costs, excluding the non-credit related discount on PCD loans, totaled $25 million and $50 million at June 30, 2020 and December 31, 2019, respectively. The amortized cost basis of residential PCD loans was $134 million and the related amount of non-credit discount was $135 million at June 30, 2020. The ACL related to PCD residential loans was $1.1 million and $1.7 million at June 30, 2020 and January 1, 2020, the date of initial adoption of ASU 2016-13, respectively.
Included in the table above are direct or sales type finance leases totaling $757 million and $733 million at June 30, 2020 and December 31, 2019, respectively. The amount of income recognized from direct or sales type finance leases for the three and six months ended June 30, 2020 and 2019 totaled $5.3 million, $10.7 million, $5.5 million and $10.8 million, respectively and is recorded as interest income on loans in the consolidated statements of income.

19
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


During the three and six months ended June 30, 2020 and 2019, the Company purchased 1-4 single family residential loans totaling $582 million, $1.1 billion, $589 million and $894 million, respectively. Purchases for the three and six months ended June 30, 2020 and 2019 included $243 million, $529 million, $151 million and $284 million, respectively, of government insured residential loans.
At June 30, 2020 and December 31, 2019, the Company had pledged loans with a carrying value of approximately $11.0 billion and $10.2 billion, respectively, as security for FHLB advances, Federal Reserve discount window capacity and PPPLF borrowings.
At June 30, 2020 and December 31, 2019, accrued interest receivable on loans totaled $108 million and $83 million, respectively, and is included in other assets in the accompanying consolidated balance sheets. The amount of interest income reversed on non-accrual loans was not material for the three and six months ended June 30, 2020.
Allowance for credit losses 
Activity in the allowance for credit losses is summarized below. The balance at December 31, 2019 and amounts presented for the three and six months ended June 30, 2019 represent the allowance for loan and leases losses, estimated using an incurred loss methodology. The ACL at June 30, 2020 and activity for the three and six months then ended were determined using the CECL methodology (in thousands):
 
Three Months Ended June 30,
 
2020
 
2019
 
Residential and Other Consumer
 
Commercial
 
Total
 
Residential and Other Consumer
 
Commercial
 
Total
Beginning balance
$
12,576

 
$
238,003

 
$
250,579

 
$
10,952

 
$
103,751

 
$
114,703

Provision (recovery)
(1,924
)
 
33,508

 
31,584

 
131

 
(2,878
)
 
(2,747
)
Charge-offs
—

 
(19,178
)
 
(19,178
)
 
—

 
(1,711
)
 
(1,711
)
Recoveries
43

 
3,095

 
3,138

 
153

 
1,743

 
1,896

Ending balance
$
10,695

 
$
255,428

 
$
266,123

 
$
11,236

 
$
100,905

 
$
112,141

 
Six Months Ended June 30,
 
2020
 
2019
 
Residential and Other Consumer
 
Commercial
 
Total
 
Residential and Other Consumer
 
Commercial
 
Total
Beginning balance
$
11,154

 
$
97,517

 
$
108,671

 
$
10,788

 
$
99,143

 
$
109,931

Impact of adoption of ASU 2016-13
8,098

 
19,207

 
27,305

 
—

 
—

 
—

Provision (recovery)
(8,572
)
 
162,021

 
153,449

 
281

 
7,253

 
7,534

Charge-offs
(31
)
 
(26,953
)
 
(26,984
)
 
—

 
(7,844
)
 
(7,844
)
Recoveries
46

 
3,636

 
3,682

 
167

 
2,353

 
2,520

Ending balance
$
10,695

 
$
255,428

 
$
266,123

 
$
11,236

 
$
100,905

 
$
112,141



20
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


The following table presents the components of the provision for credit losses for the periods indicated (in thousands):
 
Three Months Ended June 30, 2020
 
Six Months Ended June 30, 2020
Amount related to funded portion of loans
$
31,584

 
$
153,449

Amount related to off-balance sheet credit exposures
(6,170
)
 
(2,607
)
Provision for credit losses
$
25,414

 
$
150,842


Credit quality information
The increase in the ACL from January 1, 2020, the date of initial adoption of ASU 2016-13, to June 30, 2020 was reflective of the estimated impact of the emerging COVID-19 pandemic on the trajectory of the economy and on individual borrowers and portfolio sub-segments. The credit quality of the loan portfolio has been and is likely to continue to be impacted by the developing COVID-19 crisis, its impact on the economy broadly and more specifically on the Company's individual borrowers. Significant uncertainty currently exists about the extent of this impact, and the impact is likely not fully reflected in some of the credit quality indicators disclosed below as of June 30, 2020, due to the ongoing impact of the pandemic.
Credit quality of loans held for investment is continuously monitored by dedicated residential credit risk management and commercial portfolio management functions. The Company also has a workout and recovery department that monitors the credit quality of criticized and classified loans and an independent internal credit review function.
Credit quality indicators for residential loans
Management considers delinquency status to be the most meaningful indicator of the credit quality of residential and other consumer loans, other than government insured residential loans. Delinquency statistics are updated at least monthly. LTV and FICO scores are also important indicators of credit quality for 1-4 single family residential loans other than government insured loans. FICO scores are generally updated at least annually, and were most recently updated in the fourth quarter of 2019. LTVs are typically at origination since we do not routinely update residential appraisals. Substantially all of the government insured residential loans are government insured buyout loans, which the Company buys out of GNMA securitizations upon default. For these loans, traditional measures of credit quality are not particularly relevant considering the guaranteed nature of the loans and the underlying business model. Factors that impact risk inherent in the residential portfolio segment include national and regional economic conditions such as levels of unemployment and wages, as well as residential property values.
1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on delinquency status: 
 
June 30, 2020
 
Amortized Cost By Origination Year
 
 
 
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Total
Current
$
249,912

 
$
807,365

 
$
488,280

 
$
753,109

 
$
776,895

 
$
1,604,423

 
$
4,679,984

30 - 59 Days Past Due
5,703

 
11,477

 
3,372

 
2,701

 
7,417

 
18,605

 
49,275

60 - 89 Days Past Due
—

 
720

 
75

 
53

 
103

 
1,882

 
2,833

90 Days or More Past Due
—

 
807

 
2,293

 
—

 
484

 
8,190

 
11,774

 
$
255,615

 
$
820,369

 
$
494,020

 
$
755,863

 
$
784,899

 
$
1,633,100

 
$
4,743,866


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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


 
December 31, 2019
 
Amortized Cost By Origination Year
 
 
 
2019
 
2018
 
2017
 
2016
 
2015
 
Prior
 
Total
Current
$
804,913

 
$
609,814

 
$
830,710

 
$
783,318

 
$
633,833

 
$
1,225,030

 
$
4,887,618

30 - 59 Days Past Due
13,915

 
3,003

 
3,751

 
8,419

 
4,308

 
12,238

 
45,634

60 - 89 Days Past Due
1,785

 
442

 
137

 
486

 
1,766

 
4,962

 
9,578

90 Days or More Past Due
—

 
1,762

 
914

 
—

 
5,030

 
3,400

 
11,106

 
$
820,613

 
$
615,021

 
$
835,512

 
$
792,223

 
$
644,937

 
$
1,245,630

 
$
4,953,936

1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on LTV: 
 
June 30, 2020
 
Amortized Cost By Origination Year
 
 
LTV
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Total
Less than 61%
$
99,728

 
$
180,025

 
$
106,359

 
$
202,355

 
$
276,035

 
$
519,410

 
$
1,383,912

61% - 70%
62,031

 
192,880

 
110,546

 
136,212

 
184,600

 
394,279

 
1,080,548

71% - 80%
92,387

 
433,542

 
245,829

 
349,993

 
300,153

 
689,223

 
2,111,127

More than 80%
1,469

 
13,922

 
31,286

 
67,303

 
24,111

 
30,188

 
168,279

 
$
255,615

 
$
820,369

 
$
494,020

 
$
755,863

 
$
784,899

 
$
1,633,100

 
$
4,743,866

 
December 31, 2019
 
Amortized Cost By Origination Year
 
 
LTV
2019
 
2018
 
2017
 
2016
 
2015
 
Prior
 
Total
Less than 61%
$
171,069

 
$
134,978

 
$
183,807

 
$
228,868

 
$
197,039

 
$
372,221

 
$
1,287,982

61% - 70 %
195,572

 
128,766

 
152,502

 
188,856

 
154,307

 
316,031

 
1,136,034

71% - 80%
442,311

 
313,779

 
404,743

 
338,000

 
283,202

 
531,377

 
2,313,412

More than 80%
11,661

 
37,498

 
94,460

 
36,499

 
10,389

 
26,001

 
216,508

 
$
820,613

 
$
615,021

 
$
835,512

 
$
792,223

 
$
644,937

 
$
1,245,630

 
$
4,953,936

1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on FICO score:
 
June 30, 2020
 
Amortized Cost By Origination Year
 
 
FICO
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Total
760 or greater
$
168,920

 
$
482,818

 
$
298,650

 
$
521,199

 
$
573,011

 
$
1,093,732

 
$
3,138,330

720 - 759
70,279

 
224,961

 
112,407

 
138,897

 
131,205

 
304,460

 
982,209

719 or less
16,416

 
112,590

 
82,963

 
95,767

 
80,683

 
234,908

 
623,327

 
$
255,615

 
$
820,369

 
$
494,020

 
$
755,863

 
$
784,899

 
$
1,633,100

 
$
4,743,866


22
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


 
December 31, 2019
 
Amortized Cost By Origination Year
 
 
FICO
2019
 
2018
 
2017
 
2016
 
2015
 
Prior
 
Total
760 or greater
$
470,057

 
$
340,716

 
$
534,017

 
$
533,804

 
$
430,706

 
$
763,807

 
$
3,073,107

720 - 759
242,806

 
185,939

 
200,623

 
178,139

 
141,748

 
307,195

 
1,256,450

719 or less
107,750

 
88,366

 
100,872

 
80,280

 
72,483

 
174,628

 
624,379

 
$
820,613

 
$
615,021

 
$
835,512

 
$
792,223

 
$
644,937

 
$
1,245,630

 
$
4,953,936

Credit quality indicators for commercial loans
Factors that impact risk inherent in commercial portfolio segments include but are not limited to levels of economic activity, health of the national and regional economy, industry trends, patterns of and trends in customer behavior that influence demand for our borrowers' products and services, and commercial real estate values. Internal risk ratings are considered the most meaningful indicator of credit quality for commercial loans. Internal risk ratings are generally indicative of the likelihood that a borrower will default, are a key factor influencing the level and nature of ongoing monitoring of loans and may impact the estimation of the ACL. Internal risk ratings are updated on a continuous basis. Generally, relationships with balances in excess of defined thresholds, ranging from $1 million to $3 million, are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. During the second quarter of 2020, risk ratings were re-evaluated for a substantial portion of the commercial portfolio, with a focus on portfolio segments we identified for enhanced monitoring and loans for which we granted temporary payment deferrals in light of the COVID-19 pandemic. Loans exhibiting potential credit weaknesses that deserve management’s close attention and that could result in deterioration of repayment prospects at some future date if not checked or corrected are categorized as special mention. Loans with well-defined credit weaknesses, including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow, project cost overruns, unreasonable construction delays, past due real estate taxes or exhausted interest reserves, are assigned an internal risk rating of substandard. A loan with a weakness so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors has not been charged off, will be assigned an internal risk rating of doubtful. 

23
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Commercial credit exposure based on internal risk rating:
 
June 30, 2020
 
Amortized Cost By Origination Year
 
Revolving Loans
 
 
 
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
 
Total
Multi-Family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
42,877

 
$
316,733

 
$
190,227

 
$
210,681

 
$
347,973

 
$
633,791

 
$
39,607

 
$
1,781,889

Special mention
—

 
8,149

 
15,767

 
19,512

 
6,209

 
7,587

 
—

 
57,224

Substandard
—

 
—

 
—

 
2,845

 
9,801

 
41,994

 
—

 
54,640

Total Multi-Family
$
42,877

 
$
324,882

 
$
205,994

 
$
233,038

 
$
363,983

 
$
683,372

 
$
39,607

 
$
1,893,753

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
238,451

 
$
1,202,138

 
$
736,973

 
$
509,446

 
$
590,992

 
$
814,514

 
$
107,772

 
$
4,200,286

Special mention
—

 
46,971

 
96,563

 
47,930

 
166,139

 
112,887

 
—

 
470,490

Substandard
4,568

 
32,746

 
5,029

 
437

 
100,748

 
126,227

 
—

 
269,755

Total non-owner occupied commercial real estate
$
243,019

 
$
1,281,855

 
$
838,565

 
$
557,813

 
$
857,879

 
$
1,053,628

 
$
107,772

 
$
4,940,531

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and Land
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
7,208

 
$
125,429

 
$
13,619

 
$
50,020

 
$
27,336

 
$
917

 
$
243

 
$
224,772

Special mention
—

 
1,393

 
2,965

 
8,604

 
4,284

 
—

 
—

 
17,246

Substandard
—

 
—

 
888

 
—

 
3,357

 
346

 
—

 
4,591

Total Construction and Land
$
7,208

 
$
126,822

 
$
17,472

 
$
58,624

 
$
34,977

 
$
1,263

 
$
243

 
$
246,609

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
128,795

 
$
303,522

 
$
276,367

 
$
267,267

 
$
311,485

 
$
466,194

 
$
39,586

 
$
1,793,216

Special mention
2,635

 
26,410

 
15,528

 
57,102

 
41,321

 
34,201

 
2,108

 
179,305

Substandard
—

 
8,691

 
17,520

 
12,203

 
2,863

 
18,327

 
9,221

 
68,825

Total owner occupied commercial real estate
$
131,430

 
$
338,623

 
$
309,415

 
$
336,572

 
$
355,669

 
$
518,722

 
$
50,915

 
$
2,041,346

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
356,049

 
$
940,865

 
$
344,774

 
$
295,769

 
$
204,049

 
$
64,485

 
$
1,989,034

 
$
4,195,025

Special mention
611

 
81,305

 
33,987

 
2,252

 
28,507

 
6,818

 
89,918

 
243,398

Substandard
600

 
46,973

 
43,472

 
33,272

 
18,949

 
53,470

 
56,167

 
252,903

Total commercial and industrial
$
357,260

 
$
1,069,143

 
$
422,233

 
$
331,293

 
$
251,505

 
$
124,773

 
$
2,135,119

 
$
4,691,326

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPP
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
827,359

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
827,359

PPP
$
827,359

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
827,359

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pinnacle
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
125,882

 
$
134,838

 
$
92,537

 
$
232,269

 
$
227,317

 
$
429,663

 
$
—

 
$
1,242,506

Total Pinnacle
$
125,882

 
$
134,838

 
$
92,537

 
$
232,269

 
$
227,317

 
$
429,663

 
$
—

 
$
1,242,506

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bridge - Franchise Finance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
42,004

 
$
97,036

 
$
27,760

 
$
12,666

 
$
14,456

 
$
12,357

 
$
—

 
$
206,279

Special mention
42,611

 
154,808

 
73,602

 
37,731

 
11,255

 
7,368

 
—

 
327,375

Substandard
549

 
15,494

 
45,185

 
5,173

 
17,778

 
4,357

 
—

 
88,536

Doubtful
—

 
—

 
—

 
—

 
949

 
—

 
—

 
949

Total Bridge - Franchise Finance
$
85,164

 
$
267,338

 
$
146,547

 
$
55,570

 
$
44,438

 
$
24,082

 
$
—

 
$
623,139

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bridge - Equipment Finance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
24,349

 
$
193,227

 
$
103,434

 
$
94,667

 
$
54,544

 
$
67,486

 
$
—

 
$
537,707

Special mention
—

 
6,634

 
9,510

 
27,050

 
—

 
—

 
—

 
43,194

Substandard
—

 
3,608

 
4,128

 
—

 
1,005

 
143

 
—

 
8,884

Total Bridge - Equipment Finance
$
24,349

 
$
203,469

 
$
117,072

 
$
121,717

 
$
55,549

 
$
67,629

 
$
—

 
$
589,785

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Warehouse Lending
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,160,728

 
$
1,160,728

Total Mortgage Warehouse Lending
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,160,728

 
$
1,160,728


24
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


At June 30, 2020, the balance of revolving loans converted to term loans was immaterial.
The following tables summarize the Company's commercial credit exposure based on internal risk rating, in aggregate, at the dates indicated (in thousands):
 
June 30, 2020
 
Multi-Family
 
Non-Owner Occupied Commercial Real Estate
 
Construction
and Land
 
Owner Occupied Commercial Real Estate
 
Commercial and Industrial
 
PPP
 
Pinnacle
 
Bridge - Franchise Finance
 
Bridge - Equipment Finance
 
Mortgage Warehouse Lending
 
Total
Pass
$
1,781,889

 
$
4,200,286

 
$
224,772

 
$
1,793,216

 
$
4,195,025

 
$
827,359

 
$
1,242,506

 
$
206,279

 
$
537,707

 
$
1,160,728

 
$
16,169,767

Special mention
57,224

 
470,490

 
17,246

 
179,305

 
243,398

 
—

 
—

 
327,375

 
43,194

 
—

 
1,338,232

Substandard(1)
54,640

 
269,755

 
4,591

 
68,825

 
252,903

 
—

 
—

 
88,536

 
8,884

 
—

 
748,134

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
949

 
—

 
—

 
949

 
$
1,893,753

 
$
4,940,531

 
$
246,609

 
$
2,041,346

 
$
4,691,326

 
$
827,359

 
$
1,242,506

 
$
623,139

 
$
589,785

 
$
1,160,728

 
$
18,257,082

 
 
(1)
Includes $561 million of substandard accruing loans at June 30, 2020.
 
December 31, 2019
 
Multi-Family
 
Non-Owner Occupied Commercial Real Estate
 
Construction
and Land
 
Owner Occupied Commercial Real Estate
 
Commercial and Industrial
 
Pinnacle
 
Bridge - Franchise Finance
 
Bridge - Equipment Finance
 
Mortgage Warehouse Lending
 
Total
Pass
$
2,184,771

 
$
4,932,279

 
$
240,734

 
$
1,991,556

 
$
4,508,563

 
$
1,202,430

 
$
562,042

 
$
663,855

 
$
768,472

 
$
17,054,702

Special mention
—

 
5,831

 
—

 
27,870

 
28,498

 
—

 
10,682

 
—

 
—

 
72,881

Substandard (1)
32,934

 
92,794

 
3,191

 
43,382

 
118,288

 
—

 
54,758

 
20,939

 
—

 
366,286

 
$
2,217,705

 
$
5,030,904

 
$
243,925

 
$
2,062,808

 
$
4,655,349

 
$
1,202,430

 
$
627,482

 
$
684,794

 
$
768,472

 
$
17,493,869

 
 
(1)
Includes $180 million of substandard accruing loans at December 31, 2019.

25
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Past Due and Non-Accrual Loans:
The following table presents an aging of loans at the dates indicated (in thousands):
 
June 30, 2020
 
December 31, 2019
 
Current
 
30 - 59
Days Past
Due
 
60 - 89
Days Past
Due
 
90 Days or
More Past
Due
 
Total
 
Current
 
30 - 59
Days Past
Due
 
60 - 89
Days Past
Due
 
90 Days or
More Past
Due
 
Total
1-4 single family residential
$
4,679,984

 
$
49,275

 
$
2,833

 
$
11,774

 
$
4,743,866

 
$
4,887,618

 
$
45,634

 
$
9,578

 
$
11,106

 
$
4,953,936

Government insured residential
51,276

 
53,017

 
52,620

 
669,325

 
826,238

 
93,560

 
45,347

 
30,426

 
529,311

 
698,644

Home equity loans and lines of credit
1,478

 
69

 
—

 
—

 
1,547

 
1,320

 
—

 
—

 
—

 
1,320

Other consumer loans
6,156

 
—

 
—

 
—

 
6,156

 
7,219

 
—

 
—

 
—

 
7,219

Multi-family
1,858,695

 
29,047

 
6,011

 
—

 
1,893,753

 
2,217,705

 
—

 
—

 
—

 
2,217,705

Non-owner occupied commercial real estate
4,859,344

 
52,937

 
7,979

 
20,271

 
4,940,531

 
5,015,458

 
—

 
928

 
14,518

 
5,030,904

Construction and land
246,263

 
—

 
—

 
346

 
246,609

 
240,647

 
2,396

 
—

 
882

 
243,925

Owner occupied commercial real estate
2,020,077

 
1,081

 
3,376

 
16,812

 
2,041,346

 
2,041,352

 
1,336

 
4,420

 
15,700

 
2,062,808

Commercial and industrial
4,593,422

 
20,855

 
22,601

 
54,448

 
4,691,326

 
4,595,847

 
2,313

 
4,301

 
52,888

 
4,655,349

PPP
827,359

 
—

 
—

 
—

 
827,359

 
—

 
—

 
—

 
—

 
—

Pinnacle
1,242,506

 
—

 
—

 
—

 
1,242,506

 
1,202,430

 
—

 
—

 
—

 
1,202,430

Bridge - franchise finance
596,136

 
—

 
625

 
26,378

 
623,139

 
610,315

 
3,840

 
2,501

 
10,826

 
627,482

Bridge - equipment finance
589,785

 
—

 
—

 
—

 
589,785

 
677,089

 
7,705

 
—

 
—

 
684,794

Mortgage warehouse lending
1,160,728

 
—

 
—

 
—

 
1,160,728

 
768,472

 
—

 
—

 
—

 
768,472

 
$
22,733,209

 
$
206,281

 
$
96,045

 
$
799,354

 
$
23,834,889

 
$
22,359,032

 
$
108,571

 
$
52,154

 
$
635,231

 
$
23,154,988


Included in the table above is the guaranteed portion of SBA loans past due by 90 days or more totaling $37.3 million and $36.3 million at June 30, 2020 and December 31, 2019, respectively.
Loans contractually delinquent by 90 days or more and still accruing totaled $673 million, substantially all of which were government insured residential loans at June 30, 2020 and $531 million, of which $529 million were government insured residential loans at December 31, 2019. Substantially all of these loans are government insured pool buyout loans, which the Company buys out of GNMA securitizations upon default.
The following table presents information about loans on non-accrual status at the dates indicated (in thousands):
 
June 30, 2020
 
December 31, 2019
 
Amortized Cost
 
Amortized Cost With No Related Allowance
 
Amortized Cost
Residential and other consumer
$
13,183

 
$
2,622

 
$
18,894

Commercial:
 
 
 
 
 
Multi-family
6,011

 
6,011

 
6,138

Non-owner occupied commercial real estate
46,545

 
28,598

 
40,097

Construction and land
3,703

 
3,357

 
3,191

Owner occupied commercial real estate
30,493

 
8,765

 
27,141

Commercial and industrial
67,702

 
7,386

 
74,757

Bridge - franchise finance
32,857

 
1,848

 
13,631

Bridge - equipment finance
1,148

 
537

 
20,939

 
$
201,642

 
$
59,124

 
$
204,788



26
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Included in the table above is the guaranteed portion of non-accrual SBA loans totaling $45.7 million at both June 30, 2020 and December 31, 2019, respectively. The amount of additional interest income that would have been recognized on non-accrual loans had they performed in accordance with their contractual terms was approximately $3.0 million and $5.7 million for the three and six months ended June 30, 2020, respectively and $2.5 million and $4.3 million for the three and six months ended June 30, 2019, respectively.
Collateral dependent loans:
The following table presents the amortized cost basis of collateral dependent loans at June 30, 2020 (in thousands):
 
Amortized Cost
 
Extent to Which Secured by Collateral
Residential and other consumer
$
3,283

 
$
3,273

Commercial:
 
 
 
Multi-family
6,011

 
6,011

Non-owner occupied commercial real estate
30,980

 
30,980

Construction and land
3,703

 
3,703

Owner occupied commercial real estate
21,025

 
21,025

Commercial and industrial
54,232

 
29,468

Bridge - franchise finance
24,353

 
21,178

Bridge - equipment finance
1,148

 
1,078

Total commercial
141,452

 
113,443

 
$
144,735

 
$
116,716


Collateral for the multi-family, non-owner occupied commercial real estate, and owner-occupied commercial real estate loan classes generally consists of commercial real estate. Collateral for construction and land loans is typically residential or commercial real estate. Collateral for commercial and industrial loans generally consists of equipment, accounts receivable, inventory and other business assets; owner-occupied commercial real estate loans may also be collateralized by these types of assets. Bridge franchise finance loans may be collateralized by franchise value or by equipment. Bridge equipment finance loans are secured by the financed equipment. Residential loans are collateralized by residential real estate. There have been no significant changes to the extent to which collateral secures collateral dependent loans during the six months ended June 30, 2020.
Foreclosure of residential real estate
The recorded investment in residential loans in the process of foreclosure was $323 million, of which $315 million was government insured, at June 30, 2020 and $257 million, of which $248 million was government insured, at December 31, 2019. The carrying amount of foreclosed residential real estate included in "Other assets" in the accompanying consolidated balance sheet was insignificant at June 30, 2020 and $6 million at December 31, 2019. In response to the COVID-19 pandemic, new foreclosure actions on residential loans have been temporarily suspended.

27
Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Troubled debt restructurings
The following table summarizes loans that were modified in TDRs during the periods indicated, as well as loans modified during the twelve months preceding June 30, 2020 and 2019 that experienced payment defaults during the periods indicated (dollars in thousands):
 
Three Months Ended June 30,
 
2020
 
2019
 
Loans Modified in TDRs 
During the Period
 
TDRs Experiencing Payment Defaults During the Period
 
Loans Modified in TDRs 
During the Period
 
TDRs Experiencing Payment
Defaults During the Period
 
Number of
TDRs
 
Amortized Cost
 
Number of
TDRs
 
Amortized Cost
 
Number of
TDRs
 
Amortized Cost
 
Number of
TDRs
 
Amortized Cost
Government insured residential
52

 
$
7,291

 
121

 
$
19,512

 
34

 
$
5,164

 
31

 
$
4,355

Non-owner occupied commercial real estate
—

 
—

 
1

 
4,249

 
1

 
12,085

 
1

 
2,772

Owner occupied commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
3

 
1,878

Commercial and industrial
2

 
1,348

 
—

 
—

 
4

 
7,354

 
1

 
1,233

Bridge - franchise finance
1

 
919

 
5

 
18,718

 
1

 
2,073

 
—

 
—

 
55

 
$
9,558

 
127

 
$
42,479

 
40

 
$
26,676

 
36

 
$
10,238

 
Six Months Ended June 30,
 
2020
 
2019
 
Loans Modified in TDRs 
During the Period
 
TDRs Experiencing Payment
Defaults During the Period
 
Loans Modified in TDRs 
During the Period
 
TDRs Experiencing Payment
Defaults During the Period
 
Number of
TDRs
 
Amortized Cost
 
Number of
TDRs
 
Amortized Cost
 
Number of
TDRs
 
Amortized Cost
 
Number of
TDRs
 
Amortized Cost
1-4 single family residential
1

 
$
203

 
—

 
$
—

 
2

 
$
563

 
—

 
$
—

Government insured residential
86

 
12,183

 
150

 
23,994

 
46

 
6,782

 
32

 
4,517

Non-owner occupied commercial real estate
1

 
4,249

 
1

 
4,249

 
1

 
12,085

 
1

 
2,772

Owner occupied commercial real estate
—

 
—

 
—

 
—

 
1

 
849

 
3

 
1,878

Commercial and industrial
2

 
1,348

 
3

 
5,448

 
6

 
17,994

 
1

 
1,233

Bridge - franchise finance
9

 
14,666

 
8

 
23,358

 
3

 
3,238

 
—

 
—

Bridge - equipment finance
—

 
—

 
—

 
—

 
1

 
847

 
—

 
—

 
99

 
$
32,649

 
162

 
$
57,049

 
60

 
$
42,358

 
37

 
$
10,400


Modifications during the three and six months ended June 30, 2020 and 2019 included interest rate reductions, restructuring of the amount and timing of required periodic payments, extensions of maturity and covenant waivers. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy. The total amount of such loans is not material.
Under recently issued inter-agency and authoritative guidance and consistent with the CARES Act, short-term (generally periods of six months or less) deferrals or modifications related to COVID-19 will typically not be categorized as TDRs.

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Disclosures Prescribed by Legacy GAAP (Before Adoption of ASU 2016-13) for Prior Periods
The following table presents information about the balance of the ALLL and related loans as of December 31, 2019 (in thousands):
 
Residential and Other Consumer
 
Commercial
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
Ending balance
$
11,154

 
$
97,517

 
$
108,671

Ending balance: loans individually evaluated for impairment
$
9

 
$
20,481

 
$
20,490

Ending balance: loans collectively evaluated for impairment
$
11,145

 
$
77,036

 
$
88,181

Ending balance: ACI loans
$
—

 
$
—

 
$
—

Loans:
 
 
 
 
 
Ending balance
$
5,661,119

 
$
17,493,869

 
$
23,154,988

Ending balance: loans individually evaluated for impairment
$
57,117

 
$
187,788

 
$
244,905

Ending balance: loans collectively evaluated for impairment
$
5,454,422

 
$
17,288,901

 
$
22,743,323

Ending balance: ACI loans
$
149,580

 
$
17,180

 
$
166,760

The table below presents information about loans identified as impaired as of December 31, 2019 (in thousands):
 
Recorded
Investment
 
UPB
 
Related
Specific
Allowance
With no specific allowance recorded:
 

 
 

 
 

1-4 single family residential
$
992

 
$
989

 
$
—

Government insured residential
53,428

 
53,350

 
—

Multi-family
6,138

 
6,169

 
—

Non-owner occupied commercial real estate
38,345

 
38,450

 
—

Construction and land
3,191

 
3,155

 
—

Owner occupied commercial real estate
17,419

 
17,488

 
—

Commercial and industrial 
10,585

 
10,574

 
—

Bridge - franchise finance
4,115

 
4,117

 
—

Bridge - equipment finance
6,807

 
6,793

 
—

With a specific allowance recorded:
 
 
 
 
 
1-4 single family residential
2,697

 
2,652

 
9

Owner occupied commercial real estate
2,522

 
2,509

 
401

Commercial and industrial
63,531

 
63,709

 
13,992

Bridge - franchise finance
21,011

 
21,050

 
2,953

Bridge - equipment finance
14,124

 
14,024

 
3,135

Total:
 
 
 
 
 
Residential and other consumer
$
57,117

 
$
56,991

 
$
9

Commercial
187,788

 
188,038

 
20,481

 
$
244,905

 
$
245,029

 
$
20,490


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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


The following table presents the average recorded investment in impaired loans for the period indicated (in thousands):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Residential and other consumer:
 
 
 

1-4 single family residential
$
12,732

 
$
11,011

Commercial:
 
 
 
Multi-family
25,066

 
25,248

Non-owner occupied commercial real estate
24,599

 
21,563

Construction and land
9,604

 
9,730

Owner occupied commercial real estate
12,741

 
12,124

Commercial and industrial
32,690

 
30,564

Commercial lending subsidiaries
18,082

 
19,982

 
122,782

 
119,211

 
$
135,514

 
$
130,222


Note 5     Subordinated Notes
On June 11, 2020, the Company issued $300 million of 5.125% subordinated notes. The notes mature on June 11, 2030 with interest payable semiannually. The notes have an effective interest rate of 5.39% after consideration of issuance discount and costs. The notes may be redeemed by the Company, in whole or in part, on or after March 11, 2030 at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest, subject to the approval of the Federal Reserve. The notes qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations.
Note 6    Income Taxes
The Company’s effective income tax rate was 21.0% and 19.3% for the three and six months ended June 30, 2020, respectively, and 25.2% and 25.9% for the three and six months ended June 30, 2019, respectively. The effective income tax rates differed from the statutory federal income tax rate of 21% for the 2019 periods due primarily to the impact of state income taxes, partially offset by the benefit of income not subject to federal tax. These factors were largely offsetting for the 2020 periods, when the effective income tax rate did not differ materially from the Federal statutory rate of 21%. During the three and six months ended June 30 2020, income not subject to tax was a larger percentage of pre-tax income.
Note 7 Derivatives and Hedging Activities
The Company enters into LIBOR-based interest rate swaps that are designated as cash flow hedges with the objective of limiting the variability of interest payment cash flows resulting from changes in the benchmark interest rate LIBOR. The Company also enters into LIBOR-based interest rate swaps designated as fair value hedges designed to hedge changes in the fair value of outstanding fixed rate borrowings caused by fluctuations in the benchmark interest rate.
The Company enters into interest rate derivative contracts with certain of its commercial borrowers to enable those borrowers to manage their exposure to interest rate fluctuations. To mitigate interest rate risk associated with these derivative contracts, the Company enters into offsetting derivative contract positions with primary dealers. These interest rate derivative contracts are not designated as hedging instruments; therefore, changes in the fair value of these derivatives are recognized immediately in earnings. For the three and six months ended June 30, 2020 and 2019, the impact on earnings, included in "other non-interest income" in the accompanying consolidated statements of income, related to changes in fair value of these derivatives was not material.
The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. The Company manages dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements, central clearing mechanisms

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


and counterparty limits. The agreements contain bilateral collateral arrangements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company manages the risk of default by its commercial borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company does not currently anticipate any significant losses from failure of interest rate derivative counterparties to honor their obligations.
The CME legally characterizes variation margin payments for centrally cleared derivatives as settlements of the derivatives' exposures rather than collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. The Company's clearing agent for interest rate derivative contracts centrally cleared through the CME settles the variation margin daily with the CME; therefore, those interest rate derivative contracts the Company clears through the CME are reported at a fair value of approximately zero at both June 30, 2020 and December 31, 2019.
The following tables set forth certain information concerning the Company’s interest rate contract derivative financial instruments and related hedged items at the dates indicated (dollars in thousands):
 
June 30, 2020
 
 
 
Weighted
Average Pay Rate
 
Weighted
Average Receive Rate
 
Weighted
Average
Remaining
Life in Years
 
 
 
 
 
 
 
 
 
 
 
 
Notional Amount
 
Balance Sheet Location
 
Fair Value
 
Hedged Item
 
 
 
 
 
 
Asset
 
Liability
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 

 
 
 
 

 
 

Pay-fixed interest rate swaps
Variability of interest cash flows on variable rate borrowings
 
2.40%
 
 3-Month LIBOR
 
2.8
 
$
3,021,000

 
Other liabilities
 
$
—

 
$
(7,156
)
Derivatives designated as fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Receive-fixed interest rate swaps
 Variability of fair value of fixed rate borrowings
 
 3-Month LIBOR
 
1.55%
 
1.1
 
250,000

 
Other liabilities
 
—

 
—

Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed interest rate swaps
 
 
3.69%
 
Indexed to 1-month LIBOR
 
5.9
 
1,488,928

 
Other assets / Other liabilities
 
—

 
(44,857
)
Pay-variable interest rate swaps
 
 
Indexed to 1-month LIBOR
 
3.69%
 
5.9
 
1,488,928

 
Other assets
 
145,802

 
—

Interest rate caps purchased, indexed to 1-month LIBOR
 
 
 
 
3.71%
 
0.9
 
25,989

 
Other assets
 
—

 
—

Interest rate caps sold, indexed to 1-month LIBOR
 
 
3.71%
 
 
 
0.9
 
25,989

 
Other liabilities
 
—

 
—

 
 
 
 
 
 
 
 
 
$
6,300,834

 
 
 
$
145,802

 
$
(52,013
)

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


 
December 31, 2019
 
 
 
Weighted
Average Pay Rate
 
Weighted
Average Receive Rate
 
Weighted
Average
Remaining
Life in Years
 
 
 
 
 
 
 
 
 
 
 
 
Notional Amount
 
Balance Sheet Location
 
Fair Value
 
Hedged Item
 
 
 
 
 
 
Asset
 
Liability
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 

 
 
 
 

 
 

Pay-fixed interest rate swaps
Variability of interest cash flows on variable rate borrowings
 
2.37%
 
 3-Month LIBOR
 
3.2
 
$
3,131,000

 
Other liabilities
 
$
—

 
$
(1,607
)
Derivatives not designated as hedges:
 
 

 

 

 


 
 
 


 
 
Receive-fixed interest rate swaps
Variability of interest cash flows on fixed rate borrowings
 
 3-Month LIBOR
 
1.55%
 
1.6
 
250,000

 
Other liabilities
 
—

 
—

Derivatives not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed interest rate swaps
 
 
3.72%
 
Indexed to 1-month LIBOR
 
6.4
 
1,460,355

 
Other assets / Other liabilities
 
876

 
(15,307
)
Pay-variable interest rate swaps
 
 
Indexed to 1-month LIBOR
 
3.72%
 
6.4
 
1,460,355

 
Other assets / Other liabilities
 
42,810

 
(2,115
)
Interest rate caps purchased, indexed to 1-month LIBOR
 
 

 
3.30%
 
0.6
 
61,004

 
Other assets
 
—

 
—

Interest rate caps sold, indexed to 1-month LIBOR
 
 
3.30%
 
 
 
0.6
 
61,004

 
Other liabilities
 
—

 
—

 
 
 
 
 
 
 
 
 
$
6,423,718

 
 
 
$
43,686

 
$
(19,029
)

The following table provides information about the amount of gain (loss) related to derivatives designated as cash flow hedges reclassified from AOCI into interest expense for the periods indicated (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Location of Gain (Loss) Reclassified from AOCI into Income
 
2020
 
2019
 
2020
 
2019
 
Interest rate contracts
$
(10,009
)
 
$
1,688

 
$
(14,565
)
 
$
4,411

 
Interest expense on borrowings

During the three and six months ended June 30, 2020 and 2019, no derivative positions designated as cash flow hedges were discontinued and none of the gains and losses reported in AOCI were reclassified into earnings as a result of the discontinuance of cash flow hedges or because of the early extinguishment of debt. As of June 30, 2020, the amount of net loss expected to be reclassified from AOCI into earnings during the next twelve months was $60.7 million.
The following table provides information about the amount of gain (loss) related to derivatives designated as fair value hedges recognized in earnings for the periods indicated (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
Location of Gain (Loss) in Consolidated Statements of Income
 
2020
 
2019
 
2020
 
2019
 
Fair value adjustment on derivatives
$
8

 
$
—

 
$
4,028

 
$
—

 
Interest expense on borrowings
Fair value adjustment on hedged items
(164
)
 
—

 
(4,072
)
 
—

 
Interest expense on borrowings
Gain recognized on fair value hedges (ineffective portion)
$
(156
)
 
$
—

 
$
(44
)
 
$
—

 
 

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


The following table provides information about the hedged items related to derivatives designated as fair value hedges at the dates indicated (in thousands):
 
June 30, 2020
 
December 31, 2019
 
Location in Consolidated Balance Sheets
Contractual balance outstanding
of hedged item
$
250,000

 
$
250,000

 
FHLB and PPPLF borrowings
Cumulative fair value hedging adjustments
$
3,573

 
$
(499
)
 
FHLB and PPPLF borrowings

Some of the Company’s ISDA master agreements with financial institution counterparties contain provisions that permit either counterparty to terminate the agreements and require settlement in the event that regulatory capital ratios fall below certain designated thresholds, upon the initiation of other defined regulatory actions or upon suspension or withdrawal of the Bank’s credit rating. Currently, there are no circumstances that would trigger these provisions of the agreements.
The Company does not offset assets and liabilities under master netting agreements for financial reporting purposes. Information on interest rate swaps subject to these agreements is as follows at the dates indicated (dollars in thousands):
 
June 30, 2020
 
 

Gross Amounts Offset in Balance
Sheet

Net Amounts Presented in
Balance Sheet

Gross Amounts Not Offset in
Balance Sheet

 
 
Gross Amounts
Recognized



Derivative
Instruments

Collateral
Pledged

Net Amount
Derivative assets
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Derivative liabilities
(52,013
)
 
—

 
(52,013
)
 
—

 
51,887

 
(126
)
 
$
(52,013
)
 
$
—

 
$
(52,013
)
 
$
—

 
$
51,887

 
$
(126
)
 
December 31, 2019
 
 
 
Gross Amounts Offset in Balance
Sheet
 
Net Amounts Presented in
Balance Sheet
 
Gross Amounts Not Offset in
Balance Sheet
 
 
 
Gross Amounts
Recognized
 
 
 
Derivative
Instruments
 
Collateral
Pledged
 
Net Amount
Derivative assets
$
876

 
$
—

 
$
876

 
$
(876
)
 
$
—

 
$
—

Derivative liabilities
(16,914
)
 
—

 
(16,914
)
 
876

 
16,038

 
—

 
$
(16,038
)
 
$
—

 
$
(16,038
)
 
$
—

 
$
16,038

 
$
—

The difference between the amounts reported for interest rate swaps subject to master netting agreements and the total fair value of interest rate contract derivative financial instruments reported in the consolidated balance sheets is related to interest rate derivative contracts not subject to master netting agreements.
At June 30, 2020, the Company had pledged net financial collateral of $56.0 million as collateral for interest rate swaps in a liability position that are not centrally cleared. The amount of collateral required to be posted varies based on the settlement value of outstanding swaps and in some cases may include initial margin requirements.

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Note 8    Stockholders’ Equity
Accumulated Other Comprehensive Income
Changes in other comprehensive income are summarized as follows for the periods indicated (in thousands):
 
Three Months Ended June 30,
 
2020
 
2019
 
Before Tax
 
Tax Effect
 
Net of Tax
 
Before Tax
 
Tax Effect
 
Net of Tax
Unrealized gains (losses) on investment securities available for sale:
 

 
 

 
 

 
 
 
 
 
 
Net unrealized holding gain arising during the period
$
252,893

 
$
(64,488
)
 
$
188,405

 
$
31,736

 
$
(8,410
)
 
$
23,326

Amounts reclassified to gain on investment securities available for sale, net
(5,723
)
 
1,459

 
(4,264
)
 
(3,914
)
 
1,037

 
(2,877
)
Net change in unrealized gains (losses) on investment securities available for sale
247,170

 
(63,029
)
 
184,141

 
27,822

 
(7,373
)
 
20,449

Unrealized losses on derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding loss arising during the period
(12,288
)
 
1,218

 
(11,070
)
 
(50,637
)
 
13,419

 
(37,218
)
Amounts reclassified to interest expense on borrowings
10,009

 
(2,507
)
 
7,502

 
(1,688
)
 
447

 
(1,241
)
Net change in unrealized losses on derivative instruments
(2,279
)
 
(1,289
)
 
(3,568
)
 
(52,325
)
 
13,866

 
(38,459
)
Other comprehensive income (loss)
$
244,891

 
$
(64,318
)
 
$
180,573

 
$
(24,503
)
 
$
6,493

 
$
(18,010
)
 
Six Months Ended June 30,
 
2020
 
2019
 
Before Tax
 
Tax Effect
 
Net of Tax
 
Before Tax
 
Tax Effect
 
Net of Tax
Unrealized gains (losses) on investment securities available for sale:
 

 
 

 
 

 
 
 
 
 
 
Net unrealized holding gain (loss) arising during the period
$
(33,743
)
 
$
8,988

 
$
(24,755
)
 
$
61,147

 
$
(16,204
)
 
$
44,943

Amounts reclassified to gain on investment securities available for sale, net
(7,253
)
 
1,849

 
(5,404
)
 
(8,231
)
 
2,181

 
(6,050
)
Net change in unrealized gains (losses) on investment securities available for sale
(40,996
)
 
10,837

 
(30,159
)
 
52,916

 
(14,023
)
 
38,893

Unrealized losses on derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized holding loss arising during the period
(122,239
)
 
30,355

 
(91,884
)
 
(78,766
)
 
20,873

 
(57,893
)
Amounts reclassified to interest expense on borrowings
14,565

 
(3,714
)
 
10,851

 
(4,411
)
 
1,169

 
(3,242
)
Net change in unrealized losses on derivative instruments
(107,674
)
 
26,641

 
(81,033
)
 
(83,177
)
 
22,042

 
(61,135
)
Other comprehensive loss
$
(148,670
)
 
$
37,478

 
$
(111,192
)
 
$
(30,261
)
 
$
8,019

 
$
(22,242
)


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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


The categories of AOCI and changes therein are presented below for the periods indicated (in thousands):
 
Unrealized Gain (Loss) on
Investment Securities
Available for Sale
 
Unrealized Gain (Loss)
on Derivative
Instruments
 
Total
Balance at December 31, 2019
$
28,185

 
(60,012
)
 
$
(31,827
)
Other comprehensive loss
(30,159
)
 
(81,033
)
 
(111,192
)
Balance at June 30, 2020
$
(1,974
)
 
$
(141,045
)
 
$
(143,019
)
 
 
 
 
 
 
Balance at December 31, 2018
$
4,194

 
$
679

 
$
4,873

Other comprehensive loss
38,893

 
(61,135
)
 
(22,242
)
Balance at June 30, 2019
$
43,087

 
$
(60,456
)
 
$
(17,369
)
 
Note 9    Equity Based and Other Compensation Plans
Share Awards
Unvested share awards
A summary of activity related to unvested share awards follows for the periods indicated:
 
Number of Share Awards
 
Weighted Average Grant Date Fair Value
Unvested share awards outstanding, December 31, 2019
1,050,455

 
$
38.24

Granted
644,300

 
29.73

Vested
(455,260
)
 
39.15

Canceled or forfeited
(33,137
)
 
36.21

Unvested share awards outstanding, June 30, 2020
1,206,358

 
$
33.41

 
 
 
 
Unvested share awards outstanding, December 31, 2018
1,186,238

 
$
38.86

Granted
582,353

 
36.57

Vested
(533,125
)
 
37.67

Canceled or forfeited
(115,825
)
 
39.11

Unvested share awards outstanding, June 30, 2019
1,119,641

 
$
38.21

Unvested share awards are generally valued at the closing price of the Company's common stock on the date of grant. All shares granted prior to 2019 vest in equal annual installments over a period of three years from the date of grant. All shares granted in 2019 and 2020 to Company employees vest in equal annual installments over a period of four years from the date of grant. Shares granted to the Company's Board of Directors vest over a period of one year.

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


The following table summarizes the closing price of the Company's stock on the date of grant for shares granted and the aggregate grant date fair value of shares vesting for the periods indicated (in thousands, except per share data):
 
Six Months Ended June 30,
 
2020
 
2019
Closing price on date of grant (1)
$13.99 - $30.90

 
$34.23 - $36.65

Aggregate grant date fair value of shares vesting
$
17,824

 
$
20,083

 
 
(1)
During the six months ended June 30, 2020, the Company granted 599,766 and 44,534 shares with a closing price on date of grant of $30.90 and $13.99, respectively.
The total unrecognized compensation cost of $29.5 million for all unvested share awards outstanding at June 30, 2020 will be recognized over a weighted average remaining period of 2.75 years.
Executive share-based awards
Certain of the Company's executives are eligible to receive annual awards of RSUs and PSUs (collectively, the "share units"). Annual awards of RSUs represent a fixed number of shares and vest on December 31st in equal tranches over three years for grants prior to 2019, and over four years for awards issued in 2019 and 2020. PSUs are initially granted based on a target value. The number of PSUs that ultimately vest at the end of the performance measurement period will be based on the achievement of performance criteria pre-established by the Compensation Committee of the Board of Directors. Upon vesting, the share units will be converted to common stock on a one-for-one basis, or may be settled in cash at the Company's option. The share units will accumulate dividends declared on the Company's common stock from the date of grant to be paid subsequent to vesting.
As a result of the majority of previous settlements being in cash, all RSUs and PSUs have been determined to be liability instruments and are remeasured at fair value each reporting period until the awards are settled. The RSUs are valued based on the closing price of the Company's common stock at the reporting date. The PSUs are valued based on the closing price of the Company's common stock at the reporting date net of a discount related to any applicable market conditions, considering the probability of meeting the defined performance conditions. Compensation cost related to PSUs is recognized during the performance period based on the probable outcome of the respective performance conditions.
A summary of activity related to executive share-based awards for the period indicated follows:
 
RSU
 
PSU
Unvested executive share-based awards outstanding, December 31, 2019
112,116

 
125,088

Granted
106,731

 
106,731

Unvested executive share-based awards outstanding, June 30, 2020
218,847

 
231,819

 
 
 
 
Unvested executive share-based awards outstanding, December 31, 2018
90,612

 
99,874

Granted
73,062

 
73,062

Unvested executive share-based awards outstanding, June 30, 2019
163,674

 
172,936

The total liability for the share units was $2.9 million at June 30, 2020. The total unrecognized compensation cost of $6.2 million for these share units at June 30, 2020 will be recognized over a weighted average remaining period of 2.45 years.
Incentive awards
The Company's annual incentive compensation arrangements for employees other than those eligible for the executive share-based awards discussed above provide for settlement through a combination of cash payments and unvested share awards following the end of the annual performance period. The dollar value of share awards to be granted is based on the achievement of performance criteria established in the incentive arrangements. The number of shares of common stock to be awarded is variable based on the closing price of the Company's stock on the date of grant; therefore, these awards are initially classified as

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


liability instruments, with compensation cost recognized from the beginning of the performance period. Awards related to performance periods prior to 2019 vest over three years and awards related to the 2019 and 2020 performance periods vest in equal installments over a period of four years from the date of grant. These awards are included in the summary of activity related to unvested share awards above. The total liability and unrecognized compensation cost for incentive share awards for the 2020 performance period was not material. The accrued liability and unrecognized compensation cost are based on management's current estimate of the likely outcome of the performance criteria established in the incentive arrangements and may differ from actual results.
The 644,300 unvested share awards granted during the six months ended June 30, 2020, as discussed above, included 114,936 unvested share awards granted under the Company's annual incentive compensation arrangements based on the achievement of established performance criteria for the year ended December 31, 2019.
Option Awards
A summary of activity related to stock option awards for the six months ended June 30, 2020 and 2019 follows:
 
Number of
Option
Awards
 
Weighted
Average
Exercise Price
Option awards outstanding, December 31, 2019
737,753

 
$
26.64

Exercised
(60,000
)
 
25.48

Option awards outstanding and exercisable, June 30, 2020
677,753

 
$
26.74

 
 
 
 
Option awards outstanding, December 31, 2018
964,840

 
$
26.53

Exercised
(3,910
)
 
11.14

Canceled or forfeited
(1,960
)
 
63.74

Option awards outstanding, June 30, 2019
958,970

 
$
26.52

The intrinsic value of options exercised and related tax benefits was immaterial for the six months ended June 30, 2020 and 2019.
Note 10    Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis
Following is a description of the methodologies used to estimate the fair values of assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which those measurements are typically classified.
Investment securities available for sale and marketable equity securities—Fair value measurements are based on quoted prices in active markets when available; these measurements are classified within level 1 of the fair value hierarchy. These securities typically include U.S. Treasury securities and certain preferred stocks. If quoted prices in active markets are not available, fair values are estimated using quoted prices of securities with similar characteristics, quoted prices of identical securities in less active markets, discounted cash flow techniques, or matrix pricing models. These securities are generally classified within level 2 of the fair value hierarchy and include U.S. Government agency securities, U.S. Government agency and sponsored enterprise MBS, preferred stock investments for which level 1 valuations are not available, non-mortgage asset-backed securities, single family rental real estate-backed securities, certain private label residential MBS and CMOs, private label commercial MBS, collateralized loan obligations and state and municipal obligations. Pricing of these securities is generally primarily spread driven. Observable inputs that may impact the valuation of these securities include benchmark yield curves, credit spreads, reported trades, dealer quotes, bids, issuer spreads, current rating, historical constant prepayment rates, historical voluntary prepayment rates, structural and waterfall features of individual securities, published collateral data, and for certain securities, historical constant default rates and default severities.
The Company uses third-party pricing services in determining fair value measurements for investment securities. To obtain an understanding of the methodologies and assumptions used, management reviews written documentation provided by the pricing services, conducts interviews with valuation desk personnel and reviews model results and detailed assumptions used to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


value selected securities as considered necessary. Management has established a robust price challenge process that includes a review by the treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from expectations is challenged. If considered necessary to resolve any discrepancies, a price will be obtained from an additional independent valuation source. The Company does not typically adjust the prices provided, other than through this established challenge process. The results of price challenges are subject to review by executive management. The Company has also established a quarterly process whereby prices provided by its primary pricing service for a sample of securities are validated. Any price discrepancies are resolved based on careful consideration of the assumptions and inputs employed by each of the pricing sources.
Servicing rights—Commercial servicing rights are valued using a discounted cash flow methodology incorporating contractually specified servicing fees and market based assumptions about prepayments, discount rates, default rates and costs of servicing. Prepayment and default assumptions are based on historical industry data for loans with similar characteristics. Assumptions about costs of servicing are based on market convention. Discount rates are based on rates of return implied by observed trades of underlying loans in the secondary market. These instruments are classified within level 2 of the fair value hierarchy.
Derivative financial instruments—Fair values of interest rate swaps are determined using widely accepted discounted cash flow modeling techniques. These discounted cash flow models use projections of future cash payments and receipts that are discounted at mid-market rates. Observable inputs that may impact the valuation of these instruments include LIBOR swap rates and LIBOR forward yield curves. These fair value measurements are generally classified within level 2 of the fair value hierarchy.
The following tables present assets and liabilities measured at fair value on a recurring basis at the dates indicated (in thousands):
 
June 30, 2020
 
Level 1
 
Level 2
 
Total
Investment securities available for sale:
 

 
 

 
 

U.S. Treasury securities
$
77,180

 
$
—

 
$
77,180

U.S. Government agency and sponsored enterprise residential MBS
—

 
2,379,840

 
2,379,840

U.S. Government agency and sponsored enterprise commercial MBS
—

 
464,277

 
464,277

Private label residential MBS and CMOs
—

 
1,116,086

 
1,116,086

Private label commercial MBS
—

 
2,043,620

 
2,043,620

Single family rental real estate-backed securities
—

 
618,207

 
618,207

Collateralized loan obligations
—

 
1,128,753

 
1,128,753

Non-mortgage asset-backed securities
—

 
261,531

 
261,531

State and municipal obligations
—

 
259,495

 
259,495

SBA securities
—

 
245,942

 
245,942

Marketable equity securities
88,697

 
—

 
88,697

Servicing rights
—

 
7,291

 
7,291

Derivative assets
—

 
145,802

 
145,802

Total assets at fair value
$
165,877

 
$
8,670,844

 
$
8,836,721

Derivative liabilities
$
—

 
$
(52,013
)
 
$
(52,013
)
Total liabilities at fair value
$
—

 
$
(52,013
)
 
$
(52,013
)

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


 
December 31, 2019
 
Level 1
 
Level 2
 
Total
Investment securities available for sale:
 

 
 

 
 

U.S. Treasury securities
$
70,325

 
$
—

 
$
70,325

U.S. Government agency and sponsored enterprise residential MBS
—

 
2,022,175

 
2,022,175

U.S. Government agency and sponsored enterprise commercial MBS
—

 
370,976

 
370,976

Private label residential MBS and CMOs
—

 
1,012,177

 
1,012,177

Private label commercial MBS
—

 
1,724,684

 
1,724,684

Single family rental real estate-backed securities
—

 
470,025

 
470,025

Collateralized loan obligations
—

 
1,197,366

 
1,197,366

Non-mortgage asset-backed securities
—

 
194,904

 
194,904

State and municipal obligations
—

 
273,302

 
273,302

SBA securities
—

 
362,731

 
362,731

Marketable equity securities
60,572

 
—

 
60,572

Servicing rights
—

 
7,977

 
7,977

Derivative assets
—

 
43,686

 
43,686

Total assets at fair value
$
130,897

 
$
7,680,003

 
$
7,810,900

Derivative liabilities
$
—

 
$
(19,029
)
 
$
(19,029
)
Total liabilities at fair value
$
—

 
$
(19,029
)
 
$
(19,029
)

Assets and liabilities measured at fair value on a non-recurring basis
Following is a description of the methodologies used to estimate the fair values of assets and liabilities that may be measured at fair value on a non-recurring basis, and the level within the fair value hierarchy in which those measurements are typically classified. 
Impaired loans, OREO and other repossessed assets—The carrying amount of collateral dependent impaired loans is typically based on the fair value of the underlying collateral, which may be real estate or other business assets, less estimated costs to sell when repayment is expected to come from the sale of the collateral. The carrying value of OREO is initially measured based on the fair value of the real estate acquired in foreclosure and subsequently adjusted to the lower of cost or estimated fair value, less estimated cost to sell. Fair values of real estate collateral and OREO are typically based on third-party real estate appraisals which utilize market and income approaches to valuation incorporating both observable and unobservable inputs. When current appraisals are not available, the Company may use brokers’ price opinions, home price indices or other available information about changes in real estate market conditions to adjust the latest appraised value available. These adjustments to appraised values may be subjective and involve significant management judgment. The fair value of repossessed assets or collateral consisting of other business assets may be based on third-party appraisals or internal analyses that use market approaches to valuation incorporating a combination of observable and unobservable inputs.
Fair value measurements related to collateral dependent impaired loans, OREO and other repossessed assets are generally classified within level 3 of the fair value hierarchy.
Operating lease equipment—Fair values of impaired operating lease equipment are typically based upon discounted
cash flow analyses, considering expected lease rates and estimated end of life residual values, typically obtained from independent appraisals. These fair value measurements are classified within level 3 of the fair value hierarchy.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


The following tables present the carrying value of assets for which non-recurring changes in fair value have been recorded for the periods indicated (in thousands):
 
June 30, 2020
 
Losses from Fair Value Changes
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Three Months Ended  
 June 30, 2020
 
Six Months Ended June 30, 2020
OREO and repossessed assets
$
—

 
$
—

 
$
4,401

 
$
4,401

 
$
(243
)
 
$
(360
)
Impaired loans
$
—

 
$
—

 
$
101,353

 
$
101,353

 
$
(23,545
)
 
$
(42,221
)
Operating lease equipment
$
—

 
$
—

 
$
839

 
$
839

 
$
—

 
$
(691
)
 
June 30, 2019
 
Losses from Fair Value Changes
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Three Months Ended  
 June 30, 2019
 
Six Months Ended  
 June 30, 2019
OREO and repossessed assets
$
—

 
$
—

 
$
1,557

 
$
1,557

 
$
(203
)
 
$
(221
)
Impaired loans
$
—

 
$
—

 
$
15,385

 
$
15,385

 
$
(529
)
 
$
(279
)
The following table presents the carrying value and fair value of financial instruments and the level within the fair value hierarchy in which those measurements are classified at the dates indicated (dollars in thousands): 
 
 
 
June 30, 2020
 
December 31, 2019
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
1
 
$
402,231

 
$
402,231

 
$
214,673

 
$
214,673

Investment securities
1/2
 
$
8,693,628

 
$
8,694,622

 
$
7,769,237

 
$
7,769,949

Non-marketable equity securities
2
 
$
233,051

 
$
233,051

 
$
253,664

 
$
253,664

Loans held for sale
2
 
$
2,623

 
$
2,802

 
$
37,926

 
$
39,731

Loans, net
3
 
$
23,568,766

 
$
24,024,615

 
$
23,046,317

 
$
23,350,684

Derivative assets
2
 
$
145,802

 
$
145,802

 
$
43,686

 
$
43,686

Liabilities:
 
 
 
 
 
 
 
 
 
Demand, savings and money market deposits
2
 
$
19,339,621

 
$
19,339,621

 
$
17,047,344

 
$
17,047,344

Time deposits
2
 
$
6,730,803

 
$
6,762,832

 
$
7,347,247

 
$
7,377,301

Federal funds purchased
2
 
$
100,000

 
$
100,000

 
$
100,000

 
$
100,000

FHLB and PPPLF borrowings
2
 
$
4,650,599

 
$
4,648,739

 
$
4,480,501

 
$
4,500,969

Notes and other borrowings
2
 
$
722,332

 
$
779,966

 
$
429,338

 
$
473,327

Derivative liabilities
2
 
$
52,013

 
$
52,013

 
$
19,029

 
$
19,029


Note 11     Commitments and Contingencies 
The Company issues off-balance sheet financial instruments to meet the financing needs of its customers. These financial instruments include commitments to fund loans, unfunded commitments under existing lines of credit, and commercial and standby letters of credit. These commitments expose the Company to varying degrees of credit and market risk which are essentially the same as those involved in extending loans to customers, and are subject to the same credit policies used in underwriting loans. Collateral may be obtained based on the Company’s credit evaluation of the counterparty. The Company’s maximum exposure to credit loss is represented by the contractual amount of these commitments.

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
June 30, 2020


Commitments to fund loans
These are agreements to lend funds to customers as long as there is no violation of any condition established in the contract. Commitments to fund loans generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of these commitments are expected to expire without being funded and, therefore, the total commitment amounts do not necessarily represent future liquidity requirements. 
Unfunded commitments under lines of credit
Unfunded commitments under lines of credit include commercial, commercial real estate, home equity and consumer lines of credit to existing customers, for many of which additional extensions of credit are subject to borrowing base requirements. Some of these commitments may mature without being fully funded. 
Commercial and standby letters of credit
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support trade transactions or guarantee arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. 
Total lending related commitments outstanding at June 30, 2020 were as follows (in thousands):
Commitments to fund loans
$
770,860

Commitments to purchase loans
733,451

Unfunded commitments under lines of credit
3,145,104

Commercial and standby letters of credit
88,438

 
$
4,737,853


Legal Proceedings
The Company is involved as plaintiff or defendant in various legal actions arising in the normal course of business. In the opinion of management, based upon advice of legal counsel, the likelihood is remote that the impact of these proceedings, either individually or in the aggregate, would be material to the Company’s consolidated financial position, results of operations or cash flows.
Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations 
The following discussion and analysis is intended to focus on significant matters impacting and changes in the financial condition and results of operations of the Company during the six months ended June 30, 2020 and should be read in conjunction with the consolidated financial statements and notes hereto included in this Quarterly Report on Form 10-Q and BKU's 2019 Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report on Form 10-K”).
Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the Company’s current views with respect to, among other things, future events and financial performance. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” "future" and similar expressions identify forward-looking statements. These forward-looking statements are based on the historical performance of the Company or on the Company’s current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations so contemplated will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to the Company’s operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by the COVID-19 pandemic. If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, the Company’s actual results may vary materially from those indicated in these statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, the risk factors described in Part I, Item 1A of the 2019 Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q or Current Report on Form

41





8-K. The Company does not undertake any obligation to publicly update or review any forward looking statement, whether as a result of new information, future developments or otherwise.
Impact of the COVID-19 Pandemic and Our Response
In March 2020, the World Health Organization declared COVID-19 as a global pandemic. The initial response to the pandemic by governmental authorities included implementation of numerous measures attempting to contain the spread and impact of COVID-19 such as travel bans and restrictions, quarantines, shelter in place orders, and limitations on business activities, including in major markets in which the Company and its clients are located or do business. While many of these restrictions are beginning to ease and economic activity has started to resume, the COVID-19 pandemic and these necessary precautionary measures have negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets and led to sharp declines in GDP and increases in unemployment levels. The response of the U.S. Government to the crisis was swift and broad-based. The government has taken a series of actions to support individuals, households and businesses that have been negatively impacted by the economic disruption caused by the pandemic including enactment of the CARES Act. The Federal Reserve also enacted a suite of facilities using its emergency lending powers designed to support liquidity and the flow of credit. Banking regulators reduced reserve requirements and enacted rules designed to support financial institutions in their efforts to work with customers during this time. The situation continues to evolve, and there remains a high level of uncertainty about the future trajectory of the virus and its impact on the economy.
A summary of the effects the COVID-19 pandemic has had on our Company and of our expectations about how our Company may be impacted in the future follows. These matters are discussed in further detail throughout this Form 10-Q.
Our results of operations and financial condition at and for the three and six months ended June 30, 2020 were impacted by the COVID-19 pandemic.
•
Deteriorating economic conditions and a worsening forward looking economic forecast led to a higher provision for credit losses and ACL during the six months ended June 30, 2020. There continues to be significant uncertainty as to the impact of the COVID-19 crisis on future credit loss expense and future levels of the ACL, but they may be more volatile and may change materially from current levels.
•
Levels of criticized and classified assets increased at June 30, 2020, largely as a result of the COVID-19 pandemic. Additionally, a significant number of borrowers have requested relief in the form of temporary payment deferrals. Beginning late in the first quarter of 2020 and continuing through the second quarter, risk ratings were re-evaluated for a substantial portion of the commercial portfolio, with a particular focus on portfolio segments we identified for enhanced monitoring and loans for which we granted temporary payment deferrals in light of the COVID-19 pandemic. At June 30, 2020, we had not experienced an increase in non-performing assets as a result of the pandemic. It is difficult to predict when, if, or to what extent levels of non-performing assets and delinquencies will increase as a result of the pandemic, although they may do so. Similarly, charge-offs may increase. These impacts may manifest in a delayed fashion due to the impact of temporary payment deferrals and various forms of government assistance that our borrowers may receive.
•
The level of loan origination activity, outside of our participation in the PPP, was lower in the second quarter as a result of the pandemic.
Our share price has been negatively impacted by the COVID-19 crisis. We temporarily suspended our share repurchase program, utilizing our capital to provide support to customers through lending and other services.
We raised $300 million in subordinated debt to strengthen our capital position during this challenging economic environment.
Although we took significant measures to prepare for possible disruptions in liquidity, we have not experienced such disruptions to date and continue to have sufficient levels of available liquidity.
The pandemic has impacted our operations. Currently, the substantial majority of our non-branch employees are working remotely. We did not experience any significant operational difficulties, technology failures or outages, or customer service disruptions in our transition to a remote work environment. 76% of our branches remain open to serve customers via drive-through or lobby appointments, operating with reduced hours. Generally, branch locations without drive-through facilities are temporarily closed. We have focused on insuring that our technology systems and internal controls continue to operate effectively in a remote work environment. We have put mechanisms in place to allow us to evaluate all significant modifications to processes and procedures to insure continued effectiveness of our controls. We have not identified any instances in which our control environment has failed to operate effectively.
Customer demand for our products and services, particularly lending products, may be impacted by the impact of the pandemic on their businesses or by social distancing measures. Potential borrowers impacted by the pandemic may no longer meet our underwriting criteria. We expect loan production in many portfolio segments to be muted in the near term as a result of the pandemic.

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In response to the pandemic, we have prioritized risk management and implemented a number of measures to support our customers and employees. Specifically, we have:
•
Activated and continue to operate under our business continuity plan under the leadership of executive management.
•
Enhanced liquidity monitoring and management protocols.
•
Maintained a regular cadence of Board of Directors update calls.
•
Enhanced the level and frequency of pro-active outreach to borrowers and our portfolio management activities.
•
Segregated certain segments of the loan portfolio for enhanced monitoring.
•
Enhanced our workout and recovery staffing and processes.
•
Enhanced our stress testing framework. Results of internal stress testing indicate that we have sufficient capital to withstand an increase in credit losses materially beyond levels currently expected, and to withstand a severe downturn.
•
Proactively reached out to our critical third party service providers and evaluated their ability to continue to provide support in the current environment. We have experienced no significant service disruptions.
•
Expanded certain employee benefits and launched a number of programs to keep our employees healthy and engaged.
•
Enhanced personal protective measures for employees working at our corporate locations and begun planning for the eventual return to office of a larger percentage of our workforce, when conditions permit. We have not yet set a definite date to begin a phased return to office.
•
Supported our clients through participating in the Small Business Administration’s PPP, and granting payment deferrals and fee waivers on a case-by-case basis.
•
Temporarily halted new residential foreclosure actions.
We remain confident in our long-term underlying strength and stability, and our ability to navigate these challenging conditions.
Overview
Quarterly Highlights
In evaluating our financial performance, we consider the level of and trends in net interest income, the net interest margin, the cost of deposits, levels and composition of non-interest income and non-interest expense, performance ratios such as the return on average equity and return on average assets and asset quality ratios, including the ratio of non-performing loans to total loans, non-performing assets to total assets, trends in criticized and classified assets and portfolio delinquency and charge-off trends. We consider growth in earning assets and deposits, trends in funding mix and cost of funds. We analyze these ratios and trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable financial institutions.
Quarterly highlights include:
•
Net income for the three months ended June 30, 2020 was $76.5 million, or $0.80 per diluted share, compared to $81.5 million, or $0.81 per diluted share, for the three months ended June 30, 2019. For the six months ended June 30, 2020, net income was $45.6 million, or $0.47 per diluted share, compared to $147.4 million, or $1.45 per diluted share, for the six months ended June 30, 2019. Results for the six months ended June 30, 2020 were negatively impacted by the application of the CECL accounting methodology, including the expected impact of COVID-19 on the provision for credit losses.
•
PPNR improved by $37.3 million, or 44%, to $122.3 million for the three months ended June 30, 2020 compared to $85.0 million for the immediately preceding three months ended March 31, 2020 and by $16.2 million, compared to $106.1 million for the three months ended June 30, 2019. For the six months ended June 30, 2020 and 2019, PPNR was $207.3 million and $206.6 million, respectively.
•
The net interest margin, calculated on a tax-equivalent basis, increased to 2.39% for the three months ended June 30, 2020 from 2.35% for the immediately preceding quarter. The net interest margin was 2.52% for the three months ended June 30, 2019. The yield on interest earnings assets declined by 0.44% while the cost of interest bearing liabilities declined by 0.60% for the three months ended June 30, 2020 compared to the three months ended March 31, 2020.

43





•
The average cost of total deposits declined to 0.80% for the quarter ended June 30, 2020 compared to 1.70% for the quarter ended June 30, 2019. On a spot basis, the APY on total deposits declined to 0.65% at June 30, 2020.
•
The provision for credit losses totaled $25.4 million for the three months ended June 30, 2020. The provision for credit losses was $150.8 million for the six months ended June 30, 2020. For the three and six months ended June 30, 2019, the Company recorded a provision for (recovery of) loan losses, under the incurred loss model, of $(2.7) million and $7.5 million, respectively.
•
Non-interest bearing demand deposits grew by $1.3 billion, or 28%, for the three months ended June 30, 2020, to 23% of total deposits compared to 18% of total deposits at March 31, 2020. Total deposits increased by $1.1 billion during the three months ended June 30, 2020. Growth in non-interest bearing demand deposits for the three months ended June 30, 2020 was positively impacted by proceeds from PPP loans.
•
Loans and leases, including operating lease equipment, grew by $656 million for the three months ended June 30, 2020. Loan and lease growth for the three months ended June 30, 2020 included growth of $827 million in PPP loans and $308 million in mortgage warehouse outstandings, partially offset by expected declines in certain other portfolio segments. We funded over 3,500 PPP loans totaling $876 million during the three months ended June 30, 2020.
•
The net unrealized loss on investment securities available for sale improved to $2.6 million at June 30, 2020 from $249.8 million at March 31, 2020, in response to both declines in market rates and tightening spreads.
•
Stockholders' equity increased by $238.9 million during the three months ended June 30, 2020 to $2.8 billion. The increase was driven by the recovery of $180.6 million in accumulated other comprehensive income related to the reduction in unrealized losses on investment securities available for sale and by the retention of earnings. At June 30, 2020, book value per common share and tangible book value per common share were $29.81 and $28.97, respectively.
•
During the three months ended June 30, 2020, the Company completed an underwritten public offering of $300 million aggregate principal amount of its 5.125% subordinated notes, augmenting Tier 2 capital.
Results of Operations
Net Interest Income
Net interest income is the difference between interest earned on interest earning assets and interest incurred on interest bearing liabilities and is the primary driver of core earnings. Net interest income is impacted by the mix of interest earning assets and interest bearing liabilities, the ratio of interest earning assets to total assets and of interest bearing liabilities to total funding sources, movements in market interest rates, the shape of the yield curve, levels of non-performing assets and pricing pressure from competitors.
The mix of interest earning assets is influenced by loan demand, market and competitive conditions in our primary lending markets, by management's continual assessment of the rate of return and relative risk associated with various classes of earning assets and liquidity considerations. The mix of interest bearing liabilities is influenced by the Company's liquidity profile, management's assessment of the desire for lower cost funding sources weighed against relationships with customers and growth expectations, our ability to attract and retain core deposit relationships, competition for deposits in the Company's markets and the availability and pricing of other sources of funds.

44





The following tables present, 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 and restructured 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):
 
Three Months Ended June 30,
 
Three Months Ended March 31,
 
Three Months Ended June 30,
 
2020
 
2020
 
2019
 
Average
Balance
 
Interest (1)(2)
 
Yield/
Rate (1)(2)
 
Average
Balance
 
Interest (1)(2)
 
Yield/
Rate (1)(2)
 
Average
Balance
 
Interest (1)(2)
 
Yield/
Rate (1)(2)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

 
 

Loans
$
23,534,684

 
$
217,691

 
3.71
%
 
$
22,850,065

 
238,108

 
4.18
%
 
$
22,505,138

 
$
253,766

 
4.52
%
Investment securities (3)
8,325,217

 
51,684

 
2.48
%
 
8,107,649

 
56,951

 
2.81
%
 
8,187,518

 
73,867

 
3.61
%
Other interest earning assets
765,848

 
2,908

 
1.53
%
 
646,628

 
3,720

 
2.31
%
 
525,563

 
5,069

 
3.87
%
Total interest earning assets
32,625,749

 
272,283

 
3.35
%
 
31,604,342

 
298,779

 
3.79
%
 
31,218,219

 
332,702

 
4.27
%
Allowance for credit losses
(254,396
)
 
 
 
 
 
(138,842
)
 
 
 
 
 
(117,206
)
 
 
 
 
Non-interest earning assets
1,976,398

 
 
 
 
 
1,749,752

 
 
 
 
 
1,589,286

 
 
 
 
Total assets
$
34,347,751

 
 
 
 
 
$
33,215,252

 
 
 
 
 
$
32,690,299

 
 
 
 
Liabilities and Stockholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
2,448,545

 
4,722

 
0.78
%
 
$
2,173,628

 
6,959

 
1.29
%
 
$
1,773,912

 
6,225

 
1.41
%
Savings and money market deposits
10,450,310

 
17,447

 
0.67
%
 
10,412,202

 
37,756

 
1.46
%
 
10,924,580

 
52,191

 
1.92
%
Time deposits
7,096,097

 
28,018

 
1.59
%
 
7,510,070

 
38,107

 
2.04
%
 
6,944,862

 
41,571

 
2.40
%
Total interest bearing deposits
19,994,952

 
50,187

 
1.01
%
 
20,095,900

 
82,822

 
1.66
%
 
19,643,354

 
99,987

 
2.04
%
Short term borrowings
119,835

 
32

 
0.11
%
 
94,066

 
367

 
1.57
%
 
127,242

 
771

 
2.42
%
FHLB and PPPLF borrowings
4,961,376

 
21,054

 
1.71
%
 
4,414,830

 
25,084

 
2.29
%
 
5,028,418

 
30,263

 
2.41
%
Notes and other borrowings
493,278

 
6,168

 
5.00
%
 
429,099

 
5,290

 
4.93
%
 
405,726

 
5,325

 
5.25
%
Total interest bearing liabilities
25,569,441

 
77,441

 
1.22
%
 
25,033,895

 
113,563

 
1.82
%
 
25,204,740

 
136,346

 
2.17
%
Non-interest bearing demand deposits
5,313,009

 
 
 
 
 
4,368,553

 
 
 
 
 
3,932,716

 
 
 
 
Other non-interest bearing liabilities
820,439

 
 
 
 
 
749,100

 
 
 
 
 
601,703

 
 
 
 
Total liabilities
31,702,889

 
 
 
 
 
30,151,548

 
 
 
 
 
29,739,159

 
 
 
 
Stockholders' equity
2,644,862

 
 
 
 
 
3,063,704

 
 
 
 
 
2,951,140

 
 
 
 
Total liabilities and stockholders' equity
$
34,347,751

 
 
 
 
 
$
33,215,252

 
 
 
 
 
$
32,690,299

 
 
 
 
Net interest income
 
 
$
194,842

 
 
 
 
 
$
185,216

 
 
 
 
 
$
196,356

 
 
Interest rate spread
 
 
 
 
2.13
%
 
 
 
 
 
1.97
%
 
 
 
 
 
2.10
%
Net interest margin
 
 
 
 
2.39
%
 
 
 
 
 
2.35
%
 
 
 
 
 
2.52
%
 
 
(1)
On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $3.8 million and $4.4 million, and the tax-equivalent adjustment for tax-exempt investment securities was $0.8 million and $1.1 million for the three months ended June 30, 2020 and 2019, respectively.
(2)
Annualized.
(3)
At fair value except for securities held to maturity.

45





 
Six Months Ended June 30,
 
2020
 
2019
 
Average
Balance
 
Interest (1)(2)
 
Yield/
Rate (1)(2)
 
Average
Balance
 
Interest (1)(2)
 
Yield/
Rate (1)(2)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 

 
 

 
 

 
 

 
 

 
 

Loans
$
23,192,374

 
$
455,799

 
3.94
%
 
$
22,241,262

 
$
498,776

 
4.51
%
Investment securities (3)
8,216,433

 
108,635

 
2.64
%
 
8,353,116

 
151,474

 
3.63
%
Other interest earning assets
706,238

 
6,628

 
1.89
%
 
510,933

 
9,921

 
3.91
%
Total interest earning assets
32,115,045

 
571,062

 
3.57
%
 
31,105,311

 
660,171

 
4.26
%
Allowance for credit losses
(196,619
)
 
 
 
 
 
(114,157
)
 
 
 
 
Non-interest earning assets
1,863,074

 
 
 
 
 
1,596,565

 
 
 
 
Total assets
$
33,781,500

 
 
 
 
 
$
32,587,719

 
 
 
 
Liabilities and Stockholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
2,311,086

 
11,681

 
1.02
%
 
$
1,738,393

 
11,864

 
1.38
%
Savings and money market deposits
10,431,256

 
55,203

 
1.06
%
 
11,187,818

 
105,008

 
1.89
%
Time deposits
7,303,083

 
66,125

 
1.82
%
 
6,926,041

 
80,536

 
2.34
%
Total interest bearing deposits
20,045,425

 
133,009

 
1.33
%
 
19,852,252

 
197,408

 
2.01
%
Short term borrowings
106,951

 
399

 
0.75
%
 
132,282

 
1,596

 
2.41
%
FHLB and PPPLF borrowings
4,688,102

 
46,138

 
1.98
%
 
4,845,337

 
57,637

 
2.40
%
Notes and other borrowings
461,188

 
11,458

 
4.97
%
 
405,547

 
10,633

 
5.24
%
Total interest bearing liabilities
25,301,666

 
191,004

 
1.52
%
 
25,235,418

 
267,274

 
2.13
%
Non-interest bearing demand deposits
4,840,781

 
 
 
 
 
3,769,828

 
 
 
 
Other non-interest bearing liabilities
784,770

 
 
 
 
 
629,123

 
 
 
 
Total liabilities
30,927,217

 
 
 
 
 
29,634,369

 
 
 
 
Stockholders' equity
2,854,283

 
 
 
 
 
2,953,350

 
 
 
 
Total liabilities and stockholders' equity
$
33,781,500

 
 
 
 
 
$
32,587,719

 
 
 
 
Net interest income
 
 
$
380,058

 
 
 
 
 
$
392,897

 
 
Interest rate spread
 
 
 
 
2.05
%
 
 
 
 
 
2.13
%
Net interest margin
 
 
 
 
2.37
%
 
 
 
 
 
2.53
%
 
 
(1)
On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $7.5 million and $8.8 million, and the tax-equivalent adjustment for tax-exempt investment securities was $1.6 million and $2.3 million for the six months ended June 30, 2020 and 2019, respectively.
(2)
Annualized.
(3)
At fair value except for securities held to maturity.
Three months ended June 30, 2020 compared to the immediately preceding three months ended March 31, 2020
Net interest income, calculated on a tax-equivalent basis, was $194.8 million for the three months ended June 30, 2020 compared to $185.2 million for the three months ended March 31, 2020, an increase of $9.6 million, comprised of decreases in tax-equivalent interest income and interest expense of $26.5 million and $36.1 million, respectively. The decreases in both tax-equivalent interest income and interest expense resulted from decreases in market interest rates, partially offset by the impact of increases in average interest earnings assets and average interest bearing liabilities.
The net interest margin, calculated on a tax-equivalent basis, was 2.39% for the three months ended June 30, 2020, compared to 2.35% for the three months ended March 31, 2020. The interest rate spread increased to 2.13% for the quarter ended June 30, 2020 from 1.97% for the three months ended March 31, 2020 as declines in the cost of interest bearing liabilities outpaced declines in the yield on interest earning assets.

46





Offsetting factors contributing to the increase in the net interest margin for the three months ended June 30, 2020 compared to the three months ended March 31, 2020 included:
•
The most significant factor leading to the increase in the net interest margin for the quarter ended June 30, 2020 compared to the three months ended March 31, 2020 was the decline in the cost of deposits. The average rate on interest bearing deposits decreased to 1.01% for the three months ended June 30, 2020, from 1.66% for the three months ended March 31, 2020, reflecting initiatives taken to lower rates paid on deposits following actions by the Fed in the fourth quarter of 2019 and first quarter of 2020. We expect the cost of interest bearing deposits to continue to decline.
•
For the three months ended June 30, 2020, the increase in average non-interest bearing demand deposits as a percentage of average total deposits also positively impacted the cost of deposits and the net interest margin.
•
The average rate paid on borrowings declined to 1.97% for the three months ended June 30, 2020, from 2.51% for the three months ended March 31, 2020, reflecting declines in rates on overnight and short-term FHLB advances as well as the impact of PPPLF borrowings priced at rates lower than the average rate paid by the Company on its borrowings.
•
The tax-equivalent yield on loans decreased to 3.71% for the three months ended June 30, 2020, from 4.18% for the three months ended March 31, 2020. The most significant factor contributing to this decrease was the decline in benchmark interest rates, which impacted the level of prepayments of higher rate loans as well as rates earned on both existing floating rate assets and new production. The addition of lower yielding PPP loans to the balance sheet also contributed to the decline in the yield on loans.
•
The tax-equivalent yield on investment securities decreased to 2.48% for the three months ended June 30, 2020 from 2.81% for the three months ended March 31, 2020. The most significant factor contributing to this decrease was the impact of decreases in benchmark interest rates on both existing floating rate assets and new securities added to the portfolio.
Three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019
Net interest income, calculated on a tax-equivalent basis, was $194.8 million for the three months ended June 30, 2020 compared to $196.4 million for the three months ended June 30, 2019, a decrease of $1.5 million. Net interest income, calculated on a tax-equivalent basis, was $380.1 million for the six months ended June 30, 2020 compared to $392.9 million for the six months ended June 30, 2019, a decrease of $12.8 million. The decreases in net interest income were comprised of decreases in tax-equivalent interest income of $60.4 million and $89.1 million and decreases in interest expense of $58.9 million and $76.3 million for the three and six months ended June 30, 2020, respectively, compared to the three and six months ended June 30, 2019.
The decreases in tax-equivalent interest income and tax-equivalent interest expense resulted from decreases in market interest rates, partially offset by the impact of increases in average interest earning assets and average interest bearing liabilities.
The net interest margin, calculated on a tax-equivalent basis, was 2.39% for the three months ended June 30, 2020, compared to 2.52% for the three months ended June 30, 2019. The interest rate spread increased to 2.13% for the quarter ended June 30, 2020 from 2.10% for the three months ended June 30, 2019 as declines in the cost of interest bearing liabilities outpaced declines in the yield on interest earning assets.
Offsetting factors contributing to the decrease in the net interest margin for the three and six months ended June 30, 2020 compared to comparable periods of the prior year included:
•
The average rate on interest bearing deposits decreased to 1.01% and 1.33% for the three and six months ended June 30, 2020, from 2.04% and 2.01% for the three and six months ended June 30, 2019, reflecting initiatives taken to decrease the rate paid on deposits.
•
The average rate on borrowings declined to 1.97% and 2.22%% for the three and six months ended June 30, 2020, from 2.62% and 2.61%% for the three and six months ended June 30, 2019.
•
The tax-equivalent yield on loans decreased to 3.71% and 3.94% for the three and six months ended June 30, 2020, from 4.52% and 4.51% for the three and six months ended June 30, 2019, due primarily to declines in benchmark interest rates.
•
The tax-equivalent yield on investment securities decreased to 2.48% and 2.64% for the three and six months ended June 30, 2020 from 3.61% and 3.63% for the three and months ended June 30, 2019. The most significant factors

47





contributing to this decrease were decreases in benchmark interest rates impacting new purchases of investments and re-pricing of variable rate securities, and to a lesser extent, increased prepayment speeds.
Provision for Credit Losses
The provision for credit losses is a charge 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, the level of charge-offs, changes in specific reserves, changes in expected prepayment speeds and other assumptions. The provision for credit losses also includes an amount related to off-balance sheet credit exposures. 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.
For the three and six months ended June 30, 2020, the provision for (recovery of) credit losses totaled $25.4 million and $150.8 million, respectively, which included $(6.2) million and $2.6 million, respectively, related to off-balance sheet credit exposures. The provision for credit losses for the three and six months ended June 30, 2020 was determined using the CECL methodology and reflected management's estimate of the expected negative economic impact of the COVID-19 pandemic.
For the three and six months ended June 30, 2019, the Company recorded a provision for (recovery of) loan losses, under the incurred loss methodology, of $(2.7) million and $7.5 million, respectively.
The evolving COVID-19 situation may lead to increased volatility in the provision for credit losses and if economic forecasts deteriorate further as a result of COVID-19, the provision for credit losses and the ACL will likely increase.
Non-Interest Income
The following table presents a comparison of the categories of non-interest income for the periods indicated (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Deposit service charges and fees
$
3,701

 
$
4,290

 
$
7,887

 
$
8,120

Gain on sale of loans:
 
 
 
 
 
 
 
Guaranteed portions of SBA loans
375

 
848

 
1,569

 
2,635

GNMA early buyout loans
3,951

 
1,273

 
6,206

 
2,192

Other
—

 
—

 
17

 
230

Gain on sale of loans, net
4,326

 
2,121

 
7,792

 
5,057

Gain on investment securities:
 
 
 
 
 
 
 
Net realized gains on sale of AFS
5,723

 
3,915

 
7,253

 
8,232

Net unrealized gains (losses) on marketable equity securities
1,113

 
201

 
(3,870
)
 
1,669

Gain on investment securities, net
6,836

 
4,116

 
3,383

 
9,901

Lease financing
16,150

 
17,005

 
31,631

 
34,191

Other non-interest income
7,338

 
7,805

 
10,956

 
14,323

Non-interest income
$
38,351

 
$
35,337

 
$
61,649

 
$
71,592

Deposit service charges for the quarter ended June 30, 2020 were impacted by fee waivers related to COVID-19 and to lower levels of activity, also related to COVID-19.
The increase in gain on sale of GNMA early buyout loans for the three and six months ended June 30, 2020 compared to the comparable periods of 2019 resulted from an increase in the volume of activity.
The decrease in gains on guaranteed portions of SBA loans period over period is a result of declining origination volume of SBA loans, impacted by our focus on PPP lending during the second quarter of 2020.
The net unrealized loss on marketable equity securities for the six months ended June 30, 2020 was primarily due to a $5.0 million unrealized loss recorded during the first quarter, resulting from the impact on markets of the COVID-19 crisis; this improved to a gain of $1.1 million for the quarter ended June 30, 2020.

48





The decrease in income from lease financing for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019, is primarily attributed to the increase in operating lease equipment off-lease.
Non-Interest Expense
The following table presents the components of non-interest expense for the periods indicated (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Employee compensation and benefits
$
48,877

 
$
57,251

 
$
107,764

 
$
122,484

Occupancy and equipment
11,901

 
13,991

 
24,270

 
27,157

Deposit insurance expense
4,806

 
5,027

 
9,209

 
9,068

Professional fees
3,131

 
6,937

 
6,335

 
14,808

Technology and telecommunications
14,025

 
12,013

 
26,621

 
23,181

Depreciation of operating lease equipment
12,219

 
11,489

 
24,822

 
23,301

Other non-interest expense
11,411

 
13,377

 
26,217

 
26,776

Total non-interest expense
$
106,370

 
$
120,085

 
$
225,238

 
$
246,775

Less:
 
 
 
 
 
 
 
Depreciation of operating lease equipment
(12,219
)
 
(11,489
)
 
(24,822
)
 
(23,301
)
Loss on debt extinguishment
 
 
 
 
—

 
—

Costs incurred directly related to implementation of BankUnited 2.0
(255
)
 
(6,217
)
 
(334
)

(12,109
)
COVID-19 expenses
(1,519
)
 
—

 
(1,519
)
 
—

Recurring operating expenses (1)
$
92,377

 
$
102,379

 
$
198,563

 
$
211,365

 
 
(1)
Recurring operating expenses is a non-GAAP measure. See section entitled "Non-GAAP Financial Measures" below for reconciliation of non-GAAP financial measurements to their comparable GAAP financial measurements.
Employee compensation and benefits
Employee compensation and benefits declined by $8.4 million and $14.7 million for the three and six months ended June 30, 2020, respectively as compared to the three and six months ended June 30, 2019, primarily due to a reduction in headcount related to our BankUnited 2.0 initiative. Lower variable compensation costs and the impact of a declining stock price on liability-classified awards also contributed to reduced expense levels.
Professional fees
Professional fees decreased by $3.8 million and $8.5 million for the three and six months ended June 30, 2020, respectively as compared to the three and six months ended June 30, 2019. The decrease was primarily due to the consulting services in 2019 related to our BankUnited 2.0 initiative.
Other non-interest expense
The most significant components of other non-interest expense are advertising, promotion and business development, costs related to lending activities, loan servicing and deposit generation, insurance, expenses related to workouts and foreclosures, regulatory examination assessments, travel and general office expense.
For both the quarter and six months ended June 30, 2020, non-interest expense included approximately $1.5 million related directly to COVID-19, the most significant of which include technology and consulting costs related to our participation in the PPP, laptops and other equipment to facilitate employees working remotely and costs related to cleaning, sanitizing and personal protective equipment.
Income Taxes
The Company’s effective income tax rate was 21.0% and 19.3% for the three and six months ended June 30, 2020, respectively, and 25.2% and 25.9% for the three and six months ended June 30, 2019, respectively. See Note 6 to the consolidated financial statements for information about income taxes.

49





Analysis of Financial Condition
Average interest-earning assets increased $1.0 billion to $32.1 billion for the six months ended June 30, 2020 from $31.1 billion for the six months ended June 30, 2019. This increase was driven by a $951 million increase in the average balance of outstanding loans, offset by a $137 million decrease in the average balance of investment securities.
Average interest bearing liabilities was consistent for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. Average non-interest bearing deposits increased by $1.1 billion to $4.8 billion for the six months ended June 30, 2020.
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):
 
June 30, 2020
 
December 31, 2019
 
Amortized
Cost
 
Carrying Value
 
Amortized
Cost
 
Carrying Value
U.S. Treasury securities
$
75,217

 
$
77,180

 
$
70,243

 
$
70,325

U.S. Government agency and sponsored enterprise residential MBS
2,371,729

 
2,379,840

 
2,018,853

 
2,022,175

U.S. Government agency and sponsored enterprise commercial MBS
455,344

 
464,277

 
366,787

 
370,976

Private label residential MBS and CMOs
1,101,390

 
1,116,086

 
1,001,337

 
1,012,177

Private label commercial MBS
2,075,683

 
2,043,620

 
1,719,228

 
1,724,684

Single family rental real estate-backed securities
608,019

 
618,207

 
467,459

 
470,025

Collateralized loan obligations
1,166,929

 
1,128,753

 
1,204,905

 
1,197,366

Non-mortgage asset-backed securities
255,854

 
261,531

 
194,171

 
194,904

State and municipal obligations
239,502

 
259,495

 
257,528

 
273,302

SBA securities
247,914

 
245,942

 
359,808

 
362,731

Investment securities held to maturity
10,000

 
10,000

 
10,000

 
10,000

 
$
8,607,581

 
8,604,931

 
$
7,670,319

 
7,708,665

Marketable equity securities
 
 
88,697

 
 
 
60,572

 
 
 
$
8,693,628

 
 
 
$
7,769,237

Our investment strategy has focused on insuring adequate liquidity, maintaining a suitable balance of high credit quality, diverse assets, managing interest rate risk, and generating acceptable returns given our established risk parameters. We have sought to maintain liquidity by investing a significant portion of the portfolio in high quality liquid securities including U.S. Treasury securities, GNMA securities, SBA securities and U.S. Government Agency MBS. 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 rental real estate-backed securities and non-mortgage asset-backed securities that, while somewhat less liquid, provide us with attractive yields. Relatively short effective portfolio duration helps mitigate interest rate risk. Based on the Company’s assumptions, the estimated weighted average life of the investment portfolio as of June 30, 2020 was 4.4 years. The effective duration of the investment portfolio as of June 30, 2020 was 1.3 years . The model results are based on assumptions that may differ from actual results.

50





The investment securities available for sale portfolio was in a net unrealized loss position of $2.6 million at June 30, 2020, having recovered substantially from a net unrealized loss position of $249.8 million at the prior quarter end. Net unrealized losses included $98.4 million of gross unrealized gains and $101.1 million of gross unrealized losses. Investment securities available for sale in an unrealized loss position at June 30, 2020 had an aggregate fair value of $4.3 billion. The majority of the unrealized losses at June 30, 2020 related to the private label CMBS and CLO portfolio segments, which were in net unrealized loss positions of $32.1 million and $38.2 million, respectively. Comparatively, at March 31, 2020 the private label CMBS and CLO portfolios were in net unrealized loss positions of $123.8 million and $74.7 million, respectively. Unrealized losses at June 30, 2020 were primarily attributable to widening spreads, resulting in large part from market response to, and dislocation in the wake of, the COVID-19 pandemic. The ratings distribution of our AFS securities portfolio at June 30, 2020 is depicted in the chart below:
ratingsdistributiona03.jpg
We evaluate the credit quality of individual securities in the portfolio quarterly to determine whether we expect to recover the amortized cost basis of the investments in unrealized loss positions. This evaluation considers, but is not necessarily limited to, the following factors, the relative significance of which varies depending on the circumstances pertinent to each individual security:
•
whether we intend to sell the security prior to recovery of its amortized cost basis;
•
whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis;
•
The extent to which fair value is less than amortized cost;
•
Adverse conditions specifically related to the security, an industry or geographic area;
•
Changes in the financial condition of the issuer or underlying loan obligors;
•
The payment structure and remaining payment terms of the security, including levels of subordination or over-collateralization;
•
Failure of the issuer to make scheduled payments;
•
Changes in credit ratings;
•
Relevant market data;
•
Estimated prepayments, defaults, and the value and performance of underlying collateral at the individual security level.
No securities were determined to be credit loss impaired during the six months ended June 30, 2020 or other than temporarily impaired during the six months ended June 30, 2019. We do not intend to sell securities in significant unrealized loss

51





positions at June 30, 2020. Based on an assessment of our liquidity position and internal and regulatory guidelines for permissible investments and concentrations, it is not more likely than not that we will be required to sell securities in significant unrealized loss positions prior to recovery of amortized cost basis, which may be at maturity.
The timely payment of principal and interest on securities issued by the U.S. government, U.S. government agencies and U.S. government sponsored enterprises is explicitly or implicitly guaranteed by the U.S. Government. As such, there is an assumption of zero credit loss and the Company expects to recover the entire amortized cost basis of these securities.
None of our impaired private label securities had missed principal or interest payments or had been downgraded by a NRSRO at June 30, 2020. The Company performed an analysis comparing the present value of cash flows expected to be collected to the amortized cost basis of impaired securities. This analysis was based on a scenario that we believe to be generally more severe than our reasonable and supportable economic forecast at June 30, 2020, and incorporated assumptions about voluntary prepayment rates, collateral defaults, delinquencies, severity and other relevant factors. Our analysis also considered the structural characteristics of each security and the level of credit enhancement provided by that structure. Based on the results of this analysis, we expect to recover the entire amortized cost basis of the impaired private label AFS securities. Further information about the portfolio segments evidencing the largest unrealized losses at June 30, 2020, the CMBS and CLO portfolio segments, follows.
For private label CMBS, our analysis of cash flows expected to be collected incorporated assumptions about collateral default rates, voluntary prepayment rates, loss severity, delinquencies and recovery lag. In developing those assumptions, we took into account collateral quality and type, loan size, loan purpose and other qualitative factors. We also regularly monitor collateral watchlists, bankruptcy data, special servicing trends, delinquency and other economic data which would indicate further stress in the sector. 
For CLOs, our analysis of cash flows expected to be collected incorporated assumptions about collateral default rates, loss severity, and delinquencies, calibrated to take into account idiosyncratic risks associated with the underlying collateral. In developing those assumptions, we took into account each sector’s performance pre, during and post the 2008 financial crisis. We regularly engage with bond managers to monitor trends in underlying collateral including potential downgrades and subsequent cash flow diversions, liquidity, ratings migration, and any other relevant developments.
The following table presents the distribution of the third-party ratings and subordination levels compared to average stress scenario losses based on our credit loss impairment analysis of the CMBS and CLOs at June 30, 2020:
 
 
 
 
 
Subordination
 
Weighted Average Stress Scenario Loss
 
Rating
 
Percent of Total
 
Minimum
 
Maximum
 
Average
 
Private label CMBS
AAA
 
83.0
%
 
29.4
%
 
54.5
%
 
43.1
%
 
12.8
%
 
AA
 
12.0
%
 
31.1
%
 
81.8
%
 
37.2
%
 
11.4
%
 
A
 
5.0
%
 
21.5
%
 
68.7
%
 
28.8
%
 
11.9
%
Weighted average
 
 
100.0
%
 
29.2
%
 
58.5
%
 
41.6
%
 
12.6
%
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
AAA
 
84.0
%
 
36.1
%
 
48.2
%
 
43.0
%
 
20.7
%
 
AA
 
13.0
%
 
26.9
%
 
40.4
%
 
32.4
%
 
22.0
%
 
A
 
3.0
%
 
24.9
%
 
29.5
%
 
26.7
%
 
25.0
%
Weighted average
 
 
100.0
%
 
34.5
%
 
46.6
%
 
41.1
%
 
21.0
%
For further discussion of our analysis of impaired investment securities AFS for credit loss impairment see Note 3 to the consolidated financial statements.
We use third-party pricing services to assist us in estimating the fair value of investment securities. We perform a variety of procedures to ensure that we have a thorough understanding of the methodologies and assumptions used by the pricing services including obtaining and reviewing written documentation of the methods and assumptions employed, conducting interviews with valuation desk personnel and reviewing model results and detailed assumptions used to value selected securities as considered necessary. Our classification of prices within the fair value hierarchy is based on an evaluation of the nature of the significant assumptions impacting the valuation of each type of security in the portfolio. We have established a robust price challenge process that includes a review by our treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from our expectations based on recent observed trading activity and other information available in the marketplace that would impact the value of the security is challenged. Responses to the price

52





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.
We also have a quarterly price validation process to assess the propriety of the pricing methodologies utilized by our primary pricing services by independently verifying the prices of a sample of securities in the portfolio. Sample sizes vary based on the type of security being priced, with higher sample sizes applied to more difficult to value security types. Verification procedures may consist of obtaining prices from an additional outside source. We have established acceptable percentage deviations from the price provided by the initial pricing source. If deviations fall outside the established parameters, we will obtain and evaluate more detailed information about the assumptions and inputs used by each pricing source or, if considered necessary, employ an additional valuation source to price the security in question. Pricing issues identified through this evaluation are addressed with the applicable pricing service and methodologies or inputs are revised as determined necessary. Depending on the results of the validation process, sample sizes may be extended for particular classes of securities. Results of the validation process are reviewed by the treasury front office and by senior management.
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. We continue to monitor the impact of the COVID-19 pandemic on markets, and on our ability to price securities in our portfolio. While, particularly at the onset of the pandemic, we observed increased volatility and dislocation, we believe the fiscal and monetary response to the crisis has been effective in supporting liquidity and stabilizing markets. To date, circumstances have not led to a change in the categorization of our fair value estimates within the fair value hierarchy.
For additional discussion of the fair values of investment securities, see Note 10 to the consolidated financial statements.

53





The following table shows the scheduled maturities, carrying values and prospective yields for investment securities available for sale as of June 30, 2020, as well as the carrying value and yield of marketable equity securities. 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% (dollars in thousands):
 
Within One Year
 
After One Year
Through Five Years
 
After Five Years
Through Ten Years
 
After Ten Years
 
Total
 
Carrying
Value
 
Weighted
Average
Yield
 
Carrying
Value
 
Weighted
Average
Yield
 
Carrying
Value
 
Weighted
Average
Yield
 
Carrying
Value
 
Weighted
Average
Yield
 
Carrying
Value
 
Weighted
Average
Yield
U.S. Treasury securities
$
77,180

 
1.71
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
77,180

 
1.71
%
U.S. Government agency and sponsored enterprise residential MBS
229,123

 
1.11
%
 
1,051,085

 
0.99
%
 
865,614

 
0.96
%
 
234,018

 
0.89
%
 
2,379,840

 
0.98
%
U.S. Government agency and sponsored enterprise commercial MBS
3,433

 
1.88
%
 
49,877

 
2.08
%
 
258,846

 
1.06
%
 
152,121

 
1.48
%
 
464,277

 
1.31
%
Private label residential MBS and CMOs
379,488

 
3.27
%
 
579,159

 
3.07
%
 
127,964

 
2.88
%
 
29,475

 
2.50
%
 
1,116,086

 
3.10
%
Private label commercial MBS
75,949

 
3.37
%
 
1,587,327

 
2.03
%
 
350,148

 
2.34
%
 
30,196

 
3.03
%
 
2,043,620

 
2.15
%
Single family rental real estate-backed securities
3,788

 
2.96
%
 
297,246

 
3.10
%
 
317,173

 
1.51
%
 
—

 
—
%
 
618,207

 
2.27
%
Collateralized loan obligations
55,507

 
1.76
%
 
962,673

 
1.96
%
 
110,573

 
2.47
%
 
—

 
—
%
 
1,128,753

 
2.00
%
Non-mortgage asset-backed securities
32,763

 
2.89
%
 
158,375

 
2.65
%
 
68,737

 
2.27
%
 
1,656

 
2.63
%
 
261,531

 
2.58
%
State and municipal obligations
7,219

 
2.53
%
 
20,647

 
3.77
%
 
180,309

 
3.99
%
 
51,320

 
4.08
%
 
259,495

 
3.95
%
SBA securities
50,520

 
1.28
%
 
124,110

 
1.23
%
 
52,757

 
1.15
%
 
18,555

 
1.06
%
 
245,942

 
1.21
%
 
$
914,970

 
2.37
%
 
$
4,830,499

 
1.99
%
 
$
2,332,121

 
1.69
%
 
$
517,341

 
1.60
%
 
8,594,931

 
1.92
%
Marketable equity securities with no scheduled maturity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
88,697

 
7.13
%
Total investment securities available for sale and marketable equity securities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
$
8,683,628

 
1.98
%
Loans Held for Sale
Loans held for sale at June 30, 2020 included $3 million of the guaranteed portion of SBA loans held for sale in the secondary market. At December 31, 2019, loans held for sale included $28.6 million of the SBA loans held for sale and $9.3 million of other commercial loans transferred to held for sale. SBA loans are generally sold with servicing retained. Because of our focus on PPP lending in the second quarter, the origination volume of traditional SBA loans declined.

54





Loans
The loan portfolio comprises the Company’s primary interest-earning asset. The following tables show the composition of the loan portfolio at the dates indicated (dollars in thousands):
 
June 30, 2020
 
December 31, 2019
 
Total
 
Percent of Total
 
Total
 
Percent of Total
Residential and other consumer loans
$
5,577,807

 
23.5
%
 
$
5,661,119

 
24.5
%
Multi-family
1,893,753

 
7.9
%
 
2,217,705

 
9.6
%
Non-owner occupied commercial real estate
4,940,531

 
20.7
%
 
5,030,904

 
21.7
%
Construction and land
246,609

 
1.0
%
 
243,925

 
1.1
%
Owner occupied commercial real estate
2,041,346

 
8.6
%
 
2,062,808

 
8.9
%
Commercial and industrial
4,691,326

 
19.7
%
 
4,655,349

 
20.1
%
PPP
827,359

 
3.5
%
 
—

 
—
%
Pinnacle
1,242,506

 
5.1
%
 
1,202,430

 
5.2
%
Bridge - franchise finance
623,139

 
2.6
%
 
627,482

 
2.6
%
Bridge - equipment finance
589,785

 
2.5
%
 
684,794

 
3.0
%
Mortgage warehouse lending
1,160,728

 
4.9
%
 
768,472

 
3.3
%
Total loans
23,834,889

 
100.0
%
 
23,154,988

 
100.0
%
Allowance for credit losses
(266,123
)
 
 
 
(108,671
)
 
 
Loans, net
$
23,568,766

 
 
 
$
23,046,317

 
 
For the six months ended June 30, 2020, total loans grew by $680 million, primarily driven by $827 million in PPP loans and a $392 million increase in mortgage warehouse outstandings due to increased utilization. The decline in multi-family balances was driven primarily by continued runoff of the New York portfolio. Residential activity for the six months ended June 30, 2020 included purchases of approximately $529 million in GNMA early buyout loans, offset by approximately $400 million in re-poolings and paydowns. The residential portfolio, excluding GNMA early buyout loans, experienced a net decline of approximately $212 million driven by higher prepayment speeds in the current rate environment.
Residential mortgages and other consumer loans
The following table shows the composition of residential and other consumer loans at the dates indicated (in thousands):
 
June 30, 2020
 
December 31, 2019
1-4 single family residential
$
4,743,866

 
$
4,953,936

Government insured residential
826,238

 
698,644

Other consumer loans
7,703

 
8,539

 
$
5,577,807

 
$
5,661,119

The 1-4 single family residential loan portfolio, excluding government insured residential loans, is primarily comprised of loans purchased through established correspondent channels. 1-4 single family residential mortgage loans are primarily closed-end, first lien jumbo mortgages for the purchase or re-finance of owner occupied property. The loans have terms ranging from 10 to 30 years, with either fixed or adjustable interest rates. At June 30, 2020, $507 million or 11% were secured by investor-owned properties.
The Company acquires non-performing FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations (collectively, "government insured pool buyout loans" or "buyout loans"). Buyout loans that re-perform, either through modification or self-cure, may be eligible for re-securitization. The Company and the servicer share in the economics of the sale of these loans into new securitizations. The balance of buyout loans totaled $805 million at June 30, 2020. The Company is not the servicer of these loans.

55





The following charts present the distribution of the 1-4 single family residential mortgage portfolio at the dates indicated:
resiportfoliobytype.jpg
The following table presents the five states with the largest geographic concentrations of 1-4 single family residential loans, excluding government insured residential loans, at the dates indicated (dollars in thousands):
 
June 30, 2020
 
December 31, 2019
 
Total
 
Percent of Total
 
Total
 
Percent of Total
California
$
1,333,404

 
28.1
%
 
$
1,280,243

 
25.8
%
New York
1,072,564

 
22.6
%
 
1,057,926

 
21.4
%
Florida
548,488

 
11.6
%
 
597,359

 
12.1
%
Virginia
175,221

 
3.7
%
 
189,869

 
3.8
%
New Jersey
172,483

 
3.6
%
 
189,018

 
3.8
%
Others
1,441,706

 
30.4
%
 
1,639,521

 
33.1
%
 
$
4,743,866

 
100.0
%
 
$
4,953,936

 
100.0
%
Commercial loans and leases
Commercial loans include commercial and industrial loans and leases, loans secured by owner-occupied commercial real-estate, multi-family properties and other income-producing non-owner occupied commercial real estate, a limited amount of construction and land loans, SBA loans, mortgage warehouse lines of credit, PPP loans, municipal loans and leases originated by Pinnacle and franchise and equipment finance loans and leases originated by Bridge.

56





The following charts present the distribution of the commercial loan portfolio at the dates indicated (dollars in millions):
commercialloanportfolio.jpg
Commercial real estate loans include term loans secured by non-owner occupied income producing properties including rental apartments, mixed-use properties, industrial properties, retail shopping centers, free-standing single-tenant buildings, office buildings, warehouse facilities, hotels, real estate secured lines of credit, as well as credit facilities to institutional real estate entities such as REITs and commercial real estate investment funds.
The following table presents the distribution of commercial real estate loans by property type along with weighted average DSCRs and LTVs at June 30, 2020 (dollars in thousands).
 
Amortized Cost
 
Percent of Total
 
Weighted Average DSCR
 
Weighted Average LTV
Office
$
2,079,560

 
29.3
%
 
2.17

 
59.0
%
Multifamily
2,010,289

 
28.4
%
 
1.77

 
56.0
%
Retail
1,437,681

 
20.3
%
 
1.61

 
59.3
%
Warehouse/Industrial
783,387

 
11.1
%
 
2.52

 
55.5
%
Hotel
620,673

 
8.8
%
 
1.59

 
57.1
%
Other
149,303

 
2.1
%
 
1.66

 
48.9
%
 
$
7,080,893

 
100.0
%
 
1.92

 
57.4
%
DSCRs and LTVs in the table above are based on the most recent information available, which may not be fully reflective of the ultimate impact of the COVID-19 pandemic on borrowers' financial condition or property values.
The Company’s commercial real estate underwriting standards generally provide for loan terms of five to seven years, with amortization schedules of no more than thirty years. LTV ratios are typically limited to no more than 75%. Construction and land loans, included by property type in the table above, represented only 1% of the total loan portfolio at June 30, 2020. Construction and land loans are generally made for projects expected to stabilize within eighteen months of completion in sub-markets with strong fundamentals and, to a lesser extent, for-sale residential projects to experienced developers with a strong cushion between market prices and loan basis. 75% of the commercial real estate portfolio, including 79% and 76% of the retail and hotel segments, respectively, had LTVs less than 65% at June 30, 2020.

57





The New York legislature has enacted a number of rent regulation reform measures that generally have the impact of limiting landlords' ability to increase rents on stabilized units and to convert stabilized units to market rate units. The following table presents the amount of loans secured by New York multi-family properties in which some or all units are rent regulated at June 30, 2020 (in thousands):
Loans secured by stabilized properties subject to rent regulation
$
957,439

Loans secured by non-stabilized properties subject to rent regulation
58,333

 
$
1,015,772

We believe loans secured by non-stabilized properties may present a heightened level of risk as these loans were underwritten to expected cash flows upon stabilization; those expected cash flows may be impacted by the recent rent regulation reform measures.
The following tables present the distribution of stabilized rent-regulated multi-family loans, by DSCR and LTV at June 30, 2020 (in thousands):
DSCR
 
 
 
Less than 1.11
 
 
$
101,129

1.11 - 1.24
 
 
284,101

1.25 - 1.50
 
 
288,910

1.51 or greater
 
 
283,299

 
 
 
$
957,439

LTV
 
 
 
Less than 50%
 
 
$
243,997

50% - 65%
 
 
610,258

66% - 75%
 
 
97,524

More than 75%
 
 
5,660

 
 
 
$
957,439

The LTVs in the table above are based on the most recent appraisal obtained, which may not be fully reflective of changes in valuations that may result from the impact of the rent regulation reforms. Loans with DSCR less than 1.11 may be those with temporary vacancies or those for which expenses, particularly real estate taxes, have increased more rapidly than rents. Substantially all of the loans included in the tables above are current and performing.
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, trade finance, SBA product offerings and business acquisition finance credit facilities. 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. The Bank also provides financing to state and local governmental entities generally within our geographic markets. Commercial loans included shared national credits totaling $2.6 billion at June 30, 2020, the majority of which were relationship based loans to borrowers in Florida and New York. 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.

58





The following table presents the exposure in the commercial and industrial portfolio, including $2.0 billion of owner-occupied commercial real estate loans, by industry at June 30, 2020 (in thousands):
 
Amortized Cost
 
Percent of Total
Finance and Insurance
$
1,007,480

 
15.1
%
Wholesale Trade
719,847

 
10.7
%
Educational Services
640,657

 
9.5
%
Transportation and Warehousing
507,305

 
7.5
%
Health Care and Social Assistance
472,793

 
7.0
%
Manufacturing
375,569

 
5.6
%
Accommodation and Food Services
358,635

 
5.3
%
Retail Trade
332,421

 
4.9
%
Information
298,465

 
4.4
%
Real Estate and Rental and Leasing
288,045

 
4.3
%
Professional, Scientific, and Technical Services
277,081

 
4.1
%
Construction
273,685

 
4.1
%
Public Administration
244,967

 
3.6
%
Administrative and Support and Waste Management
239,441

 
3.5
%
Other Services (except Public Administration)
238,933

 
3.5
%
Arts, Entertainment, and Recreation
215,999

 
3.2
%
Utilities
188,808

 
2.8
%
Other
52,541

 
0.9
%
 
$
6,732,672

 
100.0
%
Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides equipment and franchise financing on a national basis using both loan and lease structures. Pinnacle provides essential use equipment financing to state and local governmental entities directly and through vendor programs and alliances. Pinnacle offers a full array of financing structures including equipment lease purchase agreements and direct (private placement) bond re-fundings and loan agreements. Bridge has two operating divisions. The franchise finance division offers franchise acquisition, expansion and equipment financing, typically to experienced operators in well-established concepts. The franchise finance portfolio is made up primarily of quick service restaurant and fitness concepts comprising 61% and 31% of the portfolio, respectively. The equipment finance division provides primarily transportation equipment financing through a variety of loan and lease structures. The Bank also engages in mortgage warehouse lending on a national basis.
The Company originated over 3,500 SBA PPP loans totaling $876 million during the quarter ended June 30, 2020. These loans bear interest at 1% and are guaranteed as to principal and interest by the SBA. They have terms of 2 years, and are eligible for earlier forgiveness under the terms of the PPP in prescribed circumstances. The Company also received origination fees associated with these loans; $21 million of these fees remain to be recognized in income as of June 30, 2020.
Geographic Concentrations
The Company's commercial and commercial real estate portfolios are concentrated in Florida and the Tri-state area. Excluding loans originated through our national platforms, 47% and 44% of commercial real estate loans were secured by collateral located in Florida and the Tri-state area, respectively; while 54% and 27% of commercial and industrial and owner-occupied real estate loans were to borrowers in Florida and the Tri-state area, respectively.

59





The following table presents the five states with the largest concentration of commercial loans and leases originated through our national platforms, including Bridge, Pinnacle, SBF and our mortgage warehouse finance unit at the dates indicated (dollars in thousands):
 
June 30, 2020
 
December 31, 2019
 
Total
 
Percent of Total
 
Total
 
Percent of Total
California
$
650,706

 
16.8
%
 
$
585,222

 
16.5
%
Florida
457,859

 
11.8
%
 
465,146

 
13.1
%
New Jersey
339,873

 
8.8
%
 
178,514

 
5.0
%
North Carolina
207,298

 
5.3
%
 
146,146

 
4.1
%
Maryland
187,639

 
4.8
%
 
152,663

 
4.3
%
All others
2,038,326

 
52.5
%
 
2,018,704

 
57.0
%
 
$
3,881,701

 
100.0
%
 
$
3,546,395

 
100.0
%
Operating lease equipment, net
Operating lease equipment, net of accumulated depreciation totaled $690 million at June 30, 2020, including off-lease equipment, net of accumulated depreciation totaling $89 million. The portfolio consists primarily of railcars, non-commercial aircraft and other transport equipment. We have a total of 5,313 railcars with a carrying value of $409 million at June 30, 2020, including hoppers, tank cars, boxcars, auto carriers, center beams and gondolas leased to North American commercial end users. The largest concentrations of rail cars were 2,411 hopper cars and 1,594 tank cars, primarily used to ship sand and petroleum products, respectively, for the energy industry.
The chart below presents operating lease equipment by type at the dates indicated:
equipmentbycategory.jpg

60





At June 30, 2020, the breakdown of carrying values of operating lease equipment, excluding equipment off-lease, by the year current leases are scheduled to expire was as follows (in thousands):
Years Ending December 31:
 
2020
$
78,492

2021
60,237

2022
70,404

2023
40,812

2024
14,553

Thereafter through 2034
335,829

 
$
600,327

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. In response to the COVID-19 pandemic, we have further enhanced our workout and recovery staffing and processes. Loan performance is monitored by our credit administration and workout and recovery departments. Generally, commercial relationships with balances in excess of defined thresholds are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. The defined thresholds range from $1 million to $3 million. Homogenous groups of smaller balance commercial loans may be monitored collectively. The credit quality and risk rating of commercial loans as well as our underwriting and portfolio management practices are regularly reviewed by our internal credit review department.
We believe internal risk rating is the best indicator of the credit quality of commercial loans. The Company utilizes a 13 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, 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. Beginning late in the first quarter and throughout the second quarter of 2020, risk ratings were re-evaluated for a substantial portion of the commercial portfolio, with a particular focus on portfolio segments we identified for enhanced monitoring and loans for which we granted temporary payment deferrals in light of the COVID-19 pandemic.
The following table summarizes the Company's commercial credit exposure, based on internal risk rating, at the dates indicated (dollars in thousands):
 
June 30, 2020
 
March 31, 2020
 
December 31, 2019
 
Amortized Cost
 
Percent of Commercial Loans
 
Amortized Cost
 
Percent of Commercial Loans
 
Amortized Cost
 
Percent of Commercial Loans
Pass
$
16,169,767

 
88.6
%
 
$
16,841,243

 
96.0
%
 
$
17,054,702

 
97.5
%
Special mention
1,338,232

 
7.3
%
 
288,148

 
1.6
%
 
72,881

 
0.4
%
Substandard accruing
560,624

 
3.1
%
 
238,786

 
1.4
%
 
180,380

 
1.0
%
Substandard non-accruing
187,510

 
1.0
%
 
181,278

 
1.0
%
 
185,906

 
1.1
%
Doubtful
949

 
—
%
 
—

 
—
%
 
—

 
—
%
 
$
18,257,082

 
100.0
%
 
$
17,549,455

 
100.0
%
 
$
17,493,869

 
100.0
%
It is possible, given the uncertainty surrounding the COVID-19 pandemic and related economic impacts, that the amount of criticized and classified assets could increase further in the future.

61





Both special mention and substandard accruing loans increased significantly at June 30, 2020 compared to March 31, 2020 and December 31, 2019. We believe the substantial majority of this increase to be directly related to the COVID-19 pandemic, its impact on the economy generally and on borrowers' businesses specifically. Special mention loans increased by $1.1 billion and $1.3 billion during the three and six months ended June 30, 2020, while substandard accruing loans increased by $322 million and $380 million for those same periods. Management has taken what we believe to be a pro-active and objective approach to re-risk rating the commercial loan portfolio based on granular outreach to borrowers since the onset of the pandemic.
The following table provides additional information about special mention and substandard accruing loans, at the dates indicated (in thousands):
 
June 30, 2020
 
March 31, 2020
 
December 31, 2019
 
Amortized Cost
 
Percent of Loan Segment
 
Amortized Cost
 
Percent of Loan Segment
 
Amortized Cost
 
Percent of Loan Segment
Special mention:
 
 
 
 
 
 
 
 
 
 
 
CRE:
 
 
 
 
 
 
 
 
 
 
 
Hotel
$
273,877

 
44.1
%
 
$
4,201

 
0.7
%
 
$
4,227

 
0.6
%
Retail
172,364

 
12.0
%
 
4,284

 
0.3
%
 
—

 
—
%
Multi-family
54,623

 
2.7
%
 
4,471

 
0.2
%
 
115

 
—
%
Office
29,735

 
1.4
%
 
—

 
—
%
 
—

 
—
%
Industrial
12,968

 
1.7
%
 
—

 
—
%
 
1,489

 
—
%
Other
1,393

 
0.9
%
 
—

 
—
%
 
—

 
—
%
 
544,960

 


 
12,956

 
 
 
5,831

 
 
Owner occupied commercial real estate
179,305

 
8.8
%
 
26,170

 
1.3
%
 
27,870

 
1.4
%
Commercial and industrial
243,398

 
3.6
%
 
67,173

 
1.1
%
 
28,498

 
0.5
%
Bridge - franchise finance
327,375

 
52.5
%
 
181,049

 
28
%
 
10,682

 
1.7
%
Bridge - equipment finance
43,194

 
7.3
%
 
800

 
0.1
%
 
—

 
—
%
 
$
1,338,232

 
 
 
$
288,148

 
 
 
$
72,881

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Substandard accruing:
 
 
 
 
 
 
 
 
 
 
 
CRE
 
 
 
 
 
 
 
 
 
 
 
Hotel
$
92,066

 
14.8
%
 
$
11,296

 
1.8
%
 
$
34,645

 
5.3
%
Retail
63,957

 
4.4
%
 
20,049

 
1.4
%
 
—

 
—
%
Multi-family
67,896

 
3.4
%
 
35,691

 
1.7
%
 
26,797

 
1.7
%
Office
28,994

 
1.4
%
 
6,214

 
0.3
%
 
8,299

 
0.3
%
Industrial
19,814

 
2.5
%
 
9,675

 
1.2
%
 
9,753

 
1.2
%
Owner occupied commercial real estate
38,332

 
1.9
%
 
24,520

 
1.2
%
 
16,241

 
0.8
%
Commercial and industrial
185,201

 
3.9
%
 
77,810

 
1.6
%
 
43,518

 
0.9
%
Bridge - franchise finance
56,628

 
9.1
%
 
53,531

 
8.3
%
 
41,127

 
6.6
%
Bridge - equipment finance
7,736

 
1.3
%
 
—

 
—
%
 
—

 
—
%
 
$
560,624

 
 
 
$
238,786

 
 
 
$
180,380

 
 
The increases in special mention and substandard accruing loans at June 30, 2020 were concentrated in those categories expected to exhibit additional stress in the current environment. Within the commercial real estate portfolio, the most significant increases were in the retail and hotel sub-segments as reflected in the table above. We also saw significant increases in special mention loans in the franchise finance portfolio; of a total increase of $317 million during the six months ended June 30, 2020, $154 million related to restaurant concepts and $163 million related to fitness concepts. In the C&I categories, the largest increases were in the cruise line, retail trade, food services and airport concession areas.
Potential problem loans have been identified by management as those commercial loans included in the "substandard accruing" risk rating category. These loans are typically performing, but possess specifically identified credit weaknesses such

62





as inadequate debt service coverage or liquidity that, if not remedied, may lead to a downgrade to non-accrual status and identification as impaired in the near-term.
Payment Deferrals
The following table summarizes deferral activity in the commercial portfolio, through July 17, 2020 (dollars in millions).
 
First Deferral Granted
 
Re-Deferral Requested
 
Loan Count
 
UPB
 
% of Portfolio
 
Loan Count
 
UPB
 
% of Portfolio
CRE - Property Type:
 
 
 
 
 
 
 
 
 
 
 
Retail
119

 
$
769,025

 
53
%
 
8

 
$
75,890

 
5
%
Hotel
93

 
536,826

 
86
%
 
21

 
298,388

 
48
%
Office
30

 
372,796

 
18
%
 
2

 
54,243

 
3
%
Multifamily
37

 
276,711

 
14
%
 
2

 
12,083

 
1
%
Industrial
14

 
97,776

 
13
%
 
—

 
—

 
—
%
Other
1

 
1,060

 
1
%
 
—

 
—

 
—
%
Total CRE - Property Type
294

 
$
2,054,194

 
29
%
 
33

 
$
440,604

 
6
%
C&I - Industry
 
 
 
 
 
 
 
 
 
 
 
Accommodation and Food Services
89

 
$
106,288

 
30
%
 
21

 
$
65,729

 
18
%
Retail Trade
221

 
68,299

 
20
%
 
4

 
21,575

 
7
%
Health Care and Social Assistance
126

 
59,305

 
12
%
 
—

 
—

 
—
%
Manufacturing
35

 
57,026

 
15
%
 
1

 
9,066

 
2
%
Other
265

 
178,512

 
3
%
 
1

 
4,169

 
—
%
Total C&I - Industry
736

 
469,430

 
7
%
 
27

 
100,539

 
1
%
BFG - Equipment
35

 
35,278

 
6
%
 
—

 
—

 
—
%
BFG - Franchise
362

 
459,590

 
74
%
 
82

 
155,321

 
25
%
Total Commercial
1,427

 
$
3,018,492

 
17
%
 
142

 
$
696,464

 
4
%
For commercial borrowers, initial payment deferrals were typically deferrals of principal and/or interest payments for 90 days. Re-deferrals usually take the form of additional 90 day extensions, granted on a case by case basis. The deferred payments along with interest accrued during the deferral period are generally due and payable on the maturity date.
We believe deferral rates, and particularly the rate at which borrowers have requested a second deferral, are important indicators of the extent to which borrowers' businesses and financial condition have been impacted by the COVID-19 pandemic. The majority of initial deferrals were granted in late March and April, 2020. Most of those loans have reached, or are now reaching, the end of the initial 90 day deferral period. New initial deferral requests received after June 1 were negligible.
The following table presents additional information about loan portfolio sub-segments that, in light of evolving conditions related to the COVID-19 pandemic, have been identified for enhanced monitoring as of June 30, 2020 (dollars in thousands):
 
June 30, 2020
 
Amortized Cost
 
Percent of Total Loans
 
Non Performing
 
Special Mention
 
Substandard Accruing
Retail - CRE
$
1,437,681

 
6.0
%
 
$
10,968

 
$
172,364

 
$
63,957

Retail - C&I
332,421

 
1.4
%
 
4,238

 
54,873

 
20,894

BFG - franchise finance
623,139

 
2.6
%
 
32,857

 
327,375

 
56,628

Hotel
620,673

 
2.6
%
 
32,827

 
273,877

 
92,066

Airlines and aviation authorities
163,846

 
0.7
%
 
—

 
27,050

 
—

Cruise line
74,696

 
0.3
%
 
—

 
59,886

 
—

Energy
56,310

 
0.2
%
 
—

 
—

 
—

 
$
3,308,766

 
13.8
%
 
$
80,890

 
$
915,425

 
$
233,545


63





Retail Exposure in the CRE Portfolio
The predominant collateral types supporting this sub-segment include both anchored and unanchored suburban and urban retail properties, some single tenant properties as well as some mixed-use properties with a significant retail component. We have no significant large shopping mall or "big box" exposure. The weighted average LTV for this sub-segment is 59.3% and 79% has LTVs less than 65%, based on the most recently available information.
Retail Exposure in the C&I Portfolio
This is a well-diversified sub-segment by industry. The largest exposure is to gas stations, generally with convenience stores, representing $99 million, or 29% of the sub-segment. 67% of loans in this sub-segment are collateralized by owner-occupied real estate.
BFG - Franchise Finance
The following table presents the franchise portfolio by concept at June 30, 2020:
 
Amortized Cost
 
Percent of BFG Franchise Finance
Restaurant concepts:
 
 
 
Burger King
$
66,012

 
11.0
%
Dunkin Donuts
44,737

 
7.0
%
Sonic
27,586

 
4.0
%
Domino's
23,370

 
4.0
%
Jimmy Johns
23,359

 
4.0
%
Other
193,958

 
31.0
%
 
379,022

 
61.0
%
Non-restaurant concepts:
 
 
 
Planet Fitness
107,303

 
17.0
%
Orange Theory Fitness
86,654

 
14.0
%
Other
50,160

 
8.0
%
 
244,117

 
39.0
%
 
$
623,139

 
100.0
%
Restaurant concepts that have established drive-through or delivery models are generally performing well in the current environment. Fitness concepts are beginning to re-open.
Hotel
This sub-segment is experiencing significant disruption in revenue due to social distancing measures arising from the pandemic. The weighted average LTV for this sub-segment is 57% and 76% has LTVs less than 65%, based on the most recent information available. The majority of our hotel exposure is in Florida at 75%, followed by 12% in New York. This sub-segment includes $60 million in SBA loans, of which $14 million is guaranteed. Substantially all hotel collateral properties have now re-opened for business.
Airlines and Aviation Authorities
These borrowers have directly benefited from government relief programs enacted in response to the COVID-19 pandemic.
Energy
Recent declines in oil prices have elevated this sub-segment to a level of enhanced monitoring. The Company's energy exposure in the loan portfolio is not material; approximately 64% of these loans are secured by marine transport equipment.
Bridge also had exposure to the energy industry in the operating lease equipment portfolio totaling $287 million at June 30, 2020, consisting of $229 million in railcars, $39 million in helicopters and $18 million in vessels.

64





If current conditions persist, further deterioration could occur in this sector.
Operating Lease Equipment, net
Two operating lease relationships with a carrying value of assets under lease totaling $35 million, all of which were exposures to the energy industry, were internally risk rated substandard at June 30, 2020. 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. At June 30, 2020, there were 22 operating leases for which a triggering event was met. Based on a recoverability analysis performed, the Company recognized an impairment charge of $0.7 million during the six months ended June 30, 2020 related to one operating lease relationship; this was not an energy exposure.
The primary risks inherent in the equipment leasing business are asset risk resulting from ownership of the equipment on lease and credit risk. Asset risk arises from fluctuations in supply and demand for the underlying leased equipment. The equipment is leased to commercial end users with original lease terms generally ranging from three to ten years. We are exposed to the risk that, at the end of the lease term, the value of the asset will be lower than expected, potentially resulting in reduced future lease income over the remaining life of the asset or a lower sale value. Asset risk may also lead to changes in depreciation as a result of changes in the residual values of the leased assets or through impairment of asset carrying values.
Asset risk is evaluated and managed by a dedicated internal staff of asset managers, managed by seasoned equipment finance professionals with a broad depth and breadth of experience in the leasing business. Additionally, we have partnered with an industry leading, experienced service provider who provides fleet management and servicing relating to the railcar fleet, including lease administration and reporting, a Regulation Y compliant full service maintenance program and railcar re-marketing. Risk is managed by setting appropriate residual values at inception and systematic reviews of residual values based on independent appraisals, performed at least annually. Additionally, our internal management team and our external service provider closely follow the rail markets, monitoring traffic flows, supply and demand trends and the impact of new technologies and regulatory requirements. Demand for railcars is sensitive to shifts in general and industry specific economic and market trends and shifts in trade flows from specific events such as natural or man-made disasters. We seek to mitigate these risks by leasing to a stable end user base, by maintaining a relatively young and diversified fleet of assets that are expected to maintain stronger and more stable utilization rates despite impacts from unexpected events or cyclical trends and by staggering lease maturities. We regularly monitor the impact of oil prices on the estimated residual value of rail cars being used in the petroleum/natural gas extraction sector.
Credit risk in the leased equipment portfolio results from the potential default of lessees, possibly driven by obligor specific or industry-wide conditions, and is economically less significant than asset risk, because in the operating lease business, there is no extension of credit to the obligor. Instead, the lessor deploys a portion of the useful life of the asset. Credit losses, if any, will manifest through reduced rental income due to missed payments, time off lease, or lower rental payments due either to a restructuring or re-leasing of the asset to another obligor. Credit risk in the operating lease portfolio is managed and monitored utilizing credit administration infrastructure, processes and procedures similar to those used to manage and monitor credit risk in the commercial loan portfolio. We also mitigate credit risk in this portfolio by leasing to high credit quality obligors.
Residential and Other Consumer Loans
Our residential mortgage portfolio, excluding GNMA buyout loans, consists primarily of loans purchased through established correspondent channels. Most of our purchases are of performing jumbo mortgage loans which have FICO scores above 700, primarily are owner-occupied and full documentation, and have a current LTV of 80% or less although loans with LTVs higher than 80% may be extended to selected credit-worthy borrowers. We perform due diligence on the purchased loans for credit, compliance, counterparty, payment history and property valuation.
We have a dedicated residential credit risk management function, and the residential portfolio is monitored by our internal credit review function. Residential mortgage loans and consumer loans are not individually risk rated. Delinquency status is the primary measure we use to monitor the credit quality of these loans. We also consider original LTV and most recently available FICO score to be significant indicators of credit quality for the 1-4 single family residential portfolio, excluding government insured residential loans.
The following charts present information about the 1-4 single family residential portfolio, excluding government insured loans, by FICO distribution, LTV distribution and vintage at June 30, 2020:

65





sfrcreditquality.jpg
FICO scores are generally updated at least annually and LTVs are typically based on valuation at origination.
At June 30, 2020, the majority of the 1-4 single family residential loan portfolio, excluding government insured residential loans, was owner-occupied, with 81% primary residence, 8% second homes and 11% investment properties.
1-4 single family residential loans, excluding government insured residential loans, past due more than 30 days totaled $63.9 million and $66.3 million at June 30, 2020 and December 31, 2019, respectively. The amount of these loans 90 days or more past due was $11.8 million and $11.1 million at June 30, 2020 and December 31, 2019, respectively.
At June 30, 2020 and December 31, 2019 other consumer loans were all current.
The following table presents information about residential loans granted payment deferrals as a result of the COVID-19 pandemic, as of June 30, 2020, excluding government insured residential loans (dollars in millions):
 
 
 
 
 
 
 
Balance
 
% of Portfolio
 
Balance
 
% of Initial Deferrals
 
Balance
 
% of Portfolio
Residential
$
594

 
13
%
 
$
252

 
42
%
 
$
52

 
1
%
For residential borrowers, relief has typically taken the form of 90 day payment deferrals, with deferred payments due at the end of the 90 day period. At the end of the 90 day deferral period, residential borrowers may either (i) make all payments due, (ii) be granted an additional deferral period or (iii) enter into a modification or repayment plan. As indicated in the table above, 42% of residential borrowers granted an initial deferral continued to make payments during the deferral period.
Under recently issued regulatory guidance, residential borrowers granted an initial 90 day deferral are automatically granted an additional 90 day deferral period unless they actively "opt out" of the additional deferral.
Note 4 to the consolidated financial statements presents additional information about key credit quality indicators and delinquency status of the loan portfolio.
Non-Performing Assets
Non-performing assets generally consist of (i) non-accrual loans, including loans that have been modified in TDRs and placed on non-accrual status, (ii) accruing loans that are more than 90 days contractually past due as to interest or principal, excluding government insured residential loans, and (iii) OREO and repossessed assets.
The following table and charts summarize the Company's non-performing loans and non-performing assets at the dates indicated (dollars in thousands):
 
June 30, 2020
 
December 31, 2019
Non-accrual loans
 
 
 
Residential and other consumer:
 
 
 
1-4 single family residential
$
11,234

 
$
18,877

Other consumer loans
1,949

 
17

Total residential and other consumer loans
13,183

 
18,894

Commercial:
 
 
 
Multi-family
6,011

 
6,138

Non-owner occupied commercial real estate
46,545

 
40,097

Construction and land
3,703

 
3,191

Owner occupied commercial real estate
30,493

 
27,141

Commercial and industrial
67,702

 
74,757

Bridge - franchise finance
32,857

 
13,631

Bridge - equipment finance
1,148

 
20,939

Total commercial loans
188,459

 
185,894

Total non-accrual loans
201,642

 
204,788

Loans past due 90 days and still accruing
2,606

 
—

Total non-performing loans
204,248

 
204,788

OREO and repossessed assets
4,956

 
3,897

Total non-performing assets
$
209,204

 
$
208,685

 
 
 
 
Non-performing loans to total loans (1)
0.86
%
 
0.88
%
Non-performing assets to total assets (1)
0.60
%
 
0.63
%
ACL to total loans
1.12
%
 
0.47
%
ACL to non-performing loans
130.29
%
 
53.07
%
Net charge-offs to average loans (2)
0.20
%
 
0.05
%
 
 
(1)
Non-performing loans and assets include the guaranteed portion of non-accrual SBA loans totaling $45.7 million or 0.19% of total loans and 0.13% of total assets, at June 30, 2020; compared to $45.7 million or 0.20% of total loans and 0.14% of total assets, at December 31, 2019.
(2)
Annualized for June 30, 2020.

The following chart presents trends in non-performing loans and non-performing assets:
nplassettrend3.jpg
The following chart presents trends in non-performing loans by portfolio sub-segment (in millions):
assetqualitybyportfolio.jpg
The ultimate impact of the recent and evolving COVID-19 pandemic may not be reflected in the level of non-performing assets reported above. The potential effect on non-performing asset levels may be delayed in the near-term due to government assistance and loan deferral programs.
Contractually delinquent government insured residential loans 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 more than 90 days was $669 million and $529 million at June 30, 2020 and December 31, 2019, respectively. The increase of ACL to total loans and ACL to non-performing loans ratios at June 30, 2020 from December 31, 2019 is attributable to the adoption of CECL effective January 1, 2020 and the impact on the provision for credit losses recorded during the six months ended June 30, 2020 resulting from changes in economic conditions, our economic forecast and borrower financial performance as a result of COVID-19.
Commercial loans are placed on non-accrual status when (i) management has determined that full repayment of all contractual principal and interest is in doubt, or (ii) the loan is past due 90 days or more as to principal or interest unless the loan is well secured and in the process of collection. Residential and consumer loans, other than government insured pool buyout loans, are generally placed on non-accrual status when they are 90 days past due. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged to interest income. Commercial loans are returned to accrual status only after all past due principal and interest has been collected and full repayment of remaining contractual principal and interest is reasonably assured. Residential loans are generally returned to accrual status when less than 90 days past due. Past due status of loans is determined based on the contractual next payment due date. Loans less than 30 days past due are reported as current.
TDRs
A loan modification is considered a TDR if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise grant. These concessions may take the form of temporarily or permanently reduced interest rates, payment abatement periods, restructuring of payment terms, extensions of maturity at below market terms, or in some cases, partial forgiveness of principal. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy.
Under recently issued inter-agency and authoritative guidance and consistent with the CARES Act, short-term (generally periods of six months or less) deferrals or modifications related to COVID-19 will typically not be categorized as TDRs. All of the COVID-19 related deferrals the Company has granted to date fall into this category. See the sections entitled "Asset Quality - Commercial Loans - Payment Deferrals" and "Asset Quality - Residential and Other Consumer Loans" " for further discussion.
The following table summarizes loans that have been modified in TDRs at the dates indicated (dollars in thousands):
 
June 30, 2020
 
December 31, 2019
 
Number of TDRs
 
Amortized Cost
 
Related Specific Allowance
 
Number of TDRs
 
Amortized Cost
 
Related Specific Allowance
Residential and other consumer (1)
248

 
$
38,736

 
$
35

 
361

 
$
57,117

 
$
12

Commercial
30

 
62,100

 
5,644

 
25

 
56,736

 
6,311

 
278

 
$
100,836

 
$
5,679

 
386

 
$
113,853

 
$
6,323

 
 
(1)
Includes 232 government insured residential loans modified in TDRs totaling $34.9 million at June 30, 2020; and 346 government insured residential loans modified in TDRs totaling $53.4 million at December 31, 2019.
See Note 4 to the consolidated financial statements for additional information about TDRs.
Loss Mitigation Strategies
Criticized or classified commercial loans in excess of certain thresholds are reviewed quarterly by the Criticized Asset Committee, which evaluates the appropriate strategy for collection to mitigate the amount of credit losses. 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, impaired loans on non-accrual status, loans modified as TDRs or 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. In response to the COVID-19 pandemic, we have temporarily suspended new residential foreclosure actions.
In response to the COVID-19 pandemic and its potential economic impact to our customers, we implemented a short-term program that complies with the CARES Act under which we are providing temporary relief on a case by case basis to borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. See the sections entitled "Asset Quality - Commercial Loans - Payment Deferrals" and "Asset Quality - Residential and Other Consumer Loans" for further details about COVID-19 related payment deferrals. Under recently issued inter-agency guidance and consistent with the CARES Act, deferrals or modifications related to COVID-19 will generally not be categorized as TDRs. Loans subject to these temporary deferrals or modifications, if in compliance with the contractual terms of the deferral or modification agreements, will typically not be reported as past due or classified as non-accrual during the deferral period.
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 forecasts. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. There is currently a high level of uncertainty around the impact the COVID-19 crisis will have on the economy broadly, and on our borrowers specifically. In light of this uncertainty, we believe it is possible that the ACL estimate could change, potentially materially, in future periods. Changes in the ACL may result from changes in current economic conditions, our economic forecast, and in loan portfolio composition, as well as circumstances not currently known to us that may impact the financial condition and operations of our borrowers, among other factors.
For the substantial majority of the loan portfolio, expected losses are estimated using econometric models that employ a factor based methodology to estimate PD and LGD. Projected PDs and LGDs are applied to estimated exposure at default to generate estimates of expected loss at the loan level. These loan level estimates are aggregated by portfolio segment and loan class to generate a collective estimate for groups of loans that share common risk characteristics. Qualitative adjustments may also be applied to incorporate factors that management does not believe have been adequately considered in the quantitative estimate. For loans that do not share similar risk characteristics with other loans such as collateral dependent loans and TDRs, expected credit losses are estimated on an individual basis. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments.
See Note 1 to the consolidated financial statements for more detailed information about our ACL methodology and related accounting policies.

66





The following table provides an analysis of the ACL, provision for credit losses related to the funded portion of loans and net charge-offs for the periods indicated (in thousands). For the six months ended June 30, 2020, the ACL was estimated using the CECL methodology. For the six months ended June 30, 2019, prior to the adoption of ASU 2016-13, an incurred loss methodology was used.
 
Six Months Ended June 30,
 
2020
 
2019
Balance at beginning of period:
$
108,671

 
$
109,931

Impact of adoption of ASU 2016-13
27,305

 
—

 
135,976

 
109,931

Provision for (recovery of) loan losses:
 
 
 
1-4 single family residential
(8,538
)
 
397

Home equity loans and lines of credit
(40
)
 
(150
)
Other consumer loans
6

 
34

Multi-family
16,803

 
(1,330
)
Non-owner occupied commercial real estate
75,109

 
5,309

Construction and land
766

 
498

Owner occupied commercial real estate
5,205

 
(2,611
)
Commercial and industrial
31,735

 
6,481

Pinnacle
(173
)
 
(116
)
Bridge - franchise finance
26,527

 
1,094

Bridge - equipment finance
6,049

 
(2,072
)
Total Provision
153,449

 
7,534

Charge-offs:
 
 
 
1-4 single family residential
(31
)
 
—

Non-owner occupied commercial real estate
(552
)
 
(1,703
)
Construction and land
—

 
(76
)
Owner occupied commercial real estate
(187
)
 
(174
)
Commercial and industrial
(2,933
)
 
(4,688
)
Bridge - franchise finance
(16,561
)
 
(1,203
)
Bridge - equipment finance
(6,720
)
 
—

Total Charge-offs
(26,984
)
 
(7,844
)
Recoveries:
 
 
 
Home equity loans and lines of credit
43

 
149

Other consumer loans
2

 
18

Multi-family
2

 
—

Non-owner occupied commercial real estate
82

 
41

Owner occupied commercial real estate
92

 
718

Commercial and industrial
3,012

 
1,594

Bridge - franchise finance
449

 
—

Total Recoveries
3,682

 
2,520

Net Charge-offs
(23,302
)
 
(5,324
)
Balance at end of period
$
266,123

 
$
112,141


67






The following table shows the distribution of the ACL at the dates indicated (dollars in thousands):
 
June 30, 2020
 
March 31, 2020
 
January 1, 2020 (1)
 
December 31, 2019
 
Total
 
%(2)
 
Total
 
%(2)
 
Total
 
%(2)
 
Total
 
%(2)
Residential portfolio segment
$
10,695

 
23.5
%
 
$
12,576

 
24.4
%
 
$
19,252

 
24.5
%
 
$
11,154

 
24.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
21,049

 
7.9
%
 
13,087

 
8.5
%
 
4,244

 
9.6
%
 
5,024

 
9.6
%
Non-owner occupied commercial real estate
84,436

 
20.7
%
 
25,078

 
21.5
%
 
9,798

 
21.7
%
 
23,240

 
21.7
%
Construction and land
3,384

 
1.0
%
 
2,610

 
1.0
%
 
2,618

 
1.1
%
 
764

 
1.1
%
CRE portfolio segment
108,869

 
 
 
40,775

 
 
 
16,660

 
 
 
29,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate
36,416

 
8.6
%
 
50,685

 
8.7
%
 
31,306

 
8.9
%
 
8,066

 
8.9
%
Commercial and industrial
84,142

 
28.1
%
 
106,964

 
25.3
%
 
52,326

 
23.4
%
 
43,485

 
23.4
%
Pinnacle
238

 
5.1
%
 
585

 
5.0
%
 
411

 
5.2
%
 
720

 
5.2
%
Bridge - franchise finance
19,446

 
2.6
%
 
32,910

 
2.8
%
 
9,030

 
2.6
%
 
9,163

 
2.6
%
Bridge - equipment finance
6,317

 
2.5
%
 
6,084

 
2.8
%
 
6,991

 
3.0
%
 
7,055

 
3.0
%
Commercial portfolio segment
146,559

 
 
 
197,228

 
 
 
100,064

 
 
 
68,489

 
 
 
$
266,123

 
100.0
%
 
$
250,579

 
100.0
%
 
$
135,976

 
100.0
%
 
$
108,671

 
100.0
%
 
(1)
Adoption date of ASU 2016-13.
(2)
Represents percentage of loans receivable in each category to total loans receivable.

68





Changes in the ACL for the first quarter of 2020:
The following chart depicts the changes in the ACL from December 31, 2019 to March 31, 2020 (in millions):
aclwaterfallq12020.jpg
The increase in the ACL from January 1, 2020, the date of initial adoption of ASC 326, to March 31, 2020 was primarily due to changes in our reasonable and supportable economic forecast, in large part resulting from the estimated impact of the emerging COVID-19 pandemic, which added $93.3 million to the ACL. An increase in specific reserves, primarily related to the franchise finance portfolio, contributed an additional $16.1 million to the increase in the ACL for the three months ended March 31, 2020. The ACL for residential and other consumer loans decreased from January 1, 2020 to March 31,2020. This decline was primarily attributable to the introduction of a qualitative loss factor related to model imprecision.
ASU 2016-13 was adopted effective January 1, 2020, increasing the ACL by $27.3 million. In general, the change in methodology resulted in increased reserves due to the transition to a lifetime expected loss model from an incurred loss model. However, as noted in the table above, there are certain CRE portfolios where the reserve decreased. This was mainly driven by the use of quantitative models to estimate the ACL at the loan level, specific to the Company's portfolio, under CECL, instead of the peer group historical losses rates utilized under the prior incurred loss model. Certain qualitative factors were also removed, as their impact was captured in the quantitative estimate under CECL.

69





Changes in the ACL for the second quarter of 2020
The ACL increased by $15.5 million from March 31, 2020 to June 30, 2020. At a high level, increases in the ACL for CRE portfolio segments offset a decline in the ACL for most other commercial portfolio segments during the quarter, while the ACL for the residential segment did not change materially. Significant offsetting factors contributing to the change in the ACL for the second quarter are depicted in the chart below (in millions):
aclwaterfallq22020.jpg
 

70





The following charts depict the changes in the ACL by major portfolio segment from March 31, 2020 to June 30, 2020 (in millions):
aclwaterfallbysegmenta01.jpg
In the aggregate, the ACL for the CRE portfolio segments, including multi-family, non-owner occupied CRE and construction and land, increased by $68.1 million during the quarter ended June 30, 2020. The primary factors contributing to this increase were:
•
deterioration in current economic conditions and in the economic forecast, particularly unemployment levels and commercial property forecasts; and
•
a qualitative overlay based on data collected from borrowers reflecting recent deterioration in operating results or financial condition.
In the aggregate, the ACL for the commercial portfolio segments declined by $50.7 million during the quarter ended June 30, 2020. The largest segments in this group are commercial and industrial and owner-occupied CRE; the Bridge and Pinnacle portfolios are also included. The most significant offsetting factors contributing to this decrease were:
•
an increase related to deterioration in current economic conditions compared to the prior quarter-end, offset by a decrease related to the forward path of the economic forecast, particularly the path of the volatility index and the S&P 500 index which improved from the prior quarter-end;
•
a decrease related to changes in assumptions about expected prepayments; and
•
an increase from a qualitative overlay based on data collected from borrowers that reflected recent deterioration in operating results or financial condition.
The ACL for the franchise finance portfolio declined in part due to charge-offs taken during the second quarter.



71





The econometric models we use to estimate expected credit losses ingest a wide array of national, regional and MSA level economic variables and data points. Some of the data points informing the reasonable and supportable economic forecast used in estimating the ACL at June 30, 2020 were:
•
Unemployment rates starting at 13.4% and declining to 9% by the end of 2020, and to 7% by the end of 2021;
•
Annualized growth in GDP starting at negative (27%) with recovery beginning in the third quarter of 2020 and returning to pre-recession levels in 2023;
•
VIX trailing average starting at 32, remaining elevated through 2020, and then trending downward; and
•
S&P 500 starting at 2900 and declining moderately through 2020 before increasing.
For additional information about the ACL, see Note 4 to the consolidated financial statements.
Deposits
Average balances and rates paid on deposits were as follows for the periods indicated (dollars in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
 
Average
Balance
 
Average
Rate Paid
 
Average
Balance
 
Average
Rate Paid
 
Average
Balance
 
Average
Rate Paid
 
Average
Balance
 
Average
Rate Paid
Demand deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing
$
5,313,009

 
—
%
 
$
3,932,716

 
—
%
 
$
4,840,781

 
—
%
 
$
3,769,828

 
—
%
Interest bearing
2,448,545

 
0.78
%
 
1,773,912

 
1.41
%
 
2,311,086

 
1.02
%
 
1,738,393

 
1.38
%
Money market
10,270,027

 
0.68
%
 
10,710,550

 
1.95
%
 
10,251,575

 
1.08
%
 
10,964,547

 
1.93
%
Savings
180,283

 
0.09
%
 
214,030

 
0.28
%
 
179,681

 
0.14
%
 
223,271

 
0.28
%
Time
7,096,097

 
1.59
%
 
6,944,862

 
2.40
%
 
7,303,083

 
1.82
%
 
6,926,041

 
2.34
%
 
$
25,307,961

 
0.80
%
 
$
23,576,070

 
1.70
%
 
$
24,886,206

 
1.07
%
 
$
23,622,080

 
1.68
%
The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $100,000 as of June 30, 2020 (in thousands):
Three months or less
$
833,151

Over three through six months
967,778

Over six through twelve months
1,284,607

Over twelve months
166,568

 
$
3,252,104

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 FHLB stock, qualifying residential first mortgage and commercial real estate loans, and MBS.
We have utilized the Federal Reserve's PPPLF to fund PPP loans. These borrowings bear interest at 0.35%, are secured by PPP loans, and mature as the underlying PPP loans are repaid. FHLB and PPPLF borrowings consisted of the following at the dates indicated (in thousands):
 
June 30, 2020
 
December 31, 2019
FHLB advances, net of hedge accounting fair value adjustments
$
3,999,573

 
$
4,480,501

PPPLF borrowings
651,026

 
—

 
$
4,650,599

 
$
4,480,501


72





The contractual balance of FHLB advances outstanding at June 30, 2020 is scheduled to mature as follows (in thousands):
Maturing in:
 
2020—One month or less
$
1,470,000

2020—Over one month
2,176,000

2021
250,000

Thereafter
100,000

Total contractual balance outstanding
3,996,000

Cumulative fair value hedging adjustments
3,573

Carrying value
$
3,999,573

The table above reflects contractual maturities of outstanding FHLB advances, and does not incorporate the impact that interest rate swaps designated as hedges have on the duration of borrowings. See Note 7 to the consolidated financial statements for more information about derivative instruments.
Outstanding notes payable and other borrowings consisted of the following at the dates indicated (in thousands):
 
June 30, 2020
 
December 31, 2019
Senior notes:
 
 
 
Principal amount of 4.875% senior notes maturing on November 17, 2025
$
400,000

 
$
400,000

Unamortized discount and debt issuance costs
(4,547
)
 
(4,910
)
 
395,453

 
395,090

Subordinated notes:
 
 
 
Principal amount of 5.125% subordinated notes maturing on June 11, 2030
300,000

 
—

Unamortized discount and debt issuance costs
(6,116
)
 
—

 
293,884

 
—

Total outstanding notes payable
689,337

 
395,090

Finance leases
32,995

 
34,248

Notes and other borrowings
$
722,332

 
$
429,338


Capital Resources
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 June 30, 2020 and December 31, 2019, BankUnited and the Company had capital levels that exceeded both the regulatory well-capitalized guidelines and all internal capital ratio targets.

73

The following table provides information regarding regulatory capital for the Company and the Bank as of June 30, 2020 (dollars in thousands):
 
Actual
 
Required to be
Considered Well
Capitalized
 
Required to be
Considered
Adequately
Capitalized
 
Required to be Considered
Adequately
Capitalized Including Capital Conservation Buffer
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
BankUnited, Inc.:
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Tier 1 leverage
$
2,874,094

 
8.46
%
 
N/A (1)

 
N/A (1)

 
$
1,359,339

 
4.00
%
 
N/A (1)

 
N/A (1)

CET1 risk-based capital
$
2,874,094

 
12.19
%
 
$
1,533,087

 
6.50
%
 
$
1,061,368

 
4.50
%
 
$
1,651,017

 
7.00
%
Tier 1 risk-based capital
$
2,874,094

 
12.19
%
 
$
1,886,876

 
8.00
%
 
$
1,415,157

 
6.00
%
 
$
2,004,806

 
8.50
%
Total risk based capital
$
3,381,536

 
14.34
%
 
$
2,358,595

 
10.00
%
 
$
1,886,876

 
8.00
%
 
$
2,476,525

 
10.50
%
BankUnited:
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
Tier 1 leverage
$
3,147,423

 
9.29
%
 
$
1,694,528

 
5.00
%
 
$
1,355,622

 
4.00
%
 
N/A

 
N/A

CET1 risk-based capital
$
3,147,423

 
13.42
%
 
$
1,524,283

 
6.50
%
 
$
1,055,273

 
4.50
%
 
$
1,641,535

 
7.00
%
Tier 1 risk-based capital
$
3,147,423

 
13.42
%
 
$
1,876,040

 
8.00
%
 
$
1,407,030

 
6.00
%
 
$
1,993,293

 
8.50
%
Total risk based capital
$
3,354,864

 
14.31
%
 
$
2,345,050

 
10.00
%
 
$
1,876,040

 
8.00
%
 
$
2,462,303

 
10.50
%
 
 
(1)    There is no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company.
The Company initially elected to phase-in the initial impact of adopting CECL for regulatory capital purposes, allowing CECL's regulatory capital effects to be phased in at 25 percent per year, beginning in the first year of adoption. As part of its response to the impact of COVID-19, our banking regulators issued an inter-agency interim final rule providing the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period. The Company has elected to adopt the provisions of this interim final rule.
Total stockholders' equity decreased by approximately $226 million at June 30, 2020 compared to December 31, 2019. The most significant reason for this decrease was the repurchase of common shares, followed by a comprehensive loss of $66 million for the six months ended June 30, 2020. The comprehensive loss included an increase of $111 million in accumulated other comprehensive loss, attributed to an increase in unrealized losses on AFS securities and derivative instruments. See the section of this Management's Discussion and Analysis entitled "Analysis of Financial Condition; Investment Securities" and Note 3 to the consolidated financial statements for further discussion of unrealized losses on AFS securities. Management expects to recover the entire amortized cost basis of its AFS securities. Unrealized losses on derivative instruments designated as hedging instruments were attributable to reductions in benchmark interest rates. Other factors contributing to the decrease in total stockholders equity were the initial adoption of ASU 2016-13 which impacted retained earnings by $24 million, and dividends in the amount of $44 million.
During the first quarter of 2020, the Company repurchased approximately 3.3 million shares of its common stock for an aggregate purchase price of $101 million, at a weighted average price of $30.36 per share. The Company has temporarily suspended its share repurchase program.
We believe we are well positioned, from a capital perspective, to withstand a severe downturn in the economy. In light of the COVID-19 crisis, uncertainty around its ultimate impact on the economy and, by extension, on our financial condition and results of operations, we have enhanced our stress testing framework. We have increased both the frequency of stress testing and the spectrum of scenarios utilized. One exercise we completed was to stress our March 31, 2020 loan portfolio using both the 2018 DFAST severely adverse scenario and the 2020 DFAST severely adverse scenario. The results of each of these stress tests projected regulatory capital ratios in excess of all well capitalized thresholds.
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. We successfully accessed the capital markets in the second quarter of 2020, augmenting our regulatory Tier 2 capital with a $300 million issuance of subordinated notes.

74





Liquidity
Liquidity involves our ability to generate adequate funds to support planned interest earning asset growth, meet deposit withdrawal and credit line usage requests, maintain reserve requirements, conduct routine operations, pay dividends, service outstanding debt and meet other contractual obligations.
BankUnited's ongoing liquidity needs have been and continue to be met primarily by cash flows from operations, deposit growth, the investment portfolio and FHLB advances. For the six months ended June 30, 2020 and 2019 net cash provided by operating activities was $320.8 million and $237.8 million, respectively.
The onset of the COVID-19 pandemic led to dislocation and volatility in funding and capital markets and evoked widespread concerns about the ongoing functioning of those markets, the availability of liquidity and the economy generally. In response, the Federal Reserve reduced its benchmark interest rate to a target level of 0 - 0.25% and has maintained it at that level to date, actively adjusted the size of its overnight and term repurchase agreement operations, reduced reserve requirements and the cost of discount window borrowings, encouraged banks to utilize the discount window and committed to purchasing large amounts of U.S. Treasury securities and MBS. The U.S. government has announced an unprecedented variety of additional stimulus and measures to support markets, the flow of credit, and systemic liquidity. These include the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Term Asset-Backed Securities Loan Facility, the Municipal Liquidity Facility, the Main Street New Loan Facility, the Main Street Expanded Loan Facility, Paycheck Protection Program loans, the Paycheck Protection Program Liquidity Facility (PPPLF), the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Money Market Mutual Fund Liquidity Facility. These actions appear to have been effective in stabilizing market liquidity.
In response to the onset of COVID-19 and potential concerns that might arise about the stability of liquidity, we initially took a number of precautionary measures to ensure adequacy of liquidity. We took steps to optimize available same day liquidity. We increased the level of cash held on balance sheet, to be prepared to meet potential increased demand for deposit withdrawals and line usage, which to date have not materialized. While we took proactive steps to be prepared for disruptions in liquidity, the COVID-19 pandemic has not been a liquidity event; we have not experienced unusual volatility or stress on our liquidity position to date.
At June 30, 2020, available liquidity totaled approximately $9.8 billion, including cash, borrowing capacity at the Federal Home Loan Bank of Atlanta and the Federal Reserve Discount Window, Federal Funds lines of credit, unpledged agency securities and availability under the PPPLF, as depicted in the following chart:
liquidity.jpg
Additional sources of liquidity include cash flows from operations, wholesale deposits, and cash flow from the Bank's amortizing securities and loan portfolios. In the near-term, cash flows from the loan portfolio may be reduced as a result of temporary payment deferrals granted to borrowers. This has not to date and we do not currently expect it to materially impact our liquidity position. Management also has the ability to exert substantial control over the rate and timing of loan production,

75





and resultant requirements for liquidity to fund new loans. Since the onset of the COVID-19 pandemic, we have not experienced unusual deposit outflows or volatility. Credit line usage, which we have monitored regularly since the onset of COVID-19, has not deviated materially from and is currently below our trailing three year average. Our available liquidity may also change as the FHLB and Federal Reserve Bank reprice our collateral in the normal course of business based on June 30, 2020 valuations. Based on our initial analysis, we do not expect the impact to be material to our overall liquidity position.
The ALCO policy has established several measures of liquidity which are typically monitored monthly by the ALCO and quarterly by the Board of Directors. In light of the COVID-19 situation, we have enhanced the frequency and extent of liquidity monitoring and reporting to both executive management and the Board of Directors.
The ALCO policy establishes limits for the ratio of available liquidity to volatile liabilities, the ratio of wholesale funding to total assets, the ratio of brokered deposits to total deposits and a government backed securities holding ratio, measured as the ratio of U.S. Government backed securities to total securities. At June 30, 2020 BankUnited was in compliance with all of these ALCO policy limits.
An additional primary measure of liquidity monitored by management is the 30-day total liquidity ratio, defined as (a) the sum of cash and cash equivalents, pledgeable securities and a measure of funds expected to be generated by operations over the next 30 days; divided by (b) the sum of potential deposit runoff, liabilities maturing within the 30 day time frame and a measure of funds expected to be used in operations over the next 30 days. ALCO policy thresholds stipulate that BankUnited’s liquidity is considered acceptable if the 30-day total liquidity ratio exceeds 100%. At June 30, 2020, BankUnited’s 30-day total liquidity ratio was 235%. Management also monitors a one-year liquidity ratio, defined as (a) cash and cash equivalents, pledgeable securities, unused borrowing capacity at the FHLB, and loans and non-agency securities maturing within one year; divided by (b) forecasted deposit outflows and borrowings maturing within one year. This ratio allows management to monitor liquidity over a longer time horizon. The acceptable threshold established by the ALCO for this liquidity measure is 100%. At June 30, 2020, BankUnited’s one-year liquidity ratio was 207%. Additional measures of liquidity regularly monitored by the ALCO include the ratio of FHLB advances to total funding, concentrations of large deposits, a measure of on balance sheet available liquidity 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. The Company also has a comprehensive contingency liquidity funding plan and conducts a quarterly liquidity stress test, the results of which are reported to the risk committee of the Board of Directors.
As a holding company, BankUnited, Inc. is a corporation separate and apart from its banking subsidiary, and therefore, provides for its own liquidity. BankUnited, Inc.’s main sources of funds include management fees and dividends from the Bank, access to capital markets and 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.
We expect that our liquidity requirements will continue to be satisfied over the next 12 months through the sources of funds described above.
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 limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with these policies. The thresholds established by the ALCO are approved at least annually by the Board of Directors or its Risk Committee.
Management believes that the simulation of net interest income in different interest rate environments provides the most meaningful measure of interest rate risk. Income simulation analysis is designed to capture not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them.
The income simulation model analyzes interest rate sensitivity by projecting net interest income over twelve and twenty-four month periods in a most likely rate scenario based on consensus forward interest rate curves versus net interest income in alternative rate scenarios. Management continually reviews and refines its interest rate risk management process in response to changes in the interest rate environment and economic climate. Currently, we are modeling instantaneous rate shocks of plus 100, plus 200, plus 300 and plus 400 basis point shifts as well as a variety of yield curve slope, negative rate and dynamic

76





balance sheet scenarios. We continually evaluate the scenarios being modeled with a view toward adapting them to changing economic conditions, expectations and trends.
The Company’s ALCO policy provides that net interest income sensitivity will be considered acceptable if decreases in forecast net interest income in specified parallel rate shock scenarios, generally by policy plus and minus 100, 200, 300 and 400 basis points, are within specified percentages of forecast net interest income in the most likely rate scenario over the next twelve months and in the second year. At June 30, 2020, the most likely rate scenario assumes that all indices are floored at 0%. We did not apply the minus rate scenarios at June 30, 2020 due to the low level of current interest rates. The following table illustrates the thresholds set forth in the ALCO policy and the impact on forecasted net interest income in the indicated simulated scenarios at June 30, 2020 and December 31, 2019:
 
Down 100
 
Plus 100
 
Plus 200
 
Plus 300
 
Plus 400
Policy Thresholds:
 
 
 
 
 
 
 
 
 
In year 1
(6.0
)%
 
(6.0
)%
 
(10.0
)%
 
(14.0
)%
 
(18.0
)%
In year 2
(9.0
)%
 
(9.0
)%
 
(13.0
)%
 
(17.0
)%
 
(21.0
)%
Model Results at June 30, 2020 - increase (decrease):
 
 
 
 
 
 
 
 
 
In year 1
N/A
 
2.6
 %
 
3.7
 %
 
3.5
 %
 
2.5
 %
In year 2
N/A
 
3.0
 %
 
4.9
 %
 
5.3
 %
 
4.7
 %
Model Results at December 31, 2019 - increase (decrease):
 
 
 
 
 
 
 
 
 
In year 1
(1.1
)%
 
1.0
 %
 
0.1
 %
 
(2.1
)%
 
(5.1
)%
In year 2
(4.8
)%
 
4.6
 %
 
7.2
 %
 
8.7
 %
 
9.4
 %
Management also simulates changes in EVE in various interest rate environments. The ALCO policy has established parameters of acceptable risk that are defined in terms of the percentage change in EVE from a base scenario under eight rate scenarios, derived by implementing immediate parallel movements of plus and down 100, 200, 300 and 400 basis points from current rates. We did not simulate decreases in interest rates at June 30, 2020 due to the currently low level of market interest rates. The following table illustrates the acceptable thresholds as established by ALCO and the modeled change in EVE in the indicated scenarios at June 30, 2020 and December 31, 2019:
 
Down 100
 
Plus 100
 
Plus 200
 
Plus 300
 
Plus 400
Policy Thresholds
(9.0
)%
 
(9.0
)%
 
(18.0
)%
 
(27.0
)%
 
(36.0
)%
Model Results at June 30, 2020 - increase (decrease):
N/A
 
1.4
 %
 
(1.2
)%
 
(5.1
)%
 
(9.3
)%
Model Results at December 31, 2019 - increase (decrease):
(1.5
)%
 
(0.7
)%
 
(3.1
)%
 
(6.2
)%
 
(9.7
)%
These measures fall within an acceptable level of interest rate risk per the thresholds established in the ALCO policy.
Many assumptions were used by the Company to calculate the impact of changes in interest rates, including the change in rates. Actual results may not be similar to the Company’s projections due to several factors including the timing and frequency of rate changes, market conditions, changes in depositor behavior and loan prepayment speeds and the shape of the yield curve. Actual results may also differ due to the Company’s actions, if any, in response to changing rates and conditions.
Derivative Financial Instruments
Interest rate swaps designated as cash flow or fair value hedging instruments are one of the tools we use to manage interest rate risk. These derivative instruments are used to mitigate exposure to changes in interest cash flows on variable rate borrowings and to changes in the fair value of fixed rate borrowings, in each case caused by fluctuations in benchmark interest rates, as well as to manage duration of liabilities. The fair value of derivative instruments designated as hedges is included in other assets and other liabilities in our consolidated balance sheets. Changes in fair value of derivative instruments designated as cash flow hedges are reported in accumulated other comprehensive income. Changes in the fair value of derivative instruments designated as fair value hedges are recognized in earnings, as is the offsetting gain or loss on the hedged item. At June 30, 2020, outstanding interest rate swaps designated as cash flow hedges had an aggregate notional amount of $3.0 billion and outstanding interest rate swaps designated as fair value hedges had an aggregate notional amount of $250 million. The aggregate fair value of interest rate swaps designated as cash flow hedges included in other liabilities was $7.2 million.
Interest rate swaps and caps not designated as hedges had an aggregate notional amount of $3.0 billion at June 30, 2020. The aggregate fair value of these interest rate swaps and caps included in other assets was $145.8 million and the aggregate fair

77





value included in other liabilities was $44.9 million. These interest rate swaps and caps were entered into as accommodations to certain of our commercial borrowers. To mitigate interest rate risk associated with these derivatives, the Company enters into offsetting derivative positions with primary dealers.
See Note 7 to the consolidated financial statements for additional information about derivative financial instruments.
Off-Balance Sheet Arrangements
For more information on contractual obligations and commitments, see Note 11 to the consolidated financial statements, the Borrowings section of this MD&A and Off-Balance Sheet Arrangements in the MD&A of the Company's 2019 Annual report on Form 10-K.
Non-GAAP Financial Measures
PPNR is a non-GAAP financial measure. Management believes this measure is relevant to understanding the performance of the Company attributable to elements other than the provision for credit losses, particularly in view of the adoption of the CECL accounting methodology, which may impact comparability of operating results to prior periods. This measure also provides a meaningful basis for comparison to other financial institutions and is a measure frequently cited by investors. The following table reconciles the non-GAAP financial measurement of PPNR to the comparable GAAP financial measurement of income before income taxes for the three and six months ended June 30, 2020 and 2019 and the three months ended March 31, 2020 (in thousands):
 
Three Months Ended June 30,
 
Three Months Ended March 31,
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2020
 
2019
 
2020
 
2019
Income (loss) before income taxes (GAAP)
$
96,904

 
$
(40,422
)
 
$
108,882

 
$
56,482

 
$
199,067

Plus: Provision for (recovery of) credit losses
25,414

 
125,428

 
(2,747
)
 
150,842

 
7,534

PPNR (non-GAAP)
$
122,318

 
$
85,006

 
$
106,135

 
$
207,324

 
$
206,601

Recurring operating expenses is a non-GAAP financial measure. Management believes disclosure of this measure provides readers with information that may be useful in comparing current period results to prior periods and in interpreting trends in operational costs, particularly in light of our BankUnited 2.0 initiative. The following table reconciles the non-GAAP financial measurement of recurring operating expenses to the comparable GAAP financial measurement of total non-interest expense for the three and six months ended June 30, 2020 and 2019 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Total non-interest expense (GAAP)
$
106,370

 
$
120,085

 
$
225,238

 
$
246,775

Less:
 
 
 
 
 
 
 
Depreciation of operating lease equipment
(12,219
)
 
(11,489
)
 
(24,822
)
 
(23,301
)
Costs incurred directly related to implementation of BankUnited 2.0
(255
)
 
(6,217
)
 
(334
)
 
(12,109
)
COVID-19 expenses
(1,519
)
 
—

 
(1,519
)
 
—

Recurring operating expenses (non-GAAP)
$
92,377

 
$
102,379

 
$
198,563

 
$
211,365


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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 base 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 June 30, 2020 (in thousands except share and per share data): 
Total stockholders’ equity
$
2,755,053

Less: goodwill and other intangible assets
77,652

Tangible stockholders’ equity
$
2,677,401

 
 
Common shares issued and outstanding
92,420,278

 
 
Book value per common share
$
29.81

 
 
Tangible book value per common share
$
28.97

Item 3.  Quantitative and Qualitative Disclosures About Market Risk
See the section entitled “Interest Rate Risk” included in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Effective January 1, 2020, the Company adopted ASU 2016-13. The Company designed new controls and modified existing controls as part of its adoption. These additional internal controls over financial reporting included controls over model governance, assumptions, the determination of a reasonable and supportable economic forecast, and expanded controls over loan level data.
During the quarter ended June 30, 2020, there were no changes in the Company's internal control over financial reporting, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. We have focused on insuring that our technology systems and internal controls continue to operate effectively in a remote work environment and have not identified any instances in which our control environment has failed to operate effectively. We are continually monitoring and assessing any impact of the COVID-19 situation on our internal controls to address impacts to their design, implementation and operating effectiveness.
PART II.  OTHER INFORMATION
Item 1.   Legal Proceedings
 The Company is involved as plaintiff or defendant in various legal actions arising in the normal course of business. In the opinion of management, based upon currently available information and the advice of legal counsel, the likelihood is remote that the impact of these proceedings, either individually or in the aggregate, would be material to the Company’s consolidated financial position, results of operations or cash flows.
We received a subpoena from the United States Department of Justice in October 2019 requesting documentation related to the taxi medallion line of business formerly conducted by the Bank. We are cooperating with this investigation.
Item 1A.   Risk Factors
The COVID-19 pandemic has caused substantial disruption to the global economy which has adversely affected, and is expected to continue to adversely affect, the Company’s business and results of operations. The future impacts of the COVID-19 pandemic on the global economy and the Company’s business, results of operations and financial condition remains uncertain.
In March 2020, the World Health Organization declared novel coronavirus disease 2019 (COVID-19) as a global pandemic. The pandemic has resulted in governmental authorities implementing numerous measures attempting to contain the spread and impact of COVID-19 such as travel bans and restrictions, quarantines, shelter in place orders, and limitations on business activities, including in major markets in which the Company and its clients are located or do business. The COVID-19 pandemic, and governmental responses to the pandemic, have severely negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels.
This macroeconomic environment has had, and could continue to have, an adverse effect on the Company’s business and operations. Should current economic impacts persist or continue to deteriorate, this macroeconomic environment could have a continued adverse effect on our business and operations, including, but not limited to, decreased demand for the Company’s products and services, protracted periods of lower interest rates, loss of income resulting from forbearances, deferrals and fee waivers provided by the Company to its consumer and commercial borrowers, increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs and possible constraints on liquidity and capital, whether due to increases in risk-weighted assets related to supporting client activities or to regulatory actions. The business operations of the Company may also be disrupted if significant portions of its workforce or those of vendors or third-party service providers are unable to work effectively, including because of illness, quarantines, government actions, restrictions in connection with the pandemic, and technology limitations and/or disruptions. The Company also faces an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions taken by governmental authorities in response to those conditions.

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The extent to which the COVID-19 pandemic impacts the Company’s business, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Moreover, the effects of the COVID-19 pandemic may heighten many of the other risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K including, but not limited to, financial market conditions, economic conditions, credit risk, interest rate risk, risk of security breaches and technology changes.
There have been no material changes in the other risk factors disclosed by the Company in its 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2020.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
None.

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Item 6. 
Exhibits
Exhibit
Number
 
Description
 
Location
 
 
 
 
 
 
 
Filed herewith
 
 
 
 
 
 
 
Filed herewith
 
 
 
 
 
 
 
Filed herewith
 
 
 
 
 
 
 
Filed herewith
 
 
 
 
 
101.INS
 
The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document
 
Filed herewith
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
Filed herewith
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
Filed herewith
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
Filed herewith
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
Filed herewith
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
Filed herewith

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized this 7th day of August 2020. 
 
/s/ Rajinder P. Singh
 
Rajinder P. Singh
 
Chairman, President and Chief Executive Officer
 
 
 
 
 
/s/ Leslie N. Lunak
 
Leslie N. Lunak
 
Chief Financial Officer

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