10-Q 1 document-20180930.htm 10-Q Document

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

FORM 10-Q
 
ý                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended September 30, 2018
OR 
o                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from              to 
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer ý
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
Emerging growth company o
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  o  No  ý 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
Class
 
November 2, 2018
Common Stock, $0.01 Par Value
 
103,066,802
 




BANKUNITED, INC.
Form 10-Q
For the Quarter Ended September 30, 2018
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)
AFS
 
Available for sale
ALCO
 
Asset/Liability Committee
ALLL
 
Allowance for loan and lease losses
AOCI
 
Accumulated other comprehensive income
ARM
 
Adjustable rate mortgage
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
CET1
 
Common Equity Tier 1 capital
CECL
 
Current expected credit loss
CME
 
Chicago Mercantile Exchange
CMOs
 
Collateralized mortgage obligations
Commercial Shared-Loss Agreement
 
A commercial and other loans shared-loss agreement entered into with the FDIC in connection with the FSB Acquisition
Covered assets
 
Assets covered under the Loss Sharing Agreements
Covered loans
 
Loans covered under the Loss Sharing Agreements
EVE
 
Economic value of equity
FASB
 
Financial Accounting Standards Board
FDIA
 
Federal Deposit Insurance Act
FDIC
 
Federal Deposit Insurance Corporation
FHLB
 
Federal Home Loan Bank
FHA loan
 
Loan guaranteed by the Federal Housing Administration
FICO
 
Fair Isaac Corporation (credit score)
FNMA
 
Federal National Mortgage Association
FRB
 
Federal Reserve Bank
FSB Acquisition
 
Acquisition of substantially all of the assets and assumption of all of the non-brokered deposits and substantially all of the other liabilities of BankUnited, FSB from the FDIC on May 21, 2009
GAAP
 
U.S. generally accepted accounting principles
GDP
 
Gross Domestic Product
GNMA
 
Government National Mortgage Association
HTM
 
Held to maturity
IPO
 
Initial public offering
ISDA
 
International Swaps and Derivatives Association
LIBOR
 
London InterBank Offered Rate
Loss Sharing Agreements
 
Two loss sharing agreements entered into with the FDIC in connection with the FSB Acquisition

ii


LTV
 
Loan-to-value
MBS
 
Mortgage-backed securities
MSA
 
Metropolitan Statistical Area
MSRs
 
Mortgage servicing rights
Non-ACI
 
Loans acquired without evidence of deterioration in credit quality since origination
Non-Covered Loans
 
Loans other than those covered under the Loss Sharing Agreements
NYTLC
 
New York City Taxi and Limousine Commission
OCI
 
Other comprehensive income
OCC
 
Office of the Comptroller of the Currency
OREO
 
Other real estate owned
OTTI
 
Other-than-temporary impairment
PSU
 
Performance Share Unit
Pinnacle
 
Pinnacle Public Finance, Inc.
RSU
 
Restricted Share Unit
SBA
 
U.S. Small Business Administration
SBF
 
Small Business Finance Unit
SEC
 
Securities and Exchange Commission
Single Family Shared-Loss Agreement
 
A single-family loan shared-loss agreement entered into with the FDIC in connection with the FSB Acquisition
TCJA
 
The Tax Cuts and Jobs Act of 2017
TDR
 
Troubled-debt restructuring
UPB
 
Unpaid principal balance
VA loan
 
Loan guaranteed by the U.S. Department of Veterans Affairs


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)
 
September 30,
2018
 
December 31,
2017
ASSETS
 

 
 

Cash and due from banks:
 

 
 

Non-interest bearing
$
11,644

 
$
35,246

Interest bearing
268,155

 
159,336

Cash and cash equivalents
279,799

 
194,582

Investment securities (including securities recorded at fair value of $7,217,403 and $6,680,832)
7,227,403

 
6,690,832

Non-marketable equity securities
273,427

 
265,989

Loans held for sale
37,179

 
34,097

Loans (including covered loans of $359,767 and $503,118)
21,919,171

 
21,416,504

Allowance for loan and lease losses
(124,740
)
 
(144,795
)
Loans, net
21,794,431

 
21,271,709

FDIC indemnification asset
152,517

 
295,635

Bank owned life insurance
262,987

 
252,462

Equipment under operating lease, net
661,677

 
599,502

Goodwill and other intangible assets
77,729

 
77,796

Other assets
746,487

 
664,382

Total assets
$
31,513,636

 
$
30,346,986

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Liabilities:
 

 
 

Demand deposits:
 

 
 

Non-interest bearing
$
3,413,610

 
$
3,071,032

Interest bearing
1,587,812

 
1,757,581

Savings and money market
10,588,075

 
10,715,024

Time
6,715,793

 
6,334,842

Total deposits
22,305,290

 
21,878,479

Federal funds purchased
175,000

 

Federal Home Loan Bank advances
4,946,000

 
4,771,000

Notes and other borrowings
402,780

 
402,830

Other liabilities
609,678

 
268,615

Total liabilities
28,438,748

 
27,320,924

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' equity:
 

 
 

Common stock, par value $0.01 per share, 400,000,000 shares authorized; 103,793,325 and 106,848,185 shares issued and outstanding
1,037

 
1,068

Paid-in capital
1,364,864

 
1,498,227

Retained earnings
1,667,092

 
1,471,781

Accumulated other comprehensive income
41,895

 
54,986

Total stockholders' equity
3,074,888

 
3,026,062

Total liabilities and stockholders' equity
$
31,513,636

 
$
30,346,986

 

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



BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 

 
 

Loans
$
293,543

 
$
253,815

 
$
855,807

 
$
739,586

Investment securities
59,319

 
51,851

 
165,396

 
141,624

Other
4,855

 
3,777

 
13,145

 
10,606

Total interest income
357,717

 
309,443

 
1,034,348

 
891,816

Interest expense:
 
 
 
 
 
 
 
Deposits
75,257

 
45,919

 
196,916

 
120,161

Borrowings
30,492

 
22,260

 
82,392

 
60,209

Total interest expense
105,749

 
68,179

 
279,308

 
180,370

Net interest income before provision for loan losses
251,968

 
241,264

 
755,040

 
711,446

Provision for (recovery of) loan losses (including ($50), $261, $517 and $2,693 for covered loans)
1,200

 
37,854

 
13,342

 
63,573

Net interest income after provision for loan losses
250,768

 
203,410

 
741,698

 
647,873

Non-interest income:
 
 
 
 
 
 
 
Income from resolution of covered assets, net
3,134

 
6,400

 
10,689

 
22,066

Net gain (loss) on FDIC indemnification
3,090

 
(4,838
)
 
(1,925
)
 
(14,174
)
Deposit service charges and fees
3,677

 
3,251

 
10,674

 
9,706

Gain (loss) on sale of loans, net (including $5,037, $0, $4,739 and $(1,582) related to covered loans)
8,691

 
2,447

 
12,960

 
6,601

Gain on investment securities, net
432

 
26,931

 
2,938

 
29,194

Lease financing
14,091

 
13,287

 
45,685

 
40,067

Other non-interest income
5,620

 
5,848

 
17,673

 
17,903

Total non-interest income
38,735

 
53,326

 
98,694

 
111,363

Non-interest expense:
 
 
 
 
 
 
 
Employee compensation and benefits
65,612

 
58,327

 
198,185

 
178,386

Occupancy and equipment
18,887

 
18,829

 
56,704

 
56,689

Amortization of FDIC indemnification asset
48,255

 
45,225

 
132,852

 
135,351

Deposit insurance expense
5,375

 
5,764

 
14,810

 
16,827

Professional fees
5,240

 
2,748

 
10,772

 
12,573

Telecommunications and data processing
4,187

 
3,452

 
11,772

 
10,481

Depreciation of equipment under operating lease
9,870

 
8,905

 
28,662

 
25,655

Other non-interest expense
13,372

 
13,455

 
40,105

 
37,735

Total non-interest expense
170,798

 
156,705

 
493,862

 
473,697

Income before income taxes
118,705

 
100,031

 
346,530

 
285,539

Provision for income taxes
21,377

 
32,252

 
74,067

 
89,060

Net income
$
97,328

 
$
67,779

 
$
272,463

 
$
196,479

Earnings per common share, basic
$
0.90

 
$
0.62

 
$
2.50

 
$
1.79

Earnings per common share, diluted
$
0.90

 
$
0.62

 
$
2.49

 
$
1.79

Cash dividends declared per common share
$
0.21

 
$
0.21

 
$
0.63

 
$
0.63


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



BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
(In thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income
$
97,328

 
$
67,779

 
$
272,463

 
$
196,479

Other comprehensive income (loss), net of tax:
 
 


 
 
 
 

Unrealized gains on investment securities available for sale:
 
 


 
 
 
 

Net unrealized holding gain (loss) arising during the period
(18,147
)
 
8,557

 
(58,577
)
 
32,826

Reclassification adjustment for net securities gains realized in income
(382
)
 
(16,293
)
 
(2,974
)
 
(17,662
)
Net change in unrealized gains on securities available for sale
(18,529
)
 
(7,736
)
 
(61,551
)
 
15,164

Unrealized gains on derivative instruments:
 
 


 
 
 
 

Net unrealized holding gain (loss) arising during the period
10,536

 
(170
)
 
40,175

 
(8,337
)
Reclassification adjustment for net (gains) losses realized in income
(772
)
 
1,210

 
(617
)
 
4,515

Net change in unrealized gains on derivative instruments
9,764

 
1,040

 
39,558

 
(3,822
)
Other comprehensive income (loss)
(8,765
)
 
(6,696
)
 
(21,993
)
 
11,342

Comprehensive income
$
88,563

 
$
61,083

 
$
250,470

 
$
207,821



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



BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income
$
272,463

 
$
196,479

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization and accretion, net
(97,064
)
 
(71,111
)
Provision for loan losses
13,342

 
63,573

Income from resolution of covered assets, net
(10,689
)
 
(22,066
)
Net loss on FDIC indemnification
1,925

 
14,174

Gain on sale of loans, net
(12,960
)
 
(6,601
)
Gain on investment securities, net
(2,938
)
 
(29,194
)
Equity based compensation
18,045

 
14,337

Depreciation and amortization
51,472

 
45,204

Deferred income taxes
60,071

 
31,625

Proceeds from sale of loans held for sale
182,330

 
126,778

Loans originated for sale, net of repayments
(125,509
)
 
(109,588
)
Other:
 
 
 
(Increase) decrease in other assets
(77,393
)
 
11,096

Increase (decrease) in other liabilities
130,827

 
(33,546
)
Net cash provided by operating activities
403,922

 
231,160

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of investment securities
(2,557,757
)
 
(2,355,872
)
Proceeds from repayments and calls of investment securities
1,134,995

 
861,618

Proceeds from sale of investment securities
938,555

 
827,353

Purchase of non-marketable equity securities
(235,876
)
 
(185,718
)
Proceeds from redemption of non-marketable equity securities
228,438

 
199,751

Purchases of loans
(913,840
)
 
(949,294
)
Loan originations, repayments and resolutions, net
320,550

 
(192,075
)
Proceeds from sale of loans, net
250,769

 
98,404

Proceeds from sale of equipment under operating lease
50,902

 
3,173

Acquisition of equipment under operating lease
(137,305
)
 
(77,121
)
Other investing activities
(16,548
)
 
(14,950
)
Net cash used in investing activities
(937,117
)
 
(1,784,731
)
 
 
 
(Continued)


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



BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from financing activities:
 

 
 

Net increase in deposits
426,811

 
1,732,354

Net increase in federal funds purchased
175,000

 

Additions to Federal Home Loan Bank advances
3,847,000

 
3,921,000

Repayments of Federal Home Loan Bank advances
(3,672,000
)
 
(4,290,000
)
Dividends paid
(68,911
)
 
(68,583
)
Exercise of stock options
7,727

 
61,519

Repurchase of common stock
(150,000
)
 

Other financing activities
52,785

 
41,569

Net cash provided by financing activities
618,412

 
1,397,859

Net increase (decrease) in cash and cash equivalents
85,217

 
(155,712
)
Cash and cash equivalents, beginning of period
194,582

 
448,313

Cash and cash equivalents, end of period
$
279,799

 
$
292,601

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
269,520

 
$
169,759

Income taxes paid, net
$
21,031

 
$
46,320

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Transfers from loans to other real estate owned and other repossessed assets
$
9,411

 
$
6,738

Transfers from loans to loans held for sale
$
54,322

 
$
1,971

Dividends declared, not paid
$
22,394

 
$
23,045

Unsettled purchases of investment securities
$
146,503

 
$
107,500


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



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
 
Total
Stockholders’
Equity
Balance at June 30, 2018
106,241,116

 
$
1,062

 
$
1,455,554

 
$
1,592,157

 
$
50,660

 
$
3,099,433

Comprehensive income

 

 

 
97,328

 
(8,765
)
 
88,563

Dividends

 

 

 
(22,393
)
 

 
(22,393
)
Equity based compensation
11,857

 

 
5,067

 

 

 
5,067

Forfeiture of unvested shares and shares surrendered for tax withholding obligations
(27,999
)
 

 
(181
)
 

 

 
(181
)
Repurchase of common stock
(2,431,649
)
 
(25
)
 
(95,576
)
 

 

 
(95,601
)
Balance at September 30, 2018
103,793,325

 
$
1,037

 
$
1,364,864

 
$
1,667,092

 
$
41,895

 
$
3,074,888

 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2017
106,800,972

 
$
1,068

 
$
1,488,159

 
$
1,032,308

 
$
59,285

 
$
2,580,820

Comprehensive income

 

 

 
67,779

 
(6,696
)
 
61,083

Dividends

 

 

 
(23,045
)
 

 
(23,045
)
Equity based compensation
26,307

 

 
4,723

 

 

 
4,723

Forfeiture of unvested shares and shares surrendered for tax withholding obligations
(5,377
)
 

 
(92
)
 

 

 
(92
)
Balance at September 30, 2017
106,821,902

 
$
1,068

 
$
1,492,790

 
$
1,077,042

 
$
52,589

 
$
2,623,489

 
Common
Shares
Outstanding
 
Common
Stock
 
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
Balance at December 31, 2017
106,848,185

 
$
1,068

 
$
1,498,227

 
$
1,471,781

 
$
54,986

 
$
3,026,062

Cumulative effect of adoption of new accounting standards

 

 

 
(8,902
)
 
8,902

 

Comprehensive income

 

 

 
272,463

 
(21,993
)
 
250,470

Dividends

 

 

 
(68,250
)
 

 
(68,250
)
Equity based compensation
666,277

 
6

 
15,403

 

 

 
15,409

Forfeiture of unvested shares and shares surrendered for tax withholding obligations
(235,719
)
 
(2
)
 
(6,528
)
 

 

 
(6,530
)
Exercise of stock options
291,689

 
3

 
7,724

 

 

 
7,727

Repurchase of common stock
(3,777,107
)
 
(38
)
 
(149,962
)
 

 

 
(150,000
)
Balance at September 30, 2018
103,793,325

 
$
1,037

 
$
1,364,864

 
$
1,667,092

 
$
41,895

 
$
3,074,888

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
104,166,945

 
$
1,042

 
$
1,426,459

 
$
949,681

 
$
41,247

 
$
2,418,429

Comprehensive income

 

 

 
196,479

 
11,342

 
207,821

Dividends

 

 

 
(69,118
)
 

 
(69,118
)
Equity based compensation
618,306

 
6

 
12,103

 

 

 
12,109

Forfeiture of unvested shares and shares surrendered for tax withholding obligations
(267,457
)
 
(3
)
 
(7,268
)
 

 

 
(7,271
)
Exercise of stock options
2,304,108

 
23

 
61,496

 

 

 
61,519

Balance at September 30, 2017
106,821,902

 
$
1,068

 
$
1,492,790

 
$
1,077,042

 
$
52,589

 
$
2,623,489

 


The accompanying notes are an integral part of these consolidated financial statements.
6

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018



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 86 banking centers located in 15 Florida counties and 5 banking centers located in the New York metropolitan area at September 30, 2018. The Bank also offers certain commercial lending and deposit products through national platforms.
In connection with the FSB Acquisition, BankUnited entered into two loss sharing agreements with the FDIC. The Loss Sharing Agreements consisted of the Single Family Shared-Loss Agreement and the Commercial Shared-Loss Agreement. Assets covered by the Loss Sharing Agreements are referred to as covered assets or, in certain cases, covered loans. The Single Family Shared-Loss Agreement provides for FDIC loss sharing and the Bank’s reimbursement for recoveries to the FDIC through May 21, 2019 for single family residential loans and OREO. Loss sharing under the Commercial Shared-Loss Agreement terminated on May 21, 2014. The Commercial Shared-Loss Agreement continued to provide for the Bank’s reimbursement of recoveries to the FDIC through June 30, 2017 for all other covered assets, including commercial real estate, commercial and industrial and consumer loans, certain investment securities and commercial OREO. Pursuant to the terms of the Loss Sharing Agreements, the covered assets are subject to a stated loss threshold whereby the FDIC will reimburse BankUnited for 80% of losses related to the covered assets up to $4.0 billion and 95% of losses in excess of this amount, beginning with the first dollar of loss incurred.
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, 2017 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 nine months ended September 30, 2018 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 ALLL, the amount and timing of expected cash flows from covered assets and the FDIC indemnification asset, the fair values of investment securities and other financial instruments and uncertain tax positions. Management has used information provided by third party valuation specialists to assist in the determination of the fair values of investment securities.
New Accounting Pronouncements Adopted
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), superseded the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Accounting Standards Codification. The amendments in this update affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other standards. The amendments establish a core principle requiring the recognition of revenue to depict the transfer of goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services and require expanded disclosure about revenue from contracts with customers that are within the scope of the standard. Revenue from financial instruments and lease contracts are generally outside the scope of Topic 606 as are revenues that are in the scope of ASC 860 "Transfers and Servicing", ASC 460 "Guarantees" and ASC 815 "Derivatives and Hedging". The Company adopted this standard in the first quarter of 2018 with respect to contracts not completed on the date of adoption using the modified retrospective transition method. Substantially all of the Company's revenues are generated from activities outside the scope of Topic 606; existing revenue recognition policies for contracts with

7

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


customers that are within the scope of the standard are consistent with the principles in Topic 606. Therefore, there was no impact at adoption to the Company's consolidated financial position, results of operations, or cash flows.
ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in the ASU addressed certain aspects of recognition, measurement, presentation and disclosure of certain financial instruments. The main provisions of this ASU that are applicable to the Company are to (1) eliminate the available for sale classification for equity securities and require investments in equity securities (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, provided that equity investments that do not have readily determinable fair values may be re-measured at fair value upon occurrence of an observable price change or recognition of impairment, (2) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, and (3) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments also clarified that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets, which is consistent with the Company's previous practice. The Company adopted this ASU in the first quarter of 2018 using the modified retrospective transition method. The cumulative effect adjustment to reclassify unrealized gains on equity securities from AOCI to retained earnings totaled $2.2 million, net of tax, at adoption. Unrealized losses on equity securities recognized in earnings totaled $0.1 million and $1.1 million, respectively, for the three and nine months ended September 30, 2018.
ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This amendment provided guidance on eight specific cash flow classification issues where there had been diversity in practice. The provisions of this ASU that are expected to be applicable to the Company include requirements to: (1) classify cash payments for debt prepayment or extinguishment costs to be classified as cash outflows for financing activities, (2) classify proceeds from settlement of insurance claims on the basis of the nature of the loss and (3) require cash payments from settlement of bank-owned life insurance policies to be classified as cash flows from investing activities. The Company adopted this ASU for the first quarter of 2018; the provisions of the ASU were generally consistent with the Company's existing practice, therefore, adoption did not have an impact on the Company's consolidated cash flows.
ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allowed a reclassification from AOCI to retained earnings of stranded tax effects in AOCI resulting from enactment of the TCJA that reduced the statutory federal tax rate from 35 percent to 21 percent. The Company’s existing accounting policy was to release stranded tax effects only when the entire portfolio of the type of item that created them is liquidated. This ASU was early adopted effective January 1, 2018 and a cumulative-effect adjustment was recorded to reclassify stranded tax effects totaling $11.1 million from AOCI to retained earnings.
ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modified the disclosure requirements on fair value measurements by removing certain disclosures not considered cost beneficial, clarifying certain disclosure requirements and adding some additional disclosures. The provisions of the ASU that are applicable to the fair value disclosures of the Company include: (1) adding disclosure of the changes in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements, (2) adding the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements, (3) removing the requirement to disclose the amount of and reasons for transfers between level 1 and level 2 of the fair value hierarchy, (4) removing the requirement to disclose the policy for timing of transfers between levels of the fair value hierarchy, and (5) removing disclosure of the valuation processes for level 3 fair value measurements. The Company early adopted this ASU for the third quarter of 2018.
ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU require customers in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to capitalize certain implementation costs in the same manner as software developed for internal use. The guidance allows for qualifying costs incurred during the application and development stage to be capitalized, which may include: (1) integration, (2) customization, (3) configuration, (4) installation, (5) architecture and design, (6) coding, and (7) testing. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the applicable component of the hosting arrangement is ready for its

8

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


intended use. The accounting for the cost of the hosting component of the arrangement is not affected by this ASU. The Company early adopted this ASU in the third quarter of 2018 using the prospective transition approach with no significant impact to the Company's consolidated financial position, results of operations, or cash flows.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU require a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for leases with terms longer than one year. Accounting applied by lessors is largely unchanged by this ASU. The ASU also will require both qualitative and quantitative disclosures that provide additional information about the amounts recorded in the consolidated financial statements. The amendments in this ASU are effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2018. Early adoption is permitted; however, the Company does not intend to early adopt this ASU. The most significant impact of adoption is expected to be the recognition, as lessee, of new right-of-use assets and lease liabilities on the Consolidated Balance Sheet for real estate leases currently classified as operating leases. Under a package of practical expedients that the Company plans to elect, the Company will not be required to (i) re-assess whether expired or existing contracts contain leases, (ii) re-assess the classification of expired or existing leases, (iii) re-evaluate initial direct costs for existing leases or (iv) separate lease components of certain contracts from non-lease components. The Company also plans to elect the transition method that allows entities the option of applying the provisions of the ASU at the effective date without adjusting the comparative periods presented. Management is in the process of finalizing its evaluation of the impact of adoption of this ASU on its processes and controls. The Company has completed its review of contractual arrangements for embedded leases. The Company has acquired and implemented software to facilitate calculation and reporting of the lease liability and right-of-use asset. Certain accounting policy decisions have been made including use of the incremental borrowing rate to determine the discount rate and assumptions around inclusion of renewals in lease terms. Based on the population of lease contracts existing at September 30, 2018 and an incremental borrowing rate determined as of that date, the Company estimates that a lease liability and related right-of-use asset of approximately $100 million and $90 million, respectively, will be recognized on adoption at January 1, 2019. The amounts actually recognized will be based on terms of contracts in place and an incremental borrowing rate determined at the date of adoption. The Company does not expect the impact of adoption to be material to its consolidated results of operations or cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. The ASU introduces new guidance which makes substantive changes to the accounting for credit losses. The ASU introduces 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 modifies certain provisions of the current OTTI model for AFS debt securities. Credit losses on AFS debt securities will be limited to the difference between the security's amortized cost basis and its fair value, and will be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. The ASU also provides for a simplified accounting model for purchased financial assets with more than insignificant credit deterioration since their origination. The ASU requires expanded disclosures including, but not limited to, (i) information about the methods and assumptions used to estimate expected credit losses, including changes in the factors that influenced management's estimate and the reasons for those changes, (ii) for financing receivables and net investment in leases measured at amortized cost, further disaggregation of information about the credit quality of those assets and (iii) a rollforward of the allowance for credit losses for AFS and HTM securities. The amendments in this ASU are effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted; however, the Company does not intend to early adopt this ASU. Management is in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements, processes and controls and is not currently able to reasonably estimate the impact of adoption on the Company's consolidated financial position, results of operations or cash flows; however, adoption is likely to lead to significant changes in accounting policies related to, and the methods employed in estimating, the ALLL. It is possible that the impact will be material to the Company's consolidated financial position and results of operations. To date, the Company has completed a gap analysis, adopted and is in the process of executing a detailed implementation plan, established a formal governance structure, selected and implemented credit loss models for key portfolio segments, chosen loss estimation methodologies for key portfolio segments, and is implementing a software solution to serve as its CECL platform.

9

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The ASU adds the Overnight Index Swap (OIS) rate based on Secured Overnight Financing Rate (SOFR) as a benchmark interest rate for hedge accounting purposes. The ASU is effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2018. The Company does not expect the impact of adoption to be material to its consolidated financial position, results of operations, or cash flows.
Revenue From Contracts with Customers
Revenue from contracts with customers within the scope of Topic 606 "Revenue from Contracts with Customers", is recognized in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services as the related performance obligations are satisfied. The majority of our revenues, including revenues from loans, leases, investment securities, derivative instruments and letters of credit and from transfers and servicing of financial assets, are excluded from the scope of Topic 606. Deposit service charges and fees is the most significant category of revenue within the scope of the standard. These service charges and fees consist primarily of monthly maintenance fees and other transaction based fees. Revenue is recognized when our performance obligations are complete, generally monthly for account maintenance fees or when a transaction, such as a wire transfer, is completed. Payment is typically received at the time the performance obligation is satisfied. The aggregate amount of revenue that is within the scope of Topic 606 from sources other than deposit service charges and fees is not material.
Investment Securities
Investment securities include debt securities and marketable equity securities. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Debt securities that the Company may not have the intent to hold to maturity are classified as available for sale at the time of acquisition and carried at fair value with unrealized gains and losses, net of tax, excluded from earnings and reported in AOCI. Marketable equity securities with readily determinable fair values are reported at fair value with unrealized gains and losses included in earnings. Equity securities that do not have readily determinable fair values are reported at cost and re-measured at fair value upon occurrence of an observable price change or recognition of impairment.

10

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


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 September 30,
 
Nine Months Ended September 30,
c
2018
 
2017
 
2018

2017
Basic earnings per common share:
 
 
 
 
 

 
 
Numerator:
 
 
 
 
 

 
 
Net income
$
97,328

 
$
67,779

 
$
272,463

 
$
196,479

Distributed and undistributed earnings allocated to participating securities
(3,771
)
 
(2,525
)
 
(10,444
)
 
(7,331
)
Income allocated to common stockholders for basic earnings per common share
$
93,557

 
$
65,254

 
$
262,019

 
$
189,148

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
105,063,770

 
106,809,381

 
105,914,807

 
106,488,396

Less average unvested stock awards
(1,178,982
)
 
(1,101,485
)
 
(1,170,209
)
 
(1,102,381
)
Weighted average shares for basic earnings per common share
103,884,788

 
105,707,896

 
104,744,598

 
105,386,015

Basic earnings per common share
$
0.90

 
$
0.62

 
$
2.50

 
$
1.79

Diluted earnings per common share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Income allocated to common stockholders for basic earnings per common share
$
93,557

 
$
65,254

 
$
262,019

 
$
189,148

Adjustment for earnings reallocated from participating securities
13

 
6

 
37

 
21

Income used in calculating diluted earnings per common share
$
93,570

 
$
65,260

 
$
262,056

 
$
189,169

Denominator:
 
 


 
 
 
 
Weighted average shares for basic earnings per common share
103,884,788

 
105,707,896

 
104,744,598

 
105,386,015

Dilutive effect of stock options and executive share-based awards
499,431

 
365,286

 
512,801

 
479,459

Weighted average shares for diluted earnings per common share
104,384,219

 
106,073,182

 
105,257,399

 
105,865,474

Diluted earnings per common share
$
0.90

 
$
0.62

 
$
2.49

 
$
1.79

Included in participating securities above are unvested shares and 3,023,314 dividend equivalent rights outstanding at September 30, 2018 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.
The following potentially dilutive securities were outstanding at September 30, 2018 and 2017, but excluded from the calculation of diluted earnings per common share for the periods indicated because their inclusion would have been anti-dilutive: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Unvested shares and share units
1,639,183

 
1,111,300

 
1,639,183

 
1,111,300

Stock options and warrants
1,850,279

 
1,850,279

 
1,850,279

 
1,850,279

 

11

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


Note 3    Investment Securities
Investment securities include investment securities available for sale, marketable equity securities, and investment securities held to maturity. The investment securities available for sale portfolio consisted of the following at the dates indicated (in thousands):
 
September 30, 2018
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
34,874

 
$

 
$
(28
)
 
$
34,846

U.S. Government agency and sponsored enterprise residential MBS
1,916,210

 
19,275

 
(5,655
)
 
1,929,830

U.S. Government agency and sponsored enterprise commercial MBS
240,393

 
734

 
(1,997
)
 
239,130

Private label residential MBS and CMOs
1,016,659

 
10,096

 
(18,215
)
 
1,008,540

Private label commercial MBS
1,167,228

 
6,374

 
(5,729
)
 
1,167,873

Single family rental real estate-backed securities
525,061

 
327

 
(5,268
)
 
520,120

Collateralized loan obligations
1,186,639

 
1,527

 
(839
)
 
1,187,327

Non-mortgage asset-backed securities
208,674

 
1,119

 
(2,635
)
 
207,158

State and municipal obligations
426,686

 
2,640

 
(6,551
)
 
422,775

SBA securities
425,388

 
7,017

 
(625
)
 
431,780

Other debt securities
1,560

 
4,104

 

 
5,664

 
$
7,149,372

 
$
53,213

 
$
(47,542
)
 
$
7,155,043

 
December 31, 2017
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
24,981

 
$

 
$
(28
)
 
$
24,953

U.S. Government agency and sponsored enterprise residential MBS
2,043,373

 
16,094

 
(1,440
)
 
2,058,027

U.S. Government agency and sponsored enterprise commercial MBS
233,522

 
1,330

 
(344
)
 
234,508

Private label residential MBS and CMOs
613,732

 
16,473

 
(1,958
)
 
628,247

Private label commercial MBS
1,033,022

 
13,651

 
(258
)
 
1,046,415

Single family rental real estate-backed securities
559,741

 
3,823

 
(858
)
 
562,706

Collateralized loan obligations
720,429

 
3,252

 

 
723,681

Non-mortgage asset-backed securities
119,939

 
1,808

 

 
121,747

Marketable equity securities
59,912

 
3,631

 

 
63,543

State and municipal obligations
640,511

 
17,606

 
(914
)
 
657,203

SBA securities
534,534

 
16,208

 
(60
)
 
550,682

Other debt securities
4,090

 
5,030

 

 
9,120

 
$
6,587,786

 
$
98,906

 
$
(5,860
)
 
$
6,680,832

Marketable equity securities, recorded at fair value, totaled $62.4 million and $63.5 million, at September 30, 2018 and December 31, 2017, respectively. Investment securities held to maturity at September 30, 2018 and December 31, 2017 consisted of one State of Israel bond with a carrying value of $10 million maturing in 2024. Fair value approximated carrying value at September 30, 2018 and December 31, 2017.

12

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


At September 30, 2018, contractual maturities of investment securities available for sale, adjusted for anticipated prepayments of mortgage-backed and other pass-through securities, were as follows (in thousands):
 
Amortized Cost
 
Fair Value
Due in one year or less
$
757,130

 
$
759,520

Due after one year through five years
3,551,176

 
3,556,350

Due after five years through ten years
2,457,655

 
2,453,558

Due after ten years
383,411

 
385,615

 
$
7,149,372

 
$
7,155,043

Based on the Company’s assumptions, the estimated weighted average life of the investment portfolio as of September 30, 2018 was 4.7 years. The effective duration of the investment portfolio as of September 30, 2018 was 1.5 years. The model results are based on assumptions that may differ from actual results. 
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 $2.2 billion and $2.6 billion at September 30, 2018 and December 31, 2017, respectively.
The following table provides information about gains and losses on investment securities for the periods indicated (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Proceeds from sale of investment securities available for sale
$
102,238


$
399,430

 
$
938,555

 
$
827,353

 
 
 
 
 
 
 
 
Gross realized gains:
 
 


 
 
 
 
Investment securities available for sale
$
521

 
$
28,261

 
$
6,561

 
$
30,553

Gross realized losses:
 
 


 
 
 
 
Investment securities available for sale

 
(1,330
)
 
(2,514
)
 
(1,359
)
Net realized gain
521

 
26,931

 
4,047

 
29,194

 
 
 
 
 
 
 
 
Net unrealized losses on marketable equity securities recognized in earnings
(89
)
 

 
(1,109
)
 

 
 
 
 
 
 
 
 
Gain on investment securities, net
$
432

 
$
26,931

 
$
2,938

 
$
29,194


13

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


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):
 
September 30, 2018
 
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
$
34,846

 
$
(28
)
 
$

 
$

 
$
34,846

 
$
(28
)
U.S. Government agency and sponsored enterprise residential MBS
478,707

 
(4,139
)
 
39,045

 
(1,516
)
 
517,752

 
(5,655
)
U.S. Government agency and sponsored enterprise commercial MBS
121,004

 
(1,524
)
 
7,004

 
(473
)
 
128,008

 
(1,997
)
Private label residential MBS and CMOs
800,549

 
(16,545
)
 
45,644

 
(1,670
)
 
846,193

 
(18,215
)
Private label commercial MBS
181,266

 
(3,999
)
 
31,092

 
(1,730
)
 
212,358

 
(5,729
)
Single family rental real estate-backed securities
293,384

 
(4,833
)
 
13,129

 
(435
)
 
306,513

 
(5,268
)
Collateralized loan obligations
335,018

 
(839
)
 

 

 
335,018

 
(839
)
Non-mortgage asset-backed securities
178,454

 
(2,635
)
 

 

 
178,454

 
(2,635
)
State and municipal obligations
275,664

 
(6,040
)
 
16,110

 
(511
)
 
291,774

 
(6,551
)
SBA securities
116,748

 
(591
)
 
13,399

 
(34
)
 
130,147

 
(625
)
 
$
2,815,640

 
$
(41,173
)
 
$
165,423

 
$
(6,369
)
 
$
2,981,063

 
$
(47,542
)
 
December 31, 2017
 
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
$
24,953

 
$
(28
)
 
$

 
$

 
$
24,953

 
$
(28
)
U.S. Government agency and sponsored enterprise residential MBS
471,120

 
(1,141
)
 
13,028

 
(299
)
 
484,148

 
(1,440
)
U.S. Government agency and sponsored enterprise commercial MBS
26,265

 
(344
)
 

 

 
26,265

 
(344
)
Private label residential MBS and CMOs
330,068

 
(1,858
)
 
5,083

 
(100
)
 
335,151

 
(1,958
)
Private label commercial MBS
81,322

 
(258
)
 

 

 
81,322

 
(258
)
Single family rental real estate-backed securities
94,750

 
(858
)
 

 

 
94,750

 
(858
)
State and municipal obligations
30,715

 
(49
)
 
60,982

 
(865
)
 
91,697

 
(914
)
SBA securities
21,300

 
(10
)
 
15,427

 
(50
)
 
36,727

 
(60
)
 
$
1,080,493

 
$
(4,546
)
 
$
94,520

 
$
(1,314
)
 
$
1,175,013

 
$
(5,860
)
The Company monitors its investment securities available for sale for OTTI on an individual security basis. No securities were determined to be other-than-temporarily impaired during the nine months ended September 30, 2018 or 2017. The Company does not intend to sell securities that are in significant unrealized loss positions at September 30, 2018 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,

14

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


which may be at maturity. At September 30, 2018, 175 securities were in unrealized loss positions. The amount of impairment related to 35 of these securities was considered insignificant both individually and in the aggregate, totaling approximately $297 thousand and no further analysis with respect to these securities was considered necessary. The basis for concluding that impairment of the remaining securities was not other-than-temporary is further described below:
U.S. Treasury Securities
At September 30, 2018, one U.S. Treasury security was in an unrealized loss position. Impairment of this security was primarily attributable to increases in market interest rates subsequent to the date of acquisition. The timely payment of principal and interest on this security is explicitly guaranteed by the U.S. Government. Given the expectation of timely payment of principal and interest the impairment was considered to be temporary.
U.S. Government agency and sponsored enterprise residential and commercial MBS
At September 30, 2018, forty-three U.S. Government agency and sponsored enterprise residential MBS and five U.S. Government agency and sponsored enterprise commercial MBS were in unrealized loss positions. Impairment of these securities was primarily attributable to increases in market interest rates subsequent to the date of acquisition. The timely payment of principal and interest on these securities is explicitly or implicitly guaranteed by the U.S. Government. Given the expectation of timely payment of principal and interest the impairments were considered to be temporary.
Private label residential MBS and CMOs
At September 30, 2018, thirty-three private label residential MBS and CMOs were in unrealized loss positions, primarily as a result of an increase in medium and long-term market interest rates subsequent to acquisition. These securities were assessed for OTTI using credit and prepayment behavioral models that incorporate CUSIP level constant default rates, voluntary prepayment rates and loss severity and delinquency assumptions. The results of these assessments were not indicative of credit losses related to any of these securities as of September 30, 2018. Given the expectation of timely recovery of outstanding principal the impairments were considered to be temporary.
Private label commercial MBS
At September 30, 2018, fourteen private label commercial MBS were in unrealized loss positions, primarily as a result of an increase in market interest rates. These securities were assessed for OTTI using credit and prepayment behavioral models incorporating assumptions consistent with the collateral characteristics of each security. The results of this analysis were not indicative of expected credit losses. Given the expectation of timely recovery of outstanding principal the impairments were considered to be temporary.
Single family rental real estate-backed securities
At September 30, 2018, ten single family rental real estate-backed securities were in unrealized loss positions. The unrealized losses were primarily due to increases in market interest rates since the purchase of the securities. Management's analysis of the credit characteristics, including loan-to-value and debt service coverage ratios, and levels of subordination for each of the securities is not indicative of projected credit losses. Given the absence of projected credit losses the impairments were considered to be temporary.
Collateralized loan obligations:
At September 30, 2018, six collateralized loan obligations were in unrealized loss positions. The amount of impairment of each of the individual securities was less than 1% of amortized cost. These securities were assessed for OTTI using credit and prepayment behavioral models incorporating assumptions consistent with the collateral characteristics of each security. The results of this analysis were not indicative of expected credit losses. Given the limited severity of impairment and the expectation of timely recovery of outstanding principal, the impairments were considered to be temporary.
Non-mortgage asset-backed securities
At September 30, 2018, seven non-mortgage asset-backed securities were in unrealized loss positions, due primarily to increases in market interest rates subsequent to the date of acquisition. The amount of impairment each of the individual

15

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


securities was 3% or less of amortized cost. These securities were assessed for OTTI using credit and prepayment behavioral models incorporating assumptions consistent with the collateral characteristics of each security. The results of this analysis were not indicative of expected credit losses. Given the limited severity of impairment and the expectation of timely recovery of outstanding principal, the impairment were considered to be temporary.
State and municipal obligations
At September 30, 2018, seventeen state and municipal obligations were in unrealized loss positions. The impairments are primarily attributable to increases in market interest rates and changes in statutory tax rates. All of the securities are rated investment grade by nationally recognized statistical ratings organizations. Management's evaluation of these securities for OTTI also encompassed the review of credit scores and analysis provided by a third party firm specializing in the analysis and credit review of municipal securities. Given the absence of expected credit losses, the impairments were considered to be temporary.
SBA Securities
At September 30, 2018, four SBA securities were in unrealized loss positions. The amount of impairment of each of these securities was less than 1% of amortized cost. These securities were purchased at a premium and the impairment was attributable primarily to increased prepayment speeds. The timely payment of principal and interest on these securities is guaranteed by this U.S. Government agency. Given the limited severity of impairment and the expectation of timely payment of principal and interest, the impairments were considered to be temporary.

16

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


Note 4    Loans and Allowance for Loan and Lease Losses
The Company segregates its loan portfolio between covered and non-covered loans. Non-covered loans include loans originated since the FSB acquisition and commercial and consumer loans acquired in the FSB acquisition for which loss share coverage has terminated. Covered loans are further segregated between ACI and non-ACI loans.
Loans consisted of the following at the dates indicated (dollars in thousands):
 
September 30, 2018
 

 
Covered Loans
 
 
 
Percent of Total
 
Non-Covered Loans
 
ACI
 
Non-ACI
 
Total
 
Residential and other consumer:
 

 
 

 
 

 
 

 
 

1-4 single family residential
$
4,322,915

 
$
344,078

 
$
18,779

 
$
4,685,772

 
21.4
%
Government insured residential
163,241

 

 

 
163,241

 
0.7
%
Home equity loans and lines of credit
1,715

 

 

 
1,715

 
%
Other consumer loans
16,796

 

 

 
16,796

 
0.1
%
 
4,504,667

 
344,078

 
18,779

 
4,867,524

 
22.2
%
Commercial:
 
 
 
 
 
 
 
 
 
Multi-family
2,760,856

 

 

 
2,760,856

 
12.6
%
Non-owner occupied commercial real estate
4,579,278

 

 

 
4,579,278

 
21.0
%
Construction and land
245,077

 

 

 
245,077

 
1.1
%
Owner occupied commercial real estate
2,094,371

 

 

 
2,094,371

 
9.6
%
Commercial and industrial
4,720,532

 

 

 
4,720,532

 
21.6
%
Commercial lending subsidiaries
2,611,920

 

 

 
2,611,920

 
11.9
%
 
17,012,034

 

 

 
17,012,034

 
77.8
%
Total loans
21,516,701

 
344,078

 
18,779

 
21,879,558

 
100.0
%
Premiums, discounts and deferred fees and costs, net
42,703

 

 
(3,090
)
 
39,613

 
 
Loans including premiums, discounts and deferred fees and costs
21,559,404

 
344,078

 
15,689

 
21,919,171

 
 
Allowance for loan and lease losses
(124,726
)
 

 
(14
)
 
(124,740
)
 
 
Loans, net
$
21,434,678

 
$
344,078

 
$
15,675

 
$
21,794,431

 
 
 

17

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


 
December 31, 2017
 

 
Covered Loans
 
 
 
Percent of Total
 
Non-Covered Loans
 
ACI
 
Non-ACI
 
Total
 
Residential and other consumer:
 

 
 

 
 

 
 

 
 

1-4 single family residential
$
4,089,994

 
$
479,068

 
$
27,198

 
$
4,596,260

 
21.5
%
Government insured residential
26,820

 

 

 
26,820

 
0.1
%
Home equity loans and lines of credit
1,654

 

 

 
1,654

 
%
Other consumer loans
20,512

 

 

 
20,512

 
0.1
%
 
4,138,980

 
479,068

 
27,198

 
4,645,246

 
21.7
%
Commercial:
 
 
 
 
 
 
 
 
 
Multi-family
3,215,697

 

 

 
3,215,697

 
15.0
%
Non-owner occupied commercial real estate
4,485,276

 

 

 
4,485,276

 
21.0
%
Construction and land
310,999

 

 

 
310,999

 
1.5
%
Owner occupied commercial real estate
2,014,908

 

 

 
2,014,908

 
9.4
%
Commercial and industrial
4,145,785

 

 

 
4,145,785

 
19.4
%
Commercial lending subsidiaries
2,553,576

 

 

 
2,553,576

 
12.0
%
 
16,726,241

 

 

 
16,726,241

 
78.3
%
Total loans
20,865,221

 
479,068

 
27,198

 
21,371,487

 
100.0
%
Premiums, discounts and deferred fees and costs, net
48,165

 

 
(3,148
)
 
45,017

 
 
Loans including premiums, discounts and deferred fees and costs
20,913,386

 
479,068

 
24,050

 
21,416,504

 
 
Allowance for loan and lease losses
(144,537
)
 

 
(258
)
 
(144,795
)
 
 
Loans, net
$
20,768,849

 
$
479,068

 
$
23,792

 
$
21,271,709

 
 
Included in non-covered loans above are $27 million and $34 million at September 30, 2018 and December 31, 2017, respectively, of ACI commercial loans acquired in the FSB Acquisition.
Through two subsidiaries, the Bank provides commercial and municipal equipment and franchise financing utilizing both loan and lease structures. At September 30, 2018 and December 31, 2017, the commercial lending subsidiaries portfolio included a net investment in direct financing leases of $764 million and $738 million, respectively.
During the three and nine months ended September 30, 2018 and 2017, the Company purchased 1-4 single family residential loans totaling $310 million, $914 million, $312 million and $949 million, respectively. Purchases for the three and nine months ended September 30, 2018 included $90 million and $201 million, respectively, of government insured residential loans.
At September 30, 2018, the Company had pledged real estate loans with UPB of approximately $10.2 billion and recorded investment of approximately $9.9 billion as security for FHLB advances.

18

BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2018


At September 30, 2018 and December 31, 2017, the UPB of ACI loans was $0.7 billion and $1.1 billion, respectively. The accretable yield on ACI loans represents the amount by which undiscounted expected future cash flows exceed recorded investment. Changes in the accretable yield on ACI loans for the nine months ended September 30, 2018 and the year ended December 31, 2017 were as follows (in thousands):
Balance at December 31, 2016
$
675,385

Reclassifications from non-accretable difference, net
81,501

Accretion
(301,827
)
Balance at December 31, 2017
455,059

Reclassifications from non-accretable difference, net
78,561

Accretion
(249,609
)
Balance at September 30, 2018
$
284,011

Covered loan sales
During the periods indicated, the Company sold covered residential loans to third parties on a non-recourse basis. The following table summarizes the impact of these transactions (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018