The following acronyms and terms may be used throughout this Form 10-K, including the consolidated financial statements and related notes.
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," "project," "predict," "will" and similar expressions identify forward-looking statements.
These forward-looking statements are based on management's current views with respect to future results, and are subject to risks and uncertainties. Forward-looking statements are based on beliefs and assumptions made by management using currently available information, such as market and industry materials,data, historical performance and current financial trends. These statements are only predictions and are not guarantees of future performance. The inclusion of forward-looking statements should not be regarded as a representation by the Company that the future plans, estimates or expectations contemplated by a forward-looking statement will be achieved. Forward-looking statements are subject to various risks and uncertainties and assumptions, including those relating to the Company's operations, financial results, financial condition, business prospects, growth strategy and liquidity.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 could differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include, without limitation:
•impacts of the impactCOVID-19 pandemic on the Company's business operations, financial condition and results of conditionsoperations;
•strategic risk:
◦an inability to successfully execute our core business strategy;
◦competition;
◦natural or man-made disasters, social or health care crises or political unrest;
◦loss of executive officers or key personnel;
◦climate change or societal responses thereto;
•credit risk inherent in the financial markets and economic conditions generally;
credit risk, relating to our portfoliosbusiness of loans, leases and investments overall, as well asmaking loans and leases exposed to specific industry conditions;embedded in our securities portfolio:
◦inadequate allowance for credit losses:
◦the accuracy and completeness of information about counterparties and borrowers;
◦real estate market conditions, real estate valuations and other risks related to holding loans secured by real estate or real estate received in satisfaction of loans;
an inability to successfully execute our fundamental growth strategy;
◦geographic concentration of the Company's markets in Florida and the New York metropolitantri-state area;
natural or man-made disasters;◦fluctuations in demand for and valuation of operating lease equipment;
•interest rate risk, including risks related to reference rate reform;
•liquidity risk;
◦an inability to maintain adequate liquidity
◦restrictions on the ability of BankUnited, N.A. to pay dividends to BankUnited, Inc.;
•risks related to the regulation of our industry;
•operational risk:
◦inadequate allowance for credit losses;or inaccurate forecasting tools and models;
interest rate risk;◦inability to successfully launch new products, services, or business initiatives;
liquidity risk;◦susceptibility to fraud, risk or errors;
loss of executive officers or key personnel;
competition;
◦dependence on information technology and third party service providers and the risk of systems failures, interruptions or breaches of security;security or inability to keep pace with technological change;
•reputational risk;
•a variety of regulatory, legal and compliance;
•the termsimpact of conditions in the Company's Loss Sharing Agreements (as defined below) with the FDIC (as defined below);financial markets and economic conditions generally;
inadequate or inaccurate forecasting tools and models;
•ineffective risk management or internal controls; and
a variety of operational, compliance and legal risks; and
•the selection and application of accounting policies and methods and related assumptions and estimates.
Additional factors are set forth in the Company's filings with the Securities and Exchange Commission, or the SEC, including this Annual Report on Form 10-K.
Forward-looking statements speak only as of the date on which they are made. The Company expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
As used herein, the terms the "Company," "we," "us," and "our" refer to BankUnited, Inc. and its subsidiaries unless the context otherwise requires.
PART I
Item 1. Business
Overview
BankUnited, Inc., with total consolidated assets of $32.2$35.8 billion at December 31, 2018,2021, is a bank holding company with one direct wholly-owned subsidiary, BankUnited, collectively, the Company. BankUnited, a national banking association headquartered in Miami Lakes, Florida, provides a full range of bankingcommercial lending and both commercial and consumer deposit services to individual and corporate customers through 80 banking centers located in 14 Florida counties and 5 banking centers in the New York metropolitan area. The Bank also provides certain commercial lending and deposit products through national platforms. The Company has built,platforms and certain consumer deposit products through an online channel. Our core business strategy is to build a leading regional commercial and small business bank, with a distinctive value proposition based on strong service-oriented relationships, robust digital enabled customer experiences and operational excellence, with an entrepreneurial work environment that empowers employees to deliver their best. To date, we have executed our strategy primarily through organic growth, a premier commercially focused regional bank with a long-term value oriented business model serving primarily small and medium sized businesses. We endeavor to provide, through our experienced lending and relationship banking teams, personalized customer service and offer a full range of traditional banking products and services to both our commercial and consumer customers.
The FSB Acquisition and the Loss Sharing Agreements
On May 21, 2009, BankUnited entered into the "Purchase and Assumption Agreement" with the FDIC, Receiver of BankUnited, FSB, and acquired substantially all of the assets and assumed all of the non-brokered deposits and substantially all other liabilities of the Failed Bank from the FDIC in the FSB Acquisition.
Concurrently with the FSB Acquisition, the Bank entered into two Loss Sharing Agreements with the FDIC, covering certain legacy assets, including the entire legacy loan portfolio and OREO and certain purchased investment securities. We refer to assets covered by the Loss Sharing Agreements as covered assets or, in certain cases, covered loans. The Loss Sharing Agreements do not apply to assets acquired, purchased or originated subsequent to the FSB Acquisition. At December 31, 2018, the covered assets, consisting of residential loans had an aggregate carrying value of $201 million. The total UPB of the covered assets at December 31, 2018 was $401 million.
Pursuant to the terms of the Loss Sharing Agreements, the covered assets were subject to a stated loss threshold whereby the FDIC was obligated to reimburse the Bank for 80% of losses up to a $4.0 billion stated threshold and 95% of losses in excess of the $4.0 billion stated threshold. The Bank was obligated to reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC paid the Bank a reimbursement under the Loss Sharing Agreements. The FDIC's obligation to reimburse the Company for losses with respect to the covered assets began with the first dollar of loss incurred. We have received reimbursements of $2.7 billion for claims submitted to the FDIC under the Loss Sharing Agreements as of December 31, 2018.
The Loss Sharing agreements consisted of the Single Family Shared-Loss Agreement and the Commercial Shared-Loss Agreement. The Single Family Shared-Loss Agreement originally provided for FDIC loss sharing and the Bank's reimbursement for recoveries to the FDIC for ten years from May 21, 2009, or through May 21, 2019, for single family residential and home equity loans and related OREO. The Single Family Shared-Loss Agreement was terminated on February 13, 2019. The Commercial Shared-Loss Agreement provided for FDIC loss sharing for five years from May 21, 2009, or through May 21, 2014, and for the Bank's reimbursement for recoveries to the FDIC for eight years from May 21, 2009, or through the quarter ended June 30, 2017, for all other covered assets.growth.
Our Market Areas
Our primary banking markets are Florida and the Tri-State market of New York, New Jersey and Connecticut. We believe both represent long-term attractive banking markets. In Florida, our largest concentration is in the Miami metropolitan statistical area; however, we are also focused on developing business in other markets in which we have a presence, such as the Broward, Palm Beach, Orlando, Tampa and Jacksonville markets. We operate several national commercial lending platforms, purchase residential loans on a national basis through established correspondent channels and have a national commercial deposit business.
According to estimates from the United States Census Bureau and SNL Financial, from 2015 to 2018, Florida added over 1.2 million new residents, the second most of any U.S. state, and had a total population of 21.5 million and a median household annual income of $55,629 in 2018. The Florida unemployment rate decreased to 3.3% at December 31, 2018. The Moody's home price index for Florida reflected a year over year increase of 5.3% at September 30, 2018. According to CoStar Commercial Repeat-Sale Indices, commercial real estate values in the South region reflected a year over year increase of 9% at December 31, 2018. According to a report published in December, 2018 by the University of Central Florida, personal income
in Florida is expected to average 3.1% growth from 2018 to 2021 while Florida's Real Gross State Product is forecast to expand at an average annual rate of 3.3% from 2018 to 2021.
We had five banking centers in metropolitan New York at December 31, 2018 serving the Tri-State area. Three banking centers were in Manhattan, one in Long Island and one in Brooklyn. According to the FDIC, at June 30, 2018, the Tri-State area had approximately $2.2 trillion in deposits, with the majority of the market concentrated in the New York metropolitan area. The Tri-State area had a total population of 32.5 million and a median household annual income of $73,648 in 2018, while the unemployment rate decreased to 3.7% at December 31, 2018. According to CoStar Commercial Repeat-Sale Indices, commercial real estate values in the Northeast region reflected a year over year increase of 1% at December 31, 2018.
Through two commercial lending subsidiaries of BankUnited, we engage in equipment, franchise and municipal finance on a national basis. The Bank also originates small business loans through programs sponsored by the SBA and to a lesser extent the USDA and provides mortgage warehouse finance on a national basis. We refer to our commercial lending subsidiaries, our small business finance unit, our mortgage warehouse lending operations and our residential loan purchase program as national platforms. We also offer a suite of commercial deposit and cash management products through a national platform.
Products and Services
Lending and Leasing
General—Our primary lending focus is to serve small, middle-market and middle-marketlarger corporate businesses and their executives with a variety of financial products and services, while maintaining a disciplined credit culture.
We offer a full array of lending products that cater to our customers' needs including small business loans, commercial real estate loans, equipment loans and leases, term loans, formula-based loans, municipal and non-profit loans and leases, commercial lines of credit, residential mortgage warehouse lines of credit, letters of credit and consumer loans. We also purchase performing residential loans through established correspondent channels on a national basis.
We have attracted and invested in experienced lendingrelationship management teams in our Florida, Tri-State and national markets, resulting in significant growth in our non-covered loan portfolio. At December 31, 2018, our loan portfolio included $21.8 billion in non-covered loans, including $17.0 billion in commercial and commercial real estate loans and $4.7 billion in residential and other consumer loans. Continued loan growth in both the Florida and Tri-State markets and across our nationalprimary lending and leasing platforms is a core component of our current business strategy.markets.
Commercial loans—Our commercial loans, which are generally made to growing small business, middle-market and larger corporate entities and non-profit organizations, include equipment loans, secured and unsecured lines of credit, formula-based lines of credit, equipment loans, owner-occupied commercial real estate term loans and lines of credit, mortgage warehouse lines, letters of credit, commercial credit cards, SBA and USDA product offerings, Export-Import Bank financing products, trade finance and business acquisition finance credit facilities. The Bank has also supported its customers through participation in the Small Business Administration's PPP.
Through the Bank's two commercial lending subsidiaries, Pinnacle and Bridge, we provide municipal, equipment and franchise financing on a national basis. Pinnacle, headquartered in Scottsdale, Arizona, provides financing to state and local governmental entities directly and through vendor programs and alliances. Pinnacle offers a full array of financing structures including essential use equipment lease purchase and loan agreements and direct (private placement) bond refundings. Bridge, headquartered in Baltimore, Maryland, offers large corporate and middle market businesses equipment loans and leases including finance lease and operating lease structures through its equipment finance division. Bridge offers franchise equipment, acquisition and expansion financing through its franchise finance division.
Commercial real estate loans—We offer term financing for the acquisition or refinancing of properties, primarily rental apartments, mixed-use commercial properties, industrial properties, warehouses, retail shopping centers, free-standing single-tenant buildings, office buildings and hotels. Other products that we provide include real estate secured lines of credit, lending to REITs and institutional asset owners, subscription lines of credit to real estate funds, and, to a more limited extent, acquisition, development and construction loan facilities and construction financing.
Residential mortgages—We make commercial real estatedo not originate residential loans, secured by both owner-occupied and non-owner occupied properties. Construction lending is not a primary area of focus for us; construction and land loans comprised 1.0% of the loan portfolio at December 31, 2018.
National Commercial Lending Platforms—Through the Bank's two commercial lending subsidiaries, we provide municipal, equipment and franchise financing on a national basis. Pinnacle, headquartered in Scottsdale, Arizona, provides financing to state and local governmental entities directly and through vendor programs and alliances. Pinnacle offers a full array of financing structures on a national basis including equipment lease purchase agreements and direct (private placement) bond refundings and loan agreements. Bridge offers large corporate and middle market businesses equipment leases and loans including direct finance lease and operating lease structures through its equipment finance division. Bridge offers franchise equipment, acquisition and expansion financing through its franchise division. Bridge is headquartered in Baltimore, Maryland. SBF offers an array of SBA, and to a lesser extent, USDA loan products. We typically sell the government guaranteed portion of the loans SBF originates on a servicing retained basis, and retain the unguaranteed portion in portfolio. We also engagebut do invest in residential mortgage warehouse lending on a national basis.
Residential mortgages—The non-coveredloans originated through correspondent channels and community partners. Our residential loan portfolio is primarily comprised of loans purchased on a national basis through select correspondent channels. This national purchase program allows us to diversify our loan portfolio, both by product type and geographically.geography. Residential loans purchased are primarily closed-end, first lien jumbo mortgages for the purchase or re-finance of owner occupied property. A limited portion of the portfolio is secured by investor-owned properties. We do not originate or purchase negatively amortizing or sub-prime residential loans. We also acquire non-performing FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations. Such 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.
Other consumer loans— We do not originate, or currently intend to originate a significant amount of consumer loans. Home equity loans and lines of credit are not a significant component of the loan portfolio.
Consumer loans— Consumerand other consumer loans are not a material componentsignificant components of our loan portfolio.portfolio or of our lending strategy.
Credit Policyrisk management - Credit is analyzed, approved and Proceduresmanaged through our three lines of defense framework as prescribed in our credit policies and procedures. Credit is:
BankUnited, Inc.•Analyzed within our first line of defense in accordance with our credit procedures;
•Approved within our second line of defense in accordance with our risk-based delegated credit approval framework; and
•Managed by our first and second lines of defense based upon the Bank have established assetrisk and performance characteristics of individual credits and portfolio segments.
•In addition, Credit Review as part of the third line of defense, performs risk-based targeted portfolio exams and evaluates the effectiveness and quality of our risk rating framework and credit risk management.
Asset oversight committees to administer the loan portfoliomeet at least quarterly and monitorprovide oversight of key credit governance, transactional, and manage credit risk.management functions. These committees include: (i) the Commercial Loan Committee, (ii) the
•Credit Risk Management Committee (iii)with responsibilities including credit governance policies and procedures and changes thereto and establishing and maintaining the Asset Recoverydelegated credit approval framework;
•Executive Credit Committee (iv)with responsibilities including transactional credit approval for large and/or complex credit exposures as well as the approval of periodic asset monitoring reports for large and/or complex credit exposures;
•Criticized Asset Committee with responsibilities including the evaluation and (v) the oversight of higher risk assets and oversight of workout and recovery functions; and
•Residential Credit Risk Management Committee. These committees meet at least quarterly.Committee with responsibilities including residential and consumer portfolio performance monitoring and certain bulk purchase transactional authorities.
The credit approval process provides for prompt and thorough underwriting and approval or decline of loan requests. The approval method used is a hierarchy of individual lending authorities for new credits and renewals. The Credit Risk Management Committee approves authorities for lending and credit personnel, which are ultimately submitted to our Board for ratification.Our In-house Lending authorities are based on position, capability and experience of the individuals filling these positions. Authorities are periodically reviewed and updated.
BankUnited has established in-house borrower lending limits which are significantly lower than its legal lending limit of approximately $471 million at December 31, 2018. In-house lending limits at December 31, 2018 rangedLimits ranging from $75 million to $150 million.million, are based upon loan type and are further limited by our risk-based Hold Limits that incorporate our assessment of the borrower’s financial condition and industry exposure. These limits are significantly below our legal lending limit. These limits are reviewed periodically by the Credit Risk Management Committee and approved annually by the Board of Directors.
DepositsDeposit and Treasury Solutions Products
We offer traditional deposit products including commercial and consumer checking accounts, money market deposit accounts, savings accounts and certificates of deposit with a variety of terms and rates as well as a robust suite of treasury, commercial payments and cash management services. We offer commercial and retail deposit products across our primary geographic footprint and certain commercial deposit, payments and treasury management products and services on a national platform. We have a limited on-linenationally. For our consumers, we also offer competitive money market and time deposit product offering. Our deposits are insured by the FDIC up to statutory limits.products through our online channel. Demand deposit balances are concentrated in commercial and small business accounts.accounts and our deposit growth strategy is focused on small business and middle market companies generally, as well as select industry verticals. Our service fee schedule and rates are competitive with other financial institutions in our markets.
Investment Securities
The primary objectives of our investment policy are to provide liquidity, provide a suitable balance of high credit quality and diversified assets to the consolidated balance sheet, manage interest rate risk exposure, and generate acceptable returns given the Company's established risk parameters.
The investment policy is reviewed annually by our Board of Directors. Overall investment goals are established by our Board, Chief Executive Officer, Chief Financial Officer, and members of the ALCO. The Board has delegated the responsibility of monitoring our investment activities to ALCO. Day-to-day activities pertaining to the investment portfolio are conducted within the Company's Treasury division under the supervision of the Chief Investment Officer and Chief Financial Officer.
Risk Management and OversightOur Markets
Our Board of Directors oversees our risk management framework. Our Board approves the Company's business plan, risk appetite statementprimary banking markets are Florida and the policies that set standards for the natureTri-State market of New York, New Jersey and level of risk the Company is willing to assume. The Board and its established committees receive regular reporting on the Company's management of critical risks and the effectiveness of risk management systems. While our full Board maintains the ultimate oversight responsibility for the risk management framework, its committees, including the audit committee, the risk committee, the compensation committee and the nominating and corporate governance committee, oversee risk in certain specified areas.
Our Board has assigned responsibility to our Chief Risk Officer for maintaining a risk management framework to identify, measure, monitor, control and mitigate risks to the achievement of our strategic goals and objectives and ensure we operate in a safe and sound manner in accordance with the Board's stated risk appetite and Board approved policies. We have invested significant resources to establish a robust enterprise-wide risk management framework to support the planned growth of our Company. Our framework is consistent with common industry practices and regulatory guidance and is appropriate to our size, structure and the complexity of our business activities. Significant elements include a Risk Appetite Statement and risk metrics approved by the Board, ongoing identification and assessments of risk, executive management level risk committees to oversee compliance with the Board approved risk policies and adherence to risk limits, and ongoing testing and reporting by independent internal audit, credit review, and regulatory compliance groups. Executive level oversight of the risk management framework is provided by the Enterprise Risk Management Committee which is chaired by the Chief Risk Officer and attended by the senior executives of the Company. Reporting to the Enterprise Risk Management Committee are sub-committees
dedicated to guiding and overseeing management of critical categories of risk, including the Credit Risk Management, Asset/Liability, Compliance Risk Management, Operational Risk Management, Corporate Disclosure, Enterprise Data, Ethics, and BSA/AML committees.
Marketing and Distribution
We conduct our banking business through 80 banking centers located in 14 Florida counties, 5 banking centersConnecticut, concentrated in the New York metropolitan area,Metropolitan area. We believe both represent long-term attractive banking markets. In Florida, our focus is on urban markets including the Miami-Dade, Broward, Palm Beach, Tampa, Orlando and Jacksonville markets. We have launched lending operations in Atlanta, which are not currently material to our business operations, but are expected to be a growth opportunity. Additionally, we expect to open a full service branch in Texas in 2022.
Pinnacle and Bridge offer lending products and the Bank provides mortgage warehouse financing on a national lending andbasis. We also offer a suite of commercial deposit, gathering platforms. Our distribution network also includes ATMs, fully integrated on-line banking, mobile bankingtreasury solutions and a telephone banking service. We target small businesses, middle market and larger commercial enterprises, as well as individual consumers.
In order to market ourcash management products we use local television, radio, digital, print and direct mail advertising as well as a variety of promotional activities.nationally, primarily focused on select industry verticals.
Competition
Our markets are highly competitive. Our markets containcompetitive, containing not only a large number of community and regional banks, but also a significant presence of the country's largest commercial banks. We compete with other state, national and international banks as well as savings associations, savings banks and credit unions with physical presence in our market areas or targeting our market areas digitally for deposits and loans. In addition, we compete with financial intermediaries such as FinTech companies,
consumer finance companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. Our largest banking competitors in the Florida market include BB&T,Truist, JPMorgan Chase, PNC, Regions Bank, SunTrust Bank, TD Bank, Wells Fargo, Bank of America, First Horizon, Synovus and a number of community banks. In the Tri-State market, we also compete with, in addition to the national and international financial institutions listed, Capital One, Signature Bank, New York Community Bank, Valley National Bank, M&T Bank and numerous community banks.
Interest rates on both loans and deposits and prices of fee-based services are significant competitive factors among financial institutions generally. Other important competitive factors include convenience, quality of customer service, availability and quality of on-line, mobile and remote banking products,digital offerings, community reputation, continuity of personnel and services, and, in the case of larger commercial customers, relative lending limits and ability to offer sophisticated cash management and other commercial banking services. While we continue to provide competitive interest rates on both depository and lending products, we believe that we can compete most successfully by focusing on the financial needs of growing companies and their executives and small and middle-market businesses, offering them a broad range of personalized services, digital platforms and sophisticated cash management tools tailored to their businesses.
Regulation and Supervision
The U.S. banking industry is highly regulated under federal and state law. These regulations affecthave a material effect on the operations of BankUnited, Inc. and its direct and indirect subsidiaries.
Statutes, regulations and policies limit the activities in which we may engage and the conduct of our permitted activities and establish capital requirements with which we must comply. The regulatory framework is intended primarily for the protection of depositors, borrowers, customers and clients, the FDIC insurance funds and the banking system as a whole, and not for the protection of our stockholders or creditors. In many cases, the applicable regulatory authorities have broad enforcement power over bank holding companies, banks and their subsidiaries, including the power to impose substantial fines and other penalties for violations of laws and regulations. Further, the regulatory system imposes reporting and information collection obligations. We incur significant costs related to compliance with these laws and regulations. Banking statutes, regulations and policies are continually under review by federal and state legislatures and regulatory agencies, and a change in them, including changes in how they are interpreted or implemented, could have a material impact on our business.
The material statutory and regulatory requirements that are applicable to us are summarized below. The description below is not intended to summarize all laws and regulations applicable to us.
Bank and Bank Holding Company Regulation
BankUnited is a national bank. As a national bank organized under the National Bank Act, BankUnited is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the OCC.
Any entity that directly or indirectly controls a bank must be approved by the Federal Reserve Board under the BHC Act to become a BHC. BHCs are subject to regulation, inspection, examination, supervision and enforcement by the Federal Reserve
Board under the BHC Act. The Federal Reserve Board's jurisdiction also extends to any company that is directly or indirectly controlled by a BHC.
BankUnited, Inc., which controls BankUnited, is a BHC and, as such, is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the Federal Reserve Board.
Broad Supervision, Examination and Enforcement Powers
A principal objective of the U.S. bank regulatory system is to protect depositors by ensuring the financial safety and soundness of banking organizations. To that end, the banking regulators have broad regulatory, examination and enforcement authority. The regulators regularly examine the operations of banking organizations. In addition, banking organizations are subject to periodic reporting requirements.
The regulators have various remedies available if they determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of a banking organization's operations are unsatisfactory.less than satisfactory. The regulators may also take action if they determine that the banking organization or its management is violating or has violated any law or regulation. The regulators have the power to, among other things:
•enjoin "unsafe or unsound" practices;
•require affirmative actions to correct any violation or practice;
•issue administrative orders that can be judicially enforced;
•direct increases in capital;
•direct the sale of subsidiaries or other assets;
•limit dividends and distributions;
•restrict growth;
•assess civil monetary penalties;
•remove officers and directors; and
•terminate deposit insurance.
The FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution's regulatory agency. Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory agreements could subject BankUnited, Inc., the Bank and their subsidiaries or their officers, directors and institution-affiliated parties to the remedies described above and other sanctions.
Notice and Approval Requirements Related to Control
Banking laws impose notice, approval, and ongoing regulatory requirements on any stockholder or other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution. These laws include the BHC Act and the Change in Bank Control Act, and the Home Owners' Loan Act. Among other things, these laws require regulatory filings by individuals or companies that seek to acquire direct or indirect "control" of an FDIC-insured depository institution. The determination of whether an investor "controls" a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, a party is deemed to control a depository institution or other company if the party owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a party may be presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of voting stock. Ownership by affiliated parties, or parties acting in concert, is typically aggregated for these purposes. If a party's ownership of BankUnited, Inc. were to exceed certain thresholds, the investor could be deemed to "control" the Company for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.
In addition, exceptExcept under limited circumstances, BHCs are prohibited from acquiring, without prior approval:
approval, control of any other bank or BHC or all or substantially all the assets thereof;thereof or
more than 5% of the voting shares of a bank or BHC which is not already a subsidiary.
Permissible Activities and Investments
Banking laws generally restrict the ability of BankUnited, Inc. to engage in activities other than those determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The GLB Act expanded the scope of permissible activities for a BHC that qualifies as a financial holding company. Under the regulations implementing the GLB Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to a financial activity. Those activities include, among other activities, certain insurance and securities activities. BHCs and their subsidiaries must be well-capitalized and well-managed in order for the BHC and its nonbank affiliates to engage in the expanded financial activities permissible only for a financial holding company. BankUnited, Inc. is not a financial holding company.
In addition, as a general matter, the establishment or acquisition by BankUnited, Inc. of a non-bank entity, or the initiation of a non-banking activity, requires prior regulatory approval. In approving acquisitions or the addition of activities, the Federal Reserve Board considers, among other things, whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
Regulatory Capital Requirements and Capital Adequacy
The federal bank regulators view capital levels as important indicators of an institution's financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. The final supervisory determination on an institution's capital adequacy is based on the regulator's assessment of numerous factors. Both BankUnited, Inc. and BankUnited are subject to regulatory capital requirements.
The Federal Reserve Board has established risk-based and leverage capital guidelines for BHCs, including BankUnited, Inc. The OCC has established substantially similar risk-based and leverage capital guidelines applicable to national banks, including BankUnited. BankUnited, Inc. and BankUnited are subject to capital rules implemented under the framework promulgated by the International Basel Committee on Banking Supervision (the "Basel III Capital Rules"). While some
provisions of the rules are tailored to larger institutions, the Basel III Capital Rules generally apply to all U.S. banking organizations, including BankUnited, Inc. and BankUnited.
The Basel III Capital Rules provide for the following minimum capital to risk-weighted assets ratios:ratios to be considered adequately capitalized:
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(ii) | 6.0% based upon tier 1 capital; and |
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(iii) | 8.0% based upon total regulatory capital. |
(i)4.5% based upon CET1;
(ii)6.0% based upon tier 1 capital; and
(iii)8.0% based upon total regulatory capital.
The Basel III Capital Rules require institutions to retain a capital conservation buffer of 2.5% above these required minimum capital ratio levels. A minimum leverage ratio (tier 1 capital as a percentage of average total assets) of 4.0% is also required under the Basel III Capital Rules. Banking organizations that fail to maintain the minimum required capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers, with distributions and discretionary bonus payments being completely prohibited if no capital conservation buffer exists, or in the event of the following: (i) the banking organization's capital conservation buffer was below 2.5% (or the minimum amount required) at the beginning of a quarter; and (ii) its cumulative net income for the most recent quarterly period plus the preceding four calendar quarters is less than its cumulative capital distributions (as well as associated tax effects not already reflected in net income) during the same measurement period.
Prompt Corrective Action
Under the FDIA, the federal bank regulatory agencies must take "prompt corrective action" against undercapitalized U.S. depository institutions. U.S. depository institutions are assigned one of five capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," and are subjected to differential regulation corresponding to the capital category within which the institution falls. As of December 31, 2018,2021, a depository institution was deemed to be "well capitalized" if the banking institution had a total risk-based capital ratio of 10.0% or greater, a tier 1 risk-based capital ratio of 8.0% or greater, a CET1 risk-based capital ratio of 6.5% and a leverage ratio of 5.0% or greater, and the institution was not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific level for any capital measure. Under certain circumstances, a well-capitalized, adequately-capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A banking institution that is undercapitalized is required to submit a capital restoration plan. Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including: termination of deposit insurance by the FDIC, restrictions on certain business activities, and appointment of the FDIC as conservator or receiver. As of December 31, 2018,2021, BankUnited, Inc. and BankUnited were well capitalized.
Source of strength
All companies, including BHCs, that directly or indirectly control an insured depository institution, are required to serve as a source of strength for the depository institution. Under this requirement, BankUnited, Inc. in the future could be required to provide financial assistance to BankUnited should it experience financial distress. Such support may be required at times when, absent this statutory and Federal Reserve Policy requirement, a BHC may not be inclined to provide it.
Regulatory Limits on Dividends and Distributions
Federal law currently imposes limitations upon certain capital distributions by national banks, such as certain cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. The Federal Reserve Board and OCC regulate all capital distributions by BankUnited directly or indirectly to BankUnited, Inc., including dividend payments.
BankUnited may not pay dividends to BankUnited, Inc. if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage capital ratio requirements, or in the event the OCC notified BankUnited that it was in need of more than normal supervision. Under the FDIA, an insured depository institution such as BankUnited is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized." Payment of dividends by BankUnited also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice.
BankUnited is subject to supervisory limits on its ability to declare or pay a dividend or reduce its capital unless certain conditions are satisfied.
In addition, it is the policy of the Federal Reserve Board that BHCs should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that BHCs should not maintain a level of cash dividends that undermines the BHC’s ability to serve as a source of strength to its banking subsidiaries.
Reserve Requirements
Pursuant to regulations of the Federal Reserve Board, all banking organizations are required to maintain average daily reserves at mandated ratios against their transaction accounts. In addition, reserves must be maintained on certain non-personal time deposits. These reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Bank.
Limits on Transactions with Affiliates and Insiders
Insured depository institutions are subject to restrictions on their ability to conduct transactions with affiliates and other related parties. Section 23A of the Federal Reserve Act imposes quantitative limits, qualitative requirements, and collateral requirements on certain transactions by an insured depository institution with, or for the benefit of, its affiliates. Transactions covered by Section 23A include loans, extensions of credit, investment in securities issued by an affiliate, and acquisitions of assets from an affiliate. Section 23B of the Federal Reserve Act requires that most types of transactions by an insured depository institution with, or for the benefit of, an affiliate be on terms at least as favorable to the insured depository institution as if the transaction were conducted with an unaffiliated third party.
The Federal Reserve Board's Regulation O and OCC regulations impose restrictions and procedural requirements in connection with the extension of credit by an insured depository institution to directors, executive officers, principal stockholders and their related interests.
The Volcker Rule
The Volcker Rule generally prohibits "banking entities" from engaging in "proprietary trading" and making investments and conducting certain other activities with "covered funds."
Although the rule provides for some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including BankUnited, Inc. and BankUnited. Banking entities with total assets of $10 billion or more that engage in activities subject to the Volcker Rule are required to establish a compliance program to address the prohibitions of, and exemptions from, the Volcker Rule. The banking agencies have proposed rules that would tailor a banking organization's Volcker compliance program based on the extent of the banking entity's trading assets and liabilities.
Corporate governance
The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that affect most U.S. publicly traded companies, including BankUnited, Inc. The Dodd-Frank Act (1) granted stockholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhanced independence requirements for compensation committee members; (3) required companies listed on national securities exchanges to adopt incentive-based compensation claw-back policies for executive officers; and (4) provided the SEC with authority to adopt proxy access rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company's proxy materials.
Examination Fees
The OCC currently charges fees to recover the costs of examining national banks, processing applications and other filings, and covering direct and indirect expenses in regulating national banks. Various regulatory agencies have the authority to assess additional supervision fees.
FDIC Deposit Insurance
The FDIC is an independent federal agency that insures the deposits of federally insured depository institutions up to applicable limits. The FDIC also has certain regulatory, examination and enforcement powers with respect to FDIC-insured institutions. The deposits of BankUnited are insured by the FDIC up to applicable limits. As a general matter, the maximum deposit insurance amount is $250,000 per depositor.
Additionally, FDIC-insured depository institutions are required to pay deposit insurance assessments to the FDIC. The amount of a particular institution's deposit insurance assessment is based on that institution's risk classification under an FDIC risk-based assessment system. An institution's risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators.
Depositor Preference
The FDIA provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. Insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including BankUnited, Inc., with respect to any extensions of credit they have made to such insured depository institution.
Federal Reserve System and Federal Home Loan Bank System
As a national bank, BankUnited is required to hold shares of capital stock in a Federal Reserve Bank. BankUnited holds capital stock in the Federal Reserve Bank of Atlanta. As a member of the Federal Reserve System, BankUnited has access to the Federal Reserve discount window lending and payment clearing systems.
BankUnited is a member of the Federal Home Loan Bank of Atlanta. Each FHLB provides a central credit facility primarily for its member institutions as well as other entities involved in home mortgage lending. Any advances from a FHLB
must be secured by specified types of collateral. As a member of the FHLB, BankUnited is required to acquire and hold shares of capital stock in the FHLB of Atlanta. BankUnited is in compliance with this requirement.
Anti-Money Laundering and OFAC
Under federal law, financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; a risk-based customer due diligence program; and testing of the program by an independent audit function. Financial institutions are also
prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with non-U.S. financial institutions and non-U.S. customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution's compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The regulatory authorities have imposed "cease and desist" orders and civil money penalty sanctions against institutions found to be violating these obligations.
The U.S. Department of the Treasury's OFAC is responsible for helping to insureensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations, and countries suspected of money laundering or aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If BankUnited, Inc. or BankUnited finds a name on any transaction, account or wire transfer that is on an OFAC list, BankUnited, Inc. or BankUnited must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities.
Consumer Laws and Regulations
Banking organizations are subject to numerous laws and regulations intended to protect consumers. These laws include, among others:
•Truth in Lending Act;
•Truth in Savings Act;
•Electronic Funds Transfer Act;
•Expedited Funds Availability Act;
•Equal Credit Opportunity Act;
•Fair and Accurate Credit Transactions Act;
•Fair Housing Act;
•Fair Credit Reporting Act;
Fair Debt Collection Act;
•Gramm-Leach-Bliley Act;
•Home Mortgage Disclosure Act;
•Right to Financial Privacy Act;
•Real Estate Settlement Procedures Act;
•laws regarding unfair and deceptive acts and practices; and
•usury laws.
Many states and local jurisdictions have consumer protection laws analogous, and in addition to, those listed above. These federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans, or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general, and civil or criminal liability.
Privacy and Information Security
Banking organizations are subject to many federal and state laws and regulations governing the collection, use and protection of customer information. For example, the Gramm-Leach-Bliley Act requires BankUnited to periodically disclose its privacy policies and practices relating to sharing nonpublic customer information and enables retail customers to opt out of our ability to share information with unaffiliated third parties under certain circumstances. Other federal and state laws and regulations impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. The Gramm-Leach-Bliley Act also requires BankUnited to implement a comprehensive information security program that includes administrative, technical and physical safeguards to ensure the security and confidentiality of customer records and information.
CFPB
The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services offered to bank and thrift consumers. For banking organizations with assets of $10 billion or more, such as BankUnited, Inc. and the Bank, the CFPB has exclusive rule making and examination, and primary enforcement authority under certain federal consumer protection financial law.laws. In addition, states are permitted to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB.
The Community Reinvestment Act
The CRA is intended to encourage banks to help meet the credit needs of their service areas, including low and moderate-income neighborhoods, consistent with safe and sound operations. The bank regulators examine and assign each bank a public CRA rating.
The CRA requires bank regulators to take into account the bank's record in meeting the needs of its service area when considering an application by a bank to establish or relocate a branch or to conduct certain mergers or acquisitions. The Federal Reserve Board is required to consider the CRA records of a BHC's controlled banks when considering an application by the BHC to acquire a banking organization or to merge with another BHC. If BankUnited, Inc. or BankUnited applies for regulatory approval to make certain investments, the regulators will consider the CRA record of target institutions and BankUnited, Inc.'s depository institution subsidiaries. An unsatisfactoryA less than satisfactory CRA recordrating could substantially delay approval or result in denial of an application. The regulatory agency's assessment of the institution's recordCRA performance is made available to the public. Following its most recent CRA examinationperformance evaluation in September 2015,October 2021, BankUnited received an overall rating of "Satisfactory."
Employees
Human Capital Resources
At December 31, 2018,2021, we employed 1,735had 1,465 full-time employees and 5530 part-time employees. None of our employees are parties to a collective bargaining agreement. We believe that our relationsemployees are our greatest asset and vital to our success. As such, we seek to hire and retain the best candidate for each position, without regard to age, gender, ethnicity, or other protected trait, but with an appreciation for a diversity of perspectives and experience. We have designed a compensation structure including an array of benefit plans and programs that we believe is attractive to our current and prospective employees.
Diversity, Equity and Inclusion
Our goal is to create a safe, diverse and inclusive workplace where individuals are valued for their talents, feel free to express themselves and are empowered to reach their fullest potential. At December 31, 2021, 33% of the members of our Board of Directors were female and 44% were of diverse nationality or ethnicity. Approximately 58% of our workforce was female while ethnic and racial minorities constituted 60% of our workforce at December 31, 2021.
Through our iCARE™ initiative, which stands for Inclusive Community of Advocacy, Respect and Equality, employees are encouraged to participate in interactive events, community forums, affinity groups, an enterprise-wide mentorship program and multiple volunteer opportunities. BankUnited has partnered with five universities in our local markets to provide scholarships and internship programs, with a primary focus on minority students in their junior and senior years. We have also established the ATOM Pink Tank program in partnership with Florida International University; a six-month leadership development program which creates opportunities for female students in STEM to build upon their technical and leadership skills through participation in a series of roundtable discussions, a research challenge, and mentorship with senior-level executives from the Bank. A total of 16 students participated in the first Pink Tank program and three of these students were offered temporary or permanent roles with the Company. We offer diversity and inclusion training to all of our employees and all employees are given paid time to participate in volunteer opportunities in their communities and the communities we serve. We launched WomenEmpowered@BankUnited ("WE"), a community for women at BankUnited. In 2021, WE held two interactive events for all women at the Bank, including our female directors, and created eight affinity groups. To oversee the further evolution of the iCARE™ program, we have formed an iCARE™ Council consisting of 14 employees with diverse backgrounds and perspectives across different divisions in our organization.
Health, Wellness and Safety
BankUnited prioritizes employee health by focusing on wellness initiatives that incorporate mental, physical, intellectual, occupational, social, emotional, financial, cultural and spiritual components of wellness. We offer medical, dental, vision, short and long-term disability insurance coverage, an employee assistance program, supplemental insurance plans, healthcare concierge services and parental leave for all employees. Our Wellness Program provides employees with on-site health screenings, eye exams, mammograms, vaccine clinics, nutrition consultations, music and art therapy, meditation sessions, live and virtual learning opportunities with area wellness experts, first aid, CPR, and safety courses, an on-site fitness center and on-site cafe. BankUnited received the Healthiest Employer Award from the South Florida Business Journal in 2021 and 2020. In 2021, BankUnited was listed among America's Top 100 Healthiest Employers by Springbuk HR Technology and was awarded the Worksite Wellness Award by the Florida Department of Health. For participation in our Wellness Program, we offer our team members a reduced premium rate for medical insurance coverage.
We have a Company sponsored 401(k) Plan, a tuition reimbursement program, flexible spending accounts, and health savings accounts with Company contributions.
Career Growth and Development
Through our Go for More™ Academy, we provide employees with training and resources designed to increase skillsets and product knowledge, develop leadership, promote collaboration and facilitate career development. Examples of our leadership development programs include our LEAD program for senior leaders, Rising Leaders Program for middle managers and the EXCELerate career development program for individual contributors. All of our employees are good.required to participate in compliance and cyber-security training.
Communication & Engagement
We strongly believe that communication and employee engagement are keys to our success. Toward this end, we utilize a variety of channels to facilitate open and direct dialogue and communication, including: monthly CEO update video calls, weekly newsletters, town halls, social media updates and employee surveys.
In recognition of their hard work and efforts in the challenging environment faced by the Company over the past two years, the Company paid a special $5,000 bonus in the fourth quarter of 2021 to substantially all of its employees, regardless of their position in the organization.
Available Information
Our website address is www.bankunited.com. Our electronic filings with the SEC (including all Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments to those reports) are available free of charge on the website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information posted on our website is not incorporated into this Annual Report. In addition, the SEC maintains a website that contains reports and other information filed with the SEC. The website can be accessed at http://www.sec.gov.
Item 1A. Risk Factors
Risks Related to Our Business
Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
Deterioration in business or economic conditions generally, or more specifically in the principal markets in which we do business, could have one or more of the following adverse effects on our business, financial condition and results of operations:
A decrease in demand for our loan and deposit products;
An increase in delinquencies and defaults by borrowers or counterparties;
A decrease in the value of our assets;
A decreaseinvestment in our earnings;
A decrease in liquidity; and
A decrease in our ability to access the capital markets.
Our enterprise risk management framework may not be effective in mitigating the risks to which we are subject, or in reducing the potential for losses in connection with such risks.
Our enterprise risk management frameworkcommon stock is designed to identify and minimize or mitigate the risks to which we are subject, as well as any losses stemming from such risks. Although we seek to identify, measure, monitor, report, and control our exposure to such risks, and employ a broad and diversified set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited in their ability to anticipate the existence or development of risks that are currently unknown and unanticipated. The ineffectiveness of our enterprise risk management framework in mitigating the impact of known risks or the emergence of previously unknown or unanticipated risks may result in our incurring losses in the future that could adversely impact our financial condition and results of operations.
Our business is highly susceptible to credit risk.
As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that the collateral securing the payment of their loans, if any, may be insufficient to ensure repayment. Credit losses are inherent in the business of making loans. We are also subject to credit risk that is embedded in our securities portfolio. Our credit standards, procedures and policies may not prevent us from incurring substantial credit losses, particularly if economic or market conditions deteriorate. It is difficult to determine the many ways in which a decline in economic or market conditions may impact the credit quality of our assets.
Our allowance for loan and lease losses may not be adequate to cover actual credit losses.
We maintain an allowance for loan and lease losses ("ALLL") that represents management's estimate of probable incurred lossesrisks inherent in our credit portfolio. This estimate requiresbusiness. The material risks and uncertainties that management to make significant assumptionsbelieves affect us are described below. Before making an investment decision, you should carefully consider the risks and involves a high degree of judgment, which is inherently subjective, particularly as our loan portfolio has not exhibited performance through a full credit cycle. Management considers numerous factors in determining the amountuncertainties described below, together with all of the ALLL, including, butother information included or incorporated by reference herein. The risks and uncertainties described below are not limited to, historical loss severitiesthe only ones facing us. Additional risks and net charge-off ratesuncertainties that management is not aware of BankUnited and other comparable financial institutions, internal risk ratings, loss forecasts, collateral values, delinquency rates,or focused on or that management currently deems immaterial may also impair our business operations.
If any of the level of non-performing, criticized, classified and restructured loansevents described in the portfolio, product mix, underwriting and credit administration policies and practices, portfolio trends, concentrations, industry conditions, economic trends and otherrisk factors considered by management to have an impact on the ability of borrowers to repay their loans.
If management's assumptions and judgments prove to be incorrect, our current allowance may be insufficient and we may be required to increase our ALLL. In addition, regulatory authorities periodically review our ALLL and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Adverse economic conditions could make management's estimate even more complex and difficult to determine. Any increase in our ALLL will result in a decrease in net income and capital and could have a material adverse effect on our financial condition and results of operations. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Analysis of the Allowance for Loan and Lease Losses" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Allowance for Loan and Lease Losses."
The FASB issued an ASU that will result in a significant change in how we and other financial institutions recognize credit losses in the financial statements and may have a material impact onshould actually occur, our financial condition and results of operations or on the industry more broadly.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments- Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the current "incurred loss" model for recognizing credit losses with an "expected loss" model referredcould be materially and adversely affected. If this were to as the CECL model. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The adoption of the CECL model is likely to significantly impact the methodology used to determine our ALLL and could require us to significantly increase our ALLL, resulting in an adverse impact to our financial condition, regulatory capital levels and results of operations. Moreover, the CECL model may create more volatility in the level of our ALLL. We are not yet able to reasonably estimate the impact that adoption of ASU 2016-13 will have on our financial condition, regulatory capital levels or results of operations. The ASU will be effective for us on January 1, 2020.
Additionally, uncertainty exists around whether adoption of the CECL model by the financial services industry more broadly will have an impact on loan demand, how loan products are structured, the availability and pricing of credit in the markets or regulatory capital levels for the industry.
We depend on the accuracy and completeness of information about clients and counterparties in making credit decisions.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.
The credit quality of our loan portfolio and results of operations are affected by residential and commercial real estate values and the level of residential and commercial real estate sales and rental activity.
A material portion of our loans are secured by residential or commercial real estate. The ability of our borrowers to repay their obligations and our financial results may therefore be adversely affected by changes in real estate values. Commercial real estate valuations in particular are highly subjective, as they are based on many assumptions. Such valuations can be significantly affected over relatively short periods of time by changes in business climate, economic conditions, occupancy rates, the level of rents, interest rates and, in many cases, the results of operations of businesses and other occupants of the real property. The properties securing income-producing investor real estate loans may not be fully leased at the origination of the loan. A borrower's ability to repay these loans is dependent upon stabilization of the properties and additional leasing through the life of the loan or the borrower's successful operation of a business. Weak economic conditions may impair a borrower's business operations, lead to elevated vacancy rates or lease turnover, slow the execution of new leases or result in falling rents. These factors could result in further deterioration in the fundamentals underlying the commercial real estate market and the deterioration in value of some of our loans. Similarly, residential real estate valuations can be impacted by housing trends, the availability of financing at reasonable interest rates, the level of supply of available housing, governmental policy regarding housing and housing finance and general economic conditions affecting consumers.
We make credit and reserve decisions based on current real estate values, the current conditions of borrowers, properties or projects and our expectations for the future. If real estate values or fundamentals underlying the commercial and residential real estate markets decline, we could experience higher delinquencies and charge-offs beyond that provided for in the ALLL.
Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs and risks associated with the ownership of commercial or residential real property, which could have an adverse effect on our business or results of operations.
A significant portion of our loan portfolio is secured by residential or commercial real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans, in which case, we are exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including:
general or local economic conditions;
environmental cleanup liability;
neighborhood values;
interest rates;
commercial real estate rental and vacancy rates;
real estate tax rates;
operating expenses of the mortgaged properties;
supply of and demand for properties;
ability to obtain and maintain adequate occupancy of the properties;
zoning laws;
governmental rules, regulations and fiscal policies; and
hurricanes or other natural or man-made disasters.
These same factors may impact the ability of borrowers to repay their obligations that are secured by real property.
Our business is susceptible to interest rate risk.
Our business and financial performance are impacted by market interest rates and movements in those rates. Since a high percentage of our assets and liabilities are interest bearing or otherwise sensitive in value to changes in interest rates, changes in rates, in the shape of the yield curve or in spreads between different types of rates can have a material impact on our results of operations and the values of our assets and liabilities. Changes inhappen, the value of investmentour securities available for salecould decline significantly, and certain derivatives directly impact equity through adjustmentsyou could lose all or part of accumulated other comprehensive income and changes in the values of certain other assets and liabilities may directly or indirectly impact earnings. Interest rates are highly sensitive to many factors over which we have no control and which we may not be able to anticipate adequately, including general economic conditions and the monetary and tax policies of various governmental bodies, particularly the Federal Reserve Board.your investment.
Our earnings and cash flows depend to a great extent upon the level of our net interest income. Net interest income is the difference between the interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing liabilities, such as deposits and borrowings.
Strategic Risk
The flattening of the yield curve and tight credit spreadsCOVID-19 pandemic
The COVID-19 pandemic has limited our ability to add higher yielding assetscaused substantial disruption to the balance sheet than what may otherwise might have been realized in a more normalized rate environment with a positively shaped yield curve. Ifglobal and domestic economies which has impacted the flat rate environment persists beyond current forecasts, or the curve flattens further or inverts, downward pressure on our net interest margin may be exacerbated, negatively impacting our net interest income in the future. Changes in interest rates can increase or decrease our net interest income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest bearing liabilities mature or reprice more quickly than interest earning assets in a period of rising rates, an increase in interest rates could reduce net interest income. When interest earning assets mature or reprice more quickly than interest bearing liabilities, falling interest rates could reduce net interest income. Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our deposit products, decrease loan repayment rates and negatively affect borrowers' ability to meet their obligations. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage-backed securities portfolios. Competitive conditions may also impact the interest rates we are able to earn on new loans or are required to pay on deposits, negatively impacting both our ability to grow deposits and interest earning assets and our net interest income.
We attempt to manage interest rate risk by adjusting the rates, maturity, repricing, mix and balances of the different types of interest-earning assets and interest bearing liabilities and through the use of hedging instruments; however, interest rate risk management techniques are not precise, and we may not be able to successfully manage our interest rate risk. Our ability to manage interest rate risk could be negatively impacted by longer fixed rate terms on loans being added to our portfolio or by unpredictable behavior of depositors in various interest rate environments. A rapid or unanticipated increase or decrease in interest rates, changes in the shape of the yield curve or in spreads between rates could have an adverse effect on our net interest margin and results of operations.
Possible replacement of the LIBOR benchmark interest rate may have an impact on ourCompany’s business, financial condition and results of operations. The future impact of the COVID-19 pandemic on the global and domestic economies and the Company’s business, financial condition and results of operations remains uncertain.
In July 2017,March 2020, the Financial Conduct Authority,World Health Organization declared COVID-19 a regulatorglobal pandemic. The pandemic resulted in governmental authorities implementing numerous measures attempting to contain the spread and impact of financial services firmsCOVID-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. Vaccines have become available, most of these restrictions have been lifted or moderated and we believe economic indicators currently point to a continued recovery; however, the pandemic and these precautionary measures negatively impacted the global and domestic economies, including in the United Kingdom, announcedCompany's primary market areas. There is no assurance that it intends to stop persuadingthese or compelling banks to submit LIBOR rates after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot andsimilar measures will not be guaranteed after 2021. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predictreinstated, particularly if the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other securities or financial arrangements, given LIBOR's role in determining market interest rates globally. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities in our portfolio, and may impact the availability and cost of hedging instruments and borrowings. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBORtrajectory of the substitute indices, whichvirus worsens.
This macroeconomic environment has had, and could continue to have, an adverse effect on the Company’s business and operations as well as on the business and operations of the Company's borrowers, customers and counterparties. The actual, expected or potential impact of the pandemic resulted in reduction in the level of demand for certain of the Company's products and services, particularly certain lending products. While there has been significant economic recovery and we believe that economic indicators currently point to that recovery continuing, should economic and social impacts of COVID-19 persist or further deteriorate, the macroeconomic environment could have a further adverse effect on our resultsbusiness and operations, including, but not limited to, decreased demand for the Company’s products and services, protracted periods of lower interest rates which may negatively impact the Company's net interest margin, loss of income resulting from forbearances, deferrals and fee waivers provided by the Company to its borrowers, increased credit losses due to deterioration in the financial condition of our borrowers including declining asset and collateral values, which may increase our provision for credit losses and net charge-offs and possible constraints on liquidity and capital. 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.
As the COVID-19 pandemic continues to evolve, the Company may be subject to governmental vaccination and mask-wearing mandates. A recent vaccination mandate, requiring employees to show proof they have been fully vaccinated or provide a COVID-19 test at least once a week, was overturned by the Supreme Court. While current and future mandates are being challenged in state and federal courts, it is difficult to predict the full impact these mandates, if implemented, on our workforce, business and operations.
A failureThe extent to maintain adequate liquidity could adversely affect ourwhich the COVID-19 pandemic impacts the Company’s business, financial condition and results of operations.
Effectiveoperations, as well as its regulatory capital ratios and liquidity, management is essential forwill depend on future developments, which are highly uncertain, including the operationscope and duration of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturitiesthe pandemic and withdrawalsactions taken by governmental authorities and other cash commitments under both normal operating conditionsthird parties in response to the pandemic. Moreover, the effects of the COVID-19 pandemic may heighten many of the other risks described in this Form 10-K and under extraordinaryany subsequent Quarterly Report on Form 10-Q or unpredictable circumstances causing industry or generalCurrent Report on Form 8-K including, but not limited to, financial market stress. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include a downturn inconditions, economic conditions, in the geographic markets in which our operations are concentrated or in the financial or credit markets in general. Our access to liquidity in the formrisk, interest rate risk, risk of deposits may also be affected by the liquidity needs of our depositorssecurity breaches and by competition for deposits in our primary markets. A substantial portion of our liabilities consist of deposit accounts that are payable on demand or upon several days' notice, while by comparison, the majority of our assets are loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace maturing deposits and borrowings as necessary, we might not be able to replace such funds in the future. A failure to maintain adequate liquidity could materially and adversely affect our business, results of operations or financial condition.technology changes.
We may not be successful in executing our fundamental business strategy.
OrganicOptimizing risk adjusted returns, continued organic, diversified growth and diversification of our businessloan and deposit customer base, and improving the deposit mix are essential components of our business strategy. Commercial and consumer banking, for both loan and deposit products, in our primary markets is highly competitive. Our ability to achieve profitable organic growth is also dependent on economic conditions, on the interest rate environment, which is in turn dependent to a large degree on fiscal and monetary policy, and on depositor behavior and preferences. There is no guarantee that we will be able to successfully or profitably execute our organic growthfundamental business strategy.
While acquisitions have not historically been a primary contributor tocomponent of our growth,business strategy, we opportunistically consider potential acquisitions of financial institutions and complementary non-bank businesses. There are risks that may inhibit our ability to successfully execute such acquisitions. We competeacquisitions, such as competition with other financial institutions for acquisition opportunities and there are a limited number of candidates that meet our acquisition criteria. Consequently, we may not be able to identify suitable candidates for acquisitions. If we do identify suitable candidates, there is no assurance that we will be ablepotential acquirers, the ability to obtain the
required regulatory approvals in order to acquire them. If we do succeed in consummating future acquisitions, acquisitions involve risks thata timely matter or at all, and the acquired businesses may not achieve anticipated results. In addition,successful integration of a consummated acquisition and realization of the process of integrating acquired entities may divert significant management time and resources. We may not be able to integrate successfully or operate profitably any financial institutions or complementary businesses we may acquire.expected benefits.
Growth, whether organic or through acquisition is dependent on the availability of capital and funding. Our ability to raise capital through the sale of stock or debt securities may be affected by market conditions, economic conditions or regulatory changes. There is no assurance that sufficient capital or funding to enable growth will be available in the future, upon acceptable terms or at all.
The geographic concentration of our markets in Florida and the New York metropolitan area makes our business highly susceptible to local economic conditions.
Unlike some larger financial institutions that are more geographically diversified, our operations are concentrated in Florida and the New York metropolitan area. Additionally, a significant portion of our loans secured by real estate are secured by commercial and residential properties in these geographic regions. Accordingly, the ability of our borrowers to repay their
loans, and the value of the collateral securing such loans, may be significantly affected by economic conditions in these regions or by changes in the local real estate markets. Disruption or deterioration in economic conditions in the markets we serve could result in one or more of the following:
an increase in loan delinquencies;
an increase in problem assets and foreclosures;
a decrease in the demand for our products and services; or
a decrease in the value of collateral for loans, especially real estate, in turn reducing customers' borrowing power, the value of assets associated with problem loans and collateral coverage.
Hurricanes and other weather-related events, as well as man-made disasters, could cause a disruption in our operations or other consequences that could have an adverse impact on our results of operations.
Our geographic markets in Florida and other coastal areas are susceptible to severe weather, including hurricanes, flooding and damaging winds. The occurrence of a hurricane or other natural disaster to which our markets are susceptible or a man-made catastrophe such as terrorist activity could disrupt our operations, result in damage to our facilities and negatively affect the local economies in which we operate. These events may lead to a decline in loan originations, an increase in deposit outflows, reduce or destroy the value of collateral for our loans, particularly real estate, negatively impact the business operations of our customers, and cause an increase in delinquencies, foreclosures and loan losses. Our business and results of operations may be materially, adversely impacted by these and other negative effects of such events.
Our portfolio of assets under operating lease is exposed to fluctuations in the demand for and valuation of the underlying assets.
Our equipment leasing business is exposed to asset risk resulting from ownership of the equipment on operating lease. Asset risk arises from fluctuations in supply and demand for the underlying leased equipment. We are exposed to the risk that, at the end of the lease term or in the event of early termination, the value of the asset will be lower than expected, resulting in reduced future lease income over the remaining life of the asset or a lower sale value. Demand for and the valuation of the leased equipment is sensitive to shifts in general and industry specific economic and market trends, governmental regulations and changes in trade flows from specific events such as natural or man-made disasters. A significant portion of our equipment under operating lease consists of rail cars used directly or indirectly in oil and gas drilling activities. Although we regularly monitor the value of the underlying assets and the potential impact of declines in oil and natural gas prices on the value of railcars on operating lease, there is no assurance that the value of these assets will not be adversely impacted by conditions in the energy industry.
Our reported financial results depend on management's selection and application of accounting policies and methods and related assumptions and estimates.
Our accounting policies and estimates are fundamental to our reported financial condition and results of operations. Management is required to make difficult, complex or subjective judgments in selecting and applying many of these accounting policies. In some cases, management must select an accounting policy or method from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in us reporting materially different results than would have been reported under a different alternative.
From time to time, the FASB and SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, resulting in a restatement of prior period financial statements. See Note 1 to the consolidated financial statements for more information about recent accounting pronouncements that may have a material impact on our reported financial results.
Our internal controls may be ineffective.
Management regularly monitors, evaluates and updates our internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, can provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our financial condition and results of operations.
We depend on our executive officers and key personnel to execute our long-term business strategy and could be harmed by the loss of their services.
We believe that our continued growth and future success will depend in large part on the skills of our senior management team. We believe our senior management team possesses valuable knowledge about and experience in the banking industry and that their knowledge and relationships could be difficult to replicate. The composition of our senior management team and our other key personnel may change over time. Although our Chairman, President and Chief Executive Officer has entered into an employment agreement with us, he may not complete the term of his employment agreement or renew it upon expiration. Other members of our senior management team are not subject to employment agreements. Our success also depends on the experience of other key personnel and on their relationships with the customers and communities they serve. The loss of service of one or more of our executive officers or key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition or operating results.
We face significant competition from other financial institutions and financial services providers, which may adversely impact our growth or profitability.
The primary markets we currently serve are Florida and the New York metropolitan area. Commercial and consumer banking in these markets is highly competitive. Our markets contain not only a large number of community and regional banks, but also a significant presence of the country's largest commercial banks. We compete with other state and national banks as well as savings and loan associations, savings banks and credit unions located in Florida, New York and adjoining states as well as those targeting our markets digitally for deposits and loans. In addition, we compete with financial intermediaries, such as FinTech companies, consumer finance companies, marketplace lenders, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. The variety of entities providing financial services to businesses and consumers, as well as the technologies and delivery channels through which those services are provided are rapidly evolving.
The financial services industry is likely to become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Increased competition among financial services companies may adversely affect our ability to market our products and services. Technology has lowered barriers to entry and made it possible for banks to compete in our markets without a retail footprint by offering competitive rates, as well as non-banks, including online providers and a growing number of FinTech companies, to offer products and services traditionally provided by banks. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size or particular technology capabilities, many competitors may offer a broader range of products and services as well asor may be able to offer better pricing for certain products and services than we can.
Our ability to compete successfully depends on a number of factors, including:
•the ability to develop, maintain and build upon long-term customer relationships based on quality service, high ethical standards and safe and sound banking practices;
•our ability to pro-actively and quickly respond to technological change;
•the ability to attract and retain qualified employees to operate our business effectively;
•the ability to expand our market position;
•the scope, relevance and pricing of products and services offered to meet customer needs and demands;
•the rate at which we introduce new products and services relative to our competitors;
•customer satisfaction with our level of service; and
•industry and general economic trends.
Failure to perform well in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could harm our business, financial condition and results of operations.
Crypto-currencies and blockchain technology eventually may be the foundation for greatly enhancing transactional security throughout the banking industry, but also may eventually greatly reduce or alter the need for banks as financial deposit-keepers and intermediaries.
Hurricanes and other weather-related events, social or health-care crises such as pandemics or political unrest, terrorist activity, or other natural or man-made disasters could cause a disruption in our operations or otherwise have an adverse impact on our business and results of operations.
Our geographic markets in Florida and other coastal areas are susceptible to severe weather, including hurricanes, flooding and damaging winds. The occurrence of a hurricane or other natural disaster to which our markets are susceptible, a man-made
catastrophe such as terrorist activity, pandemic outbreaks and other global health emergencies, political unrest or other man-made or natural disasters could disrupt our operations or our work-force, result in damage to our facilities, jeopardize our ability to continue to provide essential services to our customers and negatively affect our customers and the local economies in which we operate. These events may lead to a decline in loan originations, an increase in deposit outflows, strain our liquidity position, reduce or destroy the value of collateral for our loans, particularly real estate, negatively impact the business operations of our customers, and cause an increase in delinquencies, foreclosures and loan losses. Our business, financial condition and results of operations may be materially, adversely impacted by these and other negative effects of such events.
We depend on our executive officers and key personnel to execute our long-term business strategy and could be harmed by the loss of their services.
We believe that our continued growth and future success will depend in large part on the skills of our senior management team and other key personnel. We believe our senior management team possesses valuable knowledge about and experience in the banking industry and that their knowledge and relationships could be difficult to replicate. The composition of our senior management team and our other key personnel may change over time. Although our Chairman, President and Chief Executive Officer has entered into an employment agreement with us, he may not complete the term of his employment agreement or renew it upon expiration. Other members of our senior management team are not subject to employment agreements. Our success also depends on the experience of other key personnel and on their relationships with the customers and communities they serve. The loss of service of one or more of our executive officers or key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition or operating results.
Climate change or societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts to mitigate those impacts. Consumers and businesses may change their behavior as a result of these concerns. We and our customers may need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions and operating process changes. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of assets securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior. One of our primary market areas is the state of Florida, particularly in coastal areas; as such, we may have an increased vulnerability to the ultimate impacts of climate change as compared to certain of our competitors.
Increasing scrutiny and changing expectations from investors and customers with respect to our ESG practices and those of our customers may impose additional costs on us or expose us to new or additional risks.
There is increased focus, including from governmental organizations, investors, customers and employees on ESG issues such as environmental stewardship, climate change, diversity and inclusion, racial justice and workplace culture and conduct. We have expended and may further expend resources to monitor, report and adopt policies and practices that we believe will improve compliance with our evolving ESG goals and plans, as well as third party imposed ESG related standards and expectations. If our ESG practices do not meet evolving rules and regulations or investor or other stakeholder expectations and standards, then our reputation, our ability to attract or retain leading experts, employees and other professionals, and our ability to attract new customers and investors could be negatively impacted. Similarly, our failure or perceived failure to pursue or fulfill our current or future goals, targets and objectives or to satisfy various reporting standards within the timelines we announce, or at all, could also have similar negative impacts.
In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters, and unfavorable ratings of the Company may lead to negative investor sentiment, stock price fluctuations and the diversion of investment to other companies.
Credit Risk
As a lender, our business is highly susceptible to credit risk.
As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that the collateral securing the payment of their loans, if any, may be insufficient to ensure repayment. Credit losses are inherent in the business of making loans. We are also subject to credit risk that is embedded in our securities portfolio. Our credit risk
management framework inclusive of our underwriting standards, procedures and policies may not prevent us from incurring substantial credit losses, particularly if economic or market conditions deteriorate. It is difficult to determine the many ways in which a decline in economic or market conditions may impact the credit quality of our assets.
Our ACL may not be adequate to cover actual credit losses.
We maintain an ACL that represents management's estimate of current expected credit losses, or the amount of amortized cost basis not expected to be collected, on our loan portfolio and the amount of credit loss impairment on our available for sale securities portfolio. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently subjective and uncertain. The measurement of expected credit losses encompasses information about historical events, current conditions and reasonable and supportable economic forecasts. Factors that may be considered in determining the amount of the ACL 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, delinquency rates, historical or expected credit loss patterns and other quantitative and qualitative factors considered by management to have an impact on the adequacy of the ACL and the ability of borrowers to repay their loans. The adequacy of the ACL is also dependent on the effectiveness of the underlying models used in determining the estimate.
If management's assumptions and judgments prove to be incorrect, our credit loss models prove to be inaccurate or our processes and controls governing the determination of the amount of the ACL prove ineffective, our ACL may be insufficient and we may be required to increase our ACL. In addition, regulatory authorities periodically review our ACL and may require us to increase our provision for credit losses or recognize further loan charge-offs, based on judgments different than those of our management. Adverse economic conditions could make management's estimate even more complex and difficult to determine. Any increase in our ACL will result in a decrease in net income and capital and could have a material adverse effect on our financial condition and results of operations. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Analysis of the Allowance for Credit Losses" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Allowance for Credit Losses."
We depend on the accuracy and completeness of information about clients and counterparties in making credit decisions.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.
The credit quality of our loan portfolio and results of operations are affected by residential and commercial real estate values and the level of residential and commercial real estate sales and rental activity.
A material portion of our loans are secured by residential or commercial real estate. The ability of our borrowers to repay their obligations and our financial results may therefore be adversely affected by changes in real estate values. Commercial real estate valuations in particular are highly subjective, as they are based on many assumptions. Such valuations can be significantly affected over relatively short periods of time by changes in business climate, economic conditions, demographic and market trends such as the potential impact of the ongoing shift to on-line shopping on retail properties or the recent trend toward remote work on office properties, occupancy rates, the level of rents, regulatory changes such as recent changes to New York rent regulation, interest rates and, in many cases, the results of operations of businesses and other occupants of the real property. The properties securing income-producing investor real estate loans may not be fully leased at the origination of the loan. A borrower's ability to repay these loans is dependent upon stabilization of the properties and additional leasing through the life of the loan or the borrower's successful operation of a business. Weak economic conditions may impair a borrower's business operations, lead to elevated vacancy rates or lease turnover, slow the execution of new leases or result in falling rents. These factors could result in further deterioration in the fundamentals underlying the commercial real estate market and the deterioration in value of some of our loans. Similarly, residential real estate valuations can be impacted by housing trends, demographic trends, the availability of financing at reasonable interest rates, the level of supply of available housing, governmental policy regarding housing and housing finance and general economic conditions affecting consumers. Real estate values may also be impacted by weather events and other man-made or natural disasters, or ultimately, by the impact of climate change.
We make credit and reserve decisions based on current real estate values, the current conditions of borrowers, properties or projects and our expectations for the future. If real estate values or fundamentals underlying the commercial and residential real estate markets decline, we could experience higher delinquencies and charge-offs beyond that provided for in the ACL.
Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property, we may be subject to risks associated with the ownership of commercial or residential real property, which could have an adverse effect on our business, financial condition or results of operations.
A significant portion of our loan portfolio is secured by residential or commercial real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans, in which case, we are exposed to the risks and costs inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including:
•general or local economic conditions;
•environmental cleanup liability;
•neighborhood values;
•interest rates;
•commercial real estate rental and vacancy rates;
•real estate tax rates;
•operating expenses of the mortgaged properties;
•supply of and demand for properties;
•ability to obtain and maintain adequate occupancy of the properties;
•zoning laws;
•governmental rules, regulations and fiscal policies;
•hurricanes or other natural or man-made disasters; and
•the impact of social or healthcare crises or political unrest.
These same factors may impact the ability of borrowers to repay their obligations that are secured by real property.
The geographic concentration of our markets in Florida and the New York tri-state area makes our business highly susceptible to local economic conditions.
Unlike some larger financial institutions that are more geographically diversified, our operations are concentrated in Florida and the New York tri-state area. Additionally, a significant portion of our loans secured by real estate are secured by commercial and residential properties in these geographic regions. Accordingly, the ability of our borrowers to repay their loans, and the value of the collateral securing such loans, may be significantly affected by economic conditions in these regions or by changes in the local real estate markets. Disruption or deterioration in economic conditions in the markets we serve could result in one or more of the following:
•an increase in loan delinquencies;
•an increase in problem assets and foreclosures;
•a decrease in the demand for our products and services; or
•a decrease in the value of collateral for loans, especially real estate, in turn reducing customers' borrowing power, the value of assets associated with problem loans and collateral coverage.
Our portfolio of operating lease equipment is exposed to fluctuations in the demand for and valuation of the underlying assets.
Our equipment leasing business is exposed to asset risk resulting from ownership of the equipment on operating lease. Asset risk arises from fluctuations in supply and demand for the underlying leased equipment. We are exposed to the risk that, at the end of the lease term or in the event of early termination, the value of the asset will be lower than expected, resulting in reduced future lease income over the remaining life of the asset or a lower sale value. Demand for and the valuation of the leased equipment is sensitive to shifts in general and industry specific economic and market trends, governmental regulations and changes in trade flows from specific events such as natural or man-made disasters. A significant portion of our equipment under operating lease consists of railcars and other equipment used directly or indirectly in oil and gas drilling activities; future
lease rates, the demand for this equipment and its valuation are heavily influenced by conditions in the energy industry. Although we regularly monitor the value of the underlying assets and the potential impact of declines in oil and natural gas prices on the value of equipment on operating lease, there is no assurance that the value of these assets will not be adversely impacted by conditions in the energy industry. The value of these assets may also be more susceptible to adverse effects caused by climate change or measures taken to mitigate it, or by ESG considerations.
Interest Rate Risk
Our business is inherently highly susceptible to interest rate risk.
Our business and financial performance are impacted by market interest rates and movements in those rates. Since a high percentage of our assets and liabilities are interest bearing or otherwise sensitive in value to changes in interest rates, changes in rates, in the shape of the yield curve or in spreads between different types of rates can have a material impact on our financial condition and results of operations and the values of our assets and liabilities. Changes in the value of investment securities available for sale and certain derivatives directly impact equity through adjustments of accumulated other comprehensive income and changes in the values of certain other assets and liabilities may directly or indirectly impact earnings. Interest rates are highly sensitive to many factors over which we have no control and which we may not be able to anticipate adequately, including general economic conditions and the monetary and fiscal policies of various governmental bodies, particularly the Federal Reserve Board.
Our earnings and cash flows depend to a great extent upon the level of our net interest income. Net interest income is the difference between the interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing liabilities, such as deposits and borrowings. The flattening of the yield curve and tightening credit spreads have limited our ability to add higher yielding assets to the balance sheet. If the flat rate environment persists beyond current forecasts, or the curve flattens further or inverts, downward pressure on our net interest margin may be exacerbated, negatively impacting our net interest income in the future. Changes in interest rates can increase or decrease our net interest income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest bearing liabilities mature or reprice more quickly than interest earning assets in a period of rising rates, an increase in interest rates could reduce net interest income. When interest earning assets mature or reprice more quickly than interest bearing liabilities, falling interest rates could reduce net interest income. An increase in interest rates may, among other things, reduce the demand for loans and lower-priced deposit products, decrease loan repayment rates and negatively affect borrowers' ability to meet their obligations. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage-backed securities portfolios. Competitive conditions may also impact the interest rates we are able to earn on new loans or are required to pay on deposits, negatively impacting both our ability to grow deposits and interest earning assets and our net interest income.
We attempt to manage interest rate risk by adjusting the rates, maturity, repricing, mix and balances of the different types of interest-earning assets and interest bearing liabilities and through the use of hedging instruments; however, interest rate risk management techniques are not precise, and we may not be able to successfully manage our interest rate risk. Our ability to manage interest rate risk could be negatively impacted by longer fixed rate terms on loans being added to our portfolio or by unpredictable behavior of depositors in various interest rate environments. A rapid or unanticipated increase or decrease in interest rates, changes in the shape of the yield curve or in spreads between rates could have an adverse effect on our net interest margin and results of operations.
The discontinuance of the LIBOR benchmark interest rate may have an impact on our business, financial condition and results of operations.
The FCA, which regulates LIBOR, advanced the process of phasing out LIBOR by discontinuing the one-week and two-month LIBOR tenors effective December 31, 2021. The remaining tenors will be discontinued effective June 30, 2023. The Company has implemented SOFR as its preferred alternative to LIBOR, and continues to evaluate the use of other alternative reference rates. Although the full impact of transition remains unclear, this change may have an adverse impact on the value of, return on and trading markets more globally for a broad array of financial products, including any LIBOR-based securities, loans, borrowings and derivatives that are included in our financial assets and liabilities. The discontinuation of LIBOR may create uncertainty or differences in the calculation of the applicable interest rate or payment amount depending on the terms of the governing instruments, which may also impact our net interest income. In addition, LIBOR may perform differently during the phase-out period than in the past which could result in lower interest earned on certain assets and a reduction in the value of certain assets. When LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may incur additional expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our financial condition and results of operations. Banking
regulators have indicated that increases in the amount or extension of LIBOR exposures after December 31, 2021 could be considered an unsafe and unsound banking practice.
Liquidity Risk
A failure to maintain adequate liquidity could adversely affect our financial condition and results of operations.
Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities and withdrawals and other cash commitments under both normal operating conditions and under extraordinary or unpredictable circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources at an acceptable price, or at all include, but are not limited to: a downturn in economic conditions in the geographic markets in which our operations are concentrated or in the financial or credit markets in general; increases in interest rates; the availability of sufficient collateral that is acceptable to the FHLB and the Federal Reserve Bank, both of whom provide us with contingent sources of liquidity; fiscal and monetary policy; and regulatory changes. Our access to liquidity in the form of deposits may also be affected by the liquidity needs of our depositors and by competition for deposits in our primary markets. A substantial portion of our liabilities consist of deposit accounts that are payable on demand or upon several days' notice, while by comparison, the majority of our assets are loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace maturing deposits and borrowings as necessary, we might not be able to replace such funds in the future. A failure to maintain adequate liquidity could materially and adversely affect our business, financial condition or results of operations.
The inability of BankUnited, Inc. to receive dividends from its subsidiary bank could have a material adverse effect on the ability of BankUnited, Inc. to make payments on its debt, pay cash dividends to its shareholders or execute share repurchases.
BankUnited, Inc. is a separate and distinct legal entity from the Bank, and the substantial majority of its revenue consists of dividends from the Bank. These dividends are the primary funding source for the dividends paid by BankUnited, Inc. on its common stock, the interest and principal payments on its debt and any repurchases of outstanding common stock. Various federal and state laws and regulations limit the amount of dividends that a bank may pay to its parent company. In addition, our right to participate in a distribution of assets upon the liquidation or reorganization of a subsidiary may be subject to the prior claims of the subsidiary’s depositors and other creditors. If the Bank is unable to pay dividends, BankUnited, Inc. might not be able to service its debt, pay its obligations, pay dividends on its common stock or make share repurchases.
Operational Risk
We rely on analytical and forecasting models and tools that may prove to be inadequate or inaccurate, which could adversely impact the effectiveness of our strategic planning, the quality of certain accounting estimates including the ACL, the effectiveness of our risk management framework including but not limited to credit and interest rate risk monitoring and management and thereby our results of operations.
The processes we use to forecast future performance and estimate expected credit losses, the effects of changing interest rates, sources and uses of liquidity, cash flows from ACI loans, real estate values, and economic indicators such as unemployment on our financial condition and results of operations depend upon the use of analytical and forecasting tools and models. These tools and models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Furthermore, even if our assumptions are accurate predictors of future performance, the tools and models they are based onthat utilize them may prove to be inadequate or inaccurate because of other flaws in their design or implementation. If these tools prove to be inadequate or inaccurate, our strategic planning processes, risk management and monitoring framework, earnings and capital may be adversely impacted.
ChangesNew lines of business, new products and services or strategic project initiatives may subject us to additional operational risks, and the failure to successfully implement these initiatives could affect our results of operations.
From time to time, we may launch new lines of business or offer new banking products and services, which offerings may significantly increase operational, credit or reputational risks. Significant effort and resources may be required to manage and oversee the successful development, implementation, launch or scaling of new offerings, which effort and resources may be diverted from other of our products or services. While we invest significant time and resources in taxesdeveloping, marketing and other assessments maymanaging new products and services, there are material uncertainties that could adversely affect us.
The legislaturesimpact estimated implementation and taxing authorities in the tax jurisdictions in which we operate regularly enact reforms to the taxoperational costs or projected adoption, sales, revenues or profits, and other assessment regimes to which we and our customers are subject. The effects of these changes and any other changes that result from interpreting and implementing regulations or enactment of additional tax reforms cannot be quantified and thereno assurance can be no assurancegiven that any such reforms wouldnew offerings will be
successfully developed, implemented, launched or scaled. New products and services may require startup costs and operational changes, as well as continued marketing campaigns to bring in new customers and retain existing ones. These new products and services take time to develop and grow and if not have ansuccessfully implemented may result in unmet profitability targets, increased costs or other adverse effect upon our business.
Tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense, filing returns and establishing the value of deferred tax assets and liabilities for purposes of its financial statements, the Company must make judgments and interpretations about the application of these inherently complex tax laws. If the judgments, estimates and assumptions the Company uses in establishing provisions, preparing its tax returns or establishing the value of deferred tax assets and liabilities for purposes of its financial statements are subsequently found to be incorrect, there could be a material effectimpacts on our results of operations.
Operational Risks
We are subject to a variety of operational, legal and compliance risks, including the risk of fraud, theft or thefterrors by employees or outsiders, which may adversely affect our business, financial condition and results of operations.
We are exposed to many types of operational risks, including legal and compliance risk, the risk of fraud or theft by employees or outsiders and operational errors, including clerical or record-keeping errors or those resulting from ineffective processes and controls or faulty or disabled technology. The occurrence of any of these events could cause us to suffer financial loss, face regulatory action and suffer damage to our reputation.
Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control which may give rise to disruption of service to customers and to financial loss or liability. The occurrence of any of these events could result in a diminished ability to operate our business as well as potential liability to customers and counterparties, reputational damage and regulatory intervention, which could adversely affect our business, financial condition or results of operations.
We are dependent on our information technology and telecommunications systems. System failures or interruptions could have an adverse effect on our financial condition and results of operations.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems. We rely on these systems to process new and renewed loans, gather deposits, process customer and other transactions, provide customer service, facilitate collections, and share data across our organization. The failure of these systems could interrupt our operations. We may be subject to disruptions of our information technology and telecommunications systems arising from events that are wholly or partially beyond our control which may give rise to disruption of service to customers. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewed loans, gather deposits, process customer transactions, provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
We are dependent on third-party service providers for significant aspects of our business infrastructure, information technology, and telecommunications systems.
We rely on third parties to provide key components of our business infrastructure and major systems including, but not limited to, core banking systems such as loan servicing and deposit transaction processing systems, cloud based data storage, our electronic funds transfer transaction processing, cash management, and online banking services.services, and computer and networking infrastructure. We have migrated a significant portion of our core information technology systems, data storage and customer-facing applications to private and public cloud infrastructure platforms. If we fail to administer these new environments in a well-managed, secure and effective manner, or if these platforms become unavailable or do not meet their service level agreements for any reason, we may experience unplanned service disruption or unforeseen costs which could result in material harm to our business, financial condition and results of operations. We must successfully develop and maintain information, financial reporting, disclosure, data-protection and other controls adapted to our reliance on outside platforms and providers. In addition, service providers could experience system breakdowns or failures, outages, downtime, cyber-attacks, adverse changes to financial condition, bankruptcy, or other adverse conditions, which could have a material adverse effect on our business and reputation. While we have an established third party risk management framework and select and monitor the performance of third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, failure of a vendor to provide services for any reason or poor performance of services, or the termination of a third-party software license or service agreement on which any of these systems is based, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. In many cases, our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. Financial or operational difficulties of a third-party vendor could also adversely affect our operations if those difficulties interfere with the vendor's
ability to serve us effectively or at all. Replacing these third-party vendors could also create significant delays and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations.
Failure by us or third parties to detect or prevent a breach in information security or to protect customer information and privacy could have an adverse effect on our business.
In the normal course of our business, we collect, process, and retain sensitive and confidential client and customer information. Despite the security measures we have in place, our facilities and systems may be vulnerable to cyber attacks,cyber-attacks, security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events, especially because, in the case of any intentional breaches, the techniques used change frequently or are not recognized until launched, and cyber attackscyber-attacks can originate from a wide variety of sources, including third parties.
We provide our customers the ability to bank remotely, including online, via mobile devices and over the telephone. The secure transmission of confidential information over the internet and other remote channels is a critical element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. In addition to cyber attackscyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks, designed to disrupt key business services such as customer-facing websites. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. Any cyber attackcyber-attack or other security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information could severely damage our reputation, erode confidence in the security of our systems, products and services, expose us to the risk of litigation and liability, disrupt our operations and have a material adverse effect on our business.
In addition, we interact with and rely on financial counterparties for whom we process transactions and who process transactions for us and rely on other third parties, as discussed above. Each of these third parties may be targets of the same types of fraudulent activity, computer break-ins, and other cyber security breaches described above. The cyber security measures that they maintain to mitigate the risk of such activity may be different from our own and, in many cases, we do not have any control over the types of security measures they may choose to implement. We may also incur costs as a result of data or security breaches of third parties with whom we do not have a significant direct relationship. As a result of financial entities and technology systems becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us.
Concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues.
We have taken measures to implement safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact. We have a comprehensive set of information security policies and protocols and a dedicated information security division that reports to the Chief Information Officer, with oversight by the Chief Risk Officer and the Risk Committee of the Board of Directors. The Risk Committee receives regular reporting related to information security risks and the monitoring and management of those risks.
Failure to keep pace with technological changes could have a material adverse impact on our ability to compete for loans and deposits, and therefore on our financial condition and results of operations.
Financial products and services have become increasingly technology driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on our ability to keep pace with and pro-actively and quickly respond to technological advances and to invest in new technology as it becomes available. Many of our larger competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The widespread adoption of new technologies, including, but not limited to, digitally-enabled products and delivery channels and payment systems, could require us to incur substantial expenditures to modify or adapt our existing products and services. Our failure to respond to the impact of technological change could have a material adverse impact on our business, financial condition and results of operations.
The soundness of other financial institutions, particularly our financial institution counterparties, could adversely affect us.
Our ability to engage in routine funding and other transactions could be adversely affected by the stability and actions of other financial services institutions. Financial services institutions are interrelated as a result of trading, clearing, servicing,
counterparty, and other relationships. We have exposure to an increasing number of financial institutions and counterparties. These counterparties include institutions that may be exposed to various risks over which we have little or no control.
Adverse developments affecting the overall strength and soundness of the financial services industry as a whole and third parties with whom we have important relationships could have a negative impact on our business even if we are not subject to the same adverse developments.
Reputational risks could affect our results.Regulatory, Legal and Compliance Risk
Our ability to originate new businessAs a BHC, we and maintain existing customer relationships is highly dependent upon customer and other external perceptions of our business practices. Adverse perceptions regarding our business practices could damage our reputation in the customer, funding and capital markets, leading to difficulties in generating and maintaining accounts as well as in financing them. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, employee relations, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Adverse developments with respect to external perceptions regarding the practices of our competitors, or our industry as a whole, or the general economic climate may also adversely impact our reputation. These perceptions about us could cause our business to be negatively affected and exacerbate the other risks that we face. In addition, adverse reputational impacts on third parties with whom we have important relationships may adversely impact our reputation. Adverse reputational impacts or events may also increase our litigation risk. We carefully monitor internal and external developments for areas of potential reputational risk and have established governance structures to assist in evaluating such risks in our business practices and decisions.
Risks Relating to the Regulation of Our Industry
WeBankUnited operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles,other matters, or changes in them, or our failure to comply with them, may adversely affect us.
We operate in a highly regulated environment, and are subject to extensive regulation, supervision,comprehensive statutory, legal and legal requirements that govern almost all aspects of our operations,regulatory regimes, see Item 1 "Business—"Business—Regulation and Supervision." Intended to protect customers, depositors, the DIF, and the overall financial stability of the United States, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividend or distributions that BankUnited can pay to BankUnited, Inc., restrict the ability of institutions to guarantee our debt, and impose specific accounting requirements on us. Banking regulators may also from time to time focus on issues that may impact the pace of growth of our business, our ability to execute our business strategy and operations, such as commercial real estate lending concentrations.our operations. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. In addition, federal banking agencies, including the OCC, and Federal Reserve Board and CFPB, periodically conduct examinations of our business, including compliance with laws and regulations. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines, remedial actions, administrative orders and other penalties, any of which could adversely affect our results of operations and capital base.
Further, federal, state and local legislators and regulators regularly introduce measures or take actions that would modify the regulatory requirements applicable to banks, their holding companies and other financial institutions. Changes in laws, regulations or regulatory policies could adversely affect the operating environment for the Company in substantial and unpredictable ways, increase our cost of doing business, impose new restrictions on the way in which we conduct our operations or add significant operational constraints that might impair our profitability. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on our business, financial condition or results of operations.
Changes in political administrations are likely to introduce new or modified regulations and related regulatory guidance and supervisory oversight. Newly enacted laws may significantly impact the regulatory framework in which we operate and may require material changes to our business processes in short timeframes. Inability to meet new statutory requirements within the prescribed periods could adversely affect our business, financial condition and results of operations, as well as impact our reputation.
Our ability to expand through acquisition or de novo branching requires regulatory approvals, and failure to obtain them may restrict our growth.
We may identify opportunities to complement and expand our business by pursuing strategic acquisitions of financial institutions and other complementary businesses. We must generally receive federal regulatory approval before we can acquire an institution or business. In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on competition, our financial condition, our future prospects, and the impact of the proposal on U.S. financial stability. The regulators also review current and projected capital ratios and levels, the competence, experience, and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institution's record of compliance under the CRA) and the effectiveness of the acquiring institution in combating money laundering activities. Such regulatory approvals may not be granted on terms that are acceptable to us, or at all. We may also be required to sell or close branches as a condition to receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.
In addition to the acquisition of existing financial institutions, as opportunities arise, we may continue de novo branching as a part of our internalorganic growth strategy and possibly enter into new markets through de novo branching. De novo branching and any acquisition carries with it numerous risks, including the inability to obtain all required regulatory approvals. The failure to obtain these regulatory approvals for potential future strategic acquisitions and de novo branches may impact our business plans and restrict our growth.
Financial institutions, such as BankUnited, face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the USA PATRIOT Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements, and has engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by the U.S. Treasury Department's Office of Foreign Assets Control.
In order to comply with regulations, guidelines and examination procedures in this area, we dedicate significant resources to the ongoing execution of our anti-money laundering program, continuously monitor and enhance as necessary our policies and procedures and maintain a robust automated anti-money laundering software solution. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of financial institutions that we may acquire in the future are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our expansion plans.
We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution's performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution's performance under fair lending laws in private class action litigation.
The FDIC's restoration plan and any future related increased assessments could adversely affect our earnings.
Insured depository institutions such as BankUnited are required to pay deposit insurance premiums to the FDIC.FDIC, which maintains a DIF. If the current level of deposit premiums is insufficient for the DIF to meet its funding requirements in the future, special assessments or increases in deposit insurance premiums may be required. A change in BankUnited's risk classification within the FDICs'FDIC's risk-based assessment framework could also result in increased deposit insurance premiums. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures in the future, we may be required to pay FDIC premiums higher than current levels. Any future additional assessments or increases in FDIC insurance premiums may adversely affect our financial condition or results of operations.
We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our operations and financial condition.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliatednon-affiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliatednon-affiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increaseincreases our costs. Furthermore, we may not be able to ensure that all of our customers, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is
transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused, we could be exposed to litigation or regulatory sanctions under personal information laws and regulations. Any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our operations and financial condition.
Damage to our reputation could adversely affect our operating results.
Our ability to originate new business and maintain existing customer relationships is highly dependent upon customer and other external perceptions of our business practices. Adverse perceptions regarding our business practices could damage our reputation in the customer, funding and capital markets, leading to difficulties in generating and maintaining business as well as obtaining financing. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, employee relations, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Adverse developments with respect to external perceptions regarding the practices of our competitors, or our industry as a whole, or the general economic climate may also adversely impact our reputation. These perceptions about us could cause our business to be negatively affected and exacerbate the other risks that we face. In addition, adverse reputational impacts on third parties with whom we have important relationships may adversely impact our reputation. Adverse reputational impacts or events may also increase our litigation risk.
Our enterprise risk management framework may not be effective in mitigating the risks to which we are subject, or in reducing the potential for losses in connection with such risks.
Our enterprise risk management framework is designed to identify and minimize or mitigate the risks to which we are subject, as well as any losses stemming from such risks. Although we seek to identify, measure, monitor, report, and control our exposure to such risks, and employ a broad and diversified set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited in their ability to anticipate the existence or development of risks that are currently unknown and unanticipated. The ineffectiveness of our enterprise risk management framework in mitigating the impact of known risks or the emergence of previously unknown or unanticipated risks may result in our incurring losses in the future that could adversely impact our financial condition and results of operations.
Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
Deterioration in business or economic conditions generally, or more specifically in the principal markets in which we do business, could have one or more of the following adverse effects on our business, financial condition and results of operations:
•A decrease in demand for our loan and deposit products;
•An increase in delinquencies and defaults by borrowers or counterparties;
•A decrease in the value of our assets;
•A decrease in our earnings;
•A decrease in liquidity; and
•A decrease in our ability to access the capital markets.
Our reported financial results depend on management's selection and application of accounting policies and methods and related assumptions and estimates.
Our accounting policies and estimates are fundamental to our reported financial condition and results of operations. Management is required to make difficult, complex or subjective judgments in selecting and applying many of these accounting policies. In some cases, management must select an accounting policy or method from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in us reporting materially different results than would have been reported under a different alternative.
From time to time, the FASB and SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard
retrospectively, resulting in a restatement of prior period financial statements. See Note 1 to the consolidated financial statements for more information about recent accounting pronouncements that may have a material impact on our reported financial results.
Changes in taxes and other assessments may adversely affect us.
The legislatures and taxing authorities in the tax jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. The effects of these changes and any other changes that result from interpreting and implementing regulations or enactment of additional tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our business.
Tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense, filing returns and establishing the value of deferred tax assets and liabilities for purposes of its financial statements, the Company must make judgments and interpretations about the application of these inherently complex tax laws. If the judgments, estimates and assumptions the Company uses in establishing provisions, preparing its tax returns or establishing the value of deferred tax assets and liabilities for purposes of its financial statements are subsequently found to be incorrect, there could be a material effect on our financial condition and results of operations.
Our internal controls may be ineffective.
Management regularly monitors, evaluates and updates our internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, can provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our financial condition and results of operations.
Share Price Volatility
The price of our common stock may be volatile or may decline. The price of our common stock may fluctuate as a result of a number of factors, many of which are outside of management's control. In addition, the stock market is subject to fluctuations in share prices and trading volumes that affect the market prices of the shares of many companies, including BankUnited, Inc. Factors that could affect our stock price include but are not limited to:
•actual or anticipated changes in the Company's operating results and financial condition;
•changes in interest rates;
•failure to meet analysts' revenue or earnings estimates;
•changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors;
•actual or forecasted deterioration in economic conditions in our market areas or more generally;
•changes in the competitive or regulatory environment;
•actions by institutional shareholders and
•stock market volatility caused by the COVID-19 pandemic or other external events.
We may not be able to attract and retain skilled employees
Our success depends, in large part, on our ability to attract and retain key people. Due to competition and other factors, we may have difficulty recruiting qualified personnel, including uniquely qualified personnel to ensure the continued growth and successful operation of our business. The unexpected loss of the services of one or more of our key personnel could have an adverse impact on our business.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
BankUnited's corporate headquarters is located in leased office space in Miami Lakes, Florida. The headquartersWe also lease office space is used forin Manhattan and in Melville, Long Island. Our subsidiaries lease office space in Baltimore, Maryland and operations.Scottsdale, Arizona. At December 31, 2018,2021, we provided banking services at 85 branches67 banking centers located in Florida and New York. In Florida, we had 80 branch locations in 14 Florida counties. Of the 80 Florida branch properties, we leased 77 locations and owned 3 branch locations. In New York, we leased 5 branch locations, including 3 branch locations in New York City, 1 branch location in Brooklyn and 1 branch location in Melville. We also leased office space in Florida at 7 locations excluding the corporate headquarters and in New York at 5 locations.
For our two commercial lending subsidiaries, we had leased office and operations space in Hunt Valley, Maryland to house Bridge Funding Group and operations space in Scottsdale, Arizona to house Pinnacle.
We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.
See Note 8 to the consolidated financial statements for more information on our premises and equipment. Item 3. 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 4. Mine Safety Disclosures
None.
PART II - FINANCIAL INFORMATION
| |
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders of Record
Shares of our common stock trade on the NYSE under the symbol "BKU". The last sale price of our common stock on the NYSE on February 25, 201922, 2022 was $36.73$43.45 per share. As of February 25, 2019,22, 2022, there were 565562 stockholders of record of our common stock.
Equity Compensation Plan Information
The information set forth under the caption "Equity Compensation Plan Information" in our definitive proxy statement for the Company's 20192022 annual meeting of stockholders (the "Proxy Statement") is incorporated herein by reference.
Dividend Policy
The Company declared a quarterly dividend of $0.21$0.23 per share on its common stock for each of the four quarters of 20182021 and 2017,2020, resulting in total dividends for 20182021 and 20172020 of $89.9$83.4 million and $92.2$88.1 million, respectively,respectively; or $0.84$0.92 per common share for each of the years ended December 31, 20182021 and 2017.2020. Dividends from the Bank are the principal source of funds for the payment of dividends on our common stock. The Bank is subject to certain restrictions that may limit its ability to pay dividends to us. See "Business—Regulation and Supervision—Regulatory Limits on Dividends and Distributions". The quarterly dividends on our common stock are subject to the discretion of our board of directors and dependent on, among other things, our financial condition, results of operations, capital requirements restrictions contained in financing instruments and other factors that our board of directors may deem relevant.
Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on an initial investment of $100 in our common stock between December 31, 20132016 and December 31, 2018,2021, with the comparative cumulative total return of such amount on the S&P 500 Index, and the S&P 500 Bank Index and the KBW Nasdaq Regional Bank Index over the same period. Reinvestment of all dividends is assumed to have been made in our common stock.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. | | | | | | | | | | | | | | | | | | | | |
Index | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 |
BankUnited, Inc. | 100.00 | | 110.65 | | 83.15 | | 104.14 | | 103.19 | | 128.36 | |
S&P 500 Index | 100.00 | | 121.83 | | 116.49 | | 153.17 | | 181.35 | | 233.41 | |
S&P 500 Bank Index (1) | 100.00 | | 122.55 | | 102.41 | | 144.02 | | 124.21 | | 168.24 | |
KBW Nasdaq Regional Banking Index (1) | 100.00 | | 99.69 | | 80.39 | | 96.77 | | 85.06 | | 113.30 | |
(1) The KBW Nasdaq Regional Banking Index was added as a replacement index to the S&P 500 Bank Index. The Company believes the KBW Nasdaq Regional Banking Index is more relevant as it provides a better comparison to companies that would be considered our peers and is the basis of one of the performance metrics used in determining the amount of NEO variable compensation.
|
| | | | | | | | | | | | |
Index | 12/31/2013 |
| 12/31/2014 |
| 12/31/2015 |
| 12/31/2016 |
| 12/31/2017 |
| 12/31/2018 |
|
BankUnited, Inc. | 100.00 |
| 90.94 |
| 115.28 |
| 123.70 |
| 135.79 |
| 102.88 |
|
S&P 500 | 100.00 |
| 113.69 |
| 115.26 |
| 129.05 |
| 157.22 |
| 150.33 |
|
S&P Bank | 100.00 |
| 115.51 |
| 116.49 |
| 144.81 |
| 177.47 |
| 148.30 |
|
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
| | | | | | | | | | | | | | |
| | Issuer Purchases of Equity Securities |
Period | | Total number of shares purchased(1) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs(2) |
October 1 – October 31, 2018 | | 724,190 |
| | $ | 32.61 |
| | 724,190 |
| | $ | 126,382,321 |
|
November 1 – November 30, 2018 | | 2,259,462 |
| | 33.81 |
| | 2,259,462 |
| | $ | 50,000,002 |
|
December 1 – December 31, 2018 | | 1,682,379 |
| | 29.7 |
| | 1,682,379 |
| | $ | 27,395 |
|
Total | | 4,666,031 |
| | $ | 32.14 |
| | 4,666,031 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Issuer Purchases of Equity Securities |
Period | | Total number of shares purchased(1) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs |
October 1 - October 31, 2021 | | 1,174,931 | | | $ | 41.56 | | | 1,174,931 | | | $ | 159,484,624 | |
November 1 - November 30, 2021 | | 1,456,183 | | | $ | 41.98 | | | 1,456,183 | | | $ | 98,353,286 | |
December 1 - December 31, 2021 | | 1,754,770 | | | $ | 40.95 | | | 1,754,770 | | | $ | 26,499,238 | |
Total | | 4,385,884 | | | $ | 41.45 | | | 4,385,884 | | | |
| |
(1) | (1) The total number of shares purchased during the periods indicated includes shares purchased as part of a publicly announced program. |
| |
(2) | On October 23, 2018, the Company's Board of Directors authorized a now completed share repurchase program under which the Company repurchased $150 million of its outstanding common stock |
(2) On February 2, 2022, the Company's Board of Directors authorized the repurchase of up to $150 million in shares of its outstanding common stock. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued without prior notice at any time. The authorization does not require the Company to acquire any specified number of common shares.
Item 6. Selected Consolidated Financial DataReserved
You should read the selected consolidated financial data set forth below in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and the audited consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K. The selected consolidated financial data set forth below is derived from our audited consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| (dollars in thousands) |
Consolidated Balance Sheet Data: | | | |
| | |
| | |
| | |
|
Cash and cash equivalents | $ | 382,073 |
| | $ | 194,582 |
| | $ | 448,313 |
| | $ | 267,500 |
| | $ | 187,517 |
|
Investment securities | 8,166,878 |
| | 6,690,832 |
| | 6,073,584 |
| | 4,859,539 |
| | 4,585,694 |
|
Loans, net | 21,867,077 |
| | 21,271,709 |
| | 19,242,441 |
| | 16,510,775 |
| | 12,319,227 |
|
FDIC indemnification asset | — |
| | 295,635 |
| | 515,933 |
| | 739,880 |
| | 974,704 |
|
Equipment under operating lease, net | 702,354 |
| | 599,502 |
| | 539,914 |
| | 483,518 |
| | 314,558 |
|
Total assets | 32,164,326 |
| | 30,346,986 |
| | 27,880,151 |
| | 23,883,467 |
| | 19,210,529 |
|
Deposits | 23,474,223 |
| | 21,878,479 |
| | 19,490,890 |
| | 16,938,501 |
| | 13,511,755 |
|
Federal Home Loan Bank advances | 4,796,000 |
| | 4,771,000 |
| | 5,239,348 |
| | 4,008,464 |
| | 3,307,932 |
|
Notes and other borrowings | 402,749 |
| | 402,830 |
| | 402,809 |
| | 402,545 |
| | 10,627 |
|
Total liabilities | 29,240,493 |
| | 27,320,924 |
| | 25,461,722 |
| | 21,639,569 |
| | 17,157,995 |
|
Total stockholder's equity | 2,923,833 |
| | 3,026,062 |
| | 2,418,429 |
| | 2,243,898 |
| | 2,052,534 |
|
Covered assets | 201,376 |
| | 505,722 |
| | 616,600 |
| | 813,525 |
| | 1,053,317 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| (dollars in thousands, except per share data) |
Consolidated Income Statement Data: | | | |
| | |
| | |
| | |
|
Interest income | $ | 1,449,144 |
| | $ | 1,204,461 |
| | $ | 1,059,217 |
| | $ | 880,816 |
| | $ | 783,744 |
|
Interest expense | 399,051 |
| | 254,189 |
| | 188,832 |
| | 135,164 |
| | 106,651 |
|
Net interest income | 1,050,093 |
| | 950,272 |
| | 870,385 |
| | 745,652 |
| | 677,093 |
|
Provision for loan losses | 25,925 |
| | 68,747 |
| | 50,911 |
| | 44,311 |
| | 41,505 |
|
Net interest income after provision for loan losses | 1,024,168 |
| | 881,525 |
| | 819,474 |
| | 701,341 |
| | 635,588 |
|
Non-interest income | 132,022 |
| | 157,904 |
| | 106,417 |
| | 102,224 |
| | 84,165 |
|
Non-interest expense | 740,540 |
| | 634,968 |
| | 590,447 |
| | 506,672 |
| | 426,503 |
|
Income before income taxes | 415,650 |
| | 404,461 |
| | 335,444 |
| | 296,893 |
| | 293,250 |
|
Provision (benefit) for income taxes (1) | 90,784 |
| | (209,812 | ) | | 109,703 |
| | 45,233 |
| | 89,035 |
|
Net income | $ | 324,866 |
| | $ | 614,273 |
| | $ | 225,741 |
| | $ | 251,660 |
| | $ | 204,215 |
|
Share Data: | | | | | |
| | |
| | |
|
Earnings per common share, basic | $ | 3.01 |
| | $ | 5.60 |
| | $ | 2.11 |
| | $ | 2.37 |
| | $ | 1.95 |
|
Earnings per common share, diluted | $ | 2.99 |
| | $ | 5.58 |
| | $ | 2.09 |
| | $ | 2.35 |
| | $ | 1.95 |
|
Cash dividends declared per common share | $ | 0.84 |
| | $ | 0.84 |
| | $ | 0.84 |
| | $ | 0.84 |
| | $ | 0.84 |
|
Dividend payout ratio | 27.95 | % | | 14.99 | % | | 39.85 | % | | 35.75 | % | | 43.06 | % |
|
| | | | | | | | | | | | | | | | | | | |
| As of or for the Years Ended December 31, |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| (dollars in thousands, except per share data) |
Other Data (unaudited): | | | | | |
| | |
| | |
|
Financial ratios | | | | | |
| | |
| | |
|
Return on average assets | 1.05 | % | | 2.13 | % | | 0.87 | % | | 1.18 | % | | 1.21 | % |
Return on average common equity | 10.57 | % | | 23.36 | % | | 9.64 | % | | 11.62 | % | | 10.13 | % |
Yield on earning assets (2) | 5.04 | % | | 4.58 | % | | 4.51 | % | | 4.64 | % | | 5.33 | % |
Cost of interest bearing liabilities | 1.66 | % | | 1.12 | % | | 0.93 | % | | 0.84 | % | | 0.87 | % |
Tangible common equity to tangible assets | 8.87 | % | | 9.74 | % | | 8.42 | % | | 9.10 | % | | 10.37 | % |
Net interest margin (2) | 3.67 | % | | 3.65 | % | | 3.73 | % | | 3.94 | % | | 4.61 | % |
Loan to deposit ratio (3) | 93.78 | % | | 98.04 | % | | 99.72 | % | | 98.50 | % | | 91.89 | % |
Tangible book value per common share | $ | 28.71 |
| | $ | 27.59 |
| | $ | 22.47 |
| | $ | 20.90 |
| | $ | 19.52 |
|
Asset quality ratios | | | | | |
| | |
| | |
|
Non-performing loans to total loans (3) (4) | 0.59 | % | | 0.81 | % | | 0.70 | % | | 0.44 | % | | 0.32 | % |
Non-performing assets to total assets (5) | 0.43 | % | | 0.61 | % | | 0.53 | % | | 0.35 | % | | 0.28 | % |
Non-performing non-covered assets to total assets (5) (6) | 0.43 | % | | 0.60 | % | | 0.51 | % | | 0.26 | % | | 0.17 | % |
ALLL to total loans | 0.50 | % | | 0.68 | % | | 0.79 | % | | 0.76 | % | | 0.77 | % |
ALLL to non-performing loans (4) | 84.63 | % | | 83.53 | % | | 112.55 | % | | 172.23 | % | | 239.24 | % |
Net charge-offs to average loans(7) | 0.28 | % | | 0.38 | % | | 0.13 | % | | 0.10 | % | | 0.15 | % |
Non-covered net charge-offs to average non-covered loans | 0.28 | % | | 0.38 | % | | 0.13 | % | | 0.09 | % | | 0.08 | % |
|
| | | | | | | | | | | | | | |
| At December 31, |
| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Capital ratios | | | |
| | |
| | |
| | |
|
Tier 1 leverage | 8.99 | % | | 9.72 | % | | 8.41 | % | | 9.35 | % | | 10.70 | % |
CET1 risk-based capital | 12.57 | % | | 13.11 | % | | 11.63 | % | | 12.58 | % | | N/A |
|
Tier 1 risk-based capital | 12.57 | % | | 13.11 | % | | 11.63 | % | | 12.58 | % | | 15.45 | % |
Total risk-based capital | 13.08 | % | | 13.78 | % | | 12.45 | % | | 13.36 | % | | 16.27 | % |
| | | | | | | | | |
| |
(1) | Includes discrete income tax benefits of $327.9 million and $49.3 million recognized during the years ended December 31, 2017 and 2015, respectively.
|
| |
(2) | On a tax-equivalent basis, at a federal income tax rate of 21% for 2018 and 35% for years 2017, 2016, 2015 and 2014. |
| |
(3) | Total loans include premiums, discounts, deferred fees and costs and loans held for sale. |
| |
(4) | We define non-performing loans to include non-accrual loans, and loans, other than ACI loans and government insured residential loans, that are past due 90 days or more and still accruing. Contractually delinquent ACI loans on which interest continues to be accreted are excluded from non-performing loans. |
| |
(5) | Non-performing assets include non-performing loans, OREO and other repossessed assets. |
| |
(6) | Ratio for non-covered assets is calculated as non-performing non-covered assets to total assets. |
| |
(7) | The ratio of charge-offs of taxi medallion loans to average total loans was 0.18%, 0.28% and 0.06% for the years ended December 31, 2018, 2017 and 2016, respectively. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition
and results of operations of BankUnited, Inc. and its subsidiary (the "Company", "we", "us" and "our") and should be read in
conjunction with the consolidated financial statements, accompanying footnotes and supplemental financial data included
herein. In addition to historical information, this discussion contains forward-looking statements that involve risks,
uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that
could cause such differences are discussed in the sections entitled "Forward-looking Statements" and "Risk Factors." We assume no obligation to update any of these forward-looking statements.
Overview
The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2021 and 2020 and results of operations for each of the years then ended. Refer to Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with the SEC on February 26, 2021 for a discussion and analysis of the more significant factors that affected periods prior to 2020.
Performance Highlights
In evaluating our financial performance, we consider the level of and trends in net interest income, the net interest margin, the cost of deposits, 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 and the composition of 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.
Performance highlights include:
•Net income for the year ended December 31, 20182021 was$324.9 $415.0 million, or $2.99$4.52 per diluted share, compared to $614.3$197.9 million, or $5.58$2.06 per diluted share, for the year ended December 31, 2017. Excluding2020. For the impactyear ended December 31, 2021, the return on average stockholders' equity was 13.3% and the return on average assets was 1.16%.
•For the year ended December 31, 2021, the Company recorded a recovery of credit losses of $(67.1) million compared to a discrete income tax benefit and professional fees, net income was $291.3provision for credit losses of $178.4 million or $2.65 per diluted share for the year ended December 31, 2017. Earnings for2020. Year over year volatility in the year ended December 31, 2018 generated a return on average stockholders' equityprovision related to the expected economic impact of 10.57%the onset of the COVID-19 pandemic in 2020 and a return on average assets of 1.05%.
subsequent recovery in 2021.Net interest income for the year ended December 31, 2018 was $1.1 billion, an increase of $99.8 million over the prior year. •The net interest margin, calculated on a tax-equivalent basis, was 3.67%expanded to 2.38% for the year ended December 31, 2018 compared to 3.65%2021 from 2.35% for the year ended December 31, 2017. Significant factors contributing2020. Net interest income increased by $43.9 million compared to the increase inyear ended December 31, 2020. While the net interest margin included increases in accretionyield on covered loans and in yields on other categories of interest earning assets for the year ended December 31, 2021 declined by 0.45% compared to the year ended December 31, 2020, this was more than offset by an increasea 0.56% decline in the cost of interest bearing liabilities and the impact on tax equivalent yields of thea reduction in the statutory federal income tax rate. See "Results of Operations" below for further discussion.
The following chart provides a comparison of net interest margin, the interest rate spread, the average yield on interest earning assets and the average rate paid on interest bearing liabilities as a percentage of total liabilities.
•Total loans declined by $101 million for the yearsyear ended December 31, 20182021. Portfolio composition shifted to a greater proportion of residential loans, which grew by $2.0 billion during the year while commercial loans in total declined by $2.1 billion. This trend was indicative of the environment predicated by the COVID-19 pandemic, which was characterized by relatively strong residential markets coupled with comparatively lower demand and 2017 (onrisk appetite for commercial lending. Investment securities grew by $888 million for the year ended December 31, 2021 as liquidity was deployed into the securities portfolio.
•The average cost of total deposits decreased to 0.24% for the year ended December 31, 2021 from 0.77% for the year ended December 31, 2020. On a tax equivalent basis):
spot basis, the APY on total deposits declined to 0.16% at December 31, 2021 from 0.36% at December 31, 2020. This decline in the cost of deposits reflects both our ongoing strategy to increase non-interest bearing deposits as a percentage of total deposits and to reduce rates paid on interest-bearing deposits, as well as declines in market rates generally.
•Total deposits increased by $1.6$1.9 billion for the year ended December 31, 2018, of which $550 million was2021. Non-interest bearing demand deposits grew by $2.0 billion during the year ended December 31, 2021, while average non-interest bearing demand deposits representing an 18% increasegrew by $2.7 billion over the prior year-end. The average costsame period. At December 31, 2021, non-interest bearing demand deposits represented 30% of total deposits increasedcompared to 1.28%25% of total deposits at December 31, 2020 and 18% of total deposits at December 31, 2019. Total deposits grew by $3.1 billion for the year ended December 31, 2018 from 0.83% for 2017.2020. Deposit growth over the past two years has been, in part, influenced by excess liquidity in the system generally. The following charts illustrate the composition of deposits at December 31, 2018the dates indicated:
•As expected, as the economy emerges from the COVID-19 crisis and 2017:
Non-coveredour borrowers' operating results improve, criticized and classified loans and leases, including equipment under operating lease, grew by $965 millioncontinued to $22.5 billion for the year ended December 31, 2018 compared to $21.5 billion at December 31, 2017.decline. During the year ended December 31, 2018, commercial2021, total criticized and classified loans grewdeclined by $311 million; equipment under operating lease grew by $103 million; and non-covered residential and other consumer loans grew by $552 million. The following charts compare the composition of our loan and lease portfolio$1.2 billion to $1.5 billion, from $2.7 billion at December 31, 2018 and 2017:
Asset quality remained strong. At December 31, 2018, 98.2% of the commercial loan portfolio was rated "pass" and 99.5% of the 1-4 single family residential portfolio, excluding government insured residential loans, was current.2020. The ratio of non-performing loans to total loans was 0.59% and the ratio of non-performing assetsdeclined to total assets was 0.43%0.87% at December 31, 2018. Our nonperforming assets ratio2021 from 1.02% at December 31, 2018, 20172020. Loans under short-term deferral or modified under the CARES Act totaled $205 million at December 31, 2021, down from a total of $794 million at December 31, 2020.
•During the fourth quarter of 2021, the Bank reached a settlement with the Florida Department of Revenue related to certain tax matters for the 2009-2019 tax years and 2016 is presentedrecorded a tax benefit of $43.9 million, net of federal impact. Unrelated to the Florida settlement, the Bank recorded an additional $25.2 million tax benefit during the fourth quarter of 2021 related to a reduction in the chart below:
liability for unrecognized tax benefits arising from expiration of statutes of limitation in the Federal and certain state jurisdictions.
•The following table details $40.4 million of notable items that impacted income before income taxes during the fourth quarter of 2021 (income (expense) in thousands):
| | | | | | | | |
| | | | |
Gain on sale of single-family residential loans | $ | 18,216 | | | | |
Discontinuance of cash flow hedges | (44,833) | | | | |
Special employee bonus | (6,809) | | | | |
Professional fees related to tax settlement | (4,198) | | | | |
Impairment of operating lease equipment | (2,813) | | | | |
| $ | (40,437) | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
•Book value per common share and tangible book value per common share continued to accrete, increasing to $35.47 and $34.56, respectively, at December 31, 2021 from $32.05 and $31.22, respectively at December 31, 2020.•During the year ended December 31, 2018,2021, the Company repurchased approximately 8.47.8 million shares of its common stock for an aggregate purchase price of $300 million.$318 million, at a weighted average price of $40.95 per share. In February
The Bank executed a final sale
2022, the Company's Board of covered loans and OREO pursuantDirectors authorized the repurchase of up to the terms of the Single Family Shared-Loss Agreementan additional $150 million in the fourth quarter of 2018. See the section entitled "Results of Operations" below for further information. The Single Family Shared-Loss Agreement was terminated on February 13, 2019.
During the quarter ended December 31, 2018, the Bank sold substantially allshares of its taxi medallion finance loans.outstanding common stock.
Book value per common share grew to $29.49 at December 31, 2018 from $28.32 at December 31, 2017. Tangible book value per common share increased to $28.71 from $27.59 over the same period.
•The Company’sCompany's and the Bank's capital ratios exceeded all regulatory “well capitalized”"well capitalized" guidelines. The charts below present the Company's and the Bank's regulatory capital ratios compared to regulatory guidelines as of December 31, 2018 and 2017:
at the dates indicated:BankUnited, Inc:Inc.
BankUnited, N.A.:
The operating agreement between the Bank and the OCC was terminated in November 2018.Strategic Priorities
Our vision is to be the leading regional commercial and small business bank, with a distinctive value proposition based on strong service-oriented relationships, robust digital enabled customer experiences, and operational excellence with an entrepreneurial work environment that empowers employees to deliver their best. Management has identified the following strategic priorities for our Company:
Our strategy emphasizes safety•Maximizing risk adjusted returns through a combination of sustainable, diversified and soundness, long-term profitabilityprudently managed organic growth and sustainable growth.capital optimization;
Optimization•Growing core customer relationships on both sides of the deposit mix, emphasizing growth in non-interest bearing demand deposits.balance sheet;
Continued organic growth in Florida
•Commercial loan growth;
•Playing where we can win;
•Continuing to build a foundational and the Tri-State markets, both of which we believe to be attractive banking markets, as well as across our national lending and deposit platforms.
Maintaining a culture of disciplined credit underwriting.
Focus on expense management and a scalable and efficient operating model.
Identifying opportunities to augment revenue consistent with our commercial and small business focus.and middle-market franchise;
Strategic•Focusing on niche business segments where our delivery model is a differentiator;
•Investing in digital capabilities, automation and data analytics - using technology investments that enhance deliveryto enable success;
•Retaining the ability to pivot nimbly when opportunities arise;
•Maintaining an efficient, effective and scalable support model through operational excellence;
•While our primary growth strategy is organic, we will continue to monitor the M&A landscape.
Some of products and services to our customers as well as our supporting infrastructure.
Opportunistic evaluation of potential strategic acquisitions.
Challengesthe challenges confronting our Company, include:
While most economic indicators remain favorable, uncertainty about future economic conditions as we move through the credit cycle may present challenges to our business strategy.
Competitive market conditions for both loans and depositscertain of which may impact our ability to execute our balance sheet growth and profitability strategy.the banking industry more broadly, include:
Managing the cost of funds while growing deposits in a volatile or•Navigating an uncertain interest rate environment presentsenvironment;
•Economic conditions may not turn out to be as favorable as current consensus forecasts indicate, either due to a strategic challenge.resurgence of the COVID-19 pandemic to the extent that it significantly impacts the level of economic activity, or other unforeseen macro-economic factors. An economic downturn could limit the demand for our products and services.
The current flat yield curve may pressure our net interest margin.•Achieving planned commercial loan growth in an uncertain and competitive environment;
•Talent attraction and retention; •Timely completion of planned technology initiatives.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities
that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below involve a heightened level of management judgment due to the complexity, subjectivity and sensitivity involved in their application.
Note 1 to the consolidated financial statements contains a further discussion of our significant accounting policies.
Allowance for Loan and Lease Losses
ACL
The ALLLACL represents management's estimate of probablecurrent expected credit losses, or the amount of amortized cost basis not expected to be collected, on our loan losses inherent inportfolio and the Company's loanamount of credit loss impairment on our AFS securities portfolio. Determining the amount of the ALLLACL is considered a critical accounting estimate because of its complexity and because it requires significantextensive judgment and estimation. Estimates that are particularly susceptible to change that may have a material impact on the amount of the ALLLACL include:
the selection of proxy data used to calculate quantitative loss factors for portfolio segments that have not yet exhibited an observable loss trend;
•our evaluation of loss emergencecurrent conditions;
•our determination of a reasonable and historical loss experience periods;supportable economic forecast and selection of the reasonable and supportable forecast period;
•our evaluation of the risk profilehistorical loss experience;
•our evaluation of variouschanges in composition and characteristics of the loan portfolio, segments, including internal risk ratings;
•our estimate of expected prepayments;
•the value of underlying collateral, which may impact loss severity and certain cash flow assumptions for impaired,collateral-dependent, criticized and classified loans;
•our selection and evaluation of qualitative factors; and
the amount and timing•our estimate of expected future cash flows from ACI loanson AFS debt securities in unrealized loss positions.
Our selection of models and impaired loans.modeling techniques may also have a material impact on the estimate.
Note 1 to the consolidated financial statements describes the methodology used to determine the ALLL.
Accounting for ACI Loans and the FDIC Indemnification Asset
The accounting for ACI loans requires the Company to estimate the timing and amount of cash flows to be collected from these loans and to continually update estimates of the cash flows expected to be collected over the lives of the loans. Similarly, the accounting for the FDIC indemnification asset requires the Company to estimate the timing and amount of cash flows to be received from the FDIC in reimbursement for losses and expenses related to the covered loans; these estimates are directly related to estimates of cash flows to be received from the covered loans. Estimated cash flows impact the rate of accretion on ACI loans and the rate of amortization on the FDIC indemnification asset as well as the amount of any ALLL to be established related to ACI loans. These cash flow estimates are considered to be critical accounting estimates because they involve significant judgment and assumptions as to their amount and timing. In conjunction with the final sale of covered loans pursuant to the terms of the Single Family Shared-Loss Agreement, the FDIC indemnification asset was amortized to zero as of December 31, 2018 as expectations of losses eligible for indemnification with respect to any retained loans prior to final termination of the Single Family Shared-Loss Agreement were insignificant. The Single Family Shared-Loss Agreement was terminated in February 2019.
Acquired 1-4 single family residential and home equity loans were placed into homogenous pools for purposes of accounting and estimation of expected cash flows at the time of the FSB Acquisition. At acquisition, the fair value of the pools was measured based on the expected cash flows to be derived from each pool. For ACI pools, the difference between total contractual payments due and the cash flows expected to be received at acquisition was recognized as non-accretable difference. The excess of expected cash flows over the recorded fair value of each ACI pool at acquisition was recognized as accretable yield to be accreted into interest income over the expected life of each pool.
We monitor the pools quarterly by updating our expected cash flows to determine whether any changes have occurred in expected cash flows that would be indicative of impairment or necessitate reclassification between non-accretable difference and accretable yield. Initial and ongoing cash flow expectations incorporate significant assumptions regarding prepayment rates, the timing of resolution of loans, the timing and amount of loan sales and related pricing, frequency of default, delinquency and loss severity, which is dependent on estimates of underlying collateral values. These assumptions have a material impact on the amount of the ALLL related to the ACI loans as well as on the rate of accretion on these loans and the corresponding rate of amortization of the FDIC indemnification asset.
Fair Value Measurements
The Company measures certain of its assets and liabilities at fair value on a recurring or non-recurring basis. Assets and liabilities measured at fair value on a recurring basis include investment securities available for sale, marketable equity securities, servicing rights, and derivative instruments. Assets that may be measured at fair value on a non-recurring basis include impaired loans, OREO and other repossessed assets, loans held for sale, goodwill, and impaired long-lived assets. The consolidated financial statements also include disclosures about the fair value of financial instruments that are not recorded at fair value.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to determine fair value measurements are prioritized into a three level hierarchy based on observability and transparency of the inputs, summarized as follows:
Level 1—observable inputs that reflect quoted prices in active markets for identical assets,
Level 2—inputs other than quoted prices in active markets that are based on observable market data, and
Level 3—unobservable inputs requiring significant management judgment or estimation.
When observable market quotes are not available, fair value is estimated using modeling techniques such as discounted cash flow analyses and option pricing models. These modeling techniques utilize assumptions that we believe market participants would use in pricing the asset or the liability.
Particularly for estimated fair values of assets and liabilities categorized within level 3 of the fair value hierarchy, the selection of different valuation techniques or underlying assumptions could result in fair value estimates that are higher or lower than the amounts recorded or disclosed in our consolidated financial statements. Considerable judgment may be involved in determining the amount that is most representative of fair value.
Because of the degree of judgment involved in selecting valuation techniques and underlying assumptions, fair value measurements are considered critical accounting estimates.
Notes 1, 3, 11 and 15 to our consolidated financial statements contain further information about fair value estimates.ACL.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements.
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 relative 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, and by management's continual assessment of the rate of return and relative risk associated with various classes of earning assets.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 is impacted byretain core deposit relationships, competition for deposits in the Company's markets and the availability and pricing of other sources of funds.
Net interest income is also impacted by the accounting for ACI loans acquired in conjunction with the FSB Acquisition. ACI loans were initially recorded at fair value, measured based on the present value of expected cash flows. The excess of expected cash flows over carrying value, known as accretable yield, is recognized as interest income over the lives of the underlying loans.
The impact of ACI loan accounting on net interest income makes it difficult to compare our net interest margin and interest rate spread to those reported by other financial institutions.
The following table presents, for the years ended December 31, 2018, 2017 and 2016,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% during the year ended December 31, 2018(dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Average Balance | | Interest (1) | | Yield/ Rate (1) | | Average Balance | | Interest (1) | | Yield/ Rate (1) | | Average Balance | | Interest (1) | | Yield/ Rate (1) |
Assets: | | | | | | | | | | | | | | | | | |
Interest earning assets: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Loans | $ | 23,083,973 | | | $ | 814,101 | | | 3.53 | % | | $ | 23,385,832 | | | $ | 879,082 | | | 3.76 | % | | $ | 22,553,250 | | | $ | 998,130 | | | 4.43 | % |
Investment securities (2) | 9,873,178 | | | 155,353 | | | 1.57 | % | | 8,739,023 | | | 196,954 | | | 2.25 | % | | 8,231,858 | | | 284,849 | | | 3.46 | % |
Other interest earning assets | 1,093,869 | | | 6,010 | | | 0.55 | % | | 672,634 | | | 9,578 | | | 1.42 | % | | 555,992 | | | 19,902 | | | 3.58 | % |
Total interest earning assets | 34,051,020 | | | 975,464 | | | 2.86 | % | | 32,797,489 | | | 1,085,614 | | | 3.31 | % | | $ | 31,341,100 | | | 1,302,881 | | | 4.16 | % |
Allowance for credit losses | (197,212) | | | | | | | (236,704) | | | | | | | (112,890) | | | | | |
Non-interest earning assets | 1,770,685 | | | | | | | 1,860,322 | | | | | | | 1,625,579 | | | | | |
Total assets | $ | 35,624,493 | | | | | | | $ | 34,421,107 | | | | | | | $ | 32,853,789 | | | | | |
Liabilities and Stockholders' Equity: | | | | | | | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | | | | | | | |
Interest bearing demand deposits | $ | 3,027,649 | | | $ | 8,550 | | | 0.28 | % | | $ | 2,582,951 | | | $ | 19,445 | | | 0.75 | % | | $ | 1,824,803 | | | 25,054 | | | 1.37 | % |
Savings and money market deposits | 13,339,651 | | | 43,082 | | | 0.32 | % | | 10,843,894 | | | 85,572 | | | 0.79 | % | | 10,922,819 | | | 197,942 | | | 1.81 | % |
Time deposits | 3,490,082 | | | 15,964 | | | 0.46 | % | | 6,617,939 | | | 94,963 | | | 1.43 | % | | 6,928,499 | | | 162,184 | | | 2.34 | % |
Total interest bearing deposits | 19,857,382 | | | 67,596 | | | 0.34 | % | | 20,044,784 | | | 199,980 | | | 1.00 | % | | 19,676,121 | | | 385,180 | | | 1.96 | % |
Federal funds purchased | 33,945 | | | 30 | | | 0.09 | % | | 71,858 | | | 418 | | | 0.58 | % | | 124,888 | | | 2,802 | | | 2.24 | % |
FHLB and PPPLF borrowings | 2,622,723 | | | 59,116 | | | 2.25 | % | | 4,295,882 | | | 85,491 | | | 1.99 | % | | 5,089,524 | | | 119,901 | | | 2.36 | % |
Notes and other borrowings | 721,803 | | | 37,018 | | | 5.13 | % | | 592,521 | | | 29,962 | | | 5.06 | % | | 403,704 | | | 21,202 | | | 5.25 | % |
Total interest bearing liabilities | 23,235,853 | | | 163,760 | | | 0.70 | % | | 25,005,045 | | | 315,851 | | | 1.26 | % | | 25,294,237 | | | 529,085 | | | 2.09 | % |
Non-interest bearing demand deposits | 8,480,964 | | | | | | | 5,760,309 | | | | | | | 3,950,612 | | | | | |
Other non-interest bearing liabilities | 784,031 | | | | | | | 786,337 | | | | | | | 662,590 | | | | | |
Total liabilities | 32,500,848 | | | | | | | 31,551,691 | | | | | | | 29,907,439 | | | | | |
Stockholders' equity | 3,123,645 | | | | | | | 2,869,416 | | | | | | | 2,946,350 | | | | | |
Total liabilities and stockholders' equity | $ | 35,624,493 | | | | | | | $ | 34,421,107 | | | | | | | $ | 32,853,789 | | | | | |
Net interest income | | | $ | 811,704 | | | | | | | $ | 769,763 | | | | | | | $ | 773,796 | | | |
Interest rate spread | | | | | 2.16 | % | | | | | | 2.05 | % | | | | | | 2.07 | % |
Net interest margin | | | | | 2.38 | % | | | | | | 2.35 | % | | | | | | 2.47 | % |
(1)On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $13.3 million, $14.9 million and 35% during$16.7 million for the years ended December 31, 20172021, 2020 and 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Average Balance | | Interest (1) | | Yield/ Rate (1) | | Average Balance | | Interest (1) | | Yield/ Rate (1) | | Average Balance | | Interest (1) | | Yield/ Rate (1) |
Assets: | | | | | | | | | | | | | | | | | |
Interest earning assets: | |
| | |
| | |
| | |
| | |
| | |
| | | | | | |
Non-covered loans | $ | 21,169,705 |
| | $ | 847,588 |
| | 4.00 | % | | $ | 19,478,071 |
| | $ | 730,701 |
| | 3.75 | % | | $ | 17,282,886 |
| | $ | 617,863 |
| | 3.58 | % |
Covered loans | 427,437 |
| | 368,161 |
| | 86.13 | % | | 544,279 |
| | 300,540 |
| | 55.22 | % | | 721,268 |
| | 301,614 |
| | 41.82 | % |
Total loans | 21,597,142 |
| | 1,215,749 |
| | 5.63 | % | | 20,022,350 |
| | 1,031,241 |
| | 5.15 | % | | 18,004,154 |
| | 919,477 |
| | 5.11 | % |
Investment securities (2) | 7,124,372 |
| | 238,602 |
| | 3.35 | % | | 6,658,145 |
| | 201,363 |
| | 3.02 | % | | 5,691,617 |
| | 161,385 |
| | 2.84 | % |
Other interest earning assets | 506,154 |
| | 17,812 |
| | 3.52 | % | | 543,338 |
| | 14,292 |
| | 2.63 | % | | 541,816 |
| | 12,204 |
| | 2.25 | % |
Total interest earning assets | 29,227,668 |
| | 1,472,163 |
| | 5.04 | % | | 27,223,833 |
| | 1,246,896 |
| | 4.58 | % | | 24,237,587 |
| | 1,093,066 |
| | 4.51 | % |
Allowance for loan and lease losses | (136,758 | ) | | | | | | (156,471 | ) | | | | | | (139,469 | ) | | | | |
Non-interest earning assets | 1,878,284 |
| | | | | | 1,758,032 |
| | | | | | 1,923,298 |
| | | | |
Total assets | $ | 30,969,194 |
| | | | | | $ | 28,825,394 |
| | | | | | $ | 26,021,416 |
| | | | |
Liabilities and Stockholders' Equity: | | | | | | | | | | | | | | | | | |
Interest bearing liabilities: | | | | | | | | | | | | | | | | | |
Interest bearing demand deposits | $ | 1,627,828 |
| | 18,391 |
| | 1.13 | % | | $ | 1,586,390 |
| | 12,873 |
| | 0.81 | % | | $ | 1,382,717 |
| | 8,343 |
| | 0.60 | % |
Savings and money market deposits | 10,634,970 |
| | 146,324 |
| | 1.38 | % | | 9,730,101 |
| | 80,397 |
| | 0.83 | % | | 8,361,652 |
| | 51,774 |
| | 0.62 | % |
Time deposits | 6,617,006 |
| | 119,848 |
| | 1.81 | % | | 6,094,336 |
| | 77,663 |
| | 1.27 | % | | 5,326,630 |
| | 59,656 |
| | 1.12 | % |
Total interest bearing deposits | 18,879,804 |
| | 284,563 |
| | 1.51 | % | | 17,410,827 |
| | 170,933 |
| | 0.98 | % | | 15,070,999 |
| | 119,773 |
| | 0.79 | % |
Federal funds purchased | 48,940 |
| | 1,035 |
| | 2.11 | % | | — |
| | — |
| | — | % | | — |
| | — |
| | — | % |
FHLB advances | 4,637,247 |
| | 92,234 |
| | 1.99 | % | | 4,869,690 |
| | 61,996 |
| | 1.27 | % | | 4,801,406 |
| | 47,773 |
| | 0.99 | % |
Notes and other borrowings | 402,795 |
| | 21,219 |
| | 5.27 | % | | 402,921 |
| | 21,259 |
| | 5.28 | % | | 403,197 |
| | 21,287 |
| | 5.28 | % |
Total interest bearing liabilities | 23,968,786 |
| | 399,051 |
| | 1.66 | % | | 22,683,438 |
| | 254,188 |
| | 1.12 | % | | 20,275,602 |
| | 188,833 |
| | 0.93 | % |
Non-interest bearing demand deposits | 3,389,191 |
| | | | | | 3,069,565 |
| | | | | | 2,968,192 |
| | | | |
Other non-interest bearing liabilities | 538,575 |
| | | | | | 443,019 |
| | | | | | 435,645 |
| | | | |
Total liabilities | 27,896,552 |
| | | | | | 26,196,022 |
| | | | | | 23,679,439 |
| | | | |
Stockholders' equity | 3,072,642 |
| | | | | | 2,629,372 |
| | | | | | 2,341,977 |
| | | | |
Total liabilities and stockholders' equity | $ | 30,969,194 |
| | | | | | $ | 28,825,394 |
| | | | | | $ | 26,021,416 |
| | | | |
Net interest income | | | $ | 1,073,112 |
| | | | | | $ | 992,708 |
| | | | | | $ | 904,233 |
| | |
Interest rate spread | | | | | 3.38 | % | | | | | | 3.46 | % | | | | | | 3.58 | % |
Net interest margin | | | | | 3.67 | % | | | | | | 3.65 | % | | | | | | 3.73 | % |
| |
(1) | On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $17.5 million, $29.4 million and $23 million, and the tax-equivalent adjustment for tax-exempt investment securities was $5.5 million, $13.1 million and $10.52019, respectively. The tax-equivalent adjustment for tax-exempt investment securities was $2.7 million, $3.1 million and $4.3 million for the years ended December 31, 2018, 2017 and 2016, respectively. |
| |
(2) | At fair value except for securities held to maturity. |
The TCJA was signed into law in 2017, reducing the statutory corporate federal income tax rate from 35% to 21%, effective January 1, 2018. For the year ended December 31, 2018 as compared2021, 2020 and 2019, respectively.
(2) At fair value except for securities held to the year ended December 31, 2017, the tax rate change negatively impacted net interest margin by approximately 0.08%.maturity.
Increases and decreases in interest income, calculated on a tax-equivalent basis, and interest expense result from changes in average balances (volume) of interest earning assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest earning assets and the interest incurred on our interest bearing liabilities for the years indicated. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous year's volume. Changes applicable to both volume and rate have been allocated to volume (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| 2021 Compared to 2020 | | 2020 Compared to 2019 |
| Change Due to Volume | | Change Due to Rate | | Increase (Decrease) | | Change Due to Volume | | Change Due to Rate | | Increase (Decrease) |
Interest Income Attributable to: | | | | | | | | | | | |
Loans | $ | (11,194) | | | $ | (53,787) | | | $ | (64,981) | | | $ | 32,059 | | | $ | (151,107) | | | $ | (119,048) | |
Investment securities | 17,824 | | (59,425) | | | (41,601) | | | 11,710 | | (99,605) | | | (87,895) | |
Other interest earning assets | 2,284 | | (5,852) | | | (3,568) | | | 1,685 | | (12,009) | | | (10,324) | |
Total interest earning assets | 8,914 | | (119,064) | | | (110,150) | | | 45,454 | | (262,721) | | | (217,267) | |
Interest Expense Attributable to: | | | | | | | | | | | |
Interest bearing demand deposits | 1,245 | | | (12,140) | | | (10,895) | | | 5,705 | | | (11,314) | | | (5,609) | |
Savings and money market deposits | 8,476 | | | (50,966) | | | (42,490) | | | (957) | | | (111,413) | | | (112,370) | |
Time deposits | (14,805) | | | (64,194) | | | (78,999) | | | (4,172) | | | (63,049) | | | (67,221) | |
Total interest bearing deposits | (5,084) | | | (127,300) | | | (132,384) | | | 576 | | | (185,776) | | | (185,200) | |
Federal funds purchased | (36) | | | (352) | | | (388) | | | (311) | | | (2,073) | | | (2,384) | |
FHLB and PPPLF borrowings | (37,544) | | | 11,169 | | | (26,375) | | | (15,579) | | | (18,831) | | | (34,410) | |
Notes and other borrowings | 6,641 | | | 415 | | | 7,056 | | | 9,527 | | | (767) | | | 8,760 | |
Total interest expense | (36,023) | | | (116,068) | | | (152,091) | | | (5,787) | | | (207,447) | | | (213,234) | |
Increase (decrease) in net interest income | $ | 44,937 | | | $ | (2,996) | | | $ | 41,941 | | | $ | 51,241 | | | $ | (55,274) | | | $ | (4,033) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2018 Compared to 2017 | | 2017 Compared to 2016 |
| Change Due to Volume | | Change Due to Rate | | Increase (Decrease) | | Change Due to Volume | | Change Due to Rate | | Increase (Decrease) |
Interest Income Attributable to: | | | | | | | | | | | |
Loans | $ | 88,401 |
| | $ | 96,107 |
| | $ | 184,508 |
| | $ | 104,562 |
| | $ | 7,202 |
| | $ | 111,764 |
|
Investment securities | 15,267 |
| | 21,972 |
| | 37,239 |
| | 29,733 |
| | 10,245 |
| | 39,978 |
|
Other interest earning assets | (1,316 | ) | | 4,836 |
| | 3,520 |
| | 29 |
| | 2,059 |
| | 2,088 |
|
Total interest income | 102,352 |
| | 122,915 |
| | 225,267 |
| | 134,324 |
| | 19,506 |
| | 153,830 |
|
Interest Expense Attributable to: | | | | | | | | | | | |
Interest bearing demand deposits | 442 |
| | 5,076 |
| | 5,518 |
| | 1,626 |
| | 2,904 |
| | 4,530 |
|
Savings and money market deposits | 12,411 |
| | 53,516 |
| | 65,927 |
| | 11,064 |
| | 17,559 |
| | 28,623 |
|
Time deposits | 9,276 |
| | 32,909 |
| | 42,185 |
| | 10,017 |
| | 7,990 |
| | 18,007 |
|
Total interest bearing deposits | 22,129 |
| | 91,501 |
| | 113,630 |
| | 22,707 |
| | 28,453 |
| | 51,160 |
|
Federal funds purchased | 1,035 |
| | — |
| | 1,035 |
| | — |
| | — |
| | — |
|
FHLB advances | (4,824 | ) | | 35,062 |
| | 30,238 |
| | 779 |
| | 13,444 |
| | 14,223 |
|
Notes and other borrowings | — |
| | (40 | ) | | (40 | ) | | (28 | ) | | — |
| | (28 | ) |
Total interest expense | 18,340 |
| | 126,523 |
| | 144,863 |
| | 23,458 |
| | 41,897 |
| | 65,355 |
|
Increase (decrease) in net interest income | $ | 84,012 |
| | $ | (3,608 | ) | | $ | 80,404 |
| | $ | 110,866 |
| | $ | (22,391 | ) | | $ | 88,475 |
|
Year ended December 31, 2018 compared to year ended December 31, 2017
Net interest income, calculated on a tax-equivalent basis, was $1.1 billion$811.7 million for the year ended December 31, 20182021, compared to $992.7$769.8 million for the year ended December 31, 2017,2020, an increase of $80.4 million. $41.9 million. The increase in net interest income was comprised of an increasedecreases in tax-equivalent interest income of $225.3 million, offset by an increase inand interest expense of $144.9 million.
$110.2 million and $152.1 million, respectively, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The increasedecrease in tax-equivalent interest income was compriseddriven primarily of a $184.5 million increaseby decreases in interest income from loans and an $37.2investment securities of $65.0 million increase in interest income from investment securities.
Increased interest income from loans was attributable to a $1.6 billion increase in the average balance and a 0.48% increase in the tax-equivalent yield to 5.63%$41.6 million, respectively, for the year ended December 31, 2018 from 5.15% for2021 compared to the year ended December 31, 2017. Offsetting factors contributing30, 2020. These decreases resulted from the impact on asset portfolio yields of declines in market interest rates in early 2020, leading to the increaserunoff of assets originated in the yield on loans included:
The tax-equivalent yield on non-covered loans increased to 4.00% for the year ended December 31, 2018 from 3.75% for the year ended December 31, 2017. The most significant factor contributing to the increased yield on non-covered loans was an increasea higher rate environment and origination of assets at lower prevailing rates. These declines in benchmark interest rates,yields were partially offset by the impact of the declineincreases in the statutory federal income tax rate.
Interest income on covered loans totaled $368.2 million and $300.5 million for the year ended December 31, 2018 and 2017, respectively. The yield on those loans increased to 86.13% for the year ended December 31, 2018 from 55.22% for the year ended December 31, 2017, reflecting additional accretion related to acceleration of the timing of the final covered loan sale that occurred in the fourth quarter of 2018. This acceleration resulted from changes in both the expected timing of cash flows from the final loan sale and in the estimated selling price of loans included in the sale compared to assumptions previously modeled.
The impact on the overall yield on loans of increased yields on both covered and non-covered loans considered individually was partially offset by the continued increase in lower-yielding non-covered loans as a percentage of the portfolio. Non-covered loans represented 98.00% of the average balance of loans outstanding for the year ended December 31, 2018 compared to 97.30% for the year ended December 31, 2017.
interest earning assets, primarily investment securities. The reduction of the statutory corporate federal income tax rate from 35% to 21%, effective January 1, 2018, negatively impacted tax-equivalent yields on non-covered loans by approximately 0.09% for the year ended December 31, 2018.
The average balance of investment securities increased by $466 million for the year ended December 31, 2018 from the year ended December 31, 2017, while the tax-equivalent yield increased to 3.35% from 3.02%. The increase in tax-equivalent yield primarily reflects changes in portfolio composition to securities with higher tax-equivalent yields and resetting of coupon rates on floating-rate securities, partially offset by the reduction of the statutory corporate federal income tax rate discussed above.
The primary components of the increasedecline in interest expense for the year ended December 31, 2018 as2021 compared to the year ended December 31, 2017 were a $113.6 million increase in interest expense on deposits and a $30.2 million increase in interest expense on FHLB advances.
The increase in interest expense on deposits2020 was attributable to an increaselower prevailing rates, strategic initiatives implemented to reduce the cost of $1.5 billiondeposits and the decline in average interest bearing depositsliabilities.
Both average yields on interest earning assets and an increase in the average cost ofrates paid on interest bearing deposits of 0.53% to 1.51% forliabilities have been declining over the year ended December 31, 2018 from 0.98% forperiods presented, reflecting the year ended December 31, 2017. This cost increase was driven by the growth of deposits in competitive markets and a rising short-termmacro interest rate environment.
The increase in interest expense on FHLB advances was primarily a resultenvironment and ongoing initiatives to reduce the cost and improve the mix of an increase in the average cost of advances of 0.72% to 1.99% for the year ended December 31, 2018 from 1.27% for the year ended December 31, 2017. The increased cost was driven by increased market rates and an extension of maturities through interest rate swaps.deposits.
The net interest margin, calculated on a tax-equivalent basis, was 2.38% for the year ended December 31, 2018 was 3.67% as2021, compared to 3.65%2.35% for the year ended December 31, 2017.2020. The reduction in cost of interest rate spread decreased to 3.38%bearing liabilities outpaced the decline in the yield on interest earning assets for the year.
Offsetting factors impacting the net interest margin for the year ended December 31, 2018 from 3.46%2021 compared to the year ended December 31, 2020 included:
•The tax-equivalent yield on loans decreased to 3.53% for the year ended December 31, 2017. The increase in net interest margin is primarily attributed to the accelerated accretion related to the final covered loan sale discussed above.
Year ended December 31, 2017 compared to year ended December 31, 2016
Net interest income, calculated on a tax-equivalent basis, was $992.7 million2021, from 3.76% for the year ended December 31, 2017 compared2020. Factors contributing to $904.2 millionthis decrease included a shift in portfolio composition from commercial to residential loans, a decline in benchmark interest rates which impacted the rates earned on both existing floating rate assets and new production, and the runoff of loans originated in a higher rate environment. These factors were partially offset by accelerated amortization of origination fees on PPP loans which positively impacted the yield on loans.
•The tax-equivalent yield on investment securities declined to 1.57%, for the year ended December 31, 2016, an increase of $88.5 million. The increase in net interest income was comprised of an increase in tax-equivalent interest income of $153.8 million, offset by an increase in interest expense of $65.4 million.
The increase in tax-equivalent interest income was comprised primarily of a $111.8 million increase in interest income2021 from loans and a $40.0 million increase in interest income from investment securities.
Increased interest income from loans was attributable to a $2.0 billion increase in the average balance and a 0.04% increase in the tax-equivalent yield to 5.15% 2.25% for the year ended December 31, 20172020. This decrease resulted from 5.11%the impact of purchases of lower-yielding securities; the amortization, maturities and prepayment of securities purchased in a higher rate environment; and faster prepayment speeds on securities purchased at a premium.
•The average rate paid on interest bearing deposits decreased to 0.34% for the year ended December 31, 2016. Offsetting factors contributing to the increase in the yield on loans included:
The tax-equivalent yield on non-covered loans increased to 3.75% 2021,from 1.00% for the year ended December 31, 2017 from 3.58% for2020. This decrease reflected declines in prevailing interest rates and continued execution of initiatives taken to lower rates paid on deposits, including the year ended December 31, 2016. The most significant factor contributing to the increased yield on non-covered loans was increases in marketre-pricing of term deposits.
•Average interest rates.
Interest income on covered loans totaled $300.5 million and $301.6 million for the year ended December 31, 2017 and 2016, respectively. The tax-equivalent yield on those loans increased to 55.22% for the year ended December 31, 2017 from 41.82% for the year ended December 31, 2016, reflecting improvements in expected cash flows for ACI loans, as well as an increase in higher-yielding pools as a percent of total covered loans. The increase in yield largely offset the impact of the decline in the average balance of covered loans outstanding.
The impact on the overall yield on loans of increased yields on both covered and non-covered loans considered individually was largely offsetbearing liabilities declined by the continued increase in lower-yielding non-covered loans as a percentage of the portfolio. Non-covered loans represented 97.3% of the average balance of loans outstanding for the year ended December 31, 2017 compared to 96.0% for the year ended December 31, 2016.
The average balance of investment securities increased by $1.0$1.8 billion for the year ended December 31, 2017 from the year ended December 31, 2016 while the tax-equivalent yield increased to 3.02% from 2.84%. The increase in tax-equivalent yield
primarily reflected resetting of coupon rates on floating-rate securities. The tax-equivalent yield was reduced by 5 basis points in 2017 as a result of a retrospective adjustment to the amortization of premiums on SBA securities.
The components of the increase in interest expense for the year ended December 31, 2017 as2021, compared to the year ended December 31, 2016 were a $51.2 million increase in2020. Average non-interest bearing demand deposits increased by $2.7 billion for those same comparative periods. These changes positively impacted the net interest expense on deposits and a $14.2 million increase in interest expense on FHLB advances.margin.
Provision for Credit Losses
The increaseprovision for credit losses is a charge or credit to earnings required to maintain the ACL at a level consistent with management’s estimate of expected credit losses on financial assets carried at amortized cost at the balance sheet date. The amount of the provision is impacted by changes in current economic conditions, as well as in management's reasonable and supportable economic forecast, loan originations and runoff, changes in portfolio mix, risk rating migration and portfolio seasoning, changes in specific reserves, changes in expected prepayment speeds and other assumptions. The provision for credit losses also includes amounts related to off-balance sheet credit exposures and may include amounts related to accrued interest expense on deposits was attributable to an increasereceivable and AFS debt securities.
The following table presents the components of $2.3 billion in average interest bearing deposits and an increase in the average costprovision for credit losses for the periods indicated (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 |
Amount related to funded portion of loans | $ | (64,456) | | | $ | 182,339 | |
Amount related to off-balance sheet credit exposures | (1,235) | | | (5,572) | |
Amount related to accrued interest receivable | (1,064) | | | 1,300 | |
Amount related to AFS debt securities | (364) | | | 364 | |
Total provision for (recovery of) credit losses | $ | (67,119) | | | $ | 178,431 | |
The most impactful factors driving the recovery of interest bearing deposits of 0.19% to 0.98%credit losses for the year ended December 31, 2017 from 0.79% for the year ended December 31, 2016. These cost increases2021 were generally driven by the growth of depositsimprovements in competitive marketscurrent and a rising short-term interest rate environment.forecasted economic conditions.
The increase in interest expenseevolving COVID-19 situation and its actual and forecasted impact on FHLB advances was primarily a result of an increaseeconomic conditions have led and may continue to lead to volatility in the average cost of advances of 0.28% to 1.27% for the year ended December 31, 2017 from 0.99% for the year ended December 31, 2016. The increased cost was driven by increased market rates and, to a lesser extent, an extension of maturities through interest rate swaps.
The net interest margin, calculated on a tax-equivalent basis, for the year ended December 31, 2017 was 3.65% as compared to 3.73% for the year ended December 31, 2016. The interest rate spread decreased to 3.46% for the year ended December 31, 2017 from 3.58% for the year ended December 31, 2016. The declines in net interest margin and interest rate spread resulted primarily from the cost of interest-bearing liabilities increasing by more than the yield on interest earning assets. This difference was driven primarily by the decline in covered loans as a percentage of total loans.
Provision for Loan Losses
The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the ALLL at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date and that, in management’s judgment, is appropriate under GAAP. credit losses.
The determination of the amount of the ALLLACL is complex and involves a high degree of judgment and subjectivity. Our determination of the amount of the allowance and corresponding provision for loan losses considers ongoing evaluations of the credit quality of and level of credit risk inherent in various segments of the loan portfolio and of individually significant credits, levels of non-performing loans and charge-offs, historical and statistical trends and economic and other relevant factors. See “Analysis of the Allowance for Loan and LeaseCredit Losses” below for more information about how we determine the appropriate level of the allowance.ACL.
For the years ended December 31, 2018, 2017 and 2016, the Company recorded provisions for loan losses of $25.9 million, $68.7 million and $50.9 million, respectively, substantially all of which related to non-covered loans. The provision for loan losses related to taxi medallion loans totaled $26.2 million, $58.2 million and $11.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. The amount of the provision is impacted by loan growth, portfolio mix, historical loss rates, the level of charge-offs and specific reserves for impaired loans, and management's evaluation of qualitative factors in the determination of general reserves.
Significant factors impacting the decrease in the provision for loan losses related to non-covered loans for the year ended December 31, 2018 compared to 2017 were (i) a decrease in the provision related to taxi medallion loans; (ii) lower loan growth; and (iii) a net decrease in the provision related to certain quantitative and qualitative loss factors; partially offset by (iv) an increase in the provision related to specific reserves for loans other than taxi medallion loans.
The increase in the provision for loan losses related to non-covered loans for the year ended December 31, 2017 compared to 2016 included an increase of $46.3 million in the provision related to taxi medallion loans. The provision related to taxi medallion loans totaled $58.2 million for the year ended December 31, 2017 compared to $11.9 million for the year ended December 31, 2016. The increased provision related to taxi medallion loans was partially offset by (i) decreases in quantitative and qualitative loss factors, (ii) the impact of lower loan growth and (iii) a decrease in provisions for classified and specifically reserved loans.
The provision for loan losses related to covered loans was not material for any period presented.
Non-Interest Income
The following table presents a comparison of the categories of non-interest income for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2021 | | 2020 | | 2019 |
Deposit service charges and fees | | | | | $ | 21,685 | | | $ | 16,496 | | | $ | 16,539 | |
Gain on sale of loans: | | | | | | | | | |
| | | | | | | | | |
Guaranteed portions of SBA loans | | | | | 541 | | | 1,880 | | | 4,756 | |
GNMA early buyout loans | | | | | 5,636 | | | 11,274 | | | 4,751 | |
Other | | | | | 18,217 | | | 16 | | | 2,612 | |
Gain on sale of loans, net | | | | | 24,394 | | | 13,170 | | | 12,119 | |
Gain on investment securities: | | | | | | | | | |
Net realized gain on sale of securities AFS | | | | | 9,010 | | | 14,001 | | | 18,537 | |
Net unrealized gain (loss) on marketable equity securities | | | | | (2,564) | | | 3,766 | | | 2,637 | |
Gain on investment securities, net | | | | | 6,446 | | | 17,767 | | | 21,174 | |
Lease financing | | | | | 53,263 | | | 59,112 | | | 66,631 | |
Other non-interest income | | | | | 28,365 | | | 26,676 | | | 30,741 | |
| | | | | $ | 134,153 | | | $ | 133,221 | | | $ | 147,204 | |
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
Income from resolution of covered assets, net | $ | 11,551 |
| | $ | 27,450 |
| | $ | 36,155 |
|
Gain (loss) on sale of covered loans, net | 5,732 |
| | 17,406 |
| | (14,470 | ) |
Net loss on FDIC indemnification | (4,199 | ) | | (22,220 | ) | | (17,759 | ) |
Other | 1,214 |
| | 1,626 |
| | 1,100 |
|
Non-interest income related to the covered assets | 14,298 |
| | 24,262 |
| | 5,026 |
|
Deposit service charges and fees | 14,040 |
| | 12,997 |
| | 12,780 |
|
Gain on sale of non-covered loans, net | 10,132 |
| | 10,183 |
| | 10,064 |
|
Gain on investment securities, net | 3,159 |
| | 33,466 |
| | 14,461 |
|
Lease financing | 61,685 |
| | 53,837 |
| | 44,738 |
|
Other service charges and fees | 8,946 |
| | 7,867 |
| | 6,683 |
|
Other non-interest income | 19,762 |
| | 15,292 |
| | 12,665 |
|
| $ | 132,022 |
| | $ | 157,904 |
| | $ | 106,417 |
|
Refer to the section titled "Impact of the Covered Loans, the FDIC Indemnification Asset and the Loss Sharing Agreements" below for further information about non-interest income related to the covered assets.
IncreasesThe increase in deposit service charges and fees for the year ended December 31, 20182021 resulted primarily from higher treasury management fee income, related to growth in commercial non-interest bearing DDA relationships as well as expanded product offerings and pricing discipline stemming from our BankUnited 2.0 initiatives.
The increase in gain on sale of loans for the year ended December 31, 2021 compared to 2020 related primarily to a gain of $18.2 million on the sale of a portfolio of single-family residential loans.
The decrease in income from lease financing for the year ended December 31, 2021 compared to the year ended December 31, 2017 corresponded2020 related to the growthdecrease in core deposits.
The most significant componentthe balance of gain on sale of non-covered loans, net for the years ended December 31, 2018, 2017operating lease equipment and 2016 was gains on sales of the guaranteed portions of SBA loans by SBF.
Gain on investment securities, net for the year ended December 31, 2018 reflected net realized gains of $6.1 million from the sale of investment securities available for sale, offset by the net unrealized loss on marketable equity securities of $2.9 million. Gain on investment securities, net for the year ended December 31, 2017 included gains from the salere-leasing of certain securities formerly covered under the Commercial Shared-Loss Agreement and originally acquiredassets at significant discounts in the FSB Acquisition.
Year over year increases in income from lease financing generally corresponded to the growth in the portfolio of equipment under operating lease. Lease financing includes gains on the sale of equipment under operating lease of $4.5 million for the year ended December 31, 2018.
Other non-interest income for the year ended December 31, 2018 reflected increases in fair value adjustments of $7.7 million related to residential MSRs. All of the Company's residential MSRs were sold in the fourth quarter 2018.
lower rates.
Non-Interest Expense
The following table presents the components of non-interest expense for the years ended December 31, 2018, 2017 and 2016periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2021 | | 2020 | | 2019 |
Employee compensation and benefits | | | | | $ | 243,532 | | | $ | 217,156 | | | $ | 235,330 | |
Occupancy and equipment | | | | | 47,944 | | | 48,237 | | | 56,174 | |
Deposit insurance expense | | | | | 18,695 | | | 21,854 | | | 16,991 | |
Professional fees | | | | | 14,386 | | | 11,708 | | | 20,352 | |
Technology and telecommunications | | | | | 67,500 | | | 58,108 | | | 47,509 | |
Discontinuance of cash flow hedges | | | | | 44,833 | | | — | | | — | |
Depreciation and impairment of operating lease equipment | | | | | 53,764 | | | 49,407 | | | 48,493 | |
| | | | | | | | | |
Other non-interest expense | | | | | 56,921 | | | 50,719 | | | 62,240 | |
Total non-interest expense | | | | | $ | 547,575 | | | $ | 457,189 | | | 487,089 | |
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Employee compensation and benefits | $ | 254,997 |
| | $ | 237,824 |
| | $ | 223,011 |
|
Occupancy and equipment | 55,899 |
| | 58,100 |
| | 59,022 |
|
Amortization of FDIC indemnification asset | 261,763 |
| | 176,466 |
| | 160,091 |
|
Deposit insurance expense | 18,984 |
| | 22,011 |
| | 17,806 |
|
Professional fees | 16,539 |
| | 23,676 |
| | 14,249 |
|
Technology and telecommunications | 35,136 |
| | 31,252 |
| | 31,324 |
|
Depreciation of equipment under operating lease | 40,025 |
| | 35,015 |
| | 31,580 |
|
Other non-interest expense | 57,197 |
| | 50,624 |
| | 53,364 |
|
| $ | 740,540 |
| | $ | 634,968 |
| | $ | 590,447 |
|
Consolidated statement of income line item "technology and telecommunications" includes reclassifications from "occupancy and equipment" of $17.3 million and $17.0 million, respectively, for the years ended December 31, 2017 and 2016. The reclassification adjustments relate to hardware and software support and maintenance fees and depreciation of software. Excluding amortization of the FDIC indemnification asset, non-interest expense as a percentage of average assets was 1.5%, 1.6% and 1.7%, respectively, for years ended December 31, 2018, 2017 and 2016, respectively. The more significant changes in the components of non-interest expense are discussed below.
Employee compensation and benefits
As is typical for financial institutions, employeeEmployee compensation and benefits representsincreased by $26.4 million for the single largest componentyear ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily due to higher variable compensation accruals for both incentives and regular annual discretionary bonuses in 2021. Additionally, the Company paid a special bonus in the fourth quarter of recurring non-interest expense. Employee compensation and benefits2021 totaling $6.8 million.
Deposit insurance expense
Deposit insurance expense decreased by $3.2 million for the year ended December 31, 2018 increased by $17.2 million2021 compared to the year ended December 31, 2017. The increase2020, reflecting a decrease in the assessment rate.
Professional Fees
Professional fees for the year ended December 31, 2018 primarily reflected an increase2021 includes $4.2 million related to a tax settlement with the state of Florida.
Technology and telecommunications
The increases in technology and telecommunications expense are reflective of a variety of technology investments including digital, payments and data analytics capabilities.
Discontinuance of cash flow hedges
We recognized a loss on discontinuance of cash flow hedges totaling $44.8 million related to the numbertermination of employeespay-fixed interest rate swaps with a notional amount of $401 million at a weighted average pay rate of 3.24% during the fourth quarter of 2021.
Depreciation and compensation increases. Employee compensationimpairment of operating lease equipment
Depreciation and benefitsimpairment of operating lease equipment for the year ended December 31, 2017 increased $14.8 million compared to the year ended December 31, 2016. This increase reflected general increases in salaries and the cost2021 included an impairment charge of benefits as well as changes in the composition of the employee base.
Amortization of FDIC indemnification asset
See the section titled "Impact of Covered Loans, the FDIC Indemnification Asset and the Loss Sharing Agreements" below for more information about amortization of the FDIC indemnification asset.
Deposit insurance expense
Deposit insurance expense totaled $19.0 million, $22.0 million and $17.8 million respectively, for the years ended December 31, 2018, 2017 and 2016. The decrease in 2018 was attributed to discontinuance of the large bank surcharge assessment in the fourth quarter. The increase for 2017 reflected the growth of the balance sheet, the large bank surcharge imposed by the FDIC, which began in the third quarter of 2016, and increases in certain components of the Bank's assessment rate.
Professional Fees
Professional fees decreased by $7.1 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017, primarily due to a reduction in the advisory fees related to the discrete income tax benefit recognized in 2017.
Technology and telecommunications
Technology and telecommunications expense increased by $3.9 million for the year ended December 31, 2018 compared to the year ended December 31, 2017. This increase is primarily attributed to hardware and software licenses, support and maintenance as well as data processes and services.
Depreciation of equipment under operating lease
Depreciation of equipment under operating lease increased by $5.0 million for the year ended December 31, 2018
compared to the year ended December 31, 2017 and by $3.4 million for the year ended December 31, 2017 compared with the year ended December 31, 2016. These increases generally corresponded to the growth in the portfolio of equipment under operating lease. Depreciation of equipment under operating lease for the year ended December 31, 2016 also included impairment of $4.1$2.8 million related to a group of tank cars impacted by new safety regulations.
Other non-interest expense
The most significant components of other non-interest expense are advertising, promotion and business development, costs related to lending activities and deposit generation, expenses and losses related to OREO, foreclosure and repossessed assets, regulatory examination assessments, travel and general office expense.
Impact of the Covered Loans, FDIC Indemnification Asset and the Loss Sharing Agreements
The accounting for covered loans, the indemnification asset and the provisions of the Loss Sharing Agreements have materially impacted our financial condition and results of operations. The more significant ways in which our financial statements have been impacted are:
Interest income and the net interest margin reflect the impact of accretion related to the covered loans;
Non-interest expense includes the effect of amortization of the FDIC indemnification asset;
The Single Family Shared-Loss Agreements has afforded the Company significant protection against credit losses related to residential covered assets. The impact of any provision for loan losses related to the residential covered loans, losses related to covered OREO and expenses related to resolution of covered assets has been significantly mitigated by loss sharing with the FDIC. The Single Family Shared-Loss Agreement was terminated on February 13, 2019; there will be no mitigating impact of loss sharing with the FDIC on losses and expenses related to formerly covered loans retained in portfolio subsequent to the termination date;
Under the acquisition method of accounting, the assets acquired and liabilities assumed in the FSB Acquisition were initially recorded on the consolidated balance sheet at their estimated fair values as of the acquisition date. The carrying amounts of covered loans and the FDIC indemnification asset continue to be impacted by acquisition accounting adjustments. The carrying amount of covered loans, particularly ACI loans, is materially less than their UPB. Additionally, no ALLL was recorded with respect to acquired loans at the FSB Acquisition date;
Non-interest income includes gains and losses associated with the resolution of covered assets and the related effect of indemnification under the terms of the Single Family Shared-Loss Agreement. The impact of gains or losses related to transactions in covered assets prior to termination of that agreement in February 2019 was significantly mitigated by FDIC indemnification; and
ACI loans that are contractually delinquent may not be reflected as non-accrual loans or non-performing assets due to the accounting treatment accorded such loans under ASC 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality."
During the quarter ended December 31, 2018, the Bank executed a portfolio sale of certain covered loans and OREO. Covered loans with UPB totaling approximately $260 million and covered OREO totaling $5.2 million were sold during the quarter ended December 31, 2018. In conjunction with the sale, the FDIC indemnification asset was amortized to zero as of December 31, 2018 as expectations of losses eligible for indemnification with respect to any retained loans prior to final termination of the Single Family Shared-Loss Agreement were insignificant.
Covered loans with UPB totaling $401 million and a carrying value of $201 million as of December 31, 2018 were retained in portfolio. Based on our updated estimates of expected cash flows, we expect total accretion on the retained covered residential loans over their expected remaining lives to approximate $287 million. The yield on the retained loans as of December 31, 2018 was 32.9%.
The following table summarizes the net impact on pre-tax earnings of transactions in the covered assets for the years ended December 31, 2018, 2017 and 2016 (in thousands):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Interest income on covered loans | $ | 368,161 |
| | $ | 300,540 |
| | $ | 301,614 |
|
Amortization of FDIC indemnification asset | (261,763 | ) | | (176,466 | ) | | (160,091 | ) |
| 106,398 |
| | 124,074 |
| | 141,523 |
|
Income from resolution of covered assets, net | 11,551 |
| | 27,450 |
| | 36,155 |
|
Gain (loss) on sale of covered loans, net | 5,732 |
| | 17,406 |
| | (14,470 | ) |
Net loss on FDIC indemnification | (4,199 | ) | | (22,220 | ) | | (17,759 | ) |
Other, net | (655 | ) | | 1,058 |
| | (4,215 | ) |
| 12,429 |
| | 23,694 |
| | (289 | ) |
Net impact on pre-tax earnings of transactions in the covered assets | $ | 118,827 |
| | $ | 147,768 |
| | $ | 141,234 |
|
| | | | | |
Combined yield on covered loans and indemnification asset (1) | 17.06 | % | | 12.98 | % | | 10.20 | % |
| |
(1) | The combined yield on the covered loans and the FDIC indemnification asset presented above is calculated as the interest income on the covered loans, net of the amortization of the FDIC indemnification asset, divided by the average combined balance of the covered loans and FDIC indemnification asset. |
The table above does not reflect any allocation of employee compensation or other general operating expenses that may be associated with holding and maintaining the covered assets or insuring compliance with the terms of the Shared-Loss Agreements.
Interest income on covered loans and amortization of the FDIC indemnification asset
The yield on covered loans increased to 86.13% for the year ended December 31, 2018 from 55.22% and 41.82% for the years ended December 31, 2017 and 2016, respectively. See "Net Interest Income" above for further discussion of trends in interest income and yields on the covered loan portfolio.
The FDIC indemnification asset was initially recorded at its estimated fair value at the date of the FSB Acquisition, representing the present value of estimated future cash payments from the FDIC for probable losses on covered assets. As projected cash flows from the ACI loans have improved, the yield on the loans has increased accordingly and the estimated future cash payments from the FDIC have decreased. This change in estimated cash flows from the FDIC is recognized prospectively, consistent with the recognition of the estimated increased cash flows from the ACI loans. As a result, the FDIC indemnification asset is being amortized to the amount of the estimated future cash payments from the FDIC. For the year ended December 31, 2018, the average rate at which the FDIC indemnification asset was amortized was 133.51%, compared to 42.90% and 25.14% during the years ended December 31, 2017 and 2016, respectively. These increases correspond to increases in the yield on covered loans; which in 2018, was impacted by increased accretion related to changes in assumptions about the timing and pricing of the final covered loan sale pursuant to the terms of the Single Family Shared-Loss Agreement discussed above. The amount of amortization is impacted by both the change in the amortization rate and the decrease in the average balance of the indemnification asset. As discussed above, the FDIC indemnification asset was amortized to zero as of December 31, 2018.
See Note 5 to the consolidated financial statements for additional information about transactions in the covered assets and a rollforward of the FDIC indemnification asset for the years ended December 31, 2018, 2017 and 2016.
Non-interest income related to the covered assets
The most significant components of non-interest income related to the covered assets are income from resolution of covered assets, gain (loss) on sale of covered loans and the related gain or loss on indemnification asset.
Covered loans may be resolved through prepayment, short sale of the underlying collateral, foreclosure, sale of the loans or charge-off. For loans resolved through prepayment, short sale or foreclosure, the difference between consideration received in resolution of the loans and the allocated carrying value of the loans is recorded in the consolidated statement of income line item “Income from resolution of covered assets, net.” Both gains and losses on individual resolutions are included in this line item. For loans resolved through sale of the loans, the difference between consideration received and the allocated carrying value of the loans is recorded in the consolidated statement of income line item "Gain (loss) on sale of loans, net." Losses from the resolution of covered loans increase the amount recoverable from the FDIC under the Single-Family Shared Loss Agreement.
Gains from the resolution of covered loans reduce the amount recoverable from the FDIC under the Single-Family Shared Loss Agreement. These additions to or reductions in amounts recoverable from the FDIC related to the resolution of covered loans are recorded in non-interest income in the line item “Net loss on FDIC indemnification” and reflected as corresponding increases or decreases in the FDIC indemnification asset. The amount of income or loss recorded in any period will be impacted by the amount of covered loans resolved, the amount of consideration received, and our ability to accurately project cash flows from ACI loans in future periods.
For each of the years ended December 31, 2018, 2017 and 2016 the substantial majority of Income from resolution of covered assets, net, resulted from payments in full. Decreases in Income from resolution of covered assets, net, reflected decreases in both the number of resolutions and the average income per resolution.
The following table summarizes the gain (loss) recorded on the sale of covered residential loans and the impact of related FDIC indemnification for the periods indicated (in thousands):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Net gain (loss) on sale of covered loans | $ | 5,732 |
| | $ | 17,406 |
| | $ | (14,470 | ) |
Net gain (loss) on FDIC indemnification | 3,388 |
| | (1,514 | ) | | 11,615 |
|
Net impact on pre-tax earnings | $ | 9,120 |
| | $ | 15,892 |
| | $ | (2,855 | ) |
Pricing received on the sale of covered loans may varied based on (i) market conditions, including the interest rate environment, the amount of capital seeking investment and the secondary supply of loans with a particular performance history or collateral type, (ii) the type and quality of collateral, (iii) the performance history of loans included in the sale and (iv) whether or not the loans have been modified.
The net loss on FDIC indemnification related to covered loan sales for the years ended December 31, 2018 and 2017 did not bear the 80% relationship to the net gain on sale that might generally be expected. This was primarily due to the sale of loan pools where there was an acceleration in the expected timing of cash flows, resulting in a gain, with no impact on the total expected credit losses and no related adjustment on the FDIC indemnification asset.
Other items of non-interest income and expense related to the covered assets
Other items of non-interest income and expense related to the covered assets, comprising the line item "Other, net" in the table above presenting the impact on pre-tax earnings of transactions in the covered assets, include the provision for (recovery of) covered loan losses; foreclosure expenses related to covered assets; gains, losses and other expenses related to covered OREO; FDIC reimbursement of certain expenses related to resolution of covered assets, and modification incentives. None of these items had a material impact on results of operations for any period presented.sand cars.
Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2018, 20172021 and 20162020 was $90.8$34.4 million, $(209.8) and $51.5 million, and $109.7 million, respectively. The Company's effective income tax rate was 21.8%, (51.9)%7.66% and 32.7%20.66% for the years ended December 31, 2018, 20172021, and 2016,2020, respectively.
The income tax benefit and effective income tax rate for the year ended December 31, 2017 reflected2021 was impacted by a discrete income tax benefitsettlement with the Florida Department of $327.9 millionRevenue related to certain tax matters for the 2009-2019 tax years and a matter that arose during an ongoing auditreduction in the liability for unrecognized tax benefits arising primarily from expiration of statutes of limitation in the Company's 2013 federal income tax return. During that audit, the Company asserted that U.S. federal income taxes paid in respect ofFederal and certain income previously reported by the Company on its 2012, 2013 and 2014 federal income tax returns relatedstate jurisdictions. See Note 9 to the basis assigned to certain loans acquired in the FSB Acquisition should be refunded to the Company, in lightconsolidated financial statements for information about income taxes.
Analysis of guidance issued after the relevant returns had been filed. The discrete income tax benefit recognized in 2017 included expected refunds of federal income tax of $295.0 million, as well as $8.7 million in estimated interest on the federal refund and estimated refunds of $24.2 million from certain state and local taxing jurisdictions. In 2018, the Company received refunds of federal income tax of $293.0 million, as well as $13.5 million of interest related to the discrete income tax benefit recognized.Financial Condition
The Company is continuing to evaluate whether it has claims in other state jurisdictions and whether it may have any claims for federal or state income taxes relating to tax years prior to 2012. The Company has not reached any conclusion as to when or to what extent it may have any claims relating to such other state and local taxing jurisdictions or in respect of prior tax years.
Excluding, forFor the year ended December 31, 2017,2021 we saw growth in total deposits of $1.9 billion, with non-interest bearing demand deposits increasing by $2.0 billion. Borrowings decreased by $1.2 billion and liquidity was deployed into the impactsecurities portfolio, which grew by $888 million. Total loans declined by $101 million for 2021; however, there was a shift in loan portfolio composition as the residential portfolio grew by $2.0 billion and the commercial portfolio in the aggregate declined by $2.1 billion. These trends were continuations of those seen in the prior year, and reflective of the discrete income tax benefit discussed aboveenvironment predicated by the COVID-19 pandemic as systemic liquidity grew, residential loan demand and the initial impactresidential housing market remained strong, while commercial loan demand was muted and our risk appetite for commercial lending was more limited. The shift in deposit mix is also consistent with management's key strategic objective of enactmentgrowing non-interest bearing deposits and improving the overall quality of the TCJA, the effective income tax rate was 21.8%, 30.1% and 32.7% for the years ended December 31, 2018, 2017 and 2016 respectively. Significant components includeddeposit base.
Led by growth in the reconciliation of the Company's effective income tax rate to the statutory federal tax rate of 21% for the year ended December 31, 2018 included the effect of state income taxes, partially offset by the impact of income not subject to federal tax. For the years ended December 31, 2017 and 2016, the Company's adjusted effective income tax rate differed from the statutory federal tax rate of 35.0% primarily due to the impact of income not subject to federal tax, partially offset by the effect of state income taxes.
The decline in the effective income tax rate for the year ended December 31, 2018 compared to the prior years, excluding the impact of the discrete income tax benefit discussed above for the year ended December 31, 2017, was primarily attributable to the reduction of the statutory corporate federal income tax rate from 35% to 21%, effective January 1, 2018.
For more information about income taxes, see Note 10 to the consolidated financial statements.
Analysis of Financial Condition
Averageaverage investment securities, average interest-earning assets increased $2.0by $1.3 billion to $29.2$34.1 billion for the year ended December 31, 20182021 from $27.2$32.8 billion for the year ended December 31, 2017. This increase was driven by a $1.6 billion increase in the2020, while average balance of outstanding loans and a $466 million increase in the average balance of investment securities. The increase in average loans reflected growth of $1.7 billion in average non-covered loans outstanding, partially offset by a $117 million decrease in the average balance of covered loans. A $120 million increase in average non-interest earning assets was primarily attributed to an increase in income taxes receivable related to a discrete income tax benefit recognized during the fourth quarter of 2017, partially offset by a decrease in the average balance of the FDIC indemnification asset.
Average interest bearing liabilities declined by $1.8 billion over the same period. Average non-interest bearing deposits increased $1.3by $2.7 billion to $24.0$8.5 billion for the year ended December 31, 2018 from $22.7 billion for the year ended December 31, 2017, due to increases of $1.5 billion in average interest bearing deposits, offset by a decrease of $232 million in average FHLB advances. Average non-interest bearing deposits increased by $320 million.2021.
Average stockholders' equity increased by $443 million, due primarily to the retention of earnings, including the discrete income tax benefit recorded during the fourth quarter of 2017, and also reflecting proceeds from the exercise of stock options, offset by the repurchase of common stock.
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 December 31, 2018, 2017 and 2016 (in thousands):the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | |
| December 31, 2021 | | December 31, 2020 | | |
| Amortized Cost | | Carrying Value | | Amortized Cost | | Carrying Value | | | | |
U.S. Treasury securities | $ | 114,385 | | | $ | 111,660 | | | $ | 79,919 | | | $ | 80,851 | | | | | |
U.S. Government agency and sponsored enterprise residential MBS | 2,093,283 | | | 2,097,796 | | | 2,389,450 | | | 2,405,570 | | | | | |
U.S. Government agency and sponsored enterprise commercial MBS | 861,925 | | | 856,899 | | | 531,724 | | | 539,354 | | | | | |
| | | | | | | | | | | |
Private label residential MBS and CMOs | 2,160,136 | | | 2,149,420 | | | 982,890 | | | 998,603 | | | | | |
Private label commercial MBS | 2,604,690 | | | 2,604,010 | | | 2,514,271 | | | 2,526,354 | | | | | |
Single family real estate-backed securities | 474,845 | | | 476,968 | | | 636,069 | | | 650,888 | | | | | |
Collateralized loan obligations | 1,079,217 | | | 1,078,286 | | | 1,148,724 | | | 1,140,274 | | | | | |
Non-mortgage asset-backed securities | 151,091 | | | 152,510 | | | 246,597 | | | 253,261 | | | | | |
State and municipal obligations | 205,718 | | | 222,277 | | | 213,743 | | | 235,709 | | | | | |
SBA securities | 184,296 | | | 183,595 | | | 233,387 | | | 231,545 | | | | | |
| | | | | | | | | | | |
Investment securities held to maturity | 10,000 | | | 10,000 | | | 10,000 | | | 10,000 | | | | | |
| $ | 9,939,586 | | | 9,943,421 | | | $ | 8,986,774 | | | 9,072,409 | | | | | |
Marketable equity securities | | | 120,777 | | | | | 104,274 | | | | | |
| | | $ | 10,064,198 | | | | | $ | 9,176,683 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
| Amortized Cost | | Carrying Value | | Amortized Cost | | Carrying Value | | Amortized Cost | | Carrying Value |
U.S. Treasury securities | $ | 39,885 |
| | $ | 39,873 |
| | $ | 24,981 |
| | $ | 24,953 |
| | $ | 4,999 |
| | $ | 5,005 |
|
U.S. Government agency and sponsored enterprise residential MBS | 1,885,302 |
| | 1,897,474 |
| | 2,043,373 |
| | 2,058,027 |
| | 1,513,028 |
| | 1,527,242 |
|
U.S. Government agency and sponsored enterprise commercial MBS | 374,569 |
| | 374,787 |
| | 233,522 |
| | 234,508 |
| | 126,754 |
| | 124,586 |
|
Private label residential MBS and CMOs | 1,539,058 |
| | 1,534,198 |
| | 613,732 |
| | 628,247 |
| | 334,167 |
| | 375,098 |
|
Private label commercial MBS | 1,486,835 |
| | 1,485,716 |
| | 1,033,022 |
| | 1,046,415 |
| | 1,180,386 |
| | 1,187,624 |
|
Single family rental real estate-backed securities | 406,310 |
| | 402,458 |
| | 559,741 |
| | 562,706 |
| | 858,339 |
| | 861,251 |
|
Collateralized loan obligations | 1,239,355 |
| | 1,235,198 |
| | 720,429 |
| | 723,681 |
| | 487,678 |
| | 487,296 |
|
Non-mortgage asset-backed securities | 204,372 |
| | 204,067 |
| | 119,939 |
| | 121,747 |
| | 187,660 |
| | 186,736 |
|
State and municipal obligations | 398,810 |
| | 398,429 |
| | 640,511 |
| | 657,203 |
| | 705,884 |
| | 698,546 |
|
SBA securities | 514,765 |
| | 519,313 |
| | 534,534 |
| | 550,682 |
| | 517,129 |
| | 523,906 |
|
Other debt securities | 1,393 |
| | 4,846 |
| | 4,090 |
| | 9,120 |
| | 3,999 |
| | 8,091 |
|
Marketable equity securities | 60,519 |
| | 60,519 |
| | 59,912 |
| | 63,543 |
| | 76,180 |
| | 88,203 |
|
Investment securities held to maturity | 10,000 |
| | 10,000 |
| | 10,000 |
| | 10,000 |
| | 10,000 |
| | 10,000 |
|
| $ | 8,161,173 |
| | $ | 8,166,878 |
| | $ | 6,597,786 |
| | $ | 6,690,832 |
| | $ | 6,006,203 |
| | $ | 6,083,584 |
|
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.and sponsored enterprise securities. Investment grade municipal securities provide liquidity and attractive tax-equivalent yields. We have also invested in highly rated structured products, including private-label commercial MBS,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. TheBased on the Company’s assumptions, the estimated weighted average expected life of the investment portfolio as of December 31, 20182021 was 4.54.2 years and the effective duration of the portfolio was 1.41.5 years.
A summary of activity in the investment securities portfolio for the years ended December 31, 2018 and 2017 follows (in thousands):
|
| | | |
Balance at December 31, 2016 | $ | 6,083,584 |
|
Purchases | 3,131,798 |
|
Repayments, maturities and calls | (1,268,588 | ) |
Sales | (1,254,125 | ) |
Amortization of discounts and premiums, net | (17,502 | ) |
Change in unrealized gains | 15,665 |
|
Balance at December 31, 2017 | 6,690,832 |
|
Purchases | 4,138,994 |
|
Repayments, maturities and calls | (1,538,943 | ) |
Sales | (1,027,651 | ) |
Amortization of discounts and premiums, net | (12,644 | ) |
Change in unrealized gains | (83,710 | ) |
Balance at December 31, 2018 | $ | 8,166,878 |
|
The following table shows the scheduled maturities, carrying values and current yields for investment securities available for sale as of December 31, 2018, 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 | $ | 39,873 |
| | 2.29 | % | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 39,873 |
| | 2.29 | % |
U.S. Government agency and sponsored enterprise residential MBS | 223,898 |
| | 3.44 | % | | 838,349 |
| | 3.34 | % | | 727,213 |
| | 3.25 | % | | 108,014 |
| | 3.21 | % | | 1,897,474 |
| | 3.31 | % |
U.S. Government agency and sponsored enterprise commercial MBS | 6,269 |
| | 4.29 | % | | 53,887 |
| | 4.30 | % | | 229,526 |
| | 3.19 | % | | 85,105 |
| | 3.63 | % | | 374,787 |
| | 3.47 | % |
Private label residential MBS and CMOs | 359,701 |
| | 3.86 | % | | 898,830 |
| | 3.80 | % | | 231,820 |
| | 3.67 | % | | 43,847 |
| | 3.63 | % | | 1,534,198 |
| | 3.79 | % |
Private label commercial MBS | 155,136 |
| | 4.48 | % | | 1,028,374 |
| | 4.17 | % | | 293,689 |
| | 3.56 | % | | 8,517 |
| | 3.44 | % | | 1,485,716 |
| | 4.08 | % |
Single family rental real estate-backed securities | 11,200 |
| | 2.94 | % | | 168,812 |
| | 3.29 | % | | 222,446 |
| | 3.59 | % | | — |
| | — | % | | 402,458 |
| | 3.45 | % |
Collateralized loan obligations | 32,327 |
| | 4.61 | % | | 708,085 |
| | 4.34 | % | | 494,786 |
| | 4.60 | % | | — |
| | — | % | | 1,235,198 |
| | 4.45 | % |
Non-mortgage asset-backed securities | 22,296 |
| | 4.32 | % | | 140,013 |
| | 3.37 | % | | 41,033 |
| | 3.10 | % | | 725 |
| | 2.81 | % | | 204,067 |
| | 3.42 | % |
State and municipal obligations | 1,567 |
| | 1.96 | % | | 26,230 |
| | 2.52 | % | | 298,854 |
| | 3.59 | % | | 71,778 |
| | 4.27 | % | | 398,429 |
| | 3.64 | % |
SBA securities | 90,240 |
| | 3.29 | % | | 235,386 |
| | 3.20 | % | | 123,282 |
| | 3.14 | % | | 70,405 |
| | 3.06 | % | | 519,313 |
| | 3.18 | % |
Other debt securities | — |
| | — | % | | — |
| | — | % | | — |
| | — | % | | 4,846 |
| | 15.85 | % | | 4,846 |
| | 15.85 | % |
| $ | 942,507 |
| | 3.77 | % | | $ | 4,097,966 |
| | 3.82 | % | | $ | 2,662,649 |
| | 3.63 | % | | $ | 393,237 |
| | 3.57 | % | | 8,096,359 |
| | 3.74 | % |
Marketable equity securities with no scheduled maturity | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | 60,519 |
| | 7.47 | % |
Total investment securities available for sale and marketable equity securities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | $ | 8,156,878 |
| | 3.77 | % |
The investment securities available for sale portfolio was in a net unrealized gain position of $5.7$3.8 million at December 31, 2018 with aggregate fair value equal to 100.1% of amortized cost.2021. Net unrealized gains at December 31, 2021 included $49.0$55.4 million of gross unrealized gains and $43.3$51.6 million of gross unrealized losses. Investment securities available for sale in an unrealized loss positionpositions at December 31, 20182021 had an aggregate fair value of $4.3$5.3 billion. At December 31, 2018, 99.4%The ratings distribution of investmentour AFS securities available for sale were backed by the U.S. Government, U.S. Government agencies or sponsored enterprises or were rated AAA, AA or A, based on the most recent third-party ratings. At December 31, 2018, 83%, 14% and 3% of Collateralized loan obligations were rate AAA, AA and A, respectively, based on the most recent third-party ratings, with a weighted-average subordination level at 41.8%, ranging from 27.1% to 43.8%. Investment securities available for sale totaling $46 million were rated below investment grade or not ratedportfolio at December 31, 2018.2021 is depicted in the chart below:
We evaluate the credit quality of individual securities in the portfolio quarterly to determine whether anywe expect to recover the amortized cost basis of the investments in unrealized loss positions are other-than-temporarily impaired.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:
our intent•Whether we intend to holdsell the security until maturity or for a periodprior to recovery of time sufficient for a recovery in value;its amortized cost basis;
whether•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 length of time and•The extent to which fair value has beenis less than amortized cost;
adverse changes•Adverse conditions specifically related to the security, an industry or geographic area;
•Changes in expected cash flows;the financial condition of the issuer or underlying loan obligors;
collateral values and performance;
the•The payment structure and remaining payment terms of the security, including levels of subordination or over-collateralization;
changes in the economic or regulatory environment;
the general market condition•Failure of the geographic area or industry of the issuer;issuer to make scheduled payments;
the issuer’s financial condition, performance and business prospects; and
changes•Changes in credit ratings.ratings;
No securities were determined to be other-than-temporarily impaired•Relevant market data;
•Estimated prepayments, defaults, and the value and performance of underlying collateral at December 31, 2018 and 2017, or during the years then ended. During the year ended December 31, 2016, the Company recognized OTTI in the amount of $463 thousand on two positions in one private label commercial MBSindividual security which was determined to be other-than-temporary impaired. This security was sold prior to the end of 2016.level.
We do not intend to sell securities in significant unrealized loss positions at December 31, 2018.2021. 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. Unrealized losses in the portfoliobasis, which may be at December 31, 2018 were primarily attributable to an increase in market interest rates subsequent to the date the securities were acquired.maturity.
U.S. Government, Government Agency and Government Sponsored Enterprise Securities
The timely repaymentpayment of principal and interest on securities issued by the U.S. Treasurygovernment, U.S. government agencies and U.S. Government agency andgovernment sponsored enterprise securities in unrealized loss positionsenterprises is explicitly or implicitly guaranteed by the full faithU.S. Government. As such, there is an assumption of zero credit loss and creditthe Company expects to recover the entire amortized cost basis of these securities.
Private Label Securities
None of the U.S. Government. Management performed projected cash flow analyses of theimpaired private label residential MBS and CMOs,securities had missed principal or interest payments or had been downgraded by a NRSRO at December 31, 2021. The Company performed an analysis comparing the present value of cash flows expected to be collected to the amortized cost basis of impaired private label commercial MBS, collateralized loan obligationssecurities. This analysis was based on a scenario that we believe to be more severe than our reasonable and non-mortgage asset-backed securities in unrealizedsupportable economic forecast at December 31, 2021, and incorporated assumptions about voluntary prepayment rates, collateral defaults, delinquencies, other collateral quality measures, loss positions, incorporating CUSIP level assumptions consistent withseverity, recovery lag and other relevant factors. Our analysis also considered the collateralstructural characteristics of each security including collateral default rate, voluntary prepayment rate, severity and delinquency assumptions.the level of credit enhancement provided by that structure. Based on the results of this analysis, no credit losses were projected. Management's analysisnone of the credit characteristics of individual securities and the underlying collateral and levels of subordination for each of the single family rental real estate-backedprivate label AFS securities in unrealized loss positions is not indicative ofwere projected to sustain credit losses. Management's analysis of the statelosses at December 31, 2021.
The following table presents subordination levels and municipal obligations in unrealized loss positions included reviewing the ratings of the securities and the results of credit surveillance performed by an independent third party. Given the expectation of timely repayment of principal and interest, the impairments were considered to be temporary.average internal stress scenario losses for select portfolio segments at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Subordination | | Weighted Average Stress Scenario Loss |
| | | | | Minimum | | Maximum | | Average | |
Private label residential MBS and CMO | | | | | 3.0 | % | | 49.6 | % | | 15.3 | % | | 1.6 | % |
Private label CMBS | | | | | 30.0 | % | | 62.1 | % | | 40.3 | % | | 7.2 | % |
Single family real estate-backed securities | | | | | 40.5 | % | | 47.6 | % | | 44.0 | % | | 8.9 | % |
CLOs | | | | | 39.5 | % | | 46.0 | % | | 42.4 | % | | 9.2 | % |
For further discussion of our analysis of impaired investment securities AFS for OTTI,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 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 have also established 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 or internal modeling, generally based on Intex. 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. At December 31, 2018While at the onset of the COVID-19 pandemic, we observed increased volatility and 2017, 0.5%dislocation in the market for certain securities, we believe the fiscal and 0.9%, respectively,monetary response to the crisis was effective in supporting liquidity and stabilizing markets. These circumstances did not lead to a change in the categorization of our investment securities were classifiedany fair value estimates within level 3 of the fair value hierarchy. Securities classified within level 3 of the hierarchy at December 31, 2018 included certain private label residential MBS and trust preferred securities. These securities were classified within level 3 of the hierarchy because proprietary assumptions related to voluntary prepayment rates, default
probabilities, loss severities and discount rates were considered significant to the valuation. There were no transfers of investment securities between levels of the fair value hierarchy during the years ended December 31, 2018 and 2017.
For additional discussion of the fair values of investment securities, see Note 1514 to the consolidated financial statements.
The following table shows the weighted average prospective yields, categorized by scheduled maturity, for Sale
Loans held for sale atAFS investment securities as of December 31, 2018 and 2017 included $37 million and $34 million, respectively,2021. 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 commercial loans originated by SBF with the intent to sell in the secondary market. Commercial loans held for sale are comprised of the portion of loans guaranteed by U.S. government agencies, primarily the SBA. Loans are generally sold with servicing retained. Commercial servicing activity did not have a material impact on the results of operations for the years ended December 31, 2018 and 2017.21%:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Within One Year | | | | After One Year Through Five Years | | | | After Five Years Through Ten Years | | | | After Ten Years | | | | Total |
| | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | | 0.67 | % | | | | — | % | | | | — | % | | | | — | % | | | | 0.67 | % |
U.S. Government agency and sponsored enterprise residential MBS | | | 0.83 | % | | | | 0.83 | % | | | | 0.74 | % | | | | 0.65 | % | | | | 0.79 | % |
U.S. Government agency and sponsored enterprise commercial MBS | | | 1.03 | % | | | | 1.71 | % | | | | 0.91 | % | | | | 1.41 | % | | | | 1.11 | % |
Private label residential MBS and CMOs | | | 1.38 | % | | | | 1.39 | % | | | | 1.61 | % | | | | 1.61 | % | | | | 1.40 | % |
Private label commercial MBS | | | 2.21 | % | | | | 1.79 | % | | | | 2.14 | % | | | | 3.05 | % | | | | 1.88 | % |
Single family real estate-backed securities | | | 1.69 | % | | | | 2.31 | % | | | | 2.40 | % | | | | — | % | | | | 2.32 | % |
Collateralized loan obligations | | | 1.62 | % | | | | 1.92 | % | | | | 1.89 | % | | | | — | % | | | | 1.90 | % |
Non-mortgage asset-backed securities | | | 2.92 | % | | | | 2.64 | % | | | | 1.23 | % | | | | — | % | | | | 2.18 | % |
State and municipal obligations | | | 2.91 | % | | | | 3.87 | % | | | | 4.52 | % | | | | 3.99 | % | | | | 3.99 | % |
SBA securities | | | 1.30 | % | | | | 1.25 | % | | | | 1.16 | % | | | | 1.02 | % | | | | 1.23 | % |
| | | | | | | | | | | | | | | | | | | |
| | | 1.46 | % | | | | 1.63 | % | | | | 1.30 | % | | | | 1.24 | % | | | | 1.52 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Loans
The loan portfolio comprises the Company’s primary interest-earning asset. The following tables showtable shows the composition of the loan portfolio andat the breakdown of the portfolio among non-covered loans, covered ACI loans and covered non-ACI loans at December 31, of each of the yearsdates indicated (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | |
| 2018 |
|
| | Covered Loans | | | | Percent of Total |
| Non-Covered Loans | | ACI | | Non-ACI | | Total | |
Residential and other consumer: | |
| | |
| | |
| | |
| | |
|
1-4 single family residential | $ | 4,404,047 |
| | $ | 190,223 |
| | $ | 12,558 |
| | $ | 4,606,828 |
| | 21.0 | % |
Government insured residential | 265,701 |
| | — |
| | — |
| | 265,701 |
| | 1.2 | % |
Home equity loans and lines of credit | 1,393 |
| | — |
| | — |
| | 1,393 |
| | — | % |
Other consumer loans | 15,976 |
| | — |
| | — |
| | 15,976 |
| | 0.1 | % |
| 4,687,117 |
| | 190,223 |
| | 12,558 |
| | 4,889,898 |
| | 22.3 | % |
Commercial: | | | | | | | | | |
Multi-family | 2,583,331 |
| | — |
| | — |
| | 2,583,331 |
| | 11.8 | % |
Non-owner occupied commercial real estate | 4,700,188 |
| | — |
| | — |
| | 4,700,188 |
| | 21.4 | % |
Construction and land | 227,134 |
| | — |
| | — |
| | 227,134 |
| | 1.0 | % |
Owner occupied commercial real estate | 2,122,381 |
| | — |
| | — |
| | 2,122,381 |
| | 9.7 | % |
Commercial and industrial | 4,801,226 |
| | — |
| | — |
| | 4,801,226 |
| | 21.9 | % |
Commercial lending subsidiaries | 2,608,834 |
| | — |
| | — |
| | 2,608,834 |
| | 11.9 | % |
| 17,043,094 |
| | — |
| | — |
| | 17,043,094 |
| | 77.7 | % |
Total loans | 21,730,211 |
| | 190,223 |
| | 12,558 |
| | 21,932,992 |
| | 100.0 | % |
Premiums, discounts and deferred fees and costs, net | 45,421 |
| | — |
| | (1,405 | ) | | 44,016 |
| | |
Loans including premiums, discounts and deferred fees and costs | 21,775,632 |
| | 190,223 |
| | 11,153 |
| | 21,977,008 |
| | |
Allowance for loan and lease losses | (109,901 | ) | | — |
| | (30 | ) | | (109,931 | ) | | |
Loans, net | $ | 21,665,731 |
| | $ | 190,223 |
| | $ | 11,123 |
| | $ | 21,867,077 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 | | | | |
| | | | | | | |
| Total | | Percent of Total | | Total | | Percent of Total | | | | |
Residential and other consumer loans | $ | 8,368,380 | | | 35.2 | % | | $ | 6,348,222 | | | 26.6 | % | | | | |
Multi-family | 1,154,738 | | | 4.9 | % | | 1,639,201 | | | 6.9 | % | | | | |
Non-owner occupied commercial real estate | 4,381,610 | | | 18.4 | % | | 4,963,273 | | | 20.8 | % | | | | |
Construction and land | 165,390 | | | 0.7 | % | | 293,307 | | | 1.2 | % | | | | |
Owner occupied commercial real estate | 1,944,658 | | | 8.2 | % | | 2,000,770 | | | 8.4 | % | | | | |
Commercial and industrial | 4,790,275 | | | 20.2 | % | | 4,447,383 | | | 18.6 | % | | | | |
PPP | 248,505 | | | 1.0 | % | | 781,811 | | | 3.3 | % | | | | |
Pinnacle | 919,641 | | | 3.9 | % | | 1,107,386 | | | 4.6 | % | | | | |
Bridge - franchise finance | 342,124 | | | 1.4 | % | | 549,733 | | | 2.3 | % | | | | |
Bridge - equipment finance | 357,599 | | | 1.5 | % | | 475,548 | | | 2.0 | % | | | | |
Mortgage warehouse lending | 1,092,133 | | | 4.6 | % | | 1,259,408 | | | 5.3 | % | | | | |
Total loans | 23,765,053 | | | 100.0 | % | | 23,866,042 | | | 100.0 | % | | | | |
Allowance for credit losses | (126,457) | | | | | (257,323) | | | | | | | |
Loans, net | $ | 23,638,596 | | | | | $ | 23,608,719 | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| 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 |
| | |
|
| | | | | | | | | | | | | | | | | | |
| 2016 |
| | | Covered Loans | | | | Percent of Total |
| Non-Covered Loans | | ACI | | Non-ACI | | Total | |
Residential and other consumer: | | | | | | | | | |
1-4 single family residential | $ | 3,392,323 |
| | $ | 532,348 |
| | $ | 36,675 |
| | $ | 3,961,346 |
| | 20.4 | % |
Government insured residential | 30,102 |
| | — |
| | — |
| | 30,102 |
| | 0.2 | % |
Home equity loans and lines of credit | 1,120 |
| | 3,894 |
| | 47,629 |
| | 52,643 |
| | 0.3 | % |
Other consumer loans | 24,365 |
| | — |
| | — |
| | 24,365 |
| | 0.1 | % |
| 3,447,910 |
| | 536,242 |
| | 84,304 |
| | 4,068,456 |
| | 21.0 | % |
Commercial: | | | | | | | | | |
Multi-family | 3,824,973 |
| | — |
| | — |
| | 3,824,973 |
| | 19.8 | % |
Non-owner occupied commercial real estate | 3,739,235 |
| | — |
| | — |
| | 3,739,235 |
| | 19.3 | % |
Construction and land | 311,436 |
| | — |
| | — |
| | 311,436 |
| | 1.6 | % |
Owner occupied commercial real estate | 1,736,858 |
| | — |
| | — |
| | 1,736,858 |
| | 9.0 | % |
Commercial and industrial | 3,391,614 |
| | — |
| | — |
| | 3,391,614 |
| | 17.5 | % |
Commercial lending subsidiaries | 2,280,685 |
| | — |
| | — |
| | 2,280,685 |
| | 11.8 | % |
| 15,284,801 |
| | — |
| | — |
| | 15,284,801 |
| | 79.0 | % |
Total loans | 18,732,711 |
| | 536,242 |
| | 84,304 |
| | 19,353,257 |
| | 100.0 | % |
Premiums, discounts and deferred fees and costs, net | 48,641 |
| | — |
| | (6,504 | ) | | 42,137 |
| | |
Loans including premiums, discounts and deferred fees and costs | 18,781,352 |
| | 536,242 |
| | 77,800 |
| | 19,395,394 |
| | |
Allowance for loan and lease losses | (150,853 | ) | | — |
| | (2,100 | ) | | (152,953 | ) | | |
Loans, net | $ | 18,630,499 |
| | $ | 536,242 |
| | $ | 75,700 |
| | $ | 19,242,441 |
| | |
|
| | | | | | | | | | | | | | | | | | |
| 2015 |
| | | Covered Loans | | | | |
| Non-Covered Loans | | ACI | | Non-ACI | | Total | | Percent of Total |
Residential and other consumer: | | | | | | | | | |
1-4 single family residential | $ | 2,849,051 |
| | $ | 699,039 |
| | $ | 46,110 |
| | $ | 3,594,200 |
| | 21.7 | % |
Government insured residential | 34,419 |
| | — |
| | — |
| | 34,419 |
| | 0.2 | % |
Home equity loans and lines of credit | 806 |
| | 4,831 |
| | 67,493 |
| | 73,130 |
| | 0.4 | % |
Other consumer loans | 35,183 |
| | — |
| | — |
|
| 35,183 |
| | 0.2 | % |
| 2,919,459 |
| | 703,870 |
| | 113,603 |
|
| 3,736,932 |
| | 22.5 | % |
Commercial: | | | | | | | | | |
Multi-family | 3,472,162 |
| | — |
| | — |
| | 3,472,162 |
| | 20.9 | % |
Non-owner occupied commercial real estate | 2,910,327 |
| | — |
| | — |
| | 2,910,327 |
| | 17.5 | % |
Construction and land | 347,676 |
| | — |
| | — |
| | 347,676 |
| | 2.1 | % |
Owner occupied commercial real estate | 1,354,751 |
| | — |
| | — |
| | 1,354,751 |
| | 8.2 | % |
Commercial and industrial | 2,770,875 |
| | — |
| | — |
| | 2,770,875 |
| | 16.7 | % |
Commercial lending subsidiaries | 2,003,984 |
| | — |
| | — |
| | 2,003,984 |
| | 12.1 | % |
| 12,859,775 |
| | — |
| | — |
| | 12,859,775 |
| | 77.5 | % |
Total loans | 15,779,234 |
| | 703,870 |
| | 113,603 |
| | 16,596,707 |
| | 100.0 | % |
Premiums, discounts and deferred fees and costs, net | 47,829 |
| | — |
| | (7,933 | ) | | 39,896 |
| | |
Loans including premiums, discounts and deferred fees and costs | 15,827,063 |
| | 703,870 |
| | 105,670 |
| | 16,636,603 |
| | |
Allowance for loan and lease losses | (120,960 | ) | | — |
| | (4,868 | ) | | (125,828 | ) | | |
Loans, net | $ | 15,706,103 |
| | $ | 703,870 |
| | $ | 100,802 |
| | $ | 16,510,775 |
| | |
|
| | | | | | | | | | | | | | | | | | |
| 2014 |
| | | Covered Loans | | | | |
| Non-Covered Loans | | ACI | | Non-ACI | | Total | | Percent of Total |
Residential and other consumer: | | | | | | | | | |
1-4 single family residential | $ | 2,448,879 |
| | $ | 874,522 |
| | $ | 56,138 |
| | $ | 3,379,539 |
| | 27.3 | % |
Government insured residential | 37,393 |
| | — |
| | — |
| | 37,393 |
| | 0.3 | % |
Home equity loans and lines of credit | 1,827 |
| | 22,657 |
| | 101,142 |
| | 125,626 |
| | 1.0 | % |
Other consumer loans | 26,307 |
| | — |
| | — |
| | 26,307 |
| | 0.2 | % |
| 2,514,406 |
| | 897,179 |
| | 157,280 |
| | 3,568,865 |
| | 28.8 | % |
Commercial: | | | | | | | | | |
Multi-family | 1,952,189 |
| | — |
| | — |
| | 1,952,189 |
| | 15.8 | % |
Non-owner occupied commercial real estate | 1,784,079 |
| | — |
| | — |
| | 1,784,079 |
| | 14.4 | % |
Construction and land | 169,720 |
| | — |
| | — |
| | 169,720 |
| | 1.4 | % |
Owner occupied commercial real estate | 1,043,370 |
| | — |
| | — |
| | 1,043,370 |
| | 8.4 | % |
Commercial and industrial | 2,403,293 |
| | — |
| | — |
| | 2,403,293 |
| | 19.4 | % |
Commercial lending subsidiaries | 1,456,751 |
| | — |
| | — |
| | 1,456,751 |
| | 11.8 | % |
| 8,809,402 |
| | — |
| | — |
| | 8,809,402 |
| | 71.2 | % |
Total loans | 11,323,808 |
| | 897,179 |
| | 157,280 |
| | 12,378,267 |
| | 100.0 | % |
Premiums, discounts and deferred fees and costs, net | 47,097 |
| | — |
| | (10,595 | ) | | 36,502 |
| | |
Loans including premiums, discounts and deferred fees and costs | 11,370,905 |
| | 897,179 |
| | 146,685 |
| | 12,414,769 |
| | |
Allowance for loan and lease losses | (91,350 | ) | | — |
| | (4,192 | ) | | (95,542 | ) | | |
Loans, net | $ | 11,279,555 |
| | $ | 897,179 |
| | $ | 142,493 |
| | $ | 12,319,227 |
| | |
Total loans, including premiums, discounts and deferred fees and costs, increased by $561 million to $22.0 billion atFor the year ended December 31, 2018, from $21.4 billion at December 31, 2017. Non-covered loans grew by $862 million, while covered2021, total loans declined by $302$101 million, from December 31, 2017 to December 31, 2018.while total loans, excluding the PPP, grew by $432 million.
ResidentialGrowth in residential and other consumer loans grew by $552 million for the year ended December 31, 2018. Multi-family2021 totaled $2.0 billion, including $603 million in GNMA early buyout loans. In the aggregate, excluding PPP, commercial loans declined by $634 million$1.6 billion for the year ended December 31, 2018, primarily due2021. Line utilization remained below historical levels and accelerated prepayment activity continued. MWL line utilization declined to continued run-off56% at December 31, 2021 compared to 62% at December 31, 2020, we believe related to some normalization in this segment after a period of the New York portfolio, which decreasedhigh refinance activity.
PPP loans declined by $573 million. Commercial and industrial loans, inclusive of owner occupied commercial real estate, grew by $760$533 million forduring the year ended December 31, 2018, driven largely by growth in2021, resulting primarily from full or partial forgiveness on loans under the Florida portfolio.First and Second Draw programs.
Included in multi-family and non-owner occupied commercial real estate loans above at December 31, 2018 were $97 million and $14 million, respectively, in re-positioning loans. These loans, substantially all of which are in New York, provided financing for some level of improvements by the borrower to the underlying collateral to enhance the cash flow generating capacity of the collateral. The primary purpose of these loans was not for construction.
Residential mortgages and other consumer loans
Residential mortgages and other consumer loans totaled $4.9 billion, or 22.3% of total loans, at December 31, 2018 and $4.6 billion, or 21.7% of total loans, at December 31, 2017.
The following table shows the composition of residential and other consumer loans at December 31, 2018 and 2017. Amounts are net of premiums, discounts and deferred fees and coststhe dates indicated (in thousands):
| | | | | | | | December 31, 2021 | | December 31, 2020 |
| 2018 | | 2017 | |
Residential and other consumer loans: | | | | |
1-4 single family residential | $ | 4,463,544 |
| | $ | 4,145,879 |
| 1-4 single family residential | $ | 6,338,225 | | | $ | 4,922,836 | |
Government insured residential | 266,729 |
| | 28,074 |
| Government insured residential | 2,023,221 | | | 1,419,074 | |
Home equity loans and lines of credits | 1,393 |
| | 1,654 |
| |
Other consumer loans | 15,947 |
| | 20,473 |
| Other consumer loans | 6,934 | | | 6,312 | |
Covered loans | 201,376 |
| | 503,118 |
| |
| $ | 4,948,989 |
| | $ | 4,699,198 |
| | $ | 8,368,380 | | | $ | 6,348,222 | |
The 1-4 single family residential loan portfolio, excluding government insured residential loans, is primarily comprised of loans purchased on a national basis through established correspondent channels. The portfolio also includes loans originated through retail channels in our Florida and New York geographic footprint prior to the termination of our retail residential mortgage origination business in 2016. 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 December 31, 2018, $1312021, $697 million or 2.9% of non-covered residential mortgage loans11% were interest-only loans, substantially all of which begin amortizing 10 years after origination.secured by investor-owned properties.
The following tables present a breakdown of the non-covered and covered 1-4 single family residential mortgage portfolio, excluding government insured residential loans, categorized between fixed rate loans and ARMs at December 31, 2018 and 2017. Amounts are net of premiums, discounts and deferred fees and costs (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| | 2018 |
| | Non-Covered Loans | | Covered Loans | | Total | | Percent of Total |
Fixed rate loans | | $ | 1,418,579 |
| | $ | 29,467 |
| | $ | 1,448,046 |
| | 31.0 | % |
ARM loans | | 3,044,965 |
| | 171,909 |
| | 3,216,874 |
| | 69.0 | % |
| | $ | 4,463,544 |
| | $ | 201,376 |
| | $ | 4,664,920 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | Non-Covered Loans | | Covered Loans | | Total | | Percent of Total |
Fixed rate loans | | $ | 1,274,278 |
| | $ | 133,413 |
| | $ | 1,407,691 |
| | 30.3 | % |
ARM loans | | 2,871,601 |
| | 369,705 |
| | 3,241,306 |
| | 69.7 | % |
| | $ | 4,145,879 |
| | $ | 503,118 |
| | $ | 4,648,997 |
| | 100.0 | % |
In 2018, the Company began acquiringacquires 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 government insured residential loans buyout loans totaled $241 million$2.0 billion at December 31, 2018.2021. The Company is not the servicer of these loans.
The following charts present the distribution of the non-covered1-4 single family residential mortgage portfolio at the dates indicated:
See Note 4 to the consolidated financial statements for information about geographic concentrations in the 1-4 single family residential portfolio.
The following table presents a breakdown of the 1-4 single family residential mortgage portfolio, excluding government insured residential loans, by product typecategorized between fixed rate loans and ARMs at December 31, 2018 and 2017:
The geographic concentration of the non-covered 1-4 single family residential portfolio, excluding government insured residential loans, is summarized as follows at December 31, 2018 and 2017dates indicated below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Total | | Percent of Total | | Total | | Percent of Total |
Fixed rate loans | $ | 3,298,689 | | | 52.0 | % | | $ | 1,807,071 | | | 36.7 | % |
ARM loans | 3,039,536 | | | 48.0 | % | | 3,115,765 | | | 63.3 | % |
| $ | 6,338,225 | | | 100.0 | % | | $ | 4,922,836 | | | 100.0 | % |
The shift from a higher proportion of ARM loans to a higher proportion of fixed rate loans is broadly reflective of borrower preferences in a low interest rate environment.
|
| | | | | | | | | | | | | | | | | |
| 2018 |
| | | | | | | Percent of Total |
| Non-Covered Loans | | Covered Loans | | Total | | Non-Covered Loans | | Total Loans |
California | $ | 1,172,470 |
| | $ | 4,751 |
| | $ | 1,177,221 |
| | 26.3 | % | | 25.2 | % |
New York | 971,121 |
| | 6,025 |
| | 977,146 |
| | 21.8 | % | | 20.9 | % |
Florida | 520,427 |
| | 124,593 |
| | 645,020 |
| | 11.7 | % | | 13.8 | % |
DC | 182,399 |
| | 812 |
| | 183,211 |
| | 4.1 | % | | 3.9 | % |
Virginia | 179,132 |
| | 5,624 |
| | 184,756 |
| | 4.0 | % | | 4.0 | % |
Others (1) | 1,437,995 |
| | 59,571 |
| | 1,497,566 |
| | 32.1 | % | | 32.2 | % |
| $ | 4,463,544 |
| | $ | 201,376 |
| | $ | 4,664,920 |
| | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | |
| 2017 |
| | | | | | | Percent of Total |
| Non-Covered Loans | | Covered Loans | | Total | | Non-Covered Loans | | Total Loans |
California | $ | 1,094,047 |
| | $ | 23,780 |
| | $ | 1,117,827 |
| | 26.4 | % | | 24.0 | % |
New York | 871,331 |
| | 16,847 |
| | 888,178 |
| | 21.0 | % | | 19.1 | % |
Florida | 526,540 |
| | 281,396 |
| | 807,936 |
| | 12.7 | % | | 17.4 | % |
DC | 169,502 |
| | 1,933 |
| | 171,435 |
| | 4.1 | % | | 3.7 | % |
Virginia | 181,912 |
| | 22,290 |
| | 204,202 |
| | 4.4 | % | | 4.4 | % |
Others (1) | 1,302,547 |
| | 156,872 |
| | 1,459,419 |
| | 31.4 | % | | 31.4 | % |
| $ | 4,145,879 |
| | $ | 503,118 |
| | $ | 4,648,997 |
| | 100.0 | % | | 100.0 | % |
| |
(1) | No other state represented borrowers with more than 4.0% of 1-4 single family residential loans outstanding at December 31, 2018 or December 31, 2017. |
Home equity loans and lines of credit are not significant.
Other consumer loans are comprised primarily of consumer installment financing, loans secured by certificates of deposit, unsecured personal lines of credit and demand deposit account overdrafts.
Commercial loans and leases
TheCommercial loans include commercial portfolio segment includesand industrial loans and leases, loans secured by owner-occupied commercial real-estate, multi-family properties loans secured by both owner-occupied and other income-producing non-owner occupied commercial real estate, a limited amount of construction and land loans, commercial and industrialSBA loans, mortgage warehouse lines of credit, PPP loans, municipal loans and direct financing leases. Management’s loan origination strategy is heavily focused on the commercial portfolio segment, which comprised 78.4%leases originated by Pinnacle and 80.2% of non-coveredfranchise and equipment finance loans as of December 31, 2018 and 2017, respectively.leases originated by Bridge.
The following table showscharts present the compositiondistribution of the commercial loan portfolio at December 31, 2018 and 2017. Amounts are net of premiums, discounts and deferred fees and costs (in thousands)the dates indicated (dollars in millions):
|
| | | | | | | |
| 2018 | | 2017 |
Commercial: | | | |
Multi-family | $ | 2,585,421 |
| | $ | 3,218,953 |
|
Non-owner occupied commercial real estate | 4,611,573 |
| | 4,378,704 |
|
Construction and land | 210,516 |
| | 295,360 |
|
Owner occupied commercial real estate | 2,007,603 |
| | 1,907,242 |
|
Commercial and industrial | 4,312,213 |
| | 3,648,410 |
|
Commercial lending subsidiaries: | | | |
Pinnacle | 1,462,655 |
| | 1,524,650 |
|
Bridge - franchise finance | 517,305 |
| | 434,582 |
|
Bridge - equipment finance | 636,838 |
| | 603,267 |
|
SBF | 252,221 |
| | 246,750 |
|
Mortgage warehouse lending | 431,674 |
| | 459,388 |
|
| $ | 17,028,019 |
| | $ | 16,717,306 |
|
Commercial real estate loans include term loans secured by owner and 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, and hotels, as well as real estate secured lines of credit.
credit, as well as credit facilities to institutional real estate entities such as REITs and commercial real estate investment funds.
The following charts presenttable presents the distribution of non-owner occupied commercial real estate loans by productproperty type along with weighted average DSCRs and LTVs at December 31, 20182021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Amortized Cost | | Percent of Total | | FL | | New York Tri State | | Other | | Weighted Average DSCR | | Weighted Average LTV |
Office | $ | 1,810,187 | | | 32 | % | | 60 | % | | 25 | % | | 15 | % | | 2.72 | | 64.1 | % |
Multi-family | 1,224,281 | | | 21 | % | | 42 | % | | 53 | % | | 5 | % | | 2.09 | | 59.2 | % |
Retail | 1,075,466 | | | 19 | % | | 56 | % | | 35 | % | | 9 | % | | 1.75 | | 70.2 | % |
Warehouse/Industrial | 856,133 | | | 15 | % | | 64 | % | | 24 | % | | 12 | % | | 2.41 | | 57.6 | % |
Hotel | 546,568 | | | 10 | % | | 82 | % | | 10 | % | | 8 | % | | 1.54 | | 60.0 | % |
Other | 189,103 | | | 3 | % | | 55 | % | | 37 | % | | 8 | % | | 2.47 | | 57.2 | % |
| $ | 5,701,738 | | | 100 | % | | 58 | % | | 33 | % | | 9 | % | | 2.23 | | 62.6 | % |
DSCRs and 2017:
LTVs in the table above are based on the most recent information available. Geographic distribution in the table above is based on location of the underlying collateral property.The Company’s commercial real estate underwriting standards generallymost often 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 80%75%. Owner-occupied commercial real estate loans typically have risk profiles more closely aligned with that of commercial and industrial loans than with other types of commercial real estate loans. Construction and land loans, included by property type in the table above, represented only 1.0%0.7% of the total loan portfolio at December 31, 2018. Construction2021.
Included in the table above are approximately $122 million of mixed-use properties in New York, consisting of $57 million categorized as multi-family, $46 million categorized as retail and land$19 million categorized as office. The New York multi-family portfolio included $474 million of loans collateralized by properties with some or all of the units subject to rent regulation at December 31, 2021, substantially all of which were stabilized properties.
The following tables present the distribution of stabilized rent-regulated multi-family loans, by DSCR and LTV at December 31, 2021 (in thousands):
| | | | | | | | | | | |
DSCR | | | |
Less than 1.00 | | | $ | 81,280 | |
1.00 - 1.24 | | | 198,759 | |
1.25 - 1.50 | | | 134,398 | |
1.51 or greater | | | 29,048 | |
| | | $ | 443,485 | |
| | | | | | | | | | | |
LTV | | | |
Less than 50% | | | $ | 89,019 | |
50% - 65% | | | 116,796 | |
66% - 75% | | | 153,042 | |
More than 75% | | | 84,628 | |
| | | $ | 443,485 | |
The LTVs in the table above are generally made for projects expected to stabilize within eighteen monthsbased on the most recent appraisal obtained, which may not be fully reflective of completionchanges in sub-marketsvaluations that may result from the impact of rent regulation reform. Loans with strong fundamentals and, to a lesser extent, for-sale residential projects to experienced developersDSCR less than 1.00 may be those with a strong cushion between market prices and loan basis.temporary rent deferments, unit vacancies or increases in expenses exceeding rental receipts, such as real estate taxes. Certain types of ancillary income are excluded from the DSCR calculations.
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, mortgage warehouse lines, 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 itsour geographic footprint.markets. Commercial loans includeincluded loans meeting the regulatory definition of shared national credits totaling $1.9$3.2 billion at December 31, 2018, typically2021, 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.
The following table presents the exposure in the commercial and industrial portfolio by industry, including $1.9 billion of owner-occupied commercial real estate loans, at December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | | | | |
| Amortized Cost | | Percent of Total | | | | |
Finance and Insurance | $ | 1,154,658 | | | 17.1 | % | | | | |
Educational Services | 644,453 | | | 9.6 | % | | | | |
Wholesale Trade | 629,289 | | | 9.3 | % | | | | |
Transportation and Warehousing | 479,517 | | | 7.1 | % | | | | |
Health Care and Social Assistance | 461,612 | | | 6.9 | % | | | | |
Information | 436,362 | | | 6.5 | % | | | | |
Manufacturing | 433,444 | | | 6.4 | % | | | | |
Real Estate and Rental and Leasing | 365,178 | | | 5.4 | % | | | | |
Utilities | 299,988 | | | 4.5 | % | | | | |
Construction | 264,006 | | | 3.9 | % | | | | |
Retail Trade | 263,306 | | | 3.9 | % | | | | |
Professional, Scientific, and Technical Services | 255,309 | | | 3.8 | % | | | | |
Other Services (except Public Administration) | 247,396 | | | 3.7 | % | | | | |
Public Administration | 198,997 | | | 3.0 | % | | | | |
Accommodation and Food Services | 189,126 | | | 2.8 | % | | | | |
Arts, Entertainment, and Recreation | 171,274 | | | 2.5 | % | | | | |
Administrative and Support and Waste Management | 169,504 | | | 2.5 | % | | | | |
Other | 71,514 | | | 1.1 | % | | | | |
| $ | 6,734,933 | | | 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 53% and 40% of the portfolio, respectively. The equipment finance division provides primarily transportation equipment financing through a variety of loan and lease structures.
The Bank's SBF unit primarily originates SBAfollowing table presents the franchise portfolio by concept at December 31, 2021:
| | | | | | | | | | | | | | | |
| Amortized Cost | | Percent of Bridge -Franchise Finance | | | | |
Restaurant concepts: | | | | | | | |
Burger King | $ | 50,747 | | | 14.8 | % | | | | |
Dunkin Donuts | 18,155 | | | 5.3 | % | | | | |
Ram Restaurant and Brewery | 13,294 | | | 3.9 | % | | | | |
Little Caesars | 12,723 | | | 3.7 | % | | | | |
Jimmy John's | 12,583 | | | 3.7 | % | | | | |
Other | 75,293 | | | 22.0 | % | | | | |
| $ | 182,795 | | | 53.4 | % | | | | |
Non-restaurant concepts: | | | | | | | |
Planet Fitness | $ | 95,049 | | | 27.8 | % | | | | |
Orange Theory Fitness | 40,351 | | | 11.8 | % | | | | |
Other | 23,929 | | | 7.0 | % | | | | |
| 159,329 | | | 46.6 | % | | | | |
| $ | 342,124 | | | 100.0 | % | | | | |
The Company has originated PPP loans under both the First and Second Draw Programs. These loans bear interest at 1% and are guaranteed as to principal and interest by the SBA. PPP loans have terms of 2 and 5 years under the First and Second Draw Programs, respectively, and are eligible for earlier forgiveness under the terms of the PPP in prescribed circumstances. The following table summarizes PPP loan balances at December 31, 2021, and the amount of interest income related to accelerated amortization of origination fees on loans that were partially or fully forgiven, under each program during the year ended December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Year Ended December 31,2021 |
| UPB | | Deferred Origination Fees | | Amortized Cost | | Fees Recognized On Forgiveness |
First Draw Program | $ | 30,566 | | | $ | (65) | | | $ | 30,501 | | | $ | 7,963 | |
Second Draw Program | 223,522 | | | (5,518) | | | 218,004 | | | 1,942 | |
| $ | 254,088 | | | $ | (5,583) | | | $ | 248,505 | | | $ | 9,905 | |
Geographic Concentrations
The Company's commercial and commercial real estate portfolios are concentrated in Florida and the Tri-state area. 58% and 33% of commercial real estate loans generally sellingwere secured by collateral located in Florida and the guaranteed portionTri-state area, respectively; while 37% and 23% of all other commercial loans were to borrowers in Florida and the secondary market and retaining the unguaranteed portion in portfolio. The Bank engages in mortgage warehouse lending on a national basis.
Tri-state area, respectively.
The geographicfollowing table presents the five states with the largest concentration of the commercial loans and direct financing leases inoriginated through Bridge, Pinnacle and our mortgage warehouse finance unit at the national platforms is summarized as follows at December 31, 2018 and 2017. Amounts include premiums, discounts and deferred fees and costsdates indicated (dollars in thousands):
|
| | | | | | | | | | | | | |
| 2018 | | 2017 |
Florida | $ | 595,843 |
| | 18.1 | % | | $ | 639,474 |
| | 19.6 | % |
California | 498,842 |
| | 15.1 | % | | 486,733 |
| | 14.9 | % |
Arizona | 149,087 |
| | 4.5 | % | | 175,704 |
| | 5.4 | % |
Virginia | 153,619 |
| | 4.7 | % | | 148,884 |
| | 4.6 | % |
Utah | 156,732 |
| | 4.7 | % | | 123,027 |
| | 3.8 | % |
Texas | 150,878 |
| | 4.6 | % | | 160,606 |
| | 4.9 | % |
Iowa | 151,036 |
| | 4.6 | % | | 151,935 |
| | 4.6 | % |
All others (1) | 1,444,656 |
| | 43.7 | % | | 1,382,274 |
| | 42.2 | % |
| $ | 3,300,693 |
| | 100.0 | % | | $ | 3,268,637 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| December 31, 2021 | | December 31, 2020 |
| Total | | Percent of Total | | Total | | Percent of Total |
California | $ | 546,093 | | | 20.1 | % | | $ | 609,419 | | | 18.0 | % |
Florida | 223,910 | | | 8.3 | % | | 330,587 | | | 9.7 | % |
NY Tri State Area | 291,572 | | | 10.8 | % | | 545,458 | | | 16.1 | % |
Ohio | 196,189 | | | 7.2 | % | | 194,558 | | | 5.7 | % |
North Carolina | 159,014 | | | 5.9 | % | | 137,233 | | | 4.0 | % |
All Others | 1,294,719 | | | 47.7 | % | | 1,574,820 | | | 46.5 | % |
| $ | 2,711,497 | | | 100.0 | % | | $ | 3,392,075 | | | 100.0 | % |
| |
(1) | No other state represented borrowers with more than 4.0% of loans outstanding at December 31, 2018 or 2017. |
Loan Maturities
The following table sets forth, as of December 31, 2018,2021, the maturity distribution of our loan portfolio by category, based on UPB.excluding government insured residential loans. Commercial and other consumer loans are presented by contractual maturity, including scheduled payments for amortizing loans. Contractual maturities of 1-4 single family residential loans have been adjusted for an estimated rate of voluntary prepayments, on all loans, based on historical trends, current interest rates, types of loans and refinance patterns (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year or Less | | After One Through Five Years | | After Five Years Through Fifteen Years | | After Fifteen Years | | Total |
Residential and other consumer: | | | | | | | | | |
1-4 single family residential | $ | 1,113,990 | | | $ | 2,838,480 | | | $ | 2,059,273 | | | $ | 326,482 | | | $ | 6,338,225 | |
Other consumer loans | 613 | | | 5,723 | | | 513 | | | 85 | | | 6,934 | |
| 1,114,603 | | | 2,844,203 | | | 2,059,786 | | | 326,567 | | | 6,345,159 | |
Commercial: | | | | | | | | | |
Multi-family | 205,201 | | | 543,708 | | | 404,440 | | | 1,389 | | | 1,154,738 | |
Non-owner occupied commercial real estate | 705,113 | | | 2,856,427 | | | 783,347 | | | 36,723 | | | 4,381,610 | |
Construction and land | 43,712 | | | 62,010 | | | 43,489 | | | 16,179 | | | 165,390 | |
Owner occupied commercial real estate | 114,188 | | | 653,262 | | | 1,050,628 | | | 126,580 | | | 1,944,658 | |
Commercial and industrial | 821,968 | | | 3,186,756 | | | 682,017 | | | 99,534 | | | 4,790,275 | |
PPP | 30,501 | | | 218,004 | | | — | | | — | | | 248,505 | |
Pinnacle | 24,551 | | | 293,259 | | | 562,298 | | | 39,533 | | | 919,641 | |
Bridge - franchise finance | 19,990 | | | 191,267 | | | 130,867 | | | — | | | 342,124 | |
Bridge - equipment finance | 17,893 | | | 230,807 | | | 108,899 | | | — | | | 357,599 | |
Mortgage warehouse lending | 1,080,844 | | | 11,289 | | | — | | | — | | | 1,092,133 | |
| 3,063,961 | | | 8,246,789 | | | 3,765,985 | | | 319,938 | | | 15,396,673 | |
| $ | 4,178,564 | | | $ | 11,090,992 | | | $ | 5,825,771 | | | $ | 646,505 | | | $ | 21,741,832 | |
|
| | | | | | | | | | | | | | | |
| One Year or Less | | After One Through Five Years | | After Five Years | | Total |
Residential and other consumer: | | | | | | | |
1-4 single family residential | $ | 895,973 |
| | $ | 2,661,788 |
| | $ | 1,512,152 |
| | $ | 5,069,913 |
|
Home equity loans and lines of credit | 461 |
| | 226 |
| | 706 |
| | 1,393 |
|
Other consumer loans | 3,141 |
| | 8,924 |
| | 3,911 |
| | 15,976 |
|
| 899,575 |
| | 2,670,938 |
| | 1,516,769 |
| | 5,087,282 |
|
Commercial: | | | | | | | |
Multi-family | 528,888 |
| | 1,842,057 |
| | 213,071 |
| | 2,584,016 |
|
Non-owner occupied commercial real estate | 823,108 |
| | 2,890,294 |
| | 990,104 |
| | 4,703,506 |
|
Construction and land | 58,355 |
| | 70,485 |
| | 98,294 |
| | 227,134 |
|
Owner occupied commercial real estate | 307,883 |
| | 924,866 |
| | 887,642 |
| | 2,120,391 |
|
Commercial and industrial | 1,656,453 |
| | 2,817,603 |
| | 327,170 |
| | 4,801,226 |
|
Commercial lending subsidiaries | 532,032 |
| | 1,267,872 |
| | 808,930 |
| | 2,608,834 |
|
| 3,906,719 |
| | 9,813,177 |
| | 3,325,211 |
| | 17,045,107 |
|
| $ | 4,806,294 |
| | $ | 12,484,115 |
| | $ | 4,841,980 |
| | $ | 22,132,389 |
|
The following table shows the distribution of UPB of those loans that mature in more than one year between fixed and adjustable interest rate loans as of December 31, 20182021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Interest Rate Type | | |
| Fixed | | Adjustable | | Total |
Residential and other consumer: | | | | | |
1-4 single family residential | $ | 2,870,261 | | | $ | 2,353,974 | | | $ | 5,224,235 | |
Other consumer loans | 4,861 | | | 1,460 | | | 6,321 | |
| 2,875,122 | | | 2,355,434 | | | 5,230,556 | |
Commercial: | | | | | |
Multi-family | 546,252 | | | 403,285 | | | 949,537 | |
Non-owner occupied commercial real estate | 1,974,776 | | | 1,701,721 | | | 3,676,497 | |
Construction and land | 42,256 | | | 79,422 | | | 121,678 | |
Owner occupied commercial real estate | 1,294,393 | | | 536,077 | | | 1,830,470 | |
Commercial and industrial | 1,409,915 | | | 2,558,392 | | | 3,968,307 | |
PPP | 218,004 | | | — | | | 218,004 | |
Pinnacle | 895,090 | | | — | | | 895,090 | |
Bridge - franchise finance | 235,848 | | | 86,286 | | | 322,134 | |
Bridge - equipment finance | 299,999 | | | 39,707 | | | 339,706 | |
Mortgage warehouse lending | — | | | 11,289 | | | 11,289 | |
| 6,916,533 | | | 5,416,179 | | | 12,332,712 | |
| $ | 9,791,655 | | | $ | 7,771,613 | | | $ | 17,563,268 | |
|
| | | | | | | | | | | |
| Interest Rate Type | | |
| Fixed | | Adjustable | | Total |
Residential and other consumer: | | | | | |
1-4 single family residential | $ | 1,763,821 |
| | $ | 2,410,119 |
| | $ | 4,173,940 |
|
Home equity loans and lines of credit | — |
| | 932 |
| | 932 |
|
Other consumer loans | 10,884 |
| | 1,951 |
| | 12,835 |
|
| 1,774,705 |
| | 2,413,002 |
| | 4,187,707 |
|
Commercial: | | | | | |
Multi-family | 1,862,994 |
| | 192,134 |
| | 2,055,128 |
|
Non-owner occupied commercial real estate | 2,462,985 |
| | 1,417,413 |
| | 3,880,398 |
|
Construction and land | 92,126 |
| | 76,653 |
| | 168,779 |
|
Owner occupied commercial real estate | 1,237,369 |
| | 575,139 |
| | 1,812,508 |
|
Commercial and industrial | 702,144 |
| | 2,442,629 |
| | 3,144,773 |
|
Commercial lending subsidiaries | 1,989,602 |
| | 87,200 |
| | 2,076,802 |
|
| 8,347,220 |
| | 4,791,168 |
| | 13,138,388 |
|
| $ | 10,121,925 |
| | $ | 7,204,170 |
| | $ | 17,326,095 |
|
Excluded from the tables above are government insured residential loans. Resolution of these loans is generally accomplished through the re-securitization and sale of the loans after they re-perform, either through modification or self-cure, or through pursuit of the applicable guarantee.Equipment under Operating Leaselease equipment, net
Equipment under operatingOperating lease equipment, net of accumulated depreciation totaled $702$641 million at December 31, 2018.2021, including off-lease equipment, net of accumulated depreciation of $107 million. The portfolio consistedconsists primarily of railcars, non-commercial aircraft and other transport equipment. Our operating lease customers are North American commercial end users. We have a total of 5,3945,061 railcars with a carrying value of $424$368 million at December 31, 2018,2021, including hoppers, tank cars, boxcars, auto carriers, center beams and gondolas leased to North American commercial end-users.gondolas. The largest concentrations of rail cars were 2,0642,400 hopper cars and 1,5951,589 tank cars, primarily used to ship sand and petroleum products, respectively, for the energy industry. Equipment with a carrying value of $288 million at December 31, 2018 was leased to companies for use in the energy industry.
The chart below presents equipment under operating lease equipment by type at December 31, 2018 and 2017:the dates indicated:
At December 31, 2018,2021, the breakdown of carrying values of equipment under 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: | |
2022 | $ | 66,995 | |
2023 | 78,071 | |
2024 | 33,524 | |
2025 | 93,997 | |
2026 | 75,552 | |
Thereafter through 2034 | 185,240 | |
| $ | 533,379 | |
|
| | | |
Years Ending December 31: | |
2019 (1) | $ | 64,598 |
|
2020 | 99,029 |
|
2021 | 67,037 |
|
2022 | 60,656 |
|
2023 | 52,139 |
|
Thereafter through 2033 | 358,895 |
|
| $ | 702,354 |
|
| |
(1) | Includes $9.0 million of equipment off-lease as of December 31, 2018. |
Asset Quality
Commercial Loans
We have a robust credit risk management framework, an experienced team to lead the workout and recovery process for the commercial and commercial real estate portfolios and a dedicated internal credit review function. Loan performance is monitored by our credit administration, portfolio management and workout and recovery departments. 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. Additionally,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 grade16-grade internal asset risk classification system as part of its efforts to monitor and maintain commercial asset quality. LoansThe special mention rating is considered a transitional rating for loans exhibiting potential credit weaknesses that deserve management’s close attention and that if left uncorrected maycould result in deterioration of the repayment capacity of the borrower are categorized as special mention.prospects at some future date if not checked or corrected and that deserve management’s close attention. These borrowers may exhibit negative financial trendsdeclining cash flows or erratic financial performance, strained liquidity, marginal collateral coverage, declining industry trendsrevenues or weak management.increasing leverage. Loans with well-defined credit weaknesses that may result in a loss if the deficiencies are not corrected are assigned a risk rating of substandard. These borrowers may exhibit payment defaults, inadequate cash flows from current operations, operating losses, increasing balance sheet leverage, project cost overruns, unreasonable construction delays, exhausted interest reserves, declining collateral values, frequent overdrafts or past due real estate taxes. Loans with weaknesses so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors have not been charged off, are assigned an internal risk rating of doubtful. Since the onset of the COVID-19 pandemic, risk ratings have been re-evaluated for the substantial majority of the commercial portfolio, in some cases more than once, with a particular focus on portfolio segments we identified
for enhanced monitoring and loans for which we granted temporary payment deferrals or modifications in light of the pandemic. We believe internalcontinue to closely monitor the risk rating is the best indicatorof commercial loans in light of the credit quality of commercial loans. evolving COVID-19 situation.
The following table summarizes the Company's commercial credit exposure, based on internal risk rating, at December 31, 2018 and 2017 (inthe dates indicated (dollars in thousands):
| | | | | | | | | | | | December 31, 2021 | | | | December 31, 2020 | | December 31, 2019 |
| 2018 | | 2017 | |
| Balance | | Percent of Total | | Balance | | Percent of Total | | Amortized Cost | | Percent of Commercial Loans | | | | Amortized Cost | | Percent of Commercial Loans | | Amortized Cost | | Percent of Commercial Loans |
Pass | $ | 16,728,534 |
| | 98.3 | % | | $ | 16,189,392 |
| | 96.8 | % | Pass | $ | 13,934,369 | | | 90.5 | % | | | | $ | 14,832,025 | | | 84.6 | % | | $ | 17,054,702 | | | 97.5 | % |
Special mention | 81,070 |
| | 0.5 | % | | 183,234 |
| | 1.1 | % | Special mention | 148,593 | | | 1.0 | % | | | | 711,516 | | | 4.1 | % | | 72,881 | | | 0.4 | % |
Substandard (1) | 210,026 |
| | 1.2 | % | | 338,405 |
| | 2.0 | % | |
Substandard accruing | | Substandard accruing | 1,136,378 | | | 7.4 | % | | | | 1,758,654 | | | 10.0 | % | | 180,380 | | | 1.0 | % |
Substandard non-accruing | | Substandard non-accruing | 129,579 | | | 0.8 | % | | | | 203,758 | | | 1.2 | % | | 185,906 | | | 1.1 | % |
Doubtful | 8,389 |
| | — | % | | 6,275 |
| | 0.1 | % | Doubtful | 47,754 | | | 0.3 | % | | | | 11,867 | | | 0.1 | % | | — | | | — | % |
| $ | 17,028,019 |
| | 100.0 | % | | $ | 16,717,306 |
| | 100.0 | % | | $ | 15,396,673 | | | 100.0 | % | | | | $ | 17,517,820 | | | 100.0 | % | | $ | 17,493,869 | | | 100.0 | % |
| |
(1) | The balance of substandard loans at December 31, 2018 and 2017 included $0.8 million and $105 million, respectively, of taxi medallion finance loans. See Note 4 to the consolidated financial statements for more detailed information about risk rating of commercial loans.
|
Taxi Medallion Finance
During the fourth quarter of 2018, the Company sold substantially the entire taxi medallion portfolio leaving an exposure of $0.8 millionOur internal risk ratings at December 31, 2018. 2021 continued to be influenced by the impact of the COVID-19 pandemic and the measures and restrictions employed to contain the spread of the virus on the economy, our borrowers and the sectors in which they operate. Management has taken what we believe to be a proactive and objective approach to risk rating the commercial loan portfolio since the onset of the pandemic. Levels of criticized and classified loans, particularly in the special mention and substandard accruing categories, increased over the course of 2020 as a direct result of the impact of the COVID-19 pandemic. As expected given the trajectory of the economic recovery, levels of criticized and classified loans have declined during the year ended December 31, 2021 by $1.2 billion. If the economic recovery and its impact on individual borrowers evolve in line with our current expectations and economic forecast, we would expect to see the level of criticized and classified loans continue to decline in 2022. However, uncertainty remains around the future trajectory of the COVID-19 virus and the economic recovery. In light of that uncertainty, it is possible that criticized and classified loan levels may not decline or that they may increase.
The remaining taxi medallionfollowing table provides additional information about special mention and substandard accruing loans, wereat the dates indicated (dollars in thousands). Non-performing loans are discussed further in the section entitled "Non-performing Assets" below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| December 31, 2021 | | | | | | | | December 31, 2020 |
| Amortized Cost | | % of Loan Segment | | | | | | | | | | | | | | Amortized Cost | | % of Loan Segment |
Special mention: | | | | | | | | | | | | | | | | | | | |
CRE | | | | | | | | | | | | | | | | | | | |
Hotel | $ | 760 | | | 0.1 | % | | | | | | | | | | | | | | $ | 68,413 | | | 11.0 | % |
Retail | — | | | — | % | | | | | | | | | | | | | | 86,935 | | | 6.4 | % |
Multi-family | — | | | — | % | | | | | | | | | | | | | | 36,335 | | | 2.2 | % |
Office | 27,001 | | | 1.5 | % | | | | | | | | | | | | | | 37,943 | | | 1.8 | % |
Industrial | — | | | — | % | | | | | | | | | | | | | | 9,440 | | | 1.1 | % |
Other | 4,501 | | | 3.7 | % | | | | | | | | | | | | | | 38,010 | | | 45.4 | % |
| 32,262 | | | | | | | | | | | | | | | | | 277,076 | | | |
Owner occupied commercial real estate | 14,010 | | | 0.7 | % | | | | | | | | | | | | | | 156,837 | | | 7.8 | % |
Commercial and industrial | 102,321 | | | 2.1 | % | | | | | | | | | | | | | | 169,605 | | | 3.8 | % |
| | | | | | | | | | | | | | | | | | | |
Bridge - franchise finance | — | | | — | % | | | | | | | | | | | | | | 71,593 | | | 13.0 | % |
Bridge - equipment finance | — | | | — | % | | | | | | | | | | | | | | 36,405 | | | 7.7 | % |
| $ | 148,593 | | | | | | | | | | | | | | | | | $ | 711,516 | | | |
| | | | | | | | | | | | | | | | | | | |
Substandard accruing: | | | | | | | | | | | | | | | | | | | |
CRE | | | | | | | | | | | | | | | | | | | |
Hotel | $ | 200,486 | | | 36.7 | % | | | | | | | | | | | | | | $ | 400,468 | | | 64.4 | % |
Retail | 140,081 | | | 13.0 | % | | | | | | | | | | | | | | 276,149 | | | 20.4 | % |
Multi-family | 173,536 | | | 15.0 | % | | | | | | | | | | | | | | 218,532 | | | 13.3 | % |
Office | 83,121 | | | 4.6 | % | | | | | | | | | | | | | | 40,477 | | | 1.9 | % |
Industrial | 1,009 | | | 0.1 | % | | | | | | | | | | | | | | 13,902 | | | 1.7 | % |
Other | 5,803 | | | 2.2 | % | | | | | | | | | | | | | | 28,505 | | | 12.6 | % |
| 604,036 | | | | | | | | | | | | | | | | | 978,033 | | | |
Owner occupied commercial real estate | 160,159 | | | 8.2 | % | | | | | | | | | | | | | | 177,575 | | | 8.9 | % |
Commercial and industrial | 250,644 | | | 5.2 | % | | | | | | | | | | | | | | 285,925 | | | 6.4 | % |
| | | | | | | | | | | | | | | | | | | |
Bridge - franchise finance | 80,864 | | | 23.6 | % | | | | | | | | | | | | | | 242,234 | | | 44.1 | % |
Bridge - equipment finance | 40,675 | | | 11.4 | % | | | | | | | | | | | | | | 74,887 | | | 15.7 | % |
| | | | | | | | | | | | | | | | | | | |
| $ | 1,136,378 | | | | | | | | | | | | | | | | | $ | 1,758,654 | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Payment Deferrals and Modifications
We believe, in the current environment, information about loans that are on non-accrual statustemporary payment deferral or have been modified as a result of the COVID-19 pandemic provides additional insight into segments or sub-segments of the portfolio that experienced some level of stress related to the pandemic and risk rated substandardinto how those loans are performing as the economy recovers. The following table summarizes deferral and modification activity in the commercial portfolio, as of December 31, 2018.2021 and 2020 (dollars in thousands):
We are | | | | | | | | | | | | | | | | | | | | | | | |
| Under CARES Act Modification at December 31, 2021 (1) | | % of Portfolio Segment at December 31, 2021 | | Under Short Term Deferral or CARES Act Modification at December 31, 2020 | | Loans That Have Rolled Off of CARES Act Modification |
CRE by Property Type: | | | | | | | |
Retail | $ | — | | | — | % | | $ | 47,068 | | | $ | 18,513 | |
Hotel | 14,828 | | | 3 | % | | 344,547 | | | 328,526 | |
Office | — | | | — | % | | 47,949 | | | 44,660 | |
Multifamily | 7,315 | | | 1 | % | | 15,776 | | | 16,698 | |
Other | — | | | — | % | | 1,789 | | | — | |
Total CRE | 22,143 | | | — | % | | 457,129 | | | 408,397 | |
C&I by Industry | | | | | | | |
Accommodation and Food Services | 30,845 | | | 16 | % | | 14,737 | | | — | |
Retail Trade | 30,871 | | | 12 | % | | 18,261 | | | 3,380 | |
Finance and Insurance | 23,101 | | | 5 | % | | 17,550 | | | 9,908 | |
Other | 53,582 | | | 7 | % | | 84,107 | | | 61,502 | |
Total C&I | 138,399 | | | 2 | % | | 134,655 | | | 74,790 | |
Bridge - franchise finance | 27,881 | | | 8 | % | | 45,613 | | | 24,817 | |
| | | | | | | |
Total Commercial | $ | 188,423 | | | 1 | % | | $ | 637,397 | | | $ | 508,004 | |
| | | | | | | |
| | | | | | | |
(1) There were no longer originating taxi medallion loans.loans under short term deferral at December 31, 2021.
Equipment Under All of the loans that have rolled off of modification as shown in the table above have paid off or resumed regular payments. CARES Act modifications represent modifications for periods greater than 90 days and most commonly have taken the form of 9 to 12 month interest only periods. The majority of loan modifications that took place after the onset of the COVID-19 pandemic have not been categorized as TDRs, in accordance with interagency and authoritative guidance and the provisions of the CARES Act, which expired effective January 1, 2022.
Operating Lease Equipment, net
TwoSeven operating lease relationshipsleases with a carrying value of assets under lease totaling $36$43 million, all of which $31 million were exposures to the energy industry, were internally risk rated substandard at December 31, 2018. The present2021. 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 remainingtime off-lease, criticized or classified status, or management's intention to sell the asset at an amount potentially below its carrying value. During the years ended December 31, 2021 and 2020, impairment charges recognized related to operating lease payments on these leases and their residual values totaled approximately $13equipment were $2.8 million and $30$0.7 million, respectively at December 31, 2018, of which $9 million and $27 million, respectively were exposures to the energy industry. There have been no missed payments related to the operating lease portfolio to date. One relationship has been restructured to date, with no decrease in total minimum lease payments.respectively.
The primary risks inherent in the equipment leasing business are asset risk resulting from ownership of the equipment on operating 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-usersend users with original lease terms generally ranging from three to ten years at December 31, 2018.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 operating leaseleased assets or through impairment of asset carrying values. Asset risk may be higher for long-lived equipment such as railcars, which have useful lives of approximately 35-50 years.
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.disasters, including events such as the COVID-19 pandemic. We seek to mitigate these risks by leasing to a stable end-userend 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 only to high credit quality obligors.
Bridge had exposure to the energy industry of $297 million at December 31, 2021. The majority of the energy exposure was in the operating lease equipment portfolio where energy exposure totaled $258 million. The remaining energy exposure, totaling approximately $39 million was comprised of loans and direct or sales type finance leases.
Residential and Other Consumer Loans
The majority of our non-coveredOur 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 non-covered 1-4 single family residential portfolio.portfolio, excluding government insured residential loans.
The following tables showcharts present information about the distribution of non-covered 1-4 single family residential loans,portfolio, excluding government insured residential loans, by original FICO distribution, LTV distribution and LTVvintage at December 31, 20182021:
FICO scores are generally updated at least annually, and 2017:
|
| | | | | | | | | | | | | | | |
| | 2018 |
| | FICO |
LTV | | 720 or less | | 721 - 740 | | 741 - 760 | | 761 or greater | | Total |
60% or less | | 2.4 | % | | 2.8 | % | | 4.4 | % | | 18.2 | % | | 27.8 | % |
60% - 70% | | 2.7 | % | | 2.4 | % | | 3.8 | % | | 13.4 | % | | 22.3 | % |
70% - 80% | | 3.5 | % | | 4.6 | % | | 8.4 | % | | 28.3 | % | | 44.8 | % |
More than 80% | | 0.4 | % | | 0.8 | % | | 0.8 | % | | 3.1 | % | | 5.1 | % |
| | 9.0 | % | | 10.6 | % | | 17.4 | % | | 63.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | FICO |
LTV | | 720 or less | | 721 - 740 | | 741 - 760 | | 761 or greater | | Total |
60% or less | | 2.2 | % | | 2.8 | % | | 4.6 | % | | 19.7 | % | | 29.3 | % |
60% - 70% | | 2.4 | % | | 2.5 | % | | 3.6 | % | | 14.2 | % | | 22.7 | % |
70% - 80% | | 3.6 | % | | 4.4 | % | | 7.8 | % | | 27.5 | % | | 43.3 | % |
More than 80% | | 0.4 | % | | 0.7 | % | | 0.7 | % | | 2.9 | % | | 4.7 | % |
| | 8.6 | % | | 10.4 | % | | 16.7 | % | | 64.3 | % | | 100.0 | % |
were most recently updated in the third quarter of 2021. LTVs are typically based on valuation at origination since we do not routinely update residential appraisals.At December 31, 2018,2021, the non-coveredmajority of the 1-4 single family residential loan portfolio, excluding government insured residential loans, had the following characteristics: substantially all were full documentation with a weighted-average FICO score of 765 and a weighted-average LTV of 67.6%. The majority of this portfolio was owner-occupied, with 85.7%83% primary residence, 7.7%6% second homes and 6.6%11% investment properties. In terms of vintage, 25.1% of the portfolio was originated pre-2015, 16.9% in 2015, 20.1% in 2016, 22.8% in 2017 and 15.1% in 2018.
1-4 single family residential loans excluding government insured residential loans past due more than 30 days totaled $23.5$76 million and $28.9$66 million at December 31, 20182021 and 2017,2020, respectively. The amount of these loans 90 days or more past due was $6.9$17 million and $3.7$9 million at December 31, 20182021 and 2017,2020, respectively. Delinquency statistics as of December 31, 2021 may not be fully reflective of the impact of the COVID-19 pandemic on residential borrowers due to payment deferral programs. Loans on deferral that are in compliance with the terms of the deferral program are not reported as delinquent.
At December 31, 2018, the recorded investment in covered2021, $33 million or less than 1% of 1-4 single family residential loans, was $201excluding government insured residential loans, remained under short-term deferral or had been modified due to the COVID-19 pandemic. Through December 31, 2021, $533 million past due more than 30 days totaled $0.7of residential loans, excluding government insured loans, had been granted at least one short term payment deferral. The following table presents information about residential loans granted payment deferrals as a result of the COVID-19 pandemic as of December 31, 2021, excluding government insured residential loans (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Loans That Have Rolled Off of Short-Term Deferral or CARES Act Modification |
Loans Under Short-Term Deferral or CARES Act Modification (1) | | Paid Off or Paying as Agreed | | Not Resumed Regular Payments |
Balance | | Balance | | % of Loans Rolled Off Short-Term Deferral | | Balance | | % of Loans Rolled Off Short-Term Deferral |
$ | 32,865 | | | $ | 478,807 | | | 96% | | $ | 21,062 | | | 4% |
(1) Includes $11 million of loans under short-term deferral and $30.9$22 million of loans modified under the CARES Act that are continuing to make payments at December 31, 20182021.
For residential borrowers, relief has typically initially 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 initial 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.
Note 4 to the consolidated financial statements presents additional information about key credit quality indicators and December 31, 2017, respectively. The amountsdelinquency status of these loans 90 days or more past due was $44 thousand and $17.8 million December 31, 2018 and December 31, 2017, respectively. The Single Family Shared-Loss Agreement was terminated on February 13, 2019.the loan portfolio.
At December 31, 2018, the covered single family residential loans had a current weighted average FICO and LTV of 754 and 46.6%, respectively.
Other Consumer Loans
All consumer loans were current at December 31, 2018 and substantially all were current at December 31, 2017.
Impaired Loans and Non-Performing Assets
Non-performing assets generally consist of (i) non-accrual loans, including loans that have been modified in TDRs or CARES Act modifications and placed on non-accrual status, (ii) accruing loans that are more than 90 days contractually past due as to interest or principal, excluding ACIPCD loans for which management has a reasonable basis for an expectation about future cash flows and government insured residential loans, and (iii) OREO and repossessed assets. Impaired loans also typically include loans modified in TDRs that are accruing and ACI loans or pools for which expected cash flows at acquisition (as adjusted for any additional cash flows expected to be collected arising from changes in estimates after acquisition) have been revised downward since acquisition, other than due to changes in interest rate indices and prepayment assumptions.
The following table summarizesand charts summarize the Company's impairednon-performing loans and non-performing assets at December 31 of the yearsdates indicated (dollars in thousands):
| | | | | | | | | | | | | |
| December 31, 2021 | | | | December 31, 2020 |
| | | | | |
Non-accrual loans: | | | | | |
Residential and other consumer: | | | | | |
1-4 single family residential | $ | 26,988 | | | | | $ | 26,842 | |
Other consumer loans | 1,565 | | | | | 1,986 | |
Total residential and other consumer loans | 28,553 | | | | | 28,828 | |
Commercial: | | | | | |
Multi-family | 10,865 | | | | | 24,090 | |
Non-owner occupied commercial real estate | 39,251 | | | | | 64,017 | |
Construction and land | 5,164 | | | | | 4,754 | |
Owner occupied commercial real estate | 20,453 | | | | | 23,152 | |
Commercial and industrial | 68,720 | | | | | 54,584 | |
| | | | | |
Bridge - franchise finance | 32,879 | | | | | 45,028 | |
| | | | | |
Total commercial loans | 177,332 | | | | | 215,625 | |
Total non-accrual loans | 205,885 | | | | | 244,453 | |
Loans past due 90 days and still accruing | 24 | | | | | — | |
Total non-performing loans | 205,909 | | | | | 244,453 | |
OREO and repossessed assets | 2,275 | | | | | 3,138 | |
Total non-performing assets | $ | 208,184 | | | | | $ | 247,591 | |
| | | | | |
Non-performing loans to total loans (1) | 0.87 | % | | | | 1.02 | % |
Non-performing assets to total assets (1) | 0.58 | % | | | | 0.71 | % |
ACL to total loans | 0.53 | % | | | | 1.08 | % |
ACL to non-performing loans | 61.41 | % | | | | 105.26 | % |
| | | | | |
Net charge-offs to average loans | 0.29 | % | | | | 0.26 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
| Covered Assets | | Non-Covered Assets | | Total | | Covered Assets | | Non-Covered Assets | | Total | | Covered Assets | | Non- Covered Assets | | Total |
Non-accrual loans | | | | | | | | | | | | | | | | | |
Residential and other consumer: | | | | | | | | | | | | | | | | | |
1-4 single family residential | $ | — |
| | $ | 6,316 |
| | $ | 6,316 |
| | $ | 1,341 |
| | $ | 9,705 |
| | $ | 11,046 |
| | $ | 918 |
| | $ | 566 |
| | $ | 1,484 |
|
Home equity loans and lines of credit | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,283 |
| | — |
| | 2,283 |
|
Other consumer loans | — |
| | 288 |
| | 288 |
| | — |
| | 821 |
| | 821 |
| | — |
| | 2 |
| | 2 |
|
Total residential and other consumer loans | — |
| | 6,604 |
| | 6,604 |
| | 1,341 |
| | 10,526 |
| | 11,867 |
| | 3,201 |
| | 568 |
| | 3,769 |
|
Commercial: | | | | | | | | | | | | | | | | | |
Multi-family | — |
| | 25,560 |
| | 25,560 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Non-owner occupied commercial real estate | — |
| | 16,050 |
| | 16,050 |
| | — |
| | 12,716 |
| | 12,716 |
| | — |
| | 559 |
| | 559 |
|
Construction and land | — |
| | 9,923 |
| | 9,923 |
| | — |
| | 1,175 |
| | 1,175 |
| | — |
| | 1,238 |
| | 1,238 |
|
Owner occupied commercial real estate | — |
| | 19,789 |
| | 19,789 |
| | — |
| | 29,020 |
| | 29,020 |
| | — |
| | 19,439 |
| | 19,439 |
|
Commercial and industrial | | | | | | | | | | |
|
| | | | | |
|
|
Taxi medallion loans | — |
| | 775 |
| | 775 |
| | — |
| | 106,067 |
| | 106,067 |
| | — |
| | 60,660 |
| | 60,660 |
|
Other commercial and industrial | — |
| | 27,809 |
| | 27,809 |
| | — |
| | 7,049 |
| | 7,049 |
| | — |
| | 16,036 |
| | 16,036 |
|
Commercial lending subsidiaries | — |
| | 22,733 |
| | 22,733 |
| | — |
| | 3,512 |
| | 3,512 |
| | — |
| | 32,645 |
| | 32,645 |
|
Total commercial loans | — |
| | 122,639 |
| | 122,639 |
| | — |
| | 159,539 |
| | 159,539 |
| | — |
| | 130,577 |
| | 130,577 |
|
Total non-accrual loans | — |
| | 129,243 |
| | 129,243 |
| | 1,341 |
| | 170,065 |
| | 171,406 |
| | 3,201 |
| | 131,145 |
| | 134,346 |
|
Loans past due 90 days and still accruing | — |
| | 650 |
| | 650 |
| | — |
| | 1,948 |
| | 1,948 |
| | — |
| | 1,551 |
| | 1,551 |
|
Total non-performing loans | — |
| | 129,893 |
| | 129,893 |
| | 1,341 |
| | 172,013 |
| | 173,354 |
| | 3,201 |
| | 132,696 |
| | 135,897 |
|
OREO | — |
| | 8,432 |
| | 8,432 |
| | 2,862 |
| | 7,018 |
| | 9,880 |
| | 4,658 |
| | 4,882 |
| | 9,540 |
|
Repossessed assets | — |
| | 1,085 |
| | 1,085 |
| | — |
| | 2,128 |
| | 2,128 |
| | — |
| | 3,551 |
| | 3,551 |
|
Total non-performing assets | — |
| | 139,410 |
| | 139,410 |
| | 4,203 |
| | 181,159 |
| | 185,362 |
| | 7,859 |
| | 141,129 |
| | 148,988 |
|
Impaired ACI loans and pools on accrual status | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,335 |
| | 1,335 |
|
Performing TDRs | | | | | | | | | | |
|
| | | | | | |
Taxi medallion loans | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 36,848 |
| | 36,848 |
|
Other | — |
| | 7,898 |
| | 7,898 |
| | 1,264 |
| | 24,723 |
| | 25,987 |
| | 11,166 |
| | 26,282 |
| | 37,448 |
|
Total impaired loans and non-performing assets | $ | — |
| | $ | 147,308 |
| | $ | 147,308 |
| | $ | 5,467 |
| | $ | 205,882 |
| | $ | 211,349 |
| | $ | 19,025 |
| | $ | 205,594 |
| | $ | 224,619 |
|
| | | | | | | | | | | | | | | | | |
Non-performing loans to total loans (1) (3) | | | 0.60 | % | | 0.59 | % | | | | 0.82 | % | | 0.81 | % | | | | 0.71 | % | | 0.70 | % |
Non-performing assets to total assets (2) | | | 0.43 | % | | 0.43 | % | | | | 0.60 | % | | 0.61 | % | | | | 0.51 | % | | 0.53 | % |
ALLL to total loans (1) | | | 0.50 | % | | 0.50 | % | | | | 0.69 | % | | 0.68 | % | | | | 0.80 | % | | 0.79 | % |
ALLL to non-performing loans | | | 84.61 | % | | 84.63 | % | | | | 84.03 | % | | 83.53 | % | | | | 113.68 | % | | 112.55 | % |
Net charge-offs to average loans(4) | | | 0.28 | % | | 0.28 | % | | | | 0.38 | % | | 0.38 | % | | | | 0.13 | % | | 0.13 | % |
| | | | | | | | | | | | | | | | | |
| | | | | |
(1) | Total loans for purposes of calculating these ratios include premiums, discounts and deferred fees and costs. |
| |
(2) | Ratio for non-covered assets is calculated as non-performing non-covered assets to total assets. |
| |
(3) | Non-performing taxi medallion loans comprised 0.51% and 0.32% of total non-covered loans at December 31, 2017and 2016 respectively.
|
| |
(4) | The ratio of charge-offs of taxi medallion loans to average total loans was 0.18%, 0.28% and 0.06% for the years ended December 31, 2018, 2017 and 2016, respectively. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | 2014 |
| Covered Assets | | Non-Covered Assets | | Total | | Covered Assets | | Non- Covered Assets | | Total |
Non-accrual loans | | | | | | | | | | | |
Residential and other consumer: | | | | | | | | | | | |
1-4 single family residential | $ | 594 |
| | $ | 2,007 |
| | $ | 2,601 |
| | $ | 604 |
| | $ | 49 |
| | $ | 653 |
|
Home equity loans and lines of credit | 4,724 |
| | — |
| | 4,724 |
| | 3,808 |
| | — |
| | 3,808 |
|
Other consumer loans | — |
| | 7 |
| | 7 |
| | — |
| | 173 |
| | 173 |
|
Total residential and other consumer loans | 5,318 |
| | 2,014 |
| | 7,332 |
| | 4,412 |
| | 222 |
| | 4,634 |
|
Commercial: | | | | | | | | | | | |
Non-owner occupied commercial real estate | — |
| | — |
| | — |
| | — |
| | 1,326 |
| | 1,326 |
|
Construction and land | — |
| | — |
| | — |
| | — |
| | 209 |
| | 209 |
|
Owner occupied commercial real estate | — |
| | 8,274 |
| | 8,274 |
| | — |
| | 3,362 |
| | 3,362 |
|
Commercial and industrial | — |
| | — |
| | — |
| | — |
| | 13,666 |
| | 13,666 |
|
Taxi medallion loans | — |
| | 9,920 |
| | 9,920 |
| | — |
| | 9,226 |
| | 9,226 |
|
Other commercial and industrial | — |
| | 2,557 |
| | 2,557 |
| | — |
| | — |
| | — |
|
Commercial lending subsidiaries | — |
| | 35,225 |
| | 35,225 |
| | — |
| | — |
| | — |
|
Total commercial loans | — |
| | 55,976 |
| | 55,976 |
| | — |
| | 27,789 |
| | 27,789 |
|
Total non-accrual loans | 5,318 |
| | 57,990 |
| | 63,308 |
| | 4,412 |
| | 28,011 |
| | 32,423 |
|
Loans past due 90 days and still accruing | 156 |
| | 1,369 |
| | 1,525 |
| | 174 |
| | 715 |
| | 889 |
|
TDRs | 7,050 |
| | 1,175 |
| | 8,225 |
| | 2,188 |
| | 4,435 |
| | 6,623 |
|
Total non-performing loans | 12,524 |
| | 60,534 |
| | 73,058 |
| | 6,774 |
| | 33,161 |
| | 39,935 |
|
OREO | 8,853 |
| | — |
| | 8,853 |
| | 13,645 |
| | 135 |
| | 13,780 |
|
Repossessed assets | — |
| | 2,337 |
| | 2,337 |
| | — |
| | — |
| | — |
|
Total non-performing assets | 21,377 |
| | 62,871 |
| | 84,248 |
| | 20,419 |
| | 33,296 |
| | 53,715 |
|
Performing TDRs | | | | |
|
| | | | | |
|
|
Taxi medallion loans | | | 633 |
| | 633 |
| | | | | | |
Performing TDRs | 3,988 |
| | 4,902 |
| | 8,890 |
| | 3,866 |
| | 797 |
| | 4,663 |
|
Total impaired loans and non-performing assets | $ | 25,365 |
| | $ | 68,406 |
| | $ | 93,771 |
| | $ | 24,285 |
| | $ | 34,093 |
| | $ | 58,378 |
|
| | | | | | | | | | | |
Non-performing loans to total loans (2) | | | 0.38 | % | | 0.40 | % | | | | 0.29 | % | | 0.32 | % |
Non-performing assets to total assets (3) | | | 0.26 | % | | 0.35 | % | | | | 0.17 | % | | 0.28 | % |
ALLL to total loans (2) | | | 0.76 | % | | 0.76 | % | | | | 0.80 | % | | 0.77 | % |
ALLL to non-performing loans | | | 199.82 | % | | 172.23 | % | | | | 275.47 | % | | 239.24 | % |
Net charge-offs to average loans | | | 0.09 | % | | 0.10 | % | | | | 0.08 | % | | 0.15 | % |
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(1) Non-performing loans and assets include the guaranteed portion of non-accrual SBA loans totaling $46.1 million or 0.19% of total loans and 0.13% of total assets, at December 31, 2021, and $51.3 million or 0.22% of total loans and 0.15% of total assets, at December 31, 2020. | |
(1) | Includes TDRs on accrual status. |
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(2) | Total loans for purposes of calculating these ratios include premiums, discounts and deferred fees and costs. |
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(3) | Ratio for non-covered assets is calculated as non-performing non-covered assets to total assets. |
Contractually delinquent government insured residential loans are typically GNMA early buyout loans and are excluded from non-performing loans as defined in the table above due to their government guarantee. The decreasescarrying value of such loans contractually delinquent by more than 90 days was $730 million and $562 million at December 31, 2021 and 2020, respectively.
Decreases in the ratio of the ACL to total loans and the ACL to non-performing loans for the year ended December 31, 2021 were attributable to the recovery of provision for credit losses and charge-offs recognized during the year. See "Results of Operations - Provision for Credit Losses" above and “Analysis of the Allowance for Credit Losses” below for further discussion of trends in the Provision for Credit Losses and the ACL.
At December 31, 2021, the ratios of non-performing loans to total loans and non-performing assets to total assets had declined to at December 31, 2018 compared to December 31, 2017 were primarily attributable to the sale of substantially all taxi medallion loans during the fourth quarter 2018. or below pre-pandemic levels. The increasesfollowing chart presents trends in the ratios of non-performing loans to total loans and non-performing assets to total assets and the decreaseassets:
The following chart presents trends in the rationon-performing loans by portfolio sub-segment (in millions):
The ultimate impact of the ALLLCOVID-19 pandemic on non-performing asset levels and net charge-offs may be delayed due to non-performing loans at December 31, 2017 compared to December 31, 2016 were each primarily attributable to the increase in non-accrual taxi medallion loans during those periods.
Contractually delinquent ACI loans with remaining accretable yield are not reflected as non-accrual loansgovernment assistance and are not considered to be non-performing assets because accretion continues to be recorded in income. Accretion continues to be recorded as long as there is an expectation of future cash flows in excess of carrying amount from these loans. The carrying value of ACI loans contractually delinquent by more than 90 days but on which income was still being recognized was insignificant at December 31, 2018 and $18 million at December 31, 2017. Contractually delinquent government insured residential loans are excluded from non-performing loans as defined in the table above. The carrying value of such loans contractually delinquent by more than 90 days was $218 million and $2 million at December 31, 2018 and 2017, respectively. The increase is attributable to the government insured pool buyout activity which began in 2018.loan deferral programs.
Commercial loans, other than ACI 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 ACI loans and government insured pool buyout loans, are generally placed on non-accrual status when they are 90 days past due. Residential loans that have rolled off of interest is dueshort-term deferral and unpaid.have not caught up on their deferred payments may also be placed on non-accrual; these loans are typically pending modification. 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 of interest is due and unpaid.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 or extensions of maturity at below market terms, or in some cases, partial forgiveness of principal. Under GAAP, modified ACI loans accounted for in pools are not accounted for as TDRs and are not separated from their respective pools when modified.terms. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy.
Under inter-agency and authoritative guidance and consistent with the CARES Act, short-term deferrals or modifications related to COVID-19 were typically not categorized as TDRs. Additionally, section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act on December 27, 2020, effectively suspended the guidance related to TDRs codified in ASC 310-40 until the earlier of January 1, 2022 or sixty days after the date of the suspension of the declared state of emergency related to the COVID-19 pandemic. None of the COVID-19 related deferrals the Company has granted to date that fall under these provisions have been categorized as TDRs. See the sections entitled "Asset Quality - Commercial Loans - Payment Deferrals and Modifications" and "Asset Quality - Residential and Other Consumer Loans" for further discussion.
The following table summarizes loans that had been modified in TDRs at December 31, 2018the dates indicated (dollars in thousands):
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| December 31, 2021 | | December 31, 2020 |
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| Number of TDRs | | Amortized Cost | | Related Specific Allowance | | Number of TDRs | | Amortized Cost | | Related Specific Allowance |
Residential and other consumer (1) | 449 | | | $ | 79,524 | | | $ | 87 | | | 342 | | | $ | 57,017 | | | $ | 94 | |
Commercial | 16 | | | 29,309 | | | 1,377 | | | 25 | | | 55,515 | | | 15,630 | |
| 465 | | | $ | 108,833 | | | $ | 1,464 | | | 367 | | | $ | 112,532 | | | $ | 15,724 | |
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| Number of TDRs | | Recorded Investment | | Related Specific Allowance |
Residential and other consumer | 47 |
| | $ | 7,690 |
| | $ | 134 |
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Commercial | 23 |
| | 36,150 |
| | 3,595 |
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| 70 |
| | $ | 43,840 |
| | $ | 3,729 |
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Potential Problem Loans
Potential problem(1) Includes 435 government insured residential loans have been identified by management as those commercial loans includedmodified in the "substandard accruing" risk rating category. These loans are typically performing, but possess specifically identified credit weaknesses that, if not remedied, may lead to a downgrade to non-accrual status and identification as impaired in the near-term. Substandard accruing commercial loans totaled $96TDRs totaling $76.4 million at December 31, 2018, substantially all of which were current as to principal2021, and interest326 government insured residential loans modified in TDRs totaling $52.8 million at December 31, 2018.2020.
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.losses and considers the appropriate risk rating for these loans. Criticized asset reports for each relationship are presented by the assigned relationship manager and credit officer to the Criticized Asset Committee until such time as the relationships are returned to a satisfactory credit risk rating or otherwise resolved. The Criticized Asset Committee may require the transfer of a loan to our workout and recovery department, which is tasked to effectively manage the loan with the goal of minimizing losses and expenses associated with restructure, collection and/or liquidation of collateral. Commercial loans with a risk rating of substandard; impairedsubstandard, loans on non-accrual status;status, loans modified as TDRs;TDRs or CARES Act modifications and assets classified as OREO or repossessed assets are usually transferred to workout and recovery. Oversight of the workout and recovery department is provided by the Criticized Asset Recovery Committee.
WeOur servicers evaluate each residential loan in default to determine the most effective loss mitigation strategy, which may be modification, short sale, or foreclosure. We offerforeclosure, and pursue the alternative most suitable to the consumer and to mitigate losses to the bank.
In response to the COVID-19 pandemic and its potential economic impact to our customers, we implemented a short-term program that complies with interagency guidance and the CARES Act under which we have provided temporary relief, and in some cases longer term modifications, 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 and modifications. Under the 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 program modeled after the FNMA standard modification program.agreements, will typically not be reported as past due or non-performing. The CARES Act expired effective January 1, 2022.
Analysis of the Allowance for Loan and LeaseCredit Losses
The ALLL relates to (i) loans originated or purchased since the FSB acquisition, (ii) estimated additional losses arising on non-ACI loans subsequent to the FSB Acquisition, and (iii) impairment recognized as a result of decreases in expected cash flows on ACI loans due to further credit deterioration. The determinationACL is management's estimate of the amount of expected credit losses over the ALLL is, by nature, highly complex and subjective. Future events that are inherently uncertain could result in material changes to the levellife of the ALLL. Generalloan portfolio, or the amount of amortized cost basis not expected to be collected, at the balance sheet date. This estimate encompasses information about historical events, current conditions and reasonable and supportable economic conditions including but not limited to unemployment rates, the level of business investment and growth, real estate values, vacancy rates and rental rates in our primary market areas, the level of interest rates, and a variety of other factors that affect the ability of borrowers’ businesses to generate cash flows sufficient to service their debts will impact the future performance of the portfolio. Adoption of the CECL model in the first quarter of 2020 will result in significant changes
to the methodology employed to determineforecasts. Determining the amount of the ALLL,ACL is complex and may materiallyrequires extensive judgment by management about matters that are inherently uncertain. Uncertainty remains around the impact the amount ofcontinually evolving COVID-19 situation will have on the ALLL recorded in the consolidated financial statements.
Commercial loans
The allowance is comprised of specific reserves for loans that are individually evaluated and determined to be impaired as well as general reserves for loans that have not been identified as impaired.
Commercial relationships graded substandard or doubtfuleconomy broadly, and on non-accrual status with committed credit facilities greater than or equal to $1.0 million, as well as loans modifiedour borrowers specifically. In light of this uncertainty, we believe it is possible that the ACL estimate could change, potentially materially, in TDRs, are individually evaluated for impairment. Other commercial relationships on non-accrual status with committed balances under $1.0 million may also be evaluated for impairment, at management's discretion. For loans evaluated individually for impairment and determined to be impaired, a specific allowance is established based on the present value of expected cash flows discounted at the loan’s effective interest rate, the estimated fair value of the loan, or the estimated fair value of collateral less costs to sell.
We believe that loans rated special mention, substandard or doubtful that are not individually evaluated for impairment exhibit characteristics indicative of a heightened level of credit risk. We apply a quantitative loss factor for loans rated special mention based on average annual probability of default and implied severity, derived from internal and external data. Loss factors for substandard and doubtful loans that are not individually evaluated are determined by using default frequency and severity information applied at the loan level. Estimated default frequencies and severities are based on available industry and internal data. In addition, we apply a floor to these calculated loss factors, based on the loss factor applied to the special mention portfolio.
To the extent,future periods, in management's judgment, commercial portfolio segments have sufficient observable loss history, the quantitative portion of the ALLL is based on the Bank's historical net charge-off rates. These commercial segments include commercial and industrial loans and the Bridge portfolios. For commercial portfolio segments that have not yet exhibited an observable loss trend, the quantitative loss factors are based on peer group average annual historical net charge-off rates by loan class and the Company’s internal credit risk rating system. These commercial segments include multifamily, non-owner occupied commercial real estate and construction and land loans. Quantitative loss factors for SBF loans are based on historical charge-off rates published by the SBA. For Pinnacle, quantitative loss factors are based primarily on historical municipal default data. For most commercial portfolio segments, we use a 20 quarter look-back period in the calculation of historical net charge-off rates.
Where applicable, the peer group used to calculate average annual historical net charge-off rates used in estimating general reserves is made up of 26 banks included in the OCC Midsize Bank Group plus five additional banks not included in the OCC Midsize Bank Group that management believes to be comparable based on size, geography and nature of lending operations. Peer bank data is obtained from the Statistics on Depository Institutions Report published by the FDIC for the most recent quarter available. These banks, as a group, are considered by management to be comparable to BankUnited in size, nature of lending operations and loan portfolio composition. We evaluate the composition of the peer group annually, or more frequently if, in our judgment, a more frequent evaluation is necessary. Our internal risk rating system comprises 13 credit grades; grades 1 through 8 are “pass” grades. The risk ratings are driven largely by debt service coverage. Peer group historical loss rates are adjusted upward for loans assigned a lower “pass” rating.
As noted above, we generally use a 20 quarter look-back period to calculate quantitative loss rates. We believe this look-back period to be consistent with the range of industry practice and appropriate to capture a sufficient range of observations reflecting the performance of our loans, which were originated in the current economic cycle. With the exception of the Pinnacle municipal finance portfolio, a four quarter loss emergence period is used in the calculation of general reserves. A twelve quarter loss emergence period is used in the calculation of general reserves for the Pinnacle portfolio.
The primary assumptions underlying estimates of expected cash flows for ACI commercial loans are default probability and severity of loss given default. Assessments of default probability and severity are based on net realizable value analyses prepared at the individual loan level. Based on our analysis, no ALLL related to ACI commercial loans was recorded at December 31, 2018 or 2017.
Residential and other consumer loans
Non-covered Loans
The non-covered loan portfolio has not yet developed an observable loss trend. Therefore, the ALLL for non-covered residential loans is based primarily on relevant proxy historical loss rates. The ALLL for non-covered 1-4 single family residential loans, excluding government insured residential loans, is estimated using average annual loss rates on prime residential mortgage securitizations issued between 2003 and 2008 as a proxy. Based on the comparability of FICO scores and
LTV ratios between loans included in those securitizations and loans in the Bank’s portfolio and the geographic diversity in the new purchased residential portfolio, we determined that prime residential mortgage securitizations provide an appropriate proxy for incurred losses in this portfolio class. A peer group 20-quarter average net charge-off rate is used to estimate the ALLL for the non-covered home equity and other consumer loan classes. See further discussion of peer group loss factors above. The non-covered home equity and other consumer loan portfolios are not significant components of the overall loan portfolio.
Covered non-ACI Loans
The methodology for estimating the ALLL for non-ACI 1-4 single family residential mortgages is consistent with the methodology used to calculate the ALLL for the non-covered residential portfolio segment discussed above.
Qualitative Factors
Qualitative adjustments are made to the ALLL when, based on management’s judgment, there are internal or external factors impacting probable incurred losses not taken into account by the quantitative calculations. Potential qualitative adjustments are categorized as follows:
Portfolio performance trends, including trends in and the levels of delinquencies, non-performing loans and classified loans;
either direction. Changes in the natureACL may result from changes in current economic conditions, our economic forecast, loan portfolio composition and circumstances not currently known to us that may impact the financial condition and operations of our borrowers, among other factors.
Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. For loans that do not share similar risk characteristics with other loans such as collateral dependent loans and TDRs, expected credit losses are estimated on an individual basis. Expected credit losses are estimated over the portfolio andcontractual terms of the loans, specifically including the volumeadjusted for expected prepayments, generally excluding expected extensions, renewals, and nature of policy and procedural exceptions;
Portfolio growth trends;
Changes in lending policies and procedures, including credit and underwriting guidelines and portfolio management practices;
Economic factors, including unemployment rates and GDP growth rates and other factors considered relevant by management;
Changes in the value of underlying collateral;
Quality of risk ratings, as evaluated by our independent credit review function;
Credit concentrations;
Changes in and experience levels of credit administration management and staff; and
Other factors identified by management that may impact the level of losses inherent in the portfolio, including but not limited to competition and legal and regulatory considerations.
Covered ACI Loansmodifications.
For ACI loans, a valuation allowance is established when periodic evaluationsthe substantial majority of expected cash flows reflect a deterioration resulting from credit related factors from the level of cash flows that were estimated to be collected at acquisition plus any additional expected cash flows arising from revisions in those estimates. We perform a quarterly analysis of expected cash flows for ACI loans.
Expected cash flows for ACI 1-4 single familyportfolio segments and subsegments, including residential loans other than government insured loans, and most commercial and commercial real estate loans, expected losses are estimated atusing econometric models.
See Note 1 to the pool level. The analysis of expected cash flows incorporates assumptionsconsolidated financial statements for more detailed information about expected prepayment rates, default rates, delinquency levelsour ACL methodology and loss severity given default.
No ALLL related to 1-4 single family residential ACI pools was recorded at December 31, 2018 or 2017.
accounting policies.
The following tables providetable provides an analysis of the ALLL,ACL, provision for loancredit losses related to the funded portion of loans and net charge-offs by loan segment for the periods from December 31, 2013 through December 31, 2018indicated (in thousands):
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| Residential and Other Consumer Loans | | 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 | | Total |
Balance at December 31, 2018 | $ | 10,788 | | | $ | 7,399 | | | $ | 30,258 | | | $ | 1,378 | | | $ | 9,799 | | | $ | 34,316 | | | $ | 875 | | | $ | 5,560 | | | $ | 9,558 | | | $ | 109,931 | |
Provision for (recovery of) credit losses | 154 | | | (2,375) | | | (4,402) | | | (538) | | | (1,770) | | | 15,130 | | | (155) | | | 5,367 | | | (2,507) | | | 8,904 | |
Charge-offs | — | | | — | | | (2,762) | | | (76) | | | (827) | | | (12,112) | | | — | | | (1,764) | | | — | | | (17,541) | |
Recoveries | 212 | | | — | | | 146 | | | — | | | 864 | | | 6,151 | | | — | | | — | | | 4 | | | 7,377 | |
Balance at December 31, 2019 | 11,154 | | | 5,024 | | | 23,240 | | | 764 | | | 8,066 | | | 43,485 | | | 720 | | | 9,163 | | | 7,055 | | | 108,671 | |
Impact of adoption of ASU 2016-13 | 8,098 | | | (780) | | | (13,442) | | | 1,854 | | | 23,240 | | | 8,841 | | | (309) | | | (133) | | | (64) | | | 27,305 | |
Balance at January 1, 2020 | 19,252 | | | 4,244 | | | 9,798 | | | 2,618 | | | 31,306 | | | 52,326 | | | 411 | | | 9,030 | | | 6,991 | | | 135,976 | |
Provision for (recovery of) credit losses | (556) | | | 38,224 | | | 59,200 | | | 666 | | | (1,463) | | | 35,390 | | | (107) | | | 44,976 | | | 6,009 | | | 182,339 | |
Charge-offs | (31) | | | (2,643) | | | (7,681) | | | — | | | (1,178) | | | (33,188) | | | — | | | (18,125) | | | (6,756) | | | (69,602) | |
Recoveries | 54 | | | 2 | | | 190 | | | — | | | 132 | | | 7,669 | | | — | | | 450 | | | 113 | | | 8,610 | |
Balance at December 31, 2020 | 18,719 | | | 39,827 | | | 61,507 | | | 3,284 | | | 28,797 | | | 62,197 | | | 304 | | | 36,331 | | | 6,357 | | | 257,323 | |
Provision for (recovery of) credit losses | (9,241) | | | (32,077) | | | (33,466) | | | (2,253) | | | (6,844) | | | 31,180 | | | (134) | | | (8,857) | | | (2,764) | | | (64,456) | |
Charge-offs | (304) | | | (6,470) | | | (2,697) | | | — | | | (471) | | | (50,563) | | | — | | | (10,745) | | | — | | | (71,250) | |
Recoveries | 13 | | | 232 | | | 924 | | | — | | | 156 | | | 3,498 | | | — | | | 17 | | | — | | | 4,840 | |
Balance at December 31, 2021 | $ | 9,187 | | | $ | 1,512 | | | $ | 26,268 | | | $ | 1,031 | | | $ | 21,638 | | | $ | 46,312 | | | $ | 170 | | | $ | 16,746 | | | $ | 3,593 | | | $ | 126,457 | |
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Net Charge-offs to Average Loans | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2019 | — | % | | — | % | | 0.05 | % | | 0.03 | % | | — | % | | 0.12 | % | | — | % | | 0.31 | % | | — | % | | 0.05 | % |
Year Ended December 31, 2020 | — | % | | 0.14 | % | | 0.15 | % | | — | % | | 0.05 | % | | 0.42 | % | | — | % | | 2.86 | % | | 1.13 | % | | 0.26 | % |
Year Ended December 31, 2021 | — | % | | 0.46 | % | | 0.04 | % | | — | % | | 0.02 | % | | 0.82 | % | | — | % | | 2.34 | % | | — | % | | 0.29 | % |
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| Non-Covered Loans | | Covered Loans | | Total |
Balance at December 31, 2013 | $ | 57,330 |
| | $ | 12,395 |
| | $ | 69,725 |
|
Provision for (recovery of) loan losses | 41,748 |
| | (243 | ) | | 41,505 |
|
Charge-offs: | | | | | |
1-4 single family residential | — |
| | (269 | ) | | (269 | ) |
Home equity loans and lines of credit | — |
| | (2,737 | ) | | (2,737 | ) |
Other consumer loans | (1,083 | ) | | (324 | ) | | (1,407 | ) |
Multi-family | — |
| | (285 | ) | | (285 | ) |
Non-owner occupied commercial real estate | (52 | ) | | (3,031 | ) | | (3,083 | ) |
Construction and land | — |
| | (648 | ) | | (648 | ) |
Owner occupied commercial real estate | — |
| | (356 | ) | | (356 | ) |
Commercial and industrial | (6,033 | ) | | (1,050 | ) | | (7,083 | ) |
Commercial lending subsidiaries | (1,586 | ) | | — |
| | (1,586 | ) |
Total Charge-offs | (8,754 | ) | | (8,700 | ) | | (17,454 | ) |
Recoveries: | | | | | |
Home equity loans and lines of credit | — |
| | 19 |
| | 19 |
|
Other consumer loans | 498 |
| | — |
| | 498 |
|
Multi-family | — |
| | 4 |
| | 4 |
|
Non-owner occupied commercial real estate | — |
| | 3 |
| | 3 |
|
Commercial and industrial | 506 |
| | 714 |
| | 1,220 |
|
Commercial lending subsidiaries | 22 |
| | — |
| | 22 |
|
Total Recoveries | 1,026 |
| | 740 |
| | 1,766 |
|
Net Charge-offs: | (7,728 | ) | | (7,960 | ) | | (15,688 | ) |
Balance at December 31, 2014 | 91,350 |
| | 4,192 |
| | 95,542 |
|
Provision for loan losses: | 42,060 |
| | 2,251 |
| | 44,311 |
|
Charge-offs: | | | | | |
1-4 single family residential | — |
| | (16 | ) | | (16 | ) |
Home equity loans and lines of credit | — |
| | (1,664 | ) | | (1,664 | ) |
Owner occupied commercial real estate | (263 | ) | | — |
| | (263 | ) |
Commercial and industrial | (5,731 | ) | | — |
| | (5,731 | ) |
Commercial lending subsidiaries | (7,725 | ) | | — |
| | (7,725 | ) |
Total Charge-offs | (13,719 | ) | | (1,680 | ) | | (15,399 | ) |
Recoveries: | | | | | |
Home equity loans and lines of credit | — |
| | 39 |
| | 39 |
|
Other consumer loans | 32 |
| | — |
| | 32 |
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Multi-family | — |
| | 4 |
| | 4 |
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Non-owner occupied commercial real estate | 2 |
| | — |
| | 2 |
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Commercial and industrial | 1,082 |
| | 62 |
| | 1,144 |
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Commercial lending subsidiaries | 153 |
| | — |
| | 153 |
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Total Recoveries | 1,269 |
| | 105 |
| | 1,374 |
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Net Charge-offs: | (12,450 | ) | | (1,575 | ) | | (14,025 | ) |
Balance at December 31, 2015 | $ | 120,960 |
| | $ | 4,868 |
| | $ | 125,828 |
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| Non-Covered Loans | | Covered Loans | | Total |
Balance at December 31, 2015 | $ | 120,960 |
| | $ | 4,868 |
| | $ | 125,828 |
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Provision for (recovery of) loan losses | 52,592 |
| | (1,681 | ) | | 50,911 |
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Charge-offs: | | | | | |
1-4 single family residential | — |
| | (442 | ) | | (442 | ) |
Home equity loans and lines of credit | — |
| | (774 | ) | | (774 | ) |
Other consumer loans | (152 | ) | | — |
| | (152 | ) |
Non-owner occupied commercial real estate | (128 | ) | | — |
| | (128 | ) |
Construction and land | (93 | ) | | — |
| | (93 | ) |
Owner occupied commercial real estate | (2,827 | ) | | — |
| | (2,827 | ) |
Commercial and industrial | | | | | |
Taxi medallion loans | (11,141 | ) | | — |
| | (11,141 | ) |
Other commercial and industrial | (9,121 | ) | | — |
| | (9,121 | ) |
Commercial lending subsidiaries | (2,432 | ) | | — |
| | (2,432 | ) |
Total Charge-offs | (25,894 | ) | | (1,216 | ) | | (27,110 | ) |
Recoveries: | | | | | |
Home equity loans and lines of credit | — |
| | 80 |
| | 80 |
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Other consumer loans | 26 |
| | — |
| | 26 |
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Owner occupied commercial real estate | 1,193 |
| | — |
| | 1,193 |
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Commercial and industrial | | | | | |
Other commercial and industrial | 698 |
| | 49 |
| | 747 |
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Commercial lending subsidiaries | 1,278 |
| | — |
| | 1,278 |
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Total Recoveries | 3,195 |
| | 129 |
| | 3,324 |
|
Net Charge-offs: | (22,699 | ) | | (1,087 | ) | | (23,786 | ) |
Balance at December 31, 2016 | 150,853 |
| | 2,100 |
| | 152,953 |
|
Provision for (recovery of) loan losses: | 67,389 |
| | 1,358 |
| | 68,747 |
|
Charge-offs: | | | | | |
1-4 single family residential | (1 | ) | | (24 | ) | | (25 | ) |
Home equity loans and lines of credit | — |
| | (3,303 | ) | | (3,303 | ) |
Non-owner occupied commercial real estate | (255 | ) | | — |
| | (255 | ) |
Construction and land | (63 | ) | | — |
| | (63 | ) |
Owner occupied commercial real estate | (2,612 | ) | | — |
| | (2,612 | ) |
Commercial and industrial | | | | |
|
Taxi medallion loans | (56,615 | ) | | — |
| | (56,615 | ) |
Other commercial and industrial | (18,320 | ) | | — |
| | (18,320 | ) |
Total Charge-offs | (77,866 | ) | | (3,327 | ) | | (81,193 | ) |
Recoveries: | | | | | |
Home equity loans and lines of credit | — |
| | 67 |
| | 67 |
|
Other consumer loans | 26 |
| | — |
| | 26 |
|
Owner occupied commercial real estate | 2 |
| | — |
| | 2 |
|
Commercial and industrial | | | | |
|
Taxi medallion loans | — |
| | — |
| | — |
|
Other commercial and industrial | 2,689 |
| | 60 |
| | 2,749 |
|
Commercial lending subsidiaries | 1,444 |
| | — |
| | 1,444 |
|
Total Recoveries | 4,161 |
| | 127 |
| | 4,288 |
|
Net Charge-offs: | (73,705 | ) | | (3,200 | ) | | (76,905 | ) |
Balance at December 31, 2017 | $ | 144,537 |
| | $ | 258 |
| | $ | 144,795 |
|
|
| | | | | | | | | | | |
| Non-Covered Loans | | Covered Loans | | Total |
Balance at December 31, 2017 | $ | 144,537 |
| | $ | 258 |
| | $ | 144,795 |
|
Provision for (recovery of) loan losses: | | | | | |
1-4 single family residential | 456 |
| | 948 |
| | 1,404 |
|
Home equity loans and lines of credit | (4 | ) | | (196 | ) | | (200 | ) |
Other consumer loans | (172 | ) | | — |
| | (172 | ) |
Multi-family | (16,595 | ) | | — |
| | (16,595 | ) |
Non-owner occupied commercial real estate | (10,331 | ) | | — |
| | (10,331 | ) |
Construction and land | (1,547 | ) | | — |
| | (1,547 | ) |
Owner occupied commercial real estate | (22 | ) | | — |
| | (22 | ) |
Commercial and industrial | | | | | |
Taxi medallion loans | 26,187 |
| | — |
| | 26,187 |
|
Other commercial and industrial | 22,318 |
| | — |
| | 22,318 |
|
Commercial lending subsidiaries |
|
| |
|
| |
|
|
Pinnacle | 303 |
| | — |
| | 303 |
|
Bridge - franchise finance | 2,077 |
| | — |
| | 2,077 |
|
Bridge - equipment finance | 2,503 |
| | — |
| | 2,503 |
|
Total Provision | 25,173 |
| | 752 |
| | 25,925 |
|
Charge-offs: | | | | | |
1-4 single family residential | — |
| | (1,175 | ) | | (1,175 | ) |
Home equity loans and lines of credit | — |
| | (25 | ) | | (25 | ) |
Other consumer loans | (265 | ) | | — |
| | (265 | ) |
Multi-family | — |
| | — |
| | — |
|
Non-owner occupied commercial real estate | (184 | ) | | — |
| | (184 | ) |
Construction and land | (79 | ) | | — |
| | (79 | ) |
Owner occupied commercial real estate | (6,472 | ) | | — |
| | (6,472 | ) |
Commercial and industrial | | | | | |
Taxi medallion loans | (39,676 | ) | | — |
| | (39,676 | ) |
Other commercial and industrial | (19,208 | ) | | — |
| | (19,208 | ) |
Total Charge-offs | (65,884 | ) | | (1,200 | ) | | (67,084 | ) |
Recoveries: | | | | | |
Home equity loans and lines of credit | — |
| | 220 |
| | 220 |
|
Other consumer loans | 281 |
| | — |
| | 281 |
|
Non-owner occupied commercial real estate | 151 |
| | — |
| | 151 |
|
Owner occupied commercial real estate | 2,682 |
| | — |
| | 2,682 |
|
Commercial and industrial | | | | | |
Taxi medallion loans | 1,275 |
| | — |
| | 1,275 |
|
Other commercial and industrial | 1,508 |
| | — |
| | 1,508 |
|
Commercial lending subsidiaries | | | | | |
Bridge - franchise finance | 178 |
| | — |
| | 178 |
|
Total Recoveries | 6,075 |
| | 220 |
| | 6,295 |
|
Net Charge-offs: | (59,809 | ) | | (980 | ) | | (60,789 | ) |
Balance at December 31, 2018 | $ | 109,901 |
| | $ | 30 |
| | $ | 109,931 |
|
The following tables showtable shows the distribution of the ALLL, broken out between covered and non-covered loans,ACL at December 31 of the yearsdates indicated (dollars in thousands):
|
| | | | | | | | | | | | | | |
| 2018 |
| Non-Covered Loans | | Covered Loans | | Total | | %(1) |
Residential and other consumer: | | | | | | | |
|
1 - 4 single family residential | $ | 10,596 |
| | $ | 30 |
| | $ | 10,626 |
| | 22.2 | % |
Home equity loans and lines of credit | 3 |
| | — |
| | 3 |
| | — | % |
Other consumer loans | 159 |
| | — |
| | 159 |
| | 0.1 | % |
| 10,758 |
| | 30 |
| | 10,788 |
| | 22.3 | % |
Commercial: | | | | | | | |
Multi-family | 7,399 |
| | — |
| | 7,399 |
| | 11.8 | % |
Non-owner occupied commercial real estate | 30,258 |
| | — |
| | 30,258 |
| | 21.4 | % |
Construction and land | 1,378 |
| | — |
| | 1,378 |
| | 1.0 | % |
Owner occupied commercial real estate | 9,799 |
| | — |
| | 9,799 |
| | 9.7 | % |
Commercial and industrial | | | | | | | |
Taxi medallion loans | — |
| | — |
| | — |
| | — | % |
Other commercial and industrial | 34,316 |
| | — |
| | 34,316 |
| | 21.9 | % |
Commercial lending subsidiaries | | | | | | | |
Pinnacle | 875 |
| | — |
| | 875 |
| | 6.6 | % |
Bridge - franchise finance | 5,560 |
| | — |
| | 5,560 |
| | 2.4 | % |
Bridge - equipment finance | 9,558 |
| |
|
| | 9,558 |
| | 2.9 | % |
| 99,143 |
| | — |
| | 99,143 |
| | 77.7 | % |
| $ | 109,901 |
| | $ | 30 |
| | $ | 109,931 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | |
| 2017 |
| Non-Covered Loans | | Covered Loans | | Total | | %(1) |
Residential and other consumer: | |
| | |
| | |
| | |
|
1 - 4 single family residential | $ | 10,140 |
| | $ | 257 |
| | $ | 10,397 |
| | 21.6 | % |
Home equity loans and lines of credit | 7 |
| | 1 |
| | 8 |
| | — | % |
Other consumer loans | 315 |
| | — |
| | 315 |
| | 0.1 | % |
| 10,462 |
| | 258 |
| | 10,720 |
| | 21.7 | % |
Commercial: | | | | | | | |
Multi-family | 23,994 |
| | — |
| | 23,994 |
| | 15.0 | % |
Non-owner occupied commercial real estate | 40,622 |
| | — |
| | 40,622 |
| | 21.0 | % |
Construction and land | 3,004 |
| | — |
| | 3,004 |
| | 1.5 | % |
Owner occupied commercial real estate | 13,611 |
| | — |
| | 13,611 |
| | 9.4 | % |
Commercial and industrial | | | | | | | |
Taxi medallion loans | 12,214 |
| | — |
| | 12,214 |
| | 0.6 | % |
Other commercial and industrial | 29,698 |
| | — |
| | 29,698 |
| | 18.8 | % |
Commercial lending subsidiaries | | | | | | | |
Pinnacle | 572 |
| | — |
| | 572 |
| | 7.1 | % |
Bridge - franchise finance | 3,305 |
| | — |
| | 3,305 |
| | 2.1 | % |
Bridge - equipment finance | 7,055 |
| |
|
| | 7,055 |
| | 2.8 | % |
| 134,075 |
| | — |
| | 134,075 |
| | 78.3 | % |
| $ | 144,537 |
| | $ | 258 |
| | $ | 144,795 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | |
| 2016 |
| Non-Covered Loans | | Covered Loans | | Total | | %(1) |
Residential and other consumer: | |
| | |
| | |
| | |
|
1 - 4 single family residential | $ | 9,279 |
| | $ | 181 |
| | $ | 9,460 |
| | 20.6 | % |
Home equity loans and lines of credit | 7 |
| | 1,919 |
| | 1,926 |
| | 0.3 | % |
Other consumer loans | 117 |
| | — |
| | 117 |
| | 0.1 | % |
| 9,403 |
| | 2,100 |
| | 11,503 |
| | 21.0 | % |
Commercial: | | | | | | | |
Multi-family | 25,009 |
| | — |
| | 25,009 |
| | 19.8 | % |
Non-owner occupied commercial real estate | 35,604 |
| | — |
| | 35,604 |
| | 19.3 | % |
Construction and land | 2,824 |
| | — |
| | 2,824 |
| | 1.6 | % |
Owner occupied commercial real estate | 11,424 |
| | — |
| | 11,424 |
| | 9.0 | % |
Commercial and industrial | | | | | | | |
Taxi medallion loans | 10,655 |
| | — |
| | 10,655 |
| | 0.9 | % |
Other commercial and industrial | 38,067 |
| | — |
| | 38,067 |
| | 16.6 | % |
Commercial lending subsidiaries | | | | | | | |
Pinnacle | 6,586 |
| | — |
| | 6,586 |
| | 4.3 | % |
Bridge - franchise finance | 4,458 |
| | — |
| | 4,458 |
| | 2.9 | % |
Bridge - equipment finance | 6,823 |
| | — |
| | 6,823 |
| | 4.6 | % |
| 141,450 |
| | — |
| | 141,450 |
| | 79.0 | % |
| $ | 150,853 |
| | $ | 2,100 |
| | $ | 152,953 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | |
| 2015 |
| Non-Covered Loans | | Covered Loans | | Total | | %(1) |
Residential and other consumer: | | | | | | | |
1-4 single family residential | $ | 11,086 |
| | $ | 564 |
| | $ | 11,650 |
| | 21.9 | % |
Home equity loans and lines of credit | 4 |
| | 4,304 |
| | 4,308 |
| | 0.4 | % |
Other consumer loans | 253 |
| | — |
| | 253 |
| | 0.2 | % |
| 11,343 |
| | 4,868 |
| | 16,211 |
| | 22.5 | % |
Commercial: | | | | | | | |
Multi-family | 22,317 |
| | — |
| | 22,317 |
| | 20.9 | % |
Non-owner occupied commercial real estate | 26,179 |
| | — |
| | 26,179 |
| | 17.5 | % |
Construction and land | 3,587 |
| | — |
| | 3,587 |
| | 2.1 | % |
Owner occupied commercial real estate | 7,490 |
| | — |
| | 7,490 |
| | 8.2 | % |
Commercial and industrial | 33,661 |
| | — |
| | 33,661 |
| | 16.7 | % |
Commercial lending subsidiaries | | | | | | | |
Pinnacle | 6,138 |
| | — |
| | 6,138 |
| | 4.5 | % |
Bridge - franchise finance | 5,691 |
| | — |
| | 5,691 |
| | 4.2 | % |
Bridge - equipment finance | 4,554 |
| | — |
| | 4,554 |
| | 3.4 | % |
| 109,617 |
| | — |
| | 109,617 |
| | 77.5 | % |
| $ | 120,960 |
| | $ | 4,868 |
| | $ | 125,828 |
| | 100.0 | % |
|
| | | | | | | | | | | | | | |
| 2014 |
| Non-Covered Loans | | Covered Loans | | Total | | %(1) |
Residential and other consumer: | | | | | | | |
1-4 single family residential | $ | 7,116 |
| | $ | 945 |
| | $ | 8,061 |
| | 27.6 | % |
Home equity loans and lines of credit | 17 |
| | 3,247 |
| | 3,264 |
| | 1.0 | % |
Other consumer loans | 190 |
| | — |
| | 190 |
| | 0.2 | % |
| 7,323 |
| | 4,192 |
| | 11,515 |
| | 28.8 | % |
Commercial: | | | | | | | |
Multi-family | 14,970 |
| | — |
| | 14,970 |
| | 15.8 | % |
Non-owner occupied commercial real estate | 17,615 |
| | — |
| | 17,615 |
| | 14.4 | % |
Construction and land | 2,725 |
| | — |
| | 2,725 |
| | 1.4 | % |
Owner occupied commercial real estate | 8,273 |
| | — |
| | 8,273 |
| | 8.4 | % |
Commercial and industrial | 25,867 |
| | — |
| | 25,867 |
| | 19.4 | % |
Commercial lending subsidiaries | | | | | | | |
Pinnacle | 4,605 |
| | — |
| | 4,605 |
| | 3.7 | % |
Bridge - franchise finance | 4,549 |
| | — |
| | 4,549 |
| | 3.7 | % |
Bridge - equipment finance | 5,423 |
| | — |
| | 5,423 |
| | 4.4 | % |
| 84,027 |
| | — |
| | 84,027 |
| | 71.2 | % |
| $ | 91,350 |
| | $ | 4,192 |
| | $ | 95,542 |
| | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | December 31, 2020 | | January 1, 2020(1) |
| Total | | %(2) | | | | | | | | | | Total | | %(2) | | Total | | %(2) |
Residential and other consumer | $ | 9,187 | | | 35.2 | % | | | | | | | | | | $ | 18,719 | | | 26.6 | % | | $ | 19,252 | | | 24.5 | % |
| | | | | | | | | | | | | | | | | | | |
Multi-family | 1,512 | | | 4.9 | % | | | | | | | | | | 39,827 | | | 6.9 | % | | 4,244 | | | 9.6 | % |
Non-owner occupied commercial real estate | 26,268 | | | 18.4 | % | | | | | | | | | | 61,507 | | | 20.8 | % | | 9,798 | | | 21.7 | % |
Construction and land | 1,031 | | | 0.7 | % | | | | | | | | | | 3,284 | | | 1.2 | % | | 2,618 | | | 1.1 | % |
CRE | 28,811 | | | | | | | | | | | | | 104,618 | | | | | 16,660 | | | |
| | | | | | | | | | | | | | | | | | | |
Owner occupied commercial real estate | 21,638 | | | 8.2 | % | | | | | | | | | | 28,797 | | | 8.4 | % | | 31,306 | | | 8.9 | % |
Commercial and industrial | 46,312 | | | 25.8 | % | | | | | | | | | | 62,197 | | | 27.2 | % | | 52,326 | | | 23.4 | % |
Pinnacle | 170 | | | 3.9 | % | | | | | | | | | | 304 | | | 4.6 | % | | 411 | | | 5.2 | % |
Bridge - franchise finance | 16,746 | | | 1.4 | % | | | | | | | | | | 36,331 | | | 2.3 | % | | 9,030 | | | 2.6 | % |
Bridge - equipment finance | 3,593 | | | 1.5 | % | | | | | | | | | | 6,357 | | | 2.0 | % | | 6,991 | | | 3.0 | % |
Commercial | 88,459 | | | | | | | | | | | | | 133,986 | | | | | 100,064 | | | |
| $ | 126,457 | | | 100.0 | % | | | | | | | | | | $ | 257,323 | | | 100.0 | % | | $ | 135,976 | | | 100.0 | % |
| |
(1) | (1)Adoption date of ASU 2016-13. (2)Represents percentage of loans receivable in each category to total loans receivable.
The following table presents the ACL as a percentage of loans receivable in each category to total loans receivable. |
The balance of the ALLL for non-covered loans at December 31, 2018 decreased $34.6 million from the balance at December 31, 2017. This overall reduction in the ALLL was attributabledates indicated:
| | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | December 31, 2020 | | January 1, 2020 |
| | | | | | | | | |
Residential and other consumer | 0.11 | % | | | | | | 0.29 | % | | 0.34 | % |
Commercial: | | | | | | | | | |
Commercial real estate | 0.51 | % | | | | | | 1.52 | % | | 0.22 | % |
Commercial and industrial | 0.84 | % | | | | | | 1.07 | % | | 1.12 | % |
Pinnacle | 0.02 | % | | | | | | 0.03 | % | | 0.03 | % |
Bridge - franchise finance | 4.90 | % | | | | | | 6.61 | % | | 1.44 | % |
Bridge - equipment finance | 1.00 | % | | | | | | 1.34 | % | | 1.02 | % |
Total commercial | 0.76 | % | | | | | | 1.36 | % | | 0.67 | % |
| 0.53 | % | | | | | | 1.08 | % | | 0.59 | % |
Significant offsetting factors contributing to declines in both historical charge-off rates used to estimate general quantitative reserves and in certain qualitative loss factors as well as the elimination of specific reserves for the taxi medallion portfolio in conjunction with the sale of substantially all of the taxi medallion loans. Factors influencing the change in the ALLL related to specific loan types at December 31, 2018 as compared to December 31, 2017, include:
A decrease of $16.6 million for multi-family loans was primarily attributable to a decrease in the balance of loans outstanding, a decrease in certain qualitative loss factors and a decline in specific reserves for loans determined individually to be impaired.
A decrease of $10.4 million for non-owner occupied commercial real estate loans, despite an increase in the outstanding balance, was primarily attributable to decreases in both historical net charge-off rates for the peer group and certain qualitative loss factors.
A decrease of $3.8 million for owner occupied commercial real estate loans was primarily attributable to a decrease in specific reserves for one impaired loan relationship, which was fully charged-offACL during the year ended December 31, 2018,2021 are depicted in the chart below (in millions):
Changes in the ACL during the year ended December 31, 2021
As depicted in the chart above, the primary reasons for the decrease in the ACL from December 31, 2020 to December 31, 2021 were improvements in the economy and the economic forecast and net charge-offs. Other largely offsetting factors impacting the change in the ACL included (i) changes in portfolio composition including the decline in commercial loan balances and shift into residential as a percentage of the portfolio, (ii) increases in specific reserves and (iii) improved borrower financial performance as reflected in the reduction in criticized and classified assets.
The ACL for residential and other consumer loans decreased by $9.5 million during the year ended December 31, 2021, from 0.29% to 0.11% of loans. This decrease was primarily driven by improved HPI and the impact of loans that rolled off of deferral and resumed regular payments.
The ACL for the CRE portfolio sub-segment, including multi-family, non-owner occupied CRE and construction and land, decreased by $75.8 million during the year ended December 31, 2021, from 1.52% to 0.51% of loans. The decrease in the ACL for CRE related to (i) changes in portfolio composition resulting from payoffs and improvements in the credit quality of existing loans as reflected in the reduction in criticized and classified loans, (ii) improvements in the commercial property forecasts, particularly vacancy rates in the multi-family and retail segments, (iii) improvements in economic conditions and the economic forecast related to unemployment and interest rates; and (iv) net charge-offs.
The ACL for the commercial and industrial sub-segment, including owner-occupied commercial real estate, decreased by $23.0 million during the year ended December 31, 2021, from 1.07% to 0.84% of loans. Significant factors contributing to the decrease included net charge-offs and improvements in economic conditions.
The ACL for the BFG franchise finance decreased by $19.6 million during the year ended December 31, 2021, from 6.61% to 4.90% of loans. This decrease is primarily attributed to improved levels of criticized and classified loans and net charge-offs.
The estimate of the ACL at December 31, 2021 was informed by economic scenarios published in December 2021, economic information provided by additional sources, information about borrower financial condition and collateral values, data reflecting the impact of recent events on individual borrowers and other relevant information. The economic forecast used
in modeling the ACL as of December 31, 2021 was a third-party provided baseline forecast. Some of the assumptions and data points informing the reasonable and supportable economic forecast used in estimating the ACL at December 31, 2021 included:
•Labor market assumptions, which reflected national unemployment at 3.9% for the first quarter of 2022, steadily declining to normalized levels of full employment of 3.5% through the end of 2022;
•Annualized growth in GDP at 5.4% for the first quarter of 2022, normalizing to an average of 3.5% through 2022;
•VIX trending at stabilized levels through the forecast horizon; and
•S&P 500 averaging near 4,300 through the reasonable and supportable forecast period.
Additional variables and assumptions not explicitly stated also contributed to the overall impact economic conditions and the economic forecast had on the ACL estimate. Furthermore, while the variables presented above are at the national level, many of the variables are regionalized at the market and submarket level in the models.
Changes in the ACL since the adoption of ASU 2016-13
The ACL decreased from $136.0 million or 0.59% of total loans at January 1, 2020, the date of adoption of ASU 2016-13, to $126.5 million or 0.53% of total loans at December 31, 2021. This decrease is primarily attributed to lower loss rates on pass-rated loans. Factors leading to those lower loss rates included, but were not necessarily limited to:
•For commercial portfolio segments:
◦a decrease in certain qualitative loss factors.weighted average remaining lives for most segments;
A decrease of $12.2 million for taxi medallion loans, resulting from the sale of substantially the entire portfolio during the fourth quarter 2018.
An increase of $4.6 million for other commercial and industrial loans was attributable to loan growth, offset by ◦a decrease in the historical net charge-off rate.
amount of loans outstanding;A $2.3 million increase for Bridge franchise finance primarily reflected ◦an increaseimproved economic forecast as compared to the date of adoption, particularly with respect to unemployment and stock market volatility;
◦an improved commercial property forecast; and
◦reduced "through the cycle" PDs due to improvements, on balance, in specificour pass-rated commercial borrowers' financial condition.
•For the residential segment:
◦improved unemployment forecasts;
◦improved HPI path; and
◦an increased proportion of government insured loans, which carry no reserves, for one impaired loan relationship and an increase in certain qualitative loss factors, partially offset byas a decline in historical net charge-off rates.
A $2.5 million increase for Bridge equipment finance primarily reflected an increase in specific reserves for one impaired loan relationship, offset by a decline in the historical net charge-off rate and in certain qualitative factors.percentage of total residential loans.
For additional information about the ALLL,ACL, see Note 4 to the consolidated financial statements.
Goodwill
Goodwill consists of $59 million recorded in conjunction with the FSB Acquisition, $8 million recorded in conjunction with the acquisition of two commercial lending subsidiaries in 2010 and $10 million recorded in conjunction with the SBF acquisition in May 2015. The Company has a single reporting unit. We perform goodwill impairment testing in the third quarter of each fiscal year. As of the 2018 impairment testing date, the estimated fair value of the reporting unit substantially exceeded its carrying amount; therefore, no impairment was indicated.
Deposits
A further breakdown of deposits as of December 31, 2018 and 2017at the dates indicated is shown below:
(1) Brokered deposits include certain timeThe estimated amount of uninsured deposits at December 31, 20182021 and 2017.
December 31, 2020 was $20.2 billion and $17.4 billion, respectively. Time deposit accounts with balances of $250,000 or more totaled $603 million and $1.1 billion at December 31, 2021 and December 31, 2020, respectively. The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $100,000uninsured time deposits as of December 31, 20182021 (in thousands):
| | | | | |
Three months or less | $ | 301,945 | |
Over three through six months | 225,861 | |
Over six through twelve months | 109,699 | |
Over twelve months | 21,079 | |
| $ | 658,584 | |
|
| | | |
Three months or less | $ | 1,233,867 |
|
Over three through six months | 488,522 |
|
Over six through twelve months | 1,236,723 |
|
Over twelve months | 1,162,899 |
|
| $ | 4,122,011 |
|
See Note 8 to the consolidated financial statements for more information about the Company's deposits.
FHLB Advances, Notes and Other Borrowings
In addition to deposits, we utilize FHLB advances to fund growth in interest earning assets;as a funding source; the advances provide us with additional flexibility in managing both term and cost of funding.funding and in managing interest rate risk. FHLB advances are secured by FHLB stock, qualifying residential first mortgage and commercial real estate and home equity loans, and MBS. The following table presents information about the contractual balance of outstanding FHLB advances as of December 31, 2021 (dollars in thousands):
| | | | | | | | | | | |
| Amount | | Weighted Average Rate |
Maturing in: | | | |
2022 - One month or less | $ | 1,210,000 | | | 0.18 | % |
2022 - Over one month | 595,000 | | | 0.20 | % |
| | | |
| | | |
Thereafter | 100,000 | | | 0.41 | % |
| | | |
Total contractual balance outstanding | $ | 1,905,000 | | | |
| | | |
| | | |
The table above reflects contractual maturities of outstanding advances and does not incorporate the impact that interest rate swaps designated as cash flow hedges have on the duration of borrowings.
The table below presents information about outstanding interest rate swaps hedging the variability of interest cash flows on the FHLB advances included in the table above, as of December 31, 2021 (dollars in thousands):
| | | | | | | | | | | |
| Notional Amount | | Weighted Average Rate |
Cash flow hedges maturing in: | | | |
2022 | $ | 210,000 | | | 2.48 | % |
2023 | 255,000 | | | 2.35 | % |
2024 | 210,000 | | | 1.69 | % |
2025 | 275,000 | | | 1.88 | % |
2026 | 130,000 | | | 1.93 | % |
Thereafter | 25,000 | | | 2.49 | % |
Cash flow hedges | $ | 1,105,000 | | | 2.08 | % |
| | | |
| | | |
During the year ended December 31, 2021, derivative positions designated as cash flow hedges with a notional amount totaling $401 million, at a weighted average pay rate of 3.24%, were discontinued following the Company's determination that the related forecasted transactions were not probable of occurring.
The Bank utilizes federal funds purchased to manage the daily cash position. At December 31, 2018, the Company had $175 million in federal funds purchased.
See Note 97 to the consolidated financial statements for more information about the Company's FHLB advances and senior notes. Additionally, see Note 1110 to the consolidated financial statements for more information about derivative instruments the Company uses to manage risk.
Liquidity and Capital Resources
Liquidity involves our ability to generate adequate funds to support planned interest rate risk relatedearning 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 variability inbe met primarily by cash flows duefrom operations, deposit growth, the investment portfolio and FHLB advances. FRB discount window borrowings provide an additional source of contingent liquidity. For the years ended December 31, 2021, 2020 and 2019 net cash provided by operating activities was $1.2 billion, $864 million and $636 million, respectively.
Available liquidity includes cash, borrowing capacity at the Federal Home Loan Bank of Atlanta and the Federal Reserve Discount Window, Federal Funds lines of credit and unpledged agency securities. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Bank's amortizing securities and loan portfolios, and the sale of investment securities. Management also has the ability to changesexert substantial control over the rate and timing of loan production, 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; we have, in interest ratesfact experienced growth in on-balance sheet liquidity.
The ALM policy establishes limits or operating thresholds for a number of measures of liquidity which are typically monitored monthly by the ALCO and quarterly by the Board of Directors. The primary measures used to dimension liquidity risk are the ratio of available liquidity to volatile liabilities and a liquidity stress test coverage ratio. Other measures employed to monitor and manage liquidity include but are not limited to a 30-day total liquidity ratio, a one-year liquidity ratio, a wholesale funding ratio, 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. At December 31, 2021, BankUnited was operating within acceptable thresholds and limits as prescribed by the ALM policy for each of these measures.
The ALM policy stipulates that BankUnited’s liquidity is considered within policy limits or thresholds if the available liquidity/volatile liabilities ratio, 30-day total liquidity ratio and one-year liquidity ratios exceed 100%. At December 31, 2021, BankUnited’s available liquidity/volatile liabilities ratio was 328%, the 30-day total liquidity ratio was 250% and the one-year liquidity ratio was 347%. The ALM policy also prescribes that the liquidity stress test coverage ratio exceed 100%; at December 31, 2021, that ratio was 187%. The Company 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.
The following table presents the Company's material cash requirements for the following twelve months as of December 31, 2021 (in thousands):
| | | | | |
| |
Interest on term deposits | $ | 8,408 | |
FHLB advances(1) | 1,808,783 | |
Notes and other borrowings(1) | 38,348 | |
Operating lease obligations | 20,657 | |
| $ | 1,876,196 | |
(1)Includes interest.to be paid on variable rate borrowings.
the outstanding contractual obligation.
Capital ResourcesAt December 31, 2021, the Company had $3.6 billion in term deposits with a contractual maturity of twelve months or less. The majority of term deposits are expected to roll over into new instruments; this amount therefore does not represent future anticipated cash requirements. Additionally, as discussed in Note 15 to the consolidated financial statements, the Bank had $497 million in outstanding commitments to fund loans and $3.9 billion in unfunded commitments under existing lines of credit at December 31, 2021. Many of these commitments are expected to expire without being fully funded and, therefore, also do not necessarily represent future cash requirements.
We expect that our liquidity needs and cash requirements will continue to be satisfied over the next twelve months through the sources of funds described above.
Pursuant to the FDIA, the federal banking agencies have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. At December 31, 20182021 and 2017, BankUnited2020, the Company and the CompanyBank had capital levels that exceeded both the regulatory well-capitalized guidelines and all internal capital ratio targets. The Company has elected the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period. See Note 1413 to the Consolidated Financial Statementsconsolidated financial statements for more information about the Company's and the Bank's regulatory capital ratios.
Stockholders' equity decreasedWe believe we are well positioned, from a capital perspective, to $2.9 billion atwithstand a severe downturn in the economy. We continue to evolve our stress testing framework and adapt it to evolving macro-economic conditions as necessary. The majority of our commercial portfolio is subject to quarterly stress test analysis. On an annual basis, we also run a rigorous stress test of our entire balance sheet and, where applicable, we incorporate considerations for evolving macro-economic themes. The most recent balance sheet wide stress test was performed in mid-2021 for the portfolio as of December 31, 2018, a decrease2020 using the 2021 DFAST severely adverse scenario. The results of $102 million, or 3.38%, from December 31, 2017, due primarily tothis stress test projected regulatory capital ratios in excess of all well capitalized thresholds in the repurchase of common shares and payment of dividends, offset by the retention of earnings. Our dividend payout ratio was 28.0% and 15.0% for the years ended December 31, 2018 and 2017, respectively.
In 2018, the Company repurchased approximately 8.4 million shares of common stock for an aggregate purchase price of approximately $300 million.
In January 2019 the Board of Directors of the Company authorized the repurchase of up to an additional $150 million in shares of its outstanding common stock, subject to any applicable regulatory approvals. Any repurchases will be made in accordance with applicable securities laws from time to time in open market or private transactions. The extent to which the Company repurchases shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, the Company’s capital position, regulatory requirements and other considerations. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.severely adverse scenario.
We filed ahave an active shelf registration statement on file with the SEC in October 2018 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.
Liquidity
Liquidity involves our ability to generate adequate funds to support planned interest earning asset growth, meet deposit withdrawal requests, maintain reserve requirements, conduct routine operations, pay dividends, service outstanding debt and meet other contractual obligations.
Primary sources of liquidity include cash flows from operations, deposit growth, the available for sale securities portfolio and FHLB advances.
For the years ended December 31, 2018, 2017 and 2016 net cash provided by operating activities was $824.3 million, $318.6 million, and $308.5 million, respectively. Accretion on ACI loans, which is reflected as a non-cash reduction in net income to arrive at operating cash flows, totaled $369.9 million, $301.8 million and $303.9 million for the years ended December 31, 2018, 2017 and 2016, respectively. Accretable yield on ACI loans represents the excess of expected future cash flows over the carrying amount of the loans, and is recognized as interest income over the expected lives of the loans. Amounts recorded as accretion are realized in cash as individual loans are paid down or otherwise resolved; however, the timing of cash realization may differ from the timing of income recognition. These cash flows from the repayment or resolution of covered loans, inclusive of amounts that have been accreted through earnings over time, are recognized as cash flows from investing activities in the consolidated statements of cash flows upon receipt. Cash payments from the FDIC in the form of reimbursements of losses related to the covered loans under the Single Family Shared-Loss Agreement are also characterized as investing cash flows. Cash generated by the repayment and resolution of covered loans and reimbursements from the FDIC totaled $707.0 million, $469.3 million and $558.5 million for the years ended December 31, 2018, 2017 and 2016, respectively. The Single Family Shared-Loss Agreement was terminated on February 13, 2019.
In addition to cash provided by operating activities, the repayment and resolution of covered loans and payments under the Single Family Shared-Loss Agreement from the FDIC, BankUnited’s liquidity needs, particularly liquidity to fund growth of interest earning assets, have been and continue to be met by deposit growth and FHLB advances. The investment portfolio also provides a source of liquidity.
BankUnited has access to additional liquidity through FHLB advances, other collateralized borrowings, wholesale deposits or the sale of available for sale securities. At December 31, 2018, unencumbered investment securities totaled $5.9 billion. At December 31, 2018, BankUnited had available borrowing capacity at the FHLB of $3.7 billion, unused borrowing capacity at the FRB of $410 million and unused Federal funds lines of credit totaling $85 million. Management also has the ability to exert substantial control over the rate and timing of growth of the loan portfolio, and resultant requirements for liquidity to fund loans.
Continued growth of deposits and loans are the most significant trends expected to impact the Bank’s liquidity in the near term.
The ALCO policy has established several measures of liquidity which are monitored monthly by the ALCO and quarterly by the Board of Directors. One 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. BankUnited’s liquidity is considered acceptable if the 30 day total liquidity ratio exceeds 100%. At December 31, 2018, BankUnited’s 30 day total liquidity ratio was 210%. 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 December 31, 2018, BankUnited’s one year liquidity ratio was 165%. Additional measures of liquidity regularly monitored by the ALCO include the ratio of wholesale funding to total assets, a measure of available liquidity to volatile liabilities, the ratio of brokered deposits to total deposits, the ratio of FHLB advances to total funding, the percentage of investment securities backed by the U.S. government and government agencies and concentrations of large deposits. At December 31, 2018, BankUnited was within acceptable limits established by the ALCO and the Board of Directors for each of these measures.
As a holding company, BankUnited, Inc. is a corporation separate and apart from its banking subsidiary, and therefore, provides for its own liquidity. BankUnited, Inc.’s main sources of funds include management fees and dividends from the Bank, access to capital markets and, to a lesser extent, its own available for sale securities portfolio. There are regulatory limitations that 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
TheA 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 guidelinesthresholds established by the ALCO are approved at least annually by the Board of Directors.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. Simulations are generated based on both static and dynamic balance sheet assumptions. Management continually reviews and refines its interest rate risk management process in response to changes in the interest rate environment, the economic climate and economic climate.observed customer behavior. Currently, our model projectsinterest rate risk policy framework is based on modeling instantaneous rate shocks of downplus and minus 100, 200, down100, plus 100, plus 200, plus 300 and plus 400 basis point shifts as well as flatteningshifts. We also model a variety of yield curve slope and inverted yield curvedynamic 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 ALCOALM policy provides that net interest income sensitivity will be considered acceptable if decreases in forecast net interest income based on a dynamic forecasted balance sheet, 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 December 31, 2021, the most likely rate scenario assumed that all indices are floored at 0%. We did not apply the falling rate scenarios at December 31, 2021 due to the low level of current interest rates. The following table illustrates the acceptable limits as defined bythresholds set forth in the ALM policy and the impact on forecasted net interest income of down 200, down 100, plus 100, plus 200, plus 300 and plus 400 basis point rate shockin the indicated simulated scenarios at December 31, 20182021 and 2017:2020:
| | | | | | | | | | | | | | | | Down 100 | | Plus 100 | | Plus 200 | | Plus 300 | | Plus 400 |
| Down 200 | | Down 100 | | Plus 100 | | Plus 200 | | Plus 300 | | Plus 400 | |
Policy Limits: | | | | | | | | | | | | |
Policy Thresholds: | | Policy Thresholds: | | | | | | | | | | |
In year 1 | (10.0 | )% | | (6.0 | )% | | (6.0 | )% | | (10.0 | )% | | (14.0 | )% | | (18.0 | )% | In year 1 | | (6.0) | % | | (6.0) | % | | (10.0) | % | | (14.0) | % | | (18.0) | % |
In year 2 | (13.0 | )% | | (9.0 | )% | | (9.0 | )% | | (13.0 | )% | | (17.0 | )% | | (21.0 | )% | In year 2 | | (9.0) | % | | (9.0) | % | | (13.0) | % | | (17.0) | % | | (21.0) | % |
Model Results at December 31, 2018 - increase (decrease): | | | | | | | | | | | | |
Model Results at December 31, 2021 - increase: | | Model Results at December 31, 2021 - increase: | | |
In year 1 | (4.3 | )% | | (0.8 | )% | | 0.3 | % | | (0.9 | )% | | (2.4 | )% | | (5.6 | )% | In year 1 | | N/A | | 2.5 | % | | 3.9 | % | | 4.3 | % | | 4.2 | % |
In year 2 | (9.7 | )% | | (3.0 | )% | | 3.6 | % | | 4.4 | % | | 4.0 | % | | 3.1 | % | In year 2 | | N/A | | 6.6 | % | | 11.5 | % | | 15.8 | % | | 20.4 | % |
Model Results at December 31, 2017 - increase (decrease): | | | | | | | | | | | | |
Model Results at December 31, 2020 - increase: | | Model Results at December 31, 2020 - increase: | | |
In year 1 | N/A |
| | (0.3 | )% | | (0.1 | )% | | (0.5 | )% | | (1.4 | )% | | (2.7 | )% | In year 1 | | N/A | | 2.9 | % | | 3.9 | % | | 3.2 | % | | 1.9 | % |
In year 2 | N/A |
| | (3.5 | )% | | 1.8 | % | | 3.2 | % | | 4.3 | % | | 4.8 | % | In year 2 | | N/A | | 5.0 | % | | 7.8 | % | | 9.0 | % | | 9.5 | % |
Management also simulates changes in EVE in various interest rate environments. The ALCOALM 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. Prior to December 31, 2018, weWe did not simulate decreases in interest rates greater than 200 basis pointsat December 31, 2021 due to lower rate environment at that time.the currently low level of market interest rates. The following table illustrates the acceptable limitsthresholds as established by ALCO and the modeled change in EVE in plus or down 200, down 100, plus 200, plus 300 and plus 400 basis pointthe indicated scenarios at December 31, 20182021 and 2017:2020:
|
| | | | | | | | | | | | | | | | | |
| Down 200 | | Down 100 | | Plus 100 | | Plus 200 | | Plus 300 | | Plus 400 |
Policy Limits | (18.0 | )% | | (9.0 | )% | | (9.0 | )% | | (18.0 | )% | | (27.0 | )% | | (36.0 | )% |
Model Results at December 31, 2018 - increase (decrease): | 0.6 | % | | 2.5 | % | | (3.1 | )% | | (7.5 | )% | | (12.4 | )% | | (17.3 | )% |
Model Results at December 31, 2017 - increase (decrease): | N/A |
| | 1.9 | % | | (3.8 | )% | | (8.0 | )% | | (12.4 | )% | | (16.9 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 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 December 31, 2021 - increase (decrease): | | | N/A | | 0.4 | % | | (1.0) | % | | (3.2) | % | | (5.0) | % |
Model Results at December 31, 2020 - increase (decrease): | | | N/A | | 0.8 | % | | (2.0) | % | | (6.1) | % | | (10.0) | % |
These measures fall within an acceptable level of interest rate risk per the policiesthresholds established byin the ALCO and the Board of Directors. In the event the models indicate an unacceptable level of risk, the Company could undertake a number of actions that would reduce this risk, including the sale or re-positioning of a portion of its investment portfolio, restructuring of borrowings, or the use of derivatives such as interest rate swaps and caps.ALM 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 and caps 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 ratescash flows on
variable rate liabilities and to changes in the fair value of fixed rate borrowings, suchin each case caused by fluctuations in benchmark interest rates, as FHLB advances andwell as to manage duration of liabilities. These interest rate swaps are designated as cash flow hedging instruments. The fair value of thesederivative instruments designated as hedges is included in other assets and other liabilities in our consolidated balance sheets and changessheets. 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 December 31, 2018,2021, outstanding interest rate swaps and caps designated as cash flow hedges had an aggregate notional amount of $2.8$1.1 billion. The aggregate fair value of interest rate swaps designated as cash flow hedges included in other assets was $3.4 million.
Interest rate swaps and caps not designated as cash flow hedges had an aggregate notional amount of $2.3$3.4 billion at December 31, 2018. The aggregate fair value of these interest rate swaps and caps included in other assets was $26.2 million and the aggregate fair value included in other liabilities was $23.9 million.2021. 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.
During the year ended December 31, 2021, the Company terminated $401 million in notional of pay-fixed interest rate swaps designated as cash flow hedges at a weighted average pay rate of 3.24%, These swaps were discontinued following the Company's determination that the hedged forecasted transactions were not probable of occurrence.
See Note 1110 to the consolidated financial statements for additional information about derivative financial instruments.
Off-Balance Sheet ArrangementsLIBOR Transition
The FCA, which regulates LIBOR, continued the process of phasing out LIBOR by discontinuing the one-week and two-month LIBOR tenors effective December 31, 2021. The remaining tenors will be discontinued effective June 30, 2023. Banking regulators have indicated that an increase in the amount or extension of LIBOR exposures after December 31, 2021 may be considered an unsafe and unsound banking practice. To manage the Company's transition from LIBOR to one or more alternative reference rates, we established a cross-functional LIBOR transition working group that (i) assessed the Company's current exposure to LIBOR indexed instruments and the systems, models and processes that will be impacted; (ii) developed a formal governance structure for the transition; and (iii) established and began execution of a detailed transition implementation plan. We routinely enter into commitmentshave taken the following actions, among others, to extend creditfacilitate the transition to alternative reference rates by the Bank and our customers, including commitmentscustomers:
• Evaluated the fallback language in all financial instruments referencing LIBOR, and effective January 2021, adopted the ARRC recommended hardwired approach fallback provisions incorporating SOFR pursuant to funda waterfall for all bilateral commercial loans or lineswhich provide for the determination of creditreplacement rates for LIBOR-linked financial products;
• Adhered to the 2020 ISDA IBOR Fallbacks Protocol to amend fallback language in all of our existing derivative counterparty agreements;
• Adopted primarily SOFR based products and pricing for newly originated commercial loans and standby lettersinterest rate swaps for borrowers, purchases of credit. The credit risk associated with these commitments is essentiallyresidential mortgage loans and investment securities and derivative hedging instruments;
• Implemented SOFR as the same as that involvedpreferred alternative to LIBOR while continuing to evaluate the use of other alternative reference rates;
•Completed testing and implementation of replacement indices in extending loansapplicable systems and models;
•Ceased quoting LIBOR to customers effective September 30, 2021 and theyceased originating new products linked to LIBOR effective December 31, 2021;
•Established ongoing education of client-facing associates and customers; and
•Established a LIBOR transition burn-down plan for bilateral and agent loans based on the expected maturity date if maturing prior to March 2023 and planned transition dates for all others . For these loans we have begun to proactively contact our borrowers to transition to an alternative reference rate, and for participated loans where BankUnited is not the lead bank, we are subjectcommencing an outreach to our normal credit policies and approval processes. While these commitments represent contractual cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.lead banks in 2022.
For more information on commitments, see Note 16 to the consolidated financial statements.
Contractual Obligations
The following table contains supplementalpresents information regarding our significant outstanding contractual obligations, including interestabout the Company's exposure to be paid on FHLB advances, long-term borrowings and time deposits,instruments that reference LIBOR as of December 31, 20182021 (in thousands): | | | | | | | | | | | | | | | | | |
| Maturing | | |
| Prior to June 30, 2023 | | After June 30, 2023 | | Total |
Investment securities | $ | — | | | $ | 4,972,906 | | | $ | 4,972,906 | |
Non-marketable equity securities | 87,600 | | | — | | | 87,600 | |
Loans | 2,100,939 | | | 6,517,972 | | | 8,618,911 | |
FHLB advances | — | | | 100,000 | | | 100,000 | |
Interest rate derivative contracts (1) | 550,600 | | | 3,796,800 | | | 4,347,400 | |
| $ | 2,739,139 | | | $ | 15,387,678 | | | $ | 18,126,817 | |
(1)Represents notional amount.
Impact of the COVID-19 Pandemic
A discussion of how our Company has been, continues to be and may be impacted in the future by the COVID-19 pandemic follows. These matters are discussed in further detail, as applicable, throughout this Form 10-K. A more detailed discussion of the effects the COVID-19 pandemic had initially and during 2020 on our Company appears in the "Impact of the COVID-19 Pandemic and Our Response" section in the MD&A of the Company's 2020 Annual report on Form 10-K.
2021 was characterized broadly by economy recovery, evidenced by improving economic indicators such as GDP growth, unemployment and property valuations. Fiscal and monetary policy have remained accommodative, although there is uncertainty regarding their future trajectory. Inflationary pressures and supply chain disruptions are also contributing to uncertainty about the economy. Vaccines have been made widely available and many restrictions on social and economic activity have been lifted or relaxed. However, uncertainty remains regarding Omicron or other future variants of the COVID-19 virus that may emerge and the potential impact of any further threats to public health related to the virus.
Our results of operations and financial condition and our physical operations were impacted by the COVID-19 pandemic.
•The COVID-19 pandemic and its effect on the economy and our borrowers has impacted the provision for credit losses and the ACL. The provision for credit losses has been more volatile since the onset of the pandemic; deterioration in economic conditions led to a higher provision for credit losses during the year ended December 31, 2020, while improvement in economic conditions and our reasonable and supportable economic forecast contributed to a recovery of the provision for credit losses of $(67.1) million for the year ended December 31, 2021. There continues to be uncertainty as to the ultimate impact of the COVID-19 crisis on future credit loss expense and future levels of the ACL. The provision for credit losses may continue to be volatile and the level of the ACL may change materially from current levels. Future levels of the ACL could be significantly impacted, in either direction, by changes in the economic outlook and by the evolving impact of the pandemic and related events on individual borrowers in the portfolio.
•Levels of criticized and classified assets and non-performing assets increased in 2020, largely as a result of the impact or potential impact the pandemic had on our borrowers and certain portfolio sub-segments. Additionally, a significant number of borrowers requested and were granted relief in the form of temporary payment deferrals or modifications. Although levels of criticized and classified loans remain elevated compared to historical levels, criticized and classified loans declined by a total of $1.2 billion and loans on short-term deferral or subject to modification under the CARES Act declined by $589 million during the year ended December 31, 2021. Net charge-off levels have also increased since the onset of the pandemic. The full impact of the pandemic on levels of criticized and classified assets and charge-offs may not yet be known. See the section entitled "Asset Quality" for further discussion.
•The level of commercial loan origination activity, outside of our participation in the PPP, and line utilization have generally remained below pre-pandemic levels. While our pipelines have improved and we currently expect commercial loan growth to accelerate in 2022, the amount of growth we are able to achieve will depend at least to some extent on the future trajectory of the pandemic and on the pace and timing of economic recovery generally and its impact on existing and potential borrowers specifically.
•To date, we have not experienced constraints on liquidity related to the pandemic.
•The majority of our non-branch employees continue to work remotely. For the most part, our branches have resumed normal operations.
|
| | | | | | | | | | | | | | | | | | | |
| Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
FHLB advances | $ | 4,860,020 |
| | $ | 4,191,503 |
| | $ | 668,517 |
| | $ | — |
| | $ | — |
|
4.875% Senior notes due 2025 | 536,500 |
| | 19,500 |
| | 39,000 |
| | 39,000 |
| | 439,000 |
|
Operating lease obligations | 120,103 |
| | 21,207 |
| | 33,487 |
| | 22,425 |
| | 42,984 |
|
Time deposits | 6,955,654 |
| | 5,225,960 |
| | 1,654,991 |
| | 74,703 |
| | — |
|
Capital lease obligations | 12,808 |
| | 1,878 |
| | 3,928 |
| | 4,177 |
| | 2,825 |
|
| $ | 12,485,085 |
| | $ | 9,460,048 |
| | $ | 2,399,923 |
| | $ | 140,305 |
| | $ | 484,809 |
|
In response to the still evolving and uncertain situation predicated by the COVID-19 pandemic, we continue to do the following:
•We continue to operate under our business continuity plan, under the leadership of our executive management and to regularly update our Board on any new developments.
•At the onset of the pandemic, we implemented measures to ensure that our technology and internal controls continued to operate effectively. Those measures remain in place and to date, we have not experienced what we would characterize as major technology disruptions or identified instances in which our control environment failed to operate effectively.
•Enhanced liquidity monitoring protocols adopted at the onset of the pandemic remain in place.
•Enhanced loan portfolio management and monitoring and stress testing implemented in response to the pandemic remain in place.
•We continue to provide a variety of programs to keep our employees healthy and engaged.
•We are focused on planning for a successful return to office for employees who have worked largely remotely since the onset of the pandemic, and are planning to adopt a hybrid work model for most of our non-branch employees.
Non-GAAP Financial Measures
Tangible book value per common share is a non-GAAP financial measure. Management believes this measure is relevant to understanding the capital position and performance of the Company. Disclosure of this non-GAAP financial measure also provides a meaningful basebasis for comparabilitycomparison to other financial institutions.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 December 31, of the yearsdates indicated (in thousands except share and per share data):
| | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | December 31, 2020 | | | | | | |
Total stockholders’ equity | $ | 3,037,761 | | | | | $ | 2,983,012 | | | | | | |
Less: goodwill and other intangible assets | 77,637 | | | | 77,637 | | | | | | |
Tangible stockholders’ equity | $ | 2,960,124 | | | | | $ | 2,905,375 | | | | | | | |
| | | | | | | | | | | |
Common shares issued and outstanding | 85,647,986 | | | | | 93,067,500 | | | | | | |
| | | | | | | | | | | |
Book value per common share | $ | 35.47 | | | | | $ | 32.05 | | | | | | | |
| | | | | | | | | | | |
Tangible book value per common share | $ | 34.56 | | | | | $ | 31.22 | | | | | | | |
| | | | | | | | | | | |
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| 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
Total stockholders' equity | $ | 2,923,833 |
| | $ | 3,026,062 |
| | $ | 2,418,429 |
| | $ | 2,243,898 |
| | $ | 2,052,534 |
|
Less: goodwill and other intangible assets | 77,718 |
| | 77,796 |
| | 78,047 |
| | 78,330 |
| | 68,414 |
|
Tangible stockholders’ equity | $ | 2,846,115 |
| | $ | 2,948,266 |
| | $ | 2,340,382 |
| | $ | 2,165,568 |
| | $ | 1,984,120 |
|
| | | | | | | | | |
Common shares issued and outstanding | 99,141,374 |
| | 106,848,185 |
| | 104,166,945 |
| | 103,626,255 |
| | 101,656,702 |
|
| | | | | | | | | |
Book value per common share | $ | 29.49 |
| | $ | 28.32 |
| | $ | 23.22 |
| | $ | 21.65 |
| | $ | 20.19 |
|
| | | | | | | | | |
Tangible book value per common share | $ | 28.71 |
| | $ | 27.59 |
| | $ | 22.47 |
| | $ | 20.90 |
| | $ | 19.52 |
|
| | | | | | | | | |
Total assets | $ | 32,164,326 |
| | $ | 30,346,986 |
| | $ | 27,880,151 |
| | $ | 23,883,467 |
| | $ | 19,210,529 |
|
Less: goodwill and other intangible assets | 77,718 |
| | 77,796 |
| | 78,047 |
| | 78,330 |
| | 68,414 |
|
Tangible assets | $ | 32,086,608 |
| | $ | 30,269,190 |
| | $ | 27,802,104 |
| | $ | 23,805,137 |
| | $ | 19,142,115 |
|
| | | | | | | | | |
Equity to assets ratio | 9.09 | % | | 9.97 | % | | 8.67 | % | | 9.40 | % | | 10.68 | % |
| | | | | | | | | |
Tangible common equity to tangible assets ratio | 8.87 | % | | 9.74 | % | | 8.42 | % | | 9.10 | % | | 10.37 | % |
Net income and earnings per diluted common share, in each case excluding the impact of a discrete income tax benefit and related professional fees are non-GAAP financial measures. Management believes disclosure of these measures enhances readers' ability to compare the Company's financial performance for the current period to that of other periods presented. The following table reconciles these non-GAAP financial measurements to the comparable GAAP financial measurements of net income and earnings per diluted common share for the year ended December 31, 2017 (in thousands except share and per share data):
|
| | | |
| Year Ended December 31, 2017 |
Net income excluding the impact of a discrete income tax benefit and related professional fees: | |
Net income (GAAP) | $ | 614,273 |
|
Less discrete income tax benefit | (327,945 | ) |
Add back related professional fees (net of tax of $1,802 and $524) | 4,995 |
|
Net income excluding the impact of a discrete income tax benefit and related professional fees (non-GAAP) | $ | 291,323 |
|
| |
Diluted earnings per common share, excluding the impact of a discrete income tax benefit and related professional fees: |
|
|
Diluted earnings per common share (GAAP) | $ | 5.58 |
|
Less impact on diluted earnings per common share of discrete income tax benefit and related professional fees, before allocation to participating securities (non-GAAP) | (3.05 | ) |
Less impact on diluted earnings per common share of discrete income tax benefit and related professional fees allocated to participating securities (non-GAAP) | 0.12 |
|
Diluted earnings per common share, excluding the impact of a discrete income tax benefit and related professional fees (non-GAAP) | $ | 2.65 |
|
| |
Impact on diluted earnings per common share of discrete income tax benefit and related professional fees, before allocation to participating securities: | |
Discrete income tax benefit and related professional fees, net of tax | $ | 322,950 |
|
Weighted average shares for diluted earnings per share (GAAP) | 105,857,487 |
|
Impact on diluted earnings per common share of discrete income tax benefit and related professional fees, before allocation to participating securities (non-GAAP) | $ | 3.05 |
|
| |
Impact on diluted earnings per common share of discrete income tax benefit and related professional fees allocated to participating securities: | |
Discrete income tax benefit and related professional fees, net of tax, allocated to participating securities | $ | (12,424 | ) |
Weighted average shares for diluted earnings per share (GAAP) | 105,857,487 |
|
Impact on diluted earnings per common share of discrete income tax benefit and related professional fees allocated to participating securities (non-GAAP) | $ | (0.12 | ) |
The effective tax rate excluding the impact of the discrete income tax benefit and the impact of the change in the federal statutory rate on existing deferred tax assets and liabilities is a non-GAAP financial measure. Management believes disclosure of this measure enhances readers' ability to compare the Company's financial performance for the current period to that of other periods presented. The following table reconciles this non-GAAP financial measurement to the comparable GAAP financial measurement of the effective tax rate for the for the year ended December 31, 2017 (dollars in thousands):
|
| | | |
| Year Ended December 31, 2017 |
Effective income tax rate, excluding the impact of a discrete income tax benefit and impact of enactment of the Tax Cuts and Jobs Act of 2017: | |
Effective income tax rate (GAAP) | (51.9 | )% |
Less impact on effective income tax rate of discrete income tax benefit and enactment of the Tax Cuts and Jobs Act of 2017 (non-GAAP) | 82.0 | % |
Effective income tax rate, excluding the impact of a discrete income tax benefit and enactment of the Tax Cuts and Jobs Act of 2017 (non-GAAP) | 30.1 | % |
|
|
Impact on effective income tax rate of discrete income tax benefit and enactment of the Tax Cuts and Jobs Act of 2017 (non-GAAP): | |
Discrete income tax benefit | $ | (327,945 | ) |
Tax benefit recognized from enactment of the Tax Cuts and Jobs Act of 2017 | (3,744 | ) |
| $ | (331,689 | ) |
Income before income taxes (GAAP) | 404,461 |
|
Impact on effective income tax rate of discrete income tax benefit and enactment of the Tax Cuts and Jobs Act of 2017 (non-GAAP) | (82.0 | )% |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See the section entitled “Interest Rate Risk” included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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BankUnited, Inc. Consolidated Financial Statements for the Years ended December 31, 2018, 20172021, 2020 and 20162019 | |
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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Company's principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under the framework in Internal Control—Integrated Framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018.2021.
The effectiveness of the Company's internal control over financial reporting as of December 31, 20182021 has been audited by KPMGDeloitte and Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Report of Independent Registered Public Accounting Firm
To the stockholders and boardBoard of directors
Directors of BankUnited, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheetssheet of BankUnited, Inc. and subsidiaries (the "Company") as of December 31, 2018 and 2017,2021, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’stockholders' equity for each of the years in the three‑year period ended December 31, 2018,2021, and the related notes (collectively referred to as the "consolidated financial"financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017,2021, and the results of its operations and its cash flows for each of the years in the three-year periodyear ended December 31, 2018,2021, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control -— Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 201924, 2022, expressed an unqualified opinion on the effectiveness of the Company’sCompany's internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidatedthe Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditsaudit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our auditsaudit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our auditsaudit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our auditsaudit provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses — Refer to Notes 1 and 4 to the financial statements
Critical Audit Matter Description
The allowance for credit losses (“ACL”) is management's estimate of the current 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. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently subjective and uncertain. The measurement of expected credit losses encompasses information about historical events, current conditions, and reasonable and supportable economic forecasts. Factors that may be considered in determining the amount of the ACL include but are not limited to, product or collateral type, industry, geography, internal risk rating, credit characteristics such as credit scores or collateral values, delinquency rates, historical or expected credit loss patterns and other quantitative and qualitative factors considered to have an impact on the adequacy of the ACL and the ability of borrowers to repay their loans. The adequacy of the ACL is also dependent on the effectiveness of the underlying models used in determining the estimate.
Expected credit losses are estimated over the contractual terms of the loans 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 probability of default (“PD”) and loss given default (“LGD”). Projected PDs and LGDs, determined based on pool level characteristics, are applied to estimated exposure at
default. Measures of PD incorporate current conditions through market cycle or credit cycle adjustments. PDs and LGDs are then conditioned on the reasonable and supportable economic forecast. For criticized or classified loans, PDs are adjusted to benchmark PDs established for each risk rating if the most current financial information available is deemed not to be reflective of the borrowers' current financial condition.
Given the complex nature of estimating the ACL, performing audit procedures to evaluate whether the ACL was appropriately recorded as of December 31, 2021 required a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit specialist.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures to test the ACL for the loan portfolio included the following, among others:
•We tested the effectiveness of controls over the ACL including management’s controls over model development and maintenance, data transfers into and out of the models, final quantitative model results, and application of any qualitative adjustments.
•We involved our credit specialists to assist us in evaluating the reasonableness and conceptual soundness of the methodologies applied in the credit loss estimation models.
•We tested the completeness and accuracy of the data used in the models.
•We evaluated the reasonableness of the qualitative adjustments within the ACL estimate.
/s/KPMG Deloitte and Touche LLP
Miami, Florida
February 24, 2022
We have served as the Company's auditor since 2009.2021.
February 27, 2019
Report of Independent Registered Public Accounting Firm
To the stockholders and boardthe Board of directors
Directors of BankUnited, Inc.:
Opinion on Internal Control Overover Financial Reporting
We have audited BankUnited, Inc.'s and subsidiaries’ (the "Company")the internal control over financial reporting of BankUnited Inc. and subsidiaries (the “Company”) as of December 31, 2018,2021, based on criteria established in Internal Control -— Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.COSO.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB), the consolidated balance sheetsfinancial statements as of and for the year ended December 31, 2021, of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the "consolidated financial statements"), and our report dated February 27, 201924, 2022, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management'sManagement’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Overover Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/KPMGDeloitte and Touche LLP
Miami, Florida
February 27, 201924, 2022
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
BankUnited, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of BankUnited, Inc. and subsidiaries (the Company) as of December 31, 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two‑year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for each of the years in the two‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
As discussed in Note 4 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments –Credit Losses.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/KPMG LLP
We served as the Company’s auditor from 2009 to 2021.
Charlotte, North Carolina
February 26, 2021
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) |
| | | | | | | |
| December 31, 2018 | | December 31, 2017 |
ASSETS | |
| | |
|
Cash and due from banks: | |
| | |
|
Non-interest bearing | $ | 9,392 |
| | $ | 35,246 |
|
Interest bearing | 372,681 |
| | 159,336 |
|
Cash and cash equivalents | 382,073 |
| | 194,582 |
|
Investment securities (including securities recorded at fair value of $8,156,878 and $6,680,832) | 8,166,878 |
| | 6,690,832 |
|
Non-marketable equity securities | 267,052 |
| | 265,989 |
|
Loans held for sale | 36,992 |
| | 34,097 |
|
Loans (including covered loans of $201,376 and $503,118) | 21,977,008 |
| | 21,416,504 |
|
Allowance for loan and lease losses | (109,931 | ) | | (144,795 | ) |
Loans, net | 21,867,077 |
| | 21,271,709 |
|
FDIC indemnification asset | — |
| | 295,635 |
|
Bank owned life insurance | 263,340 |
| | 252,462 |
|
Equipment under operating lease, net | 702,354 |
| | 599,502 |
|
Goodwill and other intangible assets | 77,718 |
| | 77,796 |
|
Other assets | 400,842 |
| | 664,382 |
|
Total assets | $ | 32,164,326 |
| | $ | 30,346,986 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
|
Liabilities: | |
| | |
|
Demand deposits: | |
| | |
|
Non-interest bearing | $ | 3,621,254 |
| | $ | 3,071,032 |
|
Interest bearing | 1,771,465 |
| | 1,757,581 |
|
Savings and money market | 11,261,746 |
| | 10,715,024 |
|
Time | 6,819,758 |
| | 6,334,842 |
|
Total deposits | 23,474,223 |
| | 21,878,479 |
|
Federal funds purchased | 175,000 |
| | — |
|
Federal Home Loan Bank advances | 4,796,000 |
| | 4,771,000 |
|
Notes and other borrowings | 402,749 |
| | 402,830 |
|
Other liabilities | 392,521 |
| | 268,615 |
|
Total liabilities | 29,240,493 |
| | 27,320,924 |
|
| | | |
Commitments and contingencies |
|
| |
|
|
| | | |
Stockholders' equity: | |
| | |
|
Common stock, par value $0.01 per share, 400,000,000 shares authorized; 99,141,374 and 106,848,185 shares issued and outstanding | 991 |
| | 1,068 |
|
Paid-in capital | 1,220,147 |
| | 1,498,227 |
|
Retained earnings | 1,697,822 |
| | 1,471,781 |
|
Accumulated other comprehensive income | 4,873 |
| | 54,986 |
|
Total stockholders' equity | 2,923,833 |
| | 3,026,062 |
|
Total liabilities and stockholders' equity | $ | 32,164,326 |
| | $ | 30,346,986 |
|
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
ASSETS | | | |
Cash and due from banks: | | | |
Non-interest bearing | $ | 19,143 | | | $ | 20,233 | |
Interest bearing | 295,714 | | | 377,483 | |
Cash and cash equivalents | 314,857 | | | 397,716 | |
Investment securities (including securities recorded at fair value of $10,054,198 and $9,166,683) | 10,064,198 | | | 9,176,683 | |
Non-marketable equity securities | 135,859 | | | 195,865 | |
Loans held for sale | — | | | 24,676 | |
Loans | 23,765,053 | | | 23,866,042 | |
Allowance for credit losses | (126,457) | | | (257,323) | |
Loans, net | 23,638,596 | | | 23,608,719 | |
Bank owned life insurance | 309,477 | | | 294,629 | |
Operating lease equipment, net | 640,726 | | | 663,517 | |
| | | |
Goodwill | 77,637 | | | 77,637 | |
Other assets | 634,046 | | | 571,051 | |
Total assets | $ | 35,815,396 | | | $ | 35,010,493 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Liabilities: | | | |
Demand deposits: | | | |
Non-interest bearing | $ | 8,975,621 | | | $ | 7,008,838 | |
Interest bearing | 3,709,493 | | | 3,020,039 | |
Savings and money market | 13,368,745 | | | 12,659,740 | |
Time | 3,384,243 | | | 4,807,199 | |
Total deposits | 29,438,102 | | | 27,495,816 | |
Federal funds purchased | 199,000 | | | 180,000 | |
FHLB advances | 1,905,000 | | | 3,122,999 | |
Notes and other borrowings | 721,416 | | | 722,495 | |
Other liabilities | 514,117 | | | 506,171 | |
Total liabilities | 32,777,635 | | | 32,027,481 | |
| | | |
Commitments and contingencies | 0 | | 0 |
| | | |
Stockholders' equity: | | | |
Common stock, par value $0.01 per share, 400,000,000 shares authorized; 85,647,986 and 93,067,500 shares issued and outstanding | 856 | | | 931 | |
Paid-in capital | 707,503 | | | 1,017,518 | |
Retained earnings | 2,345,342 | | | 2,013,715 | |
Accumulated other comprehensive loss | (15,940) | | | (49,152) | |
Total stockholders' equity | 3,037,761 | | | 2,983,012 | |
Total liabilities and stockholders' equity | $ | 35,815,396 | | | $ | 35,010,493 | |
72
The accompanying notes are an integral part of these consolidated financial statements
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2021 | | 2020 | | 2019 |
Interest income: | | | | | | | | | |
Loans | | | | | $ | 800,819 | | | $ | 864,175 | | | $ | 981,408 | |
Investment securities | | | | | 152,619 | | | 193,856 | | | 280,560 | |
Other | | | | | 6,010 | | | 9,578 | | | 19,902 | |
Total interest income | | | | | 959,448 | | | 1,067,609 | | | 1,281,870 | |
Interest expense: | | | | | | | | | |
Deposits | | | | | 67,596 | | | 199,980 | | | 385,180 | |
Borrowings | | | | | 96,164 | | | 115,871 | | | 143,905 | |
Total interest expense | | | | | 163,760 | | | 315,851 | | | 529,085 | |
Net interest income before provision for credit losses | | | | | 795,688 | | | 751,758 | | | 752,785 | |
Provision for (recovery of) credit losses | | | | | (67,119) | | | 178,431 | | | 8,904 | |
Net interest income after provision for credit losses | | | | | 862,807 | | | 573,327 | | | 743,881 | |
Non-interest income: | | | | | | | | | |
Deposit service charges and fees | | | | | 21,685 | | | 16,496 | | | 16,539 | |
Gain on sale of loans, net | | | | | 24,394 | | | 13,170 | | | 12,119 | |
Gain on investment securities, net | | | | | 6,446 | | | 17,767 | | | 21,174 | |
Lease financing | | | | | 53,263 | | | 59,112 | | | 66,631 | |
Other non-interest income | | | | | 28,365 | | | 26,676 | | | 30,741 | |
Total non-interest income | | | | | 134,153 | | | 133,221 | | | 147,204 | |
Non-interest expense: | | | | | | | | | |
Employee compensation and benefits | | | | | 243,532 | | | 217,156 | | | 235,330 | |
Occupancy and equipment | | | | | 47,944 | | | 48,237 | | | 56,174 | |
Deposit insurance expense | | | | | 18,695 | | | 21,854 | | | 16,991 | |
Professional fees | | | | | 14,386 | | | 11,708 | | | 20,352 | |
Technology and telecommunications | | | | | 67,500 | | | 58,108 | | | 47,509 | |
Discontinuance of cash flow hedges | | | | | 44,833 | | | — | | | — | |
Depreciation and impairment of operating lease equipment | | | | | 53,764 | | | 49,407 | | | 48,493 | |
| | | | | | | | | |
Other non-interest expense | | | | | 56,921 | | | 50,719 | | | 62,240 | |
Total non-interest expense | | | | | 547,575 | | | 457,189 | | | 487,089 | |
Income before income taxes | | | | | 449,385 | | | 249,359 | | | 403,996 | |
Provision for income taxes | | | | | 34,401 | | | 51,506 | | | 90,898 | |
Net income | | | | | $ | 414,984 | | | $ | 197,853 | | | $ | 313,098 | |
Earnings per common share, basic | | | | | $ | 4.52 | | | $ | 2.06 | | | $ | 3.14 | |
Earnings per common share, diluted | | | | | $ | 4.52 | | | $ | 2.06 | | | $ | 3.13 | |
73
The accompanying notes are an integral part of these consolidated financial statements
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
Interest income: | |
| | |
| | |
Loans | $ | 1,198,241 |
| | $ | 1,001,862 |
| | $ | 896,154 |
|
Investment securities | 233,091 |
| | 188,307 |
| | 150,859 |
|
Other | 17,812 |
| | 14,292 |
| | 12,204 |
|
Total interest income | 1,449,144 |
| | 1,204,461 |
| | 1,059,217 |
|
Interest expense: | | | | | |
Deposits | 284,563 |
| | 170,933 |
| | 119,773 |
|
Borrowings | 114,488 |
| | 83,256 |
| | 69,059 |
|
Total interest expense | 399,051 |
| | 254,189 |
| | 188,832 |
|
Net interest income before provision for loan losses | 1,050,093 |
| | 950,272 |
| | 870,385 |
|
Provision for (recovery of) loan losses (including $752, $1,358, and $(1,681) for covered loans) | 25,925 |
| | 68,747 |
| | 50,911 |
|
Net interest income after provision for loan losses | 1,024,168 |
| | 881,525 |
| | 819,474 |
|
Non-interest income: | | | | | |
Income from resolution of covered assets, net | 11,551 |
| | 27,450 |
| | 36,155 |
|
Net loss on FDIC indemnification | (4,199 | ) | | (22,220 | ) | | (17,759 | ) |
Deposit service charges and fees | 14,040 |
| | 12,997 |
| | 12,780 |
|
Gain (loss) on sale of loans, net (including $5,732, $17,406 and $(14,470) related to covered loans) | 15,864 |
| | 27,589 |
| | (4,406 | ) |
Gain on investment securities, net | 3,159 |
| | 33,466 |
| | 14,461 |
|
Lease financing | 61,685 |
| | 53,837 |
| | 44,738 |
|
Other non-interest income | 29,922 |
| | 24,785 |
| | 20,448 |
|
Total non-interest income | 132,022 |
| | 157,904 |
| | 106,417 |
|
Non-interest expense: | | | | | |
Employee compensation and benefits | 254,997 |
| | 237,824 |
| | 223,011 |
|
Occupancy and equipment | 55,899 |
| | 58,100 |
| | 59,022 |
|
Amortization of FDIC indemnification asset | 261,763 |
| | 176,466 |
| | 160,091 |
|
Deposit insurance expense | 18,984 |
| | 22,011 |
| | 17,806 |
|
Professional fees | 16,539 |
| | 23,676 |
| | 14,249 |
|
Technology and telecommunications | 35,136 |
| | 31,252 |
| | 31,324 |
|
Depreciation of equipment under operating lease | 40,025 |
| | 35,015 |
| | 31,580 |
|
Other non-interest expense | 57,197 |
| | 50,624 |
| | 53,364 |
|
Total non-interest expense | 740,540 |
| | 634,968 |
| | 590,447 |
|
Income before income taxes | 415,650 |
| | 404,461 |
| | 335,444 |
|
Provision (benefit) for income taxes | 90,784 |
| | (209,812 | ) | | 109,703 |
|
Net income | $ | 324,866 |
| | $ | 614,273 |
| | $ | 225,741 |
|
Earnings per common share, basic | $ | 3.01 |
| | $ | 5.60 |
| | $ | 2.11 |
|
Earnings per common share, diluted | $ | 2.99 |
| | $ | 5.58 |
| | $ | 2.09 |
|
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2021 | | 2020 | | 2019 |
| | | | | | | | | |
Net income | | | | | $ | 414,984 | | | $ | 197,853 | | | $ | 313,098 | |
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Unrealized gains on investment securities available for sale: | | | | | | | | | |
Net unrealized holding gain (loss) arising during the period | | | | | (54,228) | | | 46,045 | | | 37,616 | |
Reclassification adjustment for net securities gains realized in income | | | | | (6,712) | | | (10,431) | | | (13,625) | |
Net change in unrealized gains on securities available for sale | | | | | (60,940) | | | 35,614 | | | 23,991 | |
Unrealized losses on derivative instruments: | | | | | | | | | |
Net unrealized holding gain (loss) arising during the period | | | | | 22,207 | | | (87,402) | | | (58,760) | |
Reclassification adjustment for net losses realized in income | | | | | 38,545 | | | 34,463 | | | (1,931) | |
Reclassification adjustment for discontinuance of cash flow hedges | | | | | 33,400 | | | — | | | — | |
Net change in unrealized losses on derivative instruments | | | | | 94,152 | | | (52,939) | | | (60,691) | |
Other comprehensive income (loss) | | | | | 33,212 | | | (17,325) | | | (36,700) | |
Comprehensive income | | | | | $ | 448,196 | | | $ | 180,528 | | | $ | 276,398 | |
74
The accompanying notes are an integral part of these consolidated financial statements
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
| | | | | |
Net income | $ | 324,866 |
| | $ | 614,273 |
| | $ | 225,741 |
|
Other comprehensive income (loss), net of tax: | | | |
| | |
Unrealized gains on investment securities available for sale: | | | |
| | |
Net unrealized holding gain (loss) arising during the period | (57,041 | ) | | 29,724 |
| | 14,271 |
|
Reclassification adjustment for net securities gains realized in income | (4,486 | ) | | (20,247 | ) | | (8,749 | ) |
Net change in unrealized gain on securities available for sale | (61,527 | ) | | 9,477 |
| | 5,522 |
|
Unrealized gains on derivative instruments: | | | |
| | |
Net unrealized holding gain (loss) arising during the period | 3,981 |
| | (1,559 | ) | | 3,766 |
|
Reclassification adjustment for net (gains) losses realized in income | (1,469 | ) | | 5,821 |
| | 9,777 |
|
Net change in unrealized gains on derivative instruments | 2,512 |
| | 4,262 |
| | 13,543 |
|
Other comprehensive income (loss) | (59,015 | ) | | 13,739 |
| | 19,065 |
|
Comprehensive income | $ | 265,851 |
| | $ | 628,012 |
| | $ | 244,806 |
|
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | Years Ended December 31, | | Years Ended December 31, |
| 2018 | | 2017 | | 2016 | | 2021 | | 2020 | | 2019 |
Cash flows from operating activities: | |
| | |
| | | Cash flows from operating activities: | | | | | |
Net income | $ | 324,866 |
| | $ | 614,273 |
| | $ | 225,741 |
| Net income | $ | 414,984 | | | $ | 197,853 | | | $ | 313,098 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Amortization and accretion, net | (86,549 | ) | | (95,145 | ) | | (113,979 | ) | Amortization and accretion, net | (21,205) | | | (28,246) | | | (37,319) | |
Provision for loan losses | 25,925 |
| | 68,747 |
| | 50,911 |
| |
Income from resolution of covered assets, net | (11,551 | ) | | (27,450 | ) | | (36,155 | ) | |
Net loss on FDIC indemnification | 4,199 |
| | 22,220 |
| | 17,759 |
| |
(Gain) loss on sale of loans, net | (15,864 | ) | | (27,589 | ) | | 4,406 |
| |
Provision for (recovery of) credit losses | | Provision for (recovery of) credit losses | (67,119) | | | 178,431 | | | 8,904 | |
| Gain on sale of loans, net | | Gain on sale of loans, net | (24,394) | | | (13,170) | | | (12,119) | |
| Gain on investment securities, net | (3,159 | ) | | (33,466 | ) | | (14,461 | ) | Gain on investment securities, net | (6,446) | | | (17,767) | | | (21,174) | |
Equity based compensation | 23,137 |
| | 22,692 |
| | 18,032 |
| Equity based compensation | 23,832 | | | 20,367 | | | 23,367 | |
Depreciation and amortization | 64,268 |
| | 61,552 |
| | 56,444 |
| Depreciation and amortization | 78,500 | | | 72,508 | | | 72,425 | |
Deferred income taxes | 67,778 |
| | 57,801 |
| | 30,189 |
| Deferred income taxes | (9,015) | | | (27,586) | | | 24,529 | |
| Proceeds from sale of loans held for sale | 268,589 |
| | 158,621 |
| | 163,088 |
| Proceeds from sale of loans held for sale | 807,097 | | | 610,623 | | | 412,034 | |
Loans originated for sale, net of repayments | (155,974 | ) | | (142,682 | ) | | (148,195 | ) | Loans originated for sale, net of repayments | — | | | (26,196) | | | (86,568) | |
| Other: | | | | | | Other: | |
(Increase) decrease in other assets | 236,461 |
| | (319,629 | ) | | 21,371 |
| (Increase) decrease in other assets | (148,806) | | | (33,383) | | | 17,749 | |
Increase (decrease) in other liabilities | 82,126 |
| | (41,319 | ) | | 33,359 |
| |
(Decrease) increase in other liabilities | | (Decrease) increase in other liabilities | 172,747 | | | (69,266) | | | (79,220) | |
Net cash provided by operating activities | 824,252 |
| | 318,626 |
| | 308,510 |
| Net cash provided by operating activities | 1,220,175 | | | 864,168 | | | 635,706 | |
| | | | | | | | | | | |
Cash flows from investing activities: | |
| | |
| | | Cash flows from investing activities: | | | | |
Purchase of investment securities | (4,138,994 | ) | | (3,131,798 | ) | | (3,058,106 | ) | |
| Purchases of investment securities | | Purchases of investment securities | (5,835,143) | | | (4,208,597) | | | (3,896,234) | |
Proceeds from repayments and calls of investment securities | 1,533,951 |
| | 1,260,444 |
| | 724,666 |
| Proceeds from repayments and calls of investment securities | 2,586,385 | | | 1,352,788 | | | 1,370,584 | |
Proceeds from sale of investment securities | 1,030,810 |
| | 1,287,591 |
| | 1,127,983 |
| Proceeds from sale of investment securities | 2,286,600 | | | 1,503,498 | | | 2,975,259 | |
Purchase of non-marketable equity securities | (308,126 | ) | | (248,405 | ) | | (255,100 | ) | |
Purchases of non-marketable equity securities | | Purchases of non-marketable equity securities | (62,137) | | | (134,938) | | | (411,825) | |
Proceeds from redemption of non-marketable equity securities | 307,063 |
| | 266,688 |
| | 190,825 |
| Proceeds from redemption of non-marketable equity securities | 122,143 | | | 192,737 | | | 425,213 | |
Purchases of loans | (1,308,772 | ) | | (1,300,996 | ) | | (1,266,097 | ) | Purchases of loans | (4,843,231) | | | (3,157,659) | | | (2,197,484) | |
Loan originations, repayments and resolutions, net | 404,769 |
| | (672,338 | ) | | (1,394,916 | ) | |
Loan originations and repayments, net | | Loan originations and repayments, net | 3,856,932 | | | 1,819,139 | | | 477,805 | |
Proceeds from sale of loans, net | 544,745 |
| | 196,413 |
| | 171,367 |
| Proceeds from sale of loans, net | 305,929 | | | 48,721 | | | 265,582 | |
Proceeds from sale of equipment under operating lease | 52,134 |
| | 4,950 |
| | 583 |
| |
Proceeds from sale of residential MSRs | 34,573 |
| | — |
| | — |
| |
Acquisition of equipment under operating lease | (190,500 | ) | | (99,553 | ) | | (88,559 | ) | |
| Acquisition of operating lease equipment | | Acquisition of operating lease equipment | (44,179) | | | (19,597) | | | (63,786) | |
Other investing activities | (3,184 | ) | | (15,572 | ) | | 21,123 |
| Other investing activities | (11,204) | | | (16,807) | | | (20,610) | |
Net cash used in investing activities | (2,041,531 | ) | | (2,452,576 | ) | | (3,826,231 | ) | Net cash used in investing activities | (1,637,905) | | | (2,620,715) | | | (1,075,496) | |
| | | | | (Continued) |
| | | | | | (Continued) |
|
75
The accompanying notes are an integral part of these consolidated financial statements
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2017 | | 2016 |
Cash flows from financing activities: | |
| | |
| | |
Net increase in deposits | 1,595,744 |
| | 2,387,589 |
| | 2,552,389 |
|
Net increase in federal funds purchased | 175,000 |
| | — |
| | — |
|
Additions to Federal Home Loan Bank advances | 4,647,000 |
| | 4,916,000 |
| | 4,025,000 |
|
Repayments of Federal Home Loan Bank advances | (4,622,000 | ) | | (5,385,000 | ) | | (2,795,000 | ) |
Dividends paid | (91,305 | ) | | (91,628 | ) | | (89,824 | ) |
Exercise of stock options | 7,727 |
| | 62,095 |
| | 791 |
|
Repurchase of common stock | (299,972 | ) | | — |
| | — |
|
Other financing activities | (7,424 | ) | | (8,837 | ) | | 5,178 |
|
Net cash provided by financing activities | 1,404,770 |
| | 1,880,219 |
| | 3,698,534 |
|
Net increase (decrease) in cash and cash equivalents | 187,491 |
| | (253,731 | ) | | 180,813 |
|
Cash and cash equivalents, beginning of period | 194,582 |
| | 448,313 |
| | 267,500 |
|
Cash and cash equivalents, end of period | $ | 382,073 |
| | $ | 194,582 |
| | $ | 448,313 |
|
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Interest paid | $ | 387,801 |
| | $ | 247,548 |
| | $ | 186,525 |
|
Income taxes (refunded) paid, net | $ | (288,267 | ) | | $ | 69,231 |
| | $ | 16,464 |
|
| | | | | |
Supplemental schedule of non-cash investing and financing activities: | | | | | |
Transfers from loans to other real estate owned and other repossessed assets | $ | 9,709 |
| | $ | 13,313 |
| | $ | 17,045 |
|
Transfers from loans to loans held for sale | $ | 108,503 |
| | $ | 1,973 |
| | $ | 2,090 |
|
Dividends declared, not paid | $ | 21,673 |
| | $ | 23,055 |
| | $ | 22,510 |
|
Obligations incurred in acquisition of affordable housing limited partnerships | $ | 4,710 |
| | $ | — |
| | $ | 12,750 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| | | | | |
Cash flows from financing activities: | | | | | |
Net increase in deposits | 1,942,286 | | | 3,101,225 | | | 920,368 | |
Net (decrease) increase in federal funds purchased | 19,000 | | | 80,000 | | | (75,000) | |
Additions to FHLB and PPPLF borrowings | 946,000 | | | 3,857,000 | | | 4,512,000 | |
Repayments of FHLB and PPPLF borrowings | (2,162,000) | | | (5,217,000) | | | (4,827,000) | |
Proceeds from issuance of notes, net | — | | | 293,858 | | | — | |
Dividends paid | (85,790) | | | (86,522) | | | (84,083) | |
Exercise of stock options | 25 | | | 19,611 | | | 5,817 | |
Repurchase of common stock | (318,499) | | | (100,972) | | | (154,030) | |
Other financing activities | (6,151) | | | (7,610) | | | (25,682) | |
Net cash provided by financing activities | 334,871 | | | 1,939,590 | | | 272,390 | |
Net increase (decrease) in cash and cash equivalents | (82,859) | | | 183,043 | | | (167,400) | |
Cash and cash equivalents, beginning of period | 397,716 | | | 214,673 | | | 382,073 | |
Cash and cash equivalents, end of period | $ | 314,857 | | | $ | 397,716 | | | $ | 214,673 | |
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Interest paid | $ | 169,291 | | | $ | 336,991 | | | $ | 518,856 | |
Income taxes paid, net | $ | 248,473 | | | $ | 8,637 | | | $ | 229 | |
| | | | | |
Supplemental schedule of non-cash investing and financing activities: | | | | | |
| | | | | |
| | | | | |
Transfers from loans to loans held for sale | $ | 1,064,090 | | | $ | 602,198 | | | $ | 536,227 | |
| | | | | |
Dividends declared, not paid | $ | 19,876 | | | $ | 22,309 | | | $ | 20,775 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
76
The accompanying notes are an integral part of these consolidated financial statements
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(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 December 31, 2018 | 99,141,374 | | | $ | 991 | | | $ | 1,220,147 | | | $ | 1,697,822 | | | $ | 4,873 | | | $ | 2,923,833 | |
Comprehensive income | — | | | — | | | — | | | 313,098 | | | (36,700) | | | 276,398 | |
Dividends ($0.84 per common share) | — | | | — | | | — | | | (83,185) | | | — | | | (83,185) | |
Equity based compensation | 591,739 | | | 6 | | | 18,454 | | | — | | | — | | | 18,460 | |
Forfeiture of unvested shares and shares surrendered for tax withholding obligations | (344,766) | | | (3) | | | (6,511) | | | — | | | — | | | (6,514) | |
Exercise of stock options | 225,127 | | | 2 | | | 5,815 | | | — | | | — | | | 5,817 | |
Repurchase of common stock | (4,485,243) | | | (45) | | | (153,985) | | | — | | | — | | | (154,030) | |
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) | |
Balance at January 1, 2020 | 95,128,231 | | | 951 | | | 1,083,920 | | | 1,903,918 | | | (31,827) | | | 2,956,962 | |
Comprehensive income | — | | | — | | | — | | | 197,853 | | | (17,325) | | | 180,528 | |
Dividends ($0.92 per common share) | — | | | — | | | — | | | (88,056) | | | — | | | (88,056) | |
Equity based compensation | 759,983 | | | 8 | | | 19,550 | | | — | | | — | | | 19,558 | |
Forfeiture of unvested shares and shares surrendered for tax withholding obligations | (230,537) | | | (2) | | | (4,617) | | | — | | | — | | | (4,619) | |
Exercise of stock options | 735,400 | | | 7 | | | 19,604 | | | — | | | — | | | 19,611 | |
Repurchase of common stock | (3,325,577) | | | (33) | | | (100,939) | | | — | | | — | | | (100,972) | |
Balance at December 31, 2020 | 93,067,500 | | | $ | 931 | | | $ | 1,017,518 | | | $ | 2,013,715 | | | $ | (49,152) | | | $ | 2,983,012 | |
Comprehensive income | — | | | — | | | — | | | 414,984 | | | 33,212 | | | 448,196 | |
Dividends ($0.92 per common share) | — | | | — | | | — | | | (83,357) | | | — | | | (83,357) | |
Equity based compensation | 571,936 | | | 6 | | | 14,334 | | | — | | | — | | | 14,340 | |
Forfeiture of unvested shares and shares surrendered for tax withholding obligations | (216,095) | | | (2) | | | (5,954) | | | — | | | — | | | (5,956) | |
Exercise of stock options | 1,569 | | | — | | | 25 | | | — | | | — | | | 25 | |
Repurchase of common stock | (7,776,924) | | | (79) | | | (318,420) | | | — | | | — | | | (318,499) | |
Balance at December 31, 2021 | 85,647,986 | | | $ | 856 | | | $ | 707,503 | | | $ | 2,345,342 | | | $ | (15,940) | | | $ | 3,037,761 | |
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| | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
Balance at December 31, 2015 | 103,626,255 |
| | $ | 1,036 |
| | $ | 1,406,786 |
| | $ | 813,894 |
| | $ | 22,182 |
| | $ | 2,243,898 |
|
Comprehensive income | — |
| | — |
| | — |
| | 225,741 |
| | 19,065 |
| | 244,806 |
|
Dividends ($0.84 per common share) | — |
| | — |
| | — |
| | (89,954 | ) | | — |
| | (89,954 | ) |
Equity based compensation | 651,760 |
| | 7 |
| | 18,026 |
| | — |
| | — |
| | 18,033 |
|
Forfeiture of unvested shares | (159,049 | ) | | (1 | ) | | (484 | ) | | — |
| | — |
| | (485 | ) |
Exercise of stock options | 47,979 |
| | — |
| | 791 |
| | — |
| | — |
| | 791 |
|
Tax benefits from dividend equivalents and equity based compensation | — |
| | — |
| | 1,340 |
| | — |
| | — |
| | 1,340 |
|
Balance at December 31, 2016 | 104,166,945 |
| | 1,042 |
| | 1,426,459 |
| | 949,681 |
| | 41,247 |
| | 2,418,429 |
|
Comprehensive income | — |
| | — |
| | — |
| | 614,273 |
| | 13,739 |
| | 628,012 |
|
Dividends ($0.84 per common share) | — |
| | — |
| | — |
| | (92,173 | ) | | — |
| | (92,173 | ) |
Equity based compensation | 621,806 |
| | 6 |
| | 16,990 |
| | — |
| | — |
| | 16,996 |
|
Forfeiture of unvested shares and shares surrendered for tax withholding obligations | (271,954 | ) | | (3 | ) | | (7,294 | ) | | — |
| | — |
| | (7,297 | ) |
Exercise of stock options | 2,331,388 |
| | 23 |
| | 62,072 |
| | — |
| | — |
| | 62,095 |
|
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 | — |
| | — |
| | — |
| | 324,866 |
| | (59,015 | ) | | 265,851 |
|
Dividends ($0.84 per common share) | — |
| | — |
| | — |
| | (89,923 | ) | | — |
| | (89,923 | ) |
Equity based compensation | 696,729 |
| | 7 |
| | 20,640 |
| | — |
| | — |
| | 20,647 |
|
Forfeiture of unvested shares and shares surrendered for tax withholding obligations | (252,091 | ) | | (3 | ) | | (6,556 | ) | | — |
| | — |
| | (6,559 | ) |
Exercise of stock options | 291,689 |
| | 3 |
| | 7,724 |
| | — |
| | — |
| | 7,727 |
|
Repurchase of common stock | (8,443,138 | ) | | (84 | ) | | (299,888 | ) | | — |
| | — |
| | (299,972 | ) |
Balance at December 31, 2018 | 99,141,374 |
| | $ | 991 |
| | $ | 1,220,147 |
| | $ | 1,697,822 |
| | $ | 4,873 |
| | $ | 2,923,833 |
|
77
The accompanying notes are an integral part of these consolidated financial statements.statements
86
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
Note 1 Basis of Presentation and Summary of Significant Accounting Policies
BankUnited, Inc., with total consolidated assets of $35.8 billion at December 31, 2021, is a national bank holding company with one wholly-owned subsidiary, BankUnited;BankUnited, collectively, the Company. BankUnited, a national banking association headquartered in Miami Lakes, Florida, provides a full range of commercial lending and both commercial and consumer deposit services through 63 banking centers located in 13 Florida counties and related services to individual and corporate customers4 banking centers in it's geographic footprint in Florida and the New York metropolitan area. The Bank also offersprovides 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 provided for FDIC loss sharing and the Bank’s reimbursement for recoveries to the FDIC through its termination on February 13, 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 were subject to a stated loss threshold whereby the FDIC reimbursed 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 consolidated financial statements have been prepared in accordance with GAAP and prevailing practices in the banking industry.
The Company has a single reportable segment.
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 includeThe most significant estimate impacting the ALLL,Company's consolidated financial statements is the amount and timing of expected cash flows from covered assets and the FDIC indemnification asset, and the fair values of investment securities and other financial instruments.ACL.
Principles of Consolidation
The consolidated financial statements include the accounts of BankUnited, Inc. and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. VIEs are consolidated if the Company is the primary beneficiary; i.e., has (i) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The Company has variable interests in affordable housing limited partnerships that are not required to be consolidated because the Company is not the primary beneficiary.
Fair Value Measurements
Certain of the Company's assets and liabilities are reflected in the consolidated financial statements at fair value on either a recurring or non-recurring basis. Investment securities available for sale, marketable equity securities, servicing rights and derivative instruments are measured at fair value on a recurring basis. Assets measured at fair value or fair value less cost to sell on a non-recurring basis may include collateral dependent impaired loans, OREO and other repossessed assets, loans held for sale, goodwill and impaired long-lived assets. These non-recurring fair value measurements typically involve lower-of-cost-or-market accounting or the measurement of impairment of certain assets.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. GAAP establishes a hierarchy that prioritizes inputs used to determine fair value measurements into three levels based on the observability and transparency of the inputs:
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
•Level 1 inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
•Level 2 inputs are observable inputs other than level 1 inputs, including quoted prices for similar assets and liabilities, quoted prices for identical assets and liabilities in less active markets and other inputs that can be corroborated by observable market data.
•Level 3 inputs are unobservable inputs supported by limited or no market activity or data and inputs requiring significant management judgment or estimation.
The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs in estimating fair value. Unobservable inputs are utilized in determining fair value measurements only to the extent that observable inputs are unavailable. The need to use unobservable inputs generally results from a lack of market liquidity and diminished observability of actual trades or assumptions that would otherwise be available to value a particular asset or liability.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, both interest bearing and non-interest bearing, including amounts on deposit at the Federal Reserve Bank, and federal funds sold. Cash equivalents have original maturities of three months or less. For purposes of reporting cash flows, cash receipts and payments pertaining to FHLB advances with original maturities of three months or less are reported net.
Investment 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 saleavailable-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, a separate component of stockholders' equity. Securities classified as available for saleavailable-for-sale may be used as part of the Company's asset/liability management strategy and may be sold in response to liquidity needs, regulatory changes, changes in interest rates, prepayment risk or other market factors. The Company does not maintain a trading portfolio. Purchase premiums and discounts on debt securities are amortized as adjustments to yield over the expected lives of the securities, using the level yield method. Premiums are amortized to the call date if the call is considered to be clearly and closely related to the host contract.for callable securities. Realized gains and losses from sales of securities are recorded on the trade date and are determined using the specific identification method.
The Company reviews investmentCompany's policy on the ACL related to debt securities for OTTI at least quarterly. An investment security is impaired if its fair value is lower than its amortized cost basis. The Company considers many factors in determining whether a decline in fair valuediscussed below amortized cost represents OTTI, including, but not limited to:
the Company's intent to hold the security until maturity or for a period of time sufficient for a recovery in value;
whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis;
the length of time and extent to which fair value has been less than amortized cost;
adverse changes in expected cash flows;
collateral values and performance;
the payment structure of the security including levels of subordination or over-collateralization;
changes in the economic or regulatory environment;
the general market condition of the geographic area or industry of the issuer;
the issuer's financial condition, performance and business prospects; and
changes in credit ratings.
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
The relative importance assigned to each of these factors varies depending on the facts and circumstances pertinent to the individual security being evaluated.
The Company recognizes OTTI of a debt security for which there has been a decline in fair value below amortized cost if (i) management intends to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell the security, or if it is more likely than not it will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the amortized cost basis and fair value of the security. Otherwise, the amount by which amortized cost exceeds the fair value of a debt security that is considered to be other-than-temporarily impaired is separated into a component representing the credit loss, which is recognized in earnings, and a component related to all other factors, which is recognized in other comprehensive income. The measurement of the credit loss component is equal to the difference between the debt security's amortized cost basis and the present value of its expected future cash flows discounted at the security's effective yield.section entitled "ACL".
Marketable equity securities with readily determinable fair values are reported at fair value with unrealized gains and losses included in earnings effective January 1, 2018.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.
Non-marketable Equity Securities
The Bank, as a member of the FRB system and the FHLB, is required to maintain investments in the stock of the FRB and FHLB. No market exists for this stock, and the investment can be liquidated only through redemption by the respective institutions, at the discretion of and subject to conditions imposed by those institutions. The stock has no readily determinable fair value and is carried at cost. Historically, stock redemptions have been at par value, which equals the Company's carrying value. The Company monitors its investment in FHLB stock for impairment through review of recent financial results of the FHLB, including capital adequacy and liquidity position, dividend payment history, redemption history and information from credit agencies. The Company has not identified any indicators of impairment of FHLB stock.
Loans Held for Sale
The guaranteed portion of SBA and USDA loansLoans originated or purchased with the intent to sell in the secondary market are carried at the lower of cost or fair value, determined in the aggregate. A valuation allowance is established through a charge to earnings if the aggregate fair value of such loans is lower than their cost. Gains or losses recognized upon sale are determined on the specific identification basis.
Loans not originated or otherwise acquired with the intent to sell, or loans which have been originated by the Company and subsequently held for sale, are transferred into the held for sale classification at the lower of carrying amount or fair value when they are specifically identified for sale and a formal plan exists to sell them. Acquired credit impaired loans accounted for in pools are removed from the pools at their carrying amounts when they are sold.
Loans
The Company's loan portfolio contains 1-4 single family residential first mortgages, government insured residential mortgages, home equity loans and lines of credit, consumer, multi-family, owner and non-owner occupied commercial real estate, construction and land, and commercial and industrial loans, mortgage warehouse lines of credit and direct financing leases. The Company segregates its loan portfolio between covered and non-covered loans. Covered loansLoans are loans acquired from the FDIC in the FSB Acquisition that are covered under the Single Family Shared-Loss Agreement. Covered loans are further segregated between ACI loans and non-ACI loans.
Non-covered Loans
Non-covered loans, other than non-covered ACI loans, are carriedreported at UPB,amortized cost, net of premiums, discounts, unearned income, deferred loan origination fees and costs, and the ALLL
ACL. Interest income on these loans 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
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Direct Financing Leases
Direct financing leases are carried at the aggregate of lease payments receivable and estimated residual value of the leased property, if applicable, less unearned income. Interest income on direct financing leases is recognized over the term of the leases to achieve a constant periodic rate of return on the outstanding investment. Initial direct costs are deferred and amortized over the lease term as a reduction to interest income using the effective interest method.
ACI Loans
ACI loans, all of which were acquired in the FSB Acquisition and the substantial majority of which are covered under the Single Family Shared-Loss Agreement, are those for which, at acquisition, management determined it probable that the Company would be unable to collect all contractual principal and interest payments due. These loans were recorded at estimated fair value at acquisition, measured as the present value of all cash flows expected to be received, discounted at an appropriately risk-adjusted discount rate. Initial cash flow expectations incorporated significant assumptions regarding prepayment rates, frequency of default and loss severity.
The difference between total contractually required payments on ACI loans and the cash flows expected to be received represents non-accretable difference. The excess of all cash flows expected to be received over the Company's recorded investment in the loans represents accretable yield and is recognized as interest income on a level-yield basis over the expected life of the loans.
The Company aggregated ACI 1-4 single family residential mortgage loans and home equity loans and lines of credit with similar risk characteristics into homogenous pools at acquisition. A composite interest rate and composite expectations of future cash flows are used in accounting for each pool. These loans were aggregated into pools based on the following characteristics:
delinquency status;
product type, in particular, amortizing as opposed to option ARMs;
loan-to-value ratio; and
borrower FICO score.
Loans that do not have similar risk characteristics, primarily commercial and commercial real estate loans, are accounted for on an individual loan basis using interest rates and expectations of cash flows for each loan.
The Company is required to develop reasonable expectations about the timing and amount of cash flows to be collected related to ACI loans and to continue to update those estimates over the lives of the loans. Expected cash flows from ACI loans are updated quarterly. If it is probable that the Company will be unable to collect all the cash flows expected from a loan or pool at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition, the loan or pool is considered impaired and a valuation allowance is established by a charge to the provision for loan losses. If there is an increase in expected cash flows from a loan or pool, the Company first reduces any valuation allowance previously established by the amount of the increase in the present value of expected cash flows, and then recalculates the amount of accretable yield for that loan or pool. The adjustment of accretable yield due to an increase in expected cash flows, as well as changes in expected cash flows due to changes in interest rate indices and changes in prepayment assumptions is accounted for prospectively as a change in yield. Additional cash flows expected to be collected are transferred from non-accretable difference to accretable yield and the amount of periodic accretion is adjusted accordingly over the remaining life of the loan or pool.
The Company may resolve an ACI loan either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or by foreclosure. When a loan accounted for in a pool is resolved, it is removed from the pool at its allocated carrying amount. In the event of a sale of the loan, the Company recognizes a gain or loss on sale based on the difference between the sales proceeds and the carrying amount of the loan. For loans resolved through pre-payment or short sale of the collateral, the Company recognizes the difference between the amount of the payment received and the carrying amount of the loan in the income statement line item "Income from resolution of covered assets, net". For loans resolved through foreclosure, the difference between the fair value of the collateral obtained through foreclosure less estimated cost to sell and the carrying amount of the loan is recognized in the income statement line item "Income from resolution of covered assets, net". Any remaining accretable discount related to loans not accounted for in pools that are
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
resolved by full or partial pre-payment, short sale or foreclosure is recognized in interest income at the time of resolution, to the extent collected.
Payments received earlier than expected or in excess of expected cash flows from sales or other resolutions may result in the carrying value of a pool being reduced to zero even though outstanding contractual balances and expected cash flows remain related to loans in the pool. Once the carrying value of a pool is reduced to zero, any future proceeds, which may include cash or real estate acquired in foreclosure, from the remaining loans, representing further realization of accretable yield, are recognized as interest income upon receipt.
Covered Non-ACI Loans
Loans acquired in the FSB Acquisition without evidence of deterioration in credit quality since origination were initially recorded at estimated fair value on the acquisition date. Non-ACI 1-4 single family residential mortgage loans and home equity loans and lines of credit with similar risk characteristics were aggregated into pools for accounting purposes at acquisition. Non-ACI loans are carried at the principal amount outstanding, adjusted for unamortized acquisition date fair value adjustments and the ALLL. Interest income is accrued based on the UPB and, with the exception of home equity loans and lines of credit, acquisition date fair value adjustments are amortized using the level-yield method over the expected lives of the related loans. For non-ACI 1-4 family residential mortgage loans accounted for in pools, prepayment estimates are used in determining the periodic amortization of acquisition date fair value adjustments. Acquisition date fair value adjustments related to revolving home equity loans and lines of credit are amortized on a straight-line basis.
Non-accrual Loans
Commercial loans, other than ACI 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 ACIgovernment insured residential loans, are generally placed on non-accrual status when they are 90 days past due. Residential loans that have rolled
Table of interest is dueContents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
off of a short-term deferral related to COVID-19 and unpaid.have not caught up on their deferred payments may also be placed on non-accrual; these loans are typically pending modification and are generally returned to accruing status upon modification. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged to interest income. Payments received on nonaccrualnon-accrual commercial loans are applied as a reduction of principal. Interest payments are recognized as income on a cash basis on nonaccrualnon-accrual 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 there is no longerless than 90 days of interest due and unpaid.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 ACIgovernment 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 discount continues to be accreted on the loans or pools.
Impaired Loans
Loans, other than ACI loans and government insured residential loans, are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreements. Commercial relationships with committed balances greater than or equal to $1.0 million that have internal risk ratings of substandard or doubtful and are on non-accrual status, as well as loans that have been modified in TDRs, are individually evaluated for impairment. Other commercial relationships on non-accrual status with committed balances under $1.0 million may also be evaluated individually for impairment at management's discretion. The likelihood of loss related to loans assigned internal risk ratings of substandard or doubtful is considered elevated due to their identified credit weaknesses. Factors considered by management in evaluating impairment include payment status, financial condition of the borrower, collateral value, and other factors impacting the probability of collecting scheduled principal and interest payments when due.
An ACI pool or loan is considered to be impaired when it is probable that the Company will be unable to collect all the cash flows expected at acquisition, plus additional cash flowshas a reasonable expectation about amounts expected to be collected arising from changes in estimates after acquisition. 1-4 single family residential and home equity ACI loans accounted for in pools are evaluated collectively for impairment on a pool by pool basis based on expected pool cash flows. Commercial ACI loans are individually evaluated for impairment based on expected cash flows from the individual loans. Discount continues to be accreted on ACI loans or pools as long as there are expected future cash flows in excess of the current carrying amount of the loans or pools.
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
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, except for ACI loans accounted for in pools, the related loan is classified as a TDR and considered impaired.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. Modified ACI loans accounted for in pools
Pursuant to 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 typically are not accounted forcategorized as TDRs. The Company has elected to apply the provisions of section 4013 of the CARES Act to qualifying loan modifications, other than short-term payment deferrals of 6 months or less that are subject to the interagency guidance, that might otherwise be categorized as TDRs under ASC 310-40. Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act on December 27, 2020, effectively suspended the guidance related to TDRs codified in ASC 310-40 through January 1, 2022.
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.
Sales-type and Direct Financing Leases
Sales-type and direct financing leases are carried at the aggregate of lease payments receivable and estimated residual value of the leased property, if applicable, less unearned income. Interest income is recognized over the term of the leases to achieve a constant periodic rate of return on the outstanding investment.
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.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
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 separatednecessarily 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.
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.
AFS securities will be charged off to the extent that there is no reasonable expectation of recovery of amortized cost basis. AFS securities will be placed on non-accrual status if the Company does not reasonably expect to receive interest payments in the future and interest accrued will be reversed against interest income. Securities will be returned to accrual status only when collection of interest is reasonably assured.
Loans
The ACL is a valuation account that is deducted from the pools and are not classified as impaired loans.
Allowanceamortized cost basis of loans to present the net amount expected to be collected. The ACL is adjusted through the provision for Loan and Lease Losses
The ALLL representscredit losses to the amount considered adequate by managementof amortized cost basis not expected to absorb probable incurred losses inherentbe collected, or in the loan portfoliocase 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 ALLL consistsmeasurement of both specificexpected credit losses encompasses information about historical events, current conditions and general components. The ALLLreasonable and supportable forecasts. Determining the amount of the ACL is established as lossescomplex and requires extensive judgment by management about matters that are estimated to have occurred through a provision charged to earnings. Individual loansinherently 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.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
Loans are charged off against the ALLLACL in the period in which they are deemed uncollectible and recoveries are credited to the ACL when management determines themreceived. Expected recoveries on loans previously charged off and expected to be uncollectible.
Ancharged-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 for non-covered open- and closed-end loans secured by residential real estate;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. Covered non-ACI loans secured by residential real estate are generally charged off at final resolution which is consistent with the terms of the Single Family Shared-Loss Agreement. ConsumerOther consumer loans are typically charged off at 120 days delinquency. Commercial loans are charged off when, management deems themin management's judgment, they are considered to be uncollectible. Subsequent recoveries
Expected credit losses are credited to the ALLL.
Commercial loans
The allowance is comprisedestimated on a collective basis for groups of specific reserves for loans that share similar risk characteristics. Factors that may be considered in aggregating loans for this purpose include but are individually evaluatednot necessarily limited to, product or collateral type, industry, geography, internal risk rating, credit characteristics such as credit scores or collateral values, and determined to be impaired as well as general reserves forhistorical or expected credit loss patterns. For loans that havedo not been identifiedshare similar risk characteristics with other loans such as impaired.collateral dependent loans and TDRs, expected credit losses are estimated on an individual basis.
Management believes thatExpected credit losses are estimated over the contractual terms of the loans, rated special mention, substandard or doubtful thatadjusted for expected prepayments. Expected prepayments for commercial loans are not individually evaluated for impairment exhibit characteristics indicative of a heightened level of credit risk. A quantitative loss factor is applied to loans rated special mention based on average annual probability of default and implied severity, derived from internal and external data. Loss factors for substandard and doubtful loans that are not individually evaluated are determined by using default frequency and severity information applied at the loan level. Estimated default frequencies and severities are based on available industry and internal data. In addition, a floor is applied to these calculated loss factors,generally estimated based on the loss factor appliedCompany's historical experience. For residential loans, expected prepayments are estimated using a model that incorporates industry prepayment data, calibrated to reflect the special mention portfolio.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.
ToFor the extent, in management's judgment, commercialsubstantial majority of portfolio segments have sufficient observable loss history, the quantitative portion of the ALLL is based on the Bank's historical net charge-off rates. These commercial segments include commercial and industrialsubsegments, including residential loans other than government insured loans, and the Bridge portfolios. Formost commercial portfolio segments that have not yet exhibited an observable loss trend, the quantitative loss factors are based on peer group average annual historical net charge-off rates by loan class and the Company’s internal credit risk rating system. These commercial segments include multifamily, non-owner occupied 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 constructionrecovery information by industry, geography, product type, collateral type and land loans. Quantitative loss factorsobligor characteristics, to estimate PD and LGD. Measures of PD for SBFcommercial loans incorporate current conditions through market cycle or credit cycle adjustments. For residential loans, the models consider FICO and adjusted LTVs. PDs and LGDs are then conditioned on the reasonable and supportable economic forecast. Projected PDs and LGDs, determined based on historical charge-off rates published bypool level characteristics, are applied to estimated exposure at default, considering the SBA.contractual term and payment structure of loans, adjusted for prepayments, to generate estimates of expected loss. For Pinnacle, quantitative loss factorscriticized or classified loans, PDs are based primarily on historical municipal default data. Foradjusted to benchmark PDs established for each risk rating if the most commercial portfolio segments, wecurrent financial information available is deemed not to be reflective of the borrowers' current financial condition. The ACL estimate incorporates a reasonable and supportable economic forecast through the use a 20 quarter look-back periodof externally developed macroeconomic scenarios applied in the calculationmodels.
A single economic scenario or a probability weighted blend of historical net charge-off rates.economic scenarios may be used. The models ingest numerous national, regional and MSA level variables and data points.
Where applicable,Commercial Real Estate Model
Variables with the peer group used to calculate average annual historical net charge-off rates usedmost significant impact on the commercial real estate model include unemployment at both national and regional levels, the CRE property forecast by property type and sub-market, 10 year treasury yield, Baa corporate yield and real GDP growth, at the national level. Increases in estimating general reserves is made up of 26 banks includedunemployment and yields within the commercial real estate model result in increases in the OCC Midsize Bank Group plus five additional banks not includedACL. Increases in real GDP growth and improvements in the OCC Midsize Bank Group that management believes to be comparable based on size, geography and nature of lending operations. Peer bank data is obtained fromCRE property forecasts reduce the Statistics on Depository Institutions Report published by the FDIC forreserve.
Commercial Model
Variables with the most recent quarter available. These banks, assignificant impact on the commercial model include a group, are considered by management to be comparable to BankUnitedstock market volatility index, the S&P 500 index, unemployment, at both national and regional levels, and a variety of interest rates and spreads. Increases in size, nature of lending operationsthe unemployment rate, the stock market volatility index, and loan portfolio composition. We evaluate the composition ofBaa corporate yield increase the peer group annually, or more frequently if,reserve, while increases in our judgment, a more frequent evaluation is necessary. Our internal risk rating system comprises 13 credit grades; grades 1
real GDP growth reduce the reserve.
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
Residential Model
through 8Variables with the most significant impact on the residential model include HPI and unemployment at regional levels, real GDP growth, and a 30 year mortgage rate. Increases in the unemployment rate and the 30-year mortgage rate increase the reserve, while increases in real GDP growth and HPI reduce the reserve.
The length of the reasonable and supportable forecast period is evaluated at each reporting period and adjusted if deemed necessary. Currently, the Company uses a 2-year reasonable and supportable forecast period in estimating the ACL. After the reasonable and supportable forecast periods, the models effectively revert to long-term mean losses on a straight-line basis over 12 months.
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. Loss rates are “pass” grades. The risk ratings are driven largely by debt service coverage. Peer groupapplied to the exposure at default, after factoring in amortization and expected prepayments. For the Pinnacle portfolio, historical loss ratesinformation 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 adjusted upward for loans assigned a lower “pass” rating.
As noted above, management generally use a 20 quarter look-back period to calculate quantitative loss rates. Management believes this look-back period to be consistent withconditioned as applicable on changes in current conditions and the range of industry practicereasonable and appropriate to capture a sufficient range of observations reflecting the performance of our loans, which were originated in the currentsupportable economic cycle. With the exception of the Pinnacle municipal finance portfolio, a four quarter loss emergence period is used in the calculation of general reserves. A twelve quarter loss emergence period is used in the calculation of general reservesforecast. Expected credit losses for the Pinnacle portfolio.
The primary assumptions underlying estimatesfunded portion of expected cash flows for ACI commercial loansmortgage warehouse lines of credit are default probability and severity of loss given default. Assessments of default probability and severity are based on net realizable value analyses prepared at the individual loan level.
Residential and other consumer loans
Non-covered Loans
The non-covered loan portfolio has not yet developed an observable loss trend. Therefore, the ALLL for non-covered residential loans isestimated based primarily on relevant proxythe Company's historical loss rates. 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 ALLL for non-covered 1-4 single family residential loans, excludingCompany expects to collect the amortized cost basis of government insured residential loans is estimated using average annual loss rates on prime residential mortgage securitizations issued between 2003 and 2008 as a proxy. Based onPPP loans due to the comparability of FICO scores and LTV ratios between loans included in those securitizations and loans in the Bank’s portfolio and the geographic diversity in the new purchased residential portfolio, we determined that prime residential mortgage securitizations provide an appropriate proxy for incurred losses in this portfolio class. A peer group 18-quarter average net charge-off rate is used to estimate the ALLL for the non-covered home equity and other consumer loan classes. The non-covered home equity and other consumer loan portfolios are not significant componentsnature of the overall loan portfolio. No quantitative ALLLgovernment guarantee, so the ACL is providedzero for U.S. Government insured residentialthese loans.
Covered non-ACI Loans
The reserving methodology for the non-ACI 1-4 single family residential mortgages is consistent with the methodology to calculated the ALLL for non-covered residential portfolio segment discussed above.
Qualitative Factorsfactors
Quantitative models have certain inherent limitations with respect to estimating expected losses. These limitations may be more prevalent in times of rapidly changing economic conditions and forecasts. Qualitative adjustments are made to the ALLLACL when, based on management’s judgment, there are internal or external factors impacting probable incurredexpected credit losses not taken into account by the quantitative calculations. Potential qualitative adjustments are categorized as follows:
Portfolio performance•Economic factors, including material uncertainties, trends including trendsand developments that, in and the levels of delinquencies, non-performing loans and classified loans;
Changesmanagement's judgment, may not have been considered in the nature of the portfolioreasonable and terms of the loans, specificallysupportable economic forecast;
•Credit policy and staffing, including the volumenature and naturelevel of policy and procedural exceptions;
Portfolio growth trends;
Changesexceptions or changes in lending policies and procedures, including credit andpolicy not reflected in quantitative results, changes in the quality of underwriting guidelines and portfolio management practices; and staff and issues identified by credit review, internal audit or regulators that may not be reflected in quantitative results;
Economic factors, including unemployment rates and GDP growth rates and other factors considered relevant by management;
Changes•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 underlying collateral;
Qualitythe collateral, adjusted for selling costs when repayment depends on sale of risk ratings, as evaluated by our independentthe collateral. Due to immateriality, expected credit review function;
Credit concentrations;
losses for collateral dependent commercial relationships with committed balances less than $1.0 million may be estimated collectively.
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
Changes in and experience levels of credit administration management and staff; and
Other factors identified by management that may impact the level of losses inherent in the portfolio, including but not limited to competition and legal and regulatory considerations.
Covered ACI LoansTroubled debt restructurings
For ACITDRs or loans for which there is a valuation allowancereasonable expectation that a TDR will be executed that are not collateral dependent, the credit loss estimate is established when periodic evaluationsdetermined by comparing the net present value of expected cash flows, reflect a deterioration resulting fromdiscounted at the loan’s original effective interest rate, to the amortized cost basis of the loan.
Off-balance sheet credit related factors from the level of cash flows that were estimated to be collected at acquisition plus any additional expected cash flows arising from revisions in those estimates. A quarterly analysis of expected cash flows is performed for ACI loans.exposures
Expected cash flows are estimated on a pool basis for ACI 1-4 single family residential loans. The analysis of expected cash flows incorporates updated expected prepayment rate, default rate, delinquency level and loss severity given default assumptions.
Reserve for Unfunded Commitments
The reserve for unfunded commitments represents the estimated probablecredit losses related to unfunded lendingoff-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 reserve is calculated in a manner similar to the general reserveliability for non-covered loans, while also considering the timing and likelihood that the available credit will be utilized as well as the exposure upon default. The reserve for unfunded commitmentslosses on off-balance sheet credit exposures is presented within other liabilities on the consolidated balance sheets, distinct from the ALLL, and adjustmentsACL. Adjustments to the reserve for unfunded commitmentsliability 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 excludes accrued interest receivable balances from tabular disclosures about financial assets carried at amortized cost. The Company generally does not 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. Under unusual circumstances, such as those presented by deferrals granted due to the COVID-19 pandemic, the Company evaluates whether its non-accrual policies continue to consistently provide for timely reversal of accrued interest receivable. If considered necessary, the Company records an allowance for uncollectible accrued interest receivable, determined using essentially the same methodologies used to estimate the ACL on the amortized cost basis of the related loans. The allowance is deducted from accrued interest receivable and presented within other non-interest expenseassets on the consolidated balance sheets, distinct from the ACL. Changes in the ACL related to accrued interest receivable are included in the provision for credit losses.
Leases
The Company determines whether a contract is or contains a lease at inception. For leases with terms greater than twelve months under which the Company is lessee, ROU assets and lease liabilities are recorded at the commencement date. Lease liabilities are initially recorded based on the present value of future lease payments over the lease term. ROU assets are initially recorded at the amount of the associated lease liabilities plus prepaid lease payments and initial direct costs, less any lease incentives received. The cost of short term leases is recognized on a straight line basis over the lease term. The lease term includes options to extend if the exercise of those options is reasonably certain and includes termination options if there is reasonable certainty the options will not be exercised. Lease payments are discounted using the Company's FHLB borrowing rate for borrowings of a similar term unless an implicit rate is defined in the contract or is determinable, which is generally not the case. Leases are classified as financing or operating leases at commencement; generally, leases are classified as finance leases when effective control of the underlying asset is transferred. The substantial majority of leases under which the Company is lessee are classified as operating leases. For operating leases, lease cost is recognized in the consolidated statements of income.
FDIC Indemnification Asset
The FDIC indemnification asset was initially recorded atincome on a straight line basis over the time of the FSB Acquisition at fair value, measured as the present value of the estimated cash payments expected from the FDIC for probable losseslease terms. For finance leases, interest expense on covered assets. The FDIC indemnification asset is measured separately from the related covered assets. It is not contractually embedded in the covered assets and it is not transferable with the covered assets should the Company choose to dispose of them.
Impairment of expected cash flows from covered assets results in an increase in cash flows expected to be collected from the FDIC. These increased expected cash flows from the FDIC are recognized as increases in the FDIC indemnification asset and as non-interest income in the same period that the impairment of the covered assetslease liabilities is recognized in the provision for loan losses. Increases in expected cash flows from covered assets result in decreases in cash flows expected to be collected from the FDIC. These decreases in expected cash flows from the FDIC are recognized immediately in earnings to the extent that they relate to a reversal of a previously recorded valuation allowance related to the covered assets. Any remaining decreases in cash flows expected to be collected from the FDIC are recognized prospectively through an adjustment of the rate of accretion or amortization on the FDIC indemnification asset, consistent with the approach taken to recognize increases in expected cash flows on the covered assets. Amortization of the FDIC indemnification asset results from circumstances in which, due to improvement in expected cash flows from the covered assets, expected cash flows from the FDIC are less than the carrying value of the FDIC indemnification asset. Accretion or amortization of the FDIC indemnification asset is recognized in earnings using the effective interest method and amortization of ROU assets is recognized on a straight line basis over the period during which cash flows from the FDIClease terms. Variable lease costs are expected to be collected, which is limited to the lesser of the contractual term of the indemnification agreement and the remaining life of the indemnified assets.
Gains and losses from resolution of ACI loans are includedrecognized in the income statement line item "Income from resolution of covered assets, net." These gains and losses representperiod in which the difference between the expected losses from ACI loans and consideration actually received in satisfaction of such loans that were resolved either by payment in full, foreclosure or short sale.obligation for those costs is incurred. The Company may also realize gains or losses on the sale or impairmenthas elected not to separate lease from non-lease components of covered loans or covered OREO. When the Company recognizes gains or losses related to the resolution, sale or impairment of covered assets in earnings, corresponding changes in the estimated amount recoverable from the FDIC under the Loss Sharing Agreements are reflected in the consolidated financial statements as increases or decreases in the FDIC indemnification asset and in the consolidated statement of income line item "Net loss on FDIC indemnification."
The FDIC indemnification asset was amortized to zero as of December 31, 2018 as expectations of losses eligible for indemnification with respect to the remaining covered assets prior to final termination of the Single Family Shared-Loss Agreement were insignificant. See Notes 4 and 5 to our consolidated financial statements for further discussion.
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
its lease contracts.
Bank Owned Life Insurance
Bank owned life insurance is carried at the amount that could be realized under the contract at the balance sheet date, which is typically cash surrender value. Changes in cash surrender value are recorded in non-interest income.
Equipment Under Operating Lease Equipment
Equipment under operatingOperating lease equipment is carried at cost less accumulated depreciation and is depreciated to estimated residual value using the straight-line method over the lease term. Estimated residual values are re-evaluated at least annually, based primarily on current residual value appraisals. Rental revenue is recognized on a straight-line basis over the contractual term of the lease.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
A review for impairment of equipment under operating lease is performed at least annually or when events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Impairment of assets is determined by comparing the carrying amount to future undiscounted net cash flows expected to be generated. If an asset is impaired, the measure of impairment is the amount by which the carrying amount exceeds the fair value of the asset.
Goodwill
Goodwill of $78 million at both December 31, 2018 and 2017 represents the excess of consideration transferred in business combinations over the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but is tested for impairment annually or more frequently if events or circumstances indicate that impairment may have occurred. The Company performs its annual goodwill impairment test in the third fiscal quarter. The Company has a single reporting unit.
When assessing goodwill for impairment, the Company may elect to perform a qualitative assessment to determine if a quantitative impairment test is necessary. If a qualitative assessment is not performed, or if the qualitative assessment indicates it is likely that the fair value of a reporting unit is less than its carrying amount, a quantitative test is performed. The quantitative impairment test compares the estimated fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, no impairment is indicated. If the fair value of the reporting unit is less than its carrying amount, impairment of goodwill is measured as the excess of the carrying amount over fair value. The estimated fair value of the reporting unit is based on the market capitalization of the Company's common stock. The estimated fair value of the reporting unit at each impairment testing date substantially exceeded its carrying amount; therefore, no impairment of goodwill was indicated.
Foreclosed PropertyOREO and Repossessed Assets
Foreclosed propertyOREO and repossessed assets consists of real estate assets acquired through, or in lieu of, loan foreclosure and personal property acquired through repossession. Such assets are included in other assets in the accompanying consolidated balance sheets. These assets are held for sale and are initially recorded at estimated fair value less costs to sell, establishing a new cost basis. Subsequent to acquisition, periodic valuations are performed and the assets are carried at the lower of the carrying amount at the date of acquisition or estimated fair value less cost to sell. Significant property improvements are capitalized to the extent that the resulting carrying value does not exceed fair value less cost to sell. Legal fees, maintenance, taxes, insurance and other direct costs of holding and maintaining these assets are expensed as incurred.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization and are included in other assets in the accompanying consolidated balance sheets. The Company measures assets held for sale at the lower of carrying amount or estimated fair value. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The lives of improvements to existing buildings are based on the lesser of the estimated remaining lives of the buildings or the estimated useful lives of the improvements. Leasehold improvements are amortized over the shorter of the expected terms of the leases at inception, considering options to extend that are reasonably assured, or their useful lives. The estimated useful lives of premises and equipment are as follows:
•buildings and improvements - 10 to 30 years;
•leasehold improvements - 5 to 20 years;
•furniture, fixtures and equipment - 5 to 7 years; and
•computer equipment - 3 to 5 years.
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
Software and CCA
Software and CCA are carried at cost less accumulated depreciation and amortization and are included in other assets in the accompanying consolidated balance sheets. Depreciation isand amortization are calculated using the straight-line method over the estimated useful lives of the assets.assets, which for CCA is based on the term of the associated hosting arrangements plus any reasonably certain renewals. Direct costs of materials and services associated with developing or obtaining and implementing internal use computer software and hosting arrangements that are service contracts incurred during the application and development stage are capitalized and amortized over thecapitalized. The estimated useful lives of the software. The estimated useful life of software, software licensing rights and CCA implementation costs range from 3 to 5 years.
Loan Servicing Rights
Loan servicing rights relate to the portion of SBA and USDA loans sold in the secondary market and are measured at fair value, with changes in fair value subsequent to acquisition recognized in earnings. Loan servicing rights are included in other assets in the accompanying consolidated balance sheets. Servicing fee income is recorded net of changes in fair value in other non-interest income. Neither the loan servicing rights nor related income have had a material impact on the Company's financial statements to date.
Investments in Affordable Housing Limited Partnerships
The Company has acquired investments in limited partnerships that manage or invest in qualified affordable housing projects and provide the Company with low-income housing tax credits and other tax benefits. These investments are included in other assets in the accompanying consolidated balance sheets. The Company accounts for investments in qualified affordable housing projects using the proportional amortization method if certain criteria are met. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the amortization is recognized in the income statement as a component of income tax expense. The investments are evaluated for impairment when events or changes in circumstances indicate that it ismay be more likely than not that the carrying amount of the investment will not be realized.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for periods in which the differences are expected to reverse. The effect of changes in tax rates on deferred tax assets and liabilities are recognized in income in the period that includes the enactment date. A valuation allowance is established for deferred tax assets when management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. In making such determinations, the Company considers all available positive and negative evidence that may impact the realization of deferred tax assets. These considerations include the amount of taxable income generated in statutory carryback periods, future reversals of existing taxable temporary differences, projected future taxable income and available tax planning strategies.
The Company recognizes tax benefits from uncertain tax positions when it is more likely than not that the related tax positions will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the tax positions. An uncertain tax position is a position taken in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law. The Company measures tax benefits related to uncertain tax positions based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. If the initial assessment fails to result in recognition of a tax benefit, the Company subsequently recognizes a tax benefit if (i) there are changes in tax law or case law that raise the likelihood of prevailing on the technical merits of the position to more-likely-than-not, (ii) the statute of limitations expires, or (iii) there is a completion of an examination resulting in a settlement of that tax year or position with the appropriate agency. The Company recognizes interest and penalties related to uncertain tax positions, as well as interest income or expense related to tax settlements, in the provision for income taxes.
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
Equity Based Compensation
The Company periodically grants unvested or restricted shares of common stock and other share-based awards to key employees. For equity classified awards, compensation cost is measured based on the estimated fair value of the awards at the grant date and is recognized in earnings on a straight-line basis over the requisite service period for each award. Liability-classified awards are remeasured each reporting period at fair value until the award is settled, and compensation cost is recognized in earnings on a straight-line basis over the requisite service period for each award, adjusted for changes in fair value each reporting period. Compensation cost related to awards that embody performance conditions is recognized when it is probable that the performance conditions will be achieved. The number of awards expected to vest is estimated in determining the amount of compensation cost to be recognized related to share-based payment transactions.
The fair value of unvested shares is generally based on the closing market price of the Company's common stock at the date of grant. Market conditions embedded in awards are reflected in the grant-date fair value of the awards.
Derivative Financial Instruments and Hedging Activities
Interest rate derivative contracts
The Company uses interest rate derivative contracts, such as swaps, caps, floors and collars, in the normal course of business to meet the financial needs of its customers and to manage exposure to changes in interest rates. Interest rate contracts are recorded as assets or liabilities in the consolidated balance sheets at fair value. Interest rate swapsderivatives that are used as a risk management tool to hedge the Company's exposure to changes in interest rates have been designated as cash flow or fair value hedging instruments. The gain or loss resulting from changes in the fair value of interest rate swaps designated and qualifying as cash flow hedging instruments is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period in which the hedged transaction affects earnings. Changes in the fair value of interest rate swaps designated as fair value hedging instruments as well as changes in the fair value of the hedged items caused by fluctuations in the designated benchmark interest rates are recognized in earnings.
The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows or fair value of the hedged item, the derivative expires or is sold, terminated, or exercised, management determines that the designation of the derivative as a hedging instrument is no longer appropriate or, for a cash flow hedge, the occurrence of the forecasted transaction is no longer probable. When hedge accounting on a cash flow hedge is discontinued, any subsequent changes in fair value of the derivative are recognized in earnings. The cumulative unrealized gain or loss related to a discontinued cash flow hedge continues to be reported in AOCI and is subsequently reclassified into earnings in the same period in which the hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period, in which case the cumulative unrealized gain or loss reported in AOCI is reclassified into earnings immediately. When hedge accounting on a fair value hedge is discontinued, adjustments to the carrying amount of the hedged item due to changes in fair value are also discontinued.
Cash flows resulting from derivative financial instruments that are accounted for as hedges, including daily settlements of centrally cleared derivatives with the CME, are classified in theas operating cash flow statement in the same category as the cash flows from the hedged items.flows.
Changes in the fair value of interest rate contracts not designated as, or not qualifying as, hedging instruments are recognized currently in earnings.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. A gain or loss is recognized in earnings upon completion of the sale based on the difference between the sales proceeds and the carrying value of the assets. Control over the transferred assets is deemed to have been surrendered when: (i) the assets have been legally isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Advertising Costs
Advertising costs are expensed as incurred.
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
Earnings per Common Share
Basic earnings per common share is calculated by dividing income allocated to common stockholders for basic earnings per common share by the weighted average number of common shares outstanding for the period, reduced by average unvested stock awards. Unvested stock awards with non-forfeitable rights to dividends, whether paid or unpaid, and stand-alone dividend participation rights are considered participating securities and are included in the computation of basic earnings per common share using the two class method whereby net income is allocated between common stock and participating securities. In periods of a net loss, no allocation is made to participating securities as they are not contractually required to fund net losses. Diluted earnings per common share is computed by dividing income allocated to common stockholders for basic earnings per common share, adjusted for earnings reallocated from participating securities, by the weighted average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options warrants and unvested stock awards using the treasury stock method. Contingently issuable shares are included in the calculation of earnings per common share as if the end of the respective period was the end of the contingency period.
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.
Reclassifications
Certain amounts presented for prior periods have been reclassified to conform to the current period presentation.
New Accounting Pronouncements Adopted in 20182021
ASU No. 2014-09, Revenue from Contracts with Customers2019-12, Income Taxes (Topic 606), superseded the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout740): Simplifying the Accounting Standards Codification. The amendmentsfor Income Taxes. This ASU simplified the accounting for income taxes by removing certain exceptions stipulated in this update affect any entity that either enters into contracts with customersASC 740 and making some other targeted changes to transfer goods or services or enters into contractsthe accounting 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".income taxes. The Company adopted this standard in the first quarter of 2018ASU on January 1, 2021 with respect to contracts not completedno material impact 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 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'sCompany’s consolidated financial position, results of operations, orand cash flows.
ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition2021-01, Reference Rate Reform (Topic 848). This ASU clarified that certain optional expedients and Measurement of Financial Assetsexceptions provided for in ASU No. 2020-04 for applying GAAP to contract modifications 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 ASUhedging relationships apply to derivatives 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
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
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.
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 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.
Accounting Pronouncements Not Yet Adopted
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.discounting transition. The amendments in this ASU are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. This ASU is effective immediately for all entities and it can be applied on a retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 22, 2020, or on a prospective basis beginning on January 7, 2021. The Company for interim and annual periods in fiscal years beginning after December 15, 2018. Early adoption is permitted; however, the Company did not earlyelected to 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
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
liabilitiesASU 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 effectiveretrospective basis. To date, without adjusting the comparative periods presented. Management has finalized 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. Relevant 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 December 31, 2018 and an incremental borrowing rate determined as of that date, the Company recognized a lease liability and related right-of-use asset of approximately $104 million and $95 million, respectively, on adoption at January 1, 2019. 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 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, orand 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 Companyflows has completed a gap analysis, adopted a detailed implementation plan, established a formal governance structure for the project, documented accounting policy elections, selected and implemented credit loss models for key portfolio segments and in the process of completing model validations, chosen loss estimation methodologies for key portfolio segments, selected a software solution to serve as its CECL platform. The Company has also established an economic forecast committee, and is in the process of documenting processes and controls.not been material.
In October 2018, the FASB issued Accounting Pronouncements Not Yet Adopted
ASU No. 2018-16, 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging (Topic 815): Inclusion- Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU simplifies the accounting for convertible debt and convertible preferred stock by reducing the number of accounting models for these instruments, resulting in fewer embedded conversion features being separately recognized from the host contract. Additionally, this ASU revises the criteria for determining whether contracts in an entity's own equity meet the scope exception from derivative accounting, which will change the population of contracts that are recognized as assets or liabilities. The amendments in this ASU also revise certain aspects of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The ASU addsguidance on calculating earnings per share with respect to convertible instruments and instruments that may be settled in the Overnight Index Swap (OIS) rate based on Secured Overnight Financing Rate (SOFR) as a benchmark interest rate for hedge accounting purposes. Theentity's own shares. This ASU is effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2018.2021. The Company does not expect the impact of adoption to be material to itsof this ASU on the Company's consolidated financial position, results of operations, orand cash flows.
flows is not expected to be material.
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
Note 2 Earnings Per Common Share
The computation of basic and diluted earnings per common share is presented below for the years ended December 31, 2018, 2017 and 2016periods indicated (in thousands, except share and per share data):
| | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
c | | | | | 2021 | | 2020 | | 2019 |
Basic earnings per common share: | | | | | | | | | |
Numerator: | | | | | | | | | |
Net income | | | | | $ | 414,984 | | | $ | 197,853 | | | $ | 313,098 | |
Distributed and undistributed earnings allocated to participating securities | | | | | (5,991) | | | (8,882) | | | (13,371) | |
Income allocated to common stockholders for basic earnings per common share | | | | | $ | 408,993 | | | $ | 188,971 | | | $ | 299,727 | |
Denominator: | | | | | | | | | |
Weighted average common shares outstanding | | | | | 91,612,243 | | | 92,869,736 | | | 96,581,290 | |
Less average unvested stock awards | | | | | (1,212,055) | | | (1,163,480) | | | (1,127,275) | |
Weighted average shares for basic earnings per common share | | | | | 90,400,188 | | | 91,706,256 | | | 95,454,015 | |
Basic earnings per common share | | | | | $ | 4.52 | | | $ | 2.06 | | | $ | 3.14 | |
Diluted earnings per common share: | | | | | | | | | |
Numerator: | | | | | | | | | |
Income allocated to common stockholders for basic earnings per common share | | | | | $ | 408,993 | | | $ | 188,971 | | | $ | 299,727 | |
Adjustment for earnings reallocated from participating securities | | | | | (585) | | | (123) | | | (175) | |
Income used in calculating diluted earnings per common share | | | | | $ | 408,408 | | | $ | 188,848 | | | $ | 299,552 | |
Denominator: | | | | | | | | | |
Weighted average shares for basic earnings per common share | | | | | 90,400,188 | | | 91,706,256 | | | 95,454,015 | |
Dilutive effect of stock options | | | | | 134 | | | 24,608 | | | 202,890 | |
Weighted average shares for diluted earnings per common share | | | | | 90,400,322 | | | 91,730,864 | | | 95,656,905 | |
Diluted earnings per common share | | | | | $ | 4.52 | | | $ | 2.06 | | | $ | 3.13 | |
|
| | | | | | | | | | | |
c | 2018 |
| 2017 | | 2016 |
Basic earnings per common share: | |
| | | | |
Numerator: | |
| | | | |
Net income | $ | 324,866 |
| | $ | 614,273 |
| | $ | 225,741 |
|
Distributed and undistributed earnings allocated to participating securities | (13,047 | ) | | (23,250 | ) | | (8,760 | ) |
Income allocated to common stockholders for basic earnings per common share | $ | 311,819 |
| | $ | 591,023 |
| | $ | 216,981 |
|
Denominator: | | | | | |
Weighted average common shares outstanding | 104,916,865 |
| | 106,574,448 |
| | 104,097,182 |
|
Less average unvested stock awards | (1,171,994 | ) | | (1,104,035 | ) | | (1,157,378 | ) |
Weighted average shares for basic earnings per common share | 103,744,871 |
| | 105,470,413 |
| | 102,939,804 |
|
Basic earnings per common share | $ | 3.01 |
| | $ | 5.60 |
| | $ | 2.11 |
|
Diluted earnings per common share: | | | | | |
Numerator: | | | | | |
Income allocated to common stockholders for basic earnings per common share | $ | 311,819 |
| | $ | 591,023 |
| | $ | 216,981 |
|
Adjustment for earnings reallocated from participating securities | (195 | ) | | (263 | ) | | 62 |
|
Income used in calculating diluted earnings per common share | $ | 311,624 |
| | $ | 590,760 |
| | $ | 217,043 |
|
Denominator: | | | | | |
Weighted average shares for basic earnings per common share | 103,744,871 |
| | 105,470,413 |
| | 102,939,804 |
|
Dilutive effect of stock options | 332,505 |
| | 387,074 |
| | 716,366 |
|
Weighted average shares for diluted earnings per common share | 104,077,376 |
| | 105,857,487 |
| | 103,656,170 |
|
Diluted earnings per common share | $ | 2.99 |
| | $ | 5.58 |
| | $ | 2.09 |
|
Included in participating securities above arePotentially dilutive unvested shares and 3,023,314 dividend equivalent rightsshare units totaling 1,804,973, 1,638,642 and 1,050,455 were outstanding at December 31, 20182021, 2020 and 2019, respectively, but excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive.
Participating securities for the years ended December 31, 2020 and 2019 included 3,023,314 dividend equivalent rights that were issued in conjunction with the IPO of the Company's common stock. These dividend equivalent rights expireexpired in February 2021 and, participatewhile outstanding, participated in dividends on a one-for-one basis.
The following potentially dilutive securities were outstanding at December 31, 2018, 2017 and 2016 but excluded from the calculation of diluted earnings per common share for the periods indicated because their inclusion would have been anti-dilutive: |
| | | | | | | | |
| 2018 | | 2017 | | 2016 |
Unvested shares and share units | 1,463,607 |
| | 1,431,761 |
| | 1,303,208 |
|
Stock options and warrants | 1,960 |
| | 1,850,279 |
| | 1,850,279 |
|
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
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 December 31, 2018 and 2017the dates indicated (in thousands):
| | | 2018 | | December 31, 2021 |
| Amortized Cost | | Gross Unrealized | | Carrying Value (1) | | Amortized Cost | | Gross Unrealized | | Carrying Value (1) |
| | Gains | | Losses | | | | Gains | | Losses | |
Investment securities available for sale: | | | | | | | | Investment securities available for sale: | | | | | | | |
U.S. Treasury securities | $ | 39,885 |
| | $ | 2 |
| | $ | (14 | ) | | $ | 39,873 |
| U.S. Treasury securities | $ | 114,385 | | | $ | 173 | | | $ | (2,898) | | | $ | 111,660 | |
U.S. Government agency and sponsored enterprise residential MBS | 1,885,302 |
| | 16,580 |
| | (4,408 | ) | | 1,897,474 |
| U.S. Government agency and sponsored enterprise residential MBS | 2,093,283 | | | 12,934 | | | (8,421) | | | 2,097,796 | |
U.S. Government agency and sponsored enterprise commercial MBS | 374,569 |
| | 1,293 |
| | (1,075 | ) | | 374,787 |
| U.S. Government agency and sponsored enterprise commercial MBS | 861,925 | | | 5,287 | | | (10,313) | | | 856,899 | |
| Private label residential MBS and CMOs | 1,539,058 |
| | 10,138 |
| | (14,998 | ) | | 1,534,198 |
| Private label residential MBS and CMOs | 2,160,136 | | | 3,575 | | | (14,291) | | | 2,149,420 | |
Private label commercial MBS | 1,486,835 |
| | 5,021 |
| | (6,140 | ) | | 1,485,716 |
| Private label commercial MBS | 2,604,690 | | | 7,843 | | | (8,523) | | | 2,604,010 | |
Single family rental real estate-backed securities | 406,310 |
| | 266 |
| | (4,118 | ) | | 402,458 |
| |
Single family real estate-backed securities | | Single family real estate-backed securities | 474,845 | | | 5,031 | | | (2,908) | | | 476,968 | |
Collateralized loan obligations | 1,239,355 |
| | 1,060 |
| | (5,217 | ) | | 1,235,198 |
| Collateralized loan obligations | 1,079,217 | | | 598 | | | (1,529) | | | 1,078,286 | |
Non-mortgage asset-backed securities | 204,372 |
| | 1,031 |
| | (1,336 | ) | | 204,067 |
| Non-mortgage asset-backed securities | 151,091 | | | 1,419 | | | — | | | 152,510 | |
State and municipal obligations | 398,810 |
| | 3,684 |
| | (4,065 | ) | | 398,429 |
| State and municipal obligations | 205,718 | | | 16,559 | | | — | | | 222,277 | |
SBA securities | 514,765 |
| | 6,502 |
| | (1,954 | ) | | 519,313 |
| SBA securities | 184,296 | | | 2,027 | | | (2,728) | | | 183,595 | |
Other debt securities | 1,393 |
| | 3,453 |
| | — |
| | 4,846 |
| |
| | | | 9,929,586 | | | $ | 55,446 | | | $ | (51,611) | | | 9,933,421 | |
Investment securities held to maturity | | Investment securities held to maturity | 10,000 | | | | | | | 10,000 | |
| 8,090,654 |
| | $ | 49,030 |
| | $ | (43,325 | ) | | 8,096,359 |
| | $ | 9,939,586 | | | 9,943,421 | |
Marketable equity securities | 60,519 |
| | | | | | 60,519 |
| Marketable equity securities | | | 120,777 | |
Investment securities held to maturity | 10,000 |
| | | | | | 10,000 |
| |
| $ | 8,161,173 |
| | | | | | $ | 8,166,878 |
| | $ | 10,064,198 | |
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
|
| | | | | | | | | | | | | | | |
| 2017 |
| Amortized Cost | | Gross Unrealized | | Carrying Value (1) |
| | 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 |
|
Investment securities held to maturity | 10,000 |
| | | | | | 10,000 |
|
| $ | 6,597,786 |
| |
|
| |
|
| | $ | 6,690,832 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| December 31, 2020 |
| Amortized Cost | | Gross Unrealized | | Carrying Value (1) |
| | Gains | | Losses | |
Investment securities available for sale: | | | | | | | |
U.S. Treasury securities | $ | 79,919 | | | $ | 1,307 | | | $ | (375) | | | $ | 80,851 | |
U.S. Government agency and sponsored enterprise residential MBS | 2,389,450 | | | 19,148 | | | (3,028) | | | 2,405,570 | |
U.S. Government agency and sponsored enterprise commercial MBS | 531,724 | | | 9,297 | | | (1,667) | | | 539,354 | |
| | | | | | | |
Private label residential MBS and CMOs | 982,890 | | | 16,274 | | | (561) | | | 998,603 | |
Private label commercial MBS(2) | 2,514,271 | | | 24,931 | | | (12,848) | | | 2,526,354 | |
Single family real estate-backed securities | 636,069 | | | 14,877 | | | (58) | | | 650,888 | |
Collateralized loan obligations | 1,148,724 | | | 285 | | | (8,735) | | | 1,140,274 | |
Non-mortgage asset-backed securities | 246,597 | | | 6,898 | | | (234) | | | 253,261 | |
State and municipal obligations | 213,743 | | | 21,966 | | | — | | | 235,709 | |
SBA securities | 233,387 | | | 2,093 | | | (3,935) | | | 231,545 | |
| 8,976,774 | | | $ | 117,076 | | | $ | (31,441) | | | 9,062,409 | |
Investment securities held to maturity | 10,000 | | | | | | | 10,000 | |
| $ | 8,986,774 | | | | | | | 9,072,409 | |
Marketable equity securities | | | | | | | 104,274 | |
| | | | | | | $ | 9,176,683 | |
| |
(1) | At fair value except for securities held to maturity. |
(1)At fair value except for securities held to maturity.
(2)Amortized cost is net of ACL totaling $0.4 million at December 31, 2020.
Investment securities held to maturity at December 31, 20182021 and 20172020 consisted of one1 State of Israel bond with a carrying value of $10 million maturing in 2024. Accrued interest receivable on investments totaled $16 million and $17 million at December 31, 2021 and 2020, respectively, and is included in other assets in the accompanying consolidated balance sheets.
At December 31, 2018,2021, contractual maturities of investment securities available for sale, adjusted for anticipated prepayments of mortgage-backed and other pass-through securities,when applicable, were as follows (in thousands):
|
| | | | | | | |
| Amortized Cost | | Fair Value |
Due in one year or less | $ | 939,802 |
| | $ | 942,507 |
|
Due after one year through five years | 4,097,200 |
| | 4,097,966 |
|
Due after five years through ten years | 2,662,298 |
| | 2,662,649 |
|
Due after ten years | 391,354 |
| | 393,237 |
|
| $ | 8,090,654 |
| | $ | 8,096,359 |
|
Based on the Company’s assumptions, the estimated weighted average life of the investment portfolio as of December 31, 2018 was 4.5 years. The effective duration of the investment portfolio as of December 31, 2018 was 1.4 years. The model results are based on assumptions that may differ from actual results. | | | | | | | | | | | |
| Amortized Cost | | Fair Value |
Due in one year or less | $ | 1,651,375 | | | $ | 1,646,232 | |
Due after one year through five years | 5,915,112 | | | 5,929,475 | |
Due after five years through ten years | 1,933,775 | | | 1,929,493 | |
Due after ten years | 429,324 | | | 428,221 | |
| $ | 9,929,586 | | | $ | 9,933,421 | |
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 $2.1$4.0 billion and $2.6$4.1 billion at December 31, 20182021 and 2017,2020, respectively.
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
The following table provides information about gains and losses on investment securities for the years ended December 31, 2018, 2017 and 2016periods indicated (in thousands):
|
| | | | | | | | | | | |
| 2018 | | 2017 | | 2016 |
Proceeds from sale of investment securities available for sale | $ | 1,030,810 |
| | $ | 1,287,591 |
| | $ | 1,127,983 |
|
| | | | | |
Gross realized gains: | | | | |
|
|
Investment securities available for sale | $ | 8,616 |
| | $ | 37,530 |
| | $ | 14,924 |
|
Gross realized losses: | | | | |
|
|
Investment securities available for sale | (2,514 | ) | | (4,064 | ) | | — |
|
Net realized gain | 6,102 |
| | 33,466 |
| | 14,924 |
|
| | | | | |
Net unrealized losses on marketable equity securities recognized in earnings | (2,943 | ) | | — |
| | — |
|
| | | | | |
OTTI on investment securities available for sale | — |
| | — |
| | (463 | ) |
| | | | | |
Gain on investment securities, net | $ | 3,159 |
| | $ | 33,466 |
| | $ | 14,461 |
|
During the year ended December 31, 2016, OTTI was recognized on two positions in one private label commercial MBS. These positions were sold at a loss before the end of 2016. | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 2021 | | 2020 | | 2019 |
Proceeds from sale of investment securities AFS | | | | | $ | 2,286,600 | | | $ | 1,503,498 | | | $ | 2,975,259 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Gross realized gains on investment securities AFS | | | | | $ | 10,005 | | | $ | 14,441 | | | $ | 21,961 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Gross realized losses on investment securities AFS | | | | | (995) | | | (440) | | | (3,424) | |
| | | | | | | | | |
| | | | | | | | | |
Net realized gain | | | | | 9,010 | | | 14,001 | | | 18,537 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Net unrealized gains (losses) on marketable equity securities recognized in earnings | | | | | (2,564) | | | 3,766 | | | 2,637 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Gain on investment securities, net | | | | | $ | 6,446 | | | $ | 17,767 | | | $ | 21,174 | |
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 December 31, 2018 and 2017the dates indicated (in thousands):
| | | | | | | | | | | | | | | | December 31, 2021 |
| 2018 | |
| Less than 12 Months | | 12 Months or Greater | | Total | | Less than 12 Months | | 12 Months or Greater | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities | $ | 14,921 |
| | $ | (14 | ) | | $ | — |
| | $ | — |
| | $ | 14,921 |
| | $ | (14 | ) | U.S. Treasury securities | $ | 49,328 | | | $ | (591) | | | $ | 47,102 | | | $ | (2,307) | | | $ | 96,430 | | | $ | (2,898) | |
U.S. Government agency and sponsored enterprise residential MBS | 450,666 |
| | (1,828 | ) | | 87,311 |
| | (2,580 | ) | | 537,977 |
| | (4,408 | ) | U.S. Government agency and sponsored enterprise residential MBS | 436,744 | | | (4,549) | | | 401,022 | | | (3,872) | | | 837,766 | | | (8,421) | |
U.S. Government agency and sponsored enterprise commercial MBS | 146,096 |
| | (352 | ) | | 25,815 |
| | (723 | ) | | 171,911 |
| | (1,075 | ) | U.S. Government agency and sponsored enterprise commercial MBS | 247,323 | | | (4,084) | | | 163,380 | | | (6,229) | | | 410,703 | | | (10,313) | |
| Private label residential MBS and CMOs | 759,921 |
| | (7,073 | ) | | 278,108 |
| | (7,925 | ) | | 1,038,029 |
| | (14,998 | ) | Private label residential MBS and CMOs | 1,552,946 | | | (13,933) | | | 23,355 | | | (358) | | | 1,576,301 | | | (14,291) | |
Private label commercial MBS | 742,092 |
| | (5,371 | ) | | 39,531 |
| | (769 | ) | | 781,623 |
| | (6,140 | ) | Private label commercial MBS | 1,338,288 | | | (6,085) | | | 171,490 | | | (2,438) | | | 1,509,778 | | | (8,523) | |
Single family rental real estate-backed securities | 234,305 |
| | (1,973 | ) | | 85,282 |
| | (2,145 | ) | | 319,587 |
| | (4,118 | ) | |
Single family real estate-backed securities | | Single family real estate-backed securities | 154,552 | | | (2,908) | | | — | | | — | | | 154,552 | | | (2,908) | |
Collateralized loan obligations | 749,047 |
| | (5,217 | ) | | — |
| | — |
| | 749,047 |
| | (5,217 | ) | Collateralized loan obligations | 318,555 | | | (445) | | | 319,192 | | | (1,084) | | | 637,747 | | | (1,529) | |
Non-mortgage asset-backed securities | 136,100 |
| | (1,336 | ) | | — |
| | — |
| | 136,100 |
| | (1,336 | ) | |
State and municipal obligations | 208,971 |
| | (3,522 | ) | | 46,247 |
| | (543 | ) | | 255,218 |
| | (4,065 | ) | |
| SBA securities | 215,975 |
| | (1,391 | ) | | 31,481 |
| | (563 | ) | | 247,456 |
| | (1,954 | ) | SBA securities | 496 | | | — | | | 99,599 | | | (2,728) | | | 100,095 | | | (2,728) | |
| $ | 3,658,094 |
| | $ | (28,077 | ) | | $ | 593,775 |
| | $ | (15,248 | ) | | $ | 4,251,869 |
| | $ | (43,325 | ) | |
| | | $ | 4,098,232 | | | $ | (32,595) | | | $ | 1,225,140 | | | $ | (19,016) | | | $ | 5,323,372 | | | $ | (51,611) | |
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20182021
| | | | | | | | | | | | | | | | December 31, 2020 |
| 2017 | |
| Less than 12 Months | | 12 Months or Greater | | Total | | Less than 12 Months | | 12 Months or Greater | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities | $ | 24,953 |
| | $ | (28 | ) | | $ | — |
| | $ | — |
| | $ | 24,953 |
| | $ | (28 | ) | U.S. Treasury securities | $ | 24,369 | | | $ | (375) | | | $ | — | | | $ | — | | | $ | 24,369 | | | $ | (375) | |
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 residential MBS | 220,179 | | | (320) | | | 370,727 | | | (2,708) | | | 590,906 | | | (3,028) | |
U.S. Government agency and sponsored enterprise commercial MBS | 26,265 |
| | (344 | ) | | — |
| | — |
| | 26,265 |
| | (344 | ) | U.S. Government agency and sponsored enterprise commercial MBS | 152,233 | | | (1,412) | | | 44,255 | | | (255) | | | 196,488 | | | (1,667) | |
| Private label residential MBS and CMOs | 330,068 |
| | (1,858 | ) | | 5,083 |
| | (100 | ) | | 335,151 |
| | (1,958 | ) | Private label residential MBS and CMOs | 141,407 | | | (561) | | | — | | | — | | | 141,407 | | | (561) | |
Private label commercial MBS | 81,322 |
| | (258 | ) | | — |
| | — |
| | 81,322 |
| | (258 | ) | Private label commercial MBS | 1,268,381 | | | (12,771) | | | 37,783 | | | (77) | | | 1,306,164 | | | (12,848) | |
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 | ) | |
Single family real estate-backed securities | | Single family real estate-backed securities | 28,758 | | | (58) | | | — | | | — | | | 28,758 | | | (58) | |
Collateralized loan obligations | | Collateralized loan obligations | 304,051 | | | (1,171) | | | 588,463 | | | (7,564) | | | 892,514 | | | (8,735) | |
Non-mortgage asset-backed securities | | Non-mortgage asset-backed securities | — | | | — | | | 12,327 | | | (234) | | | 12,327 | | | (234) | |
| SBA securities | 21,300 |
| | (10 | ) | | 15,427 |
| | (50 | ) | | 36,727 |
| | (60 | ) | SBA securities | 26,240 | | | (298) | | | 104,598 | | | (3,637) | | | 130,838 | | | (3,935) | |
| $ | 1,080,493 |
| | $ | (4,546 | ) | | $ | 94,520 |
| | $ | (1,314 | ) | | $ | 1,175,013 |
| | $ | (5,860 | ) | |
| | | $ | 2,165,618 | | | $ | (16,966) | | | $ | 1,158,153 | | | $ | (14,475) | | | $ | 3,323,771 | | | $ | (31,441) | |
Management considers delinquency status to be the most meaningful indicator of the credit quality of 1-4 single family residential home equity and other consumer loans, other than government insured residential loans. Delinquency statistics are updated at least monthly. See "Aging of loans" below for more information on the delinquency status of loans. Original LTV and original FICO scorescores are also important indicators of credit quality for the non-covered 1-4 single family residential portfolio. loans other than government insured loans. FICO scores are generally updated at least annually, and were most recently updated in the third quarter of 2021. 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.