SEC Filing | BankUnited, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2019



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

For the transition period from to

Commission File Number: 001-35039

BankUnited, Inc.

(Exact name of registrant as specified in its charter)



Delaware		27-0162450
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



14817 Oak Lane	Miami Lakes	FL	33016
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (305) 569-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class	Trading Symbol	Name of Exchange on Which Registered
Common Stock, $0.01 Par Value	BKU	New York Stock Exchange

The number of outstanding shares of the registrant common stock, $0.01 par value, was 94,945,379 as of November 6, 2019.

BANKUNITED, INC.

Form 10-Q

For the Quarter Ended September 30, 2019

TABLE OF CONTENTS



		Page

	Glossary of Defined Terms	ii

PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	1
	Consolidated Statements of Income	2
	Consolidated Statements of Comprehensive Income	3
	Consolidated Statements of Cash Flows	4
	Consolidated Statements of Stockholders’ Equity	6
	Notes to Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	72

ITEM 4.	Controls and Procedures	72

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	72

ITEM 1A.	Risk Factors	72

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73

ITEM 6.	Exhibits	74

SIGNATURES		75

GLOSSARY OF DEFINED TERMS

The following acronyms and terms may be used throughout this Form 10-Q, including the consolidated financial statements and related notes.



ACI		Loans acquired with evidence of deterioration in credit quality since origination (Acquired Credit Impaired)
AFS		Available for sale
ALCO		Asset/Liability Committee
ALLL		Allowance for loan and lease losses
AOCI		Accumulated other comprehensive income
ASC		Accounting Standards Codification
ASU		Accounting Standards Update
BKU		BankUnited, Inc.
BankUnited		BankUnited, National Association
The Bank		BankUnited, National Association
Bridge		Bridge Funding Group, Inc.
Buyout loans		FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations
CDO		Collateralized debt obligation
CET1		Common Equity Tier 1 capital
CECL		Current expected credit loss
CME		Chicago Mercantile Exchange
CLOs		Collateralized loan obligations
CMOs		Collateralized mortgage obligations
Covered assets		Assets covered under the Loss Sharing Agreements
Covered loans		Loans covered under the Loss Sharing Agreements
DSCR		Debt Service Coverage Ratio
EPS		Earnings per common share
EVE		Economic value of equity
FASB		Financial Accounting Standards Board
FDIA		Federal Deposit Insurance Act
FDIC		Federal Deposit Insurance Corporation
FHLB		Federal Home Loan Bank
FHA loan		Loan guaranteed by the Federal Housing Administration
FICO		Fair Isaac Corporation (credit score)
FRB		Federal Reserve Bank
FSB Acquisition		Acquisition of substantially all of the assets and assumption of all of the non-brokered deposits and substantially all of the other liabilities of BankUnited, FSB from the FDIC on May 21, 2009
FSB Loans		1-4 single family residential loans acquired in the FSB Acquisition that were formally covered by the Single Family Shared-Loss Agreement
GAAP		U.S. generally accepted accounting principles
GNMA		Government National Mortgage Association
HTM		Held to maturity
IPO		Initial public offering
ISDA		International Swaps and Derivatives Association
LIBOR		London InterBank Offered Rate



Loss Sharing Agreements		Two loss sharing agreements entered into with the FDIC in connection with the FSB Acquisition
LTV		Loan-to-value
MBS		Mortgage-backed securities
Non-Covered Loans		Loans other than those covered under the Loss Sharing Agreements
OCI		Other comprehensive income
OCC		Office of the Comptroller of the Currency
OREO		Other real estate owned
OTTI		Other-than-temporary impairment
PSU		Performance Share Unit
Pinnacle		Pinnacle Public Finance, Inc.
ROU Asset		Right-of-use Asset
RSU		Restricted Share Unit
SBA		U.S. Small Business Administration
SBF		Small Business Finance Unit
SEC		Securities and Exchange Commission
Single Family Shared-Loss Agreement		A single-family loan shared-loss agreement entered into with the FDIC in connection with the FSB Acquisition
SOFR		Secured Overnight Financing Rate
TDR		Troubled-debt restructuring
UPB		Unpaid principal balance
VA loan		Loan guaranteed by the U.S. Department of Veterans Affairs

iii

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements and Supplementary Data

BANKUNITED, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - UNAUDITED

(In thousands, except share and per share data)



	September 30, 2019			December 31, 2018
ASSETS
Cash and due from banks:
Non-interest bearing	$	15,401		$	9,392
Interest bearing	214,827			372,681
Cash and cash equivalents	230,228			382,073
Investment securities (including securities recorded at fair value of $7,960,656 and $8,156,878)	7,970,656			8,166,878
Non-marketable equity securities	272,789			267,052
Loans held for sale	46,332			36,992
Loans (including covered loans of $201,376 at December 31, 2018)	22,855,500			21,977,008
Allowance for loan and lease losses	(108,462		)	(109,931		)
Loans, net	22,747,038			21,867,077
Bank owned life insurance	280,839			263,340
Operating lease equipment, net	696,899			702,354
Goodwill and other intangible assets	77,685			77,718
Other assets	628,069			400,842
Total assets	$	32,950,535		$	32,164,326

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Demand deposits:
Non-interest bearing	$	4,126,788		$	3,621,254
Interest bearing	1,847,301			1,771,465
Savings and money market	10,935,779			11,261,746
Time	7,046,560			6,819,758
Total deposits	23,956,428			23,474,223
Federal funds purchased	175,000			175,000
Federal Home Loan Bank advances	4,930,638			4,796,000
Notes and other borrowings	403,832			402,749
Other liabilities	575,362			392,521
Total liabilities	30,041,260			29,240,493

Commitments and contingencies

Stockholders' equity:
Common stock, par value $0.01 per share, 400,000,000 shares authorized; 95,070,399 and 99,141,374 shares issued and outstanding	951			991
Paid-in capital	1,077,946			1,220,147
Retained earnings	1,859,055			1,697,822
Accumulated other comprehensive income (loss)	(28,677		)	4,873
Total stockholders' equity	2,909,275			2,923,833
Total liabilities and stockholders' equity	$	32,950,535		$	32,164,326

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

BANKUNITED, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

(In thousands, except per share data)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Interest income:
Loans	$	248,770	$	293,543	$	738,766	$	855,807
Investment securities	69,413		59,319		218,554		165,396
Other	5,219		4,855		15,140		13,145
Total interest income	323,402		357,717		972,460		1,034,348
Interest expense:
Deposits	99,483		75,257		296,891		196,916
Borrowings	38,229		30,492		108,095		82,392
Total interest expense	137,712		105,749		404,986		279,308
Net interest income before provision for loan losses	185,690		251,968		567,474		755,040
Provision for (recovery of) loan losses (including ($50) and $517 for covered loans for the three and nine months ended September 30, 2018)	1,839		1,200		9,373		13,342
Net interest income after provision for loan losses	183,851		250,768		558,101		741,698
Non-interest income:
Income from resolution of covered assets, net	—		3,134		—		10,689
Net gain (loss) on FDIC indemnification	—		3,090		—		(1,925		)
Deposit service charges and fees	4,269		3,723		12,389		10,811
Gain on sale of loans, net (including $5,037 and $4,739 related to covered loans for the three and nine months ended September 30, 2018)	5,163		8,691		10,220		12,960
Gain on investment securities, net	3,835		432		13,736		2,938
Lease financing	18,583		14,091		52,774		45,685
Other non-interest income	6,006		5,574		20,329		17,536
Total non-interest income	37,856		38,735		109,448		98,694
Non-interest expense:
Employee compensation and benefits	57,102		65,612		179,586		198,185
Occupancy and equipment	14,673		13,812		42,477		42,355
Amortization of FDIC indemnification asset	—		48,255		—		132,852
Deposit insurance expense	3,781		5,375		12,849		14,810
Professional fees	2,923		5,240		17,731		10,772
Technology and telecommunications	10,994		9,262		34,175		26,121
Depreciation of equipment under operating lease	11,582		9,870		34,883		28,662
Loss on debt extinguishment	3,796		—		3,796		—
Other non-interest expense	16,455		13,372		42,584		40,105
Total non-interest expense	121,306		170,798		368,081		493,862
Income before income taxes	100,401		118,705		299,468		346,530
Provision for income taxes	24,182		21,377		75,826		74,067
Net income	$	76,219	$	97,328	$	223,642	$	272,463
Earnings per common share, basic	$	0.78	$	0.90	$	2.23	$	2.50
Earnings per common share, diluted	$	0.77	$	0.90	$	2.23	$	2.49

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

BANKUNITED, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

(In thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018

Net income	$	76,219		$	97,328		$	223,642		$	272,463
Other comprehensive loss, net of tax:
Unrealized gains on investment securities available for sale:
Net unrealized holding gain (loss) arising during the period	8,358			(18,147		)	53,301			(58,577		)
Reclassification adjustment for net securities gains realized in income	(2,518		)	(382		)	(8,568		)	(2,974		)
Net change in unrealized gain on securities available for sale	5,840			(18,529		)	44,733			(61,551		)
Unrealized losses on derivative instruments:
Net unrealized holding gain (loss) arising during the period	(16,774		)	10,536			(74,667		)	40,175
Reclassification adjustment for net losses realized in income	(374		)	(772		)	(3,616		)	(617		)
Net change in unrealized loss on derivative instruments	(17,148		)	9,764			(78,283		)	39,558
Other comprehensive loss	(11,308		)	(8,765		)	(33,550		)	(21,993		)
Comprehensive income	$	64,911		$	88,563		$	190,092		$	250,470

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

BANKUNITED, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)



	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	223,642		$	272,463
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and accretion, net	(30,550		)	(97,064		)
Provision for loan losses	9,373			13,342
Income from resolution of covered assets, net	—			(10,689		)
Net loss on FDIC indemnification	—			1,925
Gain on sale of loans, net	(10,220		)	(12,960		)
Gain on investment securities, net	(13,736		)	(2,938		)
Equity based compensation	16,967			18,045
Depreciation and amortization	53,105			51,472
Deferred income taxes	22,278			60,071
Loss on debt extinguishment	3,796			—
Proceeds from sale of loans held for sale	317,027			182,330
Loans originated for sale, net of repayments	(68,665		)	(125,509		)
Other:
(Increase) decrease in other assets	20,288			(77,393		)
Increase (decrease) in other liabilities	(131,066		)	130,827
Net cash provided by operating activities	412,239			403,922

Cash flows from investing activities:
Purchase of investment securities	(3,176,833		)	(2,557,757		)
Proceeds from repayments and calls of investment securities	1,057,043			1,134,995
Proceeds from sale of investment securities	2,297,121			938,555
Purchase of non-marketable equity securities	(319,387		)	(235,876		)
Proceeds from redemption of non-marketable equity securities	313,650			228,438
Purchases of loans	(1,636,932		)	(913,840		)
Loan originations, repayments and resolutions, net	332,246			320,550
Proceeds from sale of loans, net	205,869			250,769
Proceeds from sale of equipment under operating lease	9,404			50,902
Acquisition of equipment under operating lease	(38,312		)	(137,305		)
Other investing activities	(36,409		)	(16,548		)
Net cash used in investing activities	(992,540		)	(937,117		)
				(Continued)

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

BANKUNITED, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (Continued)

(In thousands)



	Nine Months Ended September 30,
	2019			2018
Cash flows from financing activities:
Net increase in deposits	482,205			426,811
Net increase in federal funds purchased	—			175,000
Additions to Federal Home Loan Bank advances	3,962,000			3,847,000
Repayments of Federal Home Loan Bank advances	(3,827,000		)	(3,672,000		)
Dividends paid	(63,558		)	(68,911		)
Repurchase of common stock	(150,000		)	(150,000		)
Other financing activities	24,809			60,512
Net cash provided by financing activities	428,456			618,412
Net (decrease) increase in cash and cash equivalents	(151,845		)	85,217
Cash and cash equivalents, beginning of period	382,073			194,582
Cash and cash equivalents, end of period	$	230,228		$	279,799

Supplemental disclosure of cash flow information:
Interest paid	$	391,691		$	269,520
Income taxes (refunded) paid, net	$	(264	)	$	21,031

Supplemental schedule of non-cash investing and financing activities:
Transfers from loans to other real estate owned and other repossessed assets	$	3,211		$	9,411
Transfers from loans to loans held for sale	$	439,525		$	54,322
Transfers from loans held for sale to loans	$	19,716		$	—
Dividends declared, not paid	$	20,524		$	22,394
Unsettled sales and purchases of investment securities, net	$	88,331		$	146,503

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

BANKUNITED, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED

(In thousands, except share data)



	Common Shares Outstanding		Common Stock			Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
Balance at June 30, 2019	95,315,633		$	953		$	1,080,966		$	1,803,360		$	(17,369	)	$	2,867,910
Comprehensive income	—		—			—			76,219			(11,308		)	64,911
Dividends ($0.21 per common share)	—		—			—			(20,524		)	—			(20,524		)
Equity based compensation	8,219		—			4,564			—			—			4,564
Forfeiture of unvested shares	(38,596	)	—			(145		)	—			—			(145		)
Exercise of stock options	22,133		1			493			—			—			494
Repurchase of common stock	(236,990	)	(3		)	(7,932		)	—			—			(7,935		)
Balance at September 30, 2019	95,070,399		$	951		$	1,077,946		$	1,859,055		$	(28,677	)	$	2,909,275

Balance at June 30, 2018	106,241,116		$	1,062		$	1,455,554		$	1,592,157		$	50,660		$	3,099,433
Comprehensive income	—		—			—			97,328			(8,765		)	88,563
Dividends ($0.21 per common share)	—		—			—			(22,393		)	—			(22,393		)
Equity based compensation	11,857		—			5,067			—			—			5,067
Forfeiture of unvested shares and shares surrendered for tax withholding obligations	(27,999	)	—			(181		)	—			—			(181		)
Repurchase of common stock	(2,431,649	)	(25		)	(95,576		)	—			—			(95,601		)
Balance at September 30, 2018	103,793,325		$	1,037		$	1,364,864		$	1,667,092		$	41,895		$	3,074,888



	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	—		—			—			223,642			(33,550		)	190,092
Dividends ($0.63 per common share)	—		—			—			(62,409		)	—			(62,409		)
Equity based compensation	590,572		6			13,614			—			—			13,620
Forfeiture of unvested shares and shares surrendered for tax withholding obligations	(325,523	)	(3		)	(6,396		)	—			—			(6,399		)
Exercise of stock options	26,043		1			537			—			—			538
Repurchase of common stock	(4,362,067	)	(44		)	(149,956		)	—			—			(150,000		)
Balance at September 30, 2019	95,070,399		$	951		$	1,077,946		$	1,859,055		$	(28,677	)	$	2,909,275

Balance at December 31, 2017	106,848,185		$	1,068		$	1,498,227		$	1,471,781		$	54,986		$	3,026,062
Cumulative effect of adoption of new accounting standards	—		—			—			(8,902		)	8,902			—
Comprehensive income	—		—			—			272,463			(21,993		)	250,470
Dividends ($0.63 per common share)	—		—			—			(68,250		)	—			(68,250		)
Equity based compensation	666,277		6			15,403			—			—			15,409
Forfeiture of unvested shares and shares surrendered for tax withholding obligations	(235,719	)	(2		)	(6,528		)	—			—			(6,530		)
Exercise of stock options	291,689		3			7,724			—			—			7,727
Repurchase of common stock	(3,777,107	)	(38		)	(149,962		)	—			—			(150,000		)
Balance at September 30, 2018	103,793,325		$	1,037		$	1,364,864		$	1,667,092		$	41,895		$	3,074,888

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

Table of Contents

BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Note 1 Basis of Presentation and Summary of Significant Accounting Policies

BankUnited, Inc. is a national bank holding company with one wholly-owned subsidiary, BankUnited, collectively, the Company. BankUnited, a national banking association headquartered in Miami Lakes, Florida, provides a full range of banking and related services to individual and corporate customers through 77 banking centers located in 14 Florida counties and 5 banking centers located in the New York metropolitan area at September 30, 2019. The Bank also offers certain commercial lending and deposit products through national platforms.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, these do not include all of the information and footnotes required for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in BKU’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected in future periods.

Certain amounts presented for prior periods have been reclassified to conform to the current period presentation.

Accounting Estimates

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosures of contingent assets and liabilities. Actual results could differ significantly from these estimates.

Significant estimates include the ALLL and the fair values of investment securities and other financial instruments.

New Accounting Pronouncements Adopted During the Nine Months Ended September 30, 2019

ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU, along with subsequent ASUs issued to clarify certain provisions of Topic 842, 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 was largely unchanged by this ASU. The ASU also requires both qualitative and quantitative disclosures that provide additional information about the amounts recorded in the consolidated financial statements. The amendments in this ASU were effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2018. The most significant impact of adoption was the recognition, as lessee, of new right-of-use assets and lease liabilities on the Consolidated Balance Sheet for real estate leases classified as operating leases. Under a package of practical expedients that the Company elected, as lessee and lessor, the Company did not have 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 elected the transition method that allows entities the option of applying the provisions of the ASU at the effective date without adjusting the comparative periods presented. The Company adopted this ASU in the first quarter of 2019 using the modified retrospective transition method. The Company recognized a lease liability and related right of use asset of approximately $104 million and $95 million, respectively, upon adoption on January 1, 2019.

ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The ASU added the OIS rate based on SOFR as a benchmark interest rate for hedge accounting purposes. The ASU was effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2018. The Company adopted this ASU in the first quarter of 2019 with no impact at adoption to its consolidated financial position, results of operations, or cash flows.

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

Table of Contents

BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

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 on a straight line basis over the lease terms. For finance leases, interest expense on lease liabilities is recognized on the effective interest method and amortization of ROU assets is recognized on a straight line basis over the lease terms. Variable lease costs are recognized in the period in which the obligation for those costs is incurred. The Company has elected not to separate lease from non-lease components of its lease contracts.

Note 2 Earnings Per Common Share

The computation of basic and diluted earnings per common share is presented below for the periods indicated (in thousands, except share and per share data):



	Three Months Ended September 30,						Nine Months Ended September 30,
c	2019			2018			2019			2018
Basic earnings per common share:
Numerator:
Net income	$	76,219		$	97,328		$	223,642		$	272,463
Distributed and undistributed earnings allocated to participating securities	(3,174		)	(3,771		)	(9,247		)	(10,444		)
Income allocated to common stockholders for basic earnings per common share	$	73,045		$	93,557		$	214,395		$	262,019
Denominator:
Weighted average common shares outstanding	95,075,395			105,063,770			97,113,878			105,914,807
Less average unvested stock awards	(1,098,509		)	(1,178,982		)	(1,147,988		)	(1,170,209		)
Weighted average shares for basic earnings per common share	93,976,886			103,884,788			95,965,890			104,744,598
Basic earnings per common share	$	0.78		$	0.90		$	2.23		$	2.50
Diluted earnings per common share:
Numerator:
Income allocated to common stockholders for basic earnings per common share	$	73,045		$	93,557		$	214,395		$	262,019
Adjustment for earnings reallocated from participating securities	7			13			20			37
Income used in calculating diluted earnings per common share	$	73,052		$	93,570		$	214,415		$	262,056
Denominator:
Weighted average shares for basic earnings per common share	93,976,886			103,884,788			95,965,890			104,744,598
Dilutive effect of stock options and certain share-based awards	285,934			499,431			303,524			512,801
Weighted average shares for diluted earnings per common share	94,262,820			104,384,219			96,269,414			105,257,399
Diluted earnings per common share	$	0.77		$	0.90		$	2.23		$	2.49

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Included in participating securities above are unvested shares and 3,023,314 dividend equivalent rights outstanding at September 30, 2019 that were issued in conjunction with the IPO of the Company's common stock. These dividend equivalent rights expire in 2021 and participate in dividends on a one-for-one basis.

The following potentially dilutive securities were outstanding at September 30, 2019 and 2018 but excluded from the calculation of diluted earnings per common share for the periods indicated because their inclusion would have been anti-dilutive:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Unvested shares and share units	1,078,278	1,639,183	1,078,278	1,639,183
Stock options and warrants	—	1,850,279	—	1,850,279

Note 3 Investment Securities

Investment securities include investment securities available for sale, marketable equity securities, and investment securities held to maturity. The investment securities portfolio consisted of the following at the dates indicated (in thousands):



	September 30, 2019
	Amortized Cost		Gross Unrealized					Carrying Value ⁽¹⁾
	Amortized Cost		Gains		Losses			Carrying Value ⁽¹⁾
Investment securities available for sale:
U.S. Treasury securities	$	70,219	$	447	$	—		$	70,666
U.S. Government agency and sponsored enterprise residential MBS	1,961,011		13,171		(5,041		)	1,969,141
U.S. Government agency and sponsored enterprise commercial MBS	336,608		5,075		(1,093		)	340,590
Private label residential MBS and CMOs	1,295,234		20,505		(554		)	1,315,185
Private label commercial MBS	1,622,198		10,212		(312		)	1,632,098
Single family rental real estate-backed securities	491,728		5,319		(349		)	496,698
Collateralized loan obligations	1,204,888		386		(7,041		)	1,198,233
Non-mortgage asset-backed securities	202,098		2,595		(127		)	204,566
State and municipal obligations	264,108		16,678		(1		)	280,785
SBA securities	384,677		5,452		(1,889		)	388,240
Other debt securities	1,338		3,133		—			4,471
	7,834,107		$	82,973	$	(16,407	)	7,900,673
Investment securities held to maturity	10,000							10,000
	$	7,844,107						7,910,673
Marketable equity securities								59,983
								$	7,970,656

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	December 31, 2018
	Amortized Cost		Gross Unrealized					Carrying Value ⁽¹⁾
	Amortized Cost		Gains		Losses			Carrying Value ⁽¹⁾
Investment securities available for sale:
U.S. Treasury securities	$	39,885	$	2	$	(14	)	$	39,873
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 commercial MBS	374,569		1,293		(1,075		)	374,787
Private label residential MBS and CMOs	1,539,058		10,138		(14,998		)	1,534,198
Private label commercial MBS	1,486,835		5,021		(6,140		)	1,485,716
Single family rental real estate-backed securities	406,310		266		(4,118		)	402,458
Collateralized loan obligations	1,239,355		1,060		(5,217		)	1,235,198
Non-mortgage asset-backed securities	204,372		1,031		(1,336		)	204,067
State and municipal obligations	398,810		3,684		(4,065		)	398,429
SBA securities	514,765		6,502		(1,954		)	519,313
Other debt securities	1,393		3,453		—			4,846
	8,090,654		$	49,030	$	(43,325	)	8,096,359
Investment securities held to maturity	10,000							10,000
	$	8,100,654						8,106,359
Marketable equity securities								60,519
								$	8,166,878


(1)	At fair value except for securities held to maturity.

Investment securities held to maturity at September 30, 2019 and December 31, 2018 consisted of one State of Israel bond maturing in 2024.

At September 30, 2019, contractual maturities of investment securities available for sale, adjusted for anticipated prepayments when applicable, were as follows (in thousands):



	Amortized Cost		Fair Value
Due in one year or less	$	677,040	$	683,994
Due after one year through five years	4,298,108		4,318,504
Due after five years through ten years	2,438,854		2,468,533
Due after ten years	420,105		429,642
	$	7,834,107	$	7,900,673

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 billion at both September 30, 2019 and December 31, 2018, respectively.

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The following table provides information about gains and losses on investment securities for the periods indicated (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Proceeds from sale of investment securities available for sale	$	670,871		$	102,238		$	2,297,121		$	938,555

Gross realized gains:
Investment securities available for sale	$	6,094		$	521		$	15,051		$	6,561
Gross realized losses:
Investment securities available for sale	(2,669		)	—			(3,394		)	(2,514		)
Net realized gain	3,425			521			11,657			4,047

Net unrealized gains (losses) on marketable equity securities recognized in earnings	410			(89		)	2,079			(1,109		)

Gain on investment securities, net	$	3,835		$	432		$	13,736		$	2,938

The following tables present the aggregate fair value and the aggregate amount by which amortized cost exceeded fair value for investment securities available for sale in unrealized loss positions, aggregated by investment category and length of time that individual securities had been in continuous unrealized loss positions at the dates indicated (in thousands):



	September 30, 2019
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Government agency and sponsored enterprise residential MBS	$	542,289	$	(3,427	)	$	162,189	$	(1,614	)	$	704,478	$	(5,041	)
U.S. Government agency and sponsored enterprise commercial MBS	98,316		(1,057		)	6,477		(36		)	104,793		(1,093		)
Private label residential MBS and CMOs	119,494		(205		)	47,447		(349		)	166,941		(554		)
Private label commercial MBS	202,545		(306		)	2,835		(6		)	205,380		(312		)
Single family rental real estate-backed securities	188,568		(338		)	8,123		(11		)	196,691		(349		)
Collateralized loan obligations	492,347		(2,205		)	306,144		(4,836		)	798,491		(7,041		)
Non-mortgage asset-backed securities	89,413		(127		)	—		—			89,413		(127		)
State and municipal obligations	1,574		(1		)	—		—			1,574		(1		)
SBA securities	57,064		(740		)	93,424		(1,149		)	150,488		(1,889		)
	$	1,791,610	$	(8,406	)	$	626,639	$	(8,001	)	$	2,418,249	$	(16,407	)

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	December 31, 2018
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities	$	14,921	$	(14	)	$	—	$	—		$	14,921	$	(14	)
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 commercial MBS	146,096		(352		)	25,815		(723		)	171,911		(1,075		)
Private label residential MBS and CMOs	759,921		(7,073		)	278,108		(7,925		)	1,038,029		(14,998		)
Private label commercial MBS	742,092		(5,371		)	39,531		(769		)	781,623		(6,140		)
Single family rental real estate-backed securities	234,305		(1,973		)	85,282		(2,145		)	319,587		(4,118		)
Collateralized loan obligations	749,047		(5,217		)	—		—			749,047		(5,217		)
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		)
	$	3,658,094	$	(28,077	)	$	593,775	$	(15,248	)	$	4,251,869	$	(43,325	)

The Company monitors its investment securities available for sale for OTTI on an individual security basis. No securities were determined to be other-than-temporarily impaired during the nine months ended September 30, 2019 or 2018. The Company does not intend to sell securities that are in significant unrealized loss positions at September 30, 2019 and it is not more likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis, which may be at maturity. At September 30, 2019, 115 securities available for sale were in unrealized loss positions. The amount of impairment related to 41 of these securities was considered insignificant both individually and in the aggregate, totaling approximately $346 thousand and no further analysis with respect to these securities was considered necessary. The basis for concluding that impairment of the remaining securities was not other-than-temporary is further described below.

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

At September 30, 2019, twenty-seven U.S. Government agency and sponsored enterprise residential MBS and four U.S. Government agency and sponsored enterprise commercial MBS were in unrealized loss positions. Impairment of these floating rate securities was primarily attributable to widening spreads. The timely payment of principal and interest on these securities is explicitly or implicitly guaranteed by the U.S. Government. Given the expectation of timely payment of principal and interest the impairments were considered to be temporary.

Private label residential MBS and CMOs

At September 30, 2019, six private label residential MBS and CMOs were in unrealized loss positions, primarily as a result of widening spreads. These securities were assessed for OTTI using credit and prepayment behavioral models that incorporate CUSIP level constant default rates, voluntary prepayment rates and loss severity and delinquency assumptions. The results of these assessments were not indicative of credit losses related to any of these securities as of September 30, 2019. Given the expectation of timely recovery of outstanding principal the impairments were considered to be temporary.

Private label commercial MBS

At September 30, 2019, five private label commercial MBS were in unrealized loss positions, primarily as a result of widening spreads. These securities were assessed for OTTI using credit and prepayment behavioral models incorporating assumptions consistent with the collateral characteristics of each security. The results of this analysis were not indicative of

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expected credit losses. Given the expectation of timely recovery of outstanding principal the impairments were considered to be temporary.

Single family rental real estate-backed securities

At September 30, 2019, five single family rental real estate-backed securities were in unrealized loss positions. The unrealized losses were primarily due to widening spreads. Management's analysis of the credit characteristics, including loan-to-value and debt service coverage ratios, and levels of subordination for each of the securities is not indicative of projected credit losses. Given the absence of projected credit losses the impairments were considered to be temporary.

Collateralized loan obligations:

At September 30, 2019, seventeen collateralized loan obligations were in unrealized loss positions, primarily due to widening spreads for this asset class. These securities were assessed for OTTI using credit and prepayment behavioral models incorporating assumptions consistent with the collateral characteristics of each security. The results of this analysis were not indicative of expected credit losses. Given the expectation of timely recovery of outstanding principal, the impairments were considered to be temporary.

Non-mortgage asset-backed securities

At September 30, 2019, two non-mortgage asset-backed securities were in unrealized loss positions, due primarily to widening spreads. These securities were assessed for OTTI using a credit and prepayment behavioral model incorporating assumptions consistent with the collateral characteristics of the security. The results of this analysis were not indicative of expected credit losses. Given the expectation of timely recovery of outstanding principal, the impairment was considered to be temporary.

SBA Securities

At September 30, 2019, eight SBA securities were in unrealized loss positions. These securities were purchased at a premium and the impairment was attributable primarily to increased prepayment speeds. The timely payment of principal and interest on these securities is guaranteed by the SBA. Given the expectation of timely payment of principal and interest, the impairments were considered to be temporary.

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Note 4 Loans and Allowance for Loan and Lease Losses

Loans consisted of the following at the dates indicated (dollars in thousands):



	September 30, 2019					December 31, 2018
	Total			Percent of Total		Total			Percent of Total
Residential and other consumer:
1-4 single family residential	$	5,024,628		22.0	%	$	4,664,920		21.2	%
Government insured residential	536,682			2.3	%	266,729			1.2	%
Other consumer loans	9,794			0.1	%	17,340			0.1	%
	5,571,104			24.4	%	4,948,989			22.5	%
Commercial:
Multi-family	2,221,525			9.7	%	2,585,421			11.8	%
Non-owner occupied commercial real estate	4,789,673			21.0	%	4,611,573			21.0	%
Construction and land	173,345			0.8	%	210,516			1.0	%
Owner occupied commercial real estate	1,936,516			8.5	%	2,007,603			9.1	%
Commercial and industrial	4,477,062			19.6	%	4,312,213			19.6	%
National commercial lending platforms:
Pinnacle	1,236,121			5.3	%	1,462,655			6.6	%
Bridge - franchise finance	605,896			2.6	%	517,305			2.4	%
Bridge - equipment finance	682,149			3.0	%	636,838			2.9	%
Small business finance	256,490			1.1	%	252,221			1.1	%
Mortgage warehouse lending	905,619			4.0	%	431,674			2.0	%
	17,284,396			75.6	%	17,028,019			77.4	%
Total loans	22,855,500			100.0	%	21,977,008			100.0	%
Allowance for loan and lease losses	(108,462		)			(109,931		)
Loans, net	$	22,747,038				$	21,867,077

Premiums, discounts and deferred fees and costs totaled $52 million and $44 million at September 30, 2019 and December 31, 2018, respectively.

During the three and nine months ended September 30, 2019 and 2018, the Company purchased 1-4 single family residential loans totaling $743 million, $1.6 billion, $310 million and $914 million, respectively. Purchases for the three and nine months ended September 30, 2019 and 2018 included $288 million, $572 million, $90 million and $201 million, respectively, of government insured residential loans.

At September 30, 2019, the Company had pledged loans with a carrying value of approximately $10.4 billion as security for FHLB advances and Federal Reserve discount window borrowings.

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The following presents the Company's recorded investment in ACI loans, included in the table above, as of the dates indicated (in thousands):



	September 30, 2019		December 31, 2018
Residential	$	160,632	$	190,223
Commercial	17,361		17,925
	$	177,993	$	208,148

At September 30, 2019 and December 31, 2018, the UPB of ACI loans was $343 million and $408 million, respectively. The accretable yield on ACI loans represents the amount by which undiscounted expected future cash flows exceed recorded investment. Changes in the accretable yield on ACI loans for the nine months ended September 30, 2019 and the year ended December 31, 2018 were as follows (in thousands):



Balance at December 31, 2017	$	455,059
Reclassifications from non-accretable difference, net	128,499
Accretion	(369,915		)
Other changes, net ⁽¹⁾	78,204
Balance at December 31, 2018	291,847
Reclassifications to non-accretable difference, net	(702		)
Accretion	(49,065		)
Other changes, net ⁽¹⁾	(12,034		)
Balance at September 30, 2019	$	230,046


(1)	Represents changes in cash flows expected to be collected due to the impact of changes in prepayment assumptions or changes in benchmark interest rates.

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Allowance for loan and lease losses

Activity in the ALLL is summarized as follows for the periods indicated (thousands):



	Three Months Ended September 30,
	2019								2018
	Residential and Other Consumer		Commercial			Total			Residential and Other Consumer			Commercial			Total
Beginning balance	$	11,236	$	100,905		$	112,141		$	10,338		$	124,633		$	134,971
Provision	158		1,681			1,839			240			960			1,200
Charge-offs	—		(6,141		)	(6,141		)	(740		)	(12,340		)	(13,080		)
Recoveries	5		618			623			465			1,184			1,649
Ending balance	$	11,399	$	97,063		$	108,462		$	10,303		$	114,437		$	124,740



	Nine Months Ended September 30,
	2019								2018
	Residential and Other Consumer		Commercial			Total			Residential and Other Consumer			Commercial			Total
Beginning balance	$	10,788	$	99,143		$	109,931		$	10,720		$	134,075		$	144,795
Provision	439		8,934			9,373			334			13,008			13,342
Charge-offs	—		(13,985		)	(13,985		)	(1,244		)	(34,736		)	(35,980		)
Recoveries	172		2,971			3,143			493			2,090			2,583
Ending balance	$	11,399	$	97,063		$	108,462		$	10,303		$	114,437		$	124,740

The following table presents information about the balance of the ALLL and related loans at the dates indicated (in thousands):



	September 30, 2019						December 31, 2018
	Residential and Other Consumer		Commercial		Total		Residential and Other Consumer		Commercial		Total
Allowance for loan and lease losses:
Ending balance	$	11,399	$	97,063	$	108,462	$	10,788	$	99,143	$	109,931
Ending balance: loans individually evaluated for impairment	$	12	$	9,930	$	9,942	$	134	$	12,143	$	12,277
Ending balance: loans collectively evaluated for impairment	$	11,387	$	87,133	$	98,520	$	10,654	$	87,000	$	97,654
Ending balance: ACI loans	$	—	$	—	$	—	$	—	$	—	$	—
Loans:					0
Ending balance	$	5,571,104	$	17,284,396	$	22,855,500	$	4,948,989	$	17,028,019	$	21,977,008
Ending balance: loans individually evaluated for impairment	$	34,527	$	124,248	$	158,775	$	7,690	$	108,841	$	116,531
Ending balance: loans collectively evaluated for impairment	$	5,375,945	$	17,142,787	$	22,518,732	$	4,751,076	$	16,901,253	$	21,652,329
Ending balance: ACI loans	$	160,632	$	17,361	$	177,993	$	190,223	$	17,925	$	208,148

Credit quality information

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

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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 flows 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.

The table below presents information about loans identified as impaired at the dates indicated (in thousands):



	September 30, 2019						December 31, 2018
	Recorded Investment		UPB		Related Specific Allowance		Recorded Investment		UPB		Related Specific Allowance
With no specific allowance recorded:
1-4 single family residential	$	127	$	127	$	—	$	2,204	$	2,170	$	—
Government insured residential	29,853		29,772		—		3,520		3,436		—
Multi-family	17,906		17,935		—		25,560		25,592		—
Non-owner occupied commercial real estate	11,790		11,779		—		1,317		1,323		—
Construction and land	3,839		3,841		—		8,827		8,830		—
Owner occupied commercial real estate	3,358		3,365		—		398		399		—
Commercial and industrial	3,500		3,504		—		11,968		11,973		—
Bridge - franchise finance	3,902		3,907		—		3,152		3,149		—
Small business finance ⁽¹⁾	34,512		34,700		—		22,227		22,152		—
With a specific allowance recorded:
1-4 single family residential	4,547		4,476		—		1,966		1,941		134
Non-owner occupied commercial real estate	—		—		—		1,666		1,667		731
Owner occupied commercial real estate	—		—		—		3,316		3,322		844
Commercial and industrial	23,143		23,119		5,948		10,939		10,946		3,831
Bridge - franchise finance	13,174		13,211		1,275		2,047		2,046		1,427
Bridge - equipment finance	9,124		9,047		2,707		17,424		17,339		5,310
Total:
Residential and other consumer	$	34,527	$	34,375	$	12	$	7,690	$	7,547	$	134
Commercial	124,248		124,408		9,930		108,841		108,738		12,143
	$	158,775	$	158,783	$	9,942	$	116,531	$	116,285	$	12,277


(1)	Includes the guaranteed portion of impaired SBA loans totaling $31.2 million and $13.1 million at September 30, 2019 and December 31, 2018, respectively.

Interest income recognized on impaired loans was immaterial for the three and nine months ended September 30, 2019 and 2018.

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

The following table presents the average recorded investment in impaired loans for the periods indicated (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Residential and other consumer:
1-4 single family residential	$	4,685	$	6,097	$	4,639	$	5,415
Government insured residential	19,865		1,554		10,885		977
	24,550		7,651		15,524		6,392

Commercial:
Multi-family	21,370		26,041		23,955		25,674
Non-owner occupied commercial real estate	11,938		2,849		10,628		2,144
Construction and land	6,188		6,631		7,854		4,225
Owner occupied commercial real estate	3,406		3,838		3,526		8,720
Commercial and industrial ⁽¹⁾	27,297		104,939		27,879		107,862
National commercial lending platforms
Bridge - franchise finance	10,879		2,672		6,559		1,095
Bridge - equipment finance	9,732		9,890		13,632		4,303
Small business finance	32,875		23,952		26,669		22,196
	123,685		180,812		120,702		176,219
	$	148,235	$	188,463	$	136,226	$	182,611


(1)	Includes average recorded investment in taxi medallion loans totaling $84 million and $93 million during the three and nine months ended September 30, 2018, respectively.

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

The following table presents the recorded investment in loans on non-accrual status as of the dates indicated (in thousands):



	September 30, 2019		December 31, 2018
Residential and other consumer:
1-4 single family residential	$	15,363	$	6,316
Other consumer loans	325		288
	15,688		6,604
Commercial:
Multi-family	17,906		25,560
Non-owner occupied commercial real estate	11,902		3,102
Construction and land	3,839		8,827
Owner occupied commercial real estate	6,043		5,221
Commercial and industrial	22,092		23,088
National commercial lending platforms
Bridge - franchise finance	5,275		5,308
Bridge - equipment finance	9,133		17,425
Small business finance ⁽¹⁾	45,767		34,108
	121,957		122,639
	$	137,645	$	129,243


(1)	Includes the guaranteed portion of non-accrual SBA loans totaling $33.1 million and $17.8 million at September 30, 2019 and December 31, 2018, respectively.

The amount of additional interest income that would have been recognized on non-accrual loans had they performed in accordance with their contractual terms was approximately $2.0 million and $6.0 million for the three and nine months ended September 30, 2019, respectively, and $2.1 million and $5.0 million for the three and nine months ended September 30, 2018, respectively.

Management considers delinquency status to be the most meaningful indicator of the credit quality of 1-4 single family residential, home equity and consumer 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 score are also important indicators of credit quality for 1-4 single family residential loans other than the FSB loans and government insured loans.

Internal risk ratings are considered the most meaningful indicator of credit quality for commercial loans. Internal risk ratings are a key factor in identifying loans that are individually evaluated for impairment and impact management’s estimates of loss factors used in determining the amount of the ALLL. Internal risk ratings are updated on a continuous basis. Generally, relationships with balances in excess of defined thresholds, ranging from $1 million to $3 million, are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. Loans exhibiting potential credit weaknesses that deserve management’s close attention and that if left uncorrected may result in deterioration of the repayment capacity of the borrower are categorized as special mention. Loans with well-defined credit weaknesses, including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow, project cost overruns, unreasonable construction delays, past due real estate taxes or exhausted interest reserves, are assigned an internal risk rating of substandard. A loan with a weakness so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors has not been charged off, will be assigned an internal risk rating of doubtful.

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

The following tables summarize key indicators of credit quality for the Company's loans at the dates indicated. Amounts include premiums, discounts and deferred fees and costs (in thousands):

1-4 Single Family Residential credit exposure for loans, excluding FSB loans, based on original LTV and FICO score:



	September 30, 2019
	FICO
LTV	720 or less		721 - 740		741 - 760		761 or greater		Total
Less than 60%	$	114,847	$	134,444	$	187,415	$	806,492	$	1,243,198
60% - 70%	138,248		120,618		194,154		662,916		1,115,936
70% - 80%	194,742		238,208		424,120		1,410,608		2,267,678
More than 80%	19,750		32,265		33,748		141,652		227,415
	$	467,587	$	525,535	$	839,437	$	3,021,668	$	4,854,227



	December 31, 2018
	FICO
LTV	720 or less		721 - 740		741 - 760		761 or greater		Total
Less than 60%	$	105,812	$	123,877	$	197,492	$	813,944	$	1,241,125
60% - 70%	120,982		109,207		170,531		597,659		998,379
70% - 80%	156,519		203,121		374,311		1,264,491		1,998,442
More than 80%	17,352		35,036		36,723		136,487		225,598
	$	400,665	$	471,241	$	779,057	$	2,812,581	$	4,463,544

Commercial credit exposure, based on internal risk rating:



	September 30, 2019
											National Commercial Lending Platforms
	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		Small Business Finance		Mortgage Warehouse Lending		Total
Pass	$	2,181,847	$	4,718,776	$	169,507	$	1,904,344	$	4,341,662	$	1,236,121	$	535,646	$	660,341	$	192,511	$	905,619	$	16,846,374
Special mention	—		5,253		—		11,359		47,678		—		13,189		—		9,363		—		86,842
Substandard	39,678		65,644		3,838		20,813		87,631		—		57,061		19,101		54,616		—		348,382
Doubtful	—		—		—		—		91		—		—		2,707		—		—		2,798
	$	2,221,525	$	4,789,673	$	173,345	$	1,936,516	$	4,477,062	$	1,236,121	$	605,896	$	682,149	$	256,490	$	905,619	$	17,284,396



	December 31, 2018
											National Commercial Lending Platforms
	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		Small Business Finance		Mortgage Warehouse Lending		Total
Pass	$	2,547,835	$	4,550,422	$	201,689	$	1,993,067	$	4,248,038	$	1,462,655	$	492,853	$	612,968	$	197,819	$	421,188	$	16,728,534
Special mention	2,932		14,301		—		3,789		25,883		—		9,232		925		13,522		10,486		81,070
Substandard	34,654		46,850		8,827		10,747		36,546		—		15,220		16,302		40,880		—		210,026
Doubtful	—		—		—		—		1,746		—		—		6,643		—		—		8,389
	$	2,585,421	$	4,611,573	$	210,516	$	2,007,603	$	4,312,213	$	1,462,655	$	517,305	$	636,838	$	252,221	$	431,674	$	17,028,019

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Aging of loans:

The following table presents an aging of loans at the dates indicated. Amounts include premiums, discounts and deferred fees and costs (in thousands):



	September 30, 2019										December 31, 2018
	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total		Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total
1-4 single family residential	$	4,981,761	$	26,419	$	5,767	$	10,681	$	5,024,628	$	4,640,771	$	15,070	$	2,126	$	6,953	$	4,664,920
Government insured residential	68,703		27,055		20,449		420,475		536,682		31,348		8,342		8,871		218,168		266,729
Home equity loans and lines of credit	1,304		29		48		—		1,381		1,393		—		—		—		1,393
Other consumer loans	7,750		386		—		277		8,413		15,947		—		—		—		15,947
Multi-family	2,221,525		—		—		—		2,221,525		2,585,421		—		—		—		2,585,421
Non-owner occupied commercial real estate	4,789,562		—		—		111		4,789,673		4,611,454		—		119		—		4,611,573
Construction and land	173,345		—		—		—		173,345		209,825		691		—		—		210,516
Owner occupied commercial real estate	1,935,843		312		—		361		1,936,516		2,004,781		2,326		276		220		2,007,603
Commercial and industrial	4,473,727		1,318		1,059		958		4,477,062		4,297,911		6,373		175		7,754		4,312,213
National commercial lending platforms
Pinnacle	1,236,121		—		—		—		1,236,121		1,462,655		—		—		—		1,462,655
Bridge - franchise finance	597,946		—		5,601		2,349		605,896		516,077		—		—		1,228		517,305
Bridge - equipment finance	682,149		—		—		—		682,149		636,235		603		—		—		636,838
Small business finance ⁽¹⁾	220,407		642		2,162		33,279		256,490		230,708		4,705		2,817		13,991		252,221
Mortgage warehouse lending	905,619		—		—		—		905,619		431,674		—		—		—		431,674
	$	22,295,762	$	56,161	$	35,086	$	468,491	$	22,855,500	$	21,676,200	$	38,110	$	14,384	$	248,314	$	21,977,008


(1)	Includes the guaranteed portion of SBA loans past due by 90 days or more totaling $29.3 million and $8.8 million at September 30, 2019 and December 31, 2018, respectively.

Loans contractually delinquent by 90 days or more and still accruing totaled $421 million, of which $420 million are government insured loans at September 30, 2019 and $219 million, of which $218 million are government insured loans at December 31, 2018.

Foreclosure of residential real estate

The recorded investment in residential loans in the process of foreclosure was $247 million, of which $240 million was government insured, at September 30, 2019 and $85 million, all of which was government insured, at December 31, 2018. The carrying amount of foreclosed residential real estate included in "Other assets" in the accompanying consolidated balance sheet was zero and $6 million at September 30, 2019 and December 31, 2018, respectively.

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Troubled debt restructurings

The following tables summarize loans that were modified in TDRs during the periods indicated, as well as loans modified during the twelve months preceding September 30, 2019 and 2018 that experienced payment defaults during the periods indicated (dollars in thousands):



	Three Months Ended September 30,
	2019						2018
	Loans Modified in TDRs During the Period			TDRs Experiencing Payment Defaults During the Period			Loans Modified in TDRs During the Period			TDRs Experiencing Payment Defaults During the Period
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
1-4 single family residential	—	$	—	—	$	—	—	$	—	2	$	139
Government insured residential	133	21,421		56	8,461		11	956		2	172
Non-owner occupied commercial real estate	—	—		—	—		2	3,037		—	—
Commercial and industrial	1	4,421		1	395		3	4,170		1	215
National commercial lending platforms
Bridge - franchise finance	1	12,850		—	—		—	—		—	—
Small business finance	2	963		4	2,911		—	—		—	—
	137	$	39,655	61	$	11,767	16	$	8,163	5	$	526



	Nine Months Ended September 30,
	2019						2018
	Loans Modified in TDRs During the Period			TDRs Experiencing Payment Defaults During the Period			Loans Modified in TDRs During the Period			TDRs Experiencing Payment Defaults During the Period
	Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment		Number of TDRs	Recorded Investment
1-4 single family residential	2	$	560	—	$	—	10	$	3,686	2	$	139
Government insured residential	171	26,992		58	8,687		14	1,300		3	272
Non-owner occupied commercial real estate	1	11,791		—	—		2	3,037		—	—
Commercial and industrial	6	21,144		1	395		9	5,371		1	215
National commercial lending platforms
Bridge - franchise finance	4	15,715		—	—		—	—		—	—
Small business finance	2	962		6	5,872		1	164		—	—
	186	$	77,164	65	$	14,954	36	$	13,558	6	$	626

Modifications during the three and nine months ended September 30, 2019 and 2018 included interest rate reductions, restructuring of the amount and timing of required periodic payments, extensions of maturity and covenant waivers. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy. The total amount of such loans is not material. Modified ACI loans accounted for in pools are not considered TDRs, are not separated from the pools and are not classified as impaired loans.

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Note 5 Leases

Leases under which the Company is the lessee

The Company leases branches, office space and a small amount of equipment under either operating or finance leases with remaining terms ranging from one to 15 years, some of which include extension options.

The following table presents ROU assets and lease liabilities as of September 30, 2019 (in thousands):



	September 30, 2019
ROU assets:
Operating leases	$	92,797
Finance leases	6,509
	$	99,306
Lease liabilities:
Operating leases	$	102,609
Finance leases	8,920
	$	111,529

ROU assets and lease liabilities for operating leases are included in "other assets" and "other liabilities", respectively, in the accompanying Consolidated Balance Sheet. ROU assets and lease liabilities for finance leases are included in "other assets" and "notes and other borrowings", respectively.

The weighted average remaining lease term and weighted average discount rate at September 30, 2019 were:



Weighted average remaining lease term:
Operating lease	7.71 years
Finance lease	6.07 years
Weighted average discount rate:
Operating lease	3.3	%
Finance lease	11.7	%

The components of lease expense for the period indicated were (in thousands):



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease cost:
Fixed costs	$	5,095	$	15,175
Impairment of ROU assets	631		1,278
Total operating lease cost	$	5,726	$	16,453

Finance lease cost:
Amortization of ROU assets	$	434	$	1,143
Interest on lease liabilities	256		761
Total finance lease cost	$	690	$	1,904

Variable lease cost	$	1,036	$	3,016

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Short-term lease cost and sublease income were immaterial for the three and nine months ended September 30, 2019.

Additional information related to operating and finance leases for the periods indicated follows (in thousands):



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	256	$	761
Operating cash flows from operating leases	5,225		15,584
Financing cash flows from finance leases	579		2,040
	$	6,060	$	18,385

Lease liabilities recognized from obtaining ROU assets:
Operating lease liabilities recognized upon adoption of ASC 842	$	—	$	104,064
Operating leases	10,114		11,711
Finance leases	317		1,838
	$	10,431	$	117,613

Future lease payment obligations under leases with terms in excess of one year and a reconciliation to lease liabilities as of September 30, 2019 follows (in thousands):



	Operating Leases			Finance Leases			Total
Years ending December 31:
2019 (excluding the nine months ended September 30, 2019)	$	5,190		$	469		$	5,659
2020	19,375			2,564			21,939
2021	17,747			2,622			20,369
2022	14,548			2,053			16,601
2023	12,479			2,124			14,603
Thereafter	47,266			2,825			50,091
Total future minimum lease payments	116,605			12,657			129,262
Less: interest component	(13,996		)	(3,737		)	(17,733		)
Lease liabilities	$	102,609		$	8,920		$	111,529

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

At December 31, 2018, future minimum rentals under non-cancelable operating leases with initial or remaining terms in excess of one year were as follows (in thousands):



Years ending December 31:
2019	$	21,207
2020	17,629
2021	15,858
2022	12,114
2023	10,311
Thereafter	42,984
	$	120,103

Leases under which the Company is the lessor

Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides equipment financing using a variety of loan and lease structures. Pinnacle provides essential use equipment financing to state and local governmental entities. Bridge provides primarily transportation equipment financing.

The following table presents the components of the investment in direct or sales type financing leases, included in loans in the Consolidated Balance Sheets, at the dates indicated (in thousands):



	September 30, 2019			December 31, 2018
Total minimum lease payments to be received	$	799,832		$	808,921
Estimated unguaranteed residual value of leased assets	8,471			7,355
Gross investment in direct or sales type financing leases	808,303			816,276
Unearned income	(82,761		)	(81,864		)
Initial direct costs	4,484			4,833
	$	730,026		$	739,245

At September 30, 2019, future minimum lease payments to be received under direct or sales type financing leases were as follows (in thousands):



Years Ending December 31:
2019 (excluding the nine months ended September 30, 2019)	$	35,849
2020	200,817
2021	141,337
2022	93,893
2023	72,586
Thereafter	255,350
	$	799,832

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Equipment under operating lease consists primarily of railcars, non-commercial aircraft and other transportation equipment leased to commercial end users. Original lease terms generally range from three to ten years. Asset risk is evaluated and managed by a dedicated internal staff of 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. Residual risk is managed by setting appropriate residual values at inception and systematic reviews of residual values based on independent appraisals, performed at least annually. We endeavor to lease to a stable end-user base, maintain a relatively young and diversified fleet of assets and stagger lease maturities.

At September 30, 2019, scheduled minimum rental payments under operating leases were as follows (in thousands):



Years Ending December 31:
2019 (excluding the nine months ended September 30, 2019)	$	15,837
2020	58,339
2021	49,122
2022	42,335
2023	35,027
Thereafter	107,970
	$	308,630

The following table summarizes lease income recognized for operating leases and direct or sales type finance leases for the periods indicated (in thousands):



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019		Location of Lease Income on Consolidated Statements of Income
Operating leases	$	18,583	$	52,774	Non-interest income from lease financing
Direct or sales type finance leases	5,683		16,481		Interest income on loans
Total lease income	$	24,266	$	69,255

Note 6 Income Taxes

The Company’s effective income tax rate was 24.1% and 25.3% for the three and nine months ended September 30, 2019, respectively, and 18.0% and 21.4% for the three and nine months ended September 30, 2018, respectively. The effective income tax rate differed from the statutory federal income tax rate of 21% for the three and nine months ended September 30, 2019 and 2018 due primarily to the impact of state income taxes, partially offset by the benefit of income not subject to federal tax.

Note 7 Derivatives and Hedging Activities

The Company uses interest rate swaps to manage interest rate risk related to liabilities that expose the Company to variability in cash flows due to changes in interest rates. The Company enters into LIBOR-based interest rate swaps that are designated as cash flow hedges with the objective of limiting the variability of interest payment cash flows resulting from changes in the benchmark interest rate LIBOR. Changes in the fair value of interest rate swaps designated as cash flow hedging instruments are reported in AOCI and subsequently reclassified into interest expense in the same period in which the related interest on the floating-rate debt obligations affects earnings.

The Company also enters into interest rate swaps to hedge changes in the fair value of outstanding fixed rate borrowings caused by fluctuations in interest rates; these instruments are designated as fair value hedges. 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 interest rates are recognized in earnings.

The Company also enters into interest rate derivative contracts with certain of its commercial borrowers to enable those borrowers to manage their exposure to interest rate fluctuations. To mitigate interest rate risk associated with these derivative contracts, the Company enters into offsetting derivative contract positions with primary dealers. These interest rate derivative contracts are not designated as hedging instruments; therefore, changes in the fair value of these derivatives are recognized

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

immediately in earnings. The impact on earnings related to changes in fair value of these derivatives was $1.3 million and $4.3 million, respectively, for the three and nine months ended September 30, 2019 and $0.5 million and $1.2 million, respectively, for the three and nine months ended September 30, 2018.

The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. The Company manages dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements, central clearing mechanisms and counterparty limits. The agreements contain bilateral collateral arrangements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company manages the risk of default by its commercial borrower counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

The CME legally characterizes variation margin payments for centrally cleared derivatives as settlements of the derivatives' exposures rather than collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. The Company's clearing agent for interest rate derivative contracts centrally cleared through the CME settles the variation margin daily with the CME; therefore, those interest rate derivative contracts the Company clears through the CME are reported at a fair value of approximately zero at September 30, 2019 and December 31, 2018.

The following tables set forth certain information concerning the Company’s interest rate contract derivative financial instruments and related hedged items at the dates indicated (dollars in thousands):



	September 30, 2019
		Weighted Average Pay Rate	Weighted Average Receive Rate	Weighted Average Remaining Life in Years
					Notional Amount		Balance Sheet Location	Fair Value
	Hedged Item				Notional Amount		Balance Sheet Location	Asset		Liability
Derivatives designated as cash flow hedges:
Pay-fixed interest rate swaps	Variability of interest cash flows on variable rate borrowings	2.37%	3-Month Libor	3.4	$	3,131,000	Other liabilities	$	—	$	(2,427	)
Derivatives designated as fair value hedges:
Receive-fixed interest rate swaps	Variability of fair value of fixed rate borrowings	3-Month Libor	1.55%	1.8	250,000		Other liabilities	—		—
Derivatives not designated as hedges:
Pay-fixed interest rate swaps		3.99%	Indexed to 1-month Libor	6.0	1,182,804		Other assets / Other liabilities	291		(21,229		)
Pay-variable interest rate swaps		Indexed to 1-month Libor	3.99%	6.0	1,182,804		Other assets / Other liabilities	56,287		(305		)
Interest rate caps purchased, indexed to 1-month Libor			3.52%	0.7	88,221		Other assets	2		—
Interest rate caps sold, indexed to 1-month Libor		3.52%		0.7	88,221		Other liabilities	—		(2		)
					$	5,923,050		$	56,580	$	(23,963	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019



	December 31, 2018
		Weighted Average Pay Rate	Weighted Average Receive Rate	Weighted Average Remaining Life in Years
					Notional Amount		Balance Sheet Location	Fair Value
	Hedged Item				Notional Amount		Balance Sheet Location	Asset		Liability
Derivatives designated as cash flow hedges:
Pay-fixed interest rate swaps	Variability of interest cash flows on variable rate borrowings	2.38%	3-Month Libor	4.0	$	2,846,000	Other assets / Other liabilities	$	3,405	$	—
Derivatives not designated as hedges:
Pay-fixed interest rate swaps		4.10%	Indexed to 1-month Libor	6.0	1,048,196		Other assets / Other liabilities	14,883		(6,991		)
Pay-variable interest rate swaps		Indexed to 1-month Libor	4.10%	6.0	1,048,196		Other assets / Other liabilities	11,318		(16,874		)
Interest rate caps purchased, indexed to 1-month Libor			3.43%	1.2	98,407		Other assets	9		—
Interest rate caps sold, indexed to 1-month Libor		3.43%		1.2	98,407		Other liabilities	—		(9		)
					$	5,139,206		$	29,615	$	(23,874	)

The following table provides information about the amount of gain (loss) related to derivatives designated as cash flow hedges reclassified from AOCI into interest expense for the periods indicated (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,				Location of Gain Reclassified from AOCI into Income
	2019		2018		2019		2018		Location of Gain Reclassified from AOCI into Income
Interest rate contracts	$	509	$	1,050	$	4,920	$	839	Interest expense on borrowings

During the three and nine months ended September 30, 2019 and 2018, no derivative positions designated as cash flow hedges were discontinued and none of the gains and losses reported in AOCI were reclassified into earnings as a result of the discontinuance of cash flow hedges or because of the early extinguishment of debt. As of September 30, 2019, the amount of net loss expected to be reclassified from AOCI into earnings during the next twelve months was $17.7 million.

The following table provides information about the amount of gain (loss) related to derivatives designated as fair value hedges recognized in earnings for the periods indicated (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,					Location of Loss in Consolidated Statements of Income
	2019			2018		2019			2018		Location of Loss in Consolidated Statements of Income
Fair value adjustment on derivatives	$	(382	)	$	—	$	(382	)	$	—	Interest expense on borrowings
Fair value adjustment on hedged items	362			—		362			—		Interest expense on borrowings
Loss recognized on fair value hedges (ineffective portion)	$	(20	)	$	—	$	(20	)	$	—

The following table provides information about the hedged items related to derivatives designated as fair value hedges at the dates indicated (in thousands):



	September 30, 2019			December 31, 2018		Location in Consolidated Balance Sheets
Carrying value of hedged item	$	250,000		$	—	Federal Home Loan Bank advances
Cumulative fair value hedging adjustments	$	(362	)	$	—	Federal Home Loan Bank advances

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Some of the Company’s ISDA master agreements with financial institution counterparties contain provisions that permit either counterparty to terminate the agreements and require settlement in the event that regulatory capital ratios fall below certain designated thresholds, upon the initiation of other defined regulatory actions or upon suspension or withdrawal of the Bank’s credit rating. Currently, there are no circumstances that would trigger these provisions of the agreements.

The Company does not offset assets and liabilities under master netting agreements for financial reporting purposes. Information on interest rate swaps subject to these agreements is as follows at the dates indicated (in thousands):



	September 30, 2019
				Gross Amounts Offset in Balance Sheet		Net Amounts Presented in Balance Sheet			Gross Amounts Not Offset in Balance Sheet
	Gross Amounts Recognized			Gross Amounts Offset in Balance Sheet		Net Amounts Presented in Balance Sheet			Derivative Instruments			Collateral Pledged		Net Amount
Derivative assets	$	299		$	—	$	299		$	(299	)	$	—	$	—
Derivative liabilities	(23,656		)	—		(23,656		)	299			23,441		84
	$	(23,357	)	$	—	$	(23,357	)	$	—		$	23,441	$	84



	December 31, 2018
				Gross Amounts Offset in Balance Sheet		Net Amounts Presented in Balance Sheet			Gross Amounts Not Offset in Balance Sheet
	Gross Amounts Recognized			Gross Amounts Offset in Balance Sheet		Net Amounts Presented in Balance Sheet			Derivative Instruments			Collateral Pledged			Net Amount
Derivative assets	$	18,297		$	—	$	18,297		$	(5,264	)	$	(13,129	)	$	(96	)
Derivative liabilities	(6,991		)	—		(6,991		)	5,264			436			(1,291		)
	$	11,306		$	—	$	11,306		$	—		$	(12,693	)	$	(1,387	)

The difference between the amounts reported for interest rate swaps subject to master netting agreements and the total fair value of interest rate contract derivative financial instruments reported in the consolidated balance sheets is related to interest rate contracts entered into with borrowers not subject to master netting agreements.

At September 30, 2019, the Company had pledged net financial collateral of $25.0 million as collateral for interest rate swaps in a liability position that are not centrally cleared. The amount of collateral required to be posted varies based on the settlement value of outstanding swaps and in some cases may include initial margin requirements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Note 8 Stockholders’ Equity

Accumulated Other Comprehensive Income

Changes in other comprehensive income are summarized as follows for the periods indicated (in thousands):



	Three Months Ended September 30,
	2019									2018
	Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax
Unrealized gains on investment securities available for sale:
Net unrealized holding gain (loss) arising during the period	$	11,372		$	(3,014	)	$	8,358		$	(24,690	)	$	6,543		$	(18,147	)
Amounts reclassified to gain on investment securities available for sale, net	(3,426		)	908			(2,518		)	(520		)	138			(382		)
Net change in unrealized gains on investment securities available for sale	7,946			(2,106		)	5,840			(25,210		)	6,681			(18,529		)
Unrealized losses on derivative instruments:
Net unrealized holding gain (loss) arising during the period	(22,822		)	6,048			(16,774		)	14,335			(3,799		)	10,536
Amounts reclassified to interest expense on borrowings	(509		)	135			(374		)	(1,050		)	278			(772		)
Net change in unrealized losses on derivative instruments	(23,331		)	6,183			(17,148		)	13,285			(3,521		)	9,764
Other comprehensive loss	$	(15,385	)	$	4,077		$	(11,308	)	$	(11,925	)	$	3,160		$	(8,765	)



	Nine Months Ended September 30,
	2019									2018
	Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax
Unrealized gains on investment securities available for sale:
Net unrealized holding gain (loss) arising during the period	$	72,519		$	(19,218	)	$	53,301		$	(79,697	)	$	21,120		$	(58,577	)
Amounts reclassified to gain on investment securities available for sale, net	(11,657		)	3,089			(8,568		)	(4,047		)	1,073			(2,974		)
Net change in unrealized gains on investment securities available for sale	60,862			(16,129		)	44,733			(83,744		)	22,193			(61,551		)
Unrealized losses on derivative instruments:
Net unrealized holding gain (loss) arising during the period	(101,588		)	26,921			(74,667		)	54,660			(14,485		)	40,175
Amounts reclassified to interest expense on borrowings	(4,920		)	1,304			(3,616		)	(839		)	222			(617		)
Net change in unrealized losses on derivative instruments	(106,508		)	28,225			(78,283		)	53,821			(14,263		)	39,558
Other comprehensive loss	$	(45,646	)	$	12,096		$	(33,550	)	$	(29,923	)	$	7,930		$	(21,993	)

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

The categories of AOCI and changes therein are presented below for the periods indicated (in thousands):



	Unrealized Gain (Loss) on Investment Securities Available for Sale			Unrealized Gain (Loss) on Derivative Instruments			Total
Balance at December 31, 2018	$	4,194		$	679		$	4,873
Other comprehensive loss	44,733			(78,283		)	(33,550		)
Balance at September 30, 2019	$	48,927		$	(77,604	)	$	(28,677	)

Balance at December 31, 2017	$	56,534		$	(1,548	)	$	54,986
Cumulative effect of adoption of new accounting standards	9,187			(285		)	8,902
Other comprehensive loss	(61,551		)	39,558			(21,993		)
Balance at September 30, 2018	$	4,170		$	37,725		$	41,895

Other

In January 2019, the Company's Board of Directors authorized a now completed share repurchase program under which the Company repurchased approximately 4.4 million shares of its common stock during the nine months ended September 30, 2019 for an aggregate purchase price of $150 million, at a weighted average price of $34.39 per share.

In September 2019, the Company's Board of Directors authorized a new share repurchase program under which the Company may repurchase up to an additional $150 million in shares of its outstanding common stock. 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 and amount of retained earnings, regulatory requirements and other considerations. No time limit was set for completion of the share repurchase program and the program may be suspended or discontinued at any time.

Note 9 Equity Based and Other Compensation Plans

Share Awards

Unvested share awards

A summary of activity related to unvested share awards follows for the periods indicated:



	Number of Share Awards		Weighted Average Grant Date Fair Value
Unvested share awards outstanding, December 31, 2018	1,186,238		$	38.86
Granted	590,572		36.50
Vested	(548,762	)	37.57
Canceled or forfeited	(149,770	)	38.99
Unvested share awards outstanding, September 30, 2019	1,078,278		$	38.21

Unvested share awards outstanding, December 31, 2017	1,108,477		$	36.06
Granted	652,685		40.33
Vested	(529,469	)	34.64
Canceled or forfeited	(72,465	)	38.77
Unvested share awards outstanding, September 30, 2018	1,159,228		$	38.94

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Unvested share awards are generally valued at the closing price of the Company's common stock on the date of grant. All shares granted prior to 2019 vest in equal annual installments over a period of three years from the date of grant. All shares granted in 2019 to Company employees vest in equal annual installments over a period of four years from the date of grant. Shares granted to the Company's Board of Directors vest over a period of one year. The following table summarizes the closing price of the Company's stock on the date of grant for shares granted and the aggregate grant date fair value of shares vesting for the periods indicated (in thousands, except per share data):



	Nine Months Ended September 30,
	2019		2018
Range of the closing price on date of grant	$31.07 - $36.65		$39.04 - $42.80
Aggregate grant date fair value of shares vesting	$	20,616	$	18,341

The total unrecognized compensation cost of $27.4 million for all unvested share awards outstanding at September 30, 2019 will be recognized over a weighted average remaining period of 2.30 years.

Executive share-based awards

Certain of the Company's executives are eligible to receive annual awards of RSUs and PSUs (collectively, the "share units"). Annual awards of RSUs represent a fixed number of shares and vest on December 31st in equal tranches over three years for awards issued prior to 2019 and over four years for awards issued in 2019. PSUs are initially granted based on a target value. The number of PSUs that ultimately vest at the end of the performance measurement period will be based on the achievement of performance criteria pre-established by the Compensation Committee of the Board of Directors. The performance criteria established for the PSUs granted in 2019, 2018 and 2017 include both performance and market conditions. Upon vesting, the share units will be converted to common stock on a one-for-one basis, or may be settled in cash at the Company's option. The share units will accumulate dividends declared on the Company's common stock from the date of grant to be paid subsequent to vesting.

The Company has cash settled all tranches of RSUs and PSUs that have vested through December 31, 2018. As a result of the previous cash settlements, all RSUs and PSUs have been determined to be liability instruments and are remeasured at fair value each reporting period until the awards are settled. The RSUs are valued based on the closing price of the Company's common stock at the reporting date. The PSUs are valued based on the closing price of the Company's common stock at the reporting date net of a discount related to any applicable market conditions, considering the probability of meeting the defined performance conditions. Compensation cost related to PSUs is recognized during the performance period based on the probable outcome of the respective performance conditions.

A summary of activity related to executive share-based awards for the periods indicated follows:



	RSU	PSU
Unvested executive share-based awards outstanding, December 31, 2018	90,612	99,874
Granted	73,062	73,062
Unvested executive share-based awards outstanding, September 30, 2019	163,674	172,936

Unvested executive share-based awards outstanding, December 31, 2017	91,168	105,721
Granted	52,026	52,026
Unvested executive share-based awards outstanding, September 30, 2018	143,194	157,747

The total liability for these executive share-based awards was $5.0 million at September 30, 2019. The total unrecognized compensation cost of $6.3 million for unvested executive share-based awards at September 30, 2019 will be recognized over a weighted average remaining period of 2.18 years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Incentive awards

The Company's annual incentive compensation arrangements for employees other than those eligible for the executive share-based awards discussed above provide for settlement through a combination of cash payments and unvested share awards following the end of the annual performance period. The dollar value of share awards to be granted is based on the achievement of performance criteria established in the incentive arrangements. The number of shares of common stock to be awarded is variable based on the closing price of the Company's stock on the date of grant; therefore, these awards are initially classified as liability instruments, with compensation cost recognized from the beginning of the performance period. Awards related to performance periods prior to 2019, included in the summary of activity related to unvested share awards above, vest over three years and awards related to the 2019 performance period will vest in equal installments over a period of four years from the date of grant. The total liability for incentive share awards for the 2019 performance period was $0.6 million at September 30, 2019. The related total unrecognized compensation cost of $3.4 million for these incentive share awards at September 30, 2019 will be recognized over a weighted average remaining period of 4.26 years. The accrued liability and unrecognized compensation cost are based on management's current estimate of the likely outcome of the performance criteria established in the incentive arrangements and may differ from actual results.

The 590,572 unvested share awards granted during the nine months ended September 30, 2019, as discussed above, included 60,290 unvested share awards granted under the Company's annual incentive compensation arrangements based on the achievement of established performance criteria for the year ended December 31, 2018.

Option Awards

A summary of activity related to stock option awards for the nine months ended September 30, 2019 and 2018 follows:



	Number of Option Awards		Weighted Average Exercise Price
Option awards outstanding, December 31, 2018	964,840		$	26.53
Exercised	(26,043	)	20.63
Canceled or forfeited	(1,960	)	63.74
Option awards outstanding and exercisable, September 30, 2019	936,837		$	26.62

Option awards outstanding, December 31, 2017	1,270,688		$	26.93
Exercised	(291,689	)	26.49
Option awards outstanding, September 30, 2018	978,999		$	27.07

The intrinsic value of options exercised was $0.4 million and $4.6 million, respectively, during the nine months ended September 30, 2019 and 2018. The related tax benefit of options exercised was not significant for the nine months ended September 30, 2019 and was $1.1 million for the nine months ended September 30, 2018.

Note 10 Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis

Following is a description of the methodologies used to estimate the fair values of assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which those measurements are typically classified.

Investment securities available for sale and marketable equity securities—Fair value measurements are based on quoted prices in active markets when available; these measurements are classified within level 1 of the fair value hierarchy. These securities typically include U.S. Treasury securities and certain preferred stocks. If quoted prices in active markets are not available, fair values are estimated using quoted prices of securities with similar characteristics, quoted prices of identical securities in less active markets, discounted cash flow techniques, or matrix pricing models. These securities are generally classified within level 2 of the fair value hierarchy and include U.S. Government agency securities, U.S. Government agency and sponsored enterprise MBS, preferred stock investments for which level 1 valuations are not available, corporate debt securities, non-mortgage asset-backed securities, single family rental real estate-backed securities, certain private label

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

residential MBS and CMOs, private label commercial MBS, collateralized loan obligations and state and municipal obligations. Pricing of these securities is generally primarily spread driven. Observable inputs that may impact the valuation of these securities include benchmark yield curves, credit spreads, reported trades, dealer quotes, bids, issuer spreads, current rating, historical constant prepayment rates, historical voluntary prepayment rates, structural and waterfall features of individual securities, published collateral data, and for certain securities, historical constant default rates and default severities. Investment securities available for sale generally classified within level 3 of the fair value hierarchy include certain private label MBS and trust preferred securities. The Company typically values these securities using third-party proprietary pricing models, primarily discounted cash flow valuation techniques, which incorporate both observable and unobservable inputs. Unobservable inputs that may impact the valuation of these securities include risk adjusted discount rates, projected prepayment rates, projected default rates and projected loss severity.

The Company uses third-party pricing services in determining fair value measurements for investment securities. To obtain an understanding of the methodologies and assumptions used, management reviews written documentation provided by the pricing services, conducts interviews with valuation desk personnel and reviews model results and detailed assumptions used to value selected securities as considered necessary. Management has established a robust price challenge process that includes a review by the treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from expectations is challenged. If considered necessary to resolve any discrepancies, a price will be obtained from an additional independent valuation source. The Company does not typically adjust the prices provided, other than through this established challenge process. The results of price challenges are subject to review by executive management. The Company has also established a quarterly process whereby prices provided by its primary pricing service for a sample of securities are validated. Any price discrepancies are resolved based on careful consideration of the assumptions and inputs employed by each of the pricing sources.

Servicing rights—Commercial servicing rights are valued using a discounted cash flow methodology incorporating contractually specified servicing fees and market based assumptions about prepayments, discount rates, default rates and costs of servicing. Prepayment and default assumptions are based on historical industry data for loans with similar characteristics. Assumptions about costs of servicing are based on market convention. Discount rates are based on rates of return implied by observed trades of underlying loans in the secondary market.

Derivative financial instruments—Fair values of interest rate swaps are determined using widely accepted discounted cash flow modeling techniques. These discounted cash flow models use projections of future cash payments and receipts that are discounted at mid-market rates. Observable inputs that may impact the valuation of these instruments include LIBOR swap rates and LIBOR forward yield curves. These fair value measurements are generally classified within level 2 of the fair value hierarchy.

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

The following tables present assets and liabilities measured at fair value on a recurring basis at the dates indicated (in thousands):



	September 30, 2019
	Level 1		Level 2			Level 3		Total
Investment securities available for sale:
U.S. Treasury securities	$	70,666	$	—		$	—	$	70,666
U.S. Government agency and sponsored enterprise residential MBS	—		1,969,141			—		1,969,141
U.S. Government agency and sponsored enterprise commercial MBS	—		340,590			—		340,590
Private label residential MBS and CMOs	—		1,294,873			20,312		1,315,185
Private label commercial MBS	—		1,632,098			—		1,632,098
Single family rental real estate-backed securities	—		496,698			—		496,698
Collateralized loan obligations	—		1,198,233			—		1,198,233
Non-mortgage asset-backed securities	—		204,566			—		204,566
State and municipal obligations	—		280,785			—		280,785
SBA securities	—		388,240			—		388,240
Other debt securities	—		—			4,471		4,471
Marketable equity securities	59,983		—			—		59,983
Servicing rights	—		—			8,631		8,631
Derivative assets	—		56,580			—		56,580
Total assets at fair value	$	130,649	$	7,861,804		$	33,414	$	8,025,867
Derivative liabilities	$	—	$	(23,963	)	$	—	$	(23,963	)
Total liabilities at fair value	$	—	$	(23,963	)	$	—	$	(23,963	)

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019



	December 31, 2018
	Level 1		Level 2			Level 3		Total
Investment securities available for sale:
U.S. Treasury securities	$	39,873	$	—		$	—	$	39,873
U.S. Government agency and sponsored enterprise residential MBS	—		1,897,474			—		1,897,474
U.S. Government agency and sponsored enterprise commercial MBS	—		374,787			—		374,787
Private label residential MBS and CMOs	—		1,499,514			34,684		1,534,198
Private label commercial MBS	—		1,485,716			—		1,485,716
Single family rental real estate-backed securities	—		402,458			—		402,458
Collateralized loan obligations	—		1,235,198			—		1,235,198
Non-mortgage asset-backed securities	—		204,067			—		204,067
State and municipal obligations	—		398,429			—		398,429
SBA securities	—		519,313			—		519,313
Other debt securities	—		—			4,846		4,846
Marketable securities	60,519		—			—		60,519
Servicing rights	—		—			9,525		9,525
Derivative assets	—		29,615			—		29,615
Total assets at fair value	$	100,392	$	8,046,571		$	49,055	$	8,196,018
Derivative liabilities	$	—	$	(23,874	)	$	—	$	(23,874	)
Total liabilities at fair value	$	—	$	(23,874	)	$	—	$	(23,874	)

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

The following table reconciles changes in the fair value of assets and liabilities measured at fair value on a recurring basis and classified in level 3 of the fair value hierarchy during the periods indicated (in thousands):



	Three Months Ended September 30,
	2019									2018
	Private Label Residential MBS			Other Debt Securities			Servicing Rights			Private Label Residential MBS			Other Debt Securities			Servicing Rights
Balance at beginning of period	$	25,526		$	4,781		$	9,435		$	40,564		$	5,581		$	35,915
Gains (losses) for the period included in:
Net income	1,667			—			(1,341		)	—			—			(2,390		)
Other comprehensive income	(3,505		)	(253		)	—			(1,043		)	75			—
Discount accretion	1,827			221			—			701			19			—
Purchases or additions	—			—			537			—			—			4,088
Sales	(3,668		)	—			—			—			—			—
Settlements	(1,535		)	(278		)				(2,820		)	(11		)	—
Balance at end of period	$	20,312		$	4,471		$	8,631		$	37,402		$	5,664		$	37,613
Change in unrealized gains or losses included in OCI for assets held at the end of the reporting period	$	(52	)	$	(253	)				$	(1,043	)	$	75



	Nine Months Ended September 30,
	2019									2018
	Private Label Residential MBS			Other Debt Securities			Servicing Rights			Private Label Residential MBS			Other Debt Securities			Servicing Rights
Balance at beginning of period	$	34,684		$	4,846		$	9,525		$	52,214		$	5,329		$	30,737
Gains (losses) for the period included in:
Net income	3,297			—			(2,489		)	1,319			—			(4,011		)
Other comprehensive income	(7,569		)	(320		)	—			(4,504		)	362			—
Discount accretion	4,871			291			—			2,286			232			—
Purchases or additions	—			—			1,595			—			—			10,887
Sales	(9,199		)	—			—			(5,120		)	—			—
Settlements	(5,772		)	(346		)	—			(8,793		)	(259		)	—
Balance at end of period	$	20,312		$	4,471		$	8,631		$	37,402		$	5,664		$	37,613
Change in unrealized gains or losses included in OCI for assets held at the end of the reporting period	$	(620	)	$	(319	)				$	(3,035	)	$	362

Gains on private label residential MBS recognized in net income during the three and nine months ended September 30, 2019 and 2018 are included in the consolidated statement of income line item "Gain on investment securities, net." Changes in the fair value of servicing rights are included in the consolidated statement of income line item “Other non-interest income.” Changes in fair value include changes due to valuation assumptions, primarily discount rates and prepayment speeds, as well as other changes such as runoff and the passage of time. The amount of net unrealized gains (losses) included in earnings for the nine months ended September 30, 2019 and 2018 that were related to servicing rights held at September 30, 2019 and 2018 was approximately $(0.7) million and $0.4 million, respectively, and were primarily due to changes in discount rates and prepayment speeds.

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BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Securities for which fair value measurements are categorized in level 3 of the fair value hierarchy at September 30, 2019 consisted of pooled trust preferred securities with a fair value of $4 million and private label residential MBS and CMOs with a fair value of $20 million. The trust preferred securities are not material to the Company’s financial statements. Private label residential MBS consisted of senior and mezzanine tranches collateralized by prime fixed rate and hybrid 1-4 single family residential mortgages originated before 2005. Substantially all of these securities have variable rate coupons. Weighted average subordination levels at September 30, 2019 were 20.0% and 12.8% for investment grade and non-investment grade securities, respectively.

The following table provides information about the valuation techniques and unobservable inputs used in the valuation of private label residential MBS and CMOs falling within level 3 of the fair value hierarchy as of September 30, 2019 (dollars in thousands):



	Fair Value at		Valuation Technique	Unobservable Input	Range (Weighted Average)
	September 30, 2019		Valuation Technique	Unobservable Input	Range (Weighted Average)
Investment grade	$	12,244	Discounted cash flow	Voluntary prepayment rate	4.00% - 35.18% (15.37%)
				Probability of default	0.10% - 10.00% (2.01%)
				Loss severity	15.00% - 100.00% (41.93%)
				Discount rate	2.07% - 5.84% (3.08%)

Non-investment grade	$	8,068	Discounted cash flow	Voluntary prepayment rate	8.03% - 25.94% (16.24%)
				Probability of default	0.20% - 6.00% (2.15%)
				Loss severity	15.00% - 100.00% (25.38%)
				Discount rate	2.25% - 13.45% (5.10%)

The significant unobservable inputs impacting the fair value measurement of private label residential MBS and CMOs include voluntary prepayment rates, probability of default, loss severity given default and discount rates. Generally, increases in probability of default, loss severity or discount rates would result in a lower fair value measurement. Alternatively, decreases in probability of default, loss severity or discount rates would result in a higher fair value measurement. For securities with less favorable credit characteristics, decreases in voluntary prepayment speeds may be interpreted as a deterioration in the overall credit quality of the underlying collateral and as such, lead to lower fair value measurements. The fair value measurements of those securities with higher levels of subordination will be less sensitive to changes in these unobservable inputs other than discount rates, while securities with lower levels of subordination will show a higher degree of sensitivity to changes in these unobservable inputs other than discount rates. Generally, a change in the assumption used for probability of default is accompanied by a directionally similar change in the assumption used for loss severity given default and a directionally opposite change in the assumption used for voluntary prepayment rate.

The following table provides information about the valuation techniques and significant unobservable inputs used in the valuation of servicing rights as of September 30, 2019 (dollars in thousands):



	Fair Value at		Valuation Technique	Unobservable Input	Range (Weighted Average)
	September 30, 2019		Valuation Technique	Unobservable Input	Range (Weighted Average)
Commercial servicing rights	$	8,631	Discounted cash flow	Prepayment rate	3.16% - 22.13% (14.80%)
				Discount rate	5.24% - 25.99% (13.09%)

Increases in prepayment rates or discount rates would result in lower fair value measurements and decreases in prepayment rates or discount rates would result in higher fair value measurements. Although the prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions.

Assets and liabilities measured at fair value on a non-recurring basis

Following is a description of the methodologies used to estimate the fair values of assets and liabilities that may be measured at fair value on a non-recurring basis, and the level within the fair value hierarchy in which those measurements are typically classified.

Table of Contents

BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Impaired loans, OREO and other repossessed assets—The carrying amount of collateral dependent impaired loans is typically based on the fair value of the underlying collateral, which may be real estate or other business assets, less estimated costs to sell. The carrying value of OREO is initially measured based on the fair value of the real estate acquired in foreclosure and subsequently adjusted to the lower of cost or estimated fair value, less estimated cost to sell. Fair values of real estate collateral and OREO are typically based on third-party real estate appraisals which utilize market and income approaches to valuation incorporating both observable and unobservable inputs. When current appraisals are not available, the Company may use brokers’ price opinions, home price indices or other available information about changes in real estate market conditions to adjust the latest appraised value available. These adjustments to appraised values may be subjective and involve significant management judgment. The fair value of repossessed assets or collateral consisting of other business assets may be based on third-party appraisals or internal analyses that use market approaches to valuation incorporating primarily unobservable inputs.

Fair value measurements related to collateral dependent impaired loans, OREO and other repossessed assets are classified within levels 2 and 3 of the fair value hierarchy.

The following tables present the carrying value of assets for which non-recurring changes in fair value have been recorded for the periods indicated (in thousands):



	September 30, 2019								Losses from Fair Value Changes
	Level 1		Level 2		Level 3		Total		Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
OREO and repossessed assets	$	—	$	—	$	1,638	$	1,638	$	(2,376	)	$	(2,372	)
Impaired loans	$	—	$	—	$	21,104	$	21,104	$	(2,351	)	$	(2,265	)



	September 30, 2018								Losses from Fair Value Changes
	Level 1		Level 2		Level 3		Total		Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
OREO and repossessed assets	$	—	$	1,300	$	651	$	1,951	$	(646	)	$	(2,447	)
Impaired loans	$	—	$	61,029	$	22,436	$	83,465	$	(1,552	)	$	(14,510	)

Included in the tables above are impaired taxi medallion loans with carrying values of $61.0 million at September 30, 2018. Losses from fair value changes included in the tables above include $11.7 million recognized on impaired taxi medallion loans during the nine months ended September 30, 2018. In addition, OREO and repossessed assets reported above included repossessed taxi medallions with carrying values of $1.3 million at September 30, 2018. Losses of $0.2 million and $0.6 million were recognized on repossessed taxi medallions during the three and nine months ended September 30, 2018, respectively.

Table of Contents

BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

The following table presents the carrying value and fair value of financial instruments and the level within the fair value hierarchy in which those measurements are classified at the dates indicated (dollars in thousands):



		September 30, 2019				December 31, 2018
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and cash equivalents	1	$	230,228	$	230,228	$	382,073	$	382,073
Investment securities	1/2/3	7,970,656		7,971,340		8,166,878		8,167,127
Non-marketable equity securities	2	272,789		272,789		267,052		267,052
Loans held for sale	2	46,332		48,483		36,992		39,931
Loans	3	22,747,038		23,144,401		21,867,077		21,868,258
Derivative assets	2	56,580		56,580		29,615		29,615
Liabilities:
Demand, savings and money market deposits	2	$	16,909,868	$	16,909,868	$	16,654,465	$	16,654,465
Time deposits	2	7,046,560		7,082,491		6,819,758		6,820,355
Federal funds purchased	2	175,000		175,000		175,000		175,000
FHLB advances	2	4,930,638		4,951,142		4,796,000		4,810,446
Notes and other borrowings	2	403,832		445,580		402,749		416,142
Derivative liabilities	2	23,963		23,963		23,874		23,874

Note 11 Commitments and Contingencies

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

Commitments to fund loans

These are agreements to lend funds to customers as long as there is no violation of any condition established in the contract. Commitments to fund loans generally have fixed expiration dates or other termination clauses and may require payment of a fee. Many of these commitments are expected to expire without being funded and, therefore, the total commitment amounts do not necessarily represent future liquidity requirements.

Unfunded commitments under lines of credit

Unfunded commitments under lines of credit include commercial, commercial real estate, home equity and consumer lines of credit to existing customers. Some of these commitments may mature without being fully funded.

Commercial and standby letters of credit

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support trade transactions or guarantee arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Table of Contents

BANKUNITED, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

September 30, 2019

Total lending related commitments outstanding at September 30, 2019 were as follows (in thousands):



Commitments to fund loans	$	713,537
Commitments to purchase loans	710,704
Unfunded commitments under lines of credit	2,795,181
Commercial and standby letters of credit	86,356
	$	4,305,778

Legal Proceedings

The Company is involved as plaintiff or defendant in various legal actions arising in the normal course of business. In the opinion of management, based upon advice of legal counsel, the likelihood is remote that the impact of these proceedings, either individually or in the aggregate, would be material to the Company’s consolidated financial position, results of operations or cash flows.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to focus on significant matters impacting and changes in the financial condition and results of operations of the Company during the nine months ended September 30, 2019 and should be read in conjunction with the consolidated financial statements and notes hereto included in this Quarterly Report on Form 10-Q and BKU's 2018 Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Annual Report on Form 10-K”).

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the Company’s current views with respect to, among other things, future events and financial performance. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions identify forward-looking statements. These forward-looking statements are based on the historical performance of the Company or on the Company’s current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations so contemplated will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to the Company’s operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, the Company’s actual results may vary materially from those indicated in these statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, the risk factors described in Part I, Item 1A of the 2018 Annual Report on Form 10-K. The Company does not undertake any obligation to publicly update or review any forward looking statement, whether as a result of new information, future developments or otherwise.

Overview

Quarterly Highlights

In evaluating our financial performance, we consider the level of and trends in net interest income, the net interest margin, 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, and portfolio delinquency and charge-off trends. We consider growth in earning assets and deposits, trends in funding mix and cost of funds. We analyze these ratios and trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable financial institutions.

Quarterly highlights include:

•

Net income for the three months ended September 30, 2019 was $76.2 million, or $0.77 per diluted share, compared to $97.3 million, or $0.90 per diluted share, for the three months ended September 30, 2018. Non-loss share diluted earnings per share, as previously reported, for the quarter ended September 30, 2018 was $0.64. For the nine months ended September 30, 2019 net income was $223.6 million, or $2.23 per diluted share, compared to $272.5 million, or

$2.49 per diluted share, for the nine months ended September 30, 2018. Earnings for the nine months ended September 30, 2019 generated an annualized return on average stockholders' equity of 10.2% and an annualized return on average assets of 0.91%.


•	Loans and leases, including equipment under operating lease, grew by $253 million during the quarter ended September 30, 2019. For the nine months ended September 30, 2019, loans and leases grew by $873 million, net of the sale of $168 million in loans from the Pinnacle portfolio during the quarter ended September 30, 2019.

•

Non-interest bearing demand deposits grew by $506 million for the nine months ended September 30, 2019, to 17.2% of total deposits at September 30, 2019 compared to 15.4% of total deposits at December 31, 2018. Non-interest bearing demand deposits grew by $27 million during the quarter ended September 30, 2019. Total deposits grew by $34 million and $482 million for the quarter and nine months ended September 30, 2019, respectively.

•

Net interest income for the quarter ended September 30, 2019 decreased by $66.3 million from $252.0 million for the quarter ended September 30, 2018. The net interest margin, calculated on a tax-equivalent basis, was 2.41% for the quarter ended September 30, 2019, compared to 3.51% for the quarter ended September 30, 2018. The most significant reason for the decline in net interest income and the net interest margin for the quarter ended September 30, 2019 compared to the quarter ended September 30, 2018 was the decrease in accretion on formerly covered residential loans.

•

During the quarter ended September 30, 2019, the Company repurchased approximately 0.2 million shares of its common stock for an aggregate purchase price of approximately $8 million. During the nine months ended September 30, 2019, the Company repurchased approximately 4.4 million shares of its common stock for an aggregate purchase price of $150 million, at a weighted average price of $34.39 per share.


•	Book value per common share grew to $30.60 at September 30, 2019 from $29.49 at December 31, 2018 while tangible book value per common share increased to $29.78 from $28.71 over the same period.


•	The ratio of non-performing loans to total loans was 0.60% and the ratio of non-performing assets to total assets was 0.43% at September 30, 2019.

Critical Accounting Policies

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. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K and in Note 1 to the Consolidated Financial Statements included in this Form 10-Q. Three of these policies are considered critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because materially different amounts might be reported under different conditions or using different assumptions. These policies govern the ALLL, accounting for acquired loans and the indemnification asset and fair value measurements. A discussion of our critical accounting policies can be found in the Critical Accounting Policies section in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2018 Annual Report on Form 10-K. There have been no changes in the application of our critical accounting policies since December 31, 2018.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. This ASU, along with subsequent ASUs issued to clarify certain of its provisions, introduces new guidance which makes substantive changes to the accounting for credit losses. The ASU introduces the CECL model which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. This includes loans, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities. The CECL model requires an entity to estimate credit losses expected over the life of an

exposure, considering information about historical events, current conditions and reasonable and supportable forecasts, and is generally expected to result in earlier recognition of credit losses. The ASU also modifies certain provisions of the current OTTI model for AFS debt securities. Credit losses on AFS debt securities will be limited to the difference between the security's amortized cost basis and its fair value, and will be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. The ASU also provides for a simplified accounting model for purchased financial assets with more than insignificant credit deterioration since their origination. The ASU requires expanded disclosures including, but not limited to, (i) information about the methods and assumptions used to estimate expected credit losses, including changes in the factors that influenced management's estimate and the reasons for those changes, (ii) for financing receivables and net investment in leases measured at amortized cost, further disaggregation of information about the credit quality of those assets and (iii) a rollforward of the allowance for credit losses for AFS and HTM securities.

The Company will adopt this ASU in the first quarter of 2020. At adoption, we will record a cumulative effect adjustment to retained earnings for the amount of the change in our allowance for credit losses. Banking regulators have provided an optional phase-in for the initial impact of adopting the new standard for regulatory capital adequacy purposes which the Company intends to elect, allowing CECL's regulatory capital effects to be phased in at 25 percent per year, beginning in the first quarter of the year of adoption.

The Company has substantially completed the execution of a detailed implementation plan, including establishment of a formal governance structure, the selection and implementation of estimation methodologies and credit loss models for all significant portfolio segments, implementation of a software solution to serve as its CECL platform, and development of processes and controls governing the CECL estimate. We are currently in "parallel run" of the CECL estimation process.

Based on our portfolio mix as of September 30, 2019, the current economic environment, our economic forecast and other assumptions, we expect an increase in the amount of the allowance for credit losses of approximately 15% to 30%, resulting in a ratio of the allowance for credit losses to total loans, measured as of September 30, 2019, ranging from approximately 0.55% to 0.62%, compared to the current 0.47%. The initial impact of CECL on our allowance for credit losses will ultimately depend on the size and composition of our loan portfolio, current economic conditions and our economic forecast at the date of adoption as well as further review and refinement of our models, methodologies and judgments over the course of the fourth quarter. We do not currently expect the impact of CECL with respect to our HTM or AFS securities portfolios to be significant at the date of adoption.

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. 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 and is impacted by competition for deposits in the Company's markets and the availability and pricing of other sources of funds.

The following tables present, for the periods indicated, information about (i) average balances, the total dollar amount of taxable equivalent interest income from earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Non-accrual and restructured loans are included in the average balances presented in this table; however, interest income foregone on non-accrual loans is not included. Interest income, yields, spread and margin have been calculated on a tax-equivalent basis for loans and investment securities that are exempt from federal income taxes, at a federal tax rate of 21% (dollars in thousands):



	Three Months Ended September 30,
	2019							2018
	Average Balance			Interest ⁽¹⁾⁽²⁾		Yield/ Rate ⁽¹⁾⁽²⁾		Average Balance			Interest ⁽¹⁾⁽²⁾		Yield/ Rate ⁽¹⁾⁽²⁾
Assets:
Interest earning assets:
Non-covered loans	$	22,733,875		$	252,896	4.43	%	$	21,311,706		$	216,746	4.05	%
Covered loans	—			—		—	%	408,182			81,302		79.67	%
Total loans	22,733,875			252,896		4.43	%	21,719,888			298,048		5.47	%
Investment securities ⁽³⁾	8,295,205			70,427		3.40	%	7,118,626			60,677		3.41	%
Other interest earning assets	573,630			5,219		3.61	%	507,318			4,855		3.80	%
Total interest earning assets	31,602,710			328,542		4.14	%	29,345,832			363,580		4.94	%
Allowance for loan and lease losses	(112,784		)					(137,784		)
Non-interest earning assets	1,652,901							1,859,619
Total assets	$	33,142,827						$	31,067,667
Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Interest bearing demand deposits	$	1,872,573		6,705		1.42	%	$	1,592,908		4,550		1.13	%
Savings and money market deposits	10,907,317			51,229		1.86	%	10,483,248			38,520		1.46	%
Time deposits	6,845,643			41,549		2.41	%	6,728,915			32,187		1.90	%
Total interest bearing deposits	19,625,533			99,483		2.01	%	18,805,071			75,257		1.59	%
Short term borrowings	115,209			670		2.31	%	89,218			445		2.00	%
FHLB advances	5,414,963			32,252		2.36	%	4,772,902			24,743		2.06	%
Notes and other borrowings	403,788			5,307		5.26	%	402,782			5,304		5.27	%
Total interest bearing liabilities	25,559,493			137,712		2.14	%	24,069,973			105,749		1.74	%
Non-interest bearing demand deposits	3,963,955							3,369,393
Other non-interest bearing liabilities	704,995							520,118
Total liabilities	30,228,443							27,959,484
Stockholders' equity	2,914,384							3,108,183
Total liabilities and stockholders' equity	$	33,142,827						$	31,067,667
Net interest income				$	190,830						$	257,831
Interest rate spread						2.00	%						3.20	%
Net interest margin						2.41	%						3.51	%


(1)	On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $4.1 million and $4.5 million, and the tax-equivalent adjustment for tax-exempt investment securities was $1.0 million and $1.4 million for the three months ended September 30, 2019 and 2018, respectively.


(2)	Annualized.


(3)	At fair value except for securities held to maturity.



	Nine Months Ended September 30,
	2019							2018
	Average Balance			Interest ⁽¹⁾⁽²⁾		Yield/ Rate ⁽¹⁾⁽²⁾		Average Balance			Interest ⁽¹⁾⁽²⁾		Yield/ Rate ⁽¹⁾⁽²⁾
Assets:
Interest earning assets:
Non-covered loans	$	22,407,271		$	751,672	4.48	%	$	21,073,130		$	622,039	3.94	%
Covered loans	—			—		—	%	460,485			246,811		71.46	%
Total loans	22,407,271			751,672		4.48	%	21,533,615			868,850		5.39	%
Investment securities ⁽³⁾	8,333,600			221,901		3.55	%	6,932,504			169,645		3.26	%
Other interest earning assets	532,062			15,140		3.80	%	503,378			13,145		3.49	%
Total interest earning assets	31,272,933			988,713		4.22	%	28,969,497			1,051,640		4.85	%
Allowance for loan and lease losses	(113,694		)					(141,047		)
Non-interest earning assets	1,615,548							1,905,278
Total assets	$	32,774,787						$	30,733,728
Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Interest bearing demand deposits	$	1,783,611		18,569		1.39	%	$	1,604,666		12,902		1.07	%
Savings and money market deposits	11,093,290			156,236		1.88	%	10,610,889			100,891		1.27	%
Time deposits	6,898,947			122,086		2.37	%	6,507,726			83,123		1.71	%
Total interest bearing deposits	19,775,848			296,891		2.01	%	18,723,281			196,916		1.41	%
Short term borrowings	127,908			2,297		2.39	%	30,066			445		1.97	%
FHLB advances	5,037,299			89,890		2.39	%	4,665,799			66,028		1.89	%
Notes and other borrowings	403,574			15,908		5.26	%	402,809			15,919		5.27	%
Total interest bearing liabilities	25,344,629			404,986		2.14	%	23,821,955			279,308		1.57	%
Non-interest bearing demand deposits	3,835,248							3,327,521
Other non-interest bearing liabilities	654,692							498,368
Total liabilities	29,834,569							27,647,844
Stockholders' equity	2,940,218							3,085,884
Total liabilities and stockholders' equity	$	32,774,787						$	30,733,728
Net interest income				$	583,727						$	772,332
Interest rate spread						2.08	%						3.28	%
Net interest margin						2.49	%						3.56	%


(1)	On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $12.9 million and $13.0 million and the tax-equivalent adjustment for tax-exempt investment securities was $3.3 million and $4.2 million for the nine months ended September 30, 2019 and 2018, respectively.


(2)	Annualized.


(3)	At fair value except for securities held to maturity.

Net interest income, calculated on a tax-equivalent basis, was $190.8 million for the three months ended September 30, 2019 compared to $257.8 million for the three months ended September 30, 2018, a decrease of $67 million. Net interest income, calculated on a tax-equivalent basis, was $583.7 million for the nine months ended September 30, 2019 compared to $772.3 million for the nine months ended September 30, 2018, a decrease of $188.6 million. The decreases in net interest income were comprised of decreases in tax-equivalent interest income of $35.0 million and $62.9 million and increases in interest expense of $32.0 million and $125.7 million for the three and nine months ended September 30, 2019, respectively, compared to the three and nine months ended September 30, 2018.

The decreases in tax-equivalent interest income were comprised primarily of (i) decreases in interest income from loans of $45.2 million and $117.2 million for the three and nine months ended September 30, 2019, respectively, relative to the comparable periods of the prior year; partially offset by (ii) increases in interest income from investment securities of $9.8 million and $52.3 million for the three and nine months ended September 30, 2019, respectively, relative to the comparable periods of the prior year.

The declines in interest income from loans were mainly the result of the decrease in accretion on formerly covered residential loans. Interest income on formerly covered residential loans declined by $65.6 million and $198.3 million for the three and nine months ended September 30, 2019, respectively, relative to the comparable periods in the prior year. Both the average balance of and yield on these loans declined. The declines in the average balance resulted from the sale of a substantial portion of the loans during 2018 in anticipation of the termination of the Single Family Shared-Loss Agreement. The declines in the yield were due primarily to changes in assumptions about the remaining period over which accretable yield would be realized, attributable to management's decision to retain certain loans beyond expiration of the Single Family Shared-Loss Agreement.

The following tables present, for the periods indicated, further details of the composition of the tax equivalent yield on loans (dollars in thousands):



	Three Months Ended September 30,
	2019						2018
	Average Balance		Interest ⁽¹⁾⁽²⁾		Yield/ Rate ⁽¹⁾⁽²⁾		Average Balance		Interest ⁽¹⁾⁽²⁾		Yield/ Rate ⁽¹⁾⁽²⁾
Loans:
Non-covered loans	$	22,556,931	$	237,197	4.18	%	$	21,311,706	$	216,746	4.05	%
Formerly covered loans	176,944		15,699		35.49	%	408,182		81,302		79.67	%
Total loans	22,733,875		252,896		4.43	%	21,719,888		298,048		5.47	%



	Nine Months Ended September 30,
	2019						2018
	Average Balance		Interest ⁽¹⁾⁽²⁾		Yield/ Rate ⁽¹⁾⁽²⁾		Average Balance		Interest ⁽¹⁾⁽²⁾		Yield/ Rate ⁽¹⁾⁽²⁾
Loans:
Non-covered loans	$	22,217,829	$	703,157	4.23	%	$	21,073,130	$	622,039	3.94	%
Formerly covered loans	189,442		48,515		34.15	%	460,485		246,811		71.46	%
Total loans	22,407,271		751,672		4.48	%	21,533,615		868,850		5.39	%


(1)	On a tax-equivalent basis where applicable.


(2)	Annualized.

Increased interest income on loans, other than formerly covered residential loans, for the three and nine months ended September 30, 2019, respectively, relative to the comparable periods of the prior year was attributable to increases in both the yield on and average balance of those loans. The tax-equivalent yield increased by 0.13% and 0.29% for the three and nine months ended September 30, 2019, respectively, relative to the comparable periods in the prior year. The most significant factor contributing to these increased yields was the impact of increases in benchmark interest rates in 2018. The average balance outstanding increased by $1.2 billion and $1.1 billion for the three and nine months ended September 30, 2019, respectively, relative to the comparable periods of the prior year.

The average balance of investment securities increased by $1.2 billion and $1.4 billion for the three and nine months ended September 30, 2019, respectively, relative to the comparable periods in the prior year. The tax-equivalent yield was 3.40% for the three months ended September 30, 2019 compared to 3.41% for the three months ended September 30, 2018 and increased to 3.55% for the nine months ended September 30, 2019 from 3.26% for the nine months ended September 30, 2018. The main reason for the increase was increases in coupon rates.

The primary components of the increases in interest expense for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018 were increases of $24.2 million and $100.0 million, respectively, in interest expense on deposits; and increases of $7.5 million and $23.9 million, respectively, in interest expense on FHLB advances.

The increase in interest expense on deposits was attributable to increases in average interest bearing deposits of $820 million and $1.1 billion for the three and nine months ended September 30, 2019, respectively, relative to the comparable periods in the prior year and increases in the average cost of interest bearing deposits of 0.42% and 0.60% for the three and nine months ended September 30, 2019, respectively, relative to the comparable periods in the prior year. These cost increases were generally driven by the growth of deposits in competitive markets and a rising short-term interest rate environment in 2018.

The increase in interest expense on FHLB advances resulted from increases in the average cost of advances of 0.30% and 0.50% for the three and nine months ended September 30, 2019, respectively, relative to the comparable periods in the prior year. The increased costs were driven primarily by increased market rates. The average balance of advances also increased.

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. 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. The determination of the amount of the ALLL 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 Lease Losses” below for more information about how we determine the appropriate level of the allowance.

For the quarters ended September 30, 2019 and 2018, the Company recorded provisions for loan losses of $1.8 million and $1.2 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company recorded provisions for loan losses of $9.4 million and $13.3 million, respectively. The provision for the quarter and nine months ended September 30, 2018 included a net recovery of $1.8 million and a provision of $12.2 million, respectively, related to taxi medallion loans.

Excluding the net recovery related to taxi medallion loans, the provision for loan losses decreased by $1.3 million for the quarter ended September 30, 2019, as compared to the quarter ended September 30, 2018. Significant factors contributing to this decrease in the provision for loan losses included (i) a decrease in the provision related to specific reserves; offset by (ii) an increase in the provision related to criticized and classified assets not individually evaluated for impairment.

Factors contributing to the decrease in the provision for loan losses for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018 included (i) the reduction in the provision related to taxi medallion loans; (ii) a net decrease in the non-taxi provision related to specific reserves and criticized and classified loans not individually evaluated for impairment; offset by (iii) increases related to the relative impact on the provision of changes in certain quantitative and qualitative loss factors.

Non-Interest Income

The following table presents a comparison of the categories of non-interest income for the periods indicated (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Income from resolution of covered assets, net	$	—	$	3,134	$	—	$	10,689
Net gain (loss) on FDIC indemnification	—		3,090		—		(1,925		)
Gain on sale of covered loans, net	—		5,037		—		4,739
Non-interest income related to the impact of transactions in the formerly covered assets	—		11,261		—		13,503

Deposit service charges and fees	4,269		3,723		12,389		10,811
Gain on sale of non-covered loans, net	5,163		3,654		10,220		8,221
Gain on investment securities, net	3,835		432		13,736		2,938
Lease financing	18,583		14,091		52,774		45,685
Other non-interest income	6,006		5,574		20,329		17,536
	37,856		27,474		109,448		85,191
Non-interest income	$	37,856	$	38,735	$	109,448	$	98,694

Declines in income from resolution of covered assets, net, net gain (loss) on FDIC indemnification and gain on sale of covered loans, net resulted from the termination of the Single Family Shared-Loss Agreement in February, 2019.

The most significant contributor to the increases in deposit service charges and fees was higher treasury management fee income, beginning to reflect the implementation of our BankUnited 2.0 initiative.

The most significant components of gain on sale of non-covered loans are (i) gains from the sale of Pinnacle loans totaling $2.4 million for both the three and nine months ended September 30, 2019; (ii) gains on sales of the guaranteed portions of SBA loans totaling $1.5 million and $4.1 million for the three and nine months ended September 30, 2019, respectively, compared to $3.2 million and $7.4 million for the three and nine months ended September 30, 2018, respectively; and (iii) gains on sale of government-insured residential loans totaling $1.3 million and $3.5 million for the three and nine months ended September 30, 2019, respectively, compared to $0.4 million and $0.6 million for the three and nine months ended September 30, 2018, respectively.

Gain on investment securities, net for the three and nine months ended September 30, 2019 reflected net realized gains of $3.4 million and $11.7 million, respectively, from the sale of investment securities available for sale and net unrealized gains on marketable equity securities of $0.4 million and $2.1 million, respectively. Sales of securities during the quarter and nine month periods related primarily to ongoing management of the Company's liquidity position and the duration and risk/return profile of the portfolio.

Period over period increases in income from lease financing generally corresponded to the growth in the portfolio of operating lease equipment.

Non-Interest Expense

The following table presents the components of non-interest expense for the periods indicated (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Employee compensation and benefits	$	57,102	$	65,612	$	179,586	$	198,185
Occupancy and equipment	14,673		13,812		42,477		42,355
Amortization of FDIC indemnification asset	—		48,255		—		132,852
Deposit insurance expense	3,781		5,375		12,849		14,810
Professional fees	2,923		5,240		17,731		10,772
Technology and telecommunications	10,994		9,262		34,175		26,121
Depreciation of equipment under operating lease	11,582		9,870		34,883		28,662
Loss on debt extinguishment	3,796		—		3,796		—
Other non-interest expense	16,455		13,372		42,584		40,105
	$	121,306	$	170,798	$	368,081	$	493,862

Amortization of FDIC indemnification asset

The FDIC indemnification asset was amortized to zero during the fourth quarter of 2018 in light of the expected termination of the Single Family Shared-Loss Agreement

Employee compensation and benefits

Employee compensation and benefits declined by $8.5 million and $18.6 million for the three and nine months ended September 30, 2019 relative to the comparable periods of the prior year, primarily due to a reduction in headcount.

Professional fees

Professional fees decreased by $2.3 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 and increased by $7.0 million during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The decrease in professional fees for the three month periods was primarily attributable to fees incurred related to the implementation of CECL and certain technology projects during the third quarter of 2018. Professional fees for the nine months ended September 30, 2019 included $10.7 million in consulting services related to our BankUnited 2.0 initiative.

Technology and telecommunications

Increased technology and telecommunications expense related primarily to investments we are making in cloud technology, our digital platforms, data initiatives and enhancement of some of our risk management capabilities.

Loss on debt extinguishment

The loss on debt extinguishment in the third quarter of 2019 related to the extinguishment of certain higher cost FHLB advances.

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 related to workouts and foreclosures, regulatory examination assessments, travel and general office expense. Other non-interest expense for both the quarter and nine months ended September 30, 2019 included a loss on the sale of one commercial OREO property of $2.4 million.

Costs incurred directly related to the implementation of our BankUnited 2.0 initiative during the three and nine months ended September 30, 2019 included professional fees of $0.4 million and $10.7 million, respectively; branch closure expenses of $1.0 million and $2.3 million, respectively; and severance costs of $0.6 million and $1.5 million, respectively.

Income Taxes

The effective income tax rate was 24.1% and 25.3% for the quarter and nine months ended September 30, 2019. The effective income tax rate differed from the statutory federal income tax rate of 21% for the quarter and nine months ended September 30, 2019 due primarily to the impact of state income taxes, partially offset by the benefit of income not subject to federal tax.

Analysis of Financial Condition

Average interest-earning assets increased $2.3 billion to $31.3 billion for the nine months ended September 30, 2019 from $29.0 billion for the nine months ended September 30, 2018. This increase was driven by an $874 million increase in the average balance of outstanding loans and a $1.4 billion increase in the average balance of investment securities. A $290 million decrease in average non-interest earning assets was primarily attributed to (i) the decrease in the FDIC indemnification asset, which was amortized to zero during the fourth quarter of 2018 and (ii) a decrease in income taxes receivable related to a discrete income tax benefit recognized during the fourth quarter of 2017, partially offset by (iii) the recognition of the ROU asset subsequent to the adoption of ASU 2016-02 effective January 1, 2019.

Average interest bearing liabilities increased $1.5 billion to $25.3 billion for the nine months ended September 30, 2019 from $23.8 billion for the nine months ended September 30, 2018, due primarily to an increase of $1.1 billion in average interest bearing deposits. Average non-interest bearing deposits increased by $508 million to $3.8 billion for the nine months ended September 30, 2019.

Average stockholders' equity decreased by $146 million, due primarily to the repurchase of common stock, partially offset by the retention of earnings.

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 as of the dates indicated (in thousands):



	September 30, 2019				December 31, 2018
	Amortized Cost		Carrying Value		Amortized Cost		Carrying Value
U.S. Treasury securities	$	70,219	$	70,666	$	39,885	$	39,873
U.S. Government agency and sponsored enterprise residential MBS	1,961,011		1,969,141		1,885,302		1,897,474
U.S. Government agency and sponsored enterprise commercial MBS	336,608		340,590		374,569		374,787
Private label residential MBS and CMOs	1,295,234		1,315,185		1,539,058		1,534,198
Private label commercial MBS	1,622,198		1,632,098		1,486,835		1,485,716
Single family rental real estate-backed securities	491,728		496,698		406,310		402,458
Collateralized loan obligations	1,204,888		1,198,233		1,239,355		1,235,198
Non-mortgage asset-backed securities	202,098		204,566		204,372		204,067
State and municipal obligations	264,108		280,785		398,810		398,429
SBA securities	384,677		388,240		514,765		519,313
Other debt securities	1,338		4,471		1,393		4,846
Investment securities held to maturity	10,000		10,000		10,000		10,000
	$	7,844,107	7,910,673		$	8,100,654	8,106,359
Marketable equity securities			59,983				60,519
			$	7,970,656			$	8,166,878

Our investment strategy has focused on insuring adequate liquidity, maintaining a suitable balance of high credit quality, diverse assets, managing interest rate risk, and generating acceptable returns given our established risk parameters. We have sought to maintain liquidity by investing a significant portion of the portfolio in high quality liquid securities including U.S. Treasury securities, GNMA securities, SBA securities and U.S. Government Agency MBS. Investment grade municipal securities provide liquidity and attractive tax-equivalent yields. We have also invested in highly rated structured products, including private-label commercial and residential MBS, collateralized loan obligations, single family rental real estate-backed securities and non-mortgage asset-backed securities that, while somewhat less liquid, provide us with attractive yields. Relatively short effective portfolio duration helps mitigate interest rate risk. Based on the Company’s assumptions, the estimated weighted average life of the investment portfolio as of September 30, 2019 was 4.6 years. The effective duration of the investment portfolio as of September 30, 2019 was 1.4 years. The model results are based on assumptions that may differ from actual results.

The following table shows the scheduled maturities, carrying values and current yields for investment securities available for sale as of September 30, 2019, 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	$	70,666	2.06	%	$	—	—	%	$	—	—	%	$	—	—	%	$	70,666	2.06	%
U.S. Government agency and sponsored enterprise residential MBS	156,345		2.76	%	891,810		2.65	%	760,593		2.60	%	160,393		2.61	%	1,969,141		2.64	%
U.S. Government agency and sponsored enterprise commercial MBS	4,136		3.45	%	34,417		3.31	%	188,690		2.88	%	113,347		3.40	%	340,590		3.10	%
Private label residential MBS and CMOs	290,964		3.69	%	759,741		3.62	%	224,907		3.50	%	39,573		3.70	%	1,315,185		3.63	%
Private label commercial MBS	51,656		3.97	%	1,286,116		3.56	%	272,121		3.07	%	22,205		2.79	%	1,632,098		3.48	%
Single family rental real estate-backed securities	13,695		3.00	%	127,371		3.16	%	355,632		3.05	%	—		—	%	496,698		3.08	%
Collateralized loan obligations	6,303		3.66	%	883,582		3.63	%	308,348		4.10	%	—		—	%	1,198,233		3.75	%
Non-mortgage asset-backed securities	15,267		4.11	%	116,511		3.16	%	72,211		2.87	%	577		3.22	%	204,566		3.13	%
State and municipal obligations	1,574		1.96	%	33,422		2.77	%	197,399		3.99	%	48,390		4.09	%	280,785		3.84	%
SBA securities	73,388		3.45	%	185,535		3.36	%	88,631		3.31	%	40,686		3.26	%	388,240		3.35	%
Other debt securities	—		—	%	—		—	%	—		—	%	4,471		13.86	%	4,471		13.85	%
	$	683,994	3.29	%	$	4,318,505	3.36	%	$	2,468,532	3.15	%	$	429,642	3.19	%	7,900,673		3.28	%
Marketable equity securities with no scheduled maturity																	59,983		7.24	%
Total investment securities available for sale and marketable equity securities																	$	7,960,656	3.31	%

The investment securities available for sale portfolio was in a net unrealized gain position of $66.6 million at September 30, 2019 with aggregate fair value equal to 100.8% of amortized cost. Net unrealized gains included $83.0 million of gross unrealized gains and $16.4 million of gross unrealized losses. Investment securities available for sale in an unrealized loss position at September 30, 2019 had an aggregate fair value of $2.4 billion. At September 30, 2019, 98.9% of investment 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. Investment securities available for sale totaling $80 million were not rated at September 30, 2019. These securities have been determined by management to be of investment grade quality. Additionally, $8 million of securities acquired at substantial discounts in the FSB acquisition were rated below investment grade or not rated at September 30, 2019, all of which were held in significant unrealized gain positions.

We evaluate the credit quality of individual securities in the portfolio quarterly to determine whether any of the investments in unrealized loss positions are other-than-temporarily impaired. 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 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 we 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.

No securities were determined to be other-than-temporarily impaired at September 30, 2019 and 2018.

We do not intend to sell securities in significant unrealized loss positions at September 30, 2019. 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 portfolio at September 30, 2019 were primarily attributable to widening spreads and in some cases, increases in market interest rates subsequent to the date the securities were acquired.

At September 30, 2019, 85%, 12% and 3% of CLOs were rated AAA, AA and A, respectively, based on the most recent third-party ratings, with a weighted-average subordination level at 41.1%, ranging from 35.7% to 46.0%. Management performs a thorough analysis prior to purchasing CLOs, including extensive vetting of the asset manager and stress testing of collateral. Management engages an independent third party to perform ongoing credit surveillance of the CLO portfolio, performs periodic stress testing of the portfolio and continuously monitors exposure, default status, and other relevant security characteristics.

The timely repayment of principal and interest on SBA securities and U.S. Government agency and sponsored enterprise securities in unrealized loss positions is explicitly or implicitly guaranteed by the full faith and credit of the U.S. Government. Management performed projected cash flow analyses of the private label residential MBS and CMOs, private label commercial MBS, collateralized loan obligations and non-mortgage asset-backed securities in unrealized loss positions, incorporating CUSIP level assumptions consistent with the collateral characteristics of each security including collateral default rate, voluntary prepayment rate, severity and delinquency assumptions. Based on the results of this analysis, no credit losses were projected. Management's analysis of the credit characteristics of individual securities and the underlying collateral and levels of subordination for each of the single family rental real estate-backed securities in unrealized loss positions is not indicative of projected credit losses.

For further discussion of our analysis of investment securities for OTTI, 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. 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 September 30, 2019 and 2018, 0.3% and 0.6%, respectively, of our investment securities were classified within level 3 of the fair value hierarchy. Securities classified within level 3 of the hierarchy at September 30, 2019 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 nine months ended September 30, 2019 and 2018.

For additional discussion of the fair values of investment securities, see Note 10 to the consolidated financial statements.

Loans Held for Sale

Loans held for sale at September 30, 2019 included $26 million of the guaranteed portion of SBA loans held for sale in the secondary market and $20 million of other commercial loans transferred to held for sale. At December 31, 2018, loans held for sale consisted entirely of the guaranteed portion of SBA loans. SBA loans are generally sold with servicing retained.

Loans

The loan portfolio comprises the Company’s primary interest-earning asset. The following tables show the composition of the loan portfolio at the dates indicated. Amounts include premiums, discounts and deferred fees and costs (dollars in thousands):



	September 30, 2019					December 31, 2018
Residential and other consumer loans	$	5,571,104		24.4	%	$	4,948,989		22.5	%
Multi-family	2,221,525			9.7	%	2,585,421			11.8	%
Non-owner occupied commercial real estate	4,789,673			21.0	%	4,611,573			21.0	%
Construction and land	173,345			0.8	%	210,516			1.0	%
Owner occupied commercial real estate	1,936,516			8.5	%	2,007,603			9.1	%
Commercial and industrial	4,477,062			19.6	%	4,312,213			19.6	%
National commercial lending platforms
Pinnacle	1,236,121			5.3	%	1,462,655			6.6	%
Bridge - franchise finance	605,896			2.6	%	517,305			2.4	%
Bridge - equipment finance	682,149			3.0	%	636,838			2.9	%
Small business finance	256,490			1.1	%	252,221			1.1	%
Mortgage warehouse lending	905,619			4.0	%	431,674			2.0	%
Total loans	22,855,500			100.0	%	21,977,008			100.0	%
Allowance for loan and lease losses	(108,462		)			(109,931		)
Loans, net	$	22,747,038				$	21,867,077

Total loans increased by $878 million to $22.9 billion at September 30, 2019, from $22.0 billion at December 31, 2018.

Residential and other consumer loans grew by $622 million for the nine months ended September 30, 2019, of which $272 million was government insured pool buyout loans. Multi-family loans declined by $364 million for the nine months ended September 30, 2019, primarily due to continued run-off of the New York portfolio, while other categories of commercial real estate loans grew by $141 million. Commercial and industrial loans, inclusive of owner occupied commercial real estate, grew by $94 million for the nine months ended September 30, 2019. Growth in the national commercial lending platforms was primarily driven by a $474 million increase in mortgage warehouse outstandings, offset by a decline in Pinnacle resulting from the sale of $168 million in loans during the three months ended September 30, 2019.

Included in multi-family and non-owner occupied commercial real estate loans above were $81 million and $14 million, respectively, in re-positioning loans at September 30, 2019. 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

The following table shows the composition of residential and other consumer loans at the dates indicated. Amounts include premiums, discounts and deferred fees and costs (in thousands):



	September 30, 2019		December 31, 2018
1-4 single family residential	$	5,024,628	$	4,664,920
Government insured residential	536,682		266,729
Home equity loans and lines of credits	1,381		1,393
Other consumer loans	8,413		15,947
	$	5,571,104	$	4,948,989

The 1-4 single family residential loan portfolio is primarily comprised of loans purchased through established correspondent channels. The portfolio also includes loans originated through retail channels 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 September 30, 2019, $100 million or 1.8% of residential mortgage loans were interest-only loans, substantially all of which begin amortizing 10 years after origination.

The Company acquires non-performing FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations (collectively, "government insured pool buyout loans" or "buyout loans"). Buyout loans that re-perform, either through modification or self-cure, may be eligible for re-securitization. The Company and the servicer share in the economics of the sale of these loans into new securitizations. The balance of buyout loans totaled $513 million at September 30, 2019. The Company is not the servicer of these loans.

The following charts present the distribution of the 1-4 single family residential mortgage portfolio at the dates indicated:

https://cdn.kscope.io/5de4bdd411d001e7f3ba92984f9ec102-a14sfrchart.jpg

The following table presents the five states with the largest geographic concentrations of 1-4 single family residential loans, excluding government insured residential loans, at the dates indicated (dollars in thousands):



	September 30, 2019				December 31, 2018
California	$	1,323,089	26.3	%	$	1,177,221	25.2	%
New York	1,041,177		20.7	%	977,146		20.9	%
Florida	625,861		12.5	%	645,020		13.8	%
Virginia	194,268		3.9	%	184,756		4.0	%
DC	193,080		3.8	%	183,211		4.0	%
All others	1,647,153		32.8	%	1,497,566		32.1	%
	$	5,024,628	100.0	%	$	4,664,920	100.0	%

Commercial loans and leases

Commercial loans include commercial and industrial loans and leases, loans secured by owner-occupied commercial real-estate, multi-family properties and other income-producing non-owner occupied commercial real estate, and a limited amount of construction and land loans. Management’s loan origination strategy is heavily focused on the commercial portfolio segment, which comprised 75.6% and 77.5% of loans as of September 30, 2019 and December 31, 2018, respectively.

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.

The following charts present the distribution of non-owner occupied commercial real estate loans by property type at the dates indicated:

https://cdn.kscope.io/5de4bdd411d001e7f3ba92984f9ec102-crenonooa09.jpg

The Company’s commercial real estate underwriting standards generally provide for loan terms of five to seven years, with amortization schedules of no more than thirty years. LTV ratios are typically limited to no more than 80%. 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 represented only 0.8% of the total loan portfolio at September 30, 2019. Construction and land loans are generally made for projects expected to stabilize within eighteen months of completion in sub-markets with strong fundamentals and, to a lesser extent, for-sale residential projects to experienced developers with a strong cushion between market prices and loan basis.

The New York legislature recently enacted a number of rent regulation reform measures that generally have the impact of limiting landlords' ability to increase rents on stabilized units and to convert stabilized units to market rate units. The following table presents the amount of loans secured by New York multi-family properties in which some or all units are rent regulated at September 30, 2019 (in thousands):



Loans secured by stabilized properties subject to rent regulation	$	1,316,417
Loans secured by non-stabilized properties subject to rent regulation	64,522
	$	1,380,939

We believe loans secured by non-stabilized properties may present a heightened level of risk as these loans were underwritten to expected cash flows upon stabilization; those expected cash flows may be impacted by the recent rent regulation reform measures.

The following tables present the distribution of stabilized rent-regulated multi-family loans, by DSCR and LTV at September 30, 2019 (in thousands):



DSCR
Less than 1.11	$	132,614
1.11 - 1.24	389,334
1.25 - 1.50	484,762
1.51 or greater	309,707
	$	1,316,417



LTV
Less than 50%	$	327,389
50% - 65%	697,574
66% - 75%	284,832
More than 75%	6,622
	$	1,316,417

Commercial and industrial loans are typically made to small, middle market and larger corporate businesses 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 within its geographic footprint. Commercial loans included shared national credits totaling $2.2 billion at September 30, 2019, the majority of which are relationship based loans to borrowers in Florida and New York.

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 restaurant and fitness concepts comprising 63% and 30% 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 SBA guaranteed commercial and commercial real estate loans, generally selling the guaranteed portion in the

secondary market and retaining the unguaranteed portion in portfolio. The Bank engages in mortgage warehouse lending on a national basis.

The following table presents the five states with the largest concentration of commercial loans and direct financing leases in the national platforms at the dates indicated. Amounts include premiums, discounts and deferred fees and costs (dollars in thousands):



	September 30, 2019				December 31, 2018
California	$	661,737	18.0	%	$	498,842	16.8	%
Florida	440,798		12.0	%	595,843		20.0	%
New Jersey	221,374		6.0	%	116,060		3.9	%
North Carolina	193,894		5.3	%	113,530		3.8	%
Virginia	168,248		4.6	%	153,619		5.2	%
All others	2,000,224		54.1	%	1,499,955		50.3	%
	$	3,686,275	100.0	%	$	2,977,849	100.0	%

At September 30, 2019, 36.2% and 23.3% of commercial loans were originated within the Florida and New York portfolios, respectively. At December 31, 2018, 37.0% and 25.4% of commercial loans were originated within the Florida and New York portfolios, respectively.

Operating lease equipment, net

Operating lease equipment, net totaled $697 million at September 30, 2019, including off-lease equipment totaling $72 million. The portfolio consists primarily of railcars, non-commercial aircraft and other transport equipment. We have a total of 5,627 railcars with a carrying value of $436 million at September 30, 2019, including hoppers, tank cars, boxcars, auto carriers, center beams and gondolas leased to North American commercial end-users. The largest concentrations of rail cars were 2,420 hopper cars and 1,594 tank cars, primarily used to ship sand and petroleum products, respectively, for the energy industry.

Bridge had exposure to the energy industry of $306 million at September 30, 2019, consisting of $261 million in operating lease equipment and $45 million in loans and finance leases.

The chart below presents operating lease equipment by type at the dates indicated:

https://cdn.kscope.io/5de4bdd411d001e7f3ba92984f9ec102-equipmentleasesa03.jpg

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 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, commercial loans as well as underwriting and

portfolio management practices are regularly reviewed by our internal credit review department. The Company utilizes a 13 grade internal asset risk classification system as part of its efforts to monitor and maintain commercial asset quality. Loans exhibiting potential credit weaknesses that deserve management’s close attention and, that if left uncorrected, may result in deterioration of the repayment capacity of the borrower are categorized as special mention. These borrowers may exhibit negative financial trends or erratic financial performance, strained liquidity, marginal collateral coverage, declining industry trends or weak management. Loans with well-defined credit weaknesses that may result in a loss if the deficiencies are not corrected are assigned a risk rating of substandard. These borrowers may exhibit payment defaults, inadequate cash flows, operating losses, increasing balance sheet leverage, project cost overruns, unreasonable construction delays, exhausted interest reserves, declining collateral values, frequent overdrafts or past due real estate taxes. Loans with weaknesses so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors have not been charged off, are assigned an internal risk rating of doubtful.

We believe internal risk rating is the best indicator of the credit quality of commercial loans. The following table summarizes the Company's commercial credit exposure, based on internal risk rating, at the dates indicated (in thousands):



	September 30, 2019				December 31, 2018
	Balance		Percent of Total		Balance		Percent of Total
Pass	$	16,846,374	97.4	%	$	16,728,534	98.2	%
Special mention	86,842		0.5	%	81,070		0.5	%
Substandard	348,382		2.0	%	210,026		1.2	%
Doubtful	2,798		0.1	%	8,389		0.1	%
	$	17,284,396	100.0	%	$	17,028,019	100.0	%

See Note 4 to the Consolidated Financial Statements for more information about the risk rating distribution of the Company's commercial loans. Criticized and classified loans as a percentage of total loans was 1.9% at September 30, 2019, compared to 1.4% at December 31, 2018.

Operating Lease Equipment, net

Two operating lease relationships with a carrying value of assets under lease totaling $24 million, of which $19 million were exposures to the energy industry, were internally risk rated special mention or substandard at September 30, 2019. One relationship had been restructured as of September 30, 2019.

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-users with original lease terms generally ranging from three to ten years. We are exposed to the risk that, at the end of the lease term, the value of the asset will be lower than expected, potentially resulting in reduced future lease income over the remaining life of the asset or a lower sale value. Asset risk may also lead to changes in depreciation as a result of changes in the residual values of the operating lease assets or through impairment of asset carrying values.

Asset risk is evaluated and managed by a dedicated internal staff of asset managers, managed by seasoned equipment finance professionals with a broad depth and breadth of experience in the leasing business. Additionally, we have partnered with an industry leading, experienced service provider who provides fleet management and servicing relating to the railcar fleet, including lease administration and reporting, a Regulation Y compliant full service maintenance program and railcar re-marketing. Risk is managed by setting appropriate residual values at inception and systematic reviews of residual values based on independent appraisals, performed at least annually. Additionally, our internal management team and our external service provider closely follow the rail markets, monitoring traffic flows, supply and demand trends and the impact of new technologies and regulatory requirements. Demand for railcars is sensitive to shifts in general and industry specific economic and market trends and shifts in trade flows from specific events such as natural or man-made disasters. We seek to mitigate these risks by leasing to a stable end-user base, by maintaining a relatively young and diversified fleet of assets that are expected to maintain stronger and more stable utilization rates despite impacts from unexpected events or cyclical trends and by staggering lease maturities. We regularly monitor the impact of oil prices on the estimated residual value of rail cars being used in the petroleum/natural gas extraction sector.

Credit risk in the leased equipment portfolio results from the potential default of lessees, possibly driven by obligor specific or industry-wide conditions, and is economically less significant than asset risk, because in the operating lease business, there is no extension of credit to the obligor. Instead, the lessor deploys a portion of the useful life of the asset. Credit

losses, if any, will manifest through reduced rental income due to missed payments, time off lease, or lower rental payments due either to a restructuring or re-leasing of the asset to another obligor. Credit risk in the operating lease portfolio is managed and monitored utilizing credit administration infrastructure, processes and procedures similar to those used to manage and monitor credit risk in the commercial loan portfolio. We also mitigate credit risk in this portfolio by leasing to high credit quality obligors.

Residential and Other Consumer Loans

The majority of our residential mortgage portfolio consists 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 FICO score to be significant indicators of credit quality for the 1-4 single family residential portfolio, excluding FSB loans and government insured residential loans.

The following tables show the distribution of 1-4 single family residential loans, excluding FSB loans and government insured residential loans, by original FICO and LTV as of the dates indicated:



	September 30, 2019
	FICO
LTV	720 or less		721 - 740		741 - 760		761 or greater		Total
Less than 60%	2.4	%	2.8	%	3.9	%	16.6	%	25.7	%
60% - 70%	2.8	%	2.5	%	4.0	%	13.7	%	23.0	%
70% - 80%	4.0	%	4.9	%	8.7	%	29.0	%	46.6	%
More than 80%	0.4	%	0.7	%	0.7	%	2.9	%	4.7	%
	9.6	%	10.9	%	17.3	%	62.2	%	100.0	%



	December 31, 2018
	FICO
LTV	720 or less		721 - 740		741 - 760		761 or greater		Total
Less than 60%	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	%

At September 30, 2019, the 1-4 single family residential loan portfolio, excluding FSB loans and 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 68.2%. The majority of this portfolio was owner-occupied, with 84.2% primary residence, 7.3% second homes and 8.5% investment properties. In terms of vintage, 38.7% of the portfolio was originated pre-2016, 17.1% in 2016, 18.6% in 2017, 14.0% in 2018 and 11.6% in 2019.

1-4 single family residential loans, excluding government insured residential loans, past due more than 30 days totaled $42.9 million and $23.5 million at September 30, 2019 and December 31, 2018, respectively. The amount of these loans 90 days or more past due was $10.7 million and $7.0 million at September 30, 2019 and December 31, 2018, respectively.

Other Consumer Loans

Substantially all other consumer loans were current at September 30, 2019 and December 31, 2018.

Impaired Loans and Non-Performing Assets

Non-performing assets generally consist of (i) non-accrual loans, including loans that have been modified in TDRs and placed on non-accrual status, (ii) accruing loans that are more than 90 days contractually past due as to interest or principal, excluding ACI loans 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 summarizes the Company's impaired loans and non-performing assets at the dates indicated (dollars in thousands):



	September 30, 2019			December 31, 2018
Non-accrual loans
Residential and other consumer:
1-4 single family residential	$	15,363		$	6,316
Other consumer loans	48			288
Total residential and other consumer loans	15,688			6,604
Commercial:
Multi-family	17,906			25,560
Non-owner occupied commercial real estate	11,902			3,102
Construction and land	3,839			8,827
Owner occupied commercial real estate	6,043			5,221
Commercial and industrial	22,092			23,088
National commercial lending platforms
Bridge - franchise finance	5,275			5,308
Bridge - equipment finance	9,133			17,425
Small business finance	45,767			34,108
Total commercial loans	121,957			122,639
Total non-accrual loans	137,645			129,243
Loans past due 90 days and still accruing	—			650
Total non-performing loans	137,643			129,893
OREO and repossessed assets	4,437			9,517
Total non-performing assets	142,080			139,410
Performing TDRs	53,074			7,898
Total impaired loans and non-performing assets	$	195,154		$	147,308

Non-performing loans to total loans ⁽¹⁾⁽⁴⁾	0.60		%	0.59		%
Non-performing assets to total assets⁽⁴⁾	0.43		%	0.43		%
ALLL to total loans ⁽¹⁾	0.47		%	0.50		%
ALLL to non-performing loans	78.80		%	84.63		%
Net charge-offs to average loans⁽²⁾⁽³⁾	0.06		%	0.28		%


(1)	Total loans for purposes of calculating these ratios include premiums, discounts and deferred fees and costs.


(2)	Annualized for September 30, 2019.


(3)	The ratio of charge-offs of taxi medallion loans to average total loans was 0.18% for the year ended December 31, 2018.


(4)	Non-performing loans and assets include the guaranteed portion of non-accrual SBA loans totaling $33.1 million or 0.14% of total loans and 0.10% of total assets, at September 30, 2019; compared to $17.8 million or 0.08% of total loans and 0.06% of total assets, at December 31, 2018.

Contractually delinquent ACI loans with remaining accretable yield are not reflected as non-accrual loans 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 immaterial at September 30, 2019 and December 31, 2018. Contractually delinquent government insured residential loans are excluded from non-performing loans as defined in the table above due to their government guarantee. The carrying value of such loans contractually delinquent by more than 90 days was $420 million and $218 million at September 30, 2019 and December 31, 2018, respectively.

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 90 days of interest is due and unpaid. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged as a reduction 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 status of loans is determined based on the contractual next payment due date. Loans less than 30 days past due are reported as current.

A loan modification is considered a TDR if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise grant. These concessions may take the form of temporarily or permanently reduced interest rates, payment abatement periods, restructuring of payment terms, extensions of maturity at below market terms, or in some cases, partial forgiveness of principal. Modified ACI loans accounted for in pools are not accounted for as TDRs and are not separated from their respective pools when modified. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy.

The following table summarizes loans that have been modified in TDRs at the dates indicated (dollars in thousands):



	September 30, 2019					December 31, 2018
	Number of TDRs	Recorded Investment		Related Specific Allowance		Number of TDRs	Recorded Investment		Related Specific Allowance
Residential and other consumer ⁽¹⁾	213	$	34,528	$	12	47	$	7,690	$	134
Commercial	29	72,024		6,311		23	36,150		3,595
	242	$	106,552	$	6,323	70	$	43,840	$	3,729


(1)	Includes government insured residential loans modified in TDRs totaling $29.9 million and $3.5 million at September 30, 2019 and December 31, 2018, respectively.

See Note 4 to the Consolidated Financial Statements for additional information about TDRs.

Potential Problem Loans

Potential problem loans have been identified by management as those commercial loans included in the "substandard accruing" risk rating category. These loans are typically performing, but possess specifically identified credit weaknesses that, if not remedied, may lead to a downgrade to non-accrual status and identification as impaired in the near-term.

The following table summarizes the Company's substandard accruing loans, substantially all of which were current as to principal and interest, at the dates indicated (in thousands):



	September 30, 2019		June 30, 2019		December 31, 2018
Multi-family	$	21,772	$	22,926	$	9,093
Non-owner occupied commercial real estate	55,585		70,918		43,690
Owner occupied commercial real estate	12,875		4,304		5,526
Commercial and industrial	65,630		36,827		15,729
National commercial lending platforms
Bridge - franchise finance	51,786		21,158		9,912
Bridge - equipment finance	12,675		16,197		5,521
Small business finance	8,849		7,883		6,324
	$	229,172	$	180,213	$	95,795

Management closely monitors each of these loans as well as indicators of potential negative trends developing within any particular portfolio segment. The increase in substandard accruing loans at September 30, 2019 and June 30, 2019 compared to December 31, 2018 does not appear to be concentrated in any one business line, geography, product type or asset class, with the exception of the identification of correlated risk characteristics related to quick service restaurant exposures delivered through Bridge's franchise finance division. This sector comprises approximately 64% of total franchise exposure and approximately 2.26% of the total commercial portfolio. Management has not identified any other specific trends or correlated risk characteristics associated with these downgrades. The majority of the increase in substandard accruing loans in the commercial and industrial category relates to one $42 million loan relationship.

Loss Mitigation Strategies

Criticized or classified commercial loans in excess of certain thresholds are reviewed quarterly by the Criticized Asset Committee, which evaluates the appropriate strategy for collection to mitigate the amount of credit losses. Criticized asset reports for each relationship are presented by the assigned relationship manager and credit officer to the Criticized Asset Committee until such time as the relationships are returned to a satisfactory credit risk rating or otherwise resolved. The Criticized Asset Committee may require the transfer of a loan to our workout and recovery department, which is tasked to effectively manage the loan with the goal of minimizing losses and expenses associated with restructure, collection and/or liquidation of collateral. Commercial loans with a risk rating of substandard; impaired loans on non-accrual status; loans modified as TDRs; or assets classified as OREO or repossessed assets are usually transferred to workout and recovery. Oversight of the workout and recovery department is provided by the Asset Recovery Committee.

Our servicers evaluate each residential loan in default to determine the most effective loss mitigation strategy, which may be modification, short sale, or foreclosure, and pursue the alternative most suitable to the consumer and to mitigate losses to the bank.

Analysis of the Allowance for Loan and Lease Losses

The determination of the amount of the ALLL is, by nature, highly complex and subjective. Future events that are inherently uncertain could result in material changes to the level of the ALLL. General 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 determine the amount of the ALLL, and may materially impact the amount of the ALLL recorded in the consolidated financial statements. See the section entitled "Critical Accounting Policies" in this Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the expected impact of CECL.

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 doubtful and on non-accrual status with committed credit facilities greater than or equal to $1.0 million, as well as loans 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. 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, 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 owner-occupied commercial real estate loans, 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. For Pinnacle, quantitative loss factors are based primarily on historical municipal default data.

Where applicable, the peer group used to calculate average annual historical net charge-off rates used in estimating general reserves is made up of 24 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.

For most commercial portfolio segments, we 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.

Residential and other consumer loans

The residential and other consumer loan portfolio has not yet developed an observable loss trend. Therefore, the ALLL for residential loans is based primarily on relevant proxy historical loss rates. The ALLL for 1-4 single family residential loans, excluding government insured residential loans and ACI 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 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 home equity and other consumer loan classes. See further discussion of peer group loss factors above. The home equity and other consumer loan portfolios are not significant components of the overall loan portfolio.

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;


•	Changes in the nature of the portfolio and terms of the loans, specifically including the volume 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.

ACI Loans

For ACI loans, a valuation allowance is established when periodic evaluations 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 family residential loans are estimated at the pool level. The analysis of expected cash flows incorporates assumptions about expected prepayment rates, default rates, delinquency levels and loss severity given default.

No ALLL related to 1-4 single family residential ACI pools was recorded at September 30, 2019 or December 31, 2018.

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 September 30, 2019 or December 31, 2018. Commercial ACI loans are not a significant portion of the loan portfolio.

The following table provides an analysis of the ALLL, provision for loan losses and net charge-offs for the periods indicated (in thousands):



	Nine Months Ended September 30,
	2019			2018
Balance at beginning of period:	$	109,931		$	144,795
Provision for (recovery of) loan losses:
1-4 single family residential	704			(55		)
Home equity loans and lines of credit	(152		)	(223		)
Other consumer loans	(113		)	612
Multi-family	(2,265		)	(10,644		)
Non-owner occupied commercial real estate	(2,029		)	(10,026		)
Construction and land	(251		)	(1,467		)
Owner occupied commercial real estate	(2,729		)	2,490
Commercial and industrial⁽¹⁾	13,682			23,944
National commercial lending platforms
Pinnacle	(135		)	(55		)
Bridge - franchise finance	3,582			1,400
Bridge - equipment finance	(2,599		)	4,410
Small business finance	476			2,899
Mortgage warehouse lending	1,202			57
Total Provision	9,373			13,342
Charge-offs:
1-4 single family residential	—			(979		)
Other consumer loans	—			(265		)
Non-owner occupied commercial real estate	(1,626		)	—
Owner occupied commercial real estate	(89		)	(5,432		)
Commercial and industrial⁽²⁾	(9,470		)	(26,342		)
National commercial lending platforms
Bridge - franchise finance	(1,285		)	—
Small business finance	(1,515		)	(2,969		)
Total Charge-offs	(13,985		)	(35,987		)
Recoveries:
Home equity loans and lines of credit	151			218
Other consumer loans	21			275
Non-owner occupied commercial real estate	82			7
Owner occupied commercial real estate	36			96
Commercial and industrial	2,032			1,695
National commercial lending platforms
Bridge - franchise finance	—			2
Bridge - equipment finance	4			—
Small business finance	817			297
Total Recoveries	3,143			2,590
Net Charge-offs:	(10,842		)	(33,397		)
Balance at end of period	$	108,462		$	124,740


(1)	Includes provision of $12.2 million related to taxi medallion loans during the nine months ended September 30, 2018.


(2)	Includes charge-offs of $14.2 million related to taxi medallion loans during the nine months ended September 30, 2018.

The following table shows the distribution of the ALLL at the dates indicated (dollars in thousands):



	September 30, 2019				December 31, 2018
	Total		%⁽¹⁾		Total		%⁽¹⁾
Residential and other consumer:
1 - 4 single family residential	$	11,330	24.3	%	$	10,626	22.4	%
Other consumer loans	69		0.1	%	162		0.1	%
	11,399		24.4	%	10,788		22.5	%
Commercial:
Multi-family	5,134		9.7	%	7,399		11.8	%
Non-owner occupied commercial real estate	24,940		21.0	%	28,512		21.0	%
Construction and land	926		0.8	%	1,177		1.0	%
Owner occupied commercial real estate	4,013		8.5	%	6,795		9.1	%
Commercial and industrial	38,233		19.6	%	31,991		19.6	%
National commercial lending platforms
Pinnacle	740		5.3	%	875		6.6	%
Bridge - franchise finance	7,857		2.6	%	5,560		2.4	%
Bridge - equipment finance	6,963		3.0	%	9,558		2.9	%
Small business finance	5,967		1.1	%	6,189		1.1	%
Mortgage warehouse lending	2,290		4.0	%	1,087		2.0	%
	97,063		75.6	%	99,143		77.5	%
	$	108,462	100.0	%	$	109,931	100.0	%


(1)	Represents percentage of loans receivable in each category to total loans receivable.

The balance of the ALLL at September 30, 2019 decreased $1.5 million from the balance at December 31, 2018, to 0.47% of total loans from 0.50% of total loans. One factor contributing to this decline is a shift in portfolio mix; at September 30, 2019 the residential and mortgage warehouse portfolio segments, which carry lower reserves than the portfolio average, constituted a larger percentage of the total loan portfolio. Factors influencing the change in the ALLL related to specific loan types at September 30, 2019 as compared to December 31, 2018 include:


•	A decrease of $2.3 million for multi-family loans was primarily attributable to a decrease in the balance of loans outstanding and a decrease in quantitative and qualitative loss factors.


•	A decrease of $3.9 million for non-owner occupied commercial real estate loans was primarily attributable to a decrease in quantitative and qualitative loss factors.


•	A decrease of $2.8 million for owner occupied commercial real estate loans was primarily attributable to a decrease in quantitative and qualitative loss factors and a decrease in specific reserves.


•	An increase of $7.5 million for other commercial and industrial loans was primarily attributable to loan growth and increases in specific reserves and classified loans.


•	An increase of $2.3 million for franchise finance loans was primarily attributable to an increase in classified loans and to a smaller effect, loan growth.


•	A decrease of $2.6 million for equipment finance loans was primarily attributable to a decrease in the specific reserve for one impaired loan relationship and a decline in qualitative loss factors.


•	An increase of $1.2 million for mortgage warehouse lending loans was primarily attributable to an increase in qualitative loss factors.

For additional information about the ALLL, see Note 4 to the consolidated financial statements.

Deposits

Average balances and rates paid on deposits were as follows for the periods indicated (dollars in thousands):



	Three Months Ended September 30,								Nine Months Ended September 30,
	2019				2018				2019				2018
	Average Balance		Average Rate Paid		Average Balance		Average Rate Paid		Average Balance		Average Rate Paid		Average Balance		Average Rate Paid
Demand deposits:
Non-interest bearing	$	3,963,955	—	%	$	3,369,393	—	%	$	3,835,248	—	%	$	3,327,521	—	%
Interest bearing	1,872,573		1.42	%	1,592,908		1.13	%	1,783,611		1.39	%	1,604,666		1.07	%
Money market	10,710,621		1.89	%	10,214,843		1.49	%	10,878,975		1.91	%	10,314,470		1.30	%
Savings	196,696		0.23	%	268,405		0.25	%	214,315		0.26	%	296,419		0.26	%
Time	6,845,643		2.41	%	6,728,915		1.90	%	6,898,947		2.37	%	6,507,726		1.71	%
	$	23,589,488	1.67	%	$	22,174,464	1.35	%	$	23,611,096	1.68	%	$	22,050,802	1.19	%

The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $100,000 as of September 30, 2019 (in thousands):



Three months or less	$	590,519
Over three through six months	1,407,226
Over six through twelve months	1,132,179
Over twelve months	215,673
	$	3,345,597

FHLB Advances, Notes and Other Borrowings

In addition to deposits, we utilize FHLB advances to fund growth in interest earning assets; the advances provide us with additional flexibility in managing both term and cost of funding. FHLB advances are secured by FHLB stock, qualifying residential first mortgage and commercial real estate loans, and MBS.

The contractual balance of FHLB advances outstanding at September 30, 2019 is scheduled to mature as follows (in thousands):



Maturing in:
2019—One month or less	$	1,275,000
2019—Over one month	300,000
2020	3,106,000
2021	250,000
Total contractual balance outstanding	4,931,000
Cumulative fair value hedging adjustments	(362		)
Carrying value	$	4,930,638

The table above reflects contractual maturities of outstanding advances, and does not incorporate the impact that interest rate swaps designated as hedges have on the duration of borrowings. See Note 7 to the consolidated financial statements for more information about derivative instruments.

Outstanding senior notes payable and other borrowings consisted of the following at the dates indicated (in thousands):



	September 30, 2019		December 31, 2018
Senior notes	$	394,912	$	394,390
Finance leases	8,920		8,359
	$	403,832	$	402,749

Senior notes have a face amount of $400 million, a fixed coupon rate of 4.875% and mature on November 17, 2025.

The Bank utilizes federal funds purchased to manage the daily cash position. At September 30, 2019, the Company had $175 million in federal funds purchased.

Capital Resources

Pursuant to the FDIA, the federal banking agencies have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. At September 30, 2019 and December 31, 2018, BankUnited and the Company had capital levels that exceeded both the regulatory well-capitalized guidelines and all internal capital ratio targets.

Stockholders' equity remained relatively flat at September 30, 2019 compared to December 31, 2018. The repurchase of common shares and payment of dividends were largely offset by the retention of earnings. Our dividend payout ratio was 27.0% and 28.2% for the three and nine months ended September 30, 2019, respectively, compared to 23.6% and 25.5% for the three and nine months ended September 30, 2018, respectively.

In January 2019, the Company's Board of Directors authorized a now completed repurchase program under which the Company repurchased approximately 4.4 million shares of its common stock for an aggregate purchase price of $150 million, at a weighted average price of $34.39 per share. In September 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. The new repurchase program replaces the Company's prior repurchase program. The following table provides information regarding regulatory capital for the Company and the Bank as of September 30, 2019 (dollars in thousands):



	Actual				Required to be Considered Well Capitalized				Required to be Considered Adequately Capitalized				Required to be Considered Adequately Capitalized Including Capital Conservation Buffer
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
BankUnited, Inc.:
Tier 1 leverage	$	2,858,392	8.66	%	N/A ⁽¹⁾		N/A⁽¹⁾		$	1,320,013	4.00	%	N/A⁽¹⁾		N/A⁽¹⁾
CET1 risk-based capital	$	2,858,392	12.22	%	$	1,520,940	6.50	%	$	1,052,959	4.50	%	$	1,637,936	7.00	%
Tier 1 risk-based capital	$	2,858,392	12.22	%	$	1,871,927	8.00	%	$	1,403,945	6.00	%	$	1,988,922	8.50	%
Total risk based capital	$	2,969,755	12.69	%	$	2,339,908	10.00	%	$	1,871,927	8.00	%	$	2,456,904	10.50	%
BankUnited:
Tier 1 leverage	$	3,010,295	9.14	%	$	1,646,170	5.00	%	$	1,316,936	4.00	%	N/A		N/A
CET1 risk-based capital	$	3,010,295	12.91	%	$	1,515,958	6.50	%	$	1,049,509	4.50	%	$	1,632,570	7.00	%
Tier 1 risk-based capital	$	3,010,295	12.91	%	$	1,865,794	8.00	%	$	1,399,345	6.00	%	$	1,982,406	8.50	%
Total risk based capital	$	3,121,658	13.38	%	$	2,332,242	10.00	%	$	1,865,794	8.00	%	$	2,448,854	10.50	%

1) There is no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company.

Beginning January 1, 2019, the Bank and the Company are required to maintain a capital conservation buffer composed of CET1 capital equal to 2.50% of risk-weighted assets above the amounts required to be adequately capitalized in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers.

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.

BankUnited's liquidity needs have been and continue to be met by cash flows from operations, deposit growth, the investment portfolio and FHLB advances.

For the nine months ended September 30, 2019 and 2018 net cash provided by operating activities was $412.2 million and $403.9 million, respectively. When compared with the nine months ended September 30, 2018, operating cash flows were negatively impacted by approximately $193 million as a result of the daily cash settlement of derivative positions. These settlements, which are reported in cash flows from operating activities, are directly affected by changes in market interest rates. Accretion on ACI loans, which is reflected as a non-cash reduction in net income to arrive at operating cash flows, totaled $49.1 million and $249.6 million for the nine months ended September 30, 2019 and 2018, 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 of ACI 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.

BankUnited has access to additional liquidity through FHLB advances, other collateralized borrowings, wholesale deposits or the sale of available for sale securities. At September 30, 2019, unencumbered investment securities totaled $5.8 billion. At September 30, 2019, BankUnited had available borrowing capacity at the FHLB of $4.0 billion, unused borrowing capacity at the FRB of $476 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 September 30, 2019, BankUnited’s 30-day total liquidity ratio was 207%. 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 September 30, 2019, BankUnited’s one-year liquidity ratio was 168%. 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 September 30, 2019, BankUnited was within acceptable limits established by the ALCO and the Board of Directors for each of these measures. The Company also has a comprehensive contingency liquidity funding plan and conducts a quarterly liquidity stress test, the results of which are reported to the risk committee of the Board of Directors.

As a holding company, BankUnited, Inc. is a corporation separate and apart from its banking subsidiary, and therefore, provides for its own liquidity. BankUnited, Inc.’s main sources of funds include management fees and dividends from the Bank, access to capital markets and, 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

The 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 guidelines established by the ALCO are approved at least annually by the Board of Directors.

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 and economic climate. Currently, our model projects instantaneous rate shocks of down 200, down 100, plus 100, plus 200, plus 300 and plus 400 basis point shifts as well as flattening and inverted yield curve scenarios. We continually evaluate the scenarios being modeled with a view toward adapting them to changing economic conditions, expectations and trends.

The Company’s ALCO policy provides that net interest income sensitivity will be considered acceptable if decreases in forecast net interest income in specified parallel rate shock scenarios 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. Currently, the most likely rate scenario contemplates three 25 basis point rate cuts over the forecast horizon. The following table illustrates the guidelines set forth in the ALCO policy and the impact on forecasted net interest income in the indicated simulated scenarios at September 30, 2019 and December 31, 2018:



	Down 200		Down 100		Plus 100		Plus 200		Plus 300		Plus 400
Policy Guidelines:
In year 1	(10.0	)%	(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	)%
Model Results at September 30, 2019 - increase (decrease):
In year 1	(5.0	)%	(1.9	)%	0.7	%	0.6	%	(0.9	)%	(3.4	)%
In year 2	(9.9	)%	(4.8	)%	2.3	%	4.5	%	5.1	%	4.7	%
Model Results at December 31, 2018 - increase (decrease):
In year 1	(4.3	)%	(0.8	)%	0.3	%	(0.9	)%	(2.4	)%	(5.6	)%
In year 2	(9.7	)%	(3.0	)%	3.6	%	4.4	%	4.0	%	3.1	%

Management also simulates changes in EVE in various interest rate environments. The ALCO policy has established parameters of acceptable risk that are defined in terms of the percentage change in EVE from a base scenario under eight rate scenarios, derived by implementing immediate parallel movements of plus and down 100, 200, 300 and 400 basis points from current rates. We did not simulate decreases in interest rates greater than 200 basis points at September 30, 2019 or December 31, 2018 due to the relatively low level of market interest rates. The following table illustrates the acceptable guidelines as established by ALCO and the modeled change in EVE in the indicated scenarios at September 30, 2019 and December 31, 2018:



	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 September 30, 2019 - increase (decrease):	(5.7	)%	0.2	%	(2.1	)%	(4.9	)%	(8.8	)%	(13.1	)%
Model Results at December 31, 2018 - increase (decrease):	0.6	%	2.5	%	(3.1	)%	(7.5	)%	(12.4	)%	(17.3	)%

These measures fall within an acceptable level of interest rate risk per the guidelines established in the ALCO policy.

Many assumptions were used by the Company to calculate the impact of changes in interest rates, including the change in rates. Actual results may not be similar to the Company’s projections due to several factors including the timing and frequency

of rate changes, market conditions, changes in depositor behavior and the shape of the yield curve. Actual results may also differ due to the Company’s actions, if any, in response to changing rates and conditions.

Derivative Financial Instruments

Interest rate swaps designated as cash flow or fair value hedging instruments are one of the tools we use to manage interest rate risk. These derivative instruments are used to mitigate exposure to changes in interest cash flows on variable rate borrowings and to hedge changes in the fair value of fixed rate borrowings, in each case caused by fluctuations in benchmark interest rates, as well as to manage duration of liabilities. The fair value of derivative instruments designated as hedges is included in other assets and other liabilities in our consolidated balance sheets. Changes in fair value of derivative instruments designated as cash flow hedges are reported in accumulated other comprehensive income. Changes in the fair value of derivative instruments designated as fair value hedges are recognized in earnings, as is the offsetting gain or loss on the hedged item. At September 30, 2019, outstanding interest rate swaps designated as cash flow hedges had an aggregate notional amount of $3.1 billion and outstanding interest rate swaps designated as fair value hedges had an aggregate notional amount of $250 million. The aggregate fair value of interest rate swaps designated as cash flow hedges included in other liabilities was $2.4 million.

Interest rate swaps and caps not designated as hedges had an aggregate notional amount of $2.5 billion at September 30, 2019. The aggregate fair value of these interest rate swaps and caps included in other assets was $56.6 million and the aggregate fair value included in other liabilities was $21.5 million. These interest rate swaps and caps were entered into as accommodations to certain of our commercial borrowers.

See Note 7 to the consolidated financial statements for additional information about derivative financial instruments.

Off-Balance Sheet Arrangements

For more information on contractual obligations and commitments, see Note 11 to the consolidated financial statements, the FHLB Advances, Notes and Other Borrowings section of this MD&A and Off-Balance Sheet Arrangements in the MD&A of the Company's 2018 Annual Report on Form 10-K.

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 base for comparability to other financial institutions. 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 September 30, 2019 (in thousands except share and per share data):



Total stockholders' equity	$	2,909,275
Less: goodwill and other intangible assets	77,685
Tangible stockholders’ equity	$	2,831,590

Common shares issued and outstanding	95,070,399

Book value per common share	$	30.60

Tangible book value per common share	$	29.78

Non-loss share diluted earnings per share is a non-GAAP financial measure. Management believes disclosure of this measure provides readers with information that may be useful in understanding the impact of the covered loans and FDIC indemnification asset on the Company’s earnings for periods prior to the termination of the Single Family Shared-Loss Agreement. The following table reconciles this non-GAAP financial measurement to the comparable GAAP financial measurement of diluted earnings per common share for the three months ended September 30, 2018 (in millions except share and per share data, shares in thousands):



	Three Months Ended September 30, 2018
Net Income (GAAP)	$	97.3
Less Loss Share Contribution	(28.3		)
Net Income as reported, minus Loss Share Contribution	$	69.0
Diluted earnings per common share, excluding Loss Share Contribution:
Diluted earnings per common share (GAAP)	$	0.90
Less: Net impact on diluted earnings per common share of Loss Share Contribution (non-GAAP)	(0.26		)
Non-loss share diluted earnings per common share (non-GAAP)	$	0.64
Non-loss share diluted earnings per share:
Loss Share Contribution	$	28.3
Weighted average shares for diluted earnings per common share (GAAP)	104,384
Impact on diluted earnings per common share of Loss Share Contribution (non-GAAP)	0.27
Impact on diluted earnings per common share of Loss Share Contribution:
Loss Share Contribution, net of tax, allocated to participating securities	(1.0		)
Weighted average shares for diluted earnings per common share (GAAP)	104,384
Impact on diluted earnings per common share of Loss Share Contribution allocated to participating securities (non-GAAP)	(0.01		)
Net impact on diluted earnings per common share of Loss Share Contribution (non-GAAP)	$	0.26

Supplemental Calculations

Calculation of Loss Share Contribution and Non-Loss Share Earnings Per Share

Non-Loss Share Earnings are calculated by removing the total Loss Share Contribution from Net Income. The Loss Share Contribution is a hypothetical presentation of the impact of the covered loans and FDIC indemnification asset on earnings for each respective quarter, reflecting the excess of Loss Share Earnings over hypothetical interest income that could have been earned on alternative assets (in millions except share and per share data):



	Three Months Ended September 30, 2018
Net Income As Reported	$	97.3
Calculation of Loss Share Contribution:
Interest Income - Covered Loans (Accretion)	$	81.3
Net impact of sale of covered loans	10.4
Amortization of FDIC Indemnification Asset	(48.3		)
Loss Share Earnings	43.4
Hypothetical interest income on alternate assets ⁽¹⁾	(4.9		)
Loss Share Contribution, pre-tax	38.5
Income taxes ⁽²⁾	(10.2		)
Loss Share Contribution, after tax	$	28.3

Net Income as reported, minus Loss Share Contribution	$	69.0

Diluted Earnings Per Common Share, as Reported	$	0.90
Earnings Per Share, Loss Share Contribution	(0.26		)
Non-Loss Share Diluted Earnings Per Share	$	0.64


(1)	See section entitled "Supplemental Calculations - Calculation of Hypothetical Interest Income on Alternate Assets" below for calculation of these amounts and underlying assumptions.

(2) An assumed marginal tax rate of 26.5% was applied.

Calculation of Hypothetical Interest Income on Alternate Assets

The hypothetical interest income calculated below reflects the estimated income that may have been earned if the average balance of covered loans and the FDIC indemnification asset were liquidated and the proceeds assumed to be invested in securities at the weighted average yield on the Company’s investment securities portfolio as reported. Historically, cash received from the repayment, sale, or other resolution of covered loans and cash payments received from the FDIC under the terms of the Shared Loss Agreement have generally been reinvested in non-covered loans or investment securities. There is no assurance that the hypothetical results illustrated below would have been achieved if the covered loans and FDIC indemnification asset had been liquidated and proceeds reinvested (dollars in millions):



	Three Months Ended September 30, 2018
Average Balances ⁽¹⁾
Average Covered Loans	$	408
Average FDIC Indemnification Asset	170
Average Loss Share Asset	$	578

Yield
Yield on securities - reported ⁽²⁾	3.41		%
Hypothetical interest income on alternate assets	$	4.9


(1)	Calculated as the simple average of beginning and ending balances reported for each period.

(2) The weighted average yield on the Company’s investment securities as reported for the applicable quarter.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective.

During the quarter ended September 30, 2019, there were no changes in the Company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved as plaintiff or defendant in various legal actions arising in the normal course of business. In the opinion of management, based upon currently available information and the advice of legal counsel, the likelihood is remote that the impact of these proceedings, either individually or in the aggregate, would be material to the Company’s consolidated financial position, results of operations or cash flows.

We received a subpoena from the United States Department of Justice in October 2019 requesting documentation related to the taxi medallion line of business formerly conducted by the Bank. We are cooperating with this investigation.

Item 1A. Risk Factors

Possible replacement of the LIBOR benchmark interest rate may have an impact on our business, financial condition and results of operations.

In July 2017, the Financial Conduct Authority, a regulator of financial services firms in the United Kingdom, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The announcement indicated that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. At this time, no final consensus exists as to what rate or rates may become acceptable alternatives to LIBOR, although alternative reference rates such as SOFR are under consideration, and it is impossible to predict 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. There is uncertainty with respect to the impact a potential discontinuation of LIBOR may have on credit, securities and derivatives markets broadly. 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 markets in which we lend to customers and 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 LIBOR of the substitute indices, which could have an adverse effect on our results of operations.

Management is in the process of evaluating the impact of the Company's possible transition from LIBOR to an alternative reference rate. To date, the Company has completed a gap assessment, identified the population of its current exposures to LIBOR-indexed instruments and the systems and models that may be impacted by the transition, established a formal governance structure for its LIBOR transition, updated the standard fall-back language incorporated in new bilateral loan agreements, and has prepared and is in the process of executing a detailed implementation plan.

There have been no material changes in the other risk factors disclosed by the Company in its 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds



	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⁾
July 1 - July 31, 2019	236,990	$	33.48	236,990	$	—
August 1 - August 31, 2019	—	—		—	$	—
September 1 - September 30, 2019	—	—		—	$	150,000,000
Total	236,990	$	33.48	236,990


(1)	The total number of shares purchased during the periods indicated includes shares purchased as part of a publicly announced program.

(2)

On September 12, 2019, the Company's Board of Directors authorized a share repurchase program under which the Company may repurchase up to $150 million of its outstanding common stock. No time limit was set for the completion of the share repurchase program. The authorization does not require the Company to acquire any specified number of common shares and may be commenced, suspended or discontinued without prior notice. Under this authorization, $150,000,000 remained available for purchase at September 30, 2019.

Item 6.

Exhibits



Exhibit Number	Description	Location

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

101.INS	The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document	Filed herewith

101.SCH	XBRL Taxonomy Extension Schema	Filed herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase	Filed herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase	Filed herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase	Filed herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase	Filed herewith

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized this 8th day of November 2019.



	/s/ Rajinder P. Singh
	Rajinder P. Singh
	Chairman, President and Chief Executive Officer


	/s/ Leslie N. Lunak
	Leslie N. Lunak
	Chief Financial Officer

Exhibit

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Rajinder P. Singh, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of BankUnited, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;


c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



/s/ Rajinder P. Singh
Rajinder P. Singh
Chairman, President and Chief Executive Officer
Date: November 8, 2019

Exhibit

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Leslie N. Lunak, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of BankUnited, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;


c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



/s/ Leslie N. Lunak
Leslie N. Lunak
Chief Financial Officer
Date: November 8, 2019

Exhibit

Exhibit 32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of BankUnited, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rajinder P. Singh, as Chief Executive Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


1)	The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and


2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ Rajinder P. Singh
Rajinder P. Singh
Chairman, President and Chief Executive Officer

Date: November 8, 2019

Exhibit

Exhibit 32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of BankUnited, Inc. (the “Company”) on Form 10-Q for the year ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leslie N. Lunak, as Chief Financial Officer of the Company, certify, to the best of my knowledge, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


1)	The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and


2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ Leslie N. Lunak
Leslie N. Lunak
Chief Financial Officer

Date: November 8, 2019