Document

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

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

 For the quarterly period ended March 31, 2018
OR 
o                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from              to 
Commission File Number: 001-35039 

BankUnited, Inc.
(Exact name of registrant as specified in its charter) 
Delaware
 
27-0162450
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
14817 Oak Lane, Miami Lakes, FL
 
33016
(Address of principal executive offices)
 
(Zip Code)
 Registrant’s telephone number, including area code: (305) 569-2000 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý  No  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer ý
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
Class
 
May 4, 2018
Common Stock, $0.01 Par Value
 
106,069,384
 


Table of Contents

BANKUNITED, INC.
Form 10-Q
For the Quarter Ended March 31, 2018
TABLE OF CONTENTS

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


i


GLOSSARY OF DEFINED TERMS

The following acronyms and terms may be used throughout this Form 10-Q, including the consolidated financial statements and related notes.
ACI
 
Loans acquired with evidence of deterioration in credit quality since origination (Acquired Credit Impaired)
AFS
 
Available for sale
ALCO
 
Asset/Liability Committee
ALLL
 
Allowance for loan and lease losses
AOCI
 
Accumulated other comprehensive income
ARM
 
Adjustable rate mortgage
ASC
 
Accounting Standards Codification
ASU
 
Accounting Standards Update
ATM
 
Automated teller machine
BKU
 
BankUnited, Inc.
BankUnited
 
BankUnited, National Association
The Bank
 
BankUnited, National Association
Bridge
 
Bridge Funding Group, Inc.
CET1
 
Common Equity Tier 1 capital
CECL
 
Current expected credit loss
CFPB
 
Consumer Financial Protection Bureau
CME
 
Chicago Mercantile Exchange
CMOs
 
Collateralized mortgage obligations
Commercial Shared-Loss Agreement
 
A commercial and other loans shared-loss agreement entered into with the FDIC in connection with the FSB Acquisition
Covered assets
 
Assets covered under the Loss Sharing Agreements
Covered loans
 
Loans covered under the Loss Sharing Agreements
EVE
 
Economic value of equity
FASB
 
Financial Accounting Standards Board
FDIA
 
Federal Deposit Insurance Act
FDIC
 
Federal Deposit Insurance Corporation
FHLB
 
Federal Home Loan Bank
FICO
 
Fair Isaac Corporation (credit score)
FNMA
 
Federal National Mortgage Association
FRB
 
Federal Reserve Bank
FSB Acquisition
 
Acquisition of substantially all of the assets and assumption of all of the non-brokered deposits and substantially all of the other liabilities of BankUnited, FSB from the FDIC on May 21, 2009
GAAP
 
U.S. generally accepted accounting principles
GDP
 
Gross Domestic Product
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

ii


MSA
 
Metropolitan Statistical Area
MSRs
 
Mortgage servicing rights
Non-ACI
 
Loans acquired without evidence of deterioration in credit quality since origination
Non-Covered Loans
 
Loans other than those covered under the Loss Sharing Agreements
NYTLC
 
New York City Taxi and Limousine Commission
OCC
 
Office of the Comptroller of the Currency
OFAC
 
U.S. Department of the Treasury's Office of Foreign Assets Control
OREO
 
Other real estate owned
OTTI
 
Other-than-temporary impairment
PSU
 
Performance Share Unit
Pinnacle
 
Pinnacle Public Finance, Inc.
RSU
 
Restricted Share Unit
SBA
 
U.S. Small Business Administration
SBF
 
Small Business Finance Unit
SEC
 
Securities and Exchange Commission
Single Family Shared-Loss Agreement
 
A single-family loan shared-loss agreement entered into with the FDIC in connection with the FSB Acquisition
TCJA
 
The Tax Cuts and Jobs Act of 2017
TDR
 
Troubled-debt restructuring
UPB
 
Unpaid principal balance
2014 Plan
 
2014 Omnibus Equity Incentive Plan


iii

Table of Contents

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)
 
March 31,
2018
 
December 31,
2017
ASSETS
 

 
 

Cash and due from banks:
 

 
 

Non-interest bearing
$
22,908

 
$
35,246

Interest bearing
176,842

 
159,336

Cash and cash equivalents
199,750

 
194,582

Investment securities (including securities recorded at fair value of $6,745,501 and $6,680,832)
6,755,501

 
6,690,832

Non-marketable equity securities
250,052

 
265,989

Loans held for sale
46,494

 
34,097

Loans (including covered loans of $479,164 and $503,118)
21,466,821

 
21,416,504

Allowance for loan and lease losses
(137,476
)
 
(144,795
)
Loans, net
21,329,345

 
21,271,709

FDIC indemnification asset
249,637

 
295,635

Bank owned life insurance
260,852

 
252,462

Equipment under operating lease, net
591,339

 
599,502

Goodwill and other intangible assets
77,751

 
77,796

Other assets
671,815

 
664,382

Total assets
$
30,432,536

 
$
30,346,986

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Liabilities:
 

 
 

Demand deposits:
 

 
 

Non-interest bearing
$
3,431,624

 
$
3,162,032

Interest bearing
1,553,886

 
1,666,581

Savings and money market
10,937,578

 
10,715,024

Time
6,316,560

 
6,334,842

Total deposits
22,239,648

 
21,878,479

Federal Home Loan Bank advances
4,396,000

 
4,771,000

Notes and other borrowings
402,816

 
402,830

Other liabilities
361,400

 
268,615

Total liabilities
27,399,864

 
27,320,924

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Stockholders' equity:
 

 
 

Common stock, par value $0.01 per share, 400,000,000 shares authorized; 106,160,751 and 106,848,185 shares issued and outstanding
1,061

 
1,068

Paid-in capital
1,450,107

 
1,498,227

Retained earnings
1,525,174

 
1,471,781

Accumulated other comprehensive income
56,330

 
54,986

Total stockholders' equity
3,032,672

 
3,026,062

Total liabilities and stockholders' equity
$
30,432,536

 
$
30,346,986

 

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

BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands, except per share data)
 
Three Months Ended March 31,
 
2018
 
2017
Interest income:
 

 
 

Loans
$
274,000

 
$
236,362

Investment securities
49,985

 
43,719

Other
3,791

 
3,457

Total interest income
327,776

 
283,538

Interest expense:
 
 
 
Deposits
56,361

 
34,728

Borrowings
23,606

 
18,217

Total interest expense
79,967

 
52,945

Net interest income before provision for loan losses
247,809

 
230,593

Provision for loan losses (including $273 and $779 for covered loans)
3,147

 
12,100

Net interest income after provision for loan losses
244,662

 
218,493

Non-interest income:
 
 
 
Income from resolution of covered assets, net
3,317

 
7,305

Net loss on FDIC indemnification
(3,615
)
 
(6,748
)
Deposit service charges and fees
3,487

 
3,203

Gain on sale of loans, net (including $1,703 and $1,882 related to covered loans)
3,501

 
4,558

Gain on investment securities, net
364

 
1,636

Lease financing
14,102

 
13,639

Other non-interest income
6,830

 
4,551

Total non-interest income
27,986

 
28,144

Non-interest expense:
 
 
 
Employee compensation and benefits
67,036

 
59,671

Occupancy and equipment
18,832

 
18,609

Amortization of FDIC indemnification asset
40,347

 
44,463

Deposit insurance expense
4,812

 
5,475

Professional fees
2,875

 
5,040

Telecommunications and data processing
3,685

 
3,284

Depreciation of equipment under operating lease
9,316

 
8,017

Other non-interest expense
14,914

 
11,998

Total non-interest expense
161,817

 
156,557

Income before income taxes
110,831

 
90,080

Provision for income taxes
25,596

 
27,787

Net income
$
85,235

 
$
62,293

Earnings per common share, basic
$
0.78

 
$
0.57

Earnings per common share, diluted
$
0.77

 
$
0.57

Cash dividends declared per common share
$
0.21

 
$
0.21


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

BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
(In thousands)
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
Net income
$
85,235

 
$
62,293

Other comprehensive income (loss), net of tax:
 
 
 

Unrealized gains on investment securities available for sale:
 
 
 

Net unrealized holding gain (loss) arising during the period
(27,324
)
 
16,177

Reclassification adjustment for net securities gains realized in income
(717
)
 
(990
)
Net change in unrealized gains on securities available for sale
(28,041
)
 
15,187

Unrealized gains on derivative instruments:
 
 
 

Net unrealized holding gain arising during the period
19,793

 
431

Reclassification adjustment for net losses realized in income
690

 
1,749

Net change in unrealized gains on derivative instruments
20,483

 
2,180

Other comprehensive income (loss)
(7,558
)
 
17,367

Comprehensive income
$
77,677

 
$
79,660



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

BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income
$
85,235

 
$
62,293

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization and accretion, net
(34,053
)
 
(23,920
)
Provision for loan losses
3,147

 
12,100

Income from resolution of covered assets, net
(3,317
)
 
(7,305
)
Net loss on FDIC indemnification
3,615

 
6,748

Gain on sale of loans, net
(3,501
)
 
(4,558
)
Gain on investment securities, net
(364
)
 
(1,636
)
Equity based compensation
6,783

 
4,997

Depreciation and amortization
15,632

 
14,594

Deferred income taxes
13,320

 
(1,990
)
Proceeds from sale of loans held for sale
25,407

 
43,202

Loans originated for sale, net of repayments
(36,730
)
 
(32,066
)
Other:
 
 
 
Decrease in other assets
5,246

 
14,720

Increase (decrease) in other liabilities
57,674

 
(51,771
)
Net cash provided by operating activities
138,094

 
35,408

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchase of investment securities
(637,171
)
 
(659,974
)
Proceeds from repayments and calls of investment securities
272,360

 
139,192

Proceeds from sale of investment securities
266,930

 
261,555

Purchase of non-marketable equity securities
(64,813
)
 
(38,675
)
Proceeds from redemption of non-marketable equity securities
80,750

 
58,438

Purchases of loans
(332,966
)
 
(339,909
)
Loan originations, repayments and resolutions, net
289,823

 
290,728

Proceeds from sale of loans, net
62,185

 
45,414

Proceeds from sale of equipment under operating lease, net
13,405

 

Acquisition of equipment under operating lease, net
(14,035
)
 
(27,337
)
Other investing activities
(12,937
)
 
(4,624
)
Net cash used in investing activities
(76,469
)
 
(275,192
)
 
 
 
(Continued)


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

BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from financing activities:
 

 
 

Net increase in deposits
361,169

 
433,474

Additions to Federal Home Loan Bank advances
1,201,000

 
1,225,000

Repayments of Federal Home Loan Bank advances
(1,576,000
)
 
(1,690,000
)
Dividends paid
(23,055
)
 
(22,510
)
Exercise of stock options
1,092

 
61,519

Repurchase of common stock
(48,632
)
 

Other financing activities
27,969

 
23,405

Net cash provided by (used in) financing activities
(56,457
)
 
30,888

Net increase (decrease) in cash and cash equivalents
5,168

 
(208,896
)
Cash and cash equivalents, beginning of period
194,582

 
448,313

Cash and cash equivalents, end of period
$
199,750

 
$
239,417

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
73,906

 
$
46,152

Income taxes paid, net
$
18,092

 
$
29,598

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Dividends declared, not paid
$
22,940

 
$
23,040

Unsettled purchases of investment securities
$
47,760

 
$
55,500


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

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

 

 

 
85,235

 
(7,558
)
 
77,677

Dividends

 

 

 
(22,940
)
 

 
(22,940
)
Equity based compensation
640,040

 
6

 
5,378

 

 

 
5,384

Forfeiture of unvested shares and shares surrendered for tax withholding obligations
(167,534
)
 
(2
)
 
(5,969
)
 

 

 
(5,971
)
Exercise of stock options
40,500

 
1

 
1,091

 

 

 
1,092

Repurchase of common stock
(1,200,440
)
 
(12
)
 
(48,620
)
 

 

 
(48,632
)
Balance at March 31, 2018
106,160,751

 
$
1,061

 
$
1,450,107

 
$
1,525,174

 
$
56,330

 
$
3,032,672

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
104,166,945

 
$
1,042

 
$
1,426,459

 
$
949,681

 
$
41,247

 
$
2,418,429

Comprehensive income

 

 

 
62,293

 
17,367

 
79,660

Dividends

 

 

 
(23,040
)
 

 
(23,040
)
Equity based compensation
576,999

 
6

 
3,042

 

 

 
3,048

Forfeiture of unvested shares and shares surrendered for tax withholding obligations
(208,855
)
 
(3
)
 
(6,599
)
 

 

 
(6,602
)
Exercise of stock options
2,304,108

 
23

 
61,496

 

 

 
61,519

Balance at March 31, 2017
106,839,197

 
$
1,068

 
$
1,484,398

 
$
988,934

 
$
58,614

 
$
2,533,014

 


The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018



Note 1    Basis of Presentation and Summary of Significant Accounting Policies
BankUnited, Inc. is a national bank holding company with one wholly-owned subsidiary, BankUnited, collectively, the Company. BankUnited, a national banking association headquartered in Miami Lakes, Florida, provides a full range of banking and related services to individual and corporate customers through 87 banking centers located in 15 Florida counties and 6 banking centers located in the New York metropolitan area at March 31, 2018. The Bank also offers certain commercial lending and deposit products through national platforms.
In connection with the FSB Acquisition, BankUnited entered into two loss sharing agreements with the FDIC. The Loss Sharing Agreements consist of the Single Family Shared-Loss Agreement and the Commercial Shared-Loss Agreement. Assets covered by the Loss Sharing Agreements are referred to as covered assets or, in certain cases, covered loans. The Single Family Shared-Loss Agreement provides for FDIC loss sharing and the Bank’s reimbursement for recoveries to the FDIC through May 21, 2019 for single family residential loans and OREO. Loss sharing under the Commercial Shared-Loss Agreement terminated on May 21, 2014. The Commercial Shared-Loss Agreement continued to provide for the Bank’s reimbursement of recoveries to the FDIC through June 30, 2017 for all other covered assets, including commercial real estate, commercial and industrial and consumer loans, certain investment securities and commercial OREO. Pursuant to the terms of the Loss Sharing Agreements, the covered assets are subject to a stated loss threshold whereby the FDIC will reimburse BankUnited for 80% of losses related to the covered assets up to $4.0 billion and 95% of losses in excess of this amount, beginning with the first dollar of loss incurred.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, these do not include all of the information and footnotes required for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in BKU’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected in future periods. 
Certain amounts presented for prior periods have been reclassified to conform to the current period presentation.
Accounting Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosures of contingent assets and liabilities. Actual results could differ significantly from these estimates.
Significant estimates include the ALLL, the amount and timing of expected cash flows from covered assets and the FDIC indemnification asset, and the fair values of investment securities and other financial instruments. Management has used information provided by third party valuation specialists to assist in the determination of the fair values of investment securities.
New Accounting Pronouncements Adopted
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), superseded the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Accounting Standards Codification. The amendments in this update affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other standards. The amendments establish a core principle requiring the recognition of revenue to depict the transfer of goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services and require expanded disclosure about revenue from contracts with customers that are within the scope of the standard. Revenue from financial instruments and lease contracts are generally outside the scope of Topic 606 as are revenues that are in the scope of ASC 860 "Transfers and Servicing", ASC 460 "Guarantees" and ASC 815 "Derivatives and Hedging". The Company adopted this standard in the first quarter of 2018 with respect to contracts not completed on the date of adoption using the modified retrospective transition method. Substantially all of the Company's revenues are generated from activities outside the scope of Topic 606; existing revenue recognition policies for contracts with

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Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


customers that are within the scope of the standard are consistent with the principles in Topic 606. Therefore, there was no impact at adoption to the Company's consolidated financial position, results of operations, or cash flows.
ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in the ASU address certain aspects of recognition, measurement, presentation and disclosure of certain financial instruments. The main provisions of this ASU that are applicable to the Company are to 1) eliminate the available for sale classification for equity securities and require investments in equity securities (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, provided that equity investments that do not have readily determinable fair values may be re-measured at fair value upon occurrence of an observable price change or recognition of impairment, 2) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, and 3) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments also clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets, which is consistent with the Company's current practice. The Company adopted this ASU in the first quarter of 2018 using the modified retrospective transition method. The cumulative-effect adjustment to reclassify unrealized gains on equity securities from AOCI to retained earnings totaled $2.2 million, net of tax, at adoption. Unrealized losses on equity securities recognized in earnings totaled $0.6 million for the three months ended March 31, 2018.
ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This amendment provided guidance on eight specific cash flow classification issues where there had been diversity in practice. The provisions of this ASU that are expected to be applicable to the Company include requirements to: (1) classify cash payments for debt prepayment or extinguishment costs to be classified as cash outflows for financing activities, (2) classify proceeds from settlement of insurance claims on the basis of the nature of the loss and (3) require cash payments from settlement of bank-owned life insurance policies to be classified as cash flows from investing activities. The Company adopted this ASU for the first quarter of 2018; the provisions of the ASU are generally consistent with the Company's practice, therefore, adoption did not have an impact on the Company's consolidated cash flows.
ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from AOCI to retained earnings of stranded tax effects in AOCI resulting from enactment of the TCJA that reduced the statutory federal tax rate from 35 percent to 21 percent. The Company’s existing accounting policy is to release stranded tax effects only when the entire portfolio of the type of item that created them is liquidated. This ASU was early adopted effective January 1, 2018 and a cumulative-effect adjustment was recorded to reclassify stranded tax effects totaling $11.1 million from AOCI to retained earnings.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU require a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for leases with terms longer than one year. Accounting applied by lessors is largely unchanged by this ASU. The amendments in this ASU are effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2018. Early adoption is permitted; however, the Company does not intend to early adopt this ASU. Lessees and lessors are required to apply the provisions of the ASU at the beginning of the earliest period presented using a modified retrospective approach. Management is in the process of finalizing its evaluation of the impact of adoption of this ASU on its consolidated financial statements, processes and controls. The Company has acquired and implemented software to facilitate calculation and reporting of the lease liability and right-of-use asset. Certain accounting policy decisions have been made including use of the incremental borrowing rate to determine the discount rate and assumptions around inclusion of renewals in lease terms. The most significant impact of adoption is expected to be the recognition, as lessee, of new right-of-use assets and lease liabilities on the consolidated balance sheet for real estate leases currently classified as operating leases. At its November 29, 2017 meeting, the FASB proposed allowing entities the option of applying the provisions of the ASU at the effective date without adjusting the comparative periods presented. The Company is monitoring these and other proposed modifications to the requirements of this ASU.

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. The ASU introduces new guidance which makes substantive changes to the accounting for credit losses. The ASU introduces the CECL model which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. This includes loans, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities. The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions and reasonable and supportable forecasts, and is generally expected to result in earlier recognition of credit losses. The ASU also modifies certain provisions of the current OTTI model for AFS debt securities. Credit losses on AFS debt securities will be limited to the difference between the security's amortized cost basis and its fair value, and will be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. The ASU also provides for a simplified accounting model for purchased financial assets with more than insignificant credit deterioration since their origination. The ASU requires expanded disclosures including, but not limited to, (i) information about the methods and assumptions used to estimate expected credit losses, including changes in the factors that influenced management's estimate and the reasons for those changes, (ii) for financing receivables and net investment in leases measured at amortized cost, further disaggregation of information about the credit quality of those assets and (iii) a rollforward of the allowance for credit losses for AFS and HTM securities. The amendments in this ASU are effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted; however, the Company does not intend to early adopt this ASU. Management is in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements, processes and controls and is not currently able to reasonably estimate the impact of adoption on the Company's consolidated financial position, results of operations or cash flows; however, adoption is likely to lead to significant changes in accounting policies related to, and the methods employed in estimating, the ALLL. It is possible that the impact will be material to the Company's consolidated financial position and results of operations. To date, the Company has completed a gap analysis, adopted a detailed implementation plan, established a formal governance structure for the project, selected and implemented credit loss models for key portfolio segments, chosen loss estimation methodologies for key portfolio segments, and selected a software solution to serve as its CECL platform.
Revenue From Contracts with Customers
Revenue from contracts with customers within the scope of Topic 606 "Revenue from Contracts with Customers", is recognized in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services as the related performance obligations are satisfied. The majority of our revenues, including revenues from loans, leases, investment securities, derivative instruments and letters of credit and from transfers and servicing of financial assets, are excluded from the scope of Topic 606. Deposit service charges and fees is the most significant category of revenue within the scope of the standard. These service charges and fees consist primarily of monthly maintenance fees and other transaction based fees. Revenue is recognized when our performance obligations are complete, generally monthly for account maintenance fees or when a transaction, such as a wire transfer, is completed. Payment is typically received at the time the performance obligation is satisfied. The aggregate amount of revenue that is within the scope of Topic 606 from sources other than deposit service charges and fees is not material.
Investment Securities
Investment securities include debt securities and marketable equity securities. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Debt securities that the Company may not have the intent to hold to maturity are classified as available for sale at the time of acquisition and carried at fair value with unrealized gains and losses, net of tax, excluded from earnings and reported in AOCI. Marketable equity securities with readily determinable fair values are reported at fair value with unrealized gains and losses included in earnings. Equity securities that do not have readily determinable fair values are reported at cost and re-measured at fair value upon occurrence of an observable price change or recognition of impairment.

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


Note 2    Earnings Per Common Share
The computation of basic and diluted earnings per common share is presented below for the periods indicated (in thousands, except share and per share data):
 
Three Months Ended March 31,
c
2018

2017
Basic earnings per common share:
 

 
 
Numerator:
 

 
 
Net income
$
85,235

 
$
62,293

Distributed and undistributed earnings allocated to participating securities
(3,216
)
 
(2,323
)
Income allocated to common stockholders for basic earnings per common share
$
82,019

 
$
59,970

Denominator:
 
 
 
Weighted average common shares outstanding
106,525,883

 
105,817,669

Less average unvested stock awards
(1,108,434
)
 
(1,060,912
)
Weighted average shares for basic earnings per common share
105,417,449

 
104,756,757

Basic earnings per common share
$
0.78

 
$
0.57

Diluted earnings per common share:
 
 
 
Numerator:
 
 
 
Income allocated to common stockholders for basic earnings per common share
$
82,019

 
$
59,970

Adjustment for earnings reallocated from participating securities
11

 
8

Income used in calculating diluted earnings per common share
$
82,030

 
$
59,978

Denominator:
 
 
 
Weighted average shares for basic earnings per common share
105,417,449

 
104,756,757

Dilutive effect of stock options and executive share-based awards
516,161

 
620,761

Weighted average shares for diluted earnings per common share
105,933,610

 
105,377,518

Diluted earnings per common share
$
0.77

 
$
0.57

Included in participating securities above are unvested shares and 3,023,314 dividend equivalent rights outstanding at March 31, 2018 that were issued in conjunction with the IPO of the Company's common stock. These dividend equivalent rights expire in 2021 and participate in dividends on a one-for-one basis.
The following potentially dilutive securities were outstanding at March 31, 2018 and 2017, but excluded from the calculation of diluted earnings per common share for the periods indicated because their inclusion would have been anti-dilutive: 
 
Three Months Ended March 31,
 
2018
 
2017
Unvested shares and share units
1,614,379

 
1,405,842

Stock options and warrants
1,850,279

 
1,850,279

 

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


Note 3    Investment Securities
Investment securities include investment securities available for sale, marketable equity securities, and investment securities held to maturity. The investment securities available for sale portfolio consisted of the following at the dates indicated (in thousands):
 
March 31, 2018
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
24,993

 
$

 
$
(20
)
 
$
24,973

U.S. Government agency and sponsored enterprise residential MBS
2,043,011

 
23,499

 
(2,763
)
 
2,063,747

U.S. Government agency and sponsored enterprise commercial MBS
228,592

 
629

 
(1,429
)
 
227,792

Private label residential MBS and CMOs
716,690

 
12,513

 
(8,505
)
 
720,698

Private label commercial MBS
1,101,377

 
8,656

 
(2,947
)
 
1,107,086

Single family rental real estate-backed securities
469,927

 
2,093

 
(2,012
)
 
470,008

Collateralized loan obligations
820,453

 
3,176

 

 
823,629

Non-mortgage asset-backed securities
233,927

 
1,687

 
(1,340
)
 
234,274

State and municipal obligations
476,816

 
4,978

 
(3,710
)
 
478,084

SBA securities
511,459

 
11,661

 
(284
)
 
522,836

Other debt securities
4,122

 
5,382

 

 
9,504

 
$
6,631,367

 
$
74,274

 
$
(23,010
)
 
$
6,682,631

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

 
$

 
$
(28
)
 
$
24,953

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

 
16,094

 
(1,440
)
 
2,058,027

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

 
1,330

 
(344
)
 
234,508

Private label residential MBS and CMOs
613,732

 
16,473

 
(1,958
)
 
628,247

Private label commercial MBS
1,033,022

 
13,651

 
(258
)
 
1,046,415

Single family rental real estate-backed securities
559,741

 
3,823

 
(858
)
 
562,706

Collateralized loan obligations
720,429

 
3,252

 

 
723,681

Non-mortgage asset-backed securities
119,939

 
1,808

 

 
121,747

Marketable equity securities
59,912

 
3,631

 

 
63,543

State and municipal obligations
640,511

 
17,606

 
(914
)
 
657,203

SBA securities
534,534

 
16,208

 
(60
)
 
550,682

Other debt securities
4,090

 
5,030

 

 
9,120

 
$
6,587,786

 
$
98,906

 
$
(5,860
)
 
$
6,680,832

Marketable equity securities, recorded at fair value, totaled $62.9 million and $63.5 million, at March 31, 2018 and December 31, 2017, respectively. Investment securities held to maturity at March 31, 2018 and December 31, 2017 consisted of one State of Israel bond with a carrying value of $10 million maturing in 2024. Fair value approximated carrying value at March 31, 2018 and December 31, 2017.

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


At March 31, 2018, contractual maturities of investment securities, adjusted for anticipated prepayments of mortgage-backed and other pass-through securities, were as follows (in thousands):
 
Amortized Cost
 
Fair Value
Due in one year or less
$
733,520

 
$
741,171

Due after one year through five years
3,309,440

 
3,332,397

Due after five years through ten years
2,156,579

 
2,171,139

Due after ten years
431,828

 
437,924

Marketable equity securities with no stated maturity
62,870

 
62,870

 
$
6,694,237

 
$
6,745,501

Based on the Company’s assumptions, the estimated weighted average life of the investment portfolio as of March 31, 2018 was 4.8 years. The effective duration of the investment portfolio as of March 31, 2018 was 1.5 years. The model results are based on assumptions that may differ from actual results. 
The carrying value of securities pledged as collateral for FHLB advances, public deposits, interest rate swaps and to secure borrowing capacity at the FRB totaled $2.5 billion and $2.6 billion at March 31, 2018 and December 31, 2017, respectively.
The following table provides information about gains and losses on investment securities for the periods indicated (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Proceeds from sale of investment securities available for sale
$
266,930

 
$
261,555

 
 
 
 
Gross realized gains:
 
 
 
Investment securities available for sale
3,488

 
1,636

Gross realized losses:
 
 
 
Investment securities available for sale
(2,511
)
 

Net realized gain
977

 
1,636

 
 
 
 
Net unrealized losses on marketable equity securities recognized in earnings
(613
)
 

 
 
 
 
Gain on investment securities, net
$
364

 
$
1,636



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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


The following tables present the aggregate fair value and the aggregate amount by which amortized cost exceeded fair value for investment securities available for sale in unrealized loss positions, aggregated by investment category and length of time that individual securities had been in continuous unrealized loss positions at the dates indicated (in thousands):
 
March 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
$
24,973

 
$
(20
)
 
$

 
$

 
$
24,973

 
$
(20
)
U.S. Government agency and sponsored enterprise residential MBS
167,526

 
(2,302
)
 
12,424

 
(461
)
 
179,950

 
(2,763
)
U.S. Government agency and sponsored enterprise commercial MBS
59,325

 
(1,429
)
 

 

 
59,325

 
(1,429
)
Private label residential MBS and CMOs
543,348

 
(8,325
)
 
4,458

 
(180
)
 
547,806

 
(8,505
)
Private label commercial MBS
214,182

 
(2,947
)
 

 

 
214,182

 
(2,947
)
Single family rental real estate-backed securities
130,009

 
(2,012
)
 

 

 
130,009

 
(2,012
)
Non-mortgage asset-backed securities
136,491

 
(1,340
)
 

 

 
136,491

 
(1,340
)
State and municipal obligations
243,458

 
(3,233
)
 
16,298

 
(477
)
 
259,756

 
(3,710
)
SBA securities
67,488

 
(244
)
 
14,382

 
(40
)
 
81,870

 
(284
)
 
$
1,586,800

 
$
(21,852
)
 
$
47,562

 
$
(1,158
)
 
$
1,634,362

 
$
(23,010
)
 
December 31, 2017
 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. Treasury securities
$
24,953

 
$
(28
)
 
$

 
$

 
$
24,953

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

 
(1,141
)
 
13,028

 
(299
)
 
484,148

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

 
(344
)
 

 

 
26,265

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

 
(1,858
)
 
5,083

 
(100
)
 
335,151

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

 
(258
)
 

 

 
81,322

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

 
(858
)
 

 

 
94,750

 
(858
)
State and municipal obligations
30,715

 
(49
)
 
60,982

 
(865
)
 
91,697

 
(914
)
SBA securities
21,300

 
(10
)
 
15,427

 
(50
)
 
36,727

 
(60
)
 
$
1,080,493

 
$
(4,546
)
 
$
94,520

 
$
(1,314
)
 
$
1,175,013

 
$
(5,860
)
The Company monitors its investment securities available for sale for OTTI on an individual security basis. No securities were determined to be other-than-temporarily impaired during the three months ended March 31, 2018 and 2017. The Company does not intend to sell securities that are in significant unrealized loss positions at March 31, 2018 and it is not more likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis, which may be at maturity. At March 31, 2018, 118 securities were in unrealized loss positions. The amount of impairment related to 24 of these

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


securities was considered insignificant, totaling approximately $309 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 March 31, 2018, twenty-five U.S. Government agency and sponsored enterprise residential MBS and six U.S. Government agency and sponsored enterprise commercial MBS were in unrealized loss positions. For twenty-nine fixed rate securities, the amount of impairment for each of the securities was 5% or less of amortized cost and was primarily attributable to an increase in medium and long-term market interest rates subsequent to the date of acquisition. For the remaining two variable rate securities, the amount of impairment was less than 3% of amortized cost. The timely payment of principal and interest on these securities is explicitly or implicitly guaranteed by the U.S. Government. Given the limited severity of impairment and the expectation of timely payment of principal and interest, the impairments were considered to be temporary.
Private label residential MBS and CMOs
At March 31, 2018, twenty-three private label residential MBS and CMOs were in unrealized loss positions, primarily as a result of an increase in medium and long-term market interest rates subsequent to acquisition. The amount of impairment of each of the individual securities was less than 5% of amortized cost. 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 March 31, 2018. Given the limited severity of impairment and the expectation of timely recovery of outstanding principal, the impairments were considered to be temporary.
Private label commercial MBS
At March 31, 2018, ten private label commercial MBS were in unrealized loss positions, primarily as a result of an increase in market interest rates. The amount of impairment of each of the individual securities was 3% or less of amortized cost. These securities were assessed for OTTI using credit and prepayment behavioral models incorporating assumptions consistent with the collateral characteristics of each security. The results of this analysis were not indicative of expected credit losses. Given the limited severity of impairment and the expectation of timely recovery of outstanding principal, the impairments were considered to be temporary.
Single family rental real estate-backed securities
At March 31, 2018, seven single family rental real estate-backed securities were in unrealized loss positions. The unrealized losses were primarily due to increases in market interest rates since the purchase of the securities. The amount of impairment of each of the individual securities was less than 3% of amortized cost. 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 limited severity of impairment and the absence of projected credit losses, the impairments were considered to be temporary.
Non-mortgage asset-backed securities
At March 31, 2018, five non-mortgage asset-backed securities were in unrealized loss positions, due primarily to increases in market interest rates subsequent to the date of acquisition. The amount of impairment each of the individual securities was 2% or less of amortized cost. These securities were assessed for OTTI using credit and prepayment behavioral models incorporating assumptions consistent with the collateral characteristics of each security. The results of this analysis were not indicative of expected credit losses. Given the limited severity of impairment and the expectation of timely recovery of outstanding principal, the impairment were considered to be temporary.
State and municipal obligations
At March 31, 2018, fifteen state and municipal obligations were in unrealized loss positions. The amount of impairment of each of the individual securities was less than 3% of amortized cost. All of the securities are rated investment grade by nationally recognized statistical ratings organizations. Management's evaluation of these securities for OTTI also encompassed the review of credit scores and analysis provided by a third party firm specializing in the analysis and credit review of

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


municipal securities. Given the limited severity of impairment and absence of expected credit losses, the impairments were considered to be temporary.
SBA Securities
At March 31, 2018, three SBA securities were in unrealized loss positions. The amount of impairment of each of these securities was less than 1% of amortized cost. These securities were purchased at a premium and the impairment was attributable primarily to increased prepayment speeds. The timely payment of principal and interest on these securities is guaranteed by this U.S. Government agency. Given the limited severity of impairment and the expectation of timely payment of principal and interest, the impairments were considered to be temporary.
Note 4    Loans and Allowance for Loan and Lease Losses
The Company segregates its loan portfolio between covered and non-covered loans. Non-covered loans include loans originated since the FSB acquisition and commercial and consumer loans acquired in the FSB acquisition for which loss share coverage has terminated. Covered loans are further segregated between ACI and non-ACI loans.
Loans consisted of the following at the dates indicated (dollars in thousands):
 
March 31, 2018
 

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

 
 

 
 

 
 

 
 

1-4 single family residential
$
4,280,191

 
$
456,623

 
$
25,543

 
$
4,762,357

 
22.2
%
Home equity loans and lines of credit
1,674

 

 
331

 
2,005

 
%
Other consumer loans
19,796

 

 

 
19,796

 
0.1
%
 
4,301,661

 
456,623

 
25,874

 
4,784,158

 
22.3
%
Commercial:
 
 
 
 
 
 
 
 
 
Multi-family
3,105,788

 

 

 
3,105,788

 
14.5
%
Non-owner occupied commercial real estate
4,523,260

 

 

 
4,523,260

 
21.0
%
Construction and land
294,680

 

 

 
294,680

 
1.4
%
Owner occupied commercial real estate
2,007,443

 

 

 
2,007,443

 
9.4
%
Commercial and industrial
4,124,943

 

 

 
4,124,943

 
19.3
%
Commercial lending subsidiaries
2,581,769

 

 

 
2,581,769

 
12.1
%
 
16,637,883

 

 

 
16,637,883

 
77.7
%
Total loans
20,939,544

 
456,623

 
25,874

 
21,422,041

 
100.0
%
Premiums, discounts and deferred fees and costs, net
48,113

 

 
(3,333
)
 
44,780

 
 
Loans including premiums, discounts and deferred fees and costs
20,987,657

 
456,623

 
22,541

 
21,466,821

 
 
Allowance for loan and lease losses
(136,958
)
 

 
(518
)
 
(137,476
)
 
 
Loans, net
$
20,850,699

 
$
456,623

 
$
22,023

 
$
21,329,345

 
 
 

15

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


 
December 31, 2017
 

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

 
 

 
 

 
 

 
 

1-4 single family residential
$
4,116,814

 
$
479,068

 
$
26,837

 
$
4,622,719

 
21.6
%
Home equity loans and lines of credit
1,654

 

 
361

 
2,015

 
%
Other consumer loans
20,512

 

 

 
20,512

 
0.1
%
 
4,138,980

 
479,068

 
27,198

 
4,645,246

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

 

 

 
3,215,697

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

 

 

 
4,485,276

 
21.0
%
Construction and land
310,999

 

 

 
310,999

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

 

 

 
2,014,908

 
9.4
%
Commercial and industrial
4,145,785

 

 

 
4,145,785

 
19.4
%
Commercial lending subsidiaries
2,553,576

 

 

 
2,553,576

 
12.0
%
 
16,726,241

 

 

 
16,726,241

 
78.3
%
Total loans
20,865,221

 
479,068

 
27,198

 
21,371,487

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

 

 
(3,148
)
 
45,017

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

 
479,068

 
24,050

 
21,416,504

 
 
Allowance for loan and lease losses
(144,537
)
 

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

 
$
479,068

 
$
23,792

 
$
21,271,709

 
 
Included in non-covered, 1-4 single family residential loans above are $36 million of government insured residential loans at March 31, 2018.
Included in non-covered loans above are $33 million and $34 million at March 31, 2018 and December 31, 2017, respectively, of ACI commercial loans acquired in the FSB Acquisition.
Through two subsidiaries, the Bank provides commercial and municipal equipment and franchise financing utilizing both loan and lease structures. At March 31, 2018 and December 31, 2017, the commercial lending subsidiaries portfolio included a net investment in direct financing leases of $740 million and $738 million, respectively.
During the three months ended March 31, 2018 and 2017, the Company purchased 1-4 single family residential loans totaling $333 million and $340 million, respectively. Purchases for the three months ended March 31, 2018 included $39.4 million in government insured residential loans.
At March 31, 2018, the Company had pledged real estate loans with UPB of approximately $10.4 billion and recorded investment of approximately $9.9 billion as security for FHLB advances.

16

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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


At March 31, 2018 and December 31, 2017, the UPB of ACI loans was $1.0 billion and $1.1 billion, respectively. The accretable yield on ACI loans represents the amount by which undiscounted expected future cash flows exceed recorded investment. Changes in the accretable yield on ACI loans for the three months ended March 31, 2018, and the year ended December 31, 2017 were as follows (in thousands):
Balance at December 31, 2016
$
675,385

Reclassifications from non-accretable difference, net
81,501

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

Reclassifications from non-accretable difference, net
41,739

Accretion
(82,301
)
Balance at March 31, 2018
$
414,497

Covered loan sales
During the periods indicated, the Company sold covered residential loans to third parties on a non-recourse basis. The following table summarizes the impact of these transactions (in thousands): 
 
Three Months Ended March 31,
 
2018
 
2017
UPB of loans sold
$
61,043

 
$
54,594

 
 
 
 
Cash proceeds, net of transaction costs
$
54,855

 
$
45,414

Recorded investment in loans sold
53,152

 
43,532

Gain on sale of covered loans, net
$
1,703

 
$
1,882

 
 
 
 
Loss on FDIC indemnification, net
$
(1,358
)
 
$
(1,502
)
 

17

Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


Allowance for loan and lease losses 
Activity in the ALLL is summarized as follows for the periods indicated (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
 
Residential and Other Consumer
 
Commercial
 
Total
 
Residential and Other Consumer
 
Commercial
 
Total
Beginning balance
$
10,720

 
$
134,075

 
$
144,795

 
$
11,503

 
$
141,450

 
$
152,953

Provision for (recovery of) loan losses:
 
 
 
 
 
 
 
 
 
 
 
Covered loans
273

 

 
273

 
812

 
(33
)
 
779

Non-covered loans
101

 
2,773

 
2,874

 
(508
)
 
11,829

 
11,321

Total provision
374

 
2,773

 
3,147

 
304

 
11,796

 
12,100

Charge-offs:
 
 
 
 
 
 
 
 
 
 
 
Covered loans
(15
)
 

 
(15
)
 
(55
)
 

 
(55
)
Non-covered loans
(267
)
 
(10,350
)
 
(10,617
)
 

 
(14,769
)
 
(14,769
)
Total charge-offs
(282
)
 
(10,350
)
 
(10,632
)
 
(55
)
 
(14,769
)
 
(14,824
)
Recoveries:
 
 
 
 
 
 
 
 
 
 
 
Covered loans
2

 

 
2

 
32

 
33

 
65

Non-covered loans
18

 
146

 
164

 
6

 
981

 
987

Total recoveries
20

 
146

 
166

 
38

 
1,014

 
1,052

Ending balance
$
10,832

 
$
126,644

 
$
137,476

 
$
11,790

 
$
139,491

 
$
151,281


18

Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018



The following table presents information about the balance of the ALLL and related loans at the dates indicated (in thousands):
 
March 31, 2018
 
December 31, 2017
 
Residential and Other Consumer
 
Commercial
 
Total
 
Residential and Other Consumer
 
Commercial
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 

 
 

 
 

Ending balance
$
10,832

 
$
126,644

 
$
137,476

 
$
10,720

 
$
134,075

 
$
144,795

Covered loans:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
518

 
$

 
$
518

 
$
258

 
$

 
$
258

Ending balance: non-ACI loans individually evaluated for impairment
$
283

 
$

 
$
283

 
$
118

 
$

 
$
118

Ending balance: non-ACI loans collectively evaluated for impairment
$
235

 
$

 
$
235

 
$
140

 
$

 
$
140

Non-covered loans:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
10,314

 
$
126,644

 
$
136,958

 
$
10,462

 
$
134,075

 
$
144,537

Ending balance: loans individually evaluated for impairment
$
138

 
$
14,229

 
$
14,367

 
$
63

 
$
18,776

 
$
18,839

Ending balance: loans collectively evaluated for impairment
$
10,176

 
$
112,415

 
$
122,591

 
$
10,399

 
$
115,299

 
$
125,698

Loans:
 
 
 
 
0

 
 
 
 
 
0

Covered loans:
 
 
 
 
 
 
 
 
 
 
 
Ending balance
$
479,164

 
$

 
$
479,164

 
$
503,118

 
$

 
$
503,118

Ending balance: non-ACI loans individually evaluated for impairment
$
2,049

 
$

 
$
2,049

 
$
2,221

 
$

 
$
2,221

Ending balance: non-ACI loans collectively evaluated for impairment
$
20,492

 
$

 
$
20,492

 
$
21,829

 
$

 
$
21,829

Ending balance: ACI loans
$
456,623

 
$

 
$
456,623

 
$
479,068

 
$

 
$
479,068

Non-covered loans:
 
 
 
 
 
 
 
 
 
 


Ending balance
$
4,360,346

 
$
16,627,311

 
$
20,987,657

 
$
4,196,080

 
$
16,717,306

 
$
20,913,386

Ending balance: loans, other than ACI loans, individually evaluated for impairment
$
3,688

 
$
175,854

 
$
179,542

 
$
1,234

 
$
173,706

 
$
174,940

Ending balance: loans, other than ACI loans, collectively evaluated for impairment
$
4,356,658

 
$
16,418,597

 
$
20,775,255

 
$
4,194,846

 
$
16,509,824

 
$
20,704,670

Ending balance: ACI loans
$

 
$
32,860

 
$
32,860

 
$

 
$
33,776

 
$
33,776

In the first quarter of 2018, the look back period used in the determination of historical net charge-off rates for the majority of commercial portfolio classes was extended by one quarter. For commercial and industrial loans, we began using the Company's historical net charge-off rate rather than a peer group net charge-off rate in estimating the quantitative portion of the ALLL. The offsetting impact of these changes resulted in a decrease in the ALLL of approximately $2.5 million as of March 31, 2018.
Credit quality information 
Loans other than ACI 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 on non-accrual status with committed balances greater than or equal to $1.0 million that have internal risk ratings of substandard or doubtful, 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.

19

Table of Contents
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
March 31, 2018


ACI loans or pools are considered to be impaired when it is probable that the Company will be unable to collect all of the expected cash flows at acquisition (as adjusted for any additional cash flows expected to be collected arising from changes in estimates after acquisition), other than due to changes in interest rate indices and prepayment assumptions.
The table below presents information about loans or ACI pools identified as impaired at the dates indicated (in thousands):
 
March 31, 2018
 
December 31, 2017
 
Recorded
Investment
 
UPB
 
Related
Specific
Allowance
 
Recorded
Investment
 
UPB
 
Related
Specific
Allowance
Non-covered loans:
 

 
 

 
 

 
 

 
 

 
 

With no specific allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

1-4 single family residential
$
1,843

 
$
1,812

 
$

 
$