BKU 10-Q Quarterly Report Sept. 30, 2020 | Alphaminr
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BKU 10-Q Quarter ended Sept. 30, 2020

Balance Sheet
Cash Flow
Income Statement
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

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

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

The number of outstanding shares of the registrant common stock, $0.01 par value, as of November 3, 2020 was 92,387,292 .





BANKUNITED, INC.
Form 10-Q
For the Quarter Ended September 30, 2020
TABLE OF CONTENTS
Page
PART I.
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
PART II.
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 6.

i

GLOSSARY OF DEFINED TERMS

The following acronyms and terms may be used throughout this Form 10-Q, including the consolidated financial statements and related notes.
ACI
Loans acquired with evidence of deterioration in credit quality since origination (Acquired Credit Impaired)
ACL Allowance for credit losses
AFS Available for sale
ALCO Asset/Liability Committee
ALLL Allowance for loan and lease losses
AOCI Accumulated other comprehensive income
APY Annual Percentage Yield
ASC Accounting Standards Codification
ASU Accounting Standards Update
BKU BankUnited, Inc.
BankUnited BankUnited, National Association
The Bank BankUnited, National Association
BFG Bridge Funding Group, Inc.
Bridge Bridge Funding Group, Inc.
Buyout loans FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations
CARES Act Coronavirus Aid, Relief, and Economic Security Act
CECL Current expected credit losses
CET1 Common Equity Tier 1 capital
C&I Commercial and Industrial
CLO Collateralized loan obligations
CMBS Commercial mortgage-backed securities
CME Chicago Mercantile Exchange
CMOs Collateralized mortgage obligations
COVID-19 Coronavirus disease of 2019
CRE Commercial real estate
DFAST Dodd-Frank Act Stress Test
DSCR Debt Service Coverage Ratio
EPS Earnings per common share
EVE Economic value of equity
FDIA Federal Deposit Insurance Act
FHA Federal Housing Administration
FHLB Federal Home Loan Bank
FICO Fair Isaac Corporation (credit score)
FRB Federal Reserve Bank
GAAP U.S. generally accepted accounting principles
GDP Gross Domestic Product
GNMA Government National Mortgage Association
HTM Held to maturity
IPO Initial public offering
ISDA International Swaps and Derivatives Association
LGD Loss Given Default
LIBOR London InterBank Offered Rate
ii

LTV Loan-to-value
MBS Mortgage-backed securities
MSA Metropolitan Statistical Area
MWL Mortgage warehouse lending
Non-OOCRE Non-owner occupied commercial real estate
NRSRO Nationally recognized statistical rating organization
OCI Other comprehensive income
OFAC U.S. Department of the Treasury's Office of Foreign Assets Control
OOCRE Owner occupied commercial real estate
OREO Other real estate owned
OTTI Other than temporary impairment
PCD Purchased credit-deteriorated
PD Probability of default
Pinnacle Pinnacle Public Finance, Inc.
PPNR Pre-tax, pre-provision net revenue
PPP Small Business Administration’s Paycheck Protection Program
PPPLF FRB Paycheck Protection Program Liquidity Facility
PSU Performance Share Unit
REIT Real Estate Investment Trust
RSU Restricted Share Unit
SBA U.S. Small Business Administration
SBF Small Business Finance Unit
SEC Securities and Exchange Commission
SOFR Secured Overnight Financing Rate
S&P 500 Standard & Poor's 500 Index
TDR Troubled-debt restructuring
Tri-State New York, New Jersey and Connecticut
UPB Unpaid principal balance
VA loan Loan guaranteed by the U.S. Department of Veterans Affairs
VIX CBOE Volatility Index
WARM Weighted-average remaining maturity

iii

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements and Supplementary Data
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands, except share and per share data)
September 30,
2020 		December 31,
2019
ASSETS
Cash and due from banks:
Non-interest bearing $ 175 $ 7,704
Interest bearing 369,601 206,969
Cash and cash equivalents 369,776 214,673
Investment securities (including securities recorded at fair value of $ 9,290,883 and $ 7,759,237 )
9,300,883 7,769,237
Non-marketable equity securities 208,614 253,664
Loans held for sale 3,816 37,926
Loans 23,779,315 23,154,988
Allowance for credit losses ( 274,128 ) ( 108,671 )
Loans, net 23,505,187 23,046,317
Bank owned life insurance 292,773 282,151
Operating lease equipment, net 676,321 698,153
Goodwill and other intangible assets 77,641 77,674
Other assets 593,586 491,498
Total assets $ 35,028,597 $ 32,871,293
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Demand deposits:
Non-interest bearing $ 6,789,622 $ 4,294,824
Interest bearing 2,916,891 2,130,976
Savings and money market 11,002,794 10,621,544
Time 5,887,903 7,347,247
Total deposits 26,597,210 24,394,591
Federal funds purchased 180,000 100,000
FHLB and PPPLF borrowings 4,118,460 4,480,501
Notes and other borrowings 722,592 429,338
Other liabilities 545,511 486,084
Total liabilities 32,163,773 29,890,514
Commitments and contingencies
Stockholders' equity:
Common stock, par value $ 0.01 per share, 400,000,000 shares authorized; 92,388,641 and 95,128,231 shares issued and outstanding
924 951
Paid-in capital 995,438 1,083,920
Retained earnings 1,950,288 1,927,735
Accumulated other comprehensive loss ( 81,826 ) ( 31,827 )
Total stockholders' equity 2,864,824 2,980,779
Total liabilities and stockholders' equity $ 35,028,597 $ 32,871,293
1
The accompanying notes are an integral part of these consolidated financial statements




BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Interest income:
Loans $ 208,646 $ 248,770 $ 656,943 $ 738,766
Investment securities 44,604 69,413 151,596 218,554
Other 1,322 5,219 7,950 15,140
Total interest income 254,572 323,402 816,489 972,460
Interest expense:
Deposits 37,681 99,483 170,690 296,891
Borrowings 29,412 38,229 87,407 108,095
Total interest expense 67,093 137,712 258,097 404,986
Net interest income before provision for credit losses 187,479 185,690 558,392 567,474
Provision for credit losses 29,232 1,839 180,074 9,373
Net interest income after provision for credit losses 158,247 183,851 378,318 558,101
Non-interest income:
Deposit service charges and fees 4,040 4,269 11,927 12,389
Gain on sale of loans, net 2,953 5,163 10,745 10,220
Gain on investment securities, net
7,181 3,835 10,564 13,736
Lease financing 13,934 18,583 45,565 52,774
Other non-interest income 8,184 6,006 19,140 20,329
Total non-interest income 36,292 37,856 97,941 109,448
Non-interest expense:
Employee compensation and benefits 48,448 57,102 156,212 179,586
Occupancy and equipment 12,170 14,673 36,440 42,477
Deposit insurance expense 5,886 3,781 15,095 12,849
Professional fees 2,436 2,923 8,771 17,731
Technology and telecommunications 15,435 10,994 42,056 34,175
Depreciation of operating lease equipment 12,315 11,582 37,137 34,883
Loss on debt extinguishment — 3,796 — 3,796
Other non-interest expense 11,937 16,455 38,154 42,584
Total non-interest expense 108,627 121,306 333,865 368,081
Income before income taxes 85,912 100,401 142,394 299,468
Provision for income taxes 19,353 24,182 30,278 75,826
Net income $ 66,559 $ 76,219 $ 112,116 $ 223,642
Earnings per common share, basic $ 0.70 $ 0.78 $ 1.17 $ 2.23
Earnings per common share, diluted $ 0.70 $ 0.77 $ 1.17 $ 2.23
2
The accompanying notes are an integral part of these consolidated financial statements




BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
(In thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Net income $ 66,559 $ 76,219 $ 112,116 $ 223,642
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities available for sale:
Net unrealized holding gain arising during the period 49,829 8,358 25,074 53,301
Reclassification adjustment for net securities gains realized in income
( 1,685 ) ( 2,518 ) ( 7,089 ) ( 8,568 )
Net change in unrealized gain (loss) on securities available for sale
48,144 5,840 17,985 44,733
Unrealized losses on derivative instruments:
Net unrealized holding gain (loss) arising during the period 1,251 ( 16,774 ) ( 90,633 ) ( 74,667 )
Reclassification adjustment for net (gains) losses realized in income
11,798 ( 374 ) 22,649 ( 3,616 )
Net change in unrealized losses on derivative instruments
13,049 ( 17,148 ) ( 67,984 ) ( 78,283 )
Other comprehensive income (loss) 61,193 ( 11,308 ) ( 49,999 ) ( 33,550 )
Comprehensive income $ 127,752 $ 64,911 $ 62,117 $ 190,092

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


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

Nine Months Ended September 30,
2020 2019
Cash flows from operating activities:
Net income $ 112,116 $ 223,642
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and accretion, net ( 20,102 ) ( 30,550 )
Provision for credit losses 180,074 9,373
Gain on sale of loans, net ( 10,745 ) ( 10,220 )
Gain on investment securities, net ( 10,564 ) ( 13,736 )
Equity based compensation 12,286 16,967
Depreciation and amortization 54,377 53,105
Deferred income taxes ( 27,304 ) 22,278
Loss on debt extinguishment — 3,796
Proceeds from sale of loans held for sale 498,431 317,027
Loans originated for sale, net of repayments ( 21,780 ) ( 68,665 )
Other:
Decrease in other assets 2,509 20,288
Decrease in other liabilities ( 134,363 ) ( 131,066 )
Net cash provided by operating activities 634,935 412,239
Cash flows from investing activities:
Purchase of investment securities ( 3,356,639 ) ( 3,176,833 )
Proceeds from repayments and calls of investment securities 912,403 1,057,043
Proceeds from sale of investment securities 930,757 2,297,121
Purchase of non-marketable equity securities ( 134,938 ) ( 319,387 )
Proceeds from redemption of non-marketable equity securities 179,988 313,650
Purchases of loans ( 2,082,695 ) ( 1,636,932 )
Loan originations, repayments and resolutions, net 1,000,352 332,246
Proceeds from sale of loans, net 11,604 205,869
Acquisition of operating lease equipment ( 19,597 ) ( 38,312 )
Other investing activities ( 12,328 ) ( 27,005 )
Net cash used in investing activities ( 2,571,093 ) ( 992,540 )
(Continued)
4
The accompanying notes are an integral part of these consolidated financial statements


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



Nine Months Ended September 30,
2020 2019
Cash flows from financing activities:
Net increase in deposits 2,202,619 482,205
Net increase in federal funds purchased 80,000 —
Additions to FHLB and PPPLF borrowings 4,281,960 3,962,000
Repayments of FHLB and PPPLF borrowings ( 4,647,310 ) ( 3,827,000 )
Proceeds from issuance of notes, net 293,858 —
Dividends paid ( 64,611 ) ( 63,558 )
Repurchase of common stock ( 100,972 ) ( 150,000 )
Other financing activities 45,717 24,809
Net cash provided by financing activities 2,091,261 428,456
Net increase (decrease) in cash and cash equivalents 155,103 ( 151,845 )
Cash and cash equivalents, beginning of period 214,673 382,073
Cash and cash equivalents, end of period $ 369,776 $ 230,228
Supplemental disclosure of cash flow information:
Interest paid $ 268,970 $ 391,691
Income taxes paid (refunded), net $ 5,944 $ ( 264 )
Supplemental schedule of non-cash investing and financing activities:
Transfers from loans to other real estate owned and other repossessed assets $ 4,170 $ 3,211
Transfers from loans to loans held for sale $ 451,864 $ 439,525
Transfers from loans held for sale to loans $ 9,055 $ 19,716
Dividends declared, not paid $ 21,910 $ 20,524
Unsettled sales of investment securities, net of unsettled purchases $ 10,339 $ 88,331



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




BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
(In thousands, except share data)
Common
Shares
Outstanding 		Common
Stock 		Paid-in
Capital 		Retained
Earnings 		Accumulated
Other
Comprehensive
Loss 		Total
Stockholders’
Equity
Balance at June 30, 2020 92,420,278 $ 924 $ 991,509 $ 1,905,639 $ ( 143,019 ) $ 2,755,053
Comprehensive income — — — 66,559 61,193 127,752
Dividends ($ 0.23 per common share)
— — — ( 21,910 ) — ( 21,910 )
Equity based compensation — — 3,878 — — 3,878
Forfeiture of unvested shares and shares surrendered for tax withholding obligations
( 39,405 ) — ( 91 ) — — ( 91 )
Exercise of stock options 7,768 — 142 — — 142
Balance at September 30, 2020 92,388,641 $ 924 $ 995,438 $ 1,950,288 $ ( 81,826 ) $ 2,864,824
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 and shares surrendered for tax withholding obligations
( 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
Common
Shares
Outstanding 		Common
Stock 		Paid-in
Capital 		Retained
Earnings 		Accumulated
Other
Comprehensive
Income (Loss) 		Total
Stockholders’
Equity
Balance at December 31, 2019 95,128,231 $ 951 $ 1,083,920 $ 1,927,735 $ ( 31,827 ) $ 2,980,779
Impact of adoption of ASU 2016-13 — — — ( 23,817 ) — ( 23,817 )
Balance at January 1, 2020 95,128,231 951 1,083,920 1,903,918 ( 31,827 ) 2,956,962
Comprehensive income — — — 112,116 ( 49,999 ) 62,117
Dividends ($ 0.69 per common share)
— — — ( 65,746 ) — ( 65,746 )
Equity based compensation 743,696 8 15,306 — — 15,314
Forfeiture of unvested shares and shares surrendered for tax withholding obligations
( 225,477 ) ( 3 ) ( 4,519 ) — — ( 4,522 )
Exercise of stock options 67,768 1 1,670 — — 1,671
Repurchase of common stock ( 3,325,577 ) ( 33 ) ( 100,939 ) — — ( 100,972 )
Balance at September 30, 2020 92,388,641 $ 924 $ 995,438 $ 1,950,288 $ ( 81,826 ) $ 2,864,824
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

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


Note 1    Basis of Presentation and Summary of Significant Accounting Policies
BankUnited, Inc. is a national bank holding company with one wholly-owned subsidiary, BankUnited, collectively, the Company. BankUnited, a national banking association headquartered in Miami Lakes, Florida, provides a full range of banking and related services to individual and corporate customers through 71 banking centers located in 14 Florida counties and 5 banking centers located in the New York metropolitan area at September 30, 2020. The Bank also offers certain commercial lending and deposit products through national platforms.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, these do not include all of the information and footnotes required for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP and should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in BKU’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected in future periods.
Certain amounts presented for prior periods have been reclassified to conform to the current period presentation.
Accounting Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosures of contingent assets and liabilities. Actual results could differ significantly from these estimates.
Significant estimates include the allowance for credit losses and the fair values of investment securities and other financial instruments.
New Accounting Pronouncements Adopted During the Nine Months Ended September 30, 2020
ASU No. 2016-13, F inancial Instruments - Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. The ASU, along with subsequent ASUs issued to clarify certain of its provisions, introduced new guidance which made substantive changes to the accounting for credit losses. The ASU introduced the CECL model which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. This includes loans, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities. The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions and reasonable and supportable forecasts, and is generally expected to result in earlier recognition of credit losses. The ASU also modified certain provisions of the previous OTTI model for AFS debt securities. Credit losses on AFS debt securities are now limited to the difference between the security's amortized cost basis and its fair value, and should be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. The Company adopted this ASU in the first quarter of 2020 using the modified retrospective transition method for the CECL model and a prospective approach for the AFS debt security model. The Company recorded a cumulative-effect adjustment to retained earnings of $ 23.8 million, which included $ 4.8 million related to off -balance sheet credit exposures, on January 1, 2020. No cumulative-effect adjustment was recorded related to AFS debt securities upon adoption. The Company has elected to phase-in the initial impact of the adoption of ASC 326 for regulatory capital purposes, allowing the impact of adoption on regulatory capital to be delayed for two years, followed by a three-year transition period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

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

Under recently issued inter-agency and authoritative guidance and consistent with the CARES Act, short-term (generally periods of six months or less) deferrals or modifications related to COVID-19 will typically not be categorized as TDRs. Additionally, section 4013 of the CARES Act effectively suspended the guidance related to TDRs codified in ASC 310-40 until the earlier of December 31, 2020 or the date of the suspension of the declared state of emergency related to the COVID-19 pandemic. The Company has elected to apply the provisions of section 4013 to loan modifications, other than short-term payment deferrals of 6 months or less that are subject to the interagency guidance, that might otherwise be categorized as TDRs under ASC 310-40.
Purchased Credit Deteriorated ("PCD") assets
PCD assets are acquired financial assets that, as of the date of acquisition, have experienced a more than insignificant deterioration in credit quality since origination. An assessment is conducted at acquisition to determine whether acquired financial assets meet the criteria to be classified as PCD assets. That assessment may be conducted at the individual asset level, or for a group of assets acquired together that have similar risk characteristics. At acquisition, the ACL related to PCD assets, representing the estimated amount of the UPB of the assets not expected to be collected, is added to the purchase price to determine the amortized cost basis and any non-credit related discount or premium is allocated to the individual assets acquired. The non-credit related discount or premium is accreted or amortized to interest income over the life of the related assets using the level yield method, as long as there is a reasonable expectation about amounts expected to be collected. Subsequent changes in the amount of expected credit losses are recognized immediately by adjusting the ACL and reflecting the periodic changes as credit loss expense or reversal of credit loss expense.
Loans previously categorized as ACI loans were categorized as PCD loans on initial adoption of ASC 326. At adoption, an ACL was recognized and a corresponding adjustment was made to the assets' amortized cost basis. Prior to the adoption of ASC 326, ACI loans were accounted for on a pool basis. These pools were not maintained on adoption. The Company did not re-assess whether modifications to individual PCD loans previously accounted for in pools were TDRs at adoption.
Allowance for Credit Losses ("ACL")
AFS Debt Securities
The Company reviews its AFS debt securities for credit loss impairment at the individual security level on at least a quarterly basis. A security is impaired if its fair value is less than its amortized cost basis. A decline in fair value below amortized cost basis represents a credit loss impairment to the extent the Company does not expect to recover the amortized cost basis of the security. Impairment related to credit losses is recorded through the ACL to the extent fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through the ACL are recorded through other comprehensive income, net of applicable taxes.
In assessing whether an impairment is credit loss related, the Company compares the present value of cash flows expected to be collected to the security's amortized cost basis. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, a credit loss exists and an ACL is recorded. The Company discounts expected cash flows at the effective interest rate implicit in the security at the purchase date, adjusted for expected prepayments. For floating rate securities, the Company uses the floating rate as it changes over the life of the security. In developing estimates about cash flows expected to be collected and determining whether a credit loss exists, the Company considers information about past events, current conditions and reasonable and supportable forecasts. Factors and information that the Company uses in making its assessments include, but are not necessarily limited to, the following:
• The extent to which fair value is less than amortized cost;
• Adverse conditions specifically related to the security, an industry or geographic area;
• Changes in the financial condition of the issuer or underlying loan obligors;
• The payment structure and remaining payment terms of the security, including levels of subordination or over-collateralization;
• Failure of the issuer to make scheduled payments;
• Changes in credit ratings;
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

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

individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by the Company.
The length of the reasonable and supportable forecast period is evaluated at each reporting period and adjusted if deemed necessary. Currently, the Company uses a 2-year reasonable and supportable forecast period in estimating the ACL.
For the substantial majority of portfolio segments and subsegments, including residential loans other than government insured loans, and most commercial and commercial real estate loans, expected losses are estimated using econometric models. The models employ a factor based methodology, leveraging data sets containing extensive historical loss and recovery information by industry, geography, product type, collateral type and obligor characteristics, to estimate PD and LGD. Measures of PD for commercial loans incorporate current conditions through market cycle or credit cycle adjustments. For residential loans, the models consider FICO and adjusted LTVs. PDs and LGDs are then conditioned on the reasonable and supportable economic forecast. Projected PDs and LGDs, determined based on pool level characteristics, are applied to estimated exposure at default, considering the term and payment structure of loans, to generate estimates of expected loss. For criticized or classified loans, PDs are adjusted to benchmark PDs established for each risk rating if the most current financial information available is deemed not to be reflective of the borrowers' current financial condition. The ACL estimate incorporates a reasonable and supportable economic forecast through the use of externally developed macroeconomic scenarios applied in the models. After a reasonable and supportable forecast period, the forecast of future economic conditions reverts to long-run historical economic trends.
For certain less material portfolios including loans and leases to state and local government entities originated by Pinnacle, small balance commercial loans and consumer loans, the WARM method is used to estimate expected credit losses. For the Pinnacle portfolio, historical loss information is based on municipal historical default and recovery data, segmented by credit rating. For small balance commercial loans, historical loss information is based on the Company's historical loss experience over a five year period. For consumer loans, historical loss information is based on peer data; this portfolio subsegment is not significant. All loss estimates are conditioned as applicable on changes in current conditions and the reasonable and supportable economic forecast. Expected credit losses for mortgage warehouse lines of credit are estimated based primarily on the Company's historical loss experience, conditioned as applicable on changes in current conditions and the reasonable and supportable economic forecast. Generally, given the nature of these loans, losses would be expected to manifest within a very short time period after origination.
The Company expects to collect the amortized cost basis of government insured residential loans and PPP loans due to the nature of the government guarantee, so the quantitative ACL is zero for these loans.
Qualitative factors
Qualitative adjustments are made to the ACL when, based on management’s judgment, there are factors impacting expected credit losses not taken into account by the quantitative calculations. Potential qualitative adjustments are categorized as follows:
• Economic factors, including material trends and developments that, in management's judgment, may not have been considered in the reasonable and supportable economic forecast;
• Credit policy and staffing, including the nature and level of policy and procedural exceptions or changes in credit policy not reflected in quantitative results, changes in the quality of underwriting and portfolio management and staff and issues identified by credit review, internal audit or regulators that may not be reflected in quantitative results;
• Concentrations, considering whether the quantitative estimate adequately accounts for concentration risk in the portfolio;
• Model imprecision and model validation findings; and
• Other factors not adequately considered in the quantitative estimate or other qualitative categories identified by management that may materially impact the amount of expected credit losses.
Collateral dependent loans
Collateral dependent loans are those for which the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. These loans do not typically share similar risk characteristics with other loans and expected credit losses are evaluated on an individual basis. Loans evaluated individually are
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

not included in the collective evaluation. Estimates of expected credit losses for collateral dependent loans, whether or not foreclosure is probable, are based on the fair value of the collateral adjusted for selling costs when repayment depends on sale of the collateral.
Troubled debt restructurings
For TDRs or loans for which there is a reasonable expectation that a TDR will be executed that are not collateral dependent, the credit loss estimate is determined by comparing the net present value of expected cash flows, discounted at the loan’s original effective interest rate, to the amortized cost basis of the loan.
Off-balance sheet credit exposures
Expected credit losses related to off-balance sheet credit exposures are estimated over the contractual period for which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. Expected credit losses are estimated using essentially the same methodologies employed to estimate expected credit losses on the amortized cost basis of loans, taking into consideration the likelihood and amount of additional amounts expected to be funded over the terms of the commitments. The liability for credit losses on off-balance sheet credit exposures is presented within other liabilities on the consolidated balance sheets, distinct from the ACL. Adjustments to the liability are included in the provision for credit losses.
Accrued Interest Receivable
The Company has elected to present accrued interest receivable separate from the amortized cost basis of financial assets carried at amortized cost. The Company is applying the practical expedient provided in ASC 326 to exclude accrued interest receivable balances from tabular disclosures about financial assets carried at amortized cost. The Company generally does not estimate an ACL on accrued interest receivable balances since uncollectible accrued interest is timely written off in accordance with the Company's accounting policies for non-accrual loans. Under unusual circumstances, such as those presented by deferrals granted due to the COVID-19 pandemic, the Company evaluates whether its non-accrual policies continue to consistently provide for timely reversal of accrued interest receivable. If considered necessary, the Company records an allowance for uncollectible accrued interest receivable, determined using essentially the same methodologies used to estimate the ACL on the amortized cost basis of the related loans. The allowance is deducted from accrued interest receivable and presented within other assets on the consolidated balance sheets, distinct from the ACL.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

Note 2 Earnings Per Common Share
The computation of basic and diluted earnings per common share is presented below for the periods indicated (in thousands, except share and per share data):
Three Months Ended September 30, Nine Months Ended September 30,
c 2020 2019 2020 2019
Basic earnings per common share:
Numerator:
Net income $ 66,559 $ 76,219 $ 112,116 $ 223,642
Distributed and undistributed earnings allocated to participating securities
( 2,896 ) ( 3,174 ) ( 4,816 ) ( 9,247 )
Income allocated to common stockholders for basic earnings per common share
$ 63,663 $ 73,045 $ 107,300 $ 214,395
Denominator:
Weighted average common shares outstanding 92,405,239 95,075,395 92,918,030 97,113,878
Less average unvested stock awards ( 1,183,564 ) ( 1,098,509 ) ( 1,164,317 ) ( 1,147,988 )
Weighted average shares for basic earnings per common share
91,221,675 93,976,886 91,753,713 95,965,890
Basic earnings per common share $ 0.70 $ 0.78 $ 1.17 $ 2.23
Diluted earnings per common share:
Numerator:
Income allocated to common stockholders for basic earnings per common share
$ 63,663 $ 73,045 $ 107,300 $ 214,395
Adjustment for earnings reallocated from participating securities
4 7 3 20
Income used in calculating diluted earnings per common share
$ 63,667 $ 73,052 $ 107,303 $ 214,415
Denominator:
Weighted average shares for basic earnings per common share 91,221,675 93,976,886 91,753,713 95,965,890
Dilutive effect of stock options and certain shared-based awards 171,054 285,934 142,008 303,524
Weighted average shares for diluted earnings per common share
91,392,729 94,262,820 91,895,721 96,269,414
Diluted earnings per common share $ 0.70 $ 0.77 $ 1.17 $ 2.23
Participating securities include unvested shares and 3,023,314 dividend equivalent rights that were issued in conjunction with the IPO of the Company's common stock. These dividend equivalent rights expire in 2021 and participate in dividends on a one-for-one basis.
Potentially dilutive unvested shares and share units totaling 1,736,211 and 1,078,278 were outstanding at September 30, 2020 and 2019, respectively, but excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

Note 3    Investment Securities
Investment securities include investment securities available for sale, marketable equity securities, and investment securities held to maturity. During the three months ended September 30, 2020, an ACL of $ 0.6 million was recorded for one private label commercial MBS security and is deducted from the amortized cost of private label commercial MBS in the table below. The investment securities portfolio consisted of the following at the dates indicated (in thousands):
September 30, 2020
Amortized Cost Gross Unrealized
Carrying Value (1)
Gains Losses
Investment securities available for sale:
U.S. Treasury securities $ 75,196 $ 1,714 $ — $ 76,910
U.S. Government agency and sponsored enterprise residential MBS
2,301,188 19,677 ( 6,111 ) 2,314,754
U.S. Government agency and sponsored enterprise commercial MBS
532,540 10,014 ( 1,018 ) 541,536
Private label residential MBS and CMOs
1,150,571 18,423 ( 1,288 ) 1,167,706
Private label commercial MBS (2)
2,442,409 23,769 ( 25,628 ) 2,440,550
Single family rental real estate-backed securities
755,153 14,008 ( 263 ) 768,898
Collateralized loan obligations 1,158,414 220 ( 16,230 ) 1,142,404
Non-mortgage asset-backed securities 245,180 6,954 ( 295 ) 251,839
State and municipal obligations 222,959 19,965 ( 3 ) 242,921
SBA securities 243,692 2,201 ( 4,134 ) 241,759
9,127,302 $ 116,945 $ ( 54,970 ) 9,189,277
Investment securities held to maturity 10,000 10,000
$ 9,137,302 9,199,277
Marketable equity securities 101,606
$ 9,300,883
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020


December 31, 2019
Amortized Cost Gross Unrealized
Carrying Value (1)
Gains Losses
Investment securities available for sale:
U.S. Treasury securities $ 70,243 $ 219 $ ( 137 ) $ 70,325
U.S. Government agency and sponsored enterprise residential MBS
2,018,853 9,835 ( 6,513 ) 2,022,175
U.S. Government agency and sponsored enterprise commercial MBS
366,787 4,920 ( 731 ) 370,976
Private label residential MBS and CMOs
1,001,337 11,851 ( 1,011 ) 1,012,177
Private label commercial MBS
1,719,228 6,650 ( 1,194 ) 1,724,684
Single family rental real estate-backed securities
467,459 4,016 ( 1,450 ) 470,025
Collateralized loan obligations 1,204,905 322 ( 7,861 ) 1,197,366
Non-mortgage asset-backed securities 194,171 1,780 ( 1,047 ) 194,904
State and municipal obligations 257,528 15,774 — 273,302
SBA securities 359,808 4,587 ( 1,664 ) 362,731
7,660,319 $ 59,954 $ ( 21,608 ) 7,698,665
Investment securities held to maturity 10,000 10,000
$ 7,670,319 7,708,665
Marketable equity securities 60,572
$ 7,769,237
(1) At fair value except for securities held to maturity.
(2) Amortized cost is net of ACL totaling $ 0.6 million at September 30, 2020.
Investment securities held to maturity at September 30, 2020 and December 31, 2019 consisted of one State of Israel bond maturing in 2024. At September 30, 2020 and December 31, 2019, accrued interest receivable on investments totaled $ 18 million and $ 28 million, respectively, and is included in other assets in the accompanying consolidated balance sheets.
At September 30, 2020, contractual maturities of investment securities available for sale, adjusted for anticipated prepayments when applicable, were as follows (in thousands):
Amortized Cost Fair Value
Due in one year or less $ 953,629 $ 962,853
Due after one year through five years 5,310,095 5,314,711
Due after five years through ten years 2,347,332 2,385,896
Due after ten years 516,246 525,817
$ 9,127,302 $ 9,189,277
The carrying value of securities pledged as collateral for FHLB advances, public deposits, interest rate swaps and to secure borrowing capacity at the FRB totaled $ 4.4 billion and $ 2.4 billion at September 30, 2020 and December 31, 2019, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

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,
2020 2019 2020 2019
Proceeds from sale of investment securities available for sale
$ 383,420 $ 670,871 $ 930,757 $ 2,297,121
Gross realized gains:
Investment securities available for sale $ 2,689 $ 6,094 $ 9,945 $ 15,051
Gross realized losses:
Investment securities available for sale ( 426 ) ( 2,669 ) ( 429 ) ( 3,394 )
Net realized gain 2,263 3,425 9,516 11,657
Net unrealized gains on marketable equity securities recognized in earnings 4,918 410 1,048 2,079
Gain on investment securities, net $ 7,181 $ 3,835 $ 10,564 $ 13,736
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, 2020
Less than 12 Months 12 Months or Greater Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
U.S. Government agency and sponsored enterprise residential MBS
$ 226,044 $ ( 833 ) $ 499,376 $ ( 5,278 ) $ 725,420 $ ( 6,111 )
U.S. Government agency and sponsored enterprise commercial MBS
126,245 ( 749 ) 44,242 ( 269 ) 170,487 ( 1,018 )
Private label residential MBS and CMOs
175,442 ( 1,288 ) — — 175,442 ( 1,288 )
Private label commercial MBS
1,242,577 ( 25,297 ) 44,070 ( 331 ) 1,286,647 ( 25,628 )
Single family rental real estate-backed securities
118,668 ( 242 ) 43,414 ( 21 ) 162,082 ( 263 )
Collateralized loan obligations 353,622 ( 4,820 ) 563,562 ( 11,410 ) 917,184 ( 16,230 )
Non-mortgage asset-backed securities
— — 12,999 ( 295 ) 12,999 ( 295 )
State and municipal obligations 1,222 ( 3 ) — — 1,222 ( 3 )
SBA securities 27,487 ( 320 ) 108,324 ( 3,814 ) 135,811 ( 4,134 )
$ 2,271,307 $ ( 33,552 ) $ 1,315,987 $ ( 21,418 ) $ 3,587,294 $ ( 54,970 )
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December 31, 2019
Less than 12 Months 12 Months or Greater Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
U.S. Treasury securities
$ 20,056 $ ( 137 ) $ — $ — $ 20,056 $ ( 137 )
U.S. Government agency and sponsored enterprise residential MBS
579,076 ( 3,862 ) 243,839 ( 2,651 ) 822,915 ( 6,513 )
U.S. Government agency and sponsored enterprise commercial MBS
99,610 ( 696 ) 6,477 ( 35 ) 106,087 ( 731 )
Private label residential MBS and CMOs
180,398 ( 838 ) 41,636 ( 173 ) 222,034 ( 1,011 )
Private label commercial MBS
648,761 ( 1,060 ) 76,302 ( 134 ) 725,063 ( 1,194 )
Single family rental real estate-backed securities
241,915 ( 1,445 ) 5,460 ( 5 ) 247,375 ( 1,450 )
Collateralized loan obligations 63,310 ( 846 ) 682,076 ( 7,015 ) 745,386 ( 7,861 )
Non-mortgage asset-backed securities
78,964 ( 962 ) 7,883 ( 85 ) 86,847 ( 1,047 )
SBA securities 10,236 ( 2 ) 142,204 ( 1,662 ) 152,440 ( 1,664 )
$ 1,922,326 $ ( 9,848 ) $ 1,205,877 $ ( 11,760 ) $ 3,128,203 $ ( 21,608 )
The Company monitors its investment securities available for sale for credit loss impairment on an individual security basis. An allowance for credit loss was recorded related to one private label commercial MBS security during the three and nine months ended September 30, 2020. See further discussion below in the section entitled "Private Label Commercial MBS". There were no securities other than temporarily impaired during the three and nine months ended September 30, 2019. At September 30, 2020 the Company did not have an intent to sell securities that were in significant unrealized loss positions and it was not more likely than not that the Company would be required to sell these securities before recovery of the amortized cost basis, which may be at maturity. In making this determination, the Company considered its current and projected liquidity position, its investment policy as to permissible holdings and concentration limits, regulatory requirements and other relevant factors.
At September 30, 2020, 180 securities available for sale were in unrealized loss positions. The amount of impairment related to 37 of these securities was considered insignificant both individually and in the aggregate, totaling approximately $ 0.3 million and no further analysis with respect to these securities was considered necessary.
Unrealized losses at September 30, 2020, particularly in the private label CMBS and CLO asset classes, were primarily attributable to widening spreads, resulting in large part from market response to, and dislocation in the wake of, the COVID-19 pandemic.
The basis for conclusions regarding credit loss impairment of AFS debt securities and the need to record an ACL at September 30, 2020 is further discussed below.
U.S. Government Agency and Government Sponsored Enterprise Securities
At September 30, 2020, twenty-nine U.S. Government agency and sponsored enterprise residential MBS, five U.S. Government agency and sponsored enterprise commercial MBS and eleven SBA securities were in unrealized loss positions. The timely payment of principal and interest on these securities is explicitly or implicitly guaranteed by the U.S. Government. As such, there is an assumption of zero credit loss and the Company expects to recover the entire amortized cost basis of these securities.
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Private Label Securities:
None of the impaired securities had missed principal or interest payments or had been downgraded by a NRSRO at September 30, 2020. The Company performed an analysis comparing the present value of cash flows expected to be collected to the amortized cost basis of impaired securities. This analysis was based on a scenario that we believe to be generally more severe than our reasonable and supportable economic forecast at September 30, 2020, and incorporated assumptions about voluntary prepayment rates, collateral defaults, delinquencies, severity and other relevant factors as described further below. Our analysis also considered the structural characteristics of each security and the level of credit enhancement provided by that structure.
Private label residential MBS and CMOs
At September 30, 2020, five private label residential MBS and CMOs were in unrealized loss positions. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, voluntary prepayment rates, loss severity, delinquencies and recovery lag. In developing those assumptions, we took into account collateral quality measures such as FICO, LTV, documentation, loan type, property type, agency availability criteria and performing status. We also regularly monitor sector data including home price appreciation, forbearance, delinquency and prepay trends as well as other economic data which would indicate further stress in the sector. Our September 30, 2020 analysis projected weighted average collateral losses for impaired securities in this category of 4 % compared to weighted average credit support of 19 %. As of September 30, 2020, 100 % of the impaired securities in this category, based on carrying value, were externally rated AAA.
Private label commercial MBS
At September 30, 2020, sixty-five private label commercial MBS were in unrealized loss positions. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, voluntary prepayment rates, loss severity, delinquencies and recovery lag. In developing those assumptions, we took into account collateral quality and type, loan size, loan purpose and other qualitative factors. We also regularly monitor collateral watch lists, bankruptcy data, special servicing trends, delinquency and other economic data which would indicate further stress in the sector. An allowance for credit loss of $ 0.6 million was recorded for one security in this asset class. While this security is not projected to sustain credit losses and management does not intend to sell the security at the balance sheet date, due to negative underlying collateral performance trends, the security is being closely monitored and may not be held until full recovery of its amortized cost basis.
Our September 30, 2020 analysis projected weighted average collateral losses for impaired securities in this category of 12 % compared to weighted average credit support of 42 %. As of September 30, 2020, 83 % of impaired securities in this category, based on carrying value were externally rated AAA, 12 % were rated AA and 5 % were rated A.
Single family rental real estate-backed securities
At September 30, 2020, three single family rental real estate-backed securities were in unrealized loss positions. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, loss severity, delinquencies and recovery lag. We regularly monitor sector data including home price appreciation, forbearance, delinquency and prepay trends as well as other economic data which would indicate further stress in the sector. Our September 30, 2020 analysis projected weighted average collateral losses for impaired securities in this category of 14 % compared to weighted average credit support of 44 %. As of September 30, 2020, 88 % of the impaired securities in this category, based on carrying value, were externally rated AAA and 12 % were rated AA.
Collateralized loan obligations
At September 30, 2020, twenty-three collateralized loan obligations were in unrealized loss positions. Leveraged loans underlying these securities have seen pricing pressure as the market looks to evaluate ability of borrowers to maintain payments. Uncertainties surrounding the broad economy and how they may translate into rating downgrades and defaults as the COVID-19 crisis plays out have negatively impacted pricing in the leveraged loan market. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, loss severity, and delinquencies, calibrated to take into account idiosyncratic risks associated with the underlying collateral. In developing those assumptions, we took into account each sector’s performance pre, during and post the 2008 financial crisis. We regularly engage with bond
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managers to monitor trends in underlying collateral including potential downgrades and subsequent cash flow diversions, liquidity, ratings migration, and any other relevant developments. Our September 30, 2020 analysis projected weighted average collateral losses for impaired securities in this category of 22 % compared to weighted average credit support of 42 %. As of September 30, 2020, 80 % of the impaired securities in this category, based on carrying value, were externally rated AAA, 16 % were rated AA and 4 % were rated A.
Non-mortgage asset-backed securities
At September 30, 2020, two non-mortgage asset-backed securities were in unrealized loss positions. These securities are backed by student loan collateral. Our analysis of cash flows expected to be collected on these securities incorporated assumptions about collateral default rates, loss severity, delinquencies, voluntary prepayment rates and recovery lag. In developing those assumptions, we took into account collateral type, delineated by whether collateral consisted of loans to borrowers in school, refinancing, or a mixture. Our September 30, 2020 analysis projected weighted average collateral losses for impaired securities in this category of 10 % compared to weighted average credit support of 22 %. As of September 30, 2020, 100 % of the impaired securities in this category, based on carrying value, were externally rated AA.
Note 4 Loans and Allowance for Credit Losses
Loans consisted of the following at the dates indicated (dollars in thousands):
September 30, 2020 December 31, 2019
Total Percent of Total Total Percent of Total
Residential and other consumer:
1-4 single family residential $ 4,845,156 20.4 % $ 4,953,936 21.4 %
Government insured residential 1,089,055 4.6 % 698,644 3.0 %
Other consumer loans 6,689 0.1 % 8,539 0.1 %
5,940,900 25.1 % 5,661,119 24.5 %
Commercial:
Multi-family 1,810,126 7.6 % 2,217,705 9.6 %
Non-owner occupied commercial real estate 4,910,835 20.7 % 5,030,904 21.7 %
Construction and land 263,381 1.1 % 243,925 1.1 %
Owner occupied commercial real estate 2,051,577 8.6 % 2,062,808 8.9 %
Commercial and industrial 4,427,351 18.6 % 4,655,349 20.1 %
PPP 829,798 3.5 % — — %
Pinnacle 1,157,706 4.8 % 1,202,430 5.2 %
Bridge - franchise finance 606,222 2.5 % 627,482 2.6 %
Bridge - equipment finance 530,516 2.2 % 684,794 3.0 %
Mortgage warehouse lending 1,250,903 5.3 % 768,472 3.3 %
17,838,415 74.9 % 17,493,869 75.5 %
Total loans 23,779,315 100.0 % 23,154,988 100.0 %
Allowance for credit losses ( 274,128 ) ( 108,671 )
Loans, net $ 23,505,187 $ 23,046,317
Premiums, discounts and deferred fees and costs, excluding the non-credit related discount on PCD loans, totaled $ 30 million and $ 50 million at September 30, 2020 and December 31, 2019, respectively. The amortized cost basis of residential PCD loans was $ 126 million and the related amount of non-credit discount was $ 125 million at September 30, 2020. The ACL related to PCD residential loans was $ 1.5 million and $ 1.7 million at September 30, 2020 and January 1, 2020, the date of initial adoption of ASU 2016-13, respectively.
Included in the table above are direct or sales type finance leases totaling $ 687 million and $ 733 million at September 30, 2020 and December 31, 2019, respectively. The amount of income recognized from direct or sales type finance leases for the
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three and nine months ended September 30, 2020 and 2019 totaled $ 5.3 million, $ 16.0 million, $ 5.7 million and $ 16.5 million, respectively and is recorded as interest income on loans in the consolidated statements of income.
During the three and nine months ended September 30, 2020 and 2019, the Company purchased 1-4 single family residential loans totaling $ 997 million, $ 2.1 billion, $ 743 million and $ 1.6 billion, respectively. Purchases for the three and nine months ended September 30, 2020 and 2019 included $ 418 million, $ 947 million, $ 288 million and $ 572 million, respectively, of government insured residential loans.
At September 30, 2020 and December 31, 2019, the Company had pledged loans with a carrying value of approximately $ 10.9 billion and $ 10.2 billion, respectively, as security for FHLB advances, Federal Reserve discount window capacity and PPPLF borrowings.
At September 30, 2020 and December 31, 2019, accrued interest receivable on loans totaled $ 105 million and $ 83 million, respectively, and is included in other assets in the accompanying consolidated balance sheets. The amount of interest income reversed on non-accrual loans was not material for the three and nine months ended September 30, 2020.
Allowance for credit losses
Activity in the allowance for credit losses is summarized below. The balance at December 31, 2019 and amounts presented for the three and nine months ended September 30, 2019 represent the allowance for loan and leases losses, estimated using an incurred loss methodology. The ACL at September 30, 2020 and activity for the three and nine months then ended were determined using the CECL methodology (in thousands):
Three Months Ended September 30,
2020 2019
Residential and Other Consumer Commercial Total Residential and Other Consumer Commercial Total
Beginning balance $ 10,695 $ 255,428 $ 266,123 $ 11,236 $ 100,905 $ 112,141
Provision 5,331 22,315 27,646 158 1,681 1,839
Charge-offs (1)
— ( 23,770 ) ( 23,770 ) — ( 6,141 ) ( 6,141 )
Recoveries 4 4,125 4,129 5 618 623
Ending balance $ 16,030 $ 258,098 $ 274,128 $ 11,399 $ 97,063 $ 108,462
Nine Months Ended September 30,
2020 2019
Residential and Other Consumer Commercial Total Residential and Other Consumer Commercial Total
Beginning balance $ 11,154 $ 97,517 $ 108,671 $ 10,788 $ 99,143 $ 109,931
Impact of adoption of ASU 2016-13 8,098 19,207 27,305 — — —
Balance after adoption of CECL 19,252 116,724 135,976 — — —
Provision (recovery) ( 3,241 ) 184,336 181,095 439 8,934 9,373
Charge-offs ( 31 ) ( 50,723 ) ( 50,754 ) — ( 13,985 ) ( 13,985 )
Recoveries 50 7,761 7,811 172 2,971 3,143
Ending balance $ 16,030 $ 258,098 $ 274,128 $ 11,399 $ 97,063 $ 108,462
(1) Charge-offs for the three months ended September 30, 2020 includes $ 22.1 million related to one commercial and industrial relationship that was risk rated substandard prior to the onset of the COVID-19 pandemic.

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September 30, 2020

The following table presents the components of the provision for credit losses for the periods indicated (in thousands):
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Amount related to funded portion of loans $ 27,646 $ 181,095
Amount related to off-balance sheet credit exposures ( 93 ) ( 2,700 )
Amount related to accrued interest receivable 1,063 1,063
Provision for credit losses - loans 28,616 179,458
Provision for credit losses - AFS debt securities 616 616
Total provision for credit losses $ 29,232 $ 180,074
Credit quality information
The increase in the ACL from January 1, 2020, the date of initial adoption of ASU 2016-13, to September 30, 2020 was reflective of the estimated impact of the emerging COVID-19 pandemic on the trajectory of the economy and on individual borrowers and portfolio sub-segments. The credit quality of the loan portfolio has been and is likely to continue to be impacted by the developing COVID-19 crisis, its impact on the economy broadly and more specifically on the Company's individual borrowers. Significant uncertainty currently exists about the full extent of this impact, and the impact may not be fully reflected in some of the credit quality indicators disclosed below as of September 30, 2020, due to the still evolving trajectory of the pandemic. Delinquency statistics may not be fully reflective of the impact of the COVID-19 crisis due to deferral programs offered to affected borrowers.
Credit quality of loans held for investment is continuously monitored by dedicated residential credit risk management and commercial portfolio management functions. The Company also has a workout and recovery department that monitors the credit quality of criticized and classified loans and an independent internal credit review function.
Credit quality indicators for residential loans
Management considers delinquency status to be the most meaningful indicator of the credit quality of residential and other consumer loans, other than government insured residential loans. Delinquency statistics are updated at least monthly. LTV and FICO scores are also important indicators of credit quality for 1-4 single family residential loans other than government insured loans. FICO scores are generally updated at least annually, and were most recently updated in the third quarter of 2020. LTVs are typically at origination since we do not routinely update residential appraisals. Substantially all of the government insured residential loans are government insured buyout loans, which the Company buys out of GNMA securitizations upon default. For these loans, traditional measures of credit quality are not particularly relevant considering the guaranteed nature of the loans and the underlying business model. Factors that impact risk inherent in the residential portfolio segment include national and regional economic conditions such as levels of unemployment and wages, as well as residential property values.
1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on delinquency status:
September 30, 2020
Amortized Cost By Origination Year
2020 2019 2018 2017 2016 Prior Total
Current $ 528,199 $ 741,476 $ 426,780 $ 699,906 $ 833,132 $ 1,561,448 $ 4,790,941
30 - 59 Days Past Due 8,663 6,838 5,691 1,568 1,855 17,284 41,899
60 - 89 Days Past Due — — — — 24 2,256 2,280
90 Days or More Past Due — 807 1,761 53 1,004 6,411 10,036
$ 536,862 $ 749,121 $ 434,232 $ 701,527 $ 836,015 $ 1,587,399 $ 4,845,156
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December 31, 2019
Amortized Cost By Origination Year
2019 2018 2017 2016 2015 Prior Total
Current $ 804,913 $ 609,814 $ 830,710 $ 783,318 $ 633,833 $ 1,225,030 $ 4,887,618
30 - 59 Days Past Due 13,915 3,003 3,751 8,419 4,308 12,238 45,634
60 - 89 Days Past Due 1,785 442 137 486 1,766 4,962 9,578
90 Days or More Past Due — 1,762 914 — 5,030 3,400 11,106
$ 820,613 $ 615,021 $ 835,512 $ 792,223 $ 644,937 $ 1,245,630 $ 4,953,936
1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on LTV:
September 30, 2020
Amortized Cost By Origination Year
LTV 2020 2019 2018 2017 2016 Prior Total
Less than 61% $ 196,638 $ 165,287 $ 91,845 $ 194,988 $ 314,274 $ 546,052 $ 1,509,084
61% - 70% 150,811 177,825 103,789 133,872 210,631 386,857 1,163,785
71% - 80% 187,963 393,162 210,356 314,092 291,439 627,088 2,024,100
More than 80% 1,450 12,847 28,242 58,575 19,671 27,402 148,187
$ 536,862 $ 749,121 $ 434,232 $ 701,527 $ 836,015 $ 1,587,399 $ 4,845,156
December 31, 2019
Amortized Cost By Origination Year
LTV 2019 2018 2017 2016 2015 Prior Total
Less than 61% $ 171,069 $ 134,978 $ 183,807 $ 228,868 $ 197,039 $ 372,221 $ 1,287,982
61% - 70 % 195,572 128,766 152,502 188,856 154,307 316,031 1,136,034
71% - 80% 442,311 313,779 404,743 338,000 283,202 531,377 2,313,412
More than 80% 11,661 37,498 94,460 36,499 10,389 26,001 216,508
$ 820,613 $ 615,021 $ 835,512 $ 792,223 $ 644,937 $ 1,245,630 $ 4,953,936
1-4 Single Family Residential credit exposure, excluding government insured residential loans, based on FICO score:
September 30, 2020
Amortized Cost By Origination Year
FICO 2020 2019 2018 2017 2016 Prior Total
760 or greater $ 411,055 $ 515,046 $ 269,976 $ 518,064 $ 619,639 $ 1,084,645 $ 3,418,425
720 - 759 94,190 141,462 90,222 116,482 146,092 282,188 870,636
719 or less 31,617 92,613 74,034 66,981 70,284 220,566 556,095
$ 536,862 $ 749,121 $ 434,232 $ 701,527 $ 836,015 $ 1,587,399 $ 4,845,156
December 31, 2019
Amortized Cost By Origination Year
FICO 2019 2018 2017 2016 2015 Prior Total
760 or greater $ 470,057 $ 340,716 $ 534,017 $ 533,804 $ 430,706 $ 763,807 $ 3,073,107
720 - 759 242,806 185,939 200,623 178,139 141,748 307,195 1,256,450
719 or less 107,750 88,366 100,872 80,280 72,483 174,628 624,379
$ 820,613 $ 615,021 $ 835,512 $ 792,223 $ 644,937 $ 1,245,630 $ 4,953,936
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

Credit quality indicators for commercial loans
Factors that impact risk inherent in commercial portfolio segments include but are not limited to levels of economic activity, health of the national and regional economy, industry trends, patterns of and trends in customer behavior that influence demand for our borrowers' products and services, and commercial real estate values. Internal risk ratings are considered the most meaningful indicator of credit quality for commercial loans. Internal risk ratings are generally indicative of the likelihood that a borrower will default, are a key factor influencing the level and nature of ongoing monitoring of loans and may impact the estimation of the ACL. Internal risk ratings are updated on a continuous basis. Generally, relationships with balances in excess of defined thresholds, ranging from $ 1 million to $ 3 million, are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. Since the onset of the COVID-19 pandemic, risk ratings have been re-evaluated for a substantial portion of the commercial portfolio, with a focus on portfolio segments we identified for enhanced monitoring and loans that have been modified or for which we granted temporary payment deferrals. Loans exhibiting potential credit weaknesses that deserve management’s close attention and that could result in deterioration of repayment prospects at some future date if not checked or corrected are categorized as special mention. Loans with well-defined credit weaknesses, including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow from current operations, 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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Commercial credit exposure based on internal risk rating:
September 30, 2020
Amortized Cost By Origination Year Revolving Loans
2020 2019 2018 2017 2016 Prior Total
Multi-Family
Pass $ 184,395 $ 275,468 $ 157,381 $ 207,788 $ 312,223 $ 474,288 $ 37,408 $ 1,648,951
Special mention — — 15,766 11,260 1,850 — — 28,876
Substandard — 26,150 — 15,778 14,157 76,214 — 132,299
Total Multi-Family $ 184,395 $ 301,618 $ 173,147 $ 234,826 $ 328,230 $ 550,502 $ 37,408 $ 1,810,126
Non-owner occupied commercial real estate
Pass $ 296,417 $ 1,144,727 $ 751,798 $ 457,210 $ 512,790 $ 683,050 $ 103,687 $ 3,949,679
Special mention — 47,096 13,876 67,386 95,819 102,938 — 327,115
Substandard 11,449 86,647 61,170 17,410 233,371 223,994 — 634,041
Total non-owner occupied commercial real estate $ 307,866 $ 1,278,470 $ 826,844 $ 542,006 $ 841,980 $ 1,009,982 $ 103,687 $ 4,910,835
Construction and Land
Pass $ 20,155 $ 130,156 $ 7,690 $ 49,021 $ 27,092 $ 913 $ 241 $ 235,268
Special mention — — 8,083 8,604 4,284 — — 20,971
Substandard — 1,423 1,288 — 4,085 346 — 7,142
Total Construction and Land $ 20,155 $ 131,579 $ 17,061 $ 57,625 $ 35,461 $ 1,259 $ 241 $ 263,381
Owner occupied commercial real estate
Pass $ 197,281 $ 267,705 $ 264,479 $ 251,357 $ 304,613 $ 393,316 $ 19,841 $ 1,698,592
Special mention 2,614 48,328 11,636 65,822 23,023 25,217 17,227 193,867
Substandard — 20,762 18,767 11,751 23,549 75,149 9,140 159,118
Total owner occupied commercial real estate $ 199,895 $ 336,795 $ 294,882 $ 328,930 $ 351,185 $ 493,682 $ 46,208 $ 2,051,577
Commercial and industrial
Pass $ 373,737 $ 899,913 $ 314,032 $ 275,778 $ 198,928 $ 52,623 $ 1,770,311 $ 3,885,322
Special mention 11,390 82,659 18,971 1,406 23,127 6,309 52,626 196,488
Substandard 11,978 70,971 67,610 12,037 25,189 30,003 127,753 345,541
Total commercial and industrial $ 397,105 $ 1,053,543 $ 400,613 $ 289,221 $ 247,244 $ 88,935 $ 1,950,690 $ 4,427,351
PPP
Pass $ 829,798 $ — $ — $ — $ — $ — $ — $ 829,798
PPP $ 829,798 $ — $ — $ — $ — $ — $ — $ 829,798
Pinnacle
Pass $ 141,475 $ 120,453 $ 74,711 $ 214,037 $ 212,343 $ 394,687 $ — $ 1,157,706
Total Pinnacle $ 141,475 $ 120,453 $ 74,711 $ 214,037 $ 212,343 $ 394,687 $ — $ 1,157,706
Bridge - Franchise Finance
Pass $ 52,422 $ 91,804 $ 30,647 $ 15,771 $ 16,455 $ 13,191 $ — $ 220,290
Special mention 5,403 89,369 27,752 7,022 6,697 3,395 — 139,638
Substandard 29,908 82,014 81,021 28,821 18,376 5,216 — 245,356
Doubtful — — — — 938 — — 938
Total Bridge - Franchise Finance $ 87,733 $ 263,187 $ 139,420 $ 51,614 $ 42,466 $ 21,802 $ — $ 606,222
Bridge - Equipment Finance
Pass $ 24,073 $ 187,592 $ 75,598 $ 57,313 $ 42,307 $ 58,139 $ — $ 445,022
Special mention — — 20,034 24,992 — — — 45,026
Substandard — 3,452 10,620 26,396 — — — 40,468
Total Bridge - Equipment Finance $ 24,073 $ 191,044 $ 106,252 $ 108,701 $ 42,307 $ 58,139 $ — $ 530,516
Mortgage Warehouse Lending
Pass $ — $ — $ — $ — $ — $ — $ 1,250,903 $ 1,250,903
Total Mortgage Warehouse Lending $ — $ — $ — $ — $ — $ — $ 1,250,903 $ 1,250,903
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September 30, 2020

At September 30, 2020, the balance of revolving loans converted to term loans was immaterial.
The following tables summarize the Company's commercial credit exposure based on internal risk rating, in aggregate, at the dates indicated (in thousands):
September 30, 2020
Multi-Family Non-Owner Occupied Commercial Real Estate Construction
and Land 		Owner Occupied Commercial Real Estate Commercial and Industrial PPP Pinnacle Bridge - Franchise Finance Bridge - Equipment Finance Mortgage Warehouse Lending Total
Pass $ 1,648,951 $ 3,949,679 $ 235,268 $ 1,698,592 $ 3,885,322 $ 829,798 $ 1,157,706 $ 220,290 $ 445,022 $ 1,250,903 $ 15,321,531
Special mention 28,876 327,115 20,971 193,867 196,488 — — 139,638 45,026 — 951,981
Substandard (1)
132,299 634,041 7,142 159,118 345,541 — — 245,356 40,468 — 1,563,965
Doubtful — — — — — — — 938 — — 938
$ 1,810,126 $ 4,910,835 $ 263,381 $ 2,051,577 $ 4,427,351 $ 829,798 $ 1,157,706 $ 606,222 $ 530,516 $ 1,250,903 $ 17,838,415
(1) Includes $ 1.4 billion of substandard accruing loans at September 30, 2020.
December 31, 2019
Multi-Family Non-Owner Occupied Commercial Real Estate Construction
and Land 		Owner Occupied Commercial Real Estate Commercial and Industrial Pinnacle Bridge - Franchise Finance Bridge - Equipment Finance Mortgage Warehouse Lending Total
Pass $ 2,184,771 $ 4,932,279 $ 240,734 $ 1,991,556 $ 4,508,563 $ 1,202,430 $ 562,042 $ 663,855 $ 768,472 $ 17,054,702
Special mention — 5,831 — 27,870 28,498 — 10,682 — — 72,881
Substandard (1)
32,934 92,794 3,191 43,382 118,288 — 54,758 20,939 — 366,286
$ 2,217,705 $ 5,030,904 $ 243,925 $ 2,062,808 $ 4,655,349 $ 1,202,430 $ 627,482 $ 684,794 $ 768,472 $ 17,493,869
(1) Includes $ 180 million of substandard accruing loans at December 31, 2019.
Past Due and Non-Accrual Loans:
The following table presents an aging of loans at the dates indicated (in thousands):
September 30, 2020 December 31, 2019
Current 30 - 59
Days Past
Due 		60 - 89
Days Past
Due 		90 Days or
More Past
Due 		Total Current 30 - 59
Days Past
Due 		60 - 89
Days Past
Due 		90 Days or
More Past
Due 		Total
1-4 single family residential
$ 4,790,941 $ 41,899 $ 2,280 $ 10,036 $ 4,845,156 $ 4,887,618 $ 45,634 $ 9,578 $ 11,106 $ 4,953,936
Government insured residential
382,620 70,183 45,355 590,897 1,089,055 93,560 45,347 30,426 529,311 698,644
Other consumer loans
6,434 233 22 — 6,689 8,539 — — — 8,539
Multi-family
1,778,604 23,152 8,370 — 1,810,126 2,217,705 — — — 2,217,705
Non-owner occupied commercial real estate
4,709,649 51,512 130,454 19,220 4,910,835 5,015,458 — 928 14,518 5,030,904
Construction and land
263,035 — — 346 263,381 240,647 2,396 — 882 243,925
Owner occupied commercial real estate
2,036,782 630 1,706 12,459 2,051,577 2,041,352 1,336 4,420 15,700 2,062,808
Commercial and industrial
4,358,670 27,840 4,891 35,950 4,427,351 4,595,847 2,313 4,301 52,888 4,655,349
PPP
829,798 — — — 829,798 — — — — —
Pinnacle
1,157,706 — — — 1,157,706 1,202,430 — — — 1,202,430
Bridge - franchise finance
577,583 19 13,041 15,579 606,222 610,315 3,840 2,501 10,826 627,482
Bridge - equipment finance
530,516 — — — 530,516 677,089 7,705 — — 684,794
Mortgage warehouse lending
1,250,903 — — — 1,250,903 768,472 — — — 768,472
$ 22,673,241 $ 215,468 $ 206,119 $ 684,487 $ 23,779,315 $ 22,359,032 $ 108,571 $ 52,154 $ 635,231 $ 23,154,988
Included in the table above is the guaranteed portion of SBA loans past due by 90 days or more totaling $ 33.6 million and $ 36.3 million at September 30, 2020 and December 31, 2019, respectively.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

Loans contractually delinquent by 90 days or more and still accruing totaled $ 595 million and $ 531 million at September 30, 2020 and December 31, 2019, substantially all of which were government insured residential loans. These loans are government insured pool buyout loans, which the Company buys out of GNMA securitizations upon default.
The following table presents information about loans on non-accrual status at the dates indicated (in thousands):
September 30, 2020 December 31, 2019
Amortized Cost Amortized Cost With No Related Allowance Amortized Cost
Residential and other consumer $ 8,031 $ 2,683 $ 18,894
Commercial:
Multi-family — — 6,138
Non-owner occupied commercial real estate 54,944 27,002 40,097
Construction and land 4,432 4,086 3,191
Owner occupied commercial real estate 23,953 4,835 27,141
Commercial and industrial 72,094 11,898 74,757
Bridge - franchise finance 32,762 2,458 13,631
Bridge - equipment finance — — 20,939
$ 196,216 $ 52,962 $ 204,788
Included in the table above is the guaranteed portion of non-accrual SBA loans totaling $ 43.6 million and $ 45.7 million at September 30, 2020 and December 31, 2019, respectively. The amount of additional interest income that would have been recognized on non-accrual loans had they performed in accordance with their contractual terms was approximately $ 2.7 million and $ 7.6 million for the three and nine months ended September 30, 2020, respectively and $ 2.0 million and $ 6.0 million for the three and nine months ended September 30, 2019, respectively.
Collateral dependent loans:
The following table presents the amortized cost basis of collateral dependent loans at September 30, 2020 (in thousands):
Amortized Cost Extent to Which Secured by Collateral
Residential and other consumer $ 3,339 $ 3,331
Commercial:
Non-owner occupied commercial real estate 40,348 40,288
Construction and land 4,432 4,432
Owner occupied commercial real estate 15,107 15,107
Commercial and industrial 29,506 17,506
Bridge - franchise finance 19,122 12,724
Total commercial 108,515 90,057
$ 111,854 $ 93,388
Collateral for the non-owner occupied commercial real estate and owner-occupied commercial real estate loan classes generally consists of commercial real estate. Collateral for construction and land loans is typically residential or commercial real estate. Collateral for commercial and industrial loans generally consists of equipment, accounts receivable, inventory and other business assets; owner-occupied commercial real estate loans may also be collateralized by these types of assets. Bridge franchise finance loans may be collateralized by franchise value or by equipment. Bridge equipment finance loans are secured by the financed equipment. Residential loans are collateralized by residential real estate. There have been no significant changes to the extent to which collateral secures collateral dependent loans during the nine months ended September 30, 2020.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

Foreclosure of residential real estate
The recorded investment in residential loans in the process of foreclosure was $ 270 million, of which $ 264 million was government insured, at September 30, 2020 and $ 257 million, of which $ 248 million was government insured, at December 31, 2019. The carrying amount of foreclosed residential real estate included in other assets in the accompanying consolidated balance sheet was insignificant at September 30, 2020 and $ 6 million at December 31, 2019. In response to the COVID-19 pandemic, new foreclosure actions on residential loans have been temporarily suspended.
Troubled debt restructurings
The following table summarizes loans that were modified in TDRs during the periods indicated, as well as loans modified during the twelve months preceding September 30, 2020 and 2019 that experienced payment defaults during the periods indicated (dollars in thousands):
Three Months Ended September 30,
2020 2019
Loans Modified in TDRs
During the Period 		TDRs Experiencing Payment Defaults During the Period Loans Modified in TDRs
During the Period 		TDRs Experiencing Payment
Defaults During the Period
Number of
TDRs 		Amortized Cost Number of
TDRs 		Amortized Cost Number of
TDRs 		Amortized Cost Number of
TDRs 		Amortized Cost
1-4 single family residential 1 $ 1,221 — $ — — $ — — $ —
Government insured residential 148 24,031 65 10,249 133 21,421 56 8,461
Owner occupied commercial real estate — — — — 1 939 2 1,654
Commercial and industrial — — — — 2 4,445 3 1,652
Bridge - franchise finance — — 6 8,503 1 12,850 — —
149 $ 25,252 71 $ 18,752 137 $ 39,655 61 $ 11,767
Nine Months Ended September 30,
2020 2019
Loans Modified in TDRs
During the Period 		TDRs Experiencing Payment
Defaults During the Period 		Loans Modified in TDRs
During the Period 		TDRs Experiencing Payment
Defaults During the Period
Number of
TDRs 		Amortized Cost Number of
TDRs 		Amortized Cost Number of
TDRs 		Amortized Cost Number of
TDRs 		Amortized Cost
1-4 single family residential 2 $ 1,422 — $ — 2 $ 560 — $ —
Government insured residential 213 33,593 99 16,559 171 26,992 58 8,687
Non-owner occupied commercial real estate 1 4,249 1 4,249 1 11,791 1 2,671
Owner occupied commercial real estate — — — — 1 939 3 1,944
Commercial and industrial 1 305 — — 7 21,167 3 1,652
Bridge - franchise finance 9 14,554 7 12,081 4 15,715 — —
226 $ 54,123 107 $ 32,889 186 $ 77,164 65 $ 14,954
TDRs during the three and nine months ended September 30, 2020 and 2019 included interest rate reductions, restructuring of the amount and timing of required periodic payments, extensions of maturity and covenant waivers. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy. The total amount of such loans is not material. The majority of loan modifications or deferrals and payment deferrals that took place after the onset of the COVID-19 pandemic have not been categorized as TDRs, in accordance with interagency and authoritative guidance and the provisions of the CARES Act.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

Disclosures Prescribed by Legacy GAAP (Before Adoption of ASU 2016-13) for Prior Periods
The following table presents information about the balance of the ALLL and related loans as of December 31, 2019 (in thousands):
Residential and Other Consumer Commercial Total
Allowance for loan and lease losses:
Ending balance $ 11,154 $ 97,517 $ 108,671
Ending balance: loans individually evaluated for impairment
$ 9 $ 20,481 $ 20,490
Ending balance: loans collectively evaluated for impairment
$ 11,145 $ 77,036 $ 88,181
Ending balance: ACI loans
$ — $ — $ —
Loans:
Ending balance $ 5,661,119 $ 17,493,869 $ 23,154,988
Ending balance: loans individually evaluated for impairment
$ 57,117 $ 187,788 $ 244,905
Ending balance: loans collectively evaluated for impairment
$ 5,454,422 $ 17,288,901 $ 22,743,323
Ending balance: ACI loans
$ 149,580 $ 17,180 $ 166,760
The table below presents information about loans identified as impaired as of December 31, 2019 (in thousands):
Recorded
Investment 		UPB Related
Specific
Allowance
With no specific allowance recorded:
1-4 single family residential $ 992 $ 989 $ —
Government insured residential 53,428 53,350 —
Multi-family 6,138 6,169 —
Non-owner occupied commercial real estate 38,345 38,450 —
Construction and land 3,191 3,155 —
Owner occupied commercial real estate 17,419 17,488 —
Commercial and industrial
10,585 10,574 —
Bridge - franchise finance 4,115 4,117 —
Bridge - equipment finance 6,807 6,793 —
With a specific allowance recorded:
1-4 single family residential 2,697 2,652 9
Owner occupied commercial real estate 2,522 2,509 401
Commercial and industrial 63,531 63,709 13,992
Bridge - franchise finance 21,011 21,050 2,953
Bridge - equipment finance 14,124 14,024 3,135
Total:
Residential and other consumer $ 57,117 $ 56,991 $ 9
Commercial 187,788 188,038 20,481
$ 244,905 $ 245,029 $ 20,490
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

The following table presents the average recorded investment in impaired loans for the period indicated (in thousands):
Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Residential and other consumer:
1-4 single family residential $ 4,685 $ 4,639
Government insured residential 19,865 10,885
24,550 15,524
Commercial:
Multi-family 21,370 23,955
Non-owner occupied commercial real estate 11,938 10,628
Construction and land 6,188 7,854
Owner occupied commercial real estate 3,406 3,526
Commercial and industrial 27,297 27,879
Commercial lending subsidiaries 53,486 46,860
123,685 120,702
$ 148,235 $ 136,226
Note 5     Subordinated Notes
On June 11, 2020, the Company issued $ 300 million of 5.125 % subordinated notes. The notes mature on June 11, 2030 with interest payable semiannually. The notes have an effective interest rate of 5.39 % after consideration of issuance discount and costs. The notes may be redeemed by the Company, in whole or in part, on or after March 11, 2030 at a redemption price equal to 100% of the principal amount being redeemed plus accrued and unpaid interest, subject to the approval of the Federal Reserve. The notes qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations.
Note 6    Income Taxes
The Company’s effective income tax rate was 22.5 % and 21.3 % for the three and nine months ended September 30, 2020, respectively, and 24.1 % and 25.3 % for the three and nine months ended September 30, 2019, respectively. The effective income tax rates differed from the statutory federal income tax rate of 21% for the 2019 periods due primarily to the impact of state income taxes, partially offset by the benefit of income not subject to federal tax. These factors were largely offsetting for the 2020 periods, when the effective income tax rate did not differ materially from the Federal statutory rate of 21%. During the three and nine months ended September 30, 2020, income not subject to tax was a larger percentage of pre-tax income.
Note 7 Derivatives and Hedging Activities
The Company enters into LIBOR-based interest rate swaps that are designated as cash flow hedges with the objective of limiting the variability of interest payment cash flows resulting from changes in the benchmark interest rate LIBOR. The Company also enters into LIBOR-based interest rate swaps designated as fair value hedges designed to hedge changes in the fair value of outstanding fixed rate borrowings caused by fluctuations in the benchmark interest rate.
The Company enters into interest rate derivative contracts with certain of its commercial borrowers to enable those borrowers to manage their exposure to interest rate fluctuations. To mitigate interest rate risk associated with these derivative contracts, the Company enters into offsetting derivative contract positions with primary dealers. These interest rate derivative contracts are not designated as hedging instruments; therefore, changes in the fair value of these derivatives are recognized immediately in earnings. For the three and nine months ended September 30, 2020 and 2019, the impact on earnings, included in other non-interest income in the accompanying consolidated statements of income, related to changes in fair value of these derivatives was not material.
The Company may be exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. The Company manages dealer credit risk by entering into interest rate
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

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 significant losses from failure of interest rate derivative counterparties to honor their obligations.
The CME legally characterizes variation margin payments for centrally cleared derivatives as settlements of the derivatives' exposures rather than collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting and financial reporting purposes. The Company's clearing agent for interest rate derivative contracts centrally cleared through the CME settles the variation margin daily with the CME; therefore, those interest rate derivative contracts the Company clears through the CME are reported at a fair value of approximately zero at both September 30, 2020 and December 31, 2019.
The following tables set forth certain information concerning the Company’s interest rate contract derivative financial instruments and related hedged items at the dates indicated (dollars in thousands):
September 30, 2020
Weighted
Average Pay Rate 		Weighted
Average Receive Rate 		Weighted
Average
Remaining
Life in Years
Notional Amount Balance Sheet Location Fair Value
Hedged Item Asset Liability
Derivatives designated as cash flow hedges:
Pay-fixed interest rate swaps
Variability of interest cash flows on variable rate borrowings 2.41 % 3-Month LIBOR 2.6 $ 2,921,000 Other liabilities $ — $ ( 6,566 )
Derivatives designated as fair value hedges:
Receive-fixed interest rate swaps
Variability of fair value of fixed rate borrowings 3-Month LIBOR 1.55 % 0.8 250,000 Other liabilities — —
Derivatives not designated as hedges:
Pay-fixed interest rate swaps
3.68 % Indexed to 1-month LIBOR 5.9 1,528,952 Other assets / Other liabilities — ( 42,916 )
Pay-variable interest rate swaps
Indexed to 1-month LIBOR 3.68 % 5.9 1,528,952 Other assets 138,332 —
Interest rate caps purchased, indexed to 1-month LIBOR
3.71 % 0.7 25,955 Other assets — —
Interest rate caps sold, indexed to 1-month LIBOR
3.71 % 0.7 25,955 Other liabilities — —
$ 6,280,814 $ 138,332 $ ( 49,482 )
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

December 31, 2019
Weighted
Average Pay Rate 		Weighted
Average Receive Rate 		Weighted
Average
Remaining
Life in Years
Notional Amount Balance Sheet Location Fair Value
Hedged Item Asset Liability
Derivatives designated as cash flow hedges:
Pay-fixed interest rate swaps
Variability of interest cash flows on variable rate borrowings 2.37 % 3-Month LIBOR 3.2 $ 3,131,000 Other liabilities $ — $ ( 1,607 )
Derivatives not designated as hedges:
Receive-fixed interest rate swaps
Variability of interest cash flows on fixed rate borrowings 3-Month LIBOR 1.55 % 1.6 250,000 Other liabilities — —
Derivatives not designated as hedges
Pay-fixed interest rate swaps
3.72 % Indexed to 1-month LIBOR 6.4 1,460,355 Other assets / Other liabilities 876 ( 15,307 )
Pay-variable interest rate swaps
Indexed to 1-month LIBOR 3.72 % 6.4 1,460,355 Other assets / Other liabilities 42,810 ( 2,115 )
Interest rate caps purchased, indexed to 1-month LIBOR
3.30 % 0.6 61,004 Other assets — —
Interest rate caps sold, indexed to 1-month LIBOR
3.30 % 0.6 61,004 Other liabilities — —
$ 6,423,718 $ 43,686 $ ( 19,029 )
The following table provides information about the amount of gain (loss) related to derivatives designated as cash flow hedges reclassified from AOCI into interest expense for the periods indicated (in thousands):
Three Months Ended September 30, Nine Months Ended September 30, Location of Gain (Loss) Reclassified from AOCI into Income
2020 2019 2020 2019
Interest rate contracts $ ( 15,893 ) $ 509 $ ( 30,458 ) $ 4,920 Interest expense on borrowings
During the three and nine months ended September 30, 2020 and 2019, no derivative positions designated as cash flow hedges were discontinued and none of the gains and losses reported in AOCI were reclassified into earnings as a result of the discontinuance of cash flow hedges or because of the early extinguishment of debt. As of September 30, 2020, the amount of net loss expected to be reclassified from AOCI into earnings during the next twelve months was $ 57.0 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 Gain (Loss) in Consolidated Statements of Income
2020 2019 2020 2019
Fair value adjustment on derivatives $ ( 738 ) $ ( 382 ) $ 3,290 $ ( 382 ) Interest expense on borrowings
Fair value adjustment on hedged items 763 362 ( 3,309 ) 362 Interest expense on borrowings
Gain (loss) recognized on fair value hedges (ineffective portion) $ 25 $ ( 20 ) $ ( 19 ) $ ( 20 )
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

The following table provides information about the hedged items related to derivatives designated as fair value hedges at the dates indicated (in thousands):
September 30, 2020 December 31, 2019 Location in Consolidated Balance Sheets
Contractual balance outstanding
of hedged item 		$ 250,000 $ 250,000 FHLB and PPPLF borrowings
Cumulative fair value hedging adjustments $ 2,810 $ ( 499 ) FHLB and PPPLF borrowings
Some of the Company’s ISDA master agreements with financial institution counterparties contain provisions that permit either counterparty to terminate the agreements and require settlement in the event that regulatory capital ratios fall below certain designated thresholds, upon the initiation of other defined regulatory actions or upon suspension or withdrawal of the Bank’s credit rating. Currently, there are no circumstances that would trigger these provisions of the agreements.
The Company does not offset assets and liabilities under master netting agreements for financial reporting purposes. Information on interest rate swaps subject to these agreements is as follows at the dates indicated (dollars in thousands):
September 30, 2020
Gross Amounts Offset in Balance
Sheet 		Net Amounts Presented in
Balance Sheet 		Gross Amounts Not Offset in
Balance Sheet
Gross Amounts
Recognized 		Derivative
Instruments 		Collateral
Pledged 		Net Amount
Derivative assets $ — $ — $ — $ — $ — $ —
Derivative liabilities ( 49,482 ) — ( 49,482 ) — 49,482 —
$ ( 49,482 ) $ — $ ( 49,482 ) $ — $ 49,482 $ —
December 31, 2019
Gross Amounts Offset in Balance
Sheet 		Net Amounts Presented in
Balance Sheet 		Gross Amounts Not Offset in
Balance Sheet
Gross Amounts
Recognized 		Derivative
Instruments 		Collateral
Pledged 		Net Amount
Derivative assets $ 876 $ — $ 876 $ ( 876 ) $ — $ —
Derivative liabilities ( 16,914 ) — ( 16,914 ) 876 16,038 —
$ ( 16,038 ) $ — $ ( 16,038 ) $ — $ 16,038 $ —
The difference between the amounts reported for interest rate swaps subject to master netting agreements and the total fair value of interest rate contract derivative financial instruments reported in the consolidated balance sheets is related to interest rate derivative contracts not subject to master netting agreements.
At September 30, 2020, the Company had pledged net financial collateral of $ 54.5 million as collateral for interest rate swaps in a liability position that are not centrally cleared. The amount of collateral required to be posted varies based on the settlement value of outstanding swaps and in some cases may include initial margin requirements.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

Note 8    Stockholders’ Equity
Accumulated Other Comprehensive Income
Changes in other comprehensive income are summarized as follows for the periods indicated (in thousands):
Three Months Ended September 30,
2020 2019
Before Tax Tax Effect Net of Tax Before Tax Tax Effect Net of Tax
Unrealized gains (losses) on investment securities available for sale:
Net unrealized holding gain arising during the period
$ 66,885 $ ( 17,056 ) $ 49,829 $ 11,372 $ ( 3,014 ) $ 8,358
Amounts reclassified to gain on investment securities available for sale, net
( 2,262 ) 577 ( 1,685 ) ( 3,426 ) 908 ( 2,518 )
Net change in unrealized gains (losses) on investment securities available for sale
64,623 ( 16,479 ) 48,144 7,946 ( 2,106 ) 5,840
Unrealized losses on derivative instruments:
Net unrealized holding gain (loss) arising during the period 1,680 ( 429 ) 1,251 ( 22,822 ) 6,048 ( 16,774 )
Amounts reclassified to interest expense on borrowings
15,836 ( 4,038 ) 11,798 ( 509 ) 135 ( 374 )
Net change in unrealized losses on derivative instruments
17,516 ( 4,467 ) 13,049 ( 23,331 ) 6,183 ( 17,148 )
Other comprehensive income (loss) $ 82,139 $ ( 20,946 ) $ 61,193 $ ( 15,385 ) $ 4,077 $ ( 11,308 )
Nine Months Ended September 30,
2020 2019
Before Tax Tax Effect Net of Tax Before Tax Tax Effect Net of Tax
Unrealized gains (losses) on investment securities available for sale:
Net unrealized holding gain arising during the period $ 33,142 $ ( 8,068 ) $ 25,074 $ 72,519 $ ( 19,218 ) $ 53,301
Amounts reclassified to gain on investment securities available for sale, net
( 9,515 ) 2,426 ( 7,089 ) ( 11,657 ) 3,089 ( 8,568 )
Net change in unrealized gains (losses) on investment securities available for sale
23,627 ( 5,642 ) 17,985 60,862 ( 16,129 ) 44,733
Unrealized losses on derivative instruments:
Net unrealized holding loss arising during the period
( 120,559 ) 29,926 ( 90,633 ) ( 101,588 ) 26,921 ( 74,667 )
Amounts reclassified to interest expense on borrowings
30,401 ( 7,752 ) 22,649 ( 4,920 ) 1,304 ( 3,616 )
Net change in unrealized losses on derivative instruments
( 90,158 ) 22,174 ( 67,984 ) ( 106,508 ) 28,225 ( 78,283 )
Other comprehensive loss $ ( 66,531 ) $ 16,532 $ ( 49,999 ) $ ( 45,646 ) $ 12,096 $ ( 33,550 )
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

The categories of AOCI and changes therein are presented below for the periods indicated (in thousands):
Three Months Ended September 30,
Unrealized Gain (Loss) on
Investment Securities
Available for Sale 		Unrealized Gain (Loss)
on Derivative
Instruments 		Total
Balance at June 30, 2020 $ ( 1,974 ) $ ( 141,045 ) $ ( 143,019 )
Other comprehensive income 48,144 13,049 61,193
Balance at September 30, 2020 $ 46,170 $ ( 127,996 ) $ ( 81,826 )
Balance at June 30, 2019 $ 43,087 $ ( 60,456 ) $ ( 17,369 )
Other comprehensive income (loss) 5,840 ( 17,148 ) ( 11,308 )
Balance at September 30, 2019 $ 48,927 $ ( 77,604 ) $ ( 28,677 )
Nine Months Ended September 30,
Unrealized Gain on
Investment Securities
Available for Sale 		Unrealized Gain (Loss)
on Derivative
Instruments 		Total
Balance at December 31, 2019 $ 28,185 $ ( 60,012 ) $ ( 31,827 )
Other comprehensive income (loss) 17,985 ( 67,984 ) ( 49,999 )
Balance at September 30, 2020 $ 46,170 $ ( 127,996 ) $ ( 81,826 )
Balance at December 31, 2018 $ 4,194 $ 679 $ 4,873
Other comprehensive income (loss) 44,733 ( 78,283 ) ( 33,550 )
Balance at September 30, 2019 $ 48,927 $ ( 77,604 ) $ ( 28,677 )
Note 9    Equity Based and Other Compensation Plans
Share Awards
Unvested share awards
A summary of activity related to unvested share awards follows for the periods indicated:
Number of Share Awards Weighted Average Grant Date Fair Value
Unvested share awards outstanding, December 31, 2019 1,050,455 $ 38.24
Granted 644,300 29.73
Vested ( 468,283 ) 39.03
Canceled or forfeited ( 68,525 ) 34.78
Unvested share awards outstanding, September 30, 2020 1,157,947 $ 33.39
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
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

Unvested share awards are generally valued at the closing price of the Company's common stock on the date of grant. All shares granted prior to 2019 vest in equal annual installments over a period of three years from the date of grant. All shares granted in 2019 and 2020 to Company employees vest in equal annual installments over a period of four years from the date of grant. Shares granted to the Company's Board of Directors vest over a period of one year.
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,
2020 2019
Closing price on date of grant (1)
$ 13.99 - $ 30.90
$ 31.07 - $ 36.65
Aggregate grant date fair value of shares vesting $ 18,279 $ 20,616
(1) During the nine months ended September 30, 2020, the Company granted 599,766 and 44,534 shares with a closing price on date of grant of $ 30.90 and $ 13.99 , respectively.
The total unrecognized compensation cost of $ 25.4 million for all unvested share awards outstanding at September 30, 2020 will be recognized over a weighted average remaining period of 2.62 years.
Executive share-based awards
Certain of the Company's executives are eligible to receive annual awards of RSUs and PSUs (collectively, the "share units"). Annual awards of RSUs represent a fixed number of shares and vest on December 31st in equal tranches over three years for grants prior to 2019, and over four years for awards issued in 2019 and 2020. PSUs are initially granted based on a target value. The numb er of PSUs that ultimately vest at the end of the performance measurement period will be based on the achievement of performance criteria pre-established by the Compensation Committee of the Board of Directors. Upon vesting, the share units will be converted to common stock on a one-for-one basis, or may be settled in cash at the Company's option. The share units will accumulate dividends declared on the Company's common stock from the date of grant to be paid subsequent to vesting.
As a result of the majority of previous settlements being in cash, all RSUs and PSUs have been determined to be liability instruments and are remeasured at fair value each reporting period until the awards are settled. The RSUs are valued based on the closing price of the Company's common stock at the reporting date. The PSUs are valued based on the closing price of the Company's common stock at the reporting date net of a discount related to any applicable market conditions, considering the probability of meeting the defined performance conditions. Compensation cost related to PSUs is recognized during the performance period based on the probable outcome of the respective performance conditions.
A summary of activity related to executive share-based awards for the periods indicated follows:
RSU PSU
Unvested executive share-based awards outstanding, December 31, 2019 112,116 125,088
Granted 106,731 106,731
Unvested executive share-based awards outstanding, September 30, 2020 218,847 231,819
Unvested executive share-based awards outstanding, December 31, 2018 90,612 99,874
Granted 73,062 73,062
Unvested executive share-based awards outstanding, September 30, 2019 163,674 172,936
The total liability for the share units was $ 3.9 million at September 30, 2020. The total unrecognized compensation cost of $ 6.0 million for these share units at September 30, 2020 will be recognized over a weighted average remaining period of 2.32 years.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

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 vest over three years and awards related to the 2019 and 2020 performance periods vest in equal installments over a period of four years from the date of grant. These awards are included in the summary of activity related to unvested share awards above. The total liability and unrecognized compensation cost for incentive share awards for the 2020 performance period was not material. The accrued liability and unrecognized compensation cost are based on management's current estimate of the likely outcome of the performance criteria established in the incentive arrangements and may differ from actual results.
T he 644,300 unvested share awards granted during the nine months ended September 30, 2020, as discussed above, included 114,936 unvested share awards granted under the Company's annual incentive compensation arrangements based on the achievement of established performance criteria for the year ended December 31, 2019.
Option Awards
A summary of activity related to stock option awards for the nine months ended September 30, 2020 and 2019 follows:
Number of
Option
Awards 		Weighted
Average
Exercise Price
Option awards outstanding, December 31, 2019 737,753 $ 26.64
Exercised ( 67,768 ) 24.66
Option awards outstanding and exercisable, September 30, 2020 669,985 $ 26.84
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, September 30, 2019 936,837 $ 26.62
The intrinsic value of options exercised and related tax benefits was immaterial for the nine months ended September 30, 2020 and 2019.
Note 10 Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis
Following is a description of the methodologies used to estimate the fair values of assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which those measurements are typically classified.
Investment securities available for sale and marketable equity securities —Fair value measurements are based on quoted prices in active markets when available; these measurements are classified within level 1 of the fair value hierarchy. These securities typically include U.S. Treasury securities and certain preferred stocks. If quoted prices in active markets are not available, fair values are estimated using quoted prices of securities with similar characteristics, quoted prices of identical securities in less active markets, discounted cash flow techniques, or matrix pricing models. These securities are generally classified within level 2 of the fair value hierarchy and include U.S. Government agency securities, U.S. Government agency and sponsored enterprise MBS, preferred stock investments for which level 1 valuations are not available, non-mortgage asset-backed securities, single family rental real estate-backed securities, certain private label residential MBS and CMOs, private label commercial MBS, collateralized loan obligations and state and municipal obligations. Pricing of these securities is generally primarily spread driven. Observable inputs that may impact the valuation of these securities include benchmark yield curves, credit spreads, reported trades, dealer quotes, bids, issuer spreads, current rating, historical constant prepayment rates,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

historical voluntary prepayment rates, structural and waterfall features of individual securities, published collateral data, and for certain securities, historical constant default rates and default severities.
The Company uses third-party pricing services in determining fair value measurements for investment securities. To obtain an understanding of the methodologies and assumptions used, management reviews written documentation provided by the pricing services, conducts interviews with valuation desk personnel and reviews model results and detailed assumptions used to value selected securities as considered necessary. Management has established a robust price challenge process that includes a review by the treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from expectations is challenged. If considered necessary to resolve any discrepancies, a price will be obtained from an additional independent valuation source. The Company does not typically adjust the prices provided, other than through this established challenge process. The results of price challenges are subject to review by executive management. The Company has also established a quarterly process whereby prices provided by its primary pricing service for a sample of securities are validated. Any price discrepancies are resolved based on careful consideration of the assumptions and inputs employed by each of the pricing sources.
Servicing rights —Commercial servicing rights are valued using a discounted cash flow methodology incorporating contractually specified servicing fees and market based assumptions about prepayments, discount rates, default rates and costs of servicing. Prepayment and default assumptions are based on historical industry data for loans with similar characteristics. Assumptions about costs of servicing are based on market convention. Discount rates are based on rates of return implied by observed trades of underlying loans in the secondary market. These instruments are classified within level 2 of the fair value hierarchy.
Derivative financial instruments —Fair values of interest rate swaps are determined using widely accepted discounted cash flow modeling techniques. These discounted cash flow models use projections of future cash payments and receipts that are discounted at mid-market rates. Observable inputs that may impact the valuation of these instruments include LIBOR swap rates and LIBOR forward yield curves. These fair value measurements are generally classified within level 2 of the fair value hierarchy.
The following tables present assets and liabilities measured at fair value on a recurring basis at the dates indicated (in thousands):
September 30, 2020
Level 1 Level 2 Total
Investment securities available for sale:
U.S. Treasury securities $ 76,910 $ — $ 76,910
U.S. Government agency and sponsored enterprise residential MBS — 2,314,754 2,314,754
U.S. Government agency and sponsored enterprise commercial MBS — 541,536 541,536
Private label residential MBS and CMOs — 1,167,706 1,167,706
Private label commercial MBS — 2,440,550 2,440,550
Single family rental real estate-backed securities — 768,898 768,898
Collateralized loan obligations — 1,142,404 1,142,404
Non-mortgage asset-backed securities — 251,839 251,839
State and municipal obligations — 242,921 242,921
SBA securities — 241,759 241,759
Marketable equity securities 101,606 — 101,606
Servicing rights — 7,568 7,568
Derivative assets — 138,332 138,332
Total assets at fair value $ 178,516 $ 9,258,267 $ 9,436,783
Derivative liabilities $ — $ ( 49,482 ) $ ( 49,482 )
Total liabilities at fair value $ — $ ( 49,482 ) $ ( 49,482 )
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

December 31, 2019
Level 1 Level 2 Total
Investment securities available for sale:
U.S. Treasury securities
$ 70,325 $ — $ 70,325
U.S. Government agency and sponsored enterprise residential MBS — 2,022,175 2,022,175
U.S. Government agency and sponsored enterprise commercial MBS — 370,976 370,976
Private label residential MBS and CMOs — 1,012,177 1,012,177
Private label commercial MBS — 1,724,684 1,724,684
Single family rental real estate-backed securities — 470,025 470,025
Collateralized loan obligations — 1,197,366 1,197,366
Non-mortgage asset-backed securities — 194,904 194,904
State and municipal obligations — 273,302 273,302
SBA securities — 362,731 362,731
Marketable equity securities 60,572 — 60,572
Servicing rights — 7,977 7,977
Derivative assets — 43,686 43,686
Total assets at fair value $ 130,897 $ 7,680,003 $ 7,810,900
Derivative liabilities $ — $ ( 19,029 ) $ ( 19,029 )
Total liabilities at fair value $ — $ ( 19,029 ) $ ( 19,029 )
Assets and liabilities measured at fair value on a non-recurring basis
Following is a description of the methodologies used to estimate the fair values of assets and liabilities that may be measured at fair value on a non-recurring basis, and the level within the fair value hierarchy in which those measurements are typically classified.
Collateral dependent loans, OREO and other repossessed assets —The carrying amount of collateral dependent impaired loans is typically based on the fair value of the underlying collateral, which may be real estate or other business assets, less estimated costs to sell when repayment is expected to come from the sale of the collateral. The carrying value of OREO is initially measured based on the fair value of the real estate acquired in foreclosure and subsequently adjusted to the lower of cost or estimated fair value, less estimated cost to sell. Fair values of real estate collateral and OREO are typically based on third-party real estate appraisals which utilize market and income approaches to valuation incorporating both observable and unobservable inputs. When current appraisals are not available, the Company may use brokers’ price opinions, home price indices or other available information about changes in real estate market conditions to adjust the latest appraised value available. These adjustments to appraised values may be subjective and involve significant management judgment. The fair value of repossessed assets or collateral consisting of other business assets may be based on third-party appraisals or internal analyses that use market approaches to valuation incorporating a combination of observable and unobservable inputs.
Fair value measurements related to collateral dependent impaired loans, OREO and other repossessed assets are generally classified within level 3 of the fair value hierarchy.
Operating lease equipment —Fair values of impaired operating lease equipment are typically based upon discounted
cash flow analyses, considering expected lease rates and estimated end of life residual values, typically obtained from independent appraisals. These fair value measurements are classified within level 3 of the fair value hierarchy.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

The following tables pre sent the carrying value of assets for which non-recurring changes in fair value have been recorded for the periods indicated (in thousands):
September 30, 2020 Losses from Fair Value Changes
Level 1 Level 2 Level 3 Total Three Months Ended
September 30, 2020 		Nine Months Ended September 30, 2020
OREO and repossessed assets $ — $ — $ 3,803 $ 3,803 $ ( 30 ) $ ( 390 )
Collateral dependent loans $ — $ — $ 74,661 $ 74,661 $ ( 14,513 ) $ ( 56,737 )
Operating lease equipment $ — $ — $ 277 $ 277 $ — $ ( 691 )
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 )
Collateral dependent loans $ — $ — $ 21,104 $ 21,104 $ ( 2,351 ) $ ( 2,265 )
The following table pre s ents 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, 2020 December 31, 2019
Level Carrying Value Fair Value Carrying Value Fair Value
Assets:
Cash and cash equivalents 1 $ 369,776 $ 369,776 $ 214,673 $ 214,673
Investment securities 1/2 $ 9,300,883 $ 9,301,948 $ 7,769,237 $ 7,769,949
Non-marketable equity securities 2 $ 208,614 $ 208,614 $ 253,664 $ 253,664
Loans held for sale 2 $ 3,816 $ 4,056 $ 37,926 $ 39,731
Loans, net 3 $ 23,505,187 $ 24,007,794 $ 23,046,317 $ 23,350,684
Derivative assets 2 $ 138,332 $ 138,332 $ 43,686 $ 43,686
Liabilities:
Demand, savings and money market deposits 2 $ 20,709,307 $ 20,709,307 $ 17,047,344 $ 17,047,344
Time deposits 2 $ 5,887,903 $ 5,905,597 $ 7,347,247 $ 7,377,301
Federal funds purchased 2 $ 180,000 $ 180,000 $ 100,000 $ 100,000
FHLB and PPPLF borrowings
2 $ 4,118,460 $ 4,124,405 $ 4,480,501 $ 4,500,969
Notes and other borrowings 2 $ 722,592 $ 818,868 $ 429,338 $ 473,327
Derivative liabilities 2 $ 49,482 $ 49,482 $ 19,029 $ 19,029
Note 11     Commitments and Contingencies
The Company issues off-balance sheet financial instruments to meet the financing needs of its customers. These financial instruments include commitments to fund loans, unfunded commitments under existing lines of credit, and commercial and standby letters of credit. These commitments expose the Company to varying degrees of credit and market risk which are essentially the same as those involved in extending loans to customers, and are subject to the same credit policies used in underwriting loans. Collateral may be obtained based on the Company’s credit evaluation of the counterparty. The Company’s maximum exposure to credit loss is represented by the contractual amount of these commitments.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
September 30, 2020

Unfunded commitments under lines of credit
Unfunded commitments under lines of credit include commercial, commercial real estate and consumer lines of credit to existing customers, for many of which additional extensions of credit are subject to borrowing base requirements. Some of these commitments may mature without being fully funded.
Commercial and standby letters of credit
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support trade transactions or guarantee arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Total lending related commitments outstanding at September 30, 2020 were as follows (in thousands):
Commitments to fund loans $ 267,339
Unfunded commitments under lines of credit 3,583,714
Commercial and standby letters of credit 91,170
$ 3,942,223
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.
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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, 2020 and should be read in conjunction with the consolidated financial statements and notes hereto included in this Quarterly Report on Form 10-Q and BKU's 2019 Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report on Form 10-K”).
Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the Company’s current views with respect to, among other things, future events and financial performance. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” "future" and similar expressions identify forward-looking statements. These forward-looking statements are based on the historical performance of the Company or on the Company’s current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by the Company that the future plans, estimates or expectations so contemplated will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to the Company’s operations, financial results, financial condition, business prospects, growth strategy and liquidity, including as impacted by the COVID-19 pandemic. If one or more of these or other risks or uncertainties materialize, or if the Company’s underlying assumptions prove to be incorrect, the Company’s actual results may vary materially from those indicated in these statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, but not limited to, the risk factors described in Part I, Item 1A of the 2019 Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K. The Company does not undertake any obligation to publicly update or review any forward looking statement, whether as a result of new information, future developments or otherwise.
Impact of the COVID-19 Pandemic and Our Response
In March 2020, the World Health Organization declared COVID-19 as a global pandemic. The initial response to the pandemic by governmental authorities included implementation of numerous measures attempting to contain the spread and impact of COVID-19 such as travel bans and restrictions, quarantines, shelter in place orders, and limitations on business activities, including in major markets in which the Company and its clients are located or do business. While many of these restrictions are beginning to ease and economic activity has started to resume, the COVID-19 pandemic and these necessary precautionary measures have negatively impacted the global economy, disrupted global supply chains, created volatility and disruption in financial markets and led to declines in GDP and increases in unemployment levels. Certain sectors to which the Company has credit exposure, such as travel and hospitality and retail, have been particularly impacted by the pandemic.
The response of the U.S. Government to the crisis was swift and broad-based. The government has taken a series of actions to support individuals, households and businesses that have been negatively impacted by the economic disruption caused by the pandemic including enactment of the CARES Act. The Federal Reserve also enacted a suite of facilities using its emergency lending powers designed to support liquidity and the flow of credit. Banking regulators reduced reserve requirements and enacted rules designed to support financial institutions in their efforts to work with customers during this time. The situation continues to evolve, and there remains a high level of uncertainty about the future trajectory of the virus and its impact on the economy.
A summary of the effects the COVID-19 pandemic has had on our Company and of our expectations about how our Company may be impacted in the future follows. These matters are discussed in further detail throughout this Form 10-Q.
Our results of operations and financial condition at and for the three and nine months ended September 30, 2020 were impacted by the COVID-19 pandemic.
• Deterioration in economic conditions led to a higher provision for credit losses and ACL during the nine months ended September 30, 2020. There continues to be significant uncertainty as to the impact of the COVID-19 crisis on future credit loss expense and future levels of the ACL, but they may be more volatile and may change materially from current levels.
• Levels of criticized and classified assets increased at September 30, 2020, largely as a result of the COVID-19 pandemic. Additionally, a significant number of borrowers have requested relief in the form of temporary payment deferrals or modifications. Beginning late in the first quarter of 2020 and continuing through the third quarter, risk ratings were re-evaluated for a substantial portion of the commercial portfolio, with a particular focus on portfolio segments we identified for enhanced monitoring and loans for which we granted temporary payment deferrals or modifications in light of the COVID-19 pandemic. At September 30, 2020, we had not experienced an increase in non-performing assets as a result of the pandemic. It is difficult to predict when, if, or to what extent levels of non-
41




performing assets and delinquencies will increase as a result of the pandemic, although they may do so. Similarly, charge-offs may increase. These impacts may manifest in a delayed fashion due to the impact of temporary payment deferrals and modifications and various forms of government assistance that our borrowers may receive.
• The level of commercial loan origination activity, outside of our participation in the PPP, was lower in the second and third quarters as a result of the pandemic.
Our share price has been negatively impacted by the COVID-19 crisis. We temporarily suspended our share repurchase program, utilizing our capital to provide support to customers through lending and other services.
We raised $300 million in subordinated debt during the second quarter to strengthen our capital position during this challenging economic environment.
Although we took significant measures to prepare for possible disruptions in liquidity, we have not experienced such disruptions to date and continue to have sufficient levels of available liquidity.
The pandemic has impacted our operations. Currently, the substantial majority of our non-branch employees are working remotely. We did not experience any significant operational difficulties, technology failures or outages, or customer service disruptions in our transition to a remote work environment. 88% of our branches remain open to serve customers via drive-through or lobby appointments, in some cases operating with reduced hours. Generally, branch locations without drive-through facilities are temporarily closed. We have focused on insuring that our technology systems and internal controls continue to operate effectively in a remote work environment. We have put mechanisms in place to allow us to evaluate all significant modifications to processes and procedures to insure continued effectiveness of our controls. We have not identified any instances in which our control environment has failed to operate effectively.
Customer demand for our products and services, particularly lending products, may be impacted by the impact of the pandemic on their businesses or by social distancing measures. Potential borrowers impacted by the pandemic may no longer meet our underwriting criteria. We expect loan production in many portfolio segments to be muted in the near term as a result of the pandemic.
In response to the pandemic, we have prioritized risk management and implemented a number of measures to support our customers and employees. Specifically, we have:
• Activated and continue to operate under our business continuity plan under the leadership of executive management.
• Enhanced liquidity monitoring and management protocols.
• Maintained a regular cadence of Board of Directors update calls.
• Enhanced the level and frequency of pro-active outreach to borrowers and our portfolio management activities.
• Segregated certain segments of the loan portfolio for enhanced monitoring.
• Enhanced our workout and recovery staffing and processes.
• Enhanced our stress testing framework. Results of internal stress testing indicate that we have sufficient capital to withstand an increase in credit losses materially beyond levels currently expected, and to withstand a severe downturn.
• Proactively reached out to our critical third party service providers and evaluated their ability to continue to provide support in the current environment. We have experienced no significant service disruptions.
• Expanded certain employee benefits and launched a number of programs to keep our employees healthy and engaged.
• Enhanced personal protective measures for employees working at our corporate locations and begun planning for the eventual return to office of a larger percentage of our workforce, when conditions permit. We have recently started returning a limited number of employees to select corporate offices.
• Supported our clients through participating in the Small Business Administration’s PPP, and granting payment deferrals and fee waivers on a case-by-case basis.
• Temporarily halted new residential foreclosure actions.
We remain confident in our long-term underlying strength and stability, and our ability to navigate these challenging conditions.
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Overview
Quarterly Highlights
In evaluating our financial performance, we consider the level of and trends in net interest income, the net interest margin, the cost of deposits, levels and composition of non-interest income and non-interest expense, performance ratios such as the return on average equity and return on average assets and asset quality ratios, including the ratio of non-performing loans to total loans, non-performing assets to total assets, trends in criticized and classified assets and portfolio delinquency and charge-off trends. We consider growth in earning assets and deposits, particularly non-interest bearing 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, 2020 was $66.6 million, or $0.70 per diluted share, compared to $76.2 million, or $0.77 per diluted share, for the three months ended September 30, 2019. For the nine months ended September 30, 2020, net income was $112.1 million, or $1.17 per diluted share, compared to $223.6 million, or $2.23 per diluted share, for the nine months ended September 30, 2019. Results for the nine months ended September 30, 2020 were negatively impacted by the application of the CECL accounting methodology, including the expected impact of COVID-19 on the provision for credit losses.
• Non-interest bearing demand deposits grew by $906 million, or 15%, for the quarter ended September 30, 2020, to 26% of total deposits, compared to 23% of total deposits at June 30, 2020 and 18% of total deposits at December 31, 2019. Total deposits increased by $527 million during the quarter ended September 30, 2020, as growth in non-interest bearing deposits was partially offset by continued runoff of higher cost time deposits. Average non-interest bearing demand deposits increased by $874 million for the quarter ended September 30, 2020 compared to the immediately preceding quarter and by $2.2 billion compared to the quarter ended September 30, 2019.
• The average cost of total deposits declined by 0.23% to 0.57% for the quarter ended September 30, 2020, its lowest level since the Company's inception. The cost of total deposits was 0.80% for the quarter ended June 30, 2020 and 1.67% for the quarter ended September 30, 2019. On a spot basis, the average annual percentage yield ("APY") on total deposits declined to 0.49% at September 30, 2020 from 0.65% at June 30, 2020 and 1.42% at December 31, 2019.
• Loans under COVID related deferral continued to decline. We reported at the end of the second quarter that we had granted initial 90-day payment deferrals on loans totaling $3.6 billion or approximately 15% of the total loan portfolio. At September 30, 2020, $1.1 billion, or approximately 5% of total loans were still subject to a short-term COVID related payment deferral or longer term modification under the CARES Act, or were in the process of modification. At October 25, 2020, $983 million, or approximately 4%, of loans remained on deferral or modification.
• Investment securities grew by $607 million for the quarter ended September 30, 2020 while loans and leases, including operating lease equipment, declined by $69 million as liquidity was deployed into investment securities in the current challenging credit environment. We experienced growth in the residential and mortgage warehouse loan portfolio segments, offset by net runoff in other commercial and commercial real estate segments.
• PPNR continued to improve year-over-year, increasing by $12.9 million to $115.1 million for the quarter ended September 30, 2020 from $102.2 million for the quarter ended September 30, 2019. For the nine months ended September 30, 2020, PPNR improved to $322.5 million from $308.8 million for the nine months ended September 30, 2019.
• The net interest margin, calculated on a tax-equivalent basis, was 2.32% for the quarter ended September 30, 2020 compared to 2.39% for the immediately preceding quarter. Deployment of liquidity into the securities portfolio contributed to the decline in the net interest margin for the quarter. The yield on interest earnings assets declined by 0.22% while the cost of interest bearing liabilities declined by 0.15% for the quarter ended September 30, 2020 compared to the quarter ended June 30, 2020. The net interest margin was 2.41% for the quarter ended September 30, 2019.
• The provision for credit losses totaled $29.2 million for the three months ended September 30, 2020. The provision for credit losses was $180.1 million for the nine months ended September 30, 2020. For the three and nine months ended
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September 30, 2019, the Company recorded a provision for loan losses, under the incurred loss model, of $1.8 million and $9.4 million, respectively.
• The net unrealized gain (loss) on investment securities available for sale continued to improve during the quarter to a net unrealized gain of $62.0 million at September 30, 2020 compared to net unrealized losses of $2.6 million and $249.8 million at June 30, 2020 and March 31, 2020, respectively.
• Stockholders' equity increased by $110 million during the quarter ended September 30, 2020 to $2.9 billion. The increase was driven by the recovery of $61 million in accumulated other comprehensive income, related primarily to the reduction in unrealized losses on investment securities available for sale, and by the retention of earnings.
• At September 30, 2020, book value per common share and tangible book value per common share were $31.01 and $30.17, respectively, compared to $29.81 and $28.97, respectively at June 30, 2020 and $31.33 and $30.52, respectively at December 31, 2019.
Results of Operations
Net Interest Income
Net interest income is the difference between interest earned on interest earning assets and interest incurred on interest bearing liabilities and is the primary driver of core earnings. Net interest income is impacted by the mix of interest earning assets and interest bearing liabilities, the ratio of interest earning assets to total assets and of interest bearing liabilities to total funding sources, movements in market interest rates, the shape of the yield curve, levels of non-performing assets and pricing pressure from competitors.
The mix of interest earning assets is influenced by loan demand, market and competitive conditions in our primary lending markets, by management's continual assessment of the rate of return and relative risk associated with various classes of earning assets and liquidity considerations. The mix of interest bearing liabilities is influenced by the Company's liquidity profile, management's assessment of the desire for lower cost funding sources weighed against relationships with customers and growth expectations, our ability to attract and retain core deposit relationships, competition for deposits in the Company's markets and the availability and pricing of other sources of funds.
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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, Three Months Ended June 30, Three Months Ended September 30,
2020 2020 2019
Average
Balance
Interest (1)(2)
Yield/
Rate (1)(2)
Average
Balance
Interest (1)(2)
Yield/
Rate (1)(2)
Average
Balance
Interest (1)(2)
Yield/
Rate (1)(2)
Assets:
Interest earning assets:
Loans $ 23,447,514 $ 212,388 3.61 % $ 23,534,684 $ 217,691 3.71 % $ 22,733,875 $ 252,896 4.43 %
Investment securities (3)
9,065,478 45,351 2.00 % 8,325,217 51,684 2.48 % 8,295,205 70,427 3.40 %
Other interest earning assets 552,515 1,322 0.95 % 765,848 2,908 1.53 % 573,630 5,219 3.61 %
Total interest earning assets 33,065,507 259,061 3.13 % 32,625,749 272,283 3.35 % 31,602,710 328,542 4.14 %
Allowance for credit losses (272,464) (254,396) (112,784)
Non-interest earning assets 1,897,723 1,976,398 1,652,901
Total assets $ 34,690,766 $ 34,347,751 $ 33,142,827
Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Interest bearing demand deposits $ 2,800,421 4,127 0.59 % $ 2,448,545 4,722 0.78 % $ 1,872,573 6,705 1.42 %
Savings and money market deposits 10,664,462 15,853 0.59 % 10,450,310 17,447 0.67 % 10,907,317 51,229 1.86 %
Time deposits 6,519,852 17,701 1.08 % 7,096,097 28,018 1.59 % 6,845,643 41,549 2.41 %
Total interest bearing deposits 19,984,735 37,681 0.75 % 19,994,952 50,187 1.01 % 19,625,533 99,483 2.01 %
Short term borrowings 53,587 14 0.10 % 119,835 32 0.11 % 115,209 670 2.31 %
FHLB and PPPLF borrowings 4,117,181 20,146 1.95 % 4,961,376 21,054 1.71 % 5,414,963 32,252 2.36 %
Notes and other borrowings 722,271 9,252 5.12 % 493,278 6,168 5.00 % 403,788 5,307 5.26 %
Total interest bearing liabilities 24,877,774 67,093 1.07 % 25,569,441 77,441 1.22 % 25,559,493 137,712 2.14 %
Non-interest bearing demand deposits 6,186,718 5,313,009 3,963,955
Other non-interest bearing liabilities 803,498 820,439 704,995
Total liabilities 31,867,990 31,702,889 30,228,443
Stockholders' equity 2,822,776 2,644,862 2,914,384
Total liabilities and stockholders' equity $ 34,690,766 $ 34,347,751 $ 33,142,827
Net interest income $ 191,968 $ 194,842 $ 190,830
Interest rate spread 2.06 % 2.13 % 2.00 %
Net interest margin 2.32 % 2.39 % 2.41 %
(1) On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $3.7 million, $3.8 million and $4.1 million for the three months ended September 30, 2020, June 30, 2020 and September 30, 2019, respectively. The tax-equivalent adjustment for tax-exempt investment securities was $0.7 million, $0.8 million and $1.0 million for the three months ended September 30, 2020, June 30, 2020 and September 30, 2019, respectively.
(2) Annualized.
(3)     At fair value except for securities held to maturity.
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Nine Months Ended September 30,
2020 2019
Average
Balance
Interest (1)(2)
Yield/
Rate (1)(2)
Average
Balance
Interest (1)(2)
Yield/
Rate (1)(2)
Assets:
Interest earning assets:
Loans $ 23,278,042 $ 668,187 3.83 % $ 22,407,271 $ 751,672 4.48 %
Investment securities (3)
8,501,513 153,987 2.42 % 8,333,600 221,901 3.55 %
Other interest earning assets 654,623 7,950 1.62 % 532,062 15,140 3.80 %
Total interest earning assets 32,434,178 830,124 3.42 % 31,272,933 988,713 4.22 %
Allowance for credit losses (222,085) (113,694)
Non-interest earning assets 1,874,709 1,615,548
Total assets $ 34,086,802 $ 32,774,787
Liabilities and Stockholders' Equity:
Interest bearing liabilities:
Interest bearing demand deposits $ 2,475,388 15,808 0.85 % $ 1,783,611 18,569 1.39 %
Savings and money market deposits 10,509,559 71,056 0.90 % 11,093,290 156,236 1.88 %
Time deposits 7,040,101 83,826 1.59 % 6,898,947 122,086 2.37 %
Total interest bearing deposits 20,025,048 170,690 1.14 % 19,775,848 296,891 2.01 %
Short term borrowings 89,033 412 0.62 % 127,908 2,297 2.39 %
FHLB and PPPLF borrowings 4,496,407 66,284 1.97 % 5,037,299 89,890 2.39 %
Notes and other borrowings 548,851 20,711 5.03 % 403,574 15,908 5.26 %
Total interest bearing liabilities 25,159,339 258,097 1.37 % 25,344,629 404,986 2.14 %
Non-interest bearing demand deposits 5,292,702 3,835,248
Other non-interest bearing liabilities 791,057 654,692
Total liabilities 31,243,098 29,834,569
Stockholders' equity 2,843,704 2,940,218
Total liabilities and stockholders' equity $ 34,086,802 $ 32,774,787
Net interest income $ 572,027 $ 583,727
Interest rate spread 2.05 % 2.08 %
Net interest margin 2.35 % 2.49 %
(1) On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $11.2 million and $12.9 million, and the tax-equivalent adjustment for tax-exempt investment securities was $2.4 million and $3.3 million for the nine months ended September 30, 2020 and 2019, respectively.
(2) Annualized.
(3)     At fair value except for securities held to maturity.
Three months ended September 30, 2020 compared to the immediately preceding three months ended June 30, 2020
Net interest income, calculated on a tax-equivalent basis, was $192.0 million for the three months ended September 30, 2020 compared to $194.8 million for the three months ended June 30, 2020, a decrease of $2.9 million, comprised of decreases in tax-equivalent interest income and interest expense of $13.2 million and $10.3 million, respectively. Decreases in interest income resulted from declines in market interest rates, partially offset by increases in average interest earning assets. Declines in interest expense reflected decreases in market interest rates and to a lesser extent, declines in average interest bearing liabilities.
The net interest margin, calculated on a tax-equivalent basis, was 2.32% for the three months ended September 30, 2020, compared to 2.39% for the three months ended June 30, 2020. The decline in the yield on interest earning assets outpaced the reduction in cost of interest bearing liabilities for the quarter. The deployment of liquidity into the securities portfolio in a challenging lending environment contributed to the decline in the yield on interest earning assets and in the net interest margin.
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Offsetting factors contributing to the decrease in the net interest margin for the three months ended September 30, 2020 compared to the three months ended June 30, 2020 included:
• The average rate paid on interest bearing deposits decreased to 0.75% for the quarter ended September 30, 2020, from 1.01% for the quarter ended June 30, 2020. This decline reflected continued initiatives taken to lower rates paid on deposits in response to declines in general market interest rates and the re-pricing of term deposits. We expect the cost of interest bearing deposits to continue to decline.
• The tax-equivalent yield on investment securities decreased to 2.00% for the quarter ended September 30, 2020 from 2.48% for the quarter ended June 30, 2020. This decrease resulted from the impact of purchases of lower-yielding securities, prepayments of higher yielding mortgage-backed securities and decreases in coupon interest rates on existing floating rate assets.
• The tax-equivalent yield on loans decreased to 3.61% for the quarter ended September 30, 2020, from 3.71% for the quarter ended June 30, 2020. Factors contributing to this decrease included the decline in benchmark interest rates which impacted the rates earned on both existing floating rate assets and new production, and the runoff of loans originated in a higher rate environment.
• The average rate paid on borrowings increased to 2.40% for the quarter ended September 30, 2020, from 1.97% for the quarter ended June 30, 2020, reflecting the maturity of short-term, lower rate FHLB advances. The issuance of $300 million of 5.125% subordinated notes in June 2020 also contributed to the increase.
• The increase in average non-interest bearing demand deposits as a percentage of average total deposits also positively impacted the cost of total deposits and the net interest margin.
Three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019
Net interest income, calculated on a tax-equivalent basis, was $192.0 million for the three months ended September 30, 2020 compared to $190.8 million for the three months ended September 30, 2019, an increase of $1.1 million. Net interest income, calculated on a tax-equivalent basis, was $572.0 million for the nine months ended September 30, 2020 compared to $583.7 million for the nine months ended September 30, 2019, a decrease of $11.7 million. The changes in net interest income were comprised of decreases in tax-equivalent interest income of $69.5 million and $158.6 million and decreases in interest expense of $70.6 million and $146.9 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019.
Decreases in tax equivalent interest income for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 resulted from declines in market interest rates, partially offset by increases in average interest earning assets. Declines in interest expense for the same periods reflected decreases in market interest rates along with initiatives implemented to reduce deposit costs and grow non-interest bearing deposits, and to a lesser extent, declines in average interest bearing liabilities.
The net interest margin, calculated on a tax-equivalent basis, was 2.32% for the three months ended September 30, 2020, compared to 2.41% for the three months ended September 30, 2019. Factors contributing to the declines in the net interest margin for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 were largely consistent with those discussed above.
Provision for Credit Losses
The provision for credit losses is a charge to earnings required to maintain the ACL at a level consistent with management’s estimate of expected credit losses on financial assets carried at amortized cost at the balance sheet date. The amount of the provision is impacted by changes in current economic conditions as well as in management's reasonable and supportable economic forecast, loan originations and runoff, changes in portfolio mix, risk rating migration and portfolio seasoning, changes in specific reserves, changes in expected prepayment speeds and other assumptions. The provision for credit losses also includes amounts related to off-balance sheet credit exposures and immaterial components related to accrued interest receivable and AFS debt securities.
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The following table presents the components of the provision for credit losses for the periods indicated (in thousands):
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Amount related to funded portion of loans $ 27,646 $ 181,095
Amount related to off-balance sheet credit exposures (93) (2,700)
Amount related to accrued interest receivable 1,063 1,063
Amount related to AFS debt securities 616 616
Provision for credit losses $ 29,232 $ 180,074
The provision for credit losses for the three and nine months ended September 30, 2020 was determined using the CECL methodology and reflected management's estimate of the expected negative economic impact of the COVID-19 pandemic. For the three and nine months ended September 30, 2019, the Company recorded provisions for loan losses, under the incurred loss methodology, of $1.8 million and $9.4 million, respectively.
The evolving COVID-19 situation may lead to increased volatility in the provision for credit losses and if economic conditions or forecasts deteriorate further as a result of COVID-19, the provision for credit losses and the ACL will likely increase.
The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. See “Analysis of the Allowance for Credit Losses” below for more information about how we determine the appropriate level of the ACL.
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,
2020 2019 2020 2019
Deposit service charges and fees $ 4,040 $ 4,269 $ 11,927 $ 12,389
Gain on sale of loans:
Guaranteed portions of SBA loans 191 1,450 1,760 4,084
GNMA early buyout loans 2,762 1,264 8,969 3,456
Other — 2,449 16 2,680
Gain on sale of loans, net 2,953 5,163 10,745 10,220
Gain on investment securities:
Net realized gains on sale of securities AFS 2,263 3,425 9,516 11,657
Net unrealized gains on marketable equity securities 4,918 410 1,048 2,079
Gain on investment securities, net
7,181 3,835 10,564 13,736
Lease financing 13,934 18,583 45,565 52,774
Other non-interest income 8,184 6,006 19,140 20,329
Non-interest income $ 36,292 $ 37,856 $ 97,941 $ 109,448
The increase in gain on sale of GNMA early buyout loans for the three and nine months ended September 30, 2020 compared to the comparable periods of 2019 resulted from an increase in the volume of activity.
The decrease in gains on guaranteed portions of SBA loans for the three and nine months ended September 30, 2020 compared to the comparable periods of 2019 is a result of declining origination volume of SBA loans, impacted by our focus on PPP lending during the second quarter of 2020.
The gain on sale of other loans in 2019 was primarily related to a gain on sale of Pinnacle loans totaling $2.4 million.
The decrease in income from lease financing for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 is primarily attributed to the increase in operating lease equipment off-lease.
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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,
2020 2019 2020 2019
Employee compensation and benefits $ 48,448 $ 57,102 $ 156,212 $ 179,586
Occupancy and equipment 12,170 14,673 36,440 42,477
Deposit insurance expense 5,886 3,781 15,095 12,849
Professional fees 2,436 2,923 8,771 17,731
Technology and telecommunications 15,435 10,994 42,056 34,175
Depreciation of operating lease equipment 12,315 11,582 37,137 34,883
Loss on debt extinguishment — 3,796 — 3,796
Other non-interest expense 11,937 16,455 38,154 42,584
Total non-interest expense $ 108,627 $ 121,306 $ 333,865 $ 368,081
Less:
Depreciation of operating lease equipment $ (12,315) $ (11,582) $ (37,137) $ (34,883)
Loss on debt extinguishment — (3,796) — (3,796)
Costs incurred directly related to implementation of BankUnited 2.0 — (1,985) (334) (14,493)
COVID-19 expenses (531) — (2,050) —
Recurring operating expenses (1)
$ 95,781 $ 103,943 $ 294,344 $ 314,909
(1) Recurring operating expenses is a non-GAAP measure. See section entitled "Non-GAAP Financial Measures" below for reconciliation of non-GAAP financial measurements to their comparable GAAP financial measurements.
Employee compensation and benefits
Employee compensation and benefits declined by $8.7 million and $23.4 million for the three and nine months ended September 30, 2020, respectively compared to the comparable periods of 2019, primarily due to a reduction in headcount related to our BankUnited 2.0 initiative. Lower variable compensation costs and the impact of a declining stock price on liability-classified awards also contributed to reduced expense levels.
Occupancy and equipment
Occupancy and equipment decreased by $2.5 million and $6.0 million for the three and nine months ended September 30, 2020, respectively compared to the comparable periods of 2019. The decreases were a result of cost reductions stemming from our BankUnited 2.0 initiative.
Professional fees
Professional fees decreased by $0.5 million and $9.0 million for the three and nine months ended September 30, 2020, respectively as compared to the three and nine months ended September 30, 2019. The decrease was primarily due to the consulting services in 2019 related to our BankUnited 2.0 initiative.
Technology and telecommunications
Technology and telecommunications increased by $4.4 million and $7.9 million for the three and nine months ended September 30, 2020, respectively as compared to the three and nine months ended September 30, 2019. This increase is reflective of investments in digital and data analytics capabilities and in the infrastructure to support cloud migration as well as some costs directly related to the COVID-19 pandemic.
Other non-interest expense
The most significant components of other non-interest expense are advertising, promotion and business development, costs related to lending activities, loan servicing and deposit generation, insurance, expenses related to workouts and foreclosures, regulatory examination assessments, travel and general office expense. Decreases are related to our BankUnited 2.0 initiative, and in some cases, reduced levels of activity stemming from the COVID pandemic.
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Expenses related directly to COVID-19 for the three and nine months ended September 30, 2020 included technology and consulting costs related to our participation in the PPP, laptops and other equipment to facilitate employees working remotely, costs related to cleaning, sanitizing and personal protective equipment and other facilities expenses related to preparation for an eventual return of more employees to our offices.
Income Taxes
The Company’s effective income tax rate was 22.5% and 21.3% for the three and nine months ended September 30, 2020, respectively, and 24.1% and 25.3% for the three and nine months ended September 30, 2019, respectively. See Note 6 to the consolidated financial statements for information about income taxes.
Analysis of Financial Condition
Average interest-earning assets increased $1.2 billion to $32.4 billion for the nine months ended September 30, 2020 from $31.3 billion for the nine months ended September 30, 2019. This increase was driven by a $871 million increase in the average balance of outstanding loans, related in part to PPP loans originated in 2020. Average interest bearing liabilities declined by $185.3 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 while average non-interest bearing deposits increased by $1.5 billion to $5.3 billion for the nine months ended September 30, 2020.
Total deposits increased by $2.2 billion at September 30, 2020 compared to December 31, 2019, while investment securities increased by $1.5 billion and total loans increased by $624 million. Investment securities represented 27% of total assets at September 30, 2020 compared to 24% of total assets at December 31, 2019. This is reflective of the deployment of liquidity into the securities portfolio in the challenging lending environment predicated by the COVID-19 pandemic.
Investment Securities
The following table shows the amortized cost and carrying value, which, with the exception of investment securities held to maturity, is fair value, of investment securities at the dates indicated. During the three months ended September 30, 2020, an ACL of $0.6 million was recorded for one private label commercial MBS security and is deducted from the amortized cost in the table below (in thousands):
September 30, 2020 December 31, 2019
Amortized
Cost
Carrying Value (1)
Amortized
Cost
Carrying Value (1)
U.S. Treasury securities $ 75,196 $ 76,910 $ 70,243 $ 70,325
U.S. Government agency and sponsored enterprise residential MBS 2,301,188 2,314,754 2,018,853 2,022,175
U.S. Government agency and sponsored enterprise commercial MBS 532,540 541,536 366,787 370,976
Private label residential MBS and CMOs
1,150,571 1,167,706 1,001,337 1,012,177
Private label commercial MBS (2)
2,442,409 2,440,550 1,719,228 1,724,684
Single family rental real estate-backed securities 755,153 768,898 467,459 470,025
Collateralized loan obligations 1,158,414 1,142,404 1,204,905 1,197,366
Non-mortgage asset-backed securities 245,180 251,839 194,171 194,904
State and municipal obligations 222,959 242,921 257,528 273,302
SBA securities 243,692 241,759 359,808 362,731
Investment securities held to maturity 10,000 10,000 10,000 10,000
$ 9,137,302 9,199,277 $ 7,670,319 7,708,665
Marketable equity securities 101,606 60,572
$ 9,300,883 $ 7,769,237
(1) At fair value except for securities held to maturity.
(2) Amortized cost is net of ACL totaling $0.6 million at September 30, 2020.
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
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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, 2020 was 4.9 years. The effective duration of the investment portfolio as of September 30, 2020 was 1.7 years . The model results are based on assumptions that may differ from actual results.
The investment securities available for sale portfolio was in a net unrealized gain position of $62.0 million at September 30, 2020, having recovered substantially from a net unrealized loss position of $2.6 million and $249.8 million at June 30, 2020 and March 31, 2020, respectively. Net unrealized gains included $117 million of gross unrealized gains and $55 million of gross unrealized losses. Investment securities available for sale in an unrealized loss position at September 30, 2020 had an aggregate fair value of $3.6 billion. The majority of the unrealized losses at September 30, 2020 related to the private label CMBS and CLO portfolio segments. The ratings distribution of our AFS securities portfolio at September 30, 2020 is depicted in the chart below:
bku-20200930_g1.jpg
We evaluate the credit quality of individual securities in the portfolio quarterly to determine whether we expect to recover the amortized cost basis of the investments in unrealized loss positions. This evaluation considers, but is not necessarily limited to, the following factors, the relative significance of which varies depending on the circumstances pertinent to each individual security:
• Whether we intend to sell the security prior to recovery of its amortized cost basis;
• Whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis;
• The extent to which fair value is less than amortized cost;
• Adverse conditions specifically related to the security, an industry or geographic area;
• Changes in the financial condition of the issuer or underlying loan obligors;
• The payment structure and remaining payment terms of the security, including levels of subordination or over-collateralization;
• Failure of the issuer to make scheduled payments;
• Changes in credit ratings;
• Relevant market data;
• Estimated prepayments, defaults, and the value and performance of underlying collateral at the individual security level.
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An ACL of $0.6 million was recorded related to one private label CMBS security during the three months ended September 30, 2020. This security is not projected to sustain credit losses and management does not intend to sell the security at the balance sheet date. However, due to negative underlying collateral performance trends the security is being closely monitored and management may determine not to hold the security until full recovery of its amortized cost basis. No securities were determined to be other than temporarily impaired during the nine months ended September 30, 2019. We do not intend to sell securities in significant unrealized loss positions at September 30, 2020. Based on an assessment of our liquidity position and internal and regulatory guidelines for permissible investments and concentrations, it is not more likely than not that we will be required to sell securities in significant unrealized loss positions prior to recovery of amortized cost basis, which may be at maturity.
The timely payment of principal and interest on securities issued by the U.S. government, U.S. government agencies and U.S. government sponsored enterprises is explicitly or implicitly guaranteed by the U.S. Government. As such, there is an assumption of zero credit loss and the Company expects to recover the entire amortized cost basis of these securities.
None of our private label securities in unrealized loss positions had missed principal or interest payments or had been downgraded by a NRSRO at September 30, 2020. The Company performed an analysis comparing the present value of cash flows expected to be collected to the amortized cost basis of impaired securities. This analysis was based on a scenario that we believe to be generally more severe than our reasonable and supportable economic forecast at September 30, 2020, and incorporated assumptions about voluntary prepayment rates, collateral defaults, delinquencies, severity and other relevant factors. Our analysis also considered the structural characteristics of each security and the level of credit enhancement provided by that structure. Based on the results of this analysis, none of the private label AFS securities in unrealized loss positions were projected to sustain credit losses at September 30, 2020. Further information about the portfolio segments evidencing the largest unrealized losses at September 30, 2020, the CMBS and CLO portfolio segments, follows.
For private label CMBS, our analysis of cash flows expected to be collected incorporated assumptions about collateral default rates, voluntary prepayment rates, loss severity, delinquencies and recovery lag. In developing those assumptions, we took into account collateral quality and type, loan size, loan purpose and other qualitative factors. We also regularly monitor collateral watchlists, bankruptcy data, special servicing trends, delinquency and other economic data which would indicate further stress in the sector.
For CLOs, our analysis of cash flows expected to be collected incorporated assumptions about collateral default rates, loss severity, and delinquencies, calibrated to take into account idiosyncratic risks associated with the underlying collateral. In developing those assumptions, we took into account each sector’s performance pre, during and post the 2008 financial crisis. We regularly engage with bond managers to monitor trends in underlying collateral including potential downgrades and subsequent cash flow diversions, liquidity, ratings migration, and any other relevant developments.
The following table presents the distribution of third-party ratings and subordination levels compared to average stress scenario losses based on our credit loss impairment analysis of the CMBS and CLOs at September 30, 2020:
Subordination Weighted Average Stress Scenario Loss
Rating Percent of Total Minimum Maximum Average
Private label CMBS AAA 89.0 % 29.4 % 95.1 % 41.3 % 12.0 %
AA 7.3 % 28.3 % 45.2 % 35.0 % 11.4 %
A 3.7 % 21.5 % 79.8 % 37.1 % 11.7 %
Weighted average 100.0 % 29.0 % 90.9 % 40.7 % 12.0 %
CLOs AAA 83.7 % 36.0 % 48.5 % 43.1 % 20.2 %
AA 12.8 % 27.7 % 40.8 % 32.8 % 21.6 %
A 3.5 % 24.9 % 30.0 % 26.9 % 24.9 %
Weighted average 100.0 % 34.6 % 46.9 % 41.2 % 20.5 %
For further discussion of our analysis of impaired investment securities AFS for credit loss impairment see Note 3 to the consolidated financial statements.
We use third-party pricing services to assist us in estimating the fair value of investment securities. We perform a variety of procedures to ensure that we have a thorough understanding of the methodologies and assumptions used by the pricing services including obtaining and reviewing written documentation of the methods and assumptions employed, conducting interviews with valuation desk personnel and reviewing model results and detailed assumptions used to value selected securities as
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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 also have a quarterly price validation process to assess the propriety of the pricing methodologies utilized by our primary pricing services by independently verifying the prices of a sample of securities in the portfolio. Sample sizes vary based on the type of security being priced, with higher sample sizes applied to more difficult to value security types. Verification procedures may consist of obtaining prices from an additional outside source. We have established acceptable percentage deviations from the price provided by the initial pricing source. If deviations fall outside the established parameters, we will obtain and evaluate more detailed information about the assumptions and inputs used by each pricing source or, if considered necessary, employ an additional valuation source to price the security in question. Pricing issues identified through this evaluation are addressed with the applicable pricing service and methodologies or inputs are revised as determined necessary. Depending on the results of the validation process, sample sizes may be extended for particular classes of securities. Results of the validation process are reviewed by the treasury front office and by senior management.
The majority of our investment securities are classified within level 2 of the fair value hierarchy. U.S. Treasury securities and marketable equity securities are classified within level 1 of the hierarchy. We continue to monitor the impact of the COVID-19 pandemic on markets, and on our ability to price securities in our portfolio. While, particularly at the onset of the pandemic, we observed increased volatility and dislocation, we believe the fiscal and monetary response to the crisis has been effective in supporting liquidity and stabilizing markets. To date, circumstances have not led to a change in the categorization of our fair value estimates within the fair value hierarchy.
For additional discussion of the fair values of investment securities, see Note 10 to the consolidated financial statements.
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The following table shows the scheduled maturities, carrying values and prospective yields for investment securities available for sale as of September 30, 2020, as well as the carrying value and yield of marketable equity securities. Scheduled maturities have been adjusted for anticipated prepayments when applicable. Yields on tax-exempt securities have been calculated on a tax-equivalent basis, based on a federal income tax rate of 21% (dollars in thousands):
Within One Year After One Year
Through Five Years 		After Five Years
Through Ten Years 		After Ten Years Total
Carrying
Value 		Weighted
Average
Yield 		Carrying
Value 		Weighted
Average
Yield 		Carrying
Value 		Weighted
Average
Yield 		Carrying
Value 		Weighted
Average
Yield 		Carrying
Value 		Weighted
Average
Yield
U.S. Treasury securities
$ 76,910 1.71 % $ — — % $ — — % $ — — % $ 76,910 1.71 %
U.S. Government agency and sponsored enterprise residential MBS 221,258 1.01 % 1,019,052 0.90 % 829,496 0.85 % 244,948 0.79 % 2,314,754 0.88 %
U.S. Government agency and sponsored enterprise commercial MBS 3,885 1.76 % 52,680 2.00 % 344,771 1.02 % 140,200 1.44 % 541,536 1.23 %
Private label residential MBS and CMOs
397,564 3.11 % 591,926 2.78 % 137,923 2.58 % 40,293 2.40 % 1,167,706 2.86 %
Private label commercial MBS
111,847 2.77 % 1,772,951 1.99 % 526,400 2.15 % 29,352 2.98 % 2,440,550 2.07 %
Single family rental real estate-backed securities
5,099 2.51 % 541,396 2.30 % 222,403 1.82 % — — % 768,898 2.16 %
Collateralized loan obligations
50,353 1.48 % 1,029,713 1.84 % 62,338 2.29 % — — % 1,142,404 1.85 %
Non-mortgage asset-backed securities
38,524 2.84 % 164,699 2.56 % 47,452 2.25 % 1,164 2.59 % 251,839 2.55 %
State and municipal obligations
8,441 2.53 % 20,600 3.77 % 162,617 3.99 % 51,263 4.08 % 242,921 3.95 %
SBA securities 48,972 1.30 % 121,694 1.26 % 52,496 1.19 % 18,597 1.09 % 241,759 1.24 %
$ 962,853 2.27 % $ 5,314,711 1.87 % $ 2,385,896 1.62 % $ 525,817 1.53 % 9,189,277 1.83 %
Marketable equity securities with no scheduled maturity
101,606 6.30 %
Total investment securities available for sale and marketable equity securities
$ 9,290,883 1.88 %
Loans Held for Sale
Loans held for sale at September 30, 2020 included $4 million of the guaranteed portion of SBA loans held for sale in the secondary market. At December 31, 2019, loans held for sale included $28.6 million of the SBA loans held for sale and $9.3 million of other commercial loans transferred to held for sale. SBA loans are generally sold with servicing retained. Due to our focus on PPP lending in the second quarter, the origination volume of traditional SBA loans declined.
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Loans
The loan portfolio comprises the Company’s primary interest-earning asset. The following tables show the composition of the loan portfolio at the dates indicated (dollars in thousands):
September 30, 2020 December 31, 2019
Total Percent of Total Total Percent of Total
Residential and other consumer loans $ 5,940,900 25.1 % $ 5,661,119 24.5 %
Multi-family 1,810,126 7.6 % 2,217,705 9.6 %
Non-owner occupied commercial real estate 4,910,835 20.7 % 5,030,904 21.7 %
Construction and land 263,381 1.1 % 243,925 1.1 %
Owner occupied commercial real estate 2,051,577 8.6 % 2,062,808 8.9 %
Commercial and industrial 4,427,351 18.6 % 4,655,349 20.1 %
PPP 829,798 3.5 % — — %
Pinnacle 1,157,706 4.8 % 1,202,430 5.2 %
Bridge - franchise finance 606,222 2.5 % 627,482 2.6 %
Bridge - equipment finance 530,516 2.2 % 684,794 3.0 %
Mortgage warehouse lending 1,250,903 5.3 % 768,472 3.3 %
Total loans 23,779,315 100.0 % 23,154,988 100.0 %
Allowance for credit losses (274,128) (108,671)
Loans, net $ 23,505,187 $ 23,046,317
For the nine months ended September 30, 2020, total loans grew by $624 million. This increase was primarily driven by $830 million in PPP loans and a $482 million increase in mortgage warehouse outstandings, due to growth in commitments and increased utilization, offset by net runoff in other commercial and commercial real estate segments. The decline in multi-family balances was driven primarily by continued runoff of the New York portfolio. Residential and other consumer loans grew by $280 million due to growth of $392 million in GNMA early buyout loans. The residential portfolio excluding GNMA early buyout loans experienced a net decline of approximately $112 million driven by higher prepayment speeds in the current rate environment.
Residential mortgages and other consumer loans
The following table shows the composition of residential and other consumer loans at the dates indicated (in thousands):
September 30, 2020 December 31, 2019
1-4 single family residential $ 4,845,156 $ 4,953,936
Government insured residential 1,089,055 698,644
Other consumer loans 6,689 8,539
$ 5,940,900 $ 5,661,119
The 1-4 single family residential loan portfolio, excluding government insured residential loans, is primarily comprised of loans purchased through established correspondent channels. 1-4 single family residential mortgage loans are primarily closed-end, first lien jumbo mortgages for the purchase or re-finance of owner occupied property. The loans have terms ranging from 10 to 30 years, with either fixed or adjustable interest rates. At September 30, 2020, $555 million or 12% were secured by investor-owned properties.
The Company acquires non-performing FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations (collectively, "government insured pool buyout loans" or "buyout loans"). Buyout loans that re-perform, either through modification or self-cure, may be eligible for re-securitization. The Company and the servicer share in the economics of the sale of these loans into new securitizations. The balance of buyout loans totaled $1.1 billion at September 30, 2020. The Company is not the servicer of these loans.
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The following charts present the distribution of the 1-4 single family residential mortgage portfolio at the dates indicated:
bku-20200930_g2.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, 2020 December 31, 2019
Total Percent of Total Total Percent of Total
California $ 1,535,342 31.7 % $ 1,280,243 25.8 %
New York 1,051,647 21.7 % 1,057,926 21.4 %
Florida 519,004 10.7 % 597,359 12.1 %
Virginia 179,105 3.7 % 189,869 3.8 %
New Jersey 164,618 3.4 % 189,018 3.8 %
Others 1,395,440 28.8 % 1,639,521 33.1 %
$ 4,845,156 100.0 % $ 4,953,936 100.0 %
Commercial loans and leases
Commercial loans include commercial and industrial loans and leases, loans secured by owner-occupied commercial real-estate, multi-family properties and other income-producing non-owner occupied commercial real estate, a limited amount of construction and land loans, SBA loans, mortgage warehouse lines of credit, PPP loans, municipal loans and leases originated by Pinnacle and franchise and equipment finance loans and leases originated by Bridge.
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The following charts present the distribution of the commercial loan portfolio at the dates indicated (dollars in millions):
bku-20200930_g3.jpg
Commercial real estate loans include term loans secured by non-owner occupied income producing properties including rental apartments, mixed-use properties, industrial properties, retail shopping centers, free-standing single-tenant buildings, office buildings, warehouse facilities, hotels, real estate secured lines of credit, as well as credit facilities to institutional real estate entities such as REITs and commercial real estate investment funds.
The following table presents the distribution of commercial real estate loans by property type along with weighted average DSCRs and LTVs at September 30, 2020 (dollars in thousands):
Amortized Cost Percent of Total FL NY Other Weighted Average DSCR Weighted Average LTV
Office $ 2,088,796 29.9 % 59 % 26 % 15 % 2.13 59.0 %
Multifamily 1,937,079 27.7 % 28 % 65 % 7 % 1.72 56.0 %
Retail 1,421,782 20.4 % 51 % 40 % 9 % 1.54 59.7 %
Warehouse/Industrial 770,229 11.0 % 69 % 18 % 13 % 2.50 55.4 %
Hotel 619,012 8.9 % 75 % 16 % 9 % 1.35 57.6 %
Other 147,444 2.1 % 82 % 11 % 7 % 1.78 54.2 %
$ 6,984,342 100.0 % 52 % 38 % 10 % 1.86 57.7 %
DSCRs and LTVs in the table above are based on the most recent information available, which may not be fully reflective of the ultimate impact of the COVID-19 pandemic on borrowers' financial condition or property values.
The Company’s commercial real estate underwriting standards generally provide for loan terms of five to seven years, with amortization schedules of no more than thirty years. LTV ratios are typically limited to no more than 75%. Construction and land loans, included by property type in the table above, represented only 1.1% of the total loan portfolio at September 30, 2020. Construction loans are generally made for projects expected to stabilize within eighteen months of completion in sub-markets with strong fundamentals and, to a lesser extent, for-sale residential projects to experienced developers with a strong cushion between market prices and loan basis. 75% of the commercial real estate portfolio, including 79% and 76% of the retail and hotel segments, respectively, had LTVs less than 65% at September 30, 2020.
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Included in the table above are approximately $284 million of mixed-use properties in New York, consisting of $203 million categorized as multi-family, $62 million categorized as retail and $19 million categorized as office.
The New York legislature has enacted a number of rent regulation reform measures that generally have the impact of limiting landlords' ability to increase rents on stabilized units and to convert stabilized units to market rate units. The following table presents the amount of loans secured by New York multi-family properties in which some or all units are rent regulated at September 30, 2020 (in thousands):
Loans secured by stabilized properties subject to rent regulation $ 917,662
Loans secured by non-stabilized properties subject to rent regulation 34,475
$ 952,137
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, 2020 (in thousands):
DSCR
Less than 1.11 $ 128,616
1.11 - 1.24 233,325
1.25 - 1.50 237,645
1.51 or greater 318,076
$ 917,662
LTV
Less than 50% $ 263,851
50% - 65% 554,072
66% - 75% 73,874
More than 75% 25,865
$ 917,662
The LTVs in the table above are based on the most recent appraisal obtained, which may not be fully reflective of changes in valuations that may result from the impact of the rent regulation reforms, or of the COVID-19 pandemic. Loans with DSCR less than 1.11 may be those with temporary vacancies or those for which expenses, particularly real estate taxes, have increased more rapidly than rents. Substantially all of the loans included in the tables above are current and performing.
Commercial and industrial loans are typically made to small, middle market and larger corporate businesses and not-for-profit entities and include equipment loans, secured and unsecured working capital facilities, formula-based loans, trade finance, SBA product offerings and business acquisition finance credit facilities. These loans may be structured as term loans, typically with maturities of five to seven years, or revolving lines of credit which may have multi-year maturities. The Bank also provides financing to state and local governmental entities generally within our geographic markets. Commercial loans included shared national credits totaling $2.5 billion at September 30, 2020, the majority of which were relationship based loans to borrowers in Florida and New York. The Bank makes loans secured by owner-occupied commercial real estate that typically have risk profiles more closely aligned with that of commercial and industrial loans than with other types of commercial real estate loans.
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The following table presents the exposure in the commercial and industrial portfolio, including $2.1 billion of owner-occupied commercial real estate loans, by industry at September 30, 2020 (in thousands):
Amortized Cost Percent of Total
Finance and Insurance $ 901,720 14.0 %
Wholesale Trade 670,001 10.3 %
Educational Services 664,996 10.3 %
Transportation and Warehousing 487,311 7.5 %
Health Care and Social Assistance 483,941 7.5 %
Manufacturing 370,553 5.7 %
Retail Trade 321,077 5.0 %
Accommodation and Food Services 311,429 4.8 %
Information 306,733 4.7 %
Real Estate and Rental and Leasing 302,508 4.7 %
Construction 272,423 4.2 %
Professional, Scientific, and Technical Services 253,040 3.9 %
Public Administration 241,884 3.7 %
Other Services (except Public Administration) 238,138 3.7 %
Arts, Entertainment, and Recreation 215,946 3.3 %
Administrative and Support and Waste Management 200,028 3.1 %
Utilities 196,534 3.0 %
Other 40,666 0.6 %
$ 6,478,928 100.0 %
Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides equipment and franchise financing on a national basis using both loan and lease structures. Pinnacle provides essential-use equipment financing to state and local governmental entities directly and through vendor programs and alliances. Pinnacle offers a full array of financing structures including equipment lease purchase agreements and direct (private placement) bond re-fundings and loan agreements. Bridge has two operating divisions. The franchise finance division offers franchise acquisition, expansion and equipment financing, typically to experienced operators in well-established concepts. The franchise finance portfolio is made up primarily of quick service restaurant and fitness concepts comprising 60% and 32% of the portfolio, respectively. The equipment finance division provides primarily transportation equipment financing through a variety of loan and lease structures. The Bank also engages in mortgage warehouse lending on a national basis.
The Company originated over 3,500 SBA PPP loans totaling $876 million during the second quarter 2020. These loans bear interest at 1% and are guaranteed as to principal and interest by the SBA. They have terms of 2 years, and are eligible for earlier forgiveness under the terms of the PPP in prescribed circumstances. The Company expects PPP forgiveness to occur primarily during the first quarter 2021. The Company also received origination fees associated with these loans; $17 million of these fees remain to be recognized in income as of September 30, 2020.
Geographic Concentrations
The Company's commercial and commercial real estate portfolios are concentrated in Florida and the Tri-state area. Excluding loans originated through our national platforms, 52% and 41% of commercial real estate loans were secured by collateral located in Florida and the Tri-state area, respectively; while 55% and 27% of commercial and industrial and owner-occupied real estate loans were to borrowers in Florida and the Tri-state area, respectively.
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The following table presents the five states with the largest concentration of commercial loans and leases originated through our national platforms, including Bridge, Pinnacle, SBF and our mortgage warehouse finance unit at the dates indicated (dollars in thousands):
September 30, 2020 December 31, 2019
Total Percent of Total Total Percent of Total
California $ 631,317 16.6 % $ 585,222 16.5 %
NY Tri-State Area 489,528 12.9 % 349,961 9.9 %
Florida 434,034 11.4 % 465,146 13.1 %
Ohio 226,453 5.9 % 45,319 1.3 %
North Carolina 200,478 5.3 % 146,146 4.1 %
All others 1,824,666 47.9 % 1,954,601 55.1 %
$ 3,806,476 100.0 % $ 3,546,395 100.0 %
Operating lease equipment, net
Operating lease equipment, net of accumulated depreciation totaled $676 million at September 30, 2020, including off-lease equipment, net of accumulated depreciation totaling $87 million. The portfolio consists primarily of railcars, non-commercial aircraft and other transport equipment. We have a total of 5,300 railcars with a carrying value of $404 million at September 30, 2020, including hoppers, tank cars, boxcars, auto carriers, center beams and gondolas leased to North American commercial end users. The largest concentrations of rail cars were 2,408 hopper cars and 1,594 tank cars, primarily used to ship sand and petroleum products, respectively, for the energy industry.
The chart below presents operating lease equipment by type at the dates indicated: bku-20200930_g4.jpg
At September 30, 2020, the breakdown of carrying values of operating lease equipment, excluding equipment off-lease, by the year leases are scheduled to expire was as follows (in thousands):
Years Ending December 31:
2020 $ 75,906
2021 45,651
2022 62,255
2023 47,729
2024 27,171
Thereafter through 2034 329,951
$ 588,663
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Asset Quality
Commercial Loans
We have a robust credit risk management framework, an experienced team to lead the workout and recovery process for the commercial and commercial real estate portfolios and a dedicated internal credit review function. In response to the COVID-19 pandemic, we have further enhanced our workout and recovery staffing and processes. Loan performance is monitored by our credit administration and workout and recovery departments. Generally, commercial relationships with balances in excess of defined thresholds are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. The defined thresholds range from $1 million to $3 million. Homogenous groups of smaller balance commercial loans may be monitored collectively. The credit quality and risk rating of commercial loans as well as our underwriting and portfolio management practices are regularly reviewed by our internal credit review department.
We believe internal risk rating is the best indicator of the credit quality of commercial loans. The Company utilizes a 13 grade internal asset risk classification system as part of its efforts to monitor and maintain commercial asset quality. The special mention rating is considered a transitional rating for loans exhibiting potential credit weaknesses that could result in deterioration of repayment prospects at some future date if not checked or corrected and that deserve management’s close attention. These borrowers may exhibit declining cash flows or revenues or increasing leverage. Loans with well-defined credit weaknesses that may result in a loss if the deficiencies are not corrected are assigned a risk rating of substandard. These borrowers may exhibit payment defaults, inadequate cash flows, operating losses, increasing balance sheet leverage, project cost overruns, unreasonable construction delays, exhausted interest reserves, declining collateral values, frequent overdrafts or past due real estate taxes. Loans with weaknesses so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors have not been charged off, are assigned an internal risk rating of doubtful. Beginning late in the first quarter and throughout the second and third quarters of 2020, risk ratings were re-evaluated for a substantial portion of the commercial portfolio, with a particular focus on portfolio segments we identified for enhanced monitoring and loans for which we granted temporary payment deferrals or modifications in light of the COVID-19 pandemic.
The following table summarizes the Company's commercial credit exposure, based on internal risk rating, at the dates indicated (dollars in thousands):
September 30, 2020 June, 30, 2020 March 31, 2020 December 31, 2019
Amortized Cost Percent of Commercial Loans Amortized Cost Percent of Commercial Loans Amortized Cost Percent of Commercial Loans Amortized Cost Percent of Commercial Loans
Pass $ 15,321,531 85.9 % $ 16,169,767 88.6 % $ 16,841,243 96.0 % $ 17,054,702 97.5 %
Special mention 951,981 5.3 % 1,338,232 7.3 % 288,148 1.6 % 72,881 0.4 %
Substandard accruing 1,376,718 7.7 % 560,624 3.1 % 238,786 1.4 % 180,380 1.0 %
Substandard non-accruing 187,247 1.0 % 187,510 1.0 % 181,278 1.0 % 185,906 1.1 %
Doubtful 938 0.1 % 949 — % — — % — — %
$ 17,838,415 100.0 % $ 18,257,082 100.0 % $ 17,549,455 100.0 % $ 17,493,869 100.0 %
The increase in levels of criticized and classified loans over the course of 2020 is directly related to the COVID-19 pandemic and its impact on the economy and on the operations of certain of the Company's borrowers. It is possible, given the uncertainty surrounding the future trajectory of the COVID-19 pandemic and related economic impacts, that the amount of criticized and classified assets could increase further in the future.
Both special mention and substandard accruing loans increased from December 31, 2019 to June 30, 2020. As more information became available about the impact of the COVID-19 pandemic on specific businesses, we saw a further increase in substandard accruing loans during the quarter ended September 30, 2020, a significant portion of which represented migration from the special mention category. There was a net decline in special mention loans of $386 million, while substandard accruing loans increased by $816 million. Management has taken what we believe to be a pro-active and objective approach to re-risk rating the commercial loan portfolio based on granular outreach to borrowers since the onset of the pandemic. We have not yet experienced a significant increase in substandard non-accruing loans related to the pandemic, however it is possible that an increasing trend may emerge in the future as temporary payment deferrals granted to some borrowers expire, depending on the trajectory of the virus and pace of the resumption of normal activity and economic recovery.
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The following table provides additional information about special mention and substandard accruing loans, at the dates indicated (in thousands):
September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019
Amortized Cost % of Loan Segment Amortized Cost % of Loan Segment Amortized Cost % of Loan Segment Amortized Cost % of Loan Segment
Special mention:
CRE
Hotel $ 202,929 32.8 % $ 273,877 44.1 % $ 4,201 0.7 % $ 4,227 0.6 %
Retail 85,640 6.0 % 172,364 12.0 % 4,284 0.3 % — — %
Multi-family 28,876 1.5 % 54,623 2.7 % 4,471 0.2 % 115 — %
Office 38,213 1.8 % 29,735 1.4 % — — % — — %
Industrial 13,221 1.7 % 12,968 1.7 % — — % 1,489 — %
Other 8,083 5.5 % 1,393 0.9 % — — % — — %
376,962 544,960 12,956 5,831
Owner occupied commercial real estate 193,867 9.4 % 179,305 8.8 % 26,170 1.3 % 27,870 1.4 %
Commercial and industrial 196,488 4.4 % 243,398 5.2 % 67,173 1.1 % 28,498 0.5 %
Bridge - franchise finance 139,638 23.0 % 327,375 52.5 % 181,049 28.0 % 10,682 1.7 %
Bridge - equipment finance 45,026 8.5 % 43,194 7.3 % 800 0.1 % — — %
$ 951,981 $ 1,338,232 $ 288,148 $ 72,881
Substandard accruing:
CRE
Hotel $ 249,646 40.3 % $ 92,066 14.8 % $ 11,296 1.8 % $ 34,645 5.3 %
Retail 238,910 16.8 % 63,957 4.4 % 20,049 1.4 % — — %
Multi-family 143,857 7.4 % 67,896 3.4 % 35,691 1.7 % 26,797 1.7 %
Office 60,556 2.9 % 28,994 1.4 % 6,214 0.3 % 8,299 0.3 %
Industrial 19,714 2.6 % 19,814 2.5 % 9,675 1.2 % 9,753 1.2 %
Other 1,422 1.0 % — — % — — % — — %
714,105 272,727 82,925 79,494
Owner occupied commercial real estate 135,165 6.6 % 38,332 1.9 % 24,520 1.2 % 16,241 0.8 %
Commercial and industrial 273,448 6.2 % 185,201 3.9 % 77,810 1.6 % 43,518 0.9 %
Bridge - franchise finance 213,532 35.2 % 56,628 9.1 % 53,531 8.3 % 41,127 6.6 %
Bridge - equipment finance 40,468 7.6 % 7,736 1.3 % — — % — — %
$ 1,376,718 $ 560,624 $ 238,786 $ 180,380
The increases in substandard accruing loans at September 30, 2020 were concentrated in those categories expected to exhibit additional stress in the current environment including CRE hotel, CRE retail and franchise finance.
Potential problem loans have been identified by management as those commercial loans included in the "substandard accruing" risk rating category. These loans are typically performing, but possess specifically identified credit weaknesses such as inadequate debt service coverage or liquidity that, if not remedied, may lead to a downgrade to non-accrual status and identification as impaired in the near-term.
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Payment Deferrals and Modifications
We believe, in the current environment, information about loans that are on temporary payment deferral or have been modified as a result of the COVID-19 pandemic provides additional insight into segments or sub-segments of the portfolio that are experiencing some level of stress related to the pandemic The following table summarizes deferral and modification activity in the commercial portfolio, as of September 30, 2020 (dollars in thousands):
Currently Under Short-Term Deferral CARES Act Modifications In Process CARES Act Modifications Total % of Portfolio
CRE - Property Type:
Retail $ 20,289 $ 6,098 $ 15,819 $ 42,206 3 %
Hotel 1,547 126,602 162,824 290,973 47 %
Office 4,664 41,451 29,826 75,941 4 %
Multifamily 19,829 — 4,435 24,264 1 %
Total CRE $ 46,329 $ 174,151 $ 212,904 $ 433,384 6 %
C&I - Industry
Accommodation and Food Services $ 54,813 $ — $ 7,098 $ 61,911 20 %
Retail Trade 20,648 19,357 — 40,005 12 %
Manufacturing 12,234 — — 12,234 3 %
Other 21,825 53,030 — 74,855 1 %
Total C&I $ 109,520 $ 72,387 $ 7,098 $ 189,005 3 %
BFG - Equipment $ 966 $ — $ — $ 966 — %
BFG - Franchise $ 75,607 $ — $ — $ 75,607 12 %
Total Commercial $ 232,422 $ 246,538 $ 220,002 $ 698,962 4 %
Updated through October 25, 2020 $ 73,866 $ 312,142 $ 181,052 $ 567,060 3 %
Reflecting a positive trend, total commercial loans on deferral, modified or in process of modification as a result of the COVID-19 pandemic had declined to $567 million or 3% of the commercial portfolio at October 25, 2020, compared to $3.0 billion or 17% of the commercial portfolio that had been granted initial 90 day payment deferrals through July 17, 2020. For commercial borrowers, payment deferrals were deferrals of principal and/or interest payments for up to two periods of 90 days each. The deferred payments along with interest accrued during the deferral period are generally due and payable on the maturity date. CARES Act modifications represent longer-term modifications and most commonly have taken the form of 9 to 12 month interest only periods. Pursuant to interagency guidance and the CARES Act, deferrals and modifications related to COVID-19 of loans that were current as of December 31, 2019 will typically not be categorized or reported as TDRs.
The following table presents additional information, as of September 30, 2020, about loan portfolio sub-segments that, in light of evolving conditions related to the COVID-19 pandemic, were identified for enhanced monitoring (dollars in thousands):
September 30, 2020
Amortized Cost Percent of Total Loans Non-Performing Special Mention Substandard Accruing
Retail - CRE $ 1,421,782 6.0 % $ 10,674 $ 85,640 $ 238,910
Retail - C&I 321,077 1.4 % 3,992 12,268 41,992
BFG - franchise finance 606,222 2.5 % 32,762 139,638 213,532
Hotel 619,012 2.6 % 32,099 202,929 249,646
Airlines and aviation authorities 145,921 0.6 % — 35,291 26,395
Cruise line 72,962 0.3 % — 59,423 13,538
$ 3,186,976 13.4 % $ 79,527 $ 535,189 $ 784,013
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At September 30, 2020, over 70% of commercial loans on deferral, modified or in process of modification due to the COVID-19 pandemic and over 50% of criticized and classified assets were in the above portfolio sub-segments.
Retail Exposure in the CRE Portfolio
The predominant collateral types supporting this sub-segment include both anchored and unanchored suburban and urban retail properties, some single tenant properties as well as some mixed-use properties in New York City with a significant retail component. We have no significant large shopping mall or "big box" exposure. The weighted average LTV for this sub-segment is 59.7% and 79% has LTVs less than 65%, based on the most recently available information.
Retail Exposure in the C&I Portfolio
This is a well-diversified sub-segment by industry. The largest exposure is to gas stations, generally with convenience stores, representing $93 million, or 29% of the sub-segment. 66% of loans in this sub-segment are collateralized by owner-occupied real estate.
BFG - Franchise Finance
The following table presents the franchise portfolio by concept at September 30, 2020:
Amortized Cost Percent of BFG Franchise Finance
Restaurant concepts:
Burger King $ 64,786 10.7 %
Dunkin Donuts 43,166 7.1 %
Popeyes 27,588 4.6 %
Domino's 22,967 2.8 %
Jimmy Johns 21,128 3.5 %
Other 185,278 30.6 %
364,913 59.3 %
Non-restaurant concepts:
Planet Fitness $ 105,582 18.4 %
Orange Theory Fitness 86,217 14.2 %
Other 49,510 8.1 %
241,309 40.7 %
$ 606,222 100.0 %
Approximately $35 million or 10% of restaurant concepts and $41 million or 17% of non-restaurant concepts were under short-term deferral at September 30, 2020. Restaurant concepts that have established drive-through or delivery models are generally performing well in the current environment. The majority of fitness franchises have re-opened.
Hotel
Many hotels are experiencing significant disruption in revenue due to social distancing measures arising from the pandemic. The weighted average LTV for this sub-segment is 58% and 76% has LTVs less than 65%, based on the most recent information available. The majority of our hotel exposure is in Florida at 75%, followed by 16% in New York. This sub-segment includes $59 million in SBA loans, of which $14 million is guaranteed. All but one of our hotel collateral properties have now re-opened for business.
Airlines and Aviation Authorities
These borrowers have directly benefited from government relief programs enacted in response to the COVID-19 pandemic.
Operating Lease Equipment, net
Eight operating lease relationships with a carrying value of assets under lease totaling $62 million, all of which were exposures to the energy industry, were internally risk rated substandard at September 30, 2020. On a quarterly basis, management performs an impairment analysis on assets with indicators of potential impairment. Potential impairment indicators
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include evidence of changes in residual value, macro-economic conditions, an extended period of time off-lease, criticized or classified status, or management's intention to sell the asset at an amount potentially below its carrying value. At September 30, 2020, there were 17 operating leases for which a triggering event was met. Based on a recoverability analysis performed, the Company recognized an impairment charge of $0.7 million during the three months ended March 31, 2020 related to one operating lease relationship; this was not an energy exposure. There were no impairment charges during the three months ended September 30, 2020 or the three and nine months ended September 30, 2019.
The primary risks inherent in the equipment leasing business are asset risk resulting from ownership of the equipment on lease and credit risk. Asset risk arises from fluctuations in supply and demand for the underlying leased equipment. The equipment is leased to commercial end users with original lease terms generally ranging from three to ten years. We are exposed to the risk that, at the end of the lease term, the value of the asset will be lower than expected, potentially resulting in reduced future lease income over the remaining life of the asset or a lower sale value. Asset risk may also lead to changes in depreciation as a result of changes in the residual values of the leased assets or through impairment of asset carrying values.
Asset risk is evaluated and managed by a dedicated internal staff of asset managers, managed by seasoned equipment finance professionals with a broad depth and breadth of experience in the leasing business. Additionally, we have partnered with an industry leading, experienced service provider who provides fleet management and servicing relating to the railcar fleet, including lease administration and reporting, a Regulation Y compliant full service maintenance program and railcar re-marketing. Risk is managed by setting appropriate residual values at inception and systematic reviews of residual values based on independent appraisals, performed at least annually. Additionally, our internal management team and our external service provider closely follow the rail markets, monitoring traffic flows, supply and demand trends and the impact of new technologies and regulatory requirements. Demand for railcars is sensitive to shifts in general and industry specific economic and market trends and shifts in trade flows from specific events such as natural or man-made disasters, including events such as the COVID-19 pandemic. 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.
Bridge had exposure to the energy industry of $337 million at September 30, 2020. The majority of the energy exposure was in the operating lease equipment portfolio where energy exposure totaled $284 million. The remaining energy exposure, totaling approximately $54 million was comprised of loans and direct or sales type finance leases.
Residential and Other Consumer Loans
Our residential mortgage portfolio, excluding GNMA buyout loans, consists primarily of loans purchased through established correspondent channels. Most of our purchases are of performing jumbo mortgage loans which have FICO scores above 700, primarily are owner-occupied and full documentation, and have a current LTV of 80% or less although loans with LTVs higher than 80% may be extended to selected credit-worthy borrowers. We perform due diligence on the purchased loans for credit, compliance, counterparty, payment history and property valuation.
We have a dedicated residential credit risk management function, and the residential portfolio is monitored by our internal credit review function. Residential mortgage loans and consumer loans are not individually risk rated. Delinquency status is the primary measure we use to monitor the credit quality of these loans. We also consider original LTV and most recently available FICO score to be significant indicators of credit quality for the 1-4 single family residential portfolio, excluding government insured residential loans.
The following charts present information about the 1-4 single family residential portfolio, excluding government insured loans, by FICO distribution, LTV distribution and vintage at September 30, 2020:
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bku-20200930_g5.jpg
FICO scores are generally updated at least annually, and were most recently updated in the third quarter of 2020. LTVs are typically based on valuation at origination since we do not routinely update residential appraisals.
At September 30, 2020, the majority of the 1-4 single family residential loan portfolio, excluding government insured residential loans, was owner-occupied, with 80% primary residence, 8% second homes and 12% investment properties.
1-4 single family residential loans, excluding government insured residential loans, past due more than 30 days totaled $54 million and $66 million at September 30, 2020 and December 31, 2019, respectively. The amount of these loans 90 days or more past due was $10.0 million and $11.1 million at September 30, 2020 and December 31, 2019, respectively. Delinquency statistics as of September 30, 2020 may not be fully reflective of the impact of the COVID-19 pandemic on residential borrowers due to payment deferral programs. Loans on deferral that are in compliance with the terms of the deferral program are not reported as delinquent.
The following table presents information about residential loans granted payment deferrals as a result of the COVID-19 pandemic as of September 30, 2020, excluding government insured residential loans (dollars in thousands):
Currently Under Short-Term Deferral Currently Under Short-Term Deferral Continue to Pay CARES Act Modifications
Balance % of Portfolio Balance % of Deferral Balance % of Portfolio
Residential $ 395,027 8 % $ 194,859 49 % $ 21,480 — %
For residential borrowers, relief has typically initially taken the form of 90 day payment deferrals, with deferred payments due at the end of the 90 day period. At the end of the initial 90 day deferral period, residential borrowers may either (i) make all payments due, (ii) be granted an additional deferral period or (iii) enter into a modification or repayment plan. As indicated in the table above, 49% of residential borrowers who are currently under short-term deferral continued to make payments during the deferral period.
At September 30, 2020 and December 31, 2019, substantially all other consumer loans were current.
Note 4 to the consolidated financial statements presents additional information about key credit quality indicators and delinquency status of the loan portfolio.
Non-Performing Assets
Non-performing assets generally consist of (i) non-accrual loans, including loans that have been modified in TDRs or CARES Act modifications and placed on non-accrual status, (ii) accruing loans that are more than 90 days contractually past due as to interest or principal, excluding purchase credit deteriorated loans for which management has a reasonable basis for an expectation about future cash flows and government insured residential loans, and (iii) OREO and repossessed assets.
The following table and charts summarize the Company's non-performing loans and non-performing assets at the dates indicated (dollars in thousands):
September 30, 2020 December 31, 2019
Non-accrual loans:
Residential and other consumer:
1-4 single family residential $ 6,246 $ 18,877
Other consumer loans
1,785 17
Total residential and other consumer loans 8,031 18,894
Commercial:
Multi-family — 6,138
Non-owner occupied commercial real estate
54,944 40,097
Construction and land 4,432 3,191
Owner occupied commercial real estate 23,953 27,141
Commercial and industrial 72,094 74,757
Bridge - franchise finance 32,762 13,631
Bridge - equipment finance — 20,939
Total commercial loans 188,185 185,894
Total non-accrual loans 196,216 204,788
Loans past due 90 days and still accruing
4,088 —
Total non-performing loans 200,304 204,788
OREO and repossessed assets 4,154 3,897
Total non-performing assets $ 204,458 $ 208,685
Non-performing loans to total loans (1)
0.84 % 0.88 %
Non-performing assets to total assets (1)
0.58 % 0.63 %
ACL to total loans 1.15 % 0.47 %
ACL to non-performing loans 136.86 % 53.07 %
Net charge-offs to average loans (2)
0.25 % 0.05 %
(1)    Non-performing loans and assets include the guaranteed portion of non-accrual SBA loans totaling $43.6 million or 0.18% of total loans and 0.12% of total assets, at September 30, 2020; compared to $45.7 million or 0.20% of total loans and 0.14% of total assets, at December 31, 2019.
(2)    Annualized for September 30, 2020.

The following chart presents trends in non-performing loans and non-performing assets:
bku-20200930_g6.jpg
The following chart presents trends in non-performing loans by portfolio sub-segment (in millions): bku-20200930_g7.jpg
The ultimate impact of the recent and evolving COVID-19 pandemic may not be reflected in the level of non-performing assets reported above. The potential effect on non-performing asset levels may be delayed in the near-term due to government assistance and loan deferral programs.
Contractually delinquent government insured residential loans are excluded from non-performing loans as defined in the table above due to their government guarantee. The carrying value of such loans contractually delinquent by more than 90 days was $591 million and $529 million at September 30, 2020 and December 31, 2019, respectively. Increases in the ratios of the ACL to total loans and the ACL to non-performing loans at September 30, 2020 compared to December 31, 2019 are
attributable to the adoption of CECL effective January 1, 2020 and the impact on the provision for credit losses recorded during the nine months ended September 30, 2020 of changes in economic conditions, our economic forecast and borrower financial performance related to COVID-19.
Commercial loans are placed on non-accrual status when (i) management has determined that full repayment of all contractual principal and interest is in doubt, or (ii) the loan is past due 90 days or more as to principal or interest unless the loan is well secured and in the process of collection. Residential and consumer loans, other than government insured pool buyout loans, are generally placed on non-accrual status when they are 90 days past due. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged to interest income. Commercial loans are returned to accrual status only after all past due principal and interest has been collected and full repayment of remaining contractual principal and interest is reasonably assured. Residential loans are generally returned to accrual status when less than 90 days past due. Past due status of loans is determined based on the contractual next payment due date. Loans less than 30 days past due are reported as current.
TDRs
A loan modification is considered a TDR if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise grant. These concessions may take the form of temporarily or permanently reduced interest rates, payment abatement periods, restructuring of payment terms, extensions of maturity at below market terms, or in some cases, partial forgiveness of principal. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy.
Under recently issued inter-agency and authoritative guidance and consistent with the CARES Act, short-term (generally periods of six months or less) deferrals or modifications related to COVID-19 will typically not be categorized as TDRs. Additionally, section 4013 of the CARES Act effectively suspended the guidance related to TDRs codified in ASC 310-40 until the earlier of December 31, 2020 or the date of the suspension of the declared state of emergency related to the COVID-19 pandemic. All of the COVID-19 related deferrals the Company has granted to date fall under these provisions and therefore have not been categorized as TDRs. See the sections entitled "Asset Quality - Commercial Loans - Payment Deferrals" and "Asset Quality - Residential and Other Consumer Loans" " for further discussion.
The following table summarizes loans that have been modified in TDRs at the dates indicated (dollars in thousands):
September 30, 2020 December 31, 2019
Number of TDRs Amortized Cost Related Specific Allowance Number of TDRs Amortized Cost Related Specific Allowance
Residential and other consumer (1)
362 $ 59,685 $ 82 361 $ 57,117 $ 12
Commercial 27 58,671 8,594 25 56,736 6,311
389 $ 118,356 $ 8,676 386 $ 113,853 $ 6,323
(1)    Includes 345 government insured residential loans modified in TDRs totaling $54.6 million at September 30, 2020; and 346 government insured residential loans modified in TDRs totaling $53.4 million at December 31, 2019.
See Note 4 to the consolidated financial statements for additional information about TDRs.
Loss Mitigation Strategies
Criticized or classified commercial loans in excess of certain thresholds are reviewed quarterly by the Criticized Asset Committee, which evaluates the appropriate strategy for collection to mitigate the amount of credit losses and considers the appropriate risk rating for these loans. Criticized asset reports for each relationship are presented by the assigned relationship manager and credit officer to the Criticized Asset Committee until such time as the relationships are returned to a satisfactory credit risk rating or otherwise resolved. The Criticized Asset Committee may require the transfer of a loan to our workout and recovery department, which is tasked to effectively manage the loan with the goal of minimizing losses and expenses associated with restructure, collection and/or liquidation of collateral. Commercial loans with a risk rating of substandard, loans on non-accrual status, loans modified as TDRs or CARES Act modifications and assets classified as OREO or repossessed assets are usually transferred to workout and recovery. Oversight of the workout and recovery department is provided by the Criticized Asset Committee.
Our servicers evaluate each residential loan in default to determine the most effective loss mitigation strategy, which may be modification, short sale, or foreclosure, and pursue the alternative most suitable to the consumer and to mitigate losses to the bank. In response to the COVID-19 pandemic, we have temporarily suspended new residential foreclosure actions.
In response to the COVID-19 pandemic and its potential economic impact to our customers, we implemented a short-term program that complies with the CARES Act under which we are providing temporary relief on a case by case basis to borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. See the sections entitled "Asset Quality - Commercial Loans - Payment Deferrals" and "Asset Quality - Residential and Other Consumer Loans" for further details about COVID-19 related payment deferrals. Under recently issued inter-agency guidance and consistent with the CARES Act, deferrals or modifications related to COVID-19 will generally not be categorized as TDRs. Loans subject to these temporary deferrals or modifications, if in compliance with the contractual terms of the deferral or modification agreements, will typically not be reported as past due or classified as non-accrual during the deferral period.
Analysis of the Allowance for Credit Losses
The ACL is management's estimate of the amount of expected credit losses over the life of the loan portfolio, or the amount of amortized cost basis not expected to be collected, at the balance sheet date. This estimate encompasses information about historical events, current conditions and reasonable and supportable forecasts. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. There is currently a high level of uncertainty around the impact the COVID-19 crisis will have on the economy broadly, and on our borrowers specifically. In light of this uncertainty, we believe it is possible that the ACL estimate could change, potentially materially, in future periods. Changes in the ACL may result from changes in current economic conditions, our economic forecast, and in loan portfolio composition, as well as circumstances not currently known to us that may impact the financial condition and operations of our borrowers, among other factors.
For the substantial majority of the loan portfolio, expected losses are estimated using econometric models that employ a factor based methodology to estimate PD and LGD, determined based on pool level characteristics. Projected PDs and LGDs are applied to estimated exposure at default to generate estimates of expected loss. Qualitative adjustments may also be applied to incorporate factors that management does not believe have been adequately considered in the quantitative estimate. For loans that do not share similar risk characteristics with other loans such as collateral dependent loans and TDRs, expected credit losses are estimated on an individual basis. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments.
See Note 1 to the consolidated financial statements for more detailed information about our ACL methodology and related accounting policies.
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The following table provides an analysis of the ACL, provision for credit losses related to the funded portion of loans and net charge-offs for the periods indicated (in thousands). For the nine months ended September 30, 2020, the ACL was estimated using the CECL methodology. For the nine months ended September 30, 2019, prior to the adoption of ASU 2016-13, an incurred loss methodology was used.
Nine Months Ended September 30,
2020 2019
Balance at beginning of period: $ 108,671 $ 109,931
Impact of adoption of ASU 2016-13 27,305 —
135,976 109,931
Provision for (recovery of) loan losses:
1-4 single family residential (3,240) 704
Home equity loans and lines of credit (40) (152)
Other consumer loans 39 (113)
Multi-family 32,588 (2,265)
Non-owner occupied commercial real estate 64,524 (1,760)
Construction and land 280 (177)
Owner occupied commercial real estate 4,676 (3,195)
Commercial and industrial 45,617 15,483
Pinnacle (56) (135)
Bridge - franchise finance 31,475 3,582
Bridge - equipment finance 5,232 (2,599)
Total Provision 181,095 9,373
Charge-offs:
1-4 single family residential (31) —
Multi-family (129) —
Non-owner occupied commercial real estate (685) (2,184)
Construction and land — (76)
Owner occupied commercial real estate (1,028) (374)
Commercial and industrial (25,564) (10,066)
Bridge - franchise finance (16,561) (1,285)
Bridge - equipment finance (6,756) —
Total Charge-offs (50,754) (13,985)
Recoveries:
Home equity loans and lines of credit 44 151
Other consumer loans 4 21
Multi-family 2 —
Non-owner occupied commercial real estate 124 82
Owner occupied commercial real estate 98 781
Commercial and industrial 6,977 2,104
Bridge - franchise finance 449 —
Bridge - equipment finance 113 4
Total Recoveries 7,811 3,143
Net Charge-offs (42,943) (10,842)
Balance at end of period $ 274,128 $ 108,462
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The following table shows the distribution of the ACL at the dates indicated (dollars in thousands):
September 30, 2020 June 30, 2020
January 1, 2020 (1)
December 31, 2019
Total
% (2)
Total
% (2)
Total
% (2)
Total
% (2)
Residential portfolio segment $ 16,031 25.1 % $ 10,695 23.5 % $ 19,252 24.5 % $ 11,154 24.5 %
Multi-family 36,705 7.6 % 21,049 7.9 % 4,244 9.6 % 5,024 9.6 %
Non-owner occupied commercial real estate 73,760 20.7 % 84,436 20.7 % 9,798 21.7 % 23,240 21.7 %
Construction and land 2,898 1.1 % 3,384 1.0 % 2,618 1.1 % 764 1.1 %
CRE portfolio segment 113,363 108,869 16,660 29,028
Owner occupied commercial real estate 35,052 8.6 % 36,416 8.6 % 31,306 8.9 % 8,066 8.9 %
Commercial and industrial 79,357 27.4 % 84,142 28.1 % 52,326 23.4 % 43,485 23.4 %
Pinnacle 355 4.8 % 238 5.1 % 411 5.2 % 720 5.2 %
Bridge - franchise finance 24,394 2.5 % 19,446 2.6 % 9,030 2.6 % 9,163 2.6 %
Bridge - equipment finance 5,576 2.2 % 6,317 2.5 % 6,991 3.0 % 7,055 3.0 %
Commercial portfolio segment 144,734 146,559 100,064 68,489
$ 274,128 100.0 % $ 266,123 100.0 % $ 135,976 100.0 % $ 108,671 100.0 %
(1) Adoption date of ASU 2016-13.
(2) Represents percentage of loans receivable in each category to total loans receivable.

The following table shows the distribution of the ACL as a percentage of loans at the dates indicated:
September 30, 2020 June 30, 2020
January 1, 2020 (1)
Residential portfolio segment 0.27 % 0.19 % 0.34 %
Commercial:
Commercial real estate 1.62 % 1.54 % 0.22 %
Commercial and industrial 1.34 % 1.38 % 1.12 %
Pinnacle 0.03 % 0.02 % 0.03 %
Bridge - franchise finance 4.03 % 3.12 % 1.44 %
Bridge - equipment finance 1.05 % 1.07 % 1.02 %
Total commercial 1.45 % 1.40 % 0.67 %
1.15 % 1.12 % 0.59 %
(1) Adoption date of ASU 2016-13.
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Changes in the ACL upon initial adoption of CECL
ASU 2016-13 was adopted effective January 1, 2020, increasing the ACL by $27.3 million. In general, the change in methodology resulted in increased reserves due to the transition to a lifetime expected loss model from an incurred loss model. However, as noted in the table above, there are certain CRE portfolios where the reserve decreased. This was mainly driven by the use of quantitative models to estimate the ACL using a methodology tailored more specifically to loans in the Company's portfolio under CECL, instead of the peer group historical loss rates utilized under the prior incurred loss model. Certain qualitative factors were also removed, as their impact was captured in the quantitative estimate under CECL.
Changes in the ACL subsequent to the adoption of CECL
The increase in the ACL from the date of adoption of CECL to September 30, 2020 is a direct result of the impact of the COVID-19 pandemic on current and forecasted economic conditions and on our borrowers specifically, as evidenced in risk rating migration of the portfolio.
The ACL increased by $8 million, to $274.1 million or 1.15% of loans at September 30, 2020 from $266.1 million or 1.12% of loans at June 30, 2020.
Significant offsetting factors contributing to the change in the ACL for the third quarter are depicted in the chart below (in millions):
bku-20200930_g8.jpg
The ACL for the residential portfolio segment increased by $5.3 million, or from 0.19% to 0.27% of loans during the quarter ended September 30, 2020. This increase related primarily to changes in modeling assumptions about loans in forbearance, and to a lesser degree, changes in the economic forecast driven by the unemployment outlook. In the aggregate, the ACL for the CRE portfolio segments, including multi-family, non-owner occupied CRE and construction and land, increased by $4.5 million during the quarter ended September 30, 2020, from 1.54% to 1.62% of loans, driven primarily by the migration of loans from special mention to substandard accruing. T he ACL on the franchise portfolio increased by $4.9 million during the quarter ended September 30, 2020, from 3.12% of loans to 4.03% of loans, primarily driven by risk rating migration during the quarter. Charge-offs for the quarter related primarily to the $22.1 million charge-off of one commercial relationship.
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The econometric models we use to estimate expected credit losses ingest a wide array of national, regional and MSA level economic variables and data points. Some of the data points informing the reasonable and supportable economic forecast used in estimating the ACL at September 30, 2020 were:
• National unemployment starting at 8%, increasing to just over 9% by the end of 2020, declining to 8% by the end of 2021 and trending down thereafter;
• Annualized growth in GDP starting at 27%, decreasing to 3% by the end of 2020, exceeding pre-recession levels by the end of 2023, averaging 4.3% for 2020 and 3.5% for 2021;
• VIX trailing average starting at 26, trending downward to 18 by the end of 2022;
• S&P 500 starting at 3,200, declining moderately in the fourth quarter of 2020 before trending up, but staying below recent highs until mid-2022.
For additional information about the ACL, see Note 4 to the consolidated financial statements.
Deposits
Average balances and rates paid on deposits were as follows for the periods indicated (dollars in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Average
Balance 		Average
Rate Paid 		Average
Balance 		Average
Rate Paid 		Average
Balance 		Average
Rate Paid 		Average
Balance 		Average
Rate Paid
Demand deposits:
Non-interest bearing $ 6,186,718 — % $ 3,963,955 — % $ 5,292,702 — % $ 3,835,248 — %
Interest bearing 2,800,421 0.59 % 1,872,573 1.42 % 2,475,388 0.85 % 1,783,611 1.39 %
Money market 10,484,666 0.60 % 10,710,621 1.89 % 10,329,839 0.92 % 10,878,975 1.91 %
Savings 179,796 0.09 % 196,696 0.23 % 179,720 0.12 % 214,315 0.26 %
Time 6,519,852 1.08 % 6,845,643 2.41 % 7,040,101 1.59 % 6,898,947 2.37 %
$ 26,171,453 0.57 % $ 23,589,488 1.67 % $ 25,317,750 0.90 % $ 23,611,096 1.68 %
The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $100,000 as of September 30, 2020 (in thousands):
Three months or less $ 1,009,373
Over three through six months 908,323
Over six through twelve months 838,999
Over twelve months 139,500
$ 2,896,195
Borrowings
In addition to deposits, we utilize FHLB advances as a funding source; the advances provide us with additional flexibility in managing both term and cost of funding and in managing interest rate risk. FHLB advances are secured by FHLB stock, qualifying residential first mortgage and commercial real estate loans, and MBS.
We have utilized the Federal Reserve's PPPLF to fund PPP loans. These borrowings bear interest at 0.35%, are secured by PPP loans, and mature as the underlying PPP loans are repaid. FHLB and PPPLF borrowings consisted of the following at the dates indicated (in thousands):
September 30, 2020 December 31, 2019
FHLB advances, net of hedge accounting fair value adjustments $ 3,423,810 $ 4,480,501
PPPLF borrowings 694,650 —
$ 4,118,460 $ 4,480,501
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The contractual balance of FHLB advances outstanding at September 30, 2020 is scheduled to mature as follows (in thousands):
Maturing in:
2020—One month or less $ 995,000
2020—Over one month 2,076,000
2021 250,000
Thereafter 100,000
Total contractual balance outstanding 3,421,000
Cumulative fair value hedging adjustments 2,810
Carrying value $ 3,423,810
The table above reflects contractual maturities of outstanding FHLB advances, and does not incorporate the impact that interest rate swaps designated as hedges have on the duration of borrowings. See Note 7 to the consolidated financial statements for more information about derivative instruments.
Outstanding notes payable and other borrowings consisted of the following at the dates indicated (in thousands):
September 30, 2020 December 31, 2019
Senior notes:
Principal amount of 4.875% senior notes maturing on November 17, 2025 $ 400,000 $ 400,000
Unamortized discount and debt issuance costs (4,362) (4,910)
395,638 395,090
Subordinated notes:
Principal amount of 5.125% subordinated notes maturing on June 11, 2030 300,000 —
Unamortized discount and debt issuance costs (6,012) —
293,988 —
Total outstanding notes payable 689,626 395,090
Finance leases 32,966 34,248
Notes and other borrowings $ 722,592 $ 429,338

Capital Resources
Pursuant to the FDIA, the federal banking agencies have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. At September 30, 2020 and December 31, 2019, BankUnited and the Company had capital levels that exceeded both the regulatory well-capitalized guidelines and all internal capital ratio targets.
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The following table provides information regarding regulatory capital for the Company and the Bank as of September 30, 2020 (dollars in thousands):
Actual Required to be
Considered Well
Capitalized 		Required to be
Considered
Adequately
Capitalized 		Required to be Considered
Adequately
Capitalized Including Capital Conservation Buffer
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
BankUnited, Inc.:
Tier 1 leverage $ 2,924,892 8.60 %
N/A (1)
N/A (1)
$ 1,359,789 4.00 %
N/A (1)
N/A (1)
CET1 risk-based capital $ 2,924,892 12.17 % $ 1,561,717 6.50 % $ 1,081,189 4.50 % $ 1,681,849 7.00 %
Tier 1 risk-based capital $ 2,924,892 12.17 % $ 1,922,113 8.00 % $ 1,441,585 6.00 % $ 2,042,245 8.50 %
Total risk based capital $ 3,437,902 14.31 % $ 2,402,641 10.00 % $ 1,922,113 8.00 % $ 2,522,773 10.50 %
BankUnited:
Tier 1 leverage $ 3,220,494 9.51 % $ 1,692,880 5.00 % $ 1,354,304 4.00 % N/A N/A
CET1 risk-based capital $ 3,220,494 13.48 % $ 1,552,865 6.50 % $ 1,075,060 4.50 % $ 1,672,316 7.00 %
Tier 1 risk-based capital $ 3,220,494 13.48 % $ 1,911,218 8.00 % $ 1,433,414 6.00 % $ 2,030,669 8.50 %
Total risk based capital $ 3,433,504 14.37 % $ 2,389,023 10.00 % $ 1,911,218 8.00 % $ 2,508,474 10.50 %
(1)    There is no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company.
The Company has elected the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period.
Total stockholders' equity decreased by approximately $116.0 million at September 30, 2020 compared to December 31, 2019. The most significant reason for this decrease was the repurchase of common shares of $101 million, followed by dividends declared of $66 million, offset by comprehensive income of $62 million for the nine months ended September 30, 2020. The comprehensive income included retained earnings offset by an increase of $50 million in accumulated other comprehensive loss, attributed to an increase in unrealized losses on derivative instruments. Unrealized losses on derivative instruments designated as hedging instruments were attributable to reductions in benchmark interest rates.
During the first quarter of 2020, the Company repurchased approximately 3.3 million shares of its common stock for an aggregate purchase price of $101 million, at a weighted average price of $30.36 per share. The Company has temporarily suspended its share repurchase program.
We believe we are well positioned, from a capital perspective, to withstand a severe downturn in the economy. In light of the COVID-19 crisis, uncertainty around its ultimate impact on the economy and, by extension, on our financial condition and results of operations, we have enhanced our stress testing framework. We have increased both the frequency of stress testing and the spectrum of scenarios utilized. One exercise we completed was to stress our March 31, 2020 loan portfolio using both the 2018 DFAST severely adverse scenario and the 2020 DFAST severely adverse scenario. The results of each of these stress tests projected regulatory capital ratios in excess of all well capitalized thresholds.
We have an active shelf registration statement on file with the SEC that allows the Company to periodically offer and sell in one or more offerings, individually or in any combination, our common stock, preferred stock and other non-equity securities. The shelf registration provides us with flexibility in issuing capital instruments and enables us to more readily access the capital markets as needed to pursue future growth opportunities and to ensure continued compliance with regulatory capital requirements. Our ability to issue securities pursuant to the shelf registration is subject to market conditions. We successfully accessed the capital markets in the second quarter of 2020, augmenting our regulatory Tier 2 capital with a $300 million issuance of subordinated notes.
Liquidity
Liquidity involves our ability to generate adequate funds to support planned interest earning asset growth, meet deposit withdrawal and credit line usage requests, maintain reserve requirements, conduct routine operations, pay dividends, service outstanding debt and meet other contractual obligations.
BankUnited's ongoing liquidity needs have been and continue to be met primarily by cash flows from operations, deposit growth, the investment portfolio, FHLB advances and more recently the PPPLF. For the nine months ended September 30, 2020 and 2019 net cash provided by operating activities was $635 million and $412 million, respectively.
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The onset of the COVID-19 pandemic led to dislocation and volatility in funding and capital markets and evoked widespread concerns about the ongoing functioning of those markets, the availability of liquidity and the economy generally. In response, the Federal Reserve reduced its benchmark interest rate to a target level of 0 - 0.25% and has maintained it at that level to date, actively adjusted the size of its overnight and term repurchase agreement operations, reduced reserve requirements and the cost of discount window borrowings, encouraged banks to utilize the discount window and committed to purchasing large amounts of U.S. Treasury securities and MBS. The U.S. government has announced an unprecedented variety of additional stimulus and measures to support markets, the flow of credit, and systemic liquidity. These include the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Term Asset-Backed Securities Loan Facility, the Municipal Liquidity Facility, the Main Street New Loan Facility, the Main Street Expanded Loan Facility, Paycheck Protection Program loans, the PPPLF, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Money Market Mutual Fund Liquidity Facility. These actions appear to have been effective in stabilizing market liquidity.
In response to the onset of COVID-19 and potential concerns that might arise about the stability of liquidity, we initially took a number of precautionary measures to ensure adequacy of liquidity. We took steps to optimize available same day liquidity. We increased the level of cash held on balance sheet, to be prepared to meet potential increased demand for deposit withdrawals and line usage, which to date have not materialized. While we took proactive steps to be prepared for disruptions in liquidity, the COVID-19 pandemic has not been a liquidity event; we have not experienced unusual volatility or stress on our liquidity position to date.
At September 30, 2020, available liquidity totaled approximately $9.7 billion, including cash, borrowing capacity at the Federal Home Loan Bank of Atlanta and the Federal Reserve Discount Window, Federal Funds lines of credit, unpledged agency securities and availability under the PPPLF, as depicted in the following chart:
bku-20200930_g9.jpg
Additional sources of liquidity include cash flows from operations, wholesale deposits, and cash flow from the Bank's amortizing securities and loan portfolios. In the near-term, cash flows from the loan portfolio may be reduced as a result of temporary payment deferrals granted to borrowers. This has not to date and we do not currently expect it to materially impact our liquidity position. Management also has the ability to exert substantial control over the rate and timing of loan production, and resultant requirements for liquidity to fund new loans. Since the onset of the COVID-19 pandemic, we have not experienced unusual deposit outflows or volatility; we have, in fact experienced growth in deposits. Credit line usage, which we have monitored regularly since the onset of COVID-19, never significantly exceeded and is currently below our trailing three year average. Our available liquidity may also change as the FHLB and Federal Reserve Bank reprice our collateral in the normal course of business based on ongoing quarterly valuations. Based on our internal analysis, we do not expect the impact to be material to our overall liquidity position.
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The ALCO policy has established several measures of liquidity which are typically monitored monthly by the ALCO and quarterly by the Board of Directors. In light of the COVID-19 situation, we have enhanced the frequency and extent of liquidity monitoring and reporting to both executive management and the Board of Directors.
The ALCO policy establishes limits for the ratio of available liquidity to volatile liabilities, the ratio of wholesale funding to total assets, the ratio of brokered deposits to total deposits and a government backed securities holding ratio, measured as the ratio of U.S. Government backed securities to total securities. At September 30, 2020 BankUnited was in compliance with all of these ALCO policy limits.
An additional primary measure of liquidity monitored by management is the 30-day total liquidity ratio, defined as (a) the sum of cash and cash equivalents, pledgeable securities and a measure of funds expected to be generated by operations over the next 30 days; divided by (b) the sum of potential deposit runoff, liabilities maturing within the 30 day time frame and a measure of funds expected to be used in operations over the next 30 days. ALCO policy thresholds stipulate that BankUnited’s liquidity is considered acceptable if the 30-day total liquidity ratio exceeds 100%. At September 30, 2020, BankUnited’s 30-day total liquidity ratio was 267%. 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, 2020, BankUnited’s one-year liquidity ratio was 223%. Additional measures of liquidity regularly monitored by the ALCO include the ratio of FHLB advances to total funding, concentrations of large deposits, a measure of on balance sheet available liquidity and the ratio of non-interest bearing deposits to total deposits, which is reflective of the quality and cost, rather than the quantity, of available liquidity. The Company also has a comprehensive contingency liquidity funding plan and conducts a quarterly liquidity stress test, the results of which are reported to the risk committee of the Board of Directors.
As a holding company, BankUnited, Inc. is a corporation separate and apart from its banking subsidiary, and therefore, provides for its own liquidity. BankUnited, Inc.’s main sources of funds include management fees and dividends from the Bank, access to capital markets and its own securities portfolio. There are regulatory limitations that may affect the ability of the Bank to pay dividends to BankUnited, Inc. Management believes that such limitations will not impact our ability to meet our ongoing near-term cash obligations.
We expect that our liquidity requirements will continue to be satisfied over the next 12 months through the sources of funds described above.
Interest Rate Risk
A principal component of the Company’s risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is interest rate risk, including the risk that assets and liabilities with similar re-pricing characteristics may not reprice at the same time or to the same degree. A primary objective of the Company’s asset/liability management activities is to maximize net interest income, while maintaining acceptable levels of interest rate risk. The ALCO is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with these policies. The thresholds established by the ALCO are approved at least annually by the Board of Directors or its Risk Committee.
Management believes that the simulation of net interest income in different interest rate environments provides the most meaningful measure of interest rate risk. Income simulation analysis is designed to capture not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them.
The income simulation model analyzes interest rate sensitivity by projecting net interest income over twelve and twenty-four month periods in a most likely rate scenario based on consensus forward interest rate curves versus net interest income in alternative rate scenarios. Management continually reviews and refines its interest rate risk management process in response to changes in the interest rate environment, the economic climate and observed customer behavior. Currently, we are modeling instantaneous rate shocks of plus 100, plus 200, plus 300 and plus 400 basis point shifts as well as a variety of yield curve slope, negative rate and dynamic balance sheet scenarios. We continually evaluate the scenarios being modeled with a view toward adapting them to changing economic conditions, expectations and trends.
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The Company’s ALCO policy provides that net interest income sensitivity will be considered acceptable if decreases in forecast net interest income in specified parallel rate shock scenarios, generally by policy plus and minus 100, 200, 300 and 400 basis points, are within specified percentages of forecast net interest income in the most likely rate scenario over the next twelve months and in the second year. At September 30, 2020, the most likely rate scenario assumes that all indices are floored at 0%. We did not apply the falling rate scenarios at September 30, 2020 due to the low level of current interest rates. The following table illustrates the thresholds set forth in the ALCO policy and the impact on forecasted net interest income in the indicated simulated scenarios at September 30, 2020 and December 31, 2019:
Down 100 Plus 100 Plus 200 Plus 300 Plus 400
Policy Thresholds:
In year 1 (6.0) % (6.0) % (10.0) % (14.0) % (18.0) %
In year 2 (9.0) % (9.0) % (13.0) % (17.0) % (21.0) %
Model Results at September 30, 2020 - increase:
In year 1 N/A 2.9 % 4.2 % 4.0 % 3.2 %
In year 2 N/A 4.1 % 5.8 % 5.8 % 5.1 %
Model Results at December 31, 2019 - increase (decrease):
In year 1 (1.1) % 1.0 % 0.1 % (2.1) % (5.1) %
In year 2 (4.8) % 4.6 % 7.2 % 8.7 % 9.4 %
Management also simulates changes in EVE in various interest rate environments. The ALCO policy has established parameters of acceptable risk that are defined in terms of the percentage change in EVE from a base scenario under eight rate scenarios, derived by implementing immediate parallel movements of plus and down 100, 200, 300 and 400 basis points from current rates. We did not simulate decreases in interest rates at September 30, 2020 due to the currently low level of market interest rates. The following table illustrates the acceptable thresholds as established by ALCO and the modeled change in EVE in the indicated scenarios at September 30, 2020 and December 31, 2019:
Down 100 Plus 100 Plus 200 Plus 300 Plus 400
Policy Thresholds (9.0) % (9.0) % (18.0) % (27.0) % (36.0) %
Model Results at September 30, 2020 - increase (decrease):
N/A 1.0 % (1.8) % (5.5) % (9.6) %
Model Results at December 31, 2019 - decrease: (1.5) % (0.7) % (3.1) % (6.2) % (9.7) %
These measures fall within an acceptable level of interest rate risk per the thresholds established in the ALCO policy.
Many assumptions were used by the Company to calculate the impact of changes in interest rates, including the change in rates. Actual results may not be similar to the Company’s projections due to several factors including the timing and frequency of rate changes, market conditions, changes in depositor behavior and loan prepayment speeds and the shape of the yield curve. Actual results may also differ due to the Company’s actions, if any, in response to changing rates and conditions.
Derivative Financial Instruments
Interest rate swaps designated as cash flow or fair value hedging instruments are one of the tools we use to manage interest rate risk. These derivative instruments are used to mitigate exposure to changes in interest cash flows on variable rate borrowings and to changes in the fair value of fixed rate borrowings, in each case caused by fluctuations in benchmark interest rates, as well as to manage duration of liabilities. The fair value of derivative instruments designated as hedges is included in other assets and other liabilities in our consolidated balance sheets. Changes in fair value of derivative instruments designated as cash flow hedges are reported in accumulated other comprehensive income. Changes in the fair value of derivative instruments designated as fair value hedges are recognized in earnings, as is the offsetting gain or loss on the hedged item. At September 30, 2020, outstanding interest rate swaps designated as cash flow hedges had an aggregate notional amount of $2.9 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 $6.6 million.
Interest rate swaps and caps not designated as hedges had an aggregate notional amount of $3.1 billion at September 30, 2020. The aggregate fair value of these interest rate swaps and caps included in other assets was $138.3 million and the aggregate fair value included in other liabilities was $42.9 million. These interest rate swaps and caps were entered into as accommodations to certain of our commercial borrowers. To mitigate interest rate risk associated with these derivatives, the Company enters into offsetting derivative positions with primary dealers.
See Note 7 to the consolidated financial statements for additional information about derivative financial instruments.
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Off-Balance Sheet Arrangements
For more information on contractual obligations and commitments, see Note 11 to the consolidated financial statements, the Borrowings section of this MD&A and Off-Balance Sheet Arrangements in the MD&A of the Company's 2019 Annual report on Form 10-K.
Non-GAAP Financial Measures
PPNR is a non-GAAP financial measure. Management believes this measure is relevant to understanding the performance of the Company attributable to elements other than the provision for credit losses and the ability of the Company to generate earnings sufficient to cover estimated credit losses, particularly in view of the adoption of the CECL accounting methodology, which may impact comparability of operating results to prior periods. This measure also provides a meaningful basis for comparison to other financial institutions and is a measure frequently cited and requested by investors. The following table reconciles the non-GAAP financial measurement of PPNR to the comparable GAAP financial measurement of income before income taxes for the three and nine months ended September 30, 2020 and 2019 and the three months ended June 30, 2020 (in thousands):
Three Months Ended September 30, Three Months Ended June 30, Three Months Ended September 30, Nine Months Ended September 30,
2020 2020 2019 2020 2019
Income before income taxes (GAAP) $ 85,912 $ 96,904 $ 100,401 $ 142,394 $ 299,468
Plus: Provision for credit losses 29,232 25,414 1,839 180,074 9,373
PPNR (non-GAAP)
$ 115,144 $ 122,318 $ 102,240 $ 322,468 $ 308,841
Recurring operating expenses is a non-GAAP financial measure. Management believes disclosure of this measure provides readers with information that may be useful in comparing current period results to prior periods and in interpreting trends in operational costs, particularly in light of our BankUnited 2.0 initiative. The following table reconciles the non-GAAP financial measurement of recurring operating expenses to the comparable GAAP financial measurement of total non-interest expense for the three and nine months ended September 30, 2020 and 2019 (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Total non-interest expense (GAAP) $ 108,627 $ 121,306 $ 333,865 $ 368,081
Less:
Depreciation of operating lease equipment (12,315) (11,582) (37,137) (34,883)
Loss on debt extinguishment — (3,796) — (3,796)
Costs incurred directly related to implementation of BankUnited 2.0 — (1,985) (334) (14,493)
COVID-19 expenses (531) — (2,050) —
Recurring operating expenses (non-GAAP) $ 95,781 $ 103,943 $ 294,344 $ 314,909
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Tangible book value per common share is a non-GAAP financial measure. Management believes this measure is relevant to understanding the capital position and performance of the Company. Disclosure of this non-GAAP financial measure also provides a meaningful basis for comparison to other financial institutions as it is a metric commonly used in the banking industry. The following table reconciles the non-GAAP financial measurement of tangible book value per common share to the comparable GAAP financial measurement of book value per common share at the dates indicated (in thousands except share and per share data):
September 30, 2020 June 30, 2020 December 31, 2019
Total stockholders’ equity $ 2,864,824 $ 2,755,053 $ 2,980,779
Less: goodwill and other intangible assets 77,641 77,652 77,674
Tangible stockholders’ equity $ 2,787,183 $ 2,677,401 $ 2,903,105
Common shares issued and outstanding 92,388,641 92,420,278 95,128,231
Book value per common share $ 31.01 $ 29.81 $ 31.33
Tangible book value per common share $ 30.17 $ 28.97 $ 30.52
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.
Effective January 1, 2020, the Company adopted ASU 2016-13. The Company designed new controls and modified existing controls as part of its adoption. These additional internal controls over financial reporting included controls over model governance, assumptions, the determination of a reasonable and supportable economic forecast, and expanded controls over loan level data.
During the quarter ended September 30, 2020, there were no changes in the Company's internal control over financial reporting, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. We have focused on insuring that our technology systems and internal controls continue to operate effectively in a remote work environment and have not identified any instances in which our control environment has failed to operate effectively. We are continually monitoring and assessing any impact of the COVID-19 situation on our internal controls to address impacts to their design, implementation and operating effectiveness.
PART II.  OTHER INFORMATION
Item 1.   Legal Proceedings
The Company is involved as plaintiff or defendant in various legal actions arising in the normal course of business. In the opinion of management, based upon currently available information and the advice of legal counsel, the likelihood is remote that the impact of these proceedings, either individually or in the aggregate, would be material to the Company’s consolidated financial position, results of operations or cash flows.
We received a subpoena from the United States Department of Justice in October 2019 requesting documentation related to the taxi medallion line of business formerly conducted by the Bank. We are cooperating with this investigation.
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Item 1A.   Risk Factors
The COVID-19 pandemic has caused substantial disruption to the global and domestic economies which has adversely affected, and is expected to continue to adversely affect, the Company’s business and results of operations. The future impacts of the COVID-19 pandemic on the global and domestic economies and the Company’s business, results of operations and financial condition remains uncertain.
In March 2020, the World Health Organization declared novel coronavirus disease 2019 (COVID-19) as a global pandemic. The pandemic has resulted in governmental authorities implementing numerous measures attempting to contain the spread and impact of COVID-19 such as travel bans and restrictions, quarantines, shelter in place orders, and limitations on business activities, including in major markets in which the Company and its clients are located or do business. The COVID-19 pandemic, and governmental responses to the pandemic, have severely negatively impacted the global and domestic economies, disrupted supply chains, lowered some equity market valuations, particularly those of financial institutions such as the Company, created significant volatility and disruption in financial markets, and increased unemployment levels.
This macroeconomic environment has had, and could continue to have, an adverse effect on the Company’s business and operations. Should economic impacts of COVID-19 persist or further deteriorate, this macroeconomic environment could have a continued adverse effect on our business and operations, including, but not limited to, decreased demand for the Company’s products and services, protracted periods of lower interest rates which may negatively impact the Company's net interest margin, loss of income resulting from forbearances, deferrals and fee waivers provided by the Company to its consumer and commercial borrowers, increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs and possible constraints on liquidity and capital, including those related to increases in risk-weighted assets related to supporting client activities or to regulatory actions. The business operations of the Company may also be disrupted if significant portions of its workforce or those of vendors or third-party service providers are unable to work effectively, including because of illness, quarantines, government actions, restrictions in connection with the pandemic, and technology limitations and/or disruptions. The Company also faces an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions and actions taken by governmental authorities in response to those conditions.
The extent to which the COVID-19 pandemic impacts the Company’s business, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Moreover, the effects of the COVID-19 pandemic may heighten many of the other risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K including, but not limited to, financial market conditions, economic conditions, credit risk, interest rate risk, risk of security breaches and technology changes.
There have been no material changes in the other risk factors disclosed by the Company in its 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2020.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
None.
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Item 6.
Exhibits
Exhibit
Number 		Description Location
Filed herewith
Filed herewith
Filed herewith
Filed herewith
101.INS The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document Filed herewith
101.SCH XBRL Taxonomy Extension Schema Filed herewith
101.CAL XBRL Taxonomy Extension Calculation Linkbase Filed herewith
101.DEF XBRL Taxonomy Extension Definition Linkbase Filed herewith
101.LAB XBRL Taxonomy Extension Label Linkbase Filed herewith
101.PRE XBRL Taxonomy Extension Presentation Linkbase Filed herewith
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized this 5th day of November 2020.
/s/ Rajinder P. Singh
Rajinder P. Singh
Chairman, President and Chief Executive Officer
/s/ Leslie N. Lunak
Leslie N. Lunak
Chief Financial Officer
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