BankUnited, Inc. - Annual Report: 2017 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
Commission file number: 001-35039
BankUnited, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 27-0162450 (I.R.S. Employer Identification No.) | |
14817 Oak Lane, Miami Lakes, FL (Address of principal executive offices) | 33016 (Zip Code) | |
Registrant's telephone number, including area code: (305) 569-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 par value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or 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 ý | Accelerated filer o | |
Non-accelerated filer o | Smaller reporting company o | |
Emerging growth company o | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant on June 30, 2017 was $3,551,584,938.
The number of outstanding shares of the registrant's common stock, $0.01 par value, as of February 26, 2018, was 106,017,421.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for the 2018 annual meeting of stockholders are incorporated by reference in this Annual Report on Form 10-K in response to Part II. Item 5 and Part III. Items 10, 11, 12, 13 and 14.
BANKUNITED, INC.
Form 10-K
For the Year Ended December 31, 2017
TABLE OF CONTENTS
Page | ||
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GLOSSARY OF DEFINED TERMS
The following acronyms and terms may be used throughout this Form 10-K, including the consolidated financial statements and related notes.
ACI | Loans acquired with evidence of deterioration in credit quality since origination (Acquired Credit Impaired) | |
AFS | Available for sale | |
ALCO | Asset/Liability Committee | |
ALLL | Allowance for loan and lease losses | |
AOCI | Accumulated other comprehensive income | |
ARM | Adjustable rate mortgage | |
ASC | Accounting Standards Codification | |
ASU | Accounting Standards Update | |
ATM | Automated teller machine | |
Basel Committee | International Basel Committee on Banking Supervision | |
BHC Act | Bank Holding Company Act of 1956 | |
BHC | Bank holding company | |
BKU | BankUnited, Inc. | |
BankUnited | BankUnited, National Association | |
The Bank | BankUnited, National Association | |
Bridge | Bridge Funding Group, Inc. | |
CET1 | Common Equity Tier 1 capital | |
CECL | Current expected credit loss | |
CFPB | Consumer Financial Protection Bureau | |
CME | Chicago Mercantile Exchange | |
CMOs | Collateralized mortgage obligations | |
Commercial Shared-Loss Agreement | A commercial and other loans shared-loss agreement entered into with the FDIC in connection with the FSB Acquisition | |
Covered assets | Assets covered under the Loss Sharing Agreements | |
Covered loans | Loans covered under the Loss Sharing Agreements | |
CRA | Community Reinvestment Act | |
DIF | Deposit insurance fund | |
Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 | |
EVE | Economic value of equity | |
Failed Bank | BankUnited, FSB | |
FAA | Field Attorney's Advice | |
FASB | Financial Accounting Standards Board | |
FDIA | Federal Deposit Insurance Act | |
FDIC | Federal Deposit Insurance Corporation | |
FHLB | Federal Home Loan Bank | |
FICO | Fair Isaac Corporation (credit score) | |
FNMA | Federal National Mortgage Association | |
FRB | Federal Reserve Bank | |
FSB Acquisition | Acquisition of substantially all of the assets and assumption of all of the non-brokered deposits and substantially all of the other liabilities of BankUnited, FSB from the FDIC on May 21, 2009 | |
GAAP | U.S. generally accepted accounting principles | |
GDP | Gross Domestic Product | |
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GLB Act | The Gramm-Leach-Bliley Financial Modernization Act of 1999 | |
HAMP | Home Affordable Modification Program | |
HTM | Held to maturity | |
IPO | Initial public offering | |
IRS | Internal Revenue Service | |
ISDA | International Swaps and Derivatives Association | |
LIBOR | London InterBank Offered Rate | |
LIHTC | Low Income Housing Tax Credits | |
Loss Sharing Agreements | Two loss sharing agreements entered into with the FDIC in connection with the FSB Acquisition | |
LTV | Loan-to-value | |
MBS | Mortgage-backed securities | |
MSA | Metropolitan Statistical Area | |
MSRs | Mortgage servicing rights | |
Non-ACI | Loans acquired without evidence of deterioration in credit quality since origination | |
Non-Covered Loans | Loans other than those covered under the Loss Sharing Agreements | |
NYTLC | New York City Taxi and Limousine Commission | |
OCI | Other comprehensive income | |
OCC | Office of the Comptroller of the Currency | |
OFAC | U.S. Department of the Treasury's Office of Foreign Assets Control | |
OREO | Other real estate owned | |
OTTI | Other-than-temporary impairment | |
Proxy Statement | Definitive proxy statement for the Company's 2017 annual meeting of stockholders | |
PSU | Performance Share Unit | |
Pinnacle | Pinnacle Public Finance, Inc. | |
Re-Remics | Resecuritized real estate mortgage investment conduits | |
RSU | Restricted Share Unit | |
SAR | Share Appreciation Right | |
SBA | U.S. Small Business Administration | |
SBF | Small Business Finance Unit | |
SEC | Securities and Exchange Commission | |
Single Family Shared-Loss Agreement | A single-family loan shared-loss agreement entered into with the FDIC in connection with the FSB Acquisition | |
TDR | Troubled-debt restructuring | |
Tri-State | New York, New Jersey and Connecticut | |
UPB | Unpaid principal balance | |
USDA | U.S. Department of Agriculture | |
VIEs | Variable interest entities | |
2010 Plan | 2010 Omnibus Equity Incentive Plan | |
2014 Plan | 2014 Omnibus Equity Incentive Plan | |
401(k) Plan | BankUnited 401(k) Plan | |
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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," "project," "predict," "will" and similar expressions identify forward-looking statements.
These forward-looking statements are based on management's current views with respect to future results, and are subject to risks and uncertainties. Forward-looking statements are based on beliefs and assumptions made by management using currently available information, such as market and industry materials, historical performance and current financial trends. These statements are only predictions and are not guarantees of future performance. The inclusion of forward-looking statements should not be regarded as a representation by the Company that the future plans, estimates or expectations contemplated by a forward-looking statement will be achieved. Forward-looking statements are subject to various risks and uncertainties and assumptions, including those relating to the Company's operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if the Company's underlying assumptions prove to be incorrect, the Company's actual results could differ materially from those contemplated by a forward-looking statement. These risks and uncertainties include, without limitation:
• | the impact of conditions in the financial markets and economic conditions generally; |
• | credit risk, relating to our portfolios of loans, leases and investments overall, as well as loans and leases exposed to specific industry conditions; |
• | real estate market conditions and other risks related to holding loans secured by real estate or real estate received in satisfaction of loans; |
• | an inability to successfully execute our fundamental growth strategy; |
• | geographic concentration of the Company's markets in Florida and the New York metropolitan area; |
• | natural or man-made disasters; |
• | risks related to the regulation of our industry; |
• | inadequate allowance for credit losses; |
• | interest rate risk; |
• | liquidity risk; |
• | loss of executive officers or key personnel; |
• | competition; |
• | dependence on information technology and third party service providers and the risk of systems failures, interruptions or breaches of security; |
• | failure to comply with the terms of the Company's Loss Sharing Agreements (as defined below) with the FDIC (as defined below); |
• | inadequate or inaccurate forecasting tools and models; |
• | ineffective risk management or internal controls; |
• | a variety of operational, compliance and legal risks; and |
• | the selection and application of accounting methods and related assumptions and estimates. |
Additional factors are set forth in the Company's filings with the Securities and Exchange Commission, or the SEC, including this Annual Report on Form 10-K.
Forward-looking statements speak only as of the date on which they are made. The Company expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.
As used herein, the terms the "Company," "we," "us," and "our" refer to BankUnited, Inc. and its subsidiaries unless the context otherwise requires.
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PART I
Item 1. Business
Overview
BankUnited, Inc., with total consolidated assets of $30.3 billion at December 31, 2017, is a 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 services to individual and corporate customers through 87 banking centers located in 15 Florida counties and 6 banking centers in the New York metropolitan area. The Bank also provides certain commercial lending and deposit products through national platforms. The Company has built, primarily through organic growth, a premier commercially focused regional bank with a long-term value oriented business model serving primarily small and medium sized businesses. We endeavor to provide, through our experienced lending and relationship banking teams, personalized customer service and offer a full range of traditional banking products and services to both our commercial and retail customers.
The FSB Acquisition and the Loss Sharing Agreements
On May 21, 2009, BankUnited entered into the "Purchase and Assumption Agreement" with the FDIC, Receiver of BankUnited, FSB, and acquired substantially all of the assets and assumed all of the non-brokered deposits and substantially all other liabilities of the Failed Bank from the FDIC in the FSB Acquisition.
Concurrently with the FSB Acquisition, the Bank entered into two loss sharing agreements with the FDIC, covering certain legacy assets, including the entire legacy loan portfolio and OREO and certain purchased investment securities. We refer to assets covered by the Loss Sharing Agreements as covered assets or, in certain cases, covered loans. The Loss Sharing Agreements do not apply to assets acquired, purchased or originated subsequent to the FSB Acquisition. At December 31, 2017, the covered assets, consisting of residential loans and OREO, had an aggregate carrying value of $506 million. The total UPB of the covered assets at December 31, 2017 was $1.1 billion. The carrying value of the related FDIC indemnification asset at December 31, 2017 was $296 million.
The following charts illustrate the percentage of total assets represented by covered assets and the FDIC indemnification asset at December 31, 2017 and 2010, reflecting the change in balance sheet composition over time:
Pursuant to the terms of the Loss Sharing Agreements, the covered assets are subject to a stated loss threshold whereby the FDIC will reimburse the Bank for 80% of losses up to a $4.0 billion stated threshold and 95% of losses in excess of the $4.0 billion stated threshold. The Bank will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC paid the Bank a reimbursement under the Loss Sharing Agreements. The FDIC's obligation to reimburse the Company for losses with respect to the covered assets began with the first dollar of loss incurred. We have received reimbursements of $2.7 billion for claims submitted to the FDIC under the Loss Sharing Agreements as of December 31, 2017.
The Loss Sharing agreements consist of the Single Family Shared-Loss Agreement and the Commercial Shared-Loss Agreement. The Single Family Shared-Loss Agreement provides for FDIC loss sharing and the Bank's reimbursement for recoveries to the FDIC for ten years from May 21, 2009, or through May 21, 2019, for single family residential and home equity loans and related OREO. The Commercial Shared-Loss Agreement provided for FDIC loss sharing for five years from May 21, 2009, or through May 21, 2014, and for the Bank's reimbursement for recoveries to the FDIC for eight years from May 21, 2009, or through the quarter ended June 30, 2017, for all other covered assets.
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Under the terms of the Purchase and Assumption Agreement with the FDIC, the Bank may sell up to 2.5% of the covered loans based on the UPB at the date of the FSB Acquisition, or approximately $280 million, on an annual basis without prior consent of the FDIC. Any losses incurred from such loan sales are covered under the Loss Sharing Agreements. Any loan sale in excess of this annual threshold requires approval from the FDIC to be eligible for loss share coverage. However, if the Bank seeks to sell residential loans in excess of the agreed 2.5% threshold in the nine months prior to the stated termination date of loss share coverage (May 21, 2019) and the FDIC refuses to consent, then the Single Family Shared-Loss Agreement will be extended for two years only with respect to the loans requested to be included in such sales. The Bank will have the right to sell all or any portion of such loans without FDIC consent at any time within the nine months prior to the extended termination date, and any losses incurred will be covered under the Single Family Shared-Loss Agreement. If exercised, this final sale mechanism ensures no residual credit risk in our covered loan portfolio that would otherwise arise from credit losses occurring after the termination date of the Single Family Shared-Loss Agreement.
Our Market Areas
Our primary banking markets are Florida and the Tri-State market of New York, New Jersey and Connecticut. We believe both represent long-term attractive banking markets. In Florida, our largest concentration is in the Miami metropolitan statistical area; however, we are also focused on developing business in other markets in which we have a presence, such as the Broward, Palm Beach, Orlando, Tampa and Jacksonville markets. We operate several national commercial lending platforms, purchase residential loans on a national basis through established correspondent channels and have a national commercial deposit business.
According to estimates from the United States Census Bureau and SNL Financial, from 2014 to 2017, Florida added over 1.2 million new residents, the second most of any U.S. state, and had a total population of 21.1 million and a median household annual income of $53,657 in 2017. The Florida unemployment rate decreased to 3.7% at December 31, 2017. The Case-Shiller home price index for Florida reflected a year over year increase of 6% at September 30, 2017. According to CoStar Commercial Repeat-Sale Indices, commercial real estate values in the South region reflected a year over year increase of 14% at December 31, 2017. According to a report published in December, 2017 by the University of Central Florida, personal income in Florida is expected to average 4.1% growth from 2017 to 2021 while Florida's Real Gross State Product is forecast to expand at an average annual rate of 3.4% from 2017 to 2021.
We had six banking centers in metropolitan New York at December 31, 2017 serving the Tri-State area. Four banking centers were in Manhattan, one in Long Island and one in Brooklyn. According to SNL Financial, at December 31, 2017, the Tri-State area had approximately $2.0 trillion in deposits, with the majority of the market concentrated in the New York metropolitan area. The Tri-State area had a total population of 32.3 million and a median household annual income of $70,847 in 2017, while the unemployment rate decreased to 4.3% at December 31, 2017. According to CoStar Commercial Repeat-Sale Indices, commercial real estate values in the Northeast region reflected a year over year increase of 11% at December 31, 2017.
Through two commercial lending subsidiaries of BankUnited, we engage in equipment, franchise and municipal finance on a national basis. The Bank also originates small business loans through programs sponsored by the SBA and to a lesser extent the USDA and provides mortgage warehouse finance on a national basis. We refer to our commercial lending subsidiaries, our small business finance unit, our mortgage warehouse lending operations and our residential loan purchase program as national platforms. We also offer a suite of commercial deposit and cash management products through a national platform.
Products and Services
Lending and Leasing
General—Our primary lending focus is to serve small and middle-market businesses and their executives with a variety of financial products and services, while maintaining a disciplined credit culture.
We offer a full array of lending products that cater to our customers' needs including small business loans, commercial real estate loans, equipment loans and leases, term loans, formula-based loans, municipal and non-profit loans and leases, commercial lines of credit, residential mortgage warehouse lines of credit, letters of credit and consumer loans. We also purchase performing residential loans through established correspondent channels on a national basis.
We have attracted and invested in experienced lending teams from competing institutions in our Florida, Tri-State and national markets, resulting in significant growth in our non-covered loan portfolio. At December 31, 2017, our loan portfolio included $20.9 billion in non-covered loans, including $16.7 billion in commercial and commercial real estate loans and $4.2 billion in residential and other consumer loans. Continued loan growth in both the Florida and Tri-State markets and across our national lending and leasing platforms is a core component of our current business strategy.
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Commercial loans—Our commercial loans, which are generally made to growing small business, middle-market and larger corporate entities, include equipment loans, secured and unsecured lines of credit, formula-based loans, mortgage warehouse lines, letters of credit, SBA product offerings and business acquisition finance credit facilities.
Commercial real estate loans—We offer term financing for the acquisition or refinancing of properties, primarily rental apartments, mixed-use commercial properties, industrial properties, warehouses, retail shopping centers, free-standing single-tenant buildings, office buildings and hotels. Other products that we provide include real estate secured lines of credit, and, to a limited extent, acquisition, development and construction loan facilities and construction financing. We make commercial real estate loans secured by both owner-occupied and non-owner occupied properties. Construction lending is not a primary area of focus for us; construction and land loans comprised 1.5% of the loan portfolio at December 31, 2017.
National Commercial Lending Platforms—Through the Bank's two commercial lending subsidiaries, we provide municipal, equipment and franchise financing on a national basis. Pinnacle, headquartered in Scottsdale, Arizona, provides financing to state and local governmental entities directly and through vendor programs and alliances. Pinnacle offers a full array of financing structures on a national basis including equipment lease purchase agreements and direct (private placement) bond refundings and loan agreements. Bridge offers large corporate and middle market businesses equipment leases and loans including direct finance lease and operating lease structures through its equipment finance division. Bridge offers franchise equipment, acquisition and expansion financing through its franchise division. Bridge is headquartered in Baltimore, Maryland. In 2015, we acquired SBF, enabling us to expand our small business lending platform on a national basis. SBF offers an array of SBA, and to a lesser extent, USDA loan products. We typically sell the government guaranteed portion of the loans SBF originates, and retain the unguaranteed portion in portfolio. We also engage in residential mortgage warehouse lending on a national basis.
Residential mortgages—The non-covered residential loan portfolio is primarily comprised of loans purchased on a national basis through select correspondent channels. This national purchase program allows us to diversify our loan portfolio, both by product type and geographically. Residential loans purchased are primarily closed-end, first lien jumbo mortgages for the purchase or re-finance of owner occupied property. We do not originate or purchase negatively amortizing or sub-prime residential loans.
Home equity loans and lines of credit are not a significant component of the non-covered loan portfolio.
Consumer loans—We offer consumer loans to our customers for personal, family and household purposes, including auto, boat and personal installment loans. Consumer loans are not a material component of our loan portfolio.
Loan servicing—At December 31, 2017, we serviced residential mortgage loans with a UPB of $2.0 billion. Our mortgage servicing portfolio includes servicing rights acquired in bulk and in flow transactions, as well as retained servicing on residential loans originated and sold into the secondary market prior to the termination of our retail residential mortgage origination channel in 2016. We anticipate growing this business at a moderate pace, depending on market conditions, to take advantage of existing mortgage servicing capacity.
We service SBA loans originated and sold into the secondary market by SBF. We anticipate that this servicing business will expand as SBF continues to originate and sell loans. At December 31, 2017, we serviced $546 million of SBA loans.
The balance of servicing assets was not material to the Company's consolidated financial statements at December 31, 2017.
Credit Policy and Procedures
BankUnited, Inc. and the Bank have established asset oversight committees to administer the loan portfolio and monitor and manage credit risk. These committees include: (i) the Enterprise Risk Management Committee, (ii) the Commercial Loan Committee , (iii) the Credit Risk Management Committee, (iv) the Asset Recovery Committee, (v) the Criticized Asset Committee and (vi) the Residential Credit Risk Management Committee. These committees meet at least quarterly.
The credit approval process provides for prompt and thorough underwriting and approval or decline of loan requests. The approval method used is a hierarchy of individual lending authorities for new credits and renewals. The Credit Risk Management Committee approves authorities for lending and credit personnel, which are ultimately submitted to our Board for ratification. Lending authorities are based on position, capability and experience of the individuals filling these positions. Authorities are periodically reviewed and updated.
BankUnited has established in-house borrower lending limits which are significantly lower than its legal lending limit of approximately $488 million at December 31, 2017. In-house lending limits at December 31, 2017 ranged from $75 million to $100 million. These limits are reviewed periodically by the Credit Risk Management Committee and approved annually by the Board of Directors.
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Deposits
We offer traditional deposit products including checking accounts, money market deposit accounts, treasury management services, savings accounts and certificates of deposit with a variety of terms and rates. We offer commercial and retail deposit products across our primary geographic footprint and certain commercial deposit and treasury management services on a national platform. Our deposits are insured by the FDIC up to statutory limits. Demand deposit balances are concentrated in commercial and small business accounts. Our service fee schedule and rates are competitive with other financial institutions in our markets.
Investment Securities
The primary objectives of our investment policy are to provide liquidity, provide a suitable balance of high credit quality and diversified assets to the consolidated balance sheet, manage interest rate risk exposure, and generate acceptable returns given the Company's established risk parameters.
The investment policy is reviewed annually by our Board of Directors. Overall investment goals are established by our Board, Chief Executive Officer, Chief Financial Officer, and members of the ALCO. The Board has delegated the responsibility of monitoring our investment activities to ALCO. Day-to-day activities pertaining to the investment portfolio are conducted within the Company's Treasury division under the supervision of the Chief Investment Officer and Chief Financial Officer.
Risk Management and Oversight
Our Board of Directors oversees our risk management process, including the company-wide approach to risk management, carried out by our management. Our Board approves the Company's business plan, risk appetite statement and the policies that set standards for the nature and level of risk the Company is willing to assume. The Board and its established committees receive reports on the Company's management of critical risks and the effectiveness of risk management systems. While our full Board maintains the ultimate oversight responsibility for the risk management process, its committees, including the audit committee, the risk committee, the compensation committee and the nominating and corporate governance committee, oversee risk in certain specified areas.
Our Board has assigned responsibility to our Chief Risk Officer for maintaining a risk management framework to identify, manage, monitor and mitigate risks to the achievement of our strategic goals and objectives and ensure we operate in a safe and sound manner in accordance with the Board approved policies. We have invested significant resources to establish a robust enterprise-wide risk management framework to support the planned growth of our Company. Our framework is consistent with common industry practices and regulatory guidance and is appropriate to our size, growth trajectory and the complexity of our business activities. Significant elements include a Risk Appetite Statement and risk metrics approved by the Board, ongoing identification and assessments of risk, executive management level risk committees to oversee compliance with the Board approved risk policies and adherence to risk limits, and ongoing testing and reporting by independent internal audit, credit review, and regulatory compliance groups. Executive level oversight of the risk management framework is provided by the Enterprise Risk Management Committee which is chaired by the Chief Risk Officer and attended by the senior executives of the Company. Reporting to the Enterprise Risk Management Committee are sub-committees dedicated to guiding and overseeing management of critical categories of risk, including the Credit Risk Management, Asset/Liability, Compliance Risk Management, Operational Risk Management, Corporate Disclosure, Enterprise Data, Ethics, BSA/AML, and Loss Share Compliance committees.
Marketing and Distribution
We conduct our banking business through 87 banking centers located in 15 Florida counties as well as 6 banking centers in the New York metropolitan area as of December 31, 2017. Our distribution network also includes 89 ATMs, fully integrated on-line banking, mobile banking and a telephone banking service. We target growing companies and commercial and middle-market businesses, as well as individual consumers.
In order to market our products, we use local television, radio, digital, print and direct mail advertising as well as a variety of promotional activities.
Competition
Our markets are highly competitive. Our markets contain not only a large number of community and regional banks, but also a significant presence of the country's largest commercial banks. We compete with other state, national and international financial institutions located in our market areas as well as savings associations, savings banks and credit unions for deposits and loans. In addition, we compete with financial intermediaries such as consumer finance companies, mortgage banking
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companies, insurance companies, securities firms, mutual funds and several government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. Our largest banking competitors in the Florida market include Bank of America, BB&T, JPMorgan Chase, PNC, Regions Bank SunTrust Banks, TD Bank and Wells Fargo and a number of community banks. In the Tri-State market, we also compete with, in addition to the national and international financial institutions listed, Capital One, Signature Bank, New York Community Bank, Valley National Bank, M&T Bank and numerous community banks.
Interest rates on both loans and deposits and prices of fee-based services are significant competitive factors among financial institutions generally. Other important competitive factors include convenience, quality of customer service, availability of on-line, mobile and remote banking products, community reputation, continuity of personnel and services, and, in the case of larger commercial customers, relative lending limits and ability to offer sophisticated cash management and other commercial banking services. While we continue to provide competitive interest rates on both depository and lending products, we believe that we can compete most successfully by focusing on the financial needs of growing companies and their executives and commercial and middle-market businesses, offering them a broad range of personalized services and sophisticated cash management tools tailored to their businesses.
Regulation and Supervision
The U.S. banking industry is highly regulated under federal and state law. These regulations affect the operations of BankUnited, Inc. and its subsidiaries.
Statutes, regulations and policies limit the activities in which we may engage and the conduct of our permitted activities and establish capital requirements with which we must comply. The regulatory framework is intended primarily for the protection of depositors, borrowers, customers and clients, the FDIC insurance funds and the banking system as a whole, and not for the protection of our stockholders or creditors. In many cases, the applicable regulatory authorities have broad enforcement power over bank holding companies, banks and their subsidiaries, including the power to impose substantial fines and other penalties for violations of laws and regulations. Further, the regulatory system imposes reporting and information collection obligations. We incur significant costs relating to compliance with these laws and regulations. Banking statutes, regulations and policies are continually under review by federal and state legislatures and regulatory agencies, and a change in them, including changes in how they are interpreted or implemented, could have a material adverse effect on our business. Although the current U.S. presidential administration has expressed support for regulatory reform, it is unclear what impact, if any, this will have on the laws, regulations and policies affecting the supervision of banking organizations.
The material statutory and regulatory requirements that are applicable to us are summarized below. The description below is not intended to summarize all laws and regulations applicable to us.
Bank and Bank Holding Company Regulation
BankUnited is a national bank. As a national bank organized under the National Bank Act, BankUnited is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the OCC. BankUnited is subject to certain commitments made to the OCC, in conjunction with its conversion to a national bank in 2012, regarding its business and capital plans.
Any entity that directly or indirectly controls a bank must be approved by the Federal Reserve Board under the BHC Act to become a BHC. BHCs are subject to regulation, inspection, examination, supervision and enforcement by the Federal Reserve Board under the BHC Act. The Federal Reserve Board's jurisdiction also extends to any company that is directly or indirectly controlled by a BHC.
BankUnited, Inc., which controls BankUnited, is a BHC and, as such, is subject to ongoing and comprehensive supervision, regulation, examination and enforcement by the Federal Reserve Board.
Broad Supervision, Examination and Enforcement Powers
A principal objective of the U.S. bank regulatory system is to protect depositors by ensuring the financial safety and soundness of banking organizations. To that end, the banking regulators have broad regulatory, examination and enforcement authority. The regulators regularly examine the operations of banking organizations. In addition, banking organizations are subject to periodic reporting requirements.
The regulators have various remedies available if they determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of a banking organization's operations are unsatisfactory. The regulators may also take action if they determine that the banking organization or its management is violating or has violated any law or regulation. The regulators have the power to, among other things:
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• | enjoin "unsafe or unsound" practices; |
• | require affirmative actions to correct any violation or practice; |
• | issue administrative orders that can be judicially enforced; |
• | direct increases in capital; |
• | direct the sale of subsidiaries or other assets; |
• | limit dividends and distributions; |
• | restrict growth; |
• | assess civil monetary penalties; |
• | remove officers and directors; and |
• | terminate deposit insurance. |
The FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution's regulatory agency. Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations and supervisory agreements could subject BankUnited, Inc., the Bank and their subsidiaries or their officers, directors and institution-affiliated parties to the remedies described above and other sanctions.
Notice and Approval Requirements Related to Control
Banking laws impose notice, approval, and ongoing regulatory requirements on any stockholder or other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution. These laws include the BHC Act, the Change in Bank Control Act, and the Home Owners' Loan Act. Among other things, these laws require regulatory filings by individuals or companies that seek to acquire direct or indirect "control" of an FDIC-insured depository institution. The determination of whether an investor "controls" a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, a party is deemed to control a depository institution or other company if the party owns or controls 25% or more of any class of voting stock. Subject to rebuttal, a party may be presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of voting stock. Ownership by affiliated parties, or parties acting in concert, is typically aggregated for these purposes. If a party's ownership of BankUnited, Inc. were to exceed certain thresholds, the investor could be deemed to "control" the Company for regulatory purposes. This could subject the investor to regulatory filings or other regulatory consequences.
In addition, except under limited circumstances, BHCs are prohibited from acquiring, without prior approval:
• | control of any other bank or BHC or all or substantially all the assets thereof; or |
• | more than 5% of the voting shares of a bank or BHC which is not already a subsidiary. |
Permissible Activities and Investments
Banking laws generally restrict the ability of BankUnited, Inc. to engage in activities other than those determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The GLB Act expanded the scope of permissible activities for a BHC that qualifies as a financial holding company. Under the regulations implementing the GLB Act, a financial holding company may engage in additional activities that are financial in nature or incidental or complementary to a financial activity. Those activities include, among other activities, certain insurance and securities activities. BHCs and their subsidiaries must be well-capitalized and well-managed in order for the BHC and its nonbank affiliates to engage in the expanded financial activities permissible only for a financial holding company. BankUnited, Inc. is not a financial holding company.
In addition, as a general matter, the establishment or acquisition by BankUnited, Inc. of a non-bank entity, or the initiation of a non-banking activity, requires prior regulatory approval. In approving acquisitions or the addition of activities, the Federal Reserve Board considers, among other things, whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
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Regulatory Capital Requirements and Capital Adequacy
The federal bank regulators view capital levels as important indicators of an institution's financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. The final supervisory determination on an institution's capital adequacy is based on the regulator's assessment of numerous factors. Both BankUnited, Inc. and BankUnited are subject to regulatory capital requirements.
The Federal Reserve Board has established risk-based and leverage capital guidelines for BHCs, including BankUnited, Inc. The OCC has established substantially similar risk-based and leverage capital guidelines applicable to national banks, including BankUnited. BankUnited, Inc. and BankUnited are subject to capital rules implemented under the framework promulgated by the International Basel Committee on Banking Supervision (the "Basel III Capital Rules"). While some provisions of the rules are tailored to larger institutions, the Basel III Capital Rules generally apply to all U.S. banking organizations, including BankUnited, Inc. and BankUnited.
The Basel III Capital Rules provide for the following minimum capital to risk-weighted assets ratios:
(i) | 4.5% based upon CET1; |
(ii) | 6.0% based upon tier 1 capital; and |
(iii) | 8.0% based upon total regulatory capital. |
A minimum leverage ratio (tier 1 capital as a percentage of average total assets) of 4.0% is also required under the Basel III Capital Rules. The Basel III Capital Rules additionally require institutions to retain a capital conservation buffer of 2.5% above these required minimum capital ratio levels, to be phased in at annual increments of 0.625% that began in 2016. Banking organizations that fail to maintain the minimum required capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers, with distributions and discretionary bonus payments being completely prohibited if no capital conservation buffer exists, or in the event of the following: (i) the banking organization's capital conservation buffer was below 2.5% (or the minimum amount required) at the beginning of a quarter; and (ii) its cumulative net income for the most recent quarterly period plus the preceding four calendar quarters is less than its cumulative capital distributions (as well as associated tax effects not already reflected in net income) during the same measurement period.
The enactment of the Basel III Capital Rules increased the required capital levels of BankUnited, Inc. and BankUnited. The Basel III Capital Rules became effective as applied to BankUnited, Inc. and BankUnited on January 1, 2015, with a phase in period from January 1, 2015 through January 1, 2019.
Company-Run Stress Testing
Under Section 165(i) of the Dodd-Frank Act and the stress testing rules of the Federal Reserve Board and OCC, each BHC and national bank with more than $10 billion and less than $50 billion in total consolidated assets must annually conduct a company-run stress test to estimate the potential impact of three scenarios provided by the agencies on its regulatory capital ratios and certain other financial metrics. BankUnited, Inc. and the Bank are required to publicly disclose a summary of the results of these forward looking, company-run stress tests that assesses the impact of hypothetical macroeconomic baseline, adverse and severely adverse economic scenarios. In 2018, BankUnited, Inc. and the Bank will submit the results of their company-run stress test to the Federal Reserve Board and OCC by July 31 and will publish a public summary of the results between October 15 and October 30.
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Prompt Corrective Action
Under the FDIA, the federal bank regulatory agencies must take "prompt corrective action" against undercapitalized U.S. depository institutions. U.S. depository institutions are assigned one of five capital categories: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized," and are subjected to differential regulation corresponding to the capital category within which the institution falls. As of December 31, 2017, a depository institution was deemed to be "well capitalized" if the banking institution had a total risk-based capital ratio of 10.0% or greater, a tier 1 risk-based capital ratio of 8.0% or greater, a CET1 risk-based capital ratio of 6.5% and a leverage ratio of 5.0% or greater, and the institution was not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific level for any capital measure. Under certain circumstances, a well-capitalized, adequately-capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A banking institution that is undercapitalized is required to submit a capital restoration plan. Failure to meet capital guidelines could subject the institution to a variety of enforcement remedies by federal bank regulatory agencies, including: termination of deposit insurance by the FDIC, restrictions on certain business activities, and appointment of the FDIC as conservator or receiver. As of December 31, 2017, BankUnited, Inc. and BankUnited were well capitalized.
Source of strength
The Dodd-Frank Act and Federal Reserve Board policy require all companies, including BHCs, that directly or indirectly control an insured depository institution to serve as a source of strength for the institution. Under this requirement, BankUnited, Inc. in the future could be required to provide financial assistance to BankUnited should it experience financial distress. Such support may be required at times when, absent this statutory and Federal Reserve Policy requirement, a BHC may not be inclined to provide it.
Regulatory Limits on Dividends and Distributions
Federal law currently imposes limitations upon certain capital distributions by national banks, such as certain cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. The Federal Reserve Board and OCC regulate all capital distributions by BankUnited directly or indirectly to BankUnited, Inc., including dividend payments.
BankUnited may not pay dividends to BankUnited, Inc. if, after paying those dividends, it would fail to meet the required minimum levels under risk-based capital guidelines and the minimum leverage capital ratio requirements, or in the event the OCC notified BankUnited that it was in need of more than normal supervision. Under the FDIA, an insured depository institution such as BankUnited is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become "undercapitalized." Payment of dividends by BankUnited also may be restricted at any time at the discretion of the appropriate regulator if it deems the payment to constitute an unsafe and unsound banking practice.
BankUnited is subject to supervisory limits on its ability to declare or pay a dividend or reduce its capital unless certain conditions are satisfied.
In addition, it is the policy of the Federal Reserve Board that BHCs should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that BHCs should not maintain a level of cash dividends that undermines the BHC’s ability to serve as a source of strength to its banking subsidiaries.
Reserve Requirements
Pursuant to regulations of the Federal Reserve Board, all banking organizations are required to maintain average daily reserves at mandated ratios against their transaction accounts. In addition, reserves must be maintained on certain non-personal time deposits. These reserves must be maintained in the form of vault cash or in an account at a Federal Reserve Bank.
Limits on Transactions with Affiliates and Insiders
Insured depository institutions are subject to restrictions on their ability to conduct transactions with affiliates and other related parties. Section 23A of the Federal Reserve Act imposes quantitative limits, qualitative requirements, and collateral requirements on certain transactions by an insured depository institution with, or for the benefit of, its affiliates. Transactions covered by Section 23A include loans, extensions of credit, investment in securities issued by an affiliate, and acquisitions of assets from an affiliate. Section 23B of the Federal Reserve Act requires that most types of transactions by an insured
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depository institution with, or for the benefit of, an affiliate be on terms at least as favorable to the insured depository institution as if the transaction were conducted with an unaffiliated third party.
The Federal Reserve Board's Regulation O and OCC regulations impose restrictions and procedural requirements in connection with the extension of credit by an insured depository institution to directors, executive officers, principal stockholders and their related interests.
The Volcker Rule
The Volcker Rule generally prohibits "banking entities" from engaging in "proprietary trading" and making investments and conducting certain other activities with "covered funds."
Although the rule provides for some tiering of compliance and reporting obligations based on size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including BankUnited, Inc. and BankUnited. Banking entities with total assets of $10 billion or more that engage in activities subject to the Volcker Rule are required to establish a six-element compliance program to address the prohibitions of, and exemptions from, the Volcker Rule.
Corporate governance
The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that affect most U.S. publicly traded companies, including BankUnited, Inc. The Dodd-Frank Act (1) grants stockholders of U.S. publicly traded companies an advisory vote on executive compensation; (2) enhances independence requirements for compensation committee members; (3) requires companies listed on national securities exchanges to adopt incentive-based compensation claw-back policies for executive officers; and (4) provides the SEC with authority to adopt proxy access rules that would allow stockholders of publicly traded companies to nominate candidates for election as a director and have those nominees included in a company's proxy materials.
Interchange Fees
The Dodd-Frank Act gave the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of $10 billion or more and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a debit card issuer can charge a merchant for a transaction.
Examination Fees
The OCC currently charges fees to recover the costs of examining national banks, processing applications and other filings, and covering direct and indirect expenses in regulating national banks. The Dodd-Frank Act provides various agencies with the authority to assess additional supervision fees.
FDIC Deposit Insurance
The FDIC is an independent federal agency that insures the deposits of federally insured depository institutions up to applicable limits. The FDIC also has certain regulatory, examination and enforcement powers with respect to FDIC-insured institutions. The deposits of BankUnited are insured by the FDIC up to applicable limits. As a general matter, the maximum deposit insurance amount is $250,000 per depositor.
Additionally. FDIC-insured depository institutions are required to pay deposit insurance assessments to the FDIC. The amount of a particular institution's deposit insurance assessment is based on that institution's risk classification under an FDIC risk-based assessment system. An institution's risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. Deposit insurance assessments fund the DIF. The Dodd-Frank Act changed the way an insured depository institution's deposit insurance premiums are calculated and increased the minimum for the DIF reserve ratio from 1.15% to 1.35%. The Dodd-Frank Act also made banks with $10 billion or more in total assets responsible for the increase. Effective in the third quarter of 2016, regular assessment rates for all banks were reduced; however, banks with total assets of $10 billion or more began paying an assessment surcharge equal to 4.5 cents per $100 of their assessment base in excess of $10 billion. The surcharge will continue until such time the DIF reserve ratio exceeds 1.35%. Future changes to our risk classification or to the method for calculating premiums generally may impact assessment rates, which could impact the profitability of our operations.
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Depositor Preference
The FDIA provides that, in the event of the "liquidation or other resolution" of an insured depository institution, the claims of depositors of the institution (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. Insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including BankUnited, Inc., with respect to any extensions of credit they have made to such insured depository institution.
Federal Reserve System and Federal Home Loan Bank System
As a national bank, BankUnited is required to hold shares of capital stock in a Federal Reserve Bank. BankUnited holds capital stock in the Federal Reserve Bank of Atlanta. As a member of the Federal Reserve System, BankUnited has access to the Federal Reserve discount window lending and payment clearing systems.
BankUnited is a member of the Federal Home Loan Bank of Atlanta. Each FHLB provides a central credit facility primarily for its member institutions as well as other entities involved in home mortgage lending. Any advances from a FHLB must be secured by specified types of collateral. As a member of the FHLB, BankUnited is required to acquire and hold shares of capital stock in the FHLB of Atlanta. BankUnited is in compliance with this requirement.
Anti-Money Laundering and OFAC
Under federal law, financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with non-U.S. financial institutions and non-U.S. customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and law enforcement authorities have been granted increased access to financial information maintained by financial institutions. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution's compliance in connection with the regulatory review of applications, including applications for banking mergers and acquisitions. The regulatory authorities have imposed "cease and desist" orders and civil money penalty sanctions against institutions found to be violating these obligations.
The U.S. Department of the Treasury's OFAC is responsible for helping to insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations, and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If BankUnited, Inc. or BankUnited finds a name on any transaction, account or wire transfer that is on an OFAC list, BankUnited, Inc. or BankUnited must freeze or block such account or transaction, file a suspicious activity report and notify the appropriate authorities.
Consumer Laws and Regulations
Banking organizations are subject to numerous laws and regulations intended to protect consumers. These laws include, among others:
• | Truth in Lending Act; |
• | Truth in Savings Act; |
• | Electronic Funds Transfer Act; |
• | Expedited Funds Availability Act; |
• | Equal Credit Opportunity Act; |
• | Fair and Accurate Credit Transactions Act; |
• | Fair Housing Act; |
• | Fair Credit Reporting Act; |
• | Fair Debt Collection Act; |
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• | Gramm-Leach-Bliley Act; |
• | Home Mortgage Disclosure Act; |
• | Right to Financial Privacy Act; |
• | Real Estate Settlement Procedures Act; |
• | laws regarding unfair and deceptive acts and practices; and |
• | usury laws. |
Many states and local jurisdictions have consumer protection laws analogous, and in addition to, those listed above. These federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans, or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general, and civil or criminal liability. The creation of the CFPB by the Dodd-Frank Act has led to enhanced enforcement of consumer financial protection laws.
CFPB
The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes governing products and services offered to bank and thrift consumers. For banking organizations with assets of $10 billion or more, such as BankUnited, Inc. and the Bank, the CFPB has exclusive rule making and examination, and primary enforcement authority under federal consumer financial law. In addition, states are permitted to adopt consumer protection laws and regulations that are stricter than those regulations promulgated by the CFPB.
The Community Reinvestment Act
The CRA is intended to encourage banks to help meet the credit needs of their service areas, including low and moderate-income neighborhoods, consistent with safe and sound operations. The bank regulators examine and assign each bank a public CRA rating.
The CRA requires bank regulators to take into account the bank's record in meeting the needs of its service area when considering an application by a bank to establish or relocate a branch or to conduct certain mergers or acquisitions. The Federal Reserve Board is required to consider the CRA records of a BHC's controlled banks when considering an application by the BHC to acquire a banking organization or to merge with another BHC. If BankUnited, Inc. or BankUnited applies for regulatory approval to make certain investments, the regulators will consider the CRA record of target institutions and BankUnited, Inc.'s depository institution subsidiaries. An unsatisfactory CRA record could substantially delay approval or result in denial of an application. The regulatory agency's assessment of the institution's record is made available to the public. Following its most recent CRA examination in September 2015, BankUnited received an overall rating of "Satisfactory."
Employees
At December 31, 2017, we employed 1,698 full-time employees and 65 part-time employees. None of our employees are parties to a collective bargaining agreement. We believe that our relations with our employees are good.
Available Information
Our website address is www.bankunited.com. Our electronic filings with the SEC (including all Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and if applicable, amendments to those reports) are available free of charge on the website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information posted on our website is not incorporated into this Annual Report. In addition, the SEC maintains a website that contains reports and other information filed with the SEC. The website can be accessed at http://www.sec.gov.
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Item 1A. Risk Factors
Risks Related to Our Business
Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
Deterioration in business or economic conditions generally, or more specifically in the principal markets in which we do business, could have one or more of the following adverse effects on our business, financial condition and results of operations:
• | A decrease in demand for our loan and deposit products; |
• | An increase in delinquencies and defaults by borrowers or counterparties; |
• | A decrease in the value of our assets; |
• | A decrease in our earnings; |
• | A decrease in liquidity; and |
• | A decrease in our ability to access the capital markets. |
Our enterprise risk management framework may not be effective in mitigating the risks to which we are subject, or in reducing the potential for losses in connection with such risks.
Our enterprise risk management framework is designed to identify and minimize or mitigate the risks to which we are subject, as well as any losses stemming from such risks. Although we seek to identify, measure, monitor, report, and control our exposure to such risks, and employ a broad and diversified set of risk monitoring and mitigation techniques in the process, those techniques are inherently limited in their ability to anticipate the existence or development of risks that are currently unknown and unanticipated. The ineffectiveness of our enterprise risk management framework in mitigating the impact of known risks or the emergence of previously unknown or unanticipated risks may result in our incurring losses in the future that could adversely impact our financial condition and results of operations.
Our business is highly susceptible to credit risk on our non-covered assets.
As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that the collateral securing the payment of their loans, if any, may be insufficient to ensure repayment. Credit losses are inherent in the business of making loans. We are also subject to credit risk that is embedded in our securities portfolio. Our credit standards, procedures and policies may not prevent us from incurring substantial credit losses, particularly if economic or market conditions deteriorate. It is difficult to determine the many ways in which a decline in economic or market conditions may impact the credit quality of our assets. The Single Family Shared-Loss Agreement only covers a small percentage of assets, and credit losses on assets not covered by the Single Family Shared-Loss Agreement could have a material adverse effect on our operating results.
Our allowance for loan and lease losses may not be adequate to cover actual credit losses.
We maintain an allowance for loan and lease losses ("ALLL") that represents management's estimate of probable incurred losses inherent in our credit portfolio. This estimate requires management to make significant assumptions and involves a high degree of judgment, which is inherently subjective, particularly as our non-covered loan portfolio has not yet developed an observable loss trend through a full credit cycle. Management considers numerous factors in determining the amount of the ALLL, including, but not limited to, historical loss severities and net charge-off rates of BankUnited and other comparable financial institutions, internal risk ratings, loss forecasts, collateral values, delinquency rates, the level of non-performing, criticized, classified and restructured loans in the portfolio, product mix, underwriting and credit administration policies and practices, portfolio trends, concentrations, industry conditions, economic trends and other factors considered by management to have an impact on the ability of borrowers to repay their loans.
If management's assumptions and judgments prove to be incorrect, our current allowance may be insufficient and we may be required to increase our ALLL. In addition, regulatory authorities periodically review our ALLL and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Adverse economic conditions could make management's estimate even more complex and difficult to determine. Any increase in our ALLL will result in a decrease in net income and capital and could have a material adverse effect on our financial condition and results of operations. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Analysis of the Allowance for Loan and Lease Losses" and "Management's Discussion and Analysis of
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Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Allowance for Loan and Lease Losses."
The FASB has recently issued an ASU that will result in a significant change in how we and other financial institutions recognize credit losses and may have a material impact on our financial condition and results of operations or on the industry more broadly.
In June 2016, the FASB issued an ASU, "Financial Instruments- Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments," which replaces the current "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the CECL model. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The adoption of the CECL model may materially affect how we determine our ALLL and could require us to significantly increase our ALLL, resulting in an adverse impact to our financial condition, regulatory capital levels and results of operations. Moreover, the CECL model may create more volatility in the level of our ALLL. We are not yet able to reasonably estimate the impact that adoption of the CECL model will have on our financial condition, regulatory capital levels or results of operations. The ASU will be effective for us for fiscal years beginning after December 15, 2019.
Additionally, uncertainty exists around whether adoption of the CECL model by the financial services industry more broadly will have an impact on loan demand, how loan products are structured, the availability and pricing of credit in the markets or regulatory capital levels for the industry.
We depend on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.
The credit quality of our loan portfolio and results of operations are affected by residential and commercial real estate values and the level of residential and commercial real estate sales and rental activity.
A material portion of our loans are secured by residential or commercial real estate. The ability of our borrowers to repay their obligations and our financial results may therefore be adversely affected by changes in real estate values. Commercial real estate valuations in particular are highly subjective, as they are based on many assumptions. Such valuations can be significantly affected over relatively short periods of time by changes in business climate, economic conditions, occupancy rates, the level of rents, interest rates and, in many cases, the results of operations of businesses and other occupants of the real property. The properties securing income-producing investor real estate loans may not be fully leased at the origination of the loan. A borrower's ability to repay these loans is dependent upon stabilization of the properties and additional leasing through the life of the loan or the borrower's successful operation of a business. Weak economic conditions may impair a borrower's business operations, lead to elevated vacancy rates or lease turnover, slow the execution of new leases or result in falling rents. These factors could result in further deterioration in the fundamentals underlying the commercial real estate market and the deterioration in value of some of our loans. Similarly, residential real estate valuations can be impacted by housing trends, the availability of financing at reasonable interest rates, the level of supply of available housing, governmental policy regarding housing and housing finance and general economic conditions affecting consumers.
We make credit and reserve decisions based on current real estate values, the current conditions of borrowers, properties or projects and our expectations for the future. If real estate values or fundamentals underlying the commercial and residential real estate markets decline, we could experience higher delinquencies and charge-offs beyond that provided for in the ALLL.
Our portfolio of loans secured by taxi medallions is exposed to fluctuations in the demand for taxi services and valuation of the underlying collateral.
We have a portfolio of loans secured by taxi medallions, substantially all of which are in New York City. The introduction of application-based mobile ride-hailing services, such as Uber, has caused a more competitive landscape for these services, resulting in reduced ridership and utilization of taxis and a reduction in the pool of drivers willing to drive taxis. Consequently, the reduced income generated from the operation of taxi medallions has caused significant declines in the market value of
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medallions, increased defaults on loans secured by taxi medallions and an increase in TDRs, due to borrowers' inability to repay these loans at maturity. Management has provided for estimated losses incurred through December 31, 2017; however, further declines in demand for taxi services or further deterioration in the value of medallions may result in higher delinquencies, additional TDRs and losses beyond that provided for in the ALLL.
Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs and risks associated with the ownership of commercial or residential real property, which could have an adverse effect on our business or results of operations.
A significant portion of our loan portfolio is secured by residential or commercial real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans, in which case, we are exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including:
• | general or local economic conditions; |
• | environmental cleanup liability; |
• | neighborhood values; |
• | interest rates; |
• | commercial real estate rental and vacancy rates; |
• | real estate tax rates; |
• | operating expenses of the mortgaged properties; |
• | supply of and demand for properties; |
• | ability to obtain and maintain adequate occupancy of the properties; |
• | zoning laws; |
• | governmental rules, regulations and fiscal policies; and |
• | hurricanes or other natural or man-made disasters. |
These same factors may impact the ability of borrowers to repay their obligations that are secured by real property.
Our business is susceptible to interest rate risk.
Our business and financial performance are impacted by market interest rates and movements in those rates. Since a high percentage of our assets and liabilities are interest bearing or otherwise sensitive in value to changes in interest rates, changes in rates, in the shape of the yield curve or in spreads between different types of rates can have a material impact on our results of operations and the values of our assets and liabilities. Changes in the value of investment securities available for sale and certain derivatives directly impact equity through adjustments of accumulated other comprehensive income and changes in the values of certain other assets and liabilities may directly or indirectly impact earnings. Interest rates are highly sensitive to many factors over which we have no control and which we may not be able to anticipate adequately, including general economic conditions and the monetary and tax policies of various governmental bodies, particularly the Federal Reserve Board.
Our earnings and cash flows depend to a great extent upon the level of our net interest income. Net interest income is the difference between the interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing liabilities, such as deposits and borrowings. The recent persistent low level of market interest rates, flattening of the yield curve and narrow spreads has limited our ability to add higher yielding assets to the balance sheet. If this prolonged period of low rates continues beyond current forecasts, interest rates increase more slowly than expected, the yield curve flattens or inverts, or a negative interest rate environment emerges in the United States, downward pressure on our net interest margin may be exacerbated, negatively impacting our net interest income in the future. Changes in interest rates can increase or decrease our net interest income, because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest bearing liabilities mature or reprice more quickly than interest earning assets in a period of rising rates, an increase in interest rates could reduce net interest income. When interest earning assets mature or reprice more quickly than interest bearing liabilities, falling interest rates could reduce net interest income. Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our deposit products, decrease loan repayment rates and negatively affect borrowers' ability to meet their obligations. A decrease in the general level
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of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage-backed securities portfolios. Competitive conditions may also impact the interest rates we are able to earn on new loans or are required to pay on deposits, negatively impacting both our ability to grow deposits and interest earning assets and our net interest income.
We attempt to manage interest rate risk by adjusting the rates, maturity, repricing, mix and balances of the different types of interest-earning assets and interest bearing liabilities and through the use of hedging instruments; however, interest rate risk management techniques are not precise, and we may not be able to successfully manage our interest rate risk. Our ability to manage interest rate risk could be negatively impacted by longer fixed rate terms on loans being added to our portfolio or by unpredictable behavior of depositors in various interest rate environments. A rapid or unanticipated increase or decrease in interest rates, changes in the shape of the yield curve or in spreads between rates could have an adverse effect on our net interest margin and results of operations.
A failure to maintain adequate liquidity could adversely affect our financial condition and results of operations.
Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities and withdrawals and other cash commitments under both normal operating conditions and under extraordinary or unpredictable circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include a downturn in economic conditions in the geographic markets in which our operations are concentrated or in the financial or credit markets in general. Our access to liquidity in the form of deposits may also be affected by the liquidity needs of our depositors and by competition for deposits in our primary markets. A substantial portion of our liabilities consist of deposit accounts that are payable on demand or upon several days' notice, while by comparison, the majority of our assets are loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace maturing deposits and borrowings as necessary, we might not be able to replace such funds in the future. A failure to maintain adequate liquidity could materially and adversely affect our business, results of operations or financial condition.
We may not be successful in executing our fundamental business strategy.
Organic growth and diversification of our business are essential components of our business strategy. Commercial and consumer banking, for both loan and deposit products, in our primary markets is highly competitive. Our ability to achieve organic growth is also dependent on economic conditions in our primary markets. There is no guarantee that we will be able to successfully or profitably execute our organic growth strategy.
While acquisitions have not historically been a primary contributor to our growth, we opportunistically consider potential acquisitions of financial institutions and complementary non-bank businesses. There are risks that may inhibit our ability to successfully execute such acquisitions. We compete with other financial institutions for acquisition opportunities and there are a limited number of candidates that meet our acquisition criteria. Consequently, we may not be able to identify suitable candidates for acquisitions.
If we do identify suitable candidates, there is no assurance that we will be able to obtain the required regulatory approvals in order to acquire them. If we do succeed in consummating future acquisitions, acquisitions involve risks that the acquired businesses may not achieve anticipated revenue, earnings, synergies or cash flows or that the other strategic benefits of the acquisitions may not be realized. There may also be unforeseen liabilities relating to the acquired businesses or arising out of the acquisitions, asset quality problems of the acquired entities, difficulty operating in markets in which we have had no or only limited experience and other conditions not within our control, such as adverse personnel relations, loss of customers because of change in identity, and deterioration in local economic conditions.
In addition, the process of integrating acquired entities will divert significant management time and resources. We may not be able to integrate successfully or operate profitably any financial institutions or complementary businesses we may acquire. We may experience disruption and incur unexpected expenses in integrating acquisitions. Any acquisitions we do make may not enhance our cash flows, business, financial condition, results of operations or prospects and may have an adverse effect on our results of operations, particularly during periods in which the acquisitions are being integrated into our operations.
Lastly, growth, whether organic or through acquisition is dependent on the availability of capital and funding. Our ability to raise capital through the sale of stock or debt securities may be affected by market conditions, economic conditions or regulatory changes. There is no assurance that sufficient capital or funding will be available in the future, upon acceptable terms or at all.
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Risks related to our Single Family Shared-Loss Agreement with the FDIC may result in significant losses.
A significant portion of BankUnited's revenue continues to be derived from the covered assets. The Single Family Shared-Loss Agreement with the FDIC provides that a significant portion of losses related to the covered assets will be borne by the FDIC. Under the Single Family Shared-Loss Agreement, we are obligated to comply with certain loan servicing standards, including requirements to participate in loan modification programs. A failure to comply with these standards or other provisions of the Single Family Shared-Loss Agreement could result in covered assets losing some or all of their coverage. BankUnited's compliance with the terms of the Single Family Shared-Loss Agreement is subject to audit by the FDIC through its designated agent. The required terms of the agreement are extensive and failure to comply with any of the guidelines could result in a specific asset or group of assets losing their loss sharing coverage. See "Item 1. Business—The FSB Acquisition."
As discussed in “Item 1. Business - The FSB Acquisition”, the Single Family Shared-Loss Agreement is scheduled to terminate as soon as May 2019. At the time of termination, certain aspects of our exit from the Single Family Shared-Loss Agreement will be subject to agreement with the FDIC, which may be beyond our control. Commensurate with the termination of the Single Family Shared-Loss Agreement, we may sell all or a portion of the remaining covered assets and revenue generated from such covered assets is expected to cease. Our business, financial condition and results of operations following termination of the Single Family Shared-Loss Agreement and the resolution of the related covered assets will be more dependent on our ability to execute on our underlying business strategy.
The geographic concentration of our markets in Florida and the New York metropolitan area makes our business highly susceptible to local economic conditions.
Unlike some larger financial institutions that are more geographically diversified, our operations are concentrated in Florida and the New York metropolitan area. Additionally, a significant portion of our loans secured by real estate are secured by commercial and residential properties in these geographic regions. Accordingly, the ability of our borrowers to repay their loans, and the value of the collateral securing such loans, may be significantly affected by economic conditions in these regions or by changes in the local real estate markets. Disruption or deterioration in economic conditions in the markets we serve could result in one or more of the following:
• | an increase in loan delinquencies; |
• | an increase in problem assets and foreclosures; |
• | a decrease in the demand for our products and services; or |
• | a decrease in the value of collateral for loans, especially real estate, in turn reducing customers' borrowing power, the value of assets associated with problem loans and collateral coverage. |
The effects of adverse weather events such as Hurricanes Irma and Harvey or other natural or man-made disasters may negatively affect our geographic markets or disrupt our operations, which could have an adverse impact on our results of operations.
Our geographic markets in Florida and other coastal areas are susceptible to severe weather, including hurricanes, flooding and damaging winds. A significant portion of our loans are to borrowers whose businesses are located in or secured by properties located in the state of Florida, which was impacted by Hurricane Irma in September 2017. In addition, the Bank has a limited number of customers and collateral properties located in areas of Texas that were impacted by Hurricane Harvey in August 2017.
Weather events such as Hurricanes Irma and Harvey, or other natural or man-made disasters or terrorist activities, can disrupt our operations, result in damage to our facilities and negatively affect the local economies in which we operate. These events may lead to a decline in loan originations, reduce or destroy the value of collateral for our loans, particularly real estate, negatively impact the business operations of our customers, and cause an increase in delinquencies, foreclosures and loan losses. These events may also lead to a decline in regional economic conditions and prospects in certain circumstances. Our business or results of operations may be adversely impacted by these and other negative effects of such events.
Although we currently believe that Hurricanes Harvey and Irma did not materially impact the ability of the substantial majority of our borrowers to repay their loans, it is premature to conclude with certainty as to the ultimate impact of these hurricanes on our level of loan losses, our business or the results of our operations.
The Bank is generally named as a loss payee on hazard and flood insurance policies covering collateral properties and carries casualty and business interruption insurance. These policies could partially mitigate losses that the Bank may sustain due to the effects of these hurricanes or other natural or man-made disasters that may occur in the future; however, the timing
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and amount of any proceeds that we may recover from insurance policies is uncertain and may not be sufficient to adequately compensate us for losses that we experience due to these hurricanes and other natural or man-made disasters.
Our portfolio of assets under operating lease is exposed to fluctuations in the demand for and valuation of the underlying assets.
Our equipment leasing business is exposed to asset risk resulting from ownership of the equipment on operating lease. Asset risk arises from fluctuations in supply and demand for the underlying leased equipment. We are exposed to the risk that, at the end of the lease term or in the event of early termination, the value of the asset will be lower than expected, resulting in reduced future lease income over the remaining life of the asset or a lower sale value. Demand for and the valuation of the leased equipment is sensitive to shifts in general and industry specific economic and market trends, governmental regulations and changes in trade flows from specific events such as natural or man-made disasters. A significant portion of our equipment under operating lease consists of rail cars used directly or indirectly in oil and gas drilling activities. Although we regularly monitor the value of the underlying assets and the potential impact of declines in oil and natural gas prices on the value of railcars on operating lease, there is no assurance that the value of these assets will not be adversely impacted by conditions in the energy industry.
Our reported financial results depend on management's selection and application of accounting policies and methods and related assumptions and estimates.
Our accounting policies and estimates are fundamental to our reported financial condition and results of operations. Management is required to make difficult, complex or subjective judgments in selecting and applying many of these accounting policies. In some cases, management must select an accounting policy or method from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in us reporting materially different results than would have been reported under a different alternative.
From time to time, the Financial Accounting Standards Board and SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, resulting in a restatement of prior period financial statements. See Note 1 to the consolidated financial statements for more information about pending accounting pronouncements that may have a material impact on our reported financial results.
Our internal controls may be ineffective.
Management regularly monitors, evaluates and updates our internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, can provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our financial condition and results of operations.
We depend on our executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services.
We believe that our continued growth and future success will depend in large part on the skills of our senior management team. We believe our senior management team possesses valuable knowledge about and experience in the banking industry and that their knowledge and relationships could be difficult to replicate. The composition of our senior management team and our other key personnel may change over time. Although our President and Chief Executive Officer has entered into an employment agreement with us, he may not complete the term of his employment agreement or renew it upon expiration. Other members of our senior management team are not subject to employment agreements. Our success also depends on the experience of other key personnel and on their relationships with the customers and communities they serve. The loss of service of one or more of our executive officers or key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition or operating results.
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We face significant competition from other financial institutions and financial services providers, which may adversely impact our growth or profitability.
The primary markets we currently serve are Florida and the New York metropolitan area. Consumer and commercial banking in these markets is highly competitive. Our markets contain not only a large number of community and regional banks, but also a significant presence of the country's largest commercial banks. We compete with other state and national financial institutions located in Florida, New York and adjoining states as well as savings and loan associations, savings banks and credit unions for deposits and loans. In addition, we compete with financial intermediaries, such as consumer finance companies, marketplace lenders, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Increased competition among financial services companies may adversely affect our ability to market our products and services. Also, technology has lowered barriers to entry and made it possible for banks to compete in our market without a retail footprint by offering competitive rates, as well as non-banks, including online providers, to offer products and services traditionally provided by banks. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may offer a broader range of products and services as well as better pricing for certain products and services than we can.
Our ability to compete successfully depends on a number of factors, including:
• | the ability to develop, maintain and build upon long-term customer relationships based on quality service, high ethical standards and safe and sound banking practices; |
• | the ability to attract and retain qualified employees to operate our business effectively; |
• | the ability to expand our market position; |
• | the scope, relevance and pricing of products and services offered to meet customer needs and demands; |
• | the rate at which we introduce new products and services relative to our competitors; |
• | customer satisfaction with our level of service; and |
• | industry and general economic trends. |
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could harm our business, financial condition and results of operations.
The inability of BankUnited, Inc. to receive dividends from its subsidiary bank could have a material adverse effect on the ability of BankUnited, Inc. to make payments on its debt, pay cash dividends to its shareholders or execute share repurchases.
BankUnited, Inc. is a separate and distinct legal entity from the Bank, and a substantial portion of its revenue consists of dividends from the Bank. These dividends are the primary funding source for the dividends paid by BankUnited, Inc. on its common stock and the interest and principal payments on its debt. In addition, any stock repurchases made by BankUnited, Inc., including under the share repurchase program announced in January 2018, may depend in whole or in part upon dividends from the Bank. Various federal and state laws and regulations limit the amount of dividends that a bank may pay to its parent company. In addition, our right to participate in a distribution of assets upon the liquidation or reorganization of a subsidiary may be subject to the prior claims of the subsidiary’s depositors and other creditors. If the Bank is unable to pay dividends, BankUnited, Inc. might not be able to service its debt, pay its obligations, pay dividends on its common stock or make share repurchases.
We rely on analytical and forecasting models that may prove to be inadequate or inaccurate, which could adversely impact the effectiveness of our strategic planning and our results of operations.
The processes we use to forecast future performance and estimate expected credit losses, the effects of changing interest rates, sources and uses of liquidity, cash flows from the covered assets, real estate values, and economic indicators such as unemployment on our financial condition and results of operations depend upon the use of analytical and forecasting tools and models. These tools and models reflect assumptions that may not be accurate, particularly in times of market stress or other
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unforeseen circumstances. Furthermore, even if our assumptions are accurate predictors of future performance, the tools and models they are based on may prove to be inadequate or inaccurate because of other flaws in their design or implementation. If these tools prove to be inadequate or inaccurate, our strategic planning processes, earnings and capital may be adversely impacted.
Tax refunds relating to the discrete income tax benefit recognized by the Company in the fourth quarter of 2017 have not yet been finalized by applicable taxing authorities and the Company cannot provide assurances as to when or if they will be received.
During the fourth quarter of 2017, the Company recognized a discrete income tax benefit of $327.9 million related to a matter that arose during an ongoing audit of the Company's 2013 federal income tax return. The discrete income tax benefit recognized includes expected refunds of federal income tax of $295 million, as well as estimated interest on the federal refund and estimated refunds from certain state and local taxing jurisdictions. Although the Company expects to receive the federal tax refund following completion of the audit and has concluded that the requirements for accounting recognition of the benefit have been met, the Company cannot provide assurances as to when or if it will ultimately receive the refund (or the related state and local refunds) because the IRS has not yet finalized its entire internal process, or provided the Company with a notice of proposed adjustment or revenue agent report and the refund claims are subject to review by the Joint Committee on Taxation. The Company is continuing to evaluate whether it has claims in other state jurisdictions and whether it may have any claims for federal or state income taxes relating to tax years prior to 2012. The Company cannot provide assurances as to when or to what extent it may have any claims relating to such other state and local taxing jurisdictions or in respect of prior tax years. Any delays or failures to receive the federal income tax refund or related refunds from state and local taxing jurisdictions could have an adverse effect on our financial condition or operating results.
Changes in taxes and other assessments may adversely affect us.
The legislatures and taxing authorities in the tax jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. For example, the Tax Cuts and Jobs Act was enacted in December 2017. This legislation made significant changes to the U.S. Internal Revenue Code, many of which are highly complex and may require interpretations and implementing regulations. The effects of these changes and any other changes that result from such interpretations and implementing regulations or enactment of additional tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our business.
Tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense, filing returns and establishing the value of deferred tax assets and liabilities for purposes of its financial statements, the Company must make judgments and interpretations about the application of these inherently complex tax laws. If the judgments, estimates and assumptions the Company uses in establishing provisions, preparing its tax returns or establishing the value of deferred tax assets and liabilities for purposes of its financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations.
Operational Risks
We are subject to a variety of operational, legal and compliance risks, including the risk of fraud or theft by employees or outsiders, which may adversely affect our business and results of operations.
We are exposed to many types of operational risks, including legal and compliance risk, the risk of fraud or theft by employees or outsiders and operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled technology. The occurrence of any of these events could cause us to suffer financial loss, face regulatory action and suffer damage to our reputation.
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Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control which may give rise to disruption of service to customers and to financial loss or liability. The occurrence of any of these events could result in a diminished ability to operate our business as well as potential liability to customers and counterparties, reputational damage and regulatory intervention, which could adversely affect our business, financial condition or results of operations.
We are dependent on our information technology and telecommunications systems. Systems failures or interruptions could have an adverse effect on our financial condition and results of operations.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems. We rely on these systems to process new and renewal loans, gather deposits, provide customer service, facilitate collections and share data across our organization. The failure of these systems could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
We are dependent on third-party service providers for certain aspects of our business infrastructure and information and telecommunications systems.
We rely on third parties to provide key components of our business infrastructure and major systems including, but not limited to, core banking systems such as loan servicing and deposit transaction processing systems, our electronic funds transfer transaction processing, cash management and online banking services. While we select and monitor the performance of third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, failure of a vendor to provide services for any reason or poor performance of services, or the termination of a third-party software license or service agreement on which any of these systems is based, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. In many cases, our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. Financial or operational difficulties of a third party vendor could also adversely affect our operations if those difficulties interfere with the vendor's ability to serve us effectively or at all. Replacing these third party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations.
Failure by us or third parties to detect or prevent a breach in information security or to protect customer privacy could have an adverse effect on our business.
In the normal course of our business, we collect, process and retain sensitive and confidential client and customer information. Despite the security measures we have in place, our facilities and systems may be vulnerable to cyber-attacks, security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and / or human errors, or other similar events, especially because, in the case of any intentional breaches, the techniques used change frequently or are not recognized until launched, and cyber-attacks can originate from a wide variety of sources, including third parties.
We provide our customers the ability to bank remotely, including online, via mobile devices and over the telephone. The secure transmission of confidential information over the Internet and other remote channels is a critical element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks, designed to disrupt key business services such as customer-facing web sites. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. Any cyber-attack or other security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information could severely damage our reputation, erode confidence in the security of our systems, products and services, expose us to the risk of litigation and liability, disrupt our operations and have a material adverse effect on our business.
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In addition, we interact with and rely on financial counterparties for whom we process transactions and who process transactions for us and rely on other third parties, as noted above. Each of these third parties may be targets of the same types of fraudulent activity, computer break-ins and other cyber security breaches described above. The cyber security measures that they maintain to mitigate the risk of such activity may be different from our own, and in many cases we do not have any control over the types of security measures they may choose to implement. We may also incur costs as a result of data or security breaches of third parties with whom we do not have a significant direct relationship. As a result of financial entities and technology systems becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us.
We have taken measures to implement safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact. We have a comprehensive set of information security policies and protocols and a dedicated information security division that reports to the Chief Risk Officer, with oversight by the Risk Committee of the Board of Directors. The Risk Committee receives regular reporting related to information security risks and the monitoring and management of those risks.
Failure to keep pace with technological changes could have a material adverse impact on our ability to compete for loans and deposits, and therefore on our financial condition and results of operations.
Financial products and services have become increasingly technology-driven. To some degree, our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on our ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our larger competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The widespread adoption of new technologies, including internet services and payment systems, could require us to incur substantial expenditures to modify or adapt our existing products and services.
The soundness of other financial institutions, particularly our financial institution counterparties, could adversely affect us.
Our ability to engage in routine funding and other transactions could be adversely affected by the stability and actions of other financial services institutions. Financial services institutions are interrelated as a result of trading, clearing, servicing, counterparty and other relationships. We have exposure to an increasing number of financial institutions and counterparties. These counterparties include institutions that may be exposed to various risks over which we have little or no control.
Adverse developments affecting the overall strength and soundness of the financial services industry as a whole and third parties with whom we have important relationships could have a negative impact on our business even if we are not subject to the same adverse developments.
Reputational risks could affect our results.
Our ability to originate new business and maintain existing customer relationships is highly dependent upon customer and other external perceptions of our business practices. Adverse perceptions regarding our business practices could damage our reputation in the customer, funding and capital markets, leading to difficulties in generating and maintaining accounts as well as in financing them. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, employee relations, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Adverse developments with respect to external perceptions regarding the practices of our competitors, or our industry as a whole, or the general economic climate may also adversely impact our reputation. These perceptions about us could cause our business to be negatively affected and exacerbate the other risks that we face. In addition, adverse reputational impacts on third parties with whom we have important relationships may adversely impact our reputation. Adverse reputational impacts or events may also increase our litigation risk. We carefully monitor internal and external developments for areas of potential reputational risk and have established governance structures to assist in evaluating such risks in our business practices and decisions.
Risks Relating to the Regulation of Our Industry
We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, may adversely affect us.
We are subject to extensive regulation, supervision, and legal requirements that govern almost all aspects of our operations, see Item 1 "Business—Regulation and Supervision." The Dodd-Frank Act, which imposes significant regulatory and compliance
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requirements on financial institutions, is an example of this type of federal regulation. Intended to protect customers, depositors, the DIF, and the overall financial stability of the United States, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividend or distributions that BankUnited can pay to BankUnited, Inc., restrict the ability of institutions to guarantee our debt, and impose specific accounting requirements on us. Banking regulators may also from time to time focus on issues that may impact the pace of growth of our business and operations, such as commercial real estate lending concentrations. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs. In addition, federal banking agencies, including the OCC and Federal Reserve Board, periodically conduct examinations of our business, including compliance with laws and regulations. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines, remedial actions, administrative orders and other penalties, any of which could adversely affect our results of operations and capital base.
Further, federal, state and local legislators and regulators regularly introduce measures or take actions that would modify the regulatory requirements applicable to banks, their holding companies and other financial institutions. Changes in laws, regulations or regulatory policies could adversely affect the operating environment for the Company in substantial and unpredictable ways, increase our cost of doing business, impose new restrictions on the way in which we conduct our operations or add significant operational constraints that might impair our profitability. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on our business, financial condition or results of operations.
Failure to comply with the business plan filed with the OCC could have an adverse effect on our ability to execute our business strategy.
In conjunction with the conversion of its charter to that of a national bank, BankUnited was required to file a business plan with the OCC, and is required to update the business plan annually. Failure to comply with the business plan could subject the Bank to regulatory actions that could impede our ability to execute our business strategy. The provisions of the business plan restrict our ability to engage in business activities outside of those contemplated in the business plan or to expand the level of our growth beyond that contemplated in the business plan without regulatory non-objection.
Our ability to expand through acquisition or de novo branching requires regulatory approvals, and failure to obtain them may restrict our growth.
We may identify opportunities to complement and expand our business by pursuing strategic acquisitions of financial institutions and other complementary businesses. We must generally receive federal regulatory approval before we can acquire an institution or business. In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on competition, our financial condition, our future prospects, and the impact of the proposal on U.S. financial stability. The regulators also review current and projected capital ratios and levels, the competence, experience, and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institution's record of compliance under the CRA) and the effectiveness of the acquiring institution in combating money laundering activities. Such regulatory approvals may not be granted on terms that are acceptable to us, or at all. We may also be required to sell or close branches as a condition to receiving regulatory approval, which condition may not be acceptable to us or, if acceptable to us, may reduce the benefit of any acquisition.
In addition to the acquisition of existing financial institutions, as opportunities arise, we may continue de novo branching as a part of our internal growth strategy and possibly enter into new markets through de novo branching. De novo branching and any acquisition carries with it numerous risks, including the inability to obtain all required regulatory approvals. The failure to obtain these regulatory approvals for potential future strategic acquisitions and de novo branches may impact our business plans and restrict our growth.
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Financial institutions, such as BankUnited, face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, the USA PATRIOT Act, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements, and has engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by the U.S. Treasury Department's Office of Foreign Assets Control.
In order to comply with regulations, guidelines and examination procedures in this area, we dedicate significant resources to the ongoing execution of our anti-money laundering program, continuously monitor and enhance as necessary our policies and procedures and maintain a robust automated anti-money laundering software solution. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of financial institutions that we may acquire in the future are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our expansion plans.
We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution's performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution's performance under fair lending laws in private class action litigation.
The FDIC's restoration plan and any future related increased assessments could adversely affect our earnings.
As a result of economic conditions and the enactment of the Dodd-Frank Act, the FDIC increased the deposit insurance assessment rates and thus raised deposit premiums for insured depository institutions. If the current level of deposit premiums are insufficient for the DIF to meet its funding requirements in the future, further special assessments or increases in deposit insurance premiums may be required. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures in the future, we may be required to pay FDIC premiums higher than current levels. Any future additional assessments or increases in FDIC insurance premiums may adversely affect our results of operations.
We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our operations and financial condition.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that all of our customers, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be
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mishandled or misused, we could be exposed to litigation or regulatory sanctions under personal information laws and regulations. Concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our operations and financial condition.
Unfavorable results from ongoing stress analyses may adversely affect our ability to retain customers or compete for new business opportunities.
Under the Dodd-Frank Act, the Company is required to annually conduct a company-run stress test to estimate the potential impact of three macroeconomic scenarios provided by the Federal Reserve on our regulatory capital ratios and certain other financial metrics. The Company is required to publicly disclose a summary of the results of these forward looking, company-run stress tests that assess the impact of hypothetical macroeconomic baseline, adverse and severely adverse economic scenarios provided by the Federal Reserve Board. The stress testing and capital planning processes may, among other things, require us to limit any dividend or other capital distributions we may make to stockholders or increase our capital levels, modify our business and growth strategies or decrease our exposure to various asset classes, any of which could have a material adverse effect on our financial condition or results of operations.
Although the stress tests are not meant to assess our current condition, our customers may misinterpret and adversely react to the results of these stress tests. Any potential misinterpretations and adverse reactions could limit our ability to attract and retain customers or to effectively compete for new business opportunities. The inability to attract and retain customers or effectively compete for new business may adversely affect our business, financial condition or results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2017, BankUnited leased 139,572 square feet of office and operations space in Miami Lakes, Florida. This space includes our principal executive offices and operations center. At December 31, 2017, we provided banking services at 87 banking center locations in 15 Florida counties. Of the 87 banking center properties, we leased 286,643 square feet in 83 locations and owned 20,347 square feet in four locations. Additionally, we leased 39,243 square feet of office space, of which 11,227 square feet is vacant, and 5,580 square feet of warehouse space.
At December 31, 2017, BankUnited leased 25,306 square feet of banking services space in New York City at five locations and 2,000 square feet of banking services space in Melville, New York at one location. We also leased 84,419 square feet of office space in New York in 10 locations, of which 10,048 square feet have been subleased.
At December 31, 2017, we leased 10,619 square feet of office and operations space in Baltimore, Maryland to house Bridge and 5,572 square feet of office and operations space in Scottsdale, Arizona to house Pinnacle. We also leased 7,964 square feet of office and operations space in various states used by SBF.
We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.
Item 3. Legal Proceedings
The Company is involved as plaintiff or defendant in various legal actions arising in the normal course of business. In the opinion of management, based upon advice of legal counsel, the likelihood is remote that the impact of these proceedings, either individually or in the aggregate, would be material to the Company’s consolidated financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures
None.
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PART II - FINANCIAL INFORMATION
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information and Holders of Record
Shares of our common stock trade on the NYSE under the symbol "BKU". The last sale price of our common stock on the NYSE on February 26, 2018 was $41.21 per share.
The following table shows the high and low sales prices for our common stock for the periods indicated, as reported by the NYSE:
2017 | 2016 | ||||||||||||||
High | Low | High | Low | ||||||||||||
1st Quarter | $ | 41.00 | $ | 34.35 | $ | 35.94 | $ | 29.72 | |||||||
2nd Quarter | $ | 37.80 | $ | 32.33 | $ | 36.28 | $ | 27.85 | |||||||
3rd Quarter | $ | 36.14 | $ | 30.37 | $ | 33.06 | $ | 28.64 | |||||||
4th Quarter | $ | 41.64 | $ | 32.34 | $ | 38.47 | $ | 28.13 | |||||||
As of February 26, 2018, there were 551 stockholders of record of our common stock.
Equity Compensation Plan Information
The information set forth under the caption "Equity Compensation Plan Information" in our definitive proxy statement for the Company's 2018 annual meeting of stockholders (the "Proxy Statement") is incorporated herein by reference.
Dividend Policy
The Company declared a quarterly dividend of $0.21 per share on its common stock for each of the four quarters of 2017 and 2016 resulting in total dividends for 2017 and 2016 of $92.2 million and $90.0 million, respectively, or $0.84 per common share for each of the years ended December 31, 2017 and 2016. Dividends from the Bank are the principal source of funds for the payment of dividends on our common stock. The Bank is subject to certain restrictions that may limit its ability to pay dividends to us. See "Business—Regulation and Supervision—Regulatory Limits on Dividends and Distributions". The quarterly dividends on our common stock are subject to the discretion of our board of directors and dependent on, among other things, our financial condition, results of operations, capital requirements, restrictions contained in financing instruments and other factors that our board of directors may deem relevant.
The accompanying notes are an integral part of these consolidated financial statements.
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Stock Performance Graph
The graph set forth below compares the cumulative total stockholder return on an initial investment of $100 in our common stock between December 31, 2012 and December 31, 2017, with the comparative cumulative total return of such amount on the S&P 500 Index and the S&P 500 Bank Index over the same period. Reinvestment of all dividends is assumed to have been made in our common stock.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
Index | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | ||||||
BankUnited, Inc. | 100.00 | 137.80 | 125.32 | 158.85 | 170.46 | 188.66 | ||||||
S&P 500 | 100.00 | 132.39 | 150.51 | 152.59 | 170.84 | 208.14 | ||||||
S&P Bank | 100.00 | 135.72 | 156.78 | 158.10 | 196.54 | 240.87 | ||||||
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
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Item 6. Selected Consolidated Financial Data
You should read the selected consolidated financial data set forth below in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and the audited consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K. The selected consolidated financial data set forth below is derived from our audited consolidated financial statements.
At December 31, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(dollars in thousands) | |||||||||||||||||||
Consolidated Balance Sheet Data: | |||||||||||||||||||
Cash and cash equivalents | $ | 194,582 | $ | 448,313 | $ | 267,500 | $ | 187,517 | $ | 252,749 | |||||||||
Investment securities available for sale, at fair value | 6,680,832 | 6,073,584 | 4,859,539 | 4,585,694 | 3,637,124 | ||||||||||||||
Loans, net | 21,271,709 | 19,242,441 | 16,510,775 | 12,319,227 | 8,983,884 | ||||||||||||||
FDIC indemnification asset | 295,635 | 515,933 | 739,880 | 974,704 | 1,205,117 | ||||||||||||||
Equipment under operating lease, net | 599,502 | 539,914 | 483,518 | 314,558 | 196,483 | ||||||||||||||
Total assets | 30,346,986 | 27,880,151 | 23,883,467 | 19,210,529 | 15,046,649 | ||||||||||||||
Deposits | 21,878,479 | 19,490,890 | 16,938,501 | 13,511,755 | 10,532,428 | ||||||||||||||
Federal Home Loan Bank advances | 4,771,000 | 5,239,348 | 4,008,464 | 3,307,932 | 2,412,050 | ||||||||||||||
Notes and other borrowings | 402,830 | 402,809 | 402,545 | 10,627 | 2,263 | ||||||||||||||
Total liabilities | 27,320,924 | 25,461,722 | 21,639,569 | 17,157,995 | 13,117,951 | ||||||||||||||
Total stockholder's equity | 3,026,062 | 2,418,429 | 2,243,898 | 2,052,534 | 1,928,698 | ||||||||||||||
Covered assets | 505,722 | 616,600 | 813,525 | 1,053,317 | 1,730,182 | ||||||||||||||
Years Ended December 31, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(dollars in thousands, except per share data) | |||||||||||||||||||
Consolidated Income Statement Data: | |||||||||||||||||||
Interest income | $ | 1,204,461 | $ | 1,059,217 | $ | 880,816 | $ | 783,744 | $ | 738,821 | |||||||||
Interest expense | 254,189 | 188,832 | 135,164 | 106,651 | 92,611 | ||||||||||||||
Net interest income | 950,272 | 870,385 | 745,652 | 677,093 | 646,210 | ||||||||||||||
Provision for loan losses | 68,747 | 50,911 | 44,311 | 41,505 | 31,964 | ||||||||||||||
Net interest income after provision for loan losses | 881,525 | 819,474 | 701,341 | 635,588 | 614,246 | ||||||||||||||
Non-interest income | 157,904 | 106,417 | 102,224 | 84,165 | 68,049 | ||||||||||||||
Non-interest expense | 634,968 | 590,447 | 506,672 | 426,503 | 364,293 | ||||||||||||||
Income before income taxes | 404,461 | 335,444 | 296,893 | 293,250 | 318,002 | ||||||||||||||
Provision (benefit) for income taxes (1) | (209,812 | ) | 109,703 | 45,233 | 89,035 | 109,066 | |||||||||||||
Net income | $ | 614,273 | $ | 225,741 | $ | 251,660 | $ | 204,215 | $ | 208,936 | |||||||||
Share Data: | |||||||||||||||||||
Earnings per common share, basic | $ | 5.60 | $ | 2.11 | $ | 2.37 | $ | 1.95 | $ | 2.03 | |||||||||
Earnings per common share, diluted | $ | 5.58 | $ | 2.09 | $ | 2.35 | $ | 1.95 | $ | 2.01 | |||||||||
Cash dividends declared per common share | $ | 0.84 | $ | 0.84 | $ | 0.84 | $ | 0.84 | $ | 0.84 | |||||||||
Dividend payout ratio | 14.99 | % | 39.85 | % | 35.75 | % | 43.06 | % | 41.73 | % | |||||||||
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As of or for the Years Ended December 31, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(dollars in thousands, except per share data) | |||||||||||||||||||
Other Data (unaudited): | |||||||||||||||||||
Financial ratios | |||||||||||||||||||
Return on average assets | 2.13 | % | 0.87 | % | 1.18 | % | 1.21 | % | 1.55 | % | |||||||||
Return on average common equity | 23.36 | % | 9.64 | % | 11.62 | % | 10.13 | % | 11.16 | % | |||||||||
Yield on earning assets (2) | 4.58 | % | 4.51 | % | 4.64 | % | 5.33 | % | 6.54 | % | |||||||||
Cost of interest bearing liabilities | 1.12 | % | 0.93 | % | 0.84 | % | 0.87 | % | 0.94 | % | |||||||||
Tangible common equity to total assets | 9.72 | % | 8.39 | % | 9.07 | % | 10.33 | % | 12.36 | % | |||||||||
Interest rate spread (2) | 3.46 | % | 3.58 | % | 3.80 | % | 4.46 | % | 5.60 | % | |||||||||
Net interest margin (2) | 3.65 | % | 3.73 | % | 3.94 | % | 4.61 | % | 5.73 | % | |||||||||
Loan to deposit ratio (3) | 98.04 | % | 99.72 | % | 98.50 | % | 91.89 | % | 85.96 | % | |||||||||
Tangible book value per common share | $ | 27.59 | $ | 22.47 | $ | 20.90 | $ | 19.52 | $ | 18.41 | |||||||||
Asset quality ratios | |||||||||||||||||||
Non-performing loans to total loans (3) (4) | 0.81 | % | 0.70 | % | 0.44 | % | 0.32 | % | 0.39 | % | |||||||||
Non-performing assets to total assets (5) | 0.61 | % | 0.53 | % | 0.35 | % | 0.28 | % | 0.51 | % | |||||||||
Non-performing non-covered assets to total assets (5) (6) | 0.60 | % | 0.51 | % | 0.26 | % | 0.17 | % | 0.16 | % | |||||||||
ALLL to total loans | 0.68 | % | 0.79 | % | 0.76 | % | 0.77 | % | 0.77 | % | |||||||||
ALLL to non-performing loans (4) | 83.53 | % | 112.55 | % | 172.23 | % | 239.24 | % | 195.52 | % | |||||||||
Non-covered ALLL to non-covered non-performing loans (4) | 84.03 | % | 113.68 | % | 199.82 | % | 275.47 | % | 246.73 | % | |||||||||
Net charge-offs to average loans | 0.38 | % | 0.13 | % | 0.10 | % | 0.15 | % | 0.31 | % | |||||||||
Non-covered net charge-offs to average non-covered loans | 0.38 | % | 0.13 | % | 0.09 | % | 0.08 | % | 0.34 | % | |||||||||
At December 31, | ||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||
Capital ratios | ||||||||||||||
Tier 1 leverage | 9.72 | % | 8.41 | % | 9.35 | % | 10.70 | % | 12.42 | % | ||||
CET1 risk-based capital | 13.11 | % | 11.63 | % | 12.58 | % | N/A | N/A | ||||||
Tier 1 risk-based capital | 13.11 | % | 11.63 | % | 12.58 | % | 15.45 | % | 21.06 | % | ||||
Total risk-based capital | 13.78 | % | 12.45 | % | 13.36 | % | 16.27 | % | 21.93 | % | ||||
(1) | Includes discrete income tax benefits of $327.9 million and $49.3 million recognized during the years ended December 31, 2017 and 2015, respectively. |
(2) | On a tax-equivalent basis, at a federal income tax rate of 35%. |
(3) | Total loans include premiums, discounts, deferred fees and costs and loans held for sale. |
(4) | We define non-performing loans to include non-accrual loans, and loans, other than ACI loans, that are past due 90 days or more and still accruing. Contractually delinquent ACI loans on which interest continues to be accreted are excluded from non-performing loans. Effective January 1, 2016, we are no longer reporting accruing TDRs as non-performing. |
(5) | Non-performing assets include non-performing loans, OREO and other repossessed assets. |
(6) | Ratio for non-covered assets is calculated as non-performing non-covered assets to total assets. |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of BankUnited, Inc. and its subsidiary (the "Company", "we", "us" and "our") and should be read in conjunction with the consolidated financial statements, accompanying footnotes and supplemental financial data included herein. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Forward-looking Statements" and "Risk Factors." We assume no obligation to update any of these forward-looking statements.
Overview
Performance Highlights
In evaluating our financial performance, we consider the level of and trends in net interest income, the net interest margin, levels and composition of non-interest income and non-interest expense, performance ratios such as the return on average equity and return on average assets and asset quality ratios, particularly for the non-covered portfolio, including the ratio of non-performing loans to total loans, non-performing assets to total assets, and portfolio delinquency and charge-off trends. We consider growth in earning assets and deposits, trends in funding mix and cost of funds. We analyze these ratios and trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable financial institutions.
Performance highlights include:
• | Net income for the year ended December 31, 2017 was $614.3 million, or $5.58 per diluted share, compared to $225.7 million, or $2.09 per diluted share, for the year ended December 31, 2016. Earnings for the year ended December 31, 2017 generated a return on average stockholders' equity of 23.36% and a return on average assets of 2.13%. |
• | The Company recognized a discrete income tax benefit of $327.9 million during the year ended December 31, 2017, inclusive of an expected federal benefit of $295.0 million, estimated state benefits of $24.2 million and estimated interest of $8.7 million. Excluding the effect of this discrete income tax benefit and related professional fees, net income for the year ended December 31, 2017 was $291.3 million, diluted earnings per share was $2.65, return on average stockholders' equity was 11.08% and return on average assets was 1.01%. |
• | Net interest income for the year ended December 31, 2017 was $950.3 million, an increase of $79.9 million over the prior year. The net interest margin, calculated on a tax-equivalent basis, was 3.65% for the year ended December 31, 2017 compared to 3.73% for the year ended December 31, 2016. Significant factors contributing to the decline in the net interest margin included the continued run-off of high-yielding covered loans, the growth of non-covered loans and investment securities at yields lower than the yield on total earning assets and an increase in the cost of interest bearing liabilities. |
The following chart provides a comparison of net interest margin, the interest rate spread, the average yield on interest earning assets and the average rate paid on interest bearing liabilities for the years ended December 31, 2017 and 2016 (on a tax equivalent basis):
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• | Non-covered loans and leases, including equipment under operating lease, grew by $2.2 billion to $21.5 billion for the year ended December 31, 2017. During the year ended December 31, 2017, non-covered commercial loans grew by $1.4 billion; equipment under operating lease grew by $60 million; and non-covered residential and other consumer loans grew by $700 million. The Florida region and our national platforms contributed $1.0 billion and $1.2 billion, respectively, to non-covered loan and lease growth for the year ended December 31, 2017, while the New York region remained relatively flat. The following charts compare the composition of our loan and lease portfolio by portfolio segment and of our non-covered loan and lease portfolio by region at December 31, 2017 and 2016: |
(1) | Commercial real estate loans include multifamily, non-owner occupied commercial real estate and construction and land loans. |
(2) | Includes equipment under operating leases. |
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• | Asset quality remained strong. At December 31, 2017, 96.8% of the commercial loan portfolio was rated "pass" and substantially the entire non-covered residential portfolio was current. The ratio of non-performing, non-covered loans to total non-covered loans was 0.82% and the ratio of non-performing, non-covered assets to total assets was 0.60% at December 31, 2017. Non-performing taxi medallion loans comprised 0.51% of total non-covered loans and 0.35% of total assets at December 31, 2017. A comparison of our non-covered, nonperforming assets ratio to that of our peers at December 31, 2017, 2016 and 2015 is presented in the chart below: |
• | Total deposits increased by $2.4 billion for the year ended December 31, 2017 to $21.9 billion. The average cost of total deposits increased to 0.83% for the year ended December 31, 2017 from 0.66% for 2016. The following charts illustrate the composition of deposits at December 31, 2017 and 2016: |
Book value per common share grew to $28.32 at December 31, 2017, a 22.0% increase from December 31, 2016. Tangible book value per common share increased by 22.8% over the same period, to $27.59 at December 31, 2017. These increases were impacted by the discrete income tax benefit recognized in the year ended December 31, 2017.31
• | The Company’s and the Bank's capital ratios exceeded all regulatory “well capitalized” guidelines. The charts below present the Company's and the Bank's regulatory capital ratios compared to regulatory guidelines as of December 31, 2017 and 2016: |
BankUnited, Inc:
BankUnited, N.A.:
Strategic Priorities
Management has identified the following strategic priorities for our Company:
• | Our strategic focus emphasizes safety and soundness, long-term profitability and sustainable balance sheet growth. |
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• | Growth in core deposit relationships, further optimization of our deposit mix and management of the cost of funds, while targeting a loan to deposit ratio of under 100%. We anticipate deposit growth exceeding loan growth for 2018. |
• | Continued organic loan growth in Florida and the Tri-State markets, both of which we believe to be attractive banking markets, as well as across our national lending platforms. We seek to maintain a loan portfolio diversified across geographies and product classes, predicated on a culture of disciplined credit underwriting. |
• | Focus on a scalable and efficient operating model. |
• | We will opportunistically evaluate potential strategic acquisitions of financial institutions and complementary businesses. |
Challenges confronting our Company include:
• | Competitive market conditions for both loans and deposits in our primary geographic footprint may impact our ability to execute our balance sheet growth and profitability strategy. |
• | Managing the cost of funds while growing deposits in a competitive, rising interest rate environment presents a strategic challenge. |
• | Adding interest earning assets to the balance sheet at current market rates as higher yielding covered loans run off is likely to continue to put pressure on our net interest margin. |
• | Uncertainty about the regulatory environment may present challenges in the execution of our business strategy and the management of non-interest expense. For additional discussion, see "Item 1. Business—Regulation and Supervision." |
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.
Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below involve a heightened level of management judgment due to the complexity, subjectivity and sensitivity involved in their application.
Note 1 to the consolidated financial statements contains a further discussion of our significant accounting policies.
Allowance for Loan and Lease Losses
The ALLL represents management's estimate of probable loan losses inherent in the Company's loan portfolio. Determining the amount of the ALLL is considered a critical accounting estimate because of its complexity and because it requires significant judgment and estimation. Estimates that are particularly susceptible to change that may have a material impact on the amount of the ALLL include:
• | the amount and timing of expected future cash flows from ACI loans and impaired loans; |
• | the value of underlying collateral, which impacts loss severity and certain cash flow assumptions; |
• | the selection of proxy data used to calculate loss factors; |
• | our evaluation of loss emergence and historical loss experience periods; |
• | our evaluation of the risk profile of various loan portfolio segments, including internal risk ratings; and |
• | our selection and evaluation of qualitative factors. |
Note 1 to the consolidated financial statements describes the methodology used to determine the ALLL.
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Accounting for Acquired Loans and the FDIC Indemnification Asset
A significant portion of the covered loans are residential ACI Loans. The accounting for ACI loans requires the Company to estimate the timing and amount of cash flows to be collected from these loans and to continually update estimates of the cash flows expected to be collected over the lives of the loans. Similarly, the accounting for the FDIC indemnification asset requires the Company to estimate the timing and amount of cash flows to be received from the FDIC in reimbursement for losses and expenses related to the covered loans; these estimates are directly related to estimates of cash flows to be received from the covered loans. Estimated cash flows impact the rate of accretion on covered loans and the rate of amortization on the FDIC indemnification asset as well as the amount of any ALLL to be established related to the covered loans. These cash flow estimates are considered to be critical accounting estimates because they involve significant judgment and assumptions as to their amount and timing.
Covered 1-4 single family residential and home equity loans were placed into homogenous pools at the time of the FSB Acquisition; the ongoing credit quality and performance of these loans is monitored on a pool basis and expected cash flows are estimated on a pool basis. At acquisition, the fair value of the pools was measured based on the expected cash flows to be derived from each pool. For ACI pools, the difference between total contractual payments due and the cash flows expected to be received at acquisition was recognized as non-accretable difference. The excess of expected cash flows over the recorded fair value of each ACI pool at acquisition was recognized as accretable yield. The accretable yield is accreted into interest income over the life of each pool.
We monitor the pools quarterly by updating our expected cash flows to determine whether any changes have occurred in expected cash flows that would be indicative of impairment or necessitate reclassification between non-accretable difference and accretable yield. Initial and ongoing cash flow expectations incorporate significant assumptions regarding prepayment rates, the timing of resolution of loans, the timing and amount of loan sales and related pricing, frequency of default, delinquency and loss severity, which is dependent on estimates of underlying collateral values. Changes in these assumptions could have a potentially material impact on the amount of the ALLL related to the covered loans as well as on the rate of accretion on these loans and the corresponding rate of amortization of the FDIC indemnification asset. Prepayment, delinquency, default curves and loss severity used to forecast pool cash flows are derived from roll rates generated from the historical performance of the ACI residential loan portfolio observed over the immediately preceding four quarters, or the immediately preceding twelve quarters as it relates to loss severity from loan sales.
Fair Value Measurements
The Company measures certain of its assets and liabilities at fair value on a recurring or non-recurring basis. Assets and liabilities measured at fair value on a recurring basis include investment securities available for sale, servicing rights, and derivative instruments. Assets that may be measured at fair value on a non-recurring basis include impaired loans, OREO and other repossessed assets, loans held for sale, goodwill, impaired long-lived assets, and assets acquired and liabilities assumed in business combinations. The consolidated financial statements also include disclosures about the fair value of financial instruments that are not recorded at fair value.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to determine fair value measurements are prioritized into a three level hierarchy based on observability and transparency of the inputs, summarized as follows:
Level 1—observable inputs that reflect quoted prices in active markets for identical assets,
Level 2—inputs other than quoted prices in active markets that are based on observable market data, and
Level 3—unobservable inputs requiring significant management judgment or estimation.
When observable market quotes are not available, fair value is estimated using modeling techniques such as discounted cash flow analyses and option pricing models. These modeling techniques utilize assumptions that we believe market participants would use in pricing the asset or the liability.
Particularly for estimated fair values of assets and liabilities categorized within level 3 of the fair value hierarchy, the selection of different valuation techniques or underlying assumptions could result in fair value estimates that are higher or lower than the amounts recorded or disclosed in our consolidated financial statements. Considerable judgment may be involved in determining the amount that is most representative of fair value.
Because of the degree of judgment involved in selecting valuation techniques and underlying assumptions, fair value measurements are considered critical accounting estimates.
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Notes 1, 4, 12 and 16 to our consolidated financial statements contain further information about fair value estimates.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements.
Results of Operations
Net Interest Income
Net interest income is the difference between interest earned on interest earning assets and interest incurred on interest bearing liabilities and is the primary driver of core earnings. Net interest income is impacted by the relative mix of interest earning assets and interest bearing liabilities, the ratio of interest earning assets to total assets and of interest bearing liabilities to total funding sources, movements in market interest rates, levels of non-performing assets and pricing pressure from competitors.
The mix of interest earning assets is influenced by loan demand, market and competitive conditions in our primary lending markets and by management's continual assessment of the rate of return and relative risk associated with various classes of earning assets. The mix of interest bearing liabilities is influenced by the Company's liquidity profile, management's assessment of the desire for lower cost funding sources weighed against relationships with customers and growth requirements and is impacted by competition for deposits in the Company's markets and the availability and pricing of other sources of funds.
Net interest income is also impacted by the accounting for ACI loans acquired in conjunction with the FSB Acquisition. ACI loans were initially recorded at fair value, measured based on the present value of expected cash flows. The excess of expected cash flows over carrying value, known as accretable yield, is recognized as interest income over the lives of the underlying loans. Accretion related to ACI loans is expected to continue to positively impact net interest income, the net interest margin and interest rate spread until termination of the Single Family Shared-Loss Agreement, although the magnitude of the positive impact on the net interest margin and interest rate spread is expected to decline as ACI loans comprise a declining percentage of total loans. The proportion of total loans represented by ACI loans is declining as the ACI loans are resolved and new loans are added to the portfolio. ACI loans represented 2.4%, 3.0% and 4.6% of total loans, including premiums, discounts and deferred fees and costs, at December 31, 2017, 2016 and 2015, respectively.
The impact of ACI loan accounting on net interest income makes it difficult to compare our net interest margin and interest rate spread to those reported by other financial institutions.
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The following table presents, for the years ended December 31, 2017, 2016 and 2015, 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 35.0% (dollars in thousands):
2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||
Average Balance | Interest (1) | Yield/ Rate (1) | Average Balance | Interest (1) | Yield/ Rate (1) | Average Balance | Interest (1) | Yield/ Rate (1) | ||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||
Interest earning assets: | ||||||||||||||||||||||||||||||||
Non-covered loans | $ | 19,478,071 | $ | 730,701 | 3.75 | % | $ | 17,282,886 | $ | 617,863 | 3.58 | % | $ | 13,339,708 | $ | 478,072 | 3.58 | % | ||||||||||||||
Covered loans | 544,279 | 300,540 | 55.22 | % | 721,268 | 301,614 | 41.82 | % | 923,909 | 291,717 | 31.57 | % | ||||||||||||||||||||
Total loans | 20,022,350 | 1,031,241 | 5.15 | % | 18,004,154 | 919,477 | 5.11 | % | 14,263,617 | 769,789 | 5.40 | % | ||||||||||||||||||||
Investment securities (2) | 6,658,145 | 201,363 | 3.02 | % | 5,691,617 | 161,385 | 2.84 | % | 4,672,032 | 121,221 | 2.59 | % | ||||||||||||||||||||
Other interest earning assets | 543,338 | 14,292 | 2.63 | % | 541,816 | 12,204 | 2.25 | % | 481,716 | 10,098 | 2.10 | % | ||||||||||||||||||||
Total interest earning assets | 27,223,833 | 1,246,896 | 4.58 | % | 24,237,587 | 1,093,066 | 4.51 | % | 19,417,365 | 901,108 | 4.64 | % | ||||||||||||||||||||
Allowance for loan and lease losses | (156,471 | ) | (139,469 | ) | (108,875 | ) | ||||||||||||||||||||||||||
Non-interest earning assets | 1,758,032 | 1,923,298 | 1,985,421 | |||||||||||||||||||||||||||||
Total assets | $ | 28,825,394 | $ | 26,021,416 | $ | 21,293,911 | ||||||||||||||||||||||||||
Liabilities and Stockholders' Equity: | ||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||
Interest bearing demand deposits | $ | 1,586,390 | 12,873 | 0.81 | % | $ | 1,382,717 | 8,343 | 0.60 | % | $ | 1,169,921 | $ | 5,782 | 0.49 | % | ||||||||||||||||
Savings and money market deposits | 9,730,101 | 80,397 | 0.83 | % | 8,361,652 | 51,774 | 0.62 | % | 6,849,366 | 37,744 | 0.55 | % | ||||||||||||||||||||
Time deposits | 6,094,336 | 77,663 | 1.27 | % | 5,326,630 | 59,656 | 1.12 | % | 4,305,857 | 47,625 | 1.11 | % | ||||||||||||||||||||
Total interest bearing deposits | 17,410,827 | 170,933 | 0.98 | % | 15,070,999 | 119,773 | 0.79 | % | 12,325,144 | 91,151 | 0.74 | % | ||||||||||||||||||||
FHLB advances | 4,869,690 | 61,997 | 1.27 | % | 4,801,406 | 47,773 | 0.99 | % | 3,706,288 | 40,328 | 1.09 | % | ||||||||||||||||||||
Notes and other borrowings | 402,921 | 21,259 | 5.28 | % | 403,197 | 21,287 | 5.28 | % | 58,791 | 3,685 | 6.27 | % | ||||||||||||||||||||
Total interest bearing liabilities | 22,683,438 | 254,189 | 1.12 | % | 20,275,602 | 188,833 | 0.93 | % | 16,090,223 | 135,164 | 0.84 | % | ||||||||||||||||||||
Non-interest bearing demand deposits | 3,069,565 | 2,968,192 | 2,732,654 | |||||||||||||||||||||||||||||
Other non-interest bearing liabilities | 443,019 | 435,645 | 305,519 | |||||||||||||||||||||||||||||
Total liabilities | 26,196,022 | 23,679,439 | 19,128,396 | |||||||||||||||||||||||||||||
Stockholders' equity | 2,629,372 | 2,341,977 | 2,165,515 | |||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 28,825,394 | $ | 26,021,416 | $ | 21,293,911 | ||||||||||||||||||||||||||
Net interest income | $ | 992,707 | $ | 904,233 | $ | 765,944 | ||||||||||||||||||||||||||
Interest rate spread | 3.46 | % | 3.58 | % | 3.80 | % | ||||||||||||||||||||||||||
Net interest margin | 3.65 | % | 3.73 | % | 3.94 | % | ||||||||||||||||||||||||||
(1) | On a tax-equivalent basis. The tax-equivalent adjustment for tax-exempt loans was $29.4 million, $23.3 million and $15.9 million, and the tax-equivalent adjustment for tax-exempt investment securities was $13.1 million, $10.5 million and $4.4 million for the years ended December 31, 2017, 2016, and 2015, respectively. |
(2) | At fair value except for securities held to maturity. |
The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017, reducing the statutory corporate federal income tax rate from 35 percent to 21 percent, effective January 1, 2018. Had this reduction in the federal income tax rate been applied in the determination of the tax-equivalent adjustments above for the year ended December 31, 2017, the yield on non-covered loans and total loans would have been reduced by 0.07%, the yield on investment securities would have been reduced by 0.09% and the yield on total interest earning assets, the interest rate spread and the net interest margin would each have been reduced by 0.08%.
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Increases and decreases in interest income, calculated on a tax-equivalent basis, and interest expense result from changes in average balances (volume) of interest earning assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest earning assets and the interest incurred on our interest bearing liabilities for the years indicated. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous year's volume. Changes applicable to both volume and rate have been allocated to volume (in thousands):
2017 Compared to 2016 | 2016 Compared to 2015 | ||||||||||||||||||||||
Change Due to Volume | Change Due to Rate | Increase (Decrease) | Change Due to Volume | Change Due to Rate | Increase | ||||||||||||||||||
Interest Income Attributable to: | |||||||||||||||||||||||
Loans | $ | 104,562 | $ | 7,202 | $ | 111,764 | $ | 191,052 | $ | (41,364 | ) | $ | 149,688 | ||||||||||
Investment securities | 29,733 | 10,245 | 39,978 | 28,484 | 11,680 | 40,164 | |||||||||||||||||
Other interest earning assets | 29 | 2,059 | 2,088 | 1,383 | 723 | 2,106 | |||||||||||||||||
Total interest income | 134,324 | 19,506 | 153,830 | 220,919 | (28,961 | ) | 191,958 | ||||||||||||||||
Interest Expense Attributable to: | |||||||||||||||||||||||
Interest bearing demand deposits | 1,626 | 2,904 | 4,530 | 1,274 | 1,287 | 2,561 | |||||||||||||||||
Savings and money market deposits | 11,064 | 17,559 | 28,623 | 9,235 | 4,795 | 14,030 | |||||||||||||||||
Time deposits | 10,017 | 7,990 | 18,007 | 11,600 | 431 | 12,031 | |||||||||||||||||
Total interest bearing deposits | 22,707 | 28,453 | 51,160 | 22,109 | 6,513 | 28,622 | |||||||||||||||||
FHLB advances | 779 | 13,444 | 14,223 | 11,151 | (3,706 | ) | 7,445 | ||||||||||||||||
Notes and other borrowings | (28 | ) | — | (28 | ) | 18,184 | (582 | ) | 17,602 | ||||||||||||||
Total interest expense | 23,458 | 41,897 | 65,355 | 51,444 | 2,225 | 53,669 | |||||||||||||||||
Increase (decrease) in net interest income | $ | 110,866 | $ | (22,391 | ) | $ | 88,475 | $ | 169,475 | $ | (31,186 | ) | $ | 138,289 | |||||||||
Year ended December 31, 2017 compared to year ended December 31, 2016
Net interest income, calculated on a tax-equivalent basis, was $992.7 million for the year ended December 31, 2017 compared to $904.2 million for the year ended December 31, 2016, an increase of $88.5 million. The increase in net interest income was comprised of an increase in tax-equivalent interest income of $153.8 million, offset by an increase in interest expense of $65.4 million.
The increase in tax-equivalent interest income was comprised primarily of a $111.8 million increase in interest income from loans and a $40.0 million increase in interest income from investment securities.
Increased interest income from loans was attributable to a $2.0 billion increase in the average balance and a 0.04% increase in the tax-equivalent yield to 5.15% for the year ended December 31, 2017 from 5.11% for the year ended December 31, 2016. Offsetting factors contributing to the increase in the yield on loans included:
• | The tax-equivalent yield on non-covered loans increased to 3.75% for the year ended December 31, 2017 from 3.58% for the year ended December 31, 2016. The most significant factor contributing to the increased yield on non-covered loans was increases in market interest rates. |
• | Interest income on covered loans totaled $300.5 million and $301.6 million for the year ended December 31, 2017 and 2016, respectively. The tax-equivalent yield on those loans increased to 55.22% for the year ended December 31, 2017 from 41.82% for the year ended December 31, 2016, reflecting improvements in expected cash flows for ACI loans, as well as an increase in higher-yielding pools as a percent of total covered loans. The increase in yield largely offset the impact of the decline in the average balance of covered loans outstanding. |
• | The impact on the overall yield on loans of increased yields on both covered and non-covered loans considered individually was largely offset by the continued increase in lower-yielding non-covered loans as a percentage of the portfolio. Non-covered loans represented 97.3% of the average balance of loans outstanding for the year ended December 31, 2017 compared to 96.0% for the year ended December 31, 2016. |
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The average balance of investment securities increased by $1.0 billion for the year ended December 31, 2017 from the year ended December 31, 2016 while the tax-equivalent yield increased to 3.02% from 2.84%. The increase in tax-equivalent yield primarily reflects resetting of coupon rates on floating-rate securities. The tax-equivalent yield was reduced by 5 basis points in 2017 as a result of a retrospective adjustment to the amortization of premiums on SBA securities.
The components of the increase in interest expense for the year ended December 31, 2017 as compared to the year ended December 31, 2016 were a $51.2 million increase in interest expense on deposits and a $14.2 million increase in interest expense on FHLB advances.
The increase in interest expense on deposits was attributable to an increase of $2.3 billion in average interest bearing deposits and an increase in the average cost of interest bearing deposits of 0.19% to 0.98% for the year ended December 31, 2017 from 0.79% for the year ended December 31, 2016. These cost increases were generally driven by the growth of deposits in competitive markets and a rising short-term interest rate environment.
The increase in interest expense on FHLB advances was primarily a result of an increase in the average cost of advances of 0.28% to 1.27% for the year ended December 31, 2017 from 0.99% for the year ended December 31, 2016. The increased cost was driven by increased market rates and, to a lesser extent, an extension of maturities through interest rate swaps.
The net interest margin, calculated on a tax-equivalent basis, for the year ended December 31, 2017 was 3.65% as compared to 3.73% for the year ended December 31, 2016. The interest rate spread decreased to 3.46% for the year ended December 31, 2017 from 3.58% for the year ended December 31, 2016. The declines in net interest margin and interest rate spread resulted primarily from the cost of interest-bearing liabilities increasing by more than the yield on interest earning assets. This difference was driven primarily by the decline in covered loans as a percentage of total loans. Future trends in the net interest margin will be impacted by changes in market interest rates, including changes in the shape of the yield curve, by the mix of interest earning assets, including the decline in covered loans as a percentage of total loans, and by the Company's ability to manage the cost of funds while growing deposits in competitive markets.
Year ended December 31, 2016 compared to year ended December 31, 2015
Net interest income, calculated on a tax-equivalent basis, was $904.2 million for the year ended December 31, 2016 compared to $765.9 million for the year ended December 31, 2015, an increase of $138.3 million. The increase in net interest income was comprised of an increase in tax-equivalent interest income of $192.0 million, offset by an increase in interest expense of $53.7 million.
The increase in tax-equivalent interest income was comprised primarily of a $149.7 million increase in interest income from loans and a $40.2 million increase in interest income from investment securities.
Increased interest income from loans was attributable to a $3.7 billion increase in the average balance outstanding partially offset by a 0.29% decrease in the tax-equivalent yield to 5.11% for the year ended December 31, 2016 from 5.40% for the year ended December 31, 2015. Offsetting factors contributing to the overall decline in the yield on loans included:
• | Non-covered loans originated at lower market rates of interest comprised a greater percentage of the portfolio for the year ended December 31, 2016 than for 2015. Non-covered loans represented 96.0% of the average balance of loans outstanding for the year ended December 31, 2016 compared to 93.5% for the year ended December 31, 2015. |
• | The tax-equivalent yield on non-covered loans remained unchanged at 3.58% for the years ended December 31, 2016 and 2015. |
• | Interest income on covered loans totaled $301.6 million and $291.7 million for the years ended December 31, 2016 and 2015, respectively. The tax-equivalent yield on those loans increased to 41.82% for the year ended December 31, 2016 from 31.57% for the year ended December 31, 2015. |
The average balance of investment securities increased by $1.0 billion for the year ended December 31, 2016 from the year ended December 31, 2015 while the tax-equivalent yield increased to 2.84% for the year ended December 31, 2016 from 2.59% for the year ended December 31, 2015. The increase in tax-equivalent yield reflects (i) changes in portfolio composition, including growth in the municipal portfolio, (ii) resetting of rates on floating-rate securities and (iii) net purchases of securities at wider spreads.
The components of the increase in interest expense for the year ended December 31, 2016 as compared to the year ended December 31, 2015 were a $28.6 million increase in interest expense on deposits, a $7.4 million increase in interest expense on FHLB advances and a $17.6 million increase in interest expense on notes and other borrowings, reflecting the issuance of $400 million in senior notes in November 2015.
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The most significant factor contributing to the increase in interest expense on deposits was an increase of $2.7 billion in average interest bearing deposits. The average cost of interest bearing deposits increased by 0.05% to 0.79% for the year ended December 31, 2016 from 0.74% for the year ended December 31, 2015, generally driven by growth of deposits in competitive markets.
The increase in interest expense on FHLB advances was driven by an increase in the average balance of $1.1 billion, partially offset by a decrease in the average rate paid on these borrowings. The average rate paid on FHLB advances decreased by 0.10% to 0.99% for the year ended December 31, 2016 from 1.09% for the year ended December 31, 2015, primarily driven by a contraction in maturities.
The net interest margin, calculated on a tax-equivalent basis, for the year ended December 31, 2016 was 3.73% as compared to 3.94% for the year ended December 31, 2015. The interest rate spread decreased to 3.58% for the year ended December 31, 2016 from 3.80% for the year ended December 31, 2015. The declines in net interest margin and interest rate spread resulted primarily from lower yields on loans and the cost of the senior notes, as discussed above.
Provision for Loan Losses
The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the ALLL at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date and that, in management’s judgment, is appropriate under GAAP. The determination of the amount of the ALLL is complex and involves a high degree of judgment and subjectivity. Our determination of the amount of the allowance and corresponding provision for loan losses considers ongoing evaluations of the credit quality of and level of credit risk inherent in various segments of the loan portfolio and of individually significant credits, levels of non-performing loans and charge-offs, historical and statistical trends and economic and other relevant factors. See “Analysis of the Allowance for Loan and Lease Losses” below for more information about how we determine the appropriate level of the allowance.
For the years ended December 31, 2017, 2016 and 2015, we recorded provisions for loan losses of $67.4 million, $52.6 million and $42.1 million, respectively, related to non-covered loans. The amount of the provision is impacted by loan growth, portfolio mix, historical loss rates, the level of charge-offs and specific reserves for impaired loans, and management's evaluation of qualitative factors in the determination of general reserves.
The increase in the provision for loan losses related to non-covered loans for the year ended December 31, 2017 compared to 2016 included an increase of $46.3 million in the provision related to taxi medallion loans. The provision related to taxi medallion loans totaled $58.2 million for the year ended December 31, 2017 compared to $11.9 million for the year ended December 31, 2016. The increased provision related to taxi medallion loans was partially offset by (i) decreases in quantitative and qualitative loss factors, (ii) the impact of lower loan growth and (iii) a decrease in provisions for classified and specifically reserved loans.
The most significant factors contributing to the increase in the provision for loan losses related to non-covered loans for the year ended December 31, 2016 compared to 2015 were (i) an increase in the provision related to taxi medallion loans, (ii) an increase in the provision related to impaired loans in other portfolio segments and (iii) an increase in the relative impact on the provision of changes in quantitative and qualitative loss factors, partially offset by the impact of lower loan growth in 2016.
The provision for loan losses related to covered loans was not material for any period presented.
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Non-Interest Income
The following table presents a comparison of the categories of non-interest income for the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | 2016 | 2015 | ||||||||||
Non-interest income related to the covered assets | $ | 24,262 | $ | 5,026 | $ | 23,415 | ||||||
Service charges and fees | 20,864 | 19,463 | 17,876 | |||||||||
Gain on sale of non-covered loans | 10,183 | 10,064 | 5,704 | |||||||||
Gain on investment securities available for sale, net | 33,466 | 14,461 | 8,480 | |||||||||
Lease financing | 53,837 | 44,738 | 35,641 | |||||||||
Other non-interest income | 15,292 | 12,665 | 11,108 | |||||||||
$ | 157,904 | $ | 106,417 | $ | 102,224 | |||||||
Refer to the section titled "Impact of the Covered Loans, the FDIC Indemnification Asset and the Loss Sharing Agreements" below for further information about non-interest income related to the covered assets.
Year over year increases in services charges and fees correspond to the growth in deposits and loans.
Gains on sale of non-covered loans for the years ended December 31, 2017, 2016 and 2015 related primarily to sales of the guaranteed portions of SBA loans by SBF, which was acquired on May 1, 2015.
Gain on investment securities available for sale, net for the year ended December 31, 2017 primarily reflected gains from the sale of securities formerly covered under the Commercial Shared-Loss Agreement, which were originally acquired at significant discounts in the FSB Acquisition. Other gains on investment securities available for sale related to sales of securities in the normal course of managing liquidity, portfolio duration and yield.
Year over year increases in income from lease financing generally corresponded to the growth in the portfolio of equipment under operating lease.
Non-Interest Expense
The following table presents the components of non-interest expense for the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | 2016 | 2015 | |||||||||
Employee compensation and benefits | $ | 237,824 | $ | 223,011 | $ | 210,104 | |||||
Occupancy and equipment | 75,386 | 76,003 | 76,024 | ||||||||
Amortization of FDIC indemnification asset | 176,466 | 160,091 | 109,411 | ||||||||
Deposit insurance expense | 22,011 | 17,806 | 14,257 | ||||||||
Professional fees | 23,676 | 14,249 | 14,185 | ||||||||
Telecommunications and data processing | 13,966 | 14,343 | 13,613 | ||||||||
Depreciation of equipment under operating lease | 35,015 | 31,580 | 18,369 | ||||||||
Other non-interest expense | 50,624 | 53,364 | 50,709 | ||||||||
$ | 634,968 | $ | 590,447 | $ | 506,672 | ||||||
Non-interest expense as a percentage of average assets was 2.2%, 2.3% and 2.4% for the years ended December 31, 2017, 2016 and 2015, respectively. Excluding amortization of the FDIC indemnification asset, non-interest expense as a percentage of average assets was 1.6%, 1.7% and 1.9% for the years ended December 31, 2017, 2016 and 2015, respectively. The more significant changes in the components of non-interest expense are discussed below.
Employee compensation and benefits
As is typical for financial institutions, employee compensation and benefits represents the single largest component of recurring non-interest expense. Employee compensation and benefits for the year ended December 31, 2017 increased by $14.8 million compared to the year ended December 31, 2016. The increase for the year ended December 31, 2017 primarily reflected
40
increased headcount in support of growth and general increases in compensation levels. Employee compensation and benefits for the year ended December 31, 2016 increased $12.9 million compared to the year ended December 31, 2015. This increase reflected general increases in salaries and the cost of benefits as well as changes in the composition of the employee base.
Amortization of FDIC indemnification asset
See the section titled "Impact of Covered Loans, the FDIC Indemnification Asset and the Loss Sharing Agreements" below for more information about amortization of the FDIC indemnification asset.
Deposit insurance expense
Deposit insurance expense totaled $22.0 million, $17.8 million and $14.3 million respectively, for the years ended December 31, 2017, 2016 and 2015. These increases primarily reflected the growth of the balance sheet, the large bank surcharge imposed by the FDIC, which began in the third quarter of 2016, and increases in certain components of the Bank's assessment rate.
Professional fees
Professional fees increased by $9.4 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016, primarily due to $6.8 million in accounting and advisory fees related to the discrete income tax benefit recognized in 2017.
Depreciation of equipment under operating lease
Depreciation of equipment under operating lease increased by $3.4 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016 and by $13.2 million for the year ended December 31, 2016 compared with the year ended December 31, 2015. These increases generally corresponded to the growth in the portfolio of equipment under operating lease. Depreciation of equipment under operating lease for the year ended December 31, 2016 also included impairment of $4.1 million related to a group of tank cars impacted by new safety regulations.
Other non-interest expense
The most significant components of other non-interest expense are advertising and promotion, costs related to lending activities and deposit generation, OREO and foreclosure related expenses, insurance, travel and general office expense.
Impact of the Covered Loans, FDIC Indemnification Asset and the Loss Sharing Agreements
The accounting for covered loans, the indemnification asset and the provisions of the Loss Sharing Agreements impact our financial condition and results of operations. The more significant ways in which our financial statements are impacted are:
• | Interest income and the net interest margin reflect the impact of accretion related to the covered loans; |
• | Non-interest expense includes the effect of amortization of the FDIC indemnification asset; |
• | The Residential Shared-Loss Agreement affords the Company significant protection against future credit losses related to covered assets. The impact of any provision for loan losses related to the covered loans, losses related to covered OREO and expenses related to resolution of covered assets is significantly mitigated by loss sharing with the FDIC; |
• | Under the acquisition method of accounting, the assets acquired and liabilities assumed in the FSB Acquisition were initially recorded on the consolidated balance sheet at their estimated fair values as of the acquisition date. The carrying amounts of covered loans and the FDIC indemnification asset continue to be impacted by acquisition accounting adjustments. The carrying amount of covered loans, particularly ACI loans, is materially less than their UPB. Additionally, no ALLL was recorded with respect to acquired loans at the FSB Acquisition date; |
• | Non-interest income includes gains and losses associated with the resolution of covered assets and the related effect of indemnification under the terms of the Single Family Shared-Loss Agreement. The impact of gains or losses related to transactions in covered assets is significantly mitigated by FDIC indemnification; and |
• | ACI loans that are contractually delinquent may not be reflected as non-accrual loans or non-performing assets due to the accounting treatment accorded such loans under ASC section 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality." |
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The following table summarizes the net impact on pre-tax earnings of transactions in the covered assets for the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | 2016 | 2015 | ||||||||||
Interest income on covered loans | $ | 300,540 | $ | 301,614 | $ | 291,717 | ||||||
Amortization of FDIC indemnification asset | (176,466 | ) | (160,091 | ) | (109,411 | ) | ||||||
124,074 | 141,523 | 182,306 | ||||||||||
Income from resolution of covered assets, net | 27,450 | 36,155 | 50,658 | |||||||||
Gain (loss) on sale of covered loans, net | 17,406 | (14,470 | ) | 34,929 | ||||||||
Net loss on FDIC indemnification | (22,220 | ) | (17,759 | ) | (65,942 | ) | ||||||
Other, net | 1,058 | (4,215 | ) | 2,824 | ||||||||
23,694 | (289 | ) | 22,469 | |||||||||
Net impact on pre-tax earnings of transactions in the covered assets | $ | 147,768 | $ | 141,234 | $ | 204,775 | ||||||
Combined yield on covered loans and indemnification asset (1) | 12.98 | % | 10.42 | % | 10.20 | % | ||||||
(1) | The combined yield on the covered loans and the FDIC indemnification asset presented above is calculated as the interest income on the covered loans, net of the amortization of the FDIC indemnification asset, divided by the average combined balance of the covered loans and FDIC indemnification asset. |
Interest income on covered loans and amortization of the FDIC indemnification asset
The yield on covered loans increased to 55.22% for the year ended December 31, 2017 from 41.82% and 31.57% for the years ended December 31, 2016 and 2015, respectively. See "Net Interest Income" above for further discussion of trends in interest income and yields on the covered loan portfolio.
The FDIC indemnification asset was initially recorded at its estimated fair value at the date of the FSB Acquisition, representing the present value of estimated future cash payments from the FDIC for probable losses on covered assets. As projected cash flows from the ACI loans have improved, the yield on the loans has increased accordingly and the estimated future cash payments from the FDIC have decreased. This change in estimated cash flows from the FDIC is recognized prospectively, consistent with the recognition of the estimated increased cash flows from the ACI loans. As a result, the FDIC indemnification asset is being amortized to the amount of the estimated future cash payments from the FDIC. The average rate at which the FDIC indemnification asset was amortized increased to 42.90% for the year ended December 31, 2017 from 25.14% and 12.68% for the years ended December 31, 2016 and 2015, respectively, corresponding to the increases in the yield on covered loans.
The yield on covered loans will continue to increase if estimated cash flows from the ACI loans continue to improve; correspondingly, the rate of amortization on the FDIC indemnification asset will continue to increase if estimated future cash payments from the FDIC decrease. The amount of amortization is impacted by both the change in the amortization rate and the decrease in the average balance of the indemnification asset. As we continue to submit claims under the Residential Shared-Loss Agreement and recognize periodic amortization, the balance of the indemnification asset will continue to decline. See Note 6 to the consolidated financial statements for a rollforward of the FDIC indemnification asset for the years ended December 31, 2017, 2016 and 2015.
The following table presents the carrying value of the FDIC indemnification asset, expected future amortization of the asset, and the estimated future cash flows from the FDIC at December 31, 2017 and 2016 (in thousands):
2017 | 2016 | ||||||
FDIC indemnification asset | $ | 295,635 | $ | 515,933 | |||
Less expected amortization | (140,830 | ) | (245,350 | ) | |||
Amount expected to be collected from the FDIC | $ | 154,805 | $ | 270,583 | |||
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The amount of expected amortization will be amortized to non-interest expense using the effective interest method over the period during which cash flows from the FDIC are expected to be collected, which is limited to the lesser of the contractual term of the Single Family Shared-Loss Agreement and the expected remaining life of the indemnified assets.
The table below presents, at December 31, 2017, estimated future accretion on covered loans and estimated future amortization of the FDIC indemnification asset, through the expected termination date of the Single Family Shared-Loss Agreement (in thousands):
Future estimated accretion on covered loans | $ | 444,976 | |
Future estimated amortization of the indemnification asset | (140,830 | ) | |
Net estimated cumulative impact on future pre-tax earnings | $ | 304,146 | |
These amounts are based on current estimates of expected future cash flows from the covered loans and the FDIC; actual results may differ from these estimates. We are currently forecasting the sale of substantially all of the then remaining covered assets in 2019, consistent with the expected termination date of the Single Family Shared-Loss Agreement. Concurrently, we expect the balance of the FDIC indemnification asset to decline to zero.
Non-interest income related to the covered assets
The most significant components of non-interest income related to the covered assets are Income from resolution of covered assets, Gain (loss) on sale of covered loans and the related Loss on indemnification asset.
Covered loans may be resolved through prepayment, short sale of the underlying collateral, foreclosure, sale of the loans or charge-off. For loans resolved through prepayment, short sale or foreclosure, the difference between consideration received in resolution of the loans and the allocated carrying value of the loans is recorded in the consolidated statement of income line item “Income from resolution of covered assets, net.” Both gains and losses on individual resolutions are included in this line item. For loans resolved through sale of the loans, the difference between consideration received and the allocated carrying value of the loans is recorded in the consolidated statement of income line item "Gain (loss) on sale of loans, net. Losses from the resolution of covered loans increase the amount recoverable from the FDIC under the Single-Family Shared Loss Agreement. Gains from the resolution of covered loans reduce the amount recoverable from the FDIC under the Single-Family Shared Loss Agreement. These additions to or reductions in amounts recoverable from the FDIC related to the resolution of covered loans are recorded in non-interest income in the line item “Net loss on FDIC indemnification” and reflected as corresponding increases or decreases in the FDIC indemnification asset. The amount of income or loss recorded in any period will be impacted by the amount of covered loans resolved, the amount of consideration received, and our ability to accurately project cash flows from ACI loans in future periods.
For each of the years ended December 31, 2017, 2016 and 2015, the substantial majority of Income from resolution of covered assets, net, resulted from payments in full. The year over year decreases in Income from resolution of covered assets, net reflected decreases in both the number of resolutions and the average income per resolution.
As explained further in the section entitled "The FSB Acquisition" under Item 1, the Bank may sell up to approximately $280 million of covered loans on an annual basis without the prior consent of the FDIC. Any losses incurred, as defined, from such loan sales are covered under the Single Family Shared-Loss Agreement.
The following table summarizes the gain (loss) recorded on the sale of covered residential loans and the impact of related FDIC indemnification for the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | 2016 | 2015 | |||||||||
Net gain (loss) on sale of covered loans | $ | 17,406 | $ | (14,470 | ) | $ | 34,929 | ||||
Net gain (loss) on FDIC indemnification | (1,514 | ) | 11,615 | (28,051 | ) | ||||||
Net impact on pre-tax earnings | $ | 15,892 | $ | (2,855 | ) | $ | 6,878 | ||||
Pricing received on the sale of covered loans may vary based on (i) market conditions, including the interest rate environment, the amount of capital seeking investment and the secondary supply of loans with a particular performance history or collateral type, (ii) the type and quality of collateral, (iii) the performance history of loans included in the sale and (iv) whether or not the loans have been modified. We anticipate that we will continue to exercise our right to sell covered residential loans on a quarterly basis in the future.
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We sold substantially all of the remaining covered home equity loans and lines of credit, including the entire pool of ACI loans in 2017. The net loss on FDIC indemnification related to covered loan sales for the year ended December 31, 2017 did not bear the 80% relationship to the net gain on sale that might generally be expected. This was primarily attributed to the amount of accretable discount included in the carrying value of the pool of ACI loans sold. Our cash flow forecast had not previously reflected the sale of the entire pool in 2017.
Other items of non-interest income and expense related to the covered assets
Other items of non-interest income and expense related to the covered assets, comprising the line item "Other, net" in the table above presenting the impact on pre-tax earnings of transactions in the covered assets, include the provision for (recovery of) covered loan losses; foreclosure expenses related to covered assets; gains, losses and other expenses related to covered OREO; FDIC reimbursement of certain expenses related to resolution of covered assets, and modification incentives. None of these items had a material impact on results of operations for any period presented.
Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2017, 2016 and 2015 was $(209.8) million, $109.7 million and $45.2 million, respectively. The Company's effective tax rate was (51.9)%, 32.7% and 15.2% for the years ended December 31, 2017, 2016 and 2015 respectively.
The effective income tax rate for the year ended December 31, 2017 reflected a discrete income tax benefit of $327.9 million related to a matter that arose during an ongoing audit of the Company's 2013 federal income tax return. During that audit, the Company asserted that U.S. federal income taxes paid in respect of certain income previously reported by the Company for its 2012, 2013 and 2014 tax years related to the basis assigned to certain loans acquired in the FSB Acquisition should be refunded to the Company, in light of guidance issued after the relevant returns had been filed (including Treasury Regulations finalized in October 2017 clarifying and modifying the tax treatment of such acquired loans). The IRS issued a Field Attorney's Advice ("FAA") in the fourth quarter of 2017 agreeing with the Company's position. The discrete income tax benefit recognized includes expected refunds of federal income tax of $295 million, as well as estimated interest on the federal refund and estimated refunds from certain state and local taxing jurisdictions. After receipt of the FAA, the Company determined that the requirements for accounting recognition of the benefit had been met. Although the Company expects to receive the federal tax refund following completion of the audit, the IRS has not yet closed out the audit, provided the Company with a notice of proposed adjustment or revenue agent report and the refund claims are subject to review by the Joint Committee on Taxation. The Company is continuing to evaluate whether it has claims in other state jurisdictions and whether it may have any claims for federal or state income taxes relating to tax years prior to 2012. The Company has not yet determined when or to what extent it may have any claims relating to such other state and local taxing jurisdictions or in respect of prior tax years.
The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017, reducing the statutory corporate federal income tax rate from 35 percent to 21 percent, effective January 1, 2018. The impact of the rate change on deferred tax assets and liabilities existing at the date of enactment was recognized in earnings during the quarter ended December 31, 2017, resulting in a tax benefit of $3.7 million. The decrease in the corporate income tax rate is currently expected to reduce the Company's effective tax rate to a range of approximately 23% to 24%.
The effective income tax rate for the year ended December 31, 2015 reflected a discrete income tax benefit of $49.3 million related to additional tax basis recognized with respect to certain assets.
Excluding the impact of the discrete income tax benefits discussed above and the impact of enactment of the Tax Cuts and Jobs Act of 2017, the effective income tax rate was 30.1%, 32.7% and 31.8% for the years ended December 31, 2017, 2016 and 2015, respectively. Significant components included in the reconciliation of the Company's adjusted effective income tax rate to the statutory federal tax rate of 35.0% included the impact of income not subject to federal tax, partially offset by the effect of state income taxes, for each of the years presented. In addition, the effective income tax rate for the year ended December 31, 2017 reflected the impact of $3.7 million in excess tax benefits resulting from activity related to vesting of share-based awards and exercise of stock options and the effective tax rate for the year ended December 31, 2015 reflected the release of $6.2 million of reserves for uncertain tax liabilities due to the lapse of the statute of limitations related thereto.
For more information about income taxes, see Note 11 to the consolidated financial statements.
Analysis of Financial Condition
Average interest-earning assets increased $3.0 billion to $27.2 billion for the year ended December 31, 2017 from $24.2 billion for the year ended December 31, 2016. This increase was driven by a $2.0 billion increase in the average balance of outstanding loans and a $1.0 billion increase in the average balance of investment securities. The increase in average loans reflected growth of $2.2 billion in average non-covered loans outstanding, partially offset by a $177 million decrease in the
44
average balance of covered loans. The $165 million decrease in average non-interest earning assets period over period primarily reflected a decrease in the FDIC indemnification asset. Growth in interest earning assets, resolution of covered loans and declines in the amount of the FDIC indemnification asset are trends that are expected to continue.
Average interest bearing liabilities increased $2.4 billion to $22.7 billion for the year ended December 31, 2017 from $20.3 billion for the year ended December 31, 2016, due to increases of $2.3 billion in average interest bearing deposits and $68 million in average FHLB advances. Average non-interest bearing deposits increased by $101 million. We expect growth in average deposits to continue, corresponding to anticipated growth in interest earning assets.
Average stockholders' equity increased by $287 million, due primarily to the retention of earnings, including the discrete income tax benefit recorded during the fourth quarter of 2017, but also reflecting proceeds from the exercise of stock options.
Investment Securities Available for Sale
The following table shows the amortized cost and fair value of investment securities available for sale at December 31, 2017, 2016 and 2015 (in thousands):
2017 | 2016 | 2015 | |||||||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
U.S. Treasury securities | $ | 24,981 | $ | 24,953 | $ | 4,999 | $ | 5,005 | $ | 4,997 | $ | 4,997 | |||||||||||
U.S. Government agency and sponsored enterprise residential MBS | 2,043,373 | 2,058,027 | 1,513,028 | 1,527,242 | 1,167,197 | 1,178,318 | |||||||||||||||||
U.S. Government agency and sponsored enterprise commercial MBS | 233,522 | 234,508 | 126,754 | 124,586 | 95,997 | 96,814 | |||||||||||||||||
Re-Remics | — | — | — | — | 88,658 | 89,691 | |||||||||||||||||
Private label residential MBS and CMOs | 613,732 | 628,247 | 334,167 | 375,098 | 502,723 | 544,612 | |||||||||||||||||
Private label commercial MBS | 1,033,022 | 1,046,415 | 1,180,386 | 1,187,624 | 1,219,355 | 1,218,740 | |||||||||||||||||
Single family rental real estate-backed securities | 559,741 | 562,706 | 858,339 | 861,251 | 646,156 | 636,705 | |||||||||||||||||
Collateralized loan obligations | 720,429 | 723,681 | 487,678 | 487,296 | 309,615 | 306,877 | |||||||||||||||||
Non-mortgage asset-backed securities | 119,939 | 121,747 | 187,660 | 186,736 | 54,981 | 56,500 | |||||||||||||||||
Preferred stocks | 59,912 | 63,543 | 76,180 | 88,203 | 75,742 | 83,209 | |||||||||||||||||
State and municipal obligations | 640,511 | 657,203 | 705,884 | 698,546 | 351,456 | 361,753 | |||||||||||||||||
SBA securities | 534,534 | 550,682 | 517,129 | 523,906 | 270,553 | 273,336 | |||||||||||||||||
Other debt securities | 4,090 | 9,120 | 3,999 | 8,091 | 3,854 | 7,987 | |||||||||||||||||
$ | 6,587,786 | $ | 6,680,832 | $ | 5,996,203 | $ | 6,073,584 | $ | 4,791,284 | $ | 4,859,539 | ||||||||||||
Our investment strategy has focused on insuring adequate liquidity, adding a suitable balance of high credit quality, diversifying assets to the consolidated balance sheet, 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, SBA securities and U.S. Government agency MBS. Investment grade municipal securities provide liquidity along with higher tax-equivalent yields at longer durations than the portfolio in general. We have also invested in highly rated structured products that, while somewhat less liquid, provide us with attractive yields. Relatively short effective portfolio duration helps mitigate interest rate risk. The weighted average expected life of the investment portfolio as of December 31, 2017 was 4.9 years and the effective duration was 1.7 years. A summary of activity in the investment securities available for sale portfolio for the year ended December 31, 2017 follows (in thousands):
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Balance, beginning of period | $ | 6,073,584 | |
Purchases | 3,131,798 | ||
Repayments, maturities and calls | (1,268,588 | ) | |
Sales | (1,254,125 | ) | |
Amortization of discounts and premiums, net | (17,502 | ) | |
Change in unrealized gains | 15,665 | ||
Balance, end of period | $ | 6,680,832 | |
The following table shows the scheduled maturities, carrying values and current yields for investment securities available for sale as of December 31, 2017. Scheduled maturities have been adjusted for anticipated prepayments of MBS and other pass through securities. 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 | $ | 24,953 | 1.19 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 24,953 | 1.19 | % | ||||||||||||||
U.S. Government agency and sponsored enterprise residential MBS | 334,030 | 2.87 | % | 783,512 | 2.24 | % | 775,878 | 2.09 | % | 164,607 | 2.07 | % | 2,058,027 | 2.27 | % | |||||||||||||||||||
U.S. Government agency and sponsored enterprise commercial MBS | 11,657 | 3.22 | % | 16,812 | 3.03 | % | 94,694 | 2.42 | % | 111,345 | 2.78 | % | 234,508 | 2.67 | % | |||||||||||||||||||
Private label residential MBS and CMOs | 119,381 | 3.84 | % | 344,386 | 3.63 | % | 136,061 | 3.63 | % | 28,419 | 4.01 | % | 628,247 | 3.69 | % | |||||||||||||||||||
Private label commercial MBS | 71,241 | 3.93 | % | 748,263 | 3.63 | % | 223,486 | 3.36 | % | 3,425 | 3.48 | % | 1,046,415 | 3.59 | % | |||||||||||||||||||
Single family rental real estate-backed securities | 1,969 | 3.13 | % | 525,865 | 3.07 | % | 34,872 | 3.26 | % | — | — | % | 562,706 | 3.08 | % | |||||||||||||||||||
Collateralized loan obligations | 3,250 | 3.34 | % | 447,245 | 3.39 | % | 273,186 | 3.12 | % | — | — | % | 723,681 | 3.29 | % | |||||||||||||||||||
Non-mortgage asset-backed securities | 11,850 | 4.04 | % | 91,353 | 3.43 | % | 17,370 | 2.84 | % | 1,174 | 2.81 | % | 121,747 | 3.40 | % | |||||||||||||||||||
State and municipal obligations | — | — | % | 27,232 | 2.47 | % | 575,045 | 3.66 | % | 54,926 | 4.29 | % | 657,203 | 3.66 | % | |||||||||||||||||||
SBA securities | 95,960 | 2.51 | % | 247,489 | 2.43 | % | 131,656 | 2.38 | % | 75,577 | 2.32 | % | 550,682 | 2.42 | % | |||||||||||||||||||
Other debt securities | — | — | % | — | — | % | 1,883 | 9.25 | % | 7,237 | 9.68 | % | 9,120 | 9.56 | % | |||||||||||||||||||
$ | 674,291 | 3.07 | % | $ | 3,232,157 | 3.06 | % | $ | 2,264,131 | 2.88 | % | $ | 446,710 | 2.75 | % | 6,617,289 | 2.98 | % | ||||||||||||||||
Preferred stocks with no scheduled maturity | 63,543 | 7.55 | % | |||||||||||||||||||||||||||||||
Total investment securities available for sale | $ | 6,680,832 | 3.02 | % | ||||||||||||||||||||||||||||||
The available for sale investment securities portfolio was in a net unrealized gain position of $93.0 million at December 31, 2017 with aggregate fair value equal to 101.4% of amortized cost. Net unrealized gains included $98.9 million of gross unrealized gains and $5.9 million of gross unrealized losses. Investment securities available for sale in an unrealized loss position at December 31, 2017 had an aggregate fair value of $1.2 billion. At December 31, 2017, 96.7% of investment securities available for sale were backed by the U.S. Government, U.S. Government agencies or sponsored enterprises or were rated AAA , AA or A, based on the most recent third-party ratings. Investment securities available for sale totaling $21 million were rated below investment grade or not rated at December 31, 2017, all of which were acquired in the FSB Acquisition and substantially all of which were in unrealized gain positions at December 31, 2017.
We evaluate the credit quality of individual securities in the portfolio quarterly to determine whether any of the investments in unrealized loss positions are other-than-temporarily impaired. This evaluation considers, but is not necessarily limited to, the following factors, the relative significance of which varies depending on the circumstances pertinent to each individual security:
• | our intent to hold the security until maturity or for a period of time sufficient for a recovery in value; |
• | whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis; |
• | the length of time and extent to which fair value has been less than amortized cost; |
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• | adverse changes in expected cash flows; |
• | collateral values and performance; |
• | the payment structure of the security, including levels of subordination or over-collateralization; |
• | changes in the economic or regulatory environment; |
• | the general market condition of the geographic area or industry of the issuer; |
• | the issuer’s financial condition, performance and business prospects; and |
• | changes in credit ratings. |
During the year ended December 31, 2016, the Company recognized OTTI in the amount of $463 thousand on two positions in one private label commercial MBS security, which was determined to be other-than-temporarily impaired. This security was sold prior to the end of 2016. No securities were determined to be other-than-temporarily impaired at December 31, 2017 and 2015, or during the years then ended.
We do not intend to sell securities in significant unrealized loss positions at December 31, 2017. 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. The severity of impairment of individual securities in the portfolio is generally not material. Unrealized losses in the portfolio at December 31, 2017 were primarily attributable to an increase in market interest rates subsequent to the date the securities were acquired.
The timely repayment of principal and interest on U.S. Treasury and U.S. Government agency and sponsored enterprise securities in unrealized loss positions is explicitly or implicitly guaranteed by the full faith and credit of the U.S. Government. Management performed projected cash flow analyses of the private label residential MBS and CMOs, and private label commercial MBS in unrealized loss positions, incorporating CUSIP level assumptions consistent with the collateral characteristics of each security including collateral default rate, voluntary prepayment rate, severity and delinquency assumptions. Based on the results of this analysis, no credit losses were projected. Management's analysis of the credit characteristics of individual securities and the underlying collateral and levels of subordination for each of the single family rental real estate-backed securities in unrealized loss positions is not indicative of projected credit losses. Management's analysis of the state and municipal obligations in unrealized loss positions included reviewing the ratings of the securities and the results of credit surveillance performed by an independent third party. Given the expectation of timely repayment of principal and interest and the generally limited severity of impairment, the impairments were considered to be temporary.
For further discussion of our analysis of investment securities for OTTI, see Note 4 to the consolidated financial statements.
We use third-party pricing services to assist us in estimating the fair value of investment securities. We perform a variety of procedures to ensure that we have a thorough understanding of the methodologies and assumptions used by the pricing services including obtaining and reviewing written documentation of the methods and assumptions employed, conducting interviews with valuation desk personnel and reviewing model results and detailed assumptions used to value selected securities as considered necessary. Our classification of prices within the fair value hierarchy is based on an evaluation of the nature of the significant assumptions impacting the valuation of each type of security in the portfolio. We have established a robust price challenge process that includes a review by our treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from our expectations based on recent observed trading activity and other information available in the marketplace that would impact the value of the security is challenged. Responses to the price challenges, which generally include specific information about inputs and assumptions incorporated in the valuation and their sources, are reviewed in detail. If considered necessary to resolve any discrepancies, a price will be obtained from an additional independent valuation specialist. We do not typically adjust the prices provided, other than through this established challenge process. Our primary pricing services utilize observable inputs when available, and employ unobservable inputs and proprietary models only when observable inputs are not available. As a matter of course, the services validate prices by comparison to recent trading activity whenever such activity exists. Quotes obtained from the pricing services are typically non-binding.
We have also established a quarterly price validation process to assess the propriety of the pricing methodologies utilized by our primary pricing services by independently verifying the prices of a sample of securities in the portfolio. Sample sizes vary based on the type of security being priced, with higher sample sizes applied to more difficult to value security types. Verification procedures may consist of obtaining prices from an additional outside source or internal modeling, generally based on Intex. We have established acceptable percentage deviations from the price provided by the initial pricing source. If
47
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 specialist 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 certain preferred stocks are classified within level 1 of the hierarchy. At December 31, 2017 and 2016, 0.9% and 2.1%, respectively, of our investment securities were classified within level 3 of the fair value hierarchy. Securities classified within level 3 of the hierarchy at December 31, 2017 included certain private label residential MBS and trust preferred securities. These securities were classified within level 3 of the hierarchy because proprietary assumptions related to voluntary prepayment rates, default probabilities, loss severities and discount rates were considered significant to the valuation. There were no transfers of investment securities between levels of the fair value hierarchy during the years ended December 31, 2017 and 2016.
For additional discussion of the fair values of investment securities, see Note 16 to the consolidated financial statements.
Loans Held for Sale
Loans held for sale at December 31, 2017 and 2016 included $34 million and $41 million, respectively, of commercial loans originated by SBF with the intent to sell in the secondary market. Commercial loans held for sale are comprised of the portion of loans guaranteed by U.S. government agencies, primarily the SBA. Loans are generally sold with servicing retained. Servicing activity did not have a material impact on the results of operations for the years ended December 31, 2017, 2016 and 2015.
Loans
The loan portfolio comprises the Company’s primary interest-earning asset. The following tables show the composition of the loan portfolio and the breakdown of the portfolio among non-covered loans, covered ACI loans and covered non-ACI loans at December 31 of each of the years indicated (dollars in thousands):
2017 | ||||||||||||||||||
Covered Loans | Percent of Total | |||||||||||||||||
Non-Covered Loans | ACI | Non-ACI | Total | |||||||||||||||
Residential and other consumer: | ||||||||||||||||||
1-4 single family residential | $ | 4,116,814 | $ | 479,068 | $ | 26,837 | $ | 4,622,719 | 21.6 | % | ||||||||
Home equity loans and lines of credit | 1,654 | — | 361 | 2,015 | — | % | ||||||||||||
Other consumer loans | 20,512 | — | — | 20,512 | 0.1 | % | ||||||||||||
4,138,980 | 479,068 | 27,198 | 4,645,246 | 21.7 | % | |||||||||||||
Commercial: | ||||||||||||||||||
Multi-family | 3,215,697 | — | — | 3,215,697 | 15.0 | % | ||||||||||||
Non-owner occupied commercial real estate | 4,485,276 | — | — | 4,485,276 | 21.0 | % | ||||||||||||
Construction and land | 310,999 | — | — | 310,999 | 1.5 | % | ||||||||||||
Owner occupied commercial real estate | 2,014,908 | — | — | 2,014,908 | 9.4 | % | ||||||||||||
Commercial and industrial | 4,145,785 | — | — | 4,145,785 | 19.4 | % | ||||||||||||
Commercial lending subsidiaries | 2,553,576 | — | — | 2,553,576 | 12.0 | % | ||||||||||||
16,726,241 | — | — | 16,726,241 | 78.3 | % | |||||||||||||
Total loans | 20,865,221 | 479,068 | 27,198 | 21,371,487 | 100.0 | % | ||||||||||||
Premiums, discounts and deferred fees and costs, net | 48,165 | — | (3,148 | ) | 45,017 | |||||||||||||
Loans including premiums, discounts and deferred fees and costs | 20,913,386 | 479,068 | 24,050 | 21,416,504 | ||||||||||||||
Allowance for loan and lease losses | (144,537 | ) | — | (258 | ) | (144,795 | ) | |||||||||||
Loans, net | $ | 20,768,849 | $ | 479,068 | $ | 23,792 | $ | 21,271,709 | ||||||||||
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2016 | ||||||||||||||||||
Covered Loans | Percent of Total | |||||||||||||||||
Non-Covered Loans | ACI | Non-ACI | Total | |||||||||||||||
Residential and other consumer: | ||||||||||||||||||
1-4 single family residential | $ | 3,422,425 | $ | 532,348 | $ | 36,675 | $ | 3,991,448 | 20.6 | % | ||||||||
Home equity loans and lines of credit | 1,120 | 3,894 | 47,629 | 52,643 | 0.3 | % | ||||||||||||
Other consumer loans | 24,365 | — | — | 24,365 | 0.1 | % | ||||||||||||
3,447,910 | 536,242 | 84,304 | 4,068,456 | 21.0 | % | |||||||||||||
Commercial: | ||||||||||||||||||
Multi-family | 3,824,973 | — | — | 3,824,973 | 19.8 | % | ||||||||||||
Non-owner occupied commercial real estate | 3,739,235 | — | — | 3,739,235 | 19.3 | % | ||||||||||||
Construction and land | 311,436 | — | — | 311,436 | 1.6 | % | ||||||||||||
Owner occupied commercial real estate | 1,736,858 | — | — | 1,736,858 | 9.0 | % | ||||||||||||
Commercial and industrial | 3,391,614 | — | — | 3,391,614 | 17.5 | % | ||||||||||||
Commercial lending subsidiaries | 2,280,685 | — | — | 2,280,685 | 11.8 | % | ||||||||||||
15,284,801 | — | — | 15,284,801 | 79.0 | % | |||||||||||||
Total loans | 18,732,711 | 536,242 | 84,304 | 19,353,257 | 100.0 | % | ||||||||||||
Premiums, discounts and deferred fees and costs, net | 48,641 | — | (6,504 | ) | 42,137 | |||||||||||||
Loans including premiums, discounts and deferred fees and costs | 18,781,352 | 536,242 | 77,800 | 19,395,394 | ||||||||||||||
Allowance for loan and lease losses | (150,853 | ) | — | (2,100 | ) | (152,953 | ) | |||||||||||
Loans, net | $ | 18,630,499 | $ | 536,242 | $ | 75,700 | $ | 19,242,441 | ||||||||||
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2015 | ||||||||||||||||||
Covered Loans | ||||||||||||||||||
Non-Covered Loans | ACI | Non-ACI | Total | Percent of Total | ||||||||||||||
Residential and other consumer: | ||||||||||||||||||
1-4 single family residential | $ | 2,883,470 | $ | 699,039 | $ | 46,110 | $ | 3,628,619 | 21.9 | % | ||||||||
Home equity loans and lines of credit | 806 | 4,831 | 67,493 | 73,130 | 0.4 | % | ||||||||||||
Other consumer loans | 35,183 | — | — | 35,183 | 0.2 | % | ||||||||||||
2,919,459 | 703,870 | 113,603 | 3,736,932 | 22.5 | % | |||||||||||||
Commercial: | ||||||||||||||||||
Multi-family | 3,472,162 | — | — | 3,472,162 | 20.9 | % | ||||||||||||
Non-owner occupied commercial real estate | 2,910,327 | — | — | 2,910,327 | 17.5 | % | ||||||||||||
Construction and land | 347,676 | — | — | 347,676 | 2.1 | % | ||||||||||||
Owner occupied commercial real estate | 1,354,751 | — | — | 1,354,751 | 8.2 | % | ||||||||||||
Commercial and industrial | 2,770,875 | — | — | 2,770,875 | 16.7 | % | ||||||||||||
Commercial lending subsidiaries | 2,003,984 | — | — | 2,003,984 | 12.1 | % | ||||||||||||
12,859,775 | — | — | 12,859,775 | 77.5 | % | |||||||||||||
Total loans | 15,779,234 | 703,870 | 113,603 | 16,596,707 | 100.0 | % | ||||||||||||
Premiums, discounts and deferred fees and costs, net | 47,829 | — | (7,933 | ) | 39,896 | |||||||||||||
Loans net of premiums, discounts and deferred fees and costs | 15,827,063 | 703,870 | 105,670 | 16,636,603 | ||||||||||||||
Allowance for loan and lease losses | (120,960 | ) | — | (4,868 | ) | (125,828 | ) | |||||||||||
Loans, net | $ | 15,706,103 | $ | 703,870 | $ | 100,802 | $ | 16,510,775 | ||||||||||
2014 | |||||||||||||||||
Covered Loans | |||||||||||||||||
Non-Covered Loans | ACI | Non-ACI | Total | Percent of Total | |||||||||||||
Residential and other consumer: | |||||||||||||||||
1-4 single family residential | $ | 2,486,272 | $ | 874,522 | $ | 56,138 | $ | 3,416,932 | 27.6% | ||||||||
Home equity loans and lines of credit | 1,827 | 22,657 | 101,142 | 125,626 | 1.0% | ||||||||||||
Other consumer loans | 26,307 | — | — | 26,307 | 0.2% | ||||||||||||
2,514,406 | 897,179 | 157,280 | 3,568,865 | 28.8% | |||||||||||||
Commercial: | |||||||||||||||||
Multi-family | 1,952,189 | — | — | 1,952,189 | 15.8% | ||||||||||||
Non-owner occupied commercial real estate | 1,784,079 | — | — | 1,784,079 | 14.4% | ||||||||||||
Construction and land | 169,720 | — | — | 169,720 | 1.4% | ||||||||||||
Owner occupied commercial real estate | 1,043,370 | — | — | 1,043,370 | 8.4% | ||||||||||||
Commercial and industrial | 2,403,293 | — | — | 2,403,293 | 19.4% | ||||||||||||
Commercial lending subsidiaries | 1,456,751 | — | — | 1,456,751 | 11.8% | ||||||||||||
8,809,402 | — | — | 8,809,402 | 71.2% | |||||||||||||
Total loans | 11,323,808 | 897,179 | 157,280 | 12,378,267 | 100.0% | ||||||||||||
Premiums, discounts and deferred fees and costs, net | 47,097 | — | (10,595 | ) | 36,502 | ||||||||||||
Loans net of premiums, discounts and deferred fees and costs | 11,370,905 | 897,179 | 146,685 | 12,414,769 | |||||||||||||
Allowance for loan and lease losses | (91,350 | ) | — | (4,192 | ) | (95,542 | ) | ||||||||||
Loans, net | $ | 11,279,555 | $ | 897,179 | $ | 142,493 | $ | 12,319,227 | |||||||||
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2013 | |||||||||||||||||
Covered Loans | |||||||||||||||||
Non-Covered Loans | ACI | Non-ACI | Total | Percent of Total | |||||||||||||
Residential and other consumer: | |||||||||||||||||
1-4 single family residential | $ | 1,800,332 | $ | 1,057,012 | $ | 70,378 | $ | 2,927,722 | 32.4% | ||||||||
Home equity loans and lines of credit | 1,535 | 39,602 | 127,807 | 168,944 | 1.9% | ||||||||||||
Other consumer loans | 213,107 | 1,679 | — | 214,786 | 2.4% | ||||||||||||
2,014,974 | 1,098,293 | 198,185 | 3,311,452 | 36.7% | |||||||||||||
Commercial: | |||||||||||||||||
Multi-family | 1,105,965 | 33,354 | — | 1,139,319 | 12.6% | ||||||||||||
Non-owner occupied commercial real estate | 947,992 | 93,089 | 52 | 1,041,133 | 11.5% | ||||||||||||
Construction and land | 138,091 | 10,600 | 729 | 149,420 | 1.7% | ||||||||||||
Owner occupied commercial real estate | 718,162 | 49,861 | 689 | 768,712 | 8.5% | ||||||||||||
Commercial and industrial | 1,651,739 | 6,050 | 6,234 | 1,664,023 | 18.5% | ||||||||||||
Commercial lending subsidiaries | 952,050 | — | — | 952,050 | 10.5% | ||||||||||||
5,513,999 | 192,954 | 7,704 | 5,714,657 | 63.3% | |||||||||||||
Total loans | 7,528,973 | 1,291,247 | 205,889 | 9,026,109 | 100.0% | ||||||||||||
Premiums, discounts and deferred fees and costs, net | 40,748 | — | (13,248 | ) | 27,500 | ||||||||||||
Loans net of premiums, discounts and deferred fees and costs | 7,569,721 | 1,291,247 | 192,641 | 9,053,609 | |||||||||||||
Allowance for loan and lease losses | (57,330 | ) | (2,893 | ) | (9,502 | ) | (69,725 | ) | |||||||||
Loans, net | $ | 7,512,391 | $ | 1,288,354 | $ | 183,139 | $ | 8,983,884 | |||||||||
Included in non-covered loans above are $34 million, $47 million, $67 million, $93 million and $15 million at December 31, 2017, 2016, 2015, 2014 and 2013, respectively, of ACI commercial loans acquired in the FSB Acquisition.
Total loans, including premiums, discounts and deferred fees and costs, increased by $2.0 billion to $21.4 billion at December 31, 2017, from $19.4 billion at December 31, 2016. Non-covered loans grew by $2.1 billion while covered loans declined by $111 million from December 31, 2016 to December 31, 2017. Non-covered residential and other consumer loans grew by $700 million and non-covered commercial loans grew by $1.4 billion during the year ended December 31, 2017.
Growth in non-covered loans, including premiums, discounts and deferred fees and costs for the year ended December 31, 2017 reflected an increase of $1.0 billion for the Florida franchise, a decrease of $27 million for the New York franchise and an increase of $1.1 billion for the national platforms. The lack of growth for the New York franchise reflected management's decision to reduce our multi-family concentration in New York. Over the next twelve months, we expect the balance of the New York multi-family portfolio to continue to decline and other major portfolio segments to continue to grow across geographies. Actual results will be dependent on our continual evaluation of relative risk and return and on market and competitive conditions.
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The following tables show the composition of the non-covered loan portfolio and the breakdown among the Florida and New York franchises and national platforms at December 31, 2017 and 2016. Amounts include premiums, discounts and deferred fees and costs (dollars in thousands):
2017 | |||||||||||||||
Florida | New York | National | Total | ||||||||||||
Residential and other consumer | $ | 20,779 | $ | 1,348 | $ | 4,173,953 | $ | 4,196,080 | |||||||
Commercial: | |||||||||||||||
Multi-family | 580,599 | 2,638,354 | — | 3,218,953 | |||||||||||
Non-owner occupied commercial real estate | 2,805,820 | 1,572,884 | 96,097 | 4,474,801 | |||||||||||
Construction and land | 149,658 | 145,702 | 15,124 | 310,484 | |||||||||||
Owner occupied commercial real estate | 1,116,249 | 790,993 | 105,500 | 2,012,742 | |||||||||||
Commercial and industrial | 2,684,524 | 963,886 | 489,417 | 4,137,827 | |||||||||||
Commercial lending subsidiaries | — | — | 2,562,499 | 2,562,499 | |||||||||||
$ | 7,357,629 | $ | 6,113,167 | $ | 7,442,590 | $ | 20,913,386 | ||||||||
35.2 | % | 29.2 | % | 35.6 | % | 100.0 | % | ||||||||
2016 | |||||||||||||||
Florida | New York | National | Total | ||||||||||||
Residential and other consumer: | $ | 24,022 | $ | 1,404 | $ | 3,470,349 | $ | 3,495,775 | |||||||
Commercial: | |||||||||||||||
Multi-family | 520,263 | 3,309,411 | — | 3,829,674 | |||||||||||
Non-owner occupied commercial real estate | 2,337,806 | 1,294,231 | 99,771 | 3,731,808 | |||||||||||
Construction and land | 174,494 | 125,983 | 10,436 | 310,913 | |||||||||||
Owner occupied commercial real estate | 1,042,441 | 602,155 | 91,254 | 1,735,850 | |||||||||||
Commercial and industrial | 2,234,393 | 806,660 | 346,085 | 3,387,138 | |||||||||||
Commercial lending subsidiaries | — | — | 2,290,194 | 2,290,194 | |||||||||||
$ | 6,333,419 | $ | 6,139,844 | $ | 6,308,089 | $ | 18,781,352 | ||||||||
33.7 | % | 32.7 | % | 33.6 | % | 100.0 | % | ||||||||
The increase in non-owner occupied commercial real estate loans and the decrease in multi-family loans in the New York franchise for the year ended December 31, 2017 includes the impact of reclassifying $200 million of loans on mixed-use properties from multi-family to non-owner occupied commercial real estate, based on an updated evaluation of the primary source of rental income on those properties.
Included in multi-family and non-owner occupied commercial real estate loans above at December 31, 2017 were $194 million and $80 million, respectively, in re-positioning loans. These loans, substantially all of which are in New York, provided financing for some level of improvements by the borrower to the underlying collateral to enhance the cash flow generating capacity of the collateral. The primary purpose of these loans was not for construction.
Residential mortgages and other consumer loans
Residential mortgages and other consumer loans totaled $4.6 billion, or 21.7% of total loans, at December 31, 2017 and $4.1 billion, or 21.0% of total loans, at December 31, 2016.
The non-covered 1-4 single family residential loan portfolio is primarily comprised of loans purchased on a national basis through established correspondent channels. The portfolio also includes loans originated through retail channels in our Florida and New York geographic footprint prior to the termination of our retail residential mortgage origination business in early 2016. All non-covered 1-4 single family residential loans are managed together and reported as part of the national platform in the disclosures above. Non-covered 1-4 single family residential mortgage loans are primarily closed-end, first lien jumbo mortgages for the purchase or re-finance of owner occupied property. The loans have terms ranging from 10 to 30 years, with either fixed or adjustable interest rates. At December 31, 2017, $104 million or 2.5% of non-covered residential mortgage loans were interest-only loans, substantially all of which begin amortizing 10 years after origination.
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The following tables present a breakdown of the non-covered and covered 1-4 single family residential mortgage portfolio categorized between fixed rate loans and ARMs at December 31, 2017 and 2016. Amounts are net of premiums, discounts and deferred fees and costs (dollars in thousands):
2017 | ||||||||||||||
Non-Covered Loans | Covered Loans | Total | Percent of Total | |||||||||||
Fixed rate loans | $ | 1,302,323 | $ | 133,052 | $ | 1,435,375 | 30.7 | % | ||||||
ARM Loans | 2,871,630 | 369,705 | 3,241,335 | 69.3 | % | |||||||||
$ | 4,173,953 | $ | 502,757 | $ | 4,676,710 | 100.0 | % | |||||||
2016 | ||||||||||||||
Non-Covered Loans | Covered Loans | Total | Percent of Total | |||||||||||
Fixed rate loans | $ | 1,130,914 | $ | 191,676 | $ | 1,322,590 | 32.8 | % | ||||||
ARM Loans | 2,339,435 | 371,477 | 2,710,912 | 67.2 | % | |||||||||
$ | 3,470,349 | $ | 563,153 | $ | 4,033,502 | 100.0 | % | |||||||
We do not originate or acquire option ARMs, “no-doc” or “reduced-doc” mortgages and do not utilize wholesale mortgage origination channels although the covered loan portfolio contains loans with these characteristics. Included in ARM loans above are payment option ARMs representing 51.2% and 50.2% of total covered ARM loans outstanding as of December 31, 2017 and 2016, respectively, based on UPB. All of the option ARMs are covered loans and the substantial majority are ACI loans. They are all currently amortizing. The Company’s exposure to future losses on these mortgage loans is mitigated by the Single Family Shared-Loss Agreement.
The following charts present the distribution of the non-covered 1-4 single family residential mortgage portfolio by interest rate terms and contractual lives at December 31, 2017 and 2016:
(1) | Fixed-rate loans with contractual terms of 20 years comprise less than 3% of the total at both December 31, 2017 and 2016, and are reported with 15 year fixed above. |
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The geographic concentration of the 1-4 single family residential portfolio is summarized as follows at December 31, 2017 and 2016 (dollars in thousands):
2017 | |||||||||||||||||
Percent of Total | |||||||||||||||||
Non-Covered Loans | Covered Loans | Total | Non-Covered Loans | Total Loans | |||||||||||||
California | $ | 1,094,058 | $ | 23,780 | $ | 1,117,838 | 26.2 | % | 23.9 | % | |||||||
New York | 873,360 | 16,847 | 890,207 | 20.9 | % | 19.0 | % | ||||||||||
Florida | 552,556 | 281,396 | 833,952 | 13.2 | % | 17.8 | % | ||||||||||
Virginia | 181,912 | 22,290 | 204,202 | 4.4 | % | 4.4 | % | ||||||||||
Others (1) | 1,472,067 | 158,444 | 1,630,511 | 35.3 | % | 34.9 | % | ||||||||||
$ | 4,173,953 | $ | 502,757 | $ | 4,676,710 | 100.0 | % | 100.0 | % | ||||||||
2016 | |||||||||||||||||
Percent of Total | |||||||||||||||||
Non-Covered Loans | Covered Loans | Total | Non-Covered Loans | Total Loans | |||||||||||||
California | $ | 904,107 | $ | 37,330 | $ | 941,437 | 26.1 | % | 23.3 | % | |||||||
New York | 763,824 | 16,403 | 780,227 | 22.0 | % | 19.3 | % | ||||||||||
Florida | 487,294 | 300,198 | 787,492 | 14.0 | % | 19.5 | % | ||||||||||
Virginia | 152,113 | 30,818 | 182,931 | 4.4 | % | 4.5 | % | ||||||||||
Others (1) | 1,163,011 | 178,404 | 1,341,415 | 33.5 | % | 33.4 | % | ||||||||||
$ | 3,470,349 | $ | 563,153 | $ | 4,033,502 | 100.0 | % | 100.0 | % | ||||||||
(1) | No other state represented borrowers with more than 4.0% of 1-4 single family residential loans outstanding at December 31, 2017 or 2016. |
Home equity loans and lines of credit are not significant.
Other consumer loans are comprised primarily of consumer installment financing, loans secured by certificates of deposit, unsecured personal lines of credit and demand deposit account overdrafts.
Commercial loans and leases
The commercial portfolio segment includes loans secured by multi-family properties, loans secured by both owner-occupied and non-owner occupied commercial real estate, a limited amount of construction and land loans, commercial and industrial loans and direct financing leases. Management’s loan origination strategy is heavily focused on the commercial portfolio segment, which comprised 80.1% and 81.6% of non-covered loans as of December 31, 2017 and 2016, respectively.
Commercial real estate loans include term loans secured by owner and non-owner occupied income producing properties including rental apartments, mixed-use properties, industrial properties, retail shopping centers, free-standing single-tenant buildings, office buildings, warehouse facilities and hotels as well as real estate secured lines of credit.
The following charts present the distribution of non-owner occupied commercial real estate by product type at December 31, 2017 and 2016:
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The Company’s commercial real estate underwriting standards generally provide for loan terms of five to ten years, with amortization schedules of no more than thirty years. LTV ratios are typically limited to no more than 80%. Owner-occupied commercial real estate loans typically have risk profiles more closely aligned with that of commercial and industrial loans than with other types of commercial real estate loans. Construction and land loans represented only 1.5% of the total loan portfolio at December 31, 2017. Construction and land loans are generally made for projects expected to stabilize within eighteen months of completion in sub-markets with strong fundamentals and, to a lesser extent, for-sale residential projects to experienced developers with a strong cushion between market prices and loan basis. Commercial and industrial loans are typically made to small, middle market and larger corporate businesses and include equipment loans, secured and unsecured working capital facilities, formula-based loans, trade finance, mortgage warehouse lines, taxi medallion loans, SBA product offerings and business acquisition finance credit facilities. These loans may be structured as term loans, typically with maturities of five to ten years, or revolving lines of credit which may have multi-year maturities. The Bank also provides financing to state and local governmental entities within its geographic footprint. Commercial loans include shared national credits totaling $1.6 billion at December 31, 2017, typically relationship based loans to borrowers in Florida and New York.
Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides equipment and franchise financing on a national basis using both loan and lease structures. Pinnacle provides 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 equipment finance division provides primarily transportation equipment financing through a variety of loan and lease structures. The Bank's SBF unit primarily originates SBA guaranteed commercial and commercial real estate loans, generally selling the guaranteed portion in the secondary market and retaining the unguaranteed portion in portfolio. The Bank engages in mortgage warehouse lending on a national basis.
The following table presents the recorded investment in loans and direct finance leases held for investment for each of our national commercial lending platforms at December 31, 2017 and 2016 (in thousands):
2017 | 2016 | ||||||
Pinnacle | $ | 1,524,650 | $ | 1,317,820 | |||
Bridge - franchise finance | 434,582 | 426,661 | |||||
Bridge - transportation equipment finance | 603,267 | 545,713 | |||||
SBF | 246,750 | 225,241 | |||||
Mortgage warehouse lending | 459,388 | 322,305 | |||||
$ | 3,268,637 | $ | 2,837,740 | ||||
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The geographic concentration of the commercial loans and direct financing leases in the national platforms is summarized as follows at December 31, 2017 and 2016. Amounts include premiums, discounts and deferred fees and costs (dollars in thousands):
2017 | 2016 | ||||||||||||
Florida | $ | 639,474 | 19.6 | % | $ | 552,799 | 19.5 | % | |||||
California | 486,733 | 14.9 | % | 430,898 | 15.2 | % | |||||||
Arizona | 175,704 | 5.4 | % | 142,010 | 5.0 | % | |||||||
Texas | 160,606 | 4.9 | % | 122,094 | 4.3 | % | |||||||
Iowa | 151,935 | 4.6 | % | 164,025 | 5.8 | % | |||||||
North Carolina | 147,987 | 4.5 | % | 82,547 | 2.9 | % | |||||||
Virginia | 148,884 | 4.6 | % | 138,417 | 4.9 | % | |||||||
All others (1) | 1,357,314 | 41.5 | % | 1,204,950 | 42.4 | % | |||||||
$ | 3,268,637 | 100.0 | % | $ | 2,837,740 | 100.0 | % | ||||||
(1) | No other state represented borrowers with more than 4.0% of loans outstanding at December 31, 2017 or 2016. |
Loan Maturities
The following table sets forth, as of December 31, 2017, the maturity distribution of our non-covered loan portfolio by category, based on UPB. Commercial loans are presented by contractual maturity, including scheduled payments for amortizing loans. Contractual maturities of 1-4 single family residential loans have been adjusted for an estimated rate of voluntary prepayments on all loans, based on historical trends, current interest rates, types of loans and refinance patterns (in thousands):
One Year or Less | After One Through Five Years | After Five Years | Total | ||||||||||||
Residential and other consumer: | |||||||||||||||
1-4 single family residential | $ | 590,108 | $ | 2,075,104 | $ | 1,451,602 | $ | 4,116,814 | |||||||
Home equity loans and lines of credit | 286 | 656 | 712 | 1,654 | |||||||||||
Other consumer loans | 6,482 | 11,621 | 2,409 | 20,512 | |||||||||||
596,876 | 2,087,381 | 1,454,723 | 4,138,980 | ||||||||||||
Commercial: | |||||||||||||||
Multi-family | 616,771 | 2,371,476 | 229,719 | 3,217,966 | |||||||||||
Non-owner occupied commercial real estate | 576,930 | 2,765,167 | 1,144,258 | 4,486,355 | |||||||||||
Construction and land | 98,846 | 90,632 | 121,521 | 310,999 | |||||||||||
Owner occupied commercial real estate | 210,738 | 877,559 | 927,875 | 2,016,172 | |||||||||||
Commercial and industrial | 1,481,279 | 2,520,004 | 144,534 | 4,145,817 | |||||||||||
Commercial lending subsidiaries | 556,634 | 1,267,586 | 729,356 | 2,553,576 | |||||||||||
3,541,198 | 9,892,424 | 3,297,263 | 16,730,885 | ||||||||||||
$ | 4,138,074 | $ | 11,979,805 | $ | 4,751,986 | $ | 20,869,865 | ||||||||
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The following table shows the distribution of UPB of those loans that mature in more than one year between fixed and adjustable interest rate loans as of December 31, 2017 (in thousands):
Interest Rate Type | |||||||||||
Fixed | Adjustable | Total | |||||||||
Residential and other consumer: | |||||||||||
1-4 single family residential | $ | 1,172,876 | $ | 2,353,830 | $ | 3,526,706 | |||||
Home equity loans and lines of credit | — | 1,368 | 1,368 | ||||||||
Other consumer loans | 11,872 | 2,158 | 14,030 | ||||||||
1,184,748 | 2,357,356 | 3,542,104 | |||||||||
Commercial: | |||||||||||
Multi-family | 2,334,762 | 266,433 | 2,601,195 | ||||||||
Non-owner occupied commercial real estate | 2,384,995 | 1,524,430 | 3,909,425 | ||||||||
Construction and land | 114,810 | 97,343 | 212,153 | ||||||||
Owner occupied commercial real estate | 1,180,681 | 624,753 | 1,805,434 | ||||||||
Commercial and industrial | 614,641 | 2,049,897 | 2,664,538 | ||||||||
Commercial lending subsidiaries | 1,914,516 | 82,426 | 1,996,942 | ||||||||
8,544,405 | 4,645,282 | 13,189,687 | |||||||||
$ | 9,729,153 | $ | 7,002,638 | $ | 16,731,791 | ||||||
No maturity information has been provided for covered loans, which are comprised entirely of loans secured by 1-4 single family residential loans, the substantial majority of which are ACI loans accounted for in pools.
Equipment under Operating Lease
Equipment under operating lease increased by $60 million to $600 million at December 31, 2017, from $540 million at December 31, 2016. The portfolio consisted primarily of railcars, non-commercial aircraft and other transport equipment. We have a total of 5,419 railcars with a carrying value of $442 million at December 31, 2017, 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 2,263 hopper cars and 1,682 tank cars, primarily used to ship sand and petroleum products, respectively, for the energy industry. Equipment with a carrying value of $276 million at December 31, 2017 was leased to companies for use in the energy industry.
At December 31, 2017, the breakdown of carrying values of equipment under operating lease by the year current leases are scheduled to expire was as follows (in thousands):
Years Ending December 31: | |||
2018 (1) | $ | 57,148 | |
2019 | 56,574 | ||
2020 | 105,485 | ||
2021 | 71,637 | ||
2022 | 63,391 | ||
Thereafter through 2031 | 245,267 | ||
$ | 599,502 | ||
(1) | Includes $3.4 million of equipment off-lease as of December 31, 2017. |
57
Asset Quality
Non-covered Loans and Leases
Commercial Loans
We have a robust credit risk management framework, an experienced team to lead the workout and recovery process for the commercial and commercial real estate portfolios and a dedicated internal credit review function. Loan performance is monitored by our credit administration and workout and recovery departments. Generally, commercial relationships with balances in excess of defined thresholds are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. The defined thresholds range from $1 million to $3 million. Homogenous groups of smaller balance commercial loans may be monitored collectively. Additionally, commercial loans are regularly reviewed by our internal credit review department. The Company utilizes a 13 grade internal asset risk classification system as part of its efforts to monitor and maintain commercial asset quality. Loans exhibiting potential credit weaknesses that deserve management’s close attention and that if left uncorrected may result in deterioration of the repayment capacity of the borrower are categorized as special mention. These borrowers may exhibit negative financial trends or erratic financial performance, strained liquidity, marginal collateral coverage, declining industry trends or weak management. Loans with well-defined credit weaknesses that may result in a loss if the deficiencies are not corrected are assigned a risk rating of substandard. These borrowers may exhibit payment defaults, inadequate cash flows, operating losses, increasing balance sheet leverage, project cost overruns, unreasonable construction delays, exhausted interest reserves, declining collateral values, frequent overdrafts or past due real estate taxes. Loans with weaknesses so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors have not been charged off, are assigned an internal risk rating of doubtful.
We believe internal risk rating is the best indicator of the credit quality of commercial loans. The following table summarizes the Company's commercial credit exposure, based on internal risk rating, at December 31, 2017 and 2016 (in thousands):
2017 | 2016 | |||||||||||||
Balance | Percent of Total | Balance | Percent of Total | |||||||||||
Pass | $ | 16,189,392 | 96.8 | % | $ | 14,897,121 | 97.4 | % | ||||||
Special mention | 183,234 | 1.1 | % | 72,225 | 0.5 | % | ||||||||
Substandard (1) | 338,405 | 2.0 | % | 304,713 | 2.0 | % | ||||||||
Doubtful | 6,275 | 0.1 | % | 11,518 | 0.1 | % | ||||||||
$ | 16,717,306 | 100.0 | % | $ | 15,285,577 | 100.0 | % | |||||||
(1) | The balance of substandard loans at December 31, 2017 and 2016 included $105 million and $138 million, respectively, of taxi medallion finance loans. Criticized and classified loans represented 3.2% of the commercial loan portfolio, of which 0.6% were taxi medallion loans, at December 31, 2017. See Note 5 to the consolidated financial statements for more detailed information about risk rating of commercial loans. |
Taxi Medallion Finance
The commercial and industrial loan portfolio includes exposure to taxi medallion finance of $106 million at December 31, 2017. The estimated value of underlying taxi medallion collateral and liquidity in the market for sales of medallions, a potential secondary source of repayment, have declined significantly in recent years due to competitive developments in the transportation-for-hire industry. Due to the ongoing trend of declining estimated cash flows from the operation of taxi medallions leading to declines in medallion valuations, the entire taxi medallion portfolio is on non-accrual status and risk rated substandard or doubtful as of December 31, 2017. In addition, partial charge-offs were recognized on all taxi medallion loans with carrying values in excess of the value that can reasonably be supported by the cash flow generating capacity of a medallion, determined using the cash flow template discussed below.
Using an extensive data set obtained from the NYTLC and assumptions that we believe are reasonable estimates of fleet utilization and borrower expenses, we perform a quarterly analysis to estimate the cash flow generating capacity of the operation of a New York City taxi medallion. We update our analysis on a quarterly basis, based on these cash flow capacity estimates. At December 31, 2017, the estimated valuations based on our cash flow template were $320,625 for corporate medallions owned by certain large scale fleet operators and $304,000 for individual and other corporate medallions. We used these values for purposes of determining the partial charge-offs. We established an additional 15% specific reserve from these
58
valuation levels at December 31, 2017 in recognition of continued declining trends in the estimated cash flow generating capacity of medallions. See Note 16 to the consolidated financial statements for additional information about the valuation of New York City taxi medallions.
The taxi medallion portfolio had the following characteristics at December 31, 2017:
• | Approximately 97.5% of the portfolio secured directly by taxi medallions was concentrated in New York City. |
• | Loans delinquent by 30 days or more totaled $17.7 million or 16.7% of the portfolio, compared to $40.8 million or 22.8% of the portfolio at December 31, 2016. Loans delinquent by 90 days or more totaled $8.3 million or 7.8% of the portfolio, compared to $29.2 million or 16.4% of the portfolio at December 31, 2016. The most significant factor contributing to the decrease in delinquencies was one large relationship that was brought current and restructured in 2017. Partial charge-offs during the year ended December 31, 2017 also contributed to the reduction in the dollar amount of delinquencies. |
• | The portfolio included 186 loans modified in TDRs with a recorded investment of $87.9 million. |
• | In the aggregate, the ALLL related to taxi medallion loans was 11.5% of the outstanding balance at December 31, 2017, compared to 6.0% at December 31, 2016. Charge-offs of $56.6 million were recognized in the year ended December 31, 2017 related to taxi medallion loans. Cumulative charge-offs of $67.8 million have been recognized related to taxi medallion loans through December 31, 2017. |
We are no longer originating new taxi medallion loans. Our portfolio management strategies include, but are not limited to, working with borrowers experiencing cash flow challenges to provide short term relief and/or extended amortization periods, pro-actively attempting to refinance loans prior to maturity, obtaining principal reductions or additional collateral when possible, continuing to monitor industry data and obtaining updated borrower and guarantor financial information.
Equipment Under Operating Lease
Five operating lease relationships with a carrying value of assets under lease totaling $74 million, of which $68 million were exposures to the energy industry, were internally risk rated special mention or substandard at December 31, 2017. The present value of remaining lease payments on these leases totaled approximately $22 million at December 31, 2017, of which $17 million were exposures to the energy industry. There have been no missed payments related to the operating lease portfolio to date. One relationship has been restructured to date, with no decrease in total minimum lease payments.
The primary risks inherent in the equipment leasing business are asset risk resulting from ownership of the equipment on operating lease and credit risk. Asset risk arises from fluctuations in supply and demand for the underlying leased equipment. The equipment is leased to commercial end-users with original lease terms generally ranging from 3-10 years at December 31, 2017. We are exposed to the risk that, at the end of the lease term, the value of the asset will be lower than expected, potentially resulting in reduced future lease income over the remaining life of the asset or a lower sale value. Asset risk may also lead to changes in depreciation as a result of changes in the residual values of the operating lease assets or through impairment of asset carrying values. Asset risk may be higher for long-lived equipment such as railcars, which have useful lives of approximately 35-50 years.
Asset risk is evaluated and managed by a dedicated internal staff of asset managers, managed by seasoned equipment finance professionals with a broad depth and breadth of experience in the leasing business. Additionally, we have partnered with an industry leading, experienced service provider who provides fleet management and servicing relating to the railcar portfolio, including lease administration and reporting, a Regulation Y compliant full service maintenance program and railcar re-marketing. Risk is managed by setting appropriate residual values at inception and systematic reviews of residual values based on independent appraisals, performed at least annually. Additionally, our internal management team and our external service provider closely follow the rail markets, monitoring traffic flows, supply and demand trends and the impact of new technologies and regulatory requirements. Demand for railcars is sensitive to shifts in general and industry specific economic and market trends and shifts in trade flows from specific events such as natural or man-made disasters. We seek to mitigate these risks by leasing to a stable end-user base, by maintaining a relatively young and diversified fleet of assets that are expected to maintain stronger and more stable utilization rates despite impacts from unexpected events or cyclical trends and by staggering lease maturities. We regularly monitor the impact of lower 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
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due either to a restructuring or re-leasing of the asset to another obligor. Credit risk in the operating lease portfolio is managed and monitored utilizing credit administration infrastructure, processes and procedures similar to those used to manage and monitor credit risk in the commercial loan portfolio. We also mitigate credit risk in this portfolio by leasing only to high credit quality obligors.
We expect our operating lease portfolio to continue to grow, and we plan to expand into additional asset classes to mitigate concentration risk.
Residential and Other Consumer Loans
The majority of our non-covered residential mortgage portfolio consists of loans purchased through established correspondent channels. Most of our purchases are of performing jumbo mortgage loans which have FICO scores above 700, primarily are owner-occupied and full documentation, and have a current LTV of 80% or less although loans with LTVs higher than 80% may be extended to selected credit-worthy borrowers. We perform due diligence on the purchased loans for credit, compliance, counterparty, payment history and property valuation.
We have a dedicated residential credit risk management function, and the residential portfolio is monitored by our internal credit review function. Residential mortgage loans and consumer loans are not individually risk rated. Delinquency status is the primary measure we use to monitor the credit quality of these loans. We also consider original LTV and FICO score to be significant indicators of credit quality for the non-covered 1-4 single family residential portfolio.
The following tables show the distribution of non-covered 1-4 single family residential loans by original FICO and LTV as of December 31, 2017 and 2016:
2017 | |||||||||||||||
FICO | |||||||||||||||
LTV | 720 or less | 721 - 740 | 741 - 760 | 761 or greater | Total | ||||||||||
60% or less | 2.2 | % | 2.8 | % | 4.5 | % | 19.5 | % | 29.0 | % | |||||
60% - 70% | 2.4 | % | 2.5 | % | 3.5 | % | 14.2 | % | 22.6 | % | |||||
70% - 80% | 3.6 | % | 4.4 | % | 7.8 | % | 27.3 | % | 43.1 | % | |||||
More than 80% | 0.8 | % | 0.8 | % | 0.7 | % | 3.0 | % | 5.3 | % | |||||
9.0 | % | 10.5 | % | 16.5 | % | 64.0 | % | 100.0 | % | ||||||
2016 | |||||||||||||||
FICO | |||||||||||||||
LTV | 720 or less | 721 - 740 | 741 - 760 | 761 or greater | Total | ||||||||||
60% or less | 2.5 | % | 3.2 | % | 4.7 | % | 21.7 | % | 32.1 | % | |||||
60% - 70% | 2.3 | % | 2.7 | % | 3.6 | % | 15.1 | % | 23.7 | % | |||||
70% - 80% | 3.2 | % | 4.3 | % | 8.0 | % | 26.1 | % | 41.6 | % | |||||
More than 80% | 0.7 | % | 0.3 | % | 0.4 | % | 1.2 | % | 2.6 | % | |||||
8.7 | % | 10.5 | % | 16.7 | % | 64.1 | % | 100.0 | % | ||||||
At December 31, 2017, the non-covered 1-4 single family residential loan portfolio had the following characteristics: substantially all were full documentation with a weighted-average FICO score of 765 and a weighted-average LTV of 67.2%. The majority of this portfolio was owner-occupied, with 87.6% primary residence, 8.1% second homes and 4.3% investment properties. In terms of vintage, 19.8% of the portfolio was originated pre-2014, 12.0% in 2014, 20.5% in 2015, 24.2% in 2016 and 23.5% in 2017.
Non-covered 1-4 single family residential loans past due more than 30 days totaled $28.9 million and $12.7 million at December 31, 2017 and 2016, respectively. The amount of these loans 90 days or more past due was $5.6 million and $2.1 million at December 31, 2017 and 2016, respectively.
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Other Consumer Loans
Substantially all consumer loans were current at December 31, 2017. At December 31, 2016, there were no delinquent consumer loans.
Covered Loans
At December 31, 2017, residential ACI loans totaled $479 million and residential non-ACI loans totaled $24 million, including premiums, discounts and deferred fees and costs. Our exposure to loss related to covered loans is significantly mitigated by the Single Family Shared-Loss Agreement and by the fair value basis recorded in these loans in conjunction with the FSB Acquisition. We have an experienced resolution team in place for covered residential mortgage loans, and have implemented outsourcing arrangements with industry leading firms in certain areas such as OREO resolution.
Covered residential loans were placed into homogenous pools at the time of the FSB Acquisition and the ongoing credit quality and performance of these loans is monitored on a pool basis. We monitor the pools quarterly to determine whether any changes have occurred in expected cash flows that would be indicative of impairment or necessitate reclassification between non-accretable difference and accretable yield. At December 31, 2017, accretable yield on residential ACI loans totaled $445 million and non-accretable difference related to those loans totaled $191 million.
At December 31, 2017, the recorded investment in non-ACI 1-4 single family residential loans was $23.7 million; $2.6 million or 11.0% of these loans were 30 days or more past due and $1.0 million or 4.3% of these loans were 90 days or more past due. At December 31, 2017, the recorded investment in ACI 1-4 single family residential loans totaled $479.1 million; $30.9 million or 6.5% of these loans were delinquent by 30 days or more and $17.8 million or 3.7% were delinquent by 90 days or more.
During 2017, the Company sold substantially all of the covered home equity loans and lines of credit.
Hurricanes Irma and Harvey
In September 2017, Hurricane Irma made landfall in Florida as a Category 4 hurricane affecting some areas of the state with significant flooding, wind damage and power outages. In addition, the Bank has a limited number of customers and collateral properties located in areas of Texas that were impacted by Hurricane Harvey during August 2017.We performed an extensive review of loans with borrowers and/or collateral located in areas impacted by these storms. This analysis entailed the identification of and direct communication with borrowers located in impacted areas to determine the population of borrowers that may have been significantly impacted as well as consideration of factors including but not limited to level and type of insurance coverage, collateral and lien position, financial condition of the borrowers, delinquency trends and requests by borrowers for forbearance or modification of payment terms.
Commercial Loans
Commercial loans totaling $8.8 million had been modified or granted temporary payment deferrals at December 31, 2017, related to the recent hurricanes. Of these modifications and deferrals, none were determined to be TDRs due to the generally insignificant nature of the payment delays. Approximately $21.1 million of commercial loans have been downgraded to criticized or classified status through December 31, 2017 as a result of the impact of the storms. All of these loans were performing at December 31, 2017.
Residential loans
The following table presents information related to 1-4 single family residential mortgages with borrowers and/or collateral located in areas impacted by Hurricanes Irma and Harvey, at December 31, 2017 (in thousands):
Past due more than 30 days: | |||
Covered loans | $ | 13,523 | |
Non-covered loans | 12,814 | ||
Total | $ | 26,337 | |
On temporary payment deferrals: | |||
Covered loans | $ | 4,413 | |
Non-covered loans | 2,564 | ||
Total | $ | 6,977 | |
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Based on our assessment, we have concluded that the hurricanes did not materially impact the ability of our borrowers to repay their loans.
Management also considered the impact of the hurricanes in our analysis of investment securities for OTTI, as well as our evaluation of potential impairment of our investment in equipment under operating lease, LIHTC partnerships, servicing assets and OREO and determined there was no material impact.
Impaired Loans and Non-Performing Assets
Non-performing assets generally consist of (i) non-accrual loans, including loans that have been modified in TDRs and placed on non-accrual status, (ii) accruing loans that are more than 90 days contractually past due as to interest or principal, excluding ACI loans, and (iii) OREO and repossessed assets. Impaired loans also typically include loans modified in TDRs that are accruing and ACI loans or pools for which expected cash flows at acquisition (as adjusted for any additional cash flows expected to be collected arising from changes in estimates after acquisition) have been revised downward since acquisition, other than due to changes in interest rate indices and prepayment assumptions.
The following tables summarize the Company's impaired loans and non-performing assets at December 31 of the years indicated (dollars in thousands):
2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||
Covered Assets | Non-Covered Assets | Total | Covered Assets | Non-Covered Assets | Total | Covered Assets | Non- Covered Assets | Total | |||||||||||||||||||||||||||
Non-accrual loans | |||||||||||||||||||||||||||||||||||
Residential and other consumer: | |||||||||||||||||||||||||||||||||||
1-4 single family residential | $ | 1,010 | $ | 9,705 | $ | 10,715 | $ | 918 | $ | 566 | $ | 1,484 | $ | 594 | $ | 2,007 | $ | 2,601 | |||||||||||||||||
Home equity loans and lines of credit | 331 | — | 331 | 2,283 | — | 2,283 | 4,724 | — | 4,724 | ||||||||||||||||||||||||||
Other consumer loans | — | 821 | 821 | — | 2 | 2 | — | 7 | 7 | ||||||||||||||||||||||||||
Total residential and other consumer loans | 1,341 | 10,526 | 11,867 | 3,201 | 568 | 3,769 | 5,318 | 2,014 | 7,332 | ||||||||||||||||||||||||||
Commercial: | |||||||||||||||||||||||||||||||||||
Non-owner occupied commercial real estate | — | 12,716 | 12,716 | — | 559 | 559 | — | — | — | ||||||||||||||||||||||||||
Construction and land | — | 1,175 | 1,175 | — | 1,238 | 1,238 | — | — | — | ||||||||||||||||||||||||||
Owner occupied commercial real estate | — | 29,020 | 29,020 | — | 19,439 | 19,439 | — | 8,274 | 8,274 | ||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||||||||
Taxi medallion loans | — | 106,067 | 106,067 | — | 60,660 | 60,660 | — | 2,557 | 2,557 | ||||||||||||||||||||||||||
Other commercial and industrial | — | 7,049 | 7,049 | — | 16,036 | 16,036 | — | 35,225 | 35,225 | ||||||||||||||||||||||||||
Commercial lending subsidiaries | — | 3,512 | 3,512 | — | 32,645 | 32,645 | — | 9,920 | 9,920 | ||||||||||||||||||||||||||
Total commercial loans | — | 159,539 | 159,539 | — | 130,577 | 130,577 | — | 55,976 | 55,976 | ||||||||||||||||||||||||||
Total non-accrual loans | 1,341 | 170,065 | 171,406 | 3,201 | 131,145 | 134,346 | 5,318 | 57,990 | 63,308 | ||||||||||||||||||||||||||
Loans past due 90 days and still accruing | — | 1,948 | 1,948 | — | 1,551 | 1,551 | 156 | 1,369 | 1,525 | ||||||||||||||||||||||||||
TDRs (1) | — | — | — | — | — | — | 7,050 | 1,175 | 8,225 | ||||||||||||||||||||||||||
Total non-performing loans | 1,341 | 172,013 | 173,354 | 3,201 | 132,696 | 135,897 | 12,524 | 60,534 | 73,058 | ||||||||||||||||||||||||||
OREO | 2,862 | 7,018 | 9,880 | 4,658 | 4,882 | 9,540 | 8,853 | — | 8,853 | ||||||||||||||||||||||||||
Repossessed assets | — | 2,128 | 2,128 | — | 3,551 | 3,551 | — | 2,337 | 2,337 | ||||||||||||||||||||||||||
Total non-performing assets | 4,203 | 181,159 | 185,362 | 7,859 | 141,129 | 148,988 | 21,377 | 62,871 | 84,248 | ||||||||||||||||||||||||||
Impaired ACI loans and pools on accrual status | — | — | — | — | 1,335 | 1,335 | — | — | — | ||||||||||||||||||||||||||
Performing TDRs | |||||||||||||||||||||||||||||||||||
Taxi medallion loans | — | — | — | — | 36,848 | 36,848 | — | 633 | 633 | ||||||||||||||||||||||||||
Other | 1,264 | 24,723 | 25,987 | 11,166 | 26,282 | 37,448 | 3,988 | 4,902 | 8,890 | ||||||||||||||||||||||||||
Total impaired loans and non-performing assets | $ | 5,467 | $ | 205,882 | $ | 211,349 | $ | 19,025 | $ | 205,594 | $ | 224,619 | $ | 25,365 | $ | 68,406 | $ | 93,771 | |||||||||||||||||
Non-performing loans to total loans (2) (4) | 0.82 | % | 0.81 | % | 0.71 | % | 0.70 | % | 0.38 | % | 0.44 | % | |||||||||||||||||||||||
Non-performing assets to total assets (3) | 0.60 | % | 0.61 | % | 0.51 | % | 0.53 | % | 0.26 | % | 0.35 | % | |||||||||||||||||||||||
ALLL to total loans (2) | 0.69 | % | 0.68 | % | 0.80 | % | 0.79 | % | 0.76 | % | 0.76 | % | |||||||||||||||||||||||
ALLL to non-performing loans | 84.03 | % | 83.53 | % | 113.68 | % | 112.55 | % | 199.82 | % | 172.23 | % | |||||||||||||||||||||||
Net charge-offs to average loans(5) | 0.38 | % | 0.38 | % | 0.13 | % | 0.13 | % | 0.09 | % | 0.10 | % | |||||||||||||||||||||||
(1) | Effective January 1, 2016, we are no longer reporting accruing TDRs as non-performing. |
(2) | Total loans for purposes of calculating these ratios include premiums, discounts and deferred fees and costs. |
(3) | Ratio for non-covered assets is calculated as non-performing non-covered assets to total assets. |
(4) | Non-performing taxi medallion loans comprised 0.51%, 0.32% and 0.02% of total non-covered loans at December 31, 2017, 2016 and 2015, respectively. |
(5) | The ratio of charge-offs of taxi medallion loans to average non-covered loans was 0.29% and 0.06% for the years ended December 31, 2017 and 2016, respectively. |
2014 | 2013 | ||||||||||||||||||||||
Covered Assets | Non-Covered Assets | Total | Covered Assets | Non- Covered Assets | Total | ||||||||||||||||||
Non-accrual loans | |||||||||||||||||||||||
Residential and other consumer: | |||||||||||||||||||||||
1-4 single family residential | $ | 604 | $ | 49 | $ | 653 | $ | 293 | $ | 194 | $ | 487 | |||||||||||
Home equity loans and lines of credit | 3,808 | — | 3,808 | 6,559 | — | 6,559 | |||||||||||||||||
Other consumer loans | — | 173 | 173 | — | 75 | 75 | |||||||||||||||||
Total residential and other consumer loans | 4,412 | 222 | 4,634 | 6,852 | 269 | 7,121 | |||||||||||||||||
Commercial: | |||||||||||||||||||||||
Non-owner occupied commercial real estate | — | 1,326 | 1,326 | 941 | 1,443 | 2,384 | |||||||||||||||||
Construction and land | — | 209 | 209 | — | 244 | 244 | |||||||||||||||||
Owner occupied commercial real estate | — | 3,362 | 3,362 | 101 | 2,786 | 2,887 | |||||||||||||||||
Commercial and industrial | — | 13,666 | 13,666 | 2,767 | 16,612 | 19,379 | |||||||||||||||||
Commercial lending subsidiaries | — | 9,226 | 9,226 | — | 1,370 | 1,370 | |||||||||||||||||
Total commercial loans | — | 27,789 | 27,789 | 3,809 | 22,455 | 26,264 | |||||||||||||||||
Total non-accrual loans | 4,412 | 28,011 | 32,423 | 10,661 | 22,724 | 33,385 | |||||||||||||||||
Loans past due 90 days and still accruing | 174 | 715 | 889 | — | 512 | 512 | |||||||||||||||||
TDRs | 2,188 | 4,435 | 6,623 | 1,765 | — | 1,765 | |||||||||||||||||
Total non-performing loans | 6,774 | 33,161 | 39,935 | 12,426 | 23,236 | 35,662 | |||||||||||||||||
OREO | 13,645 | 135 | 13,780 | 39,672 | 898 | 40,570 | |||||||||||||||||
Total non-performing assets | 20,419 | 33,296 | 53,715 | 52,098 | 24,134 | 76,232 | |||||||||||||||||
Impaired ACI loans on accrual status(1) | — | — | — | 44,286 | — | 44,286 | |||||||||||||||||
Performing TDRs | 3,866 | 797 | 4,663 | 3,588 | 1,400 | 4,988 | |||||||||||||||||
Total impaired loans and non-performing assets | $ | 24,285 | $ | 34,093 | $ | 58,378 | $ | 99,972 | $ | 25,534 | $ | 125,506 | |||||||||||
Non-performing loans to total loans (2) | 0.29 | % | 0.32 | % | 0.31 | % | 0.39 | % | |||||||||||||||
Non-performing assets to total assets (3) | 0.17 | % | 0.28 | % | 0.16 | % | 0.51 | % | |||||||||||||||
ALLL to total loans (2) | 0.80 | % | 0.77 | % | 0.76 | % | 0.77 | % | |||||||||||||||
ALLL to non-performing loans | 275.47 | % | 239.24 | % | 246.73 | % | 195.52 | % | |||||||||||||||
Net charge-offs to average loans | 0.08 | % | 0.15 | % | 0.34 | % | 0.31 | % | |||||||||||||||
(1) | Includes TDRs on accrual status. |
(2) | Total loans for purposes of calculating these ratios include premiums, discounts and deferred fees and costs. |
(3) | Ratio for non-covered assets is calculated as non-performing non-covered assets to total assets. |
The increases in the ratios of non-performing loans to total loans and non-performing assets to total assets and the decrease in the ratio of the ALLL to non-performing loans at December 31, 2017 compared to December 31, 2016 and December 31, 2015 were each primarily attributable to the increase in non-accrual taxi medallion loans. The decrease in the ratio of the ALLL to non-performing loans was also impacted by increases in partial charge-offs, the majority of which were related to taxi medallion loans.
Contractually delinquent ACI loans with remaining accretable yield are not reflected as non-accrual loans and are not considered to be non-performing assets because accretion continues to be recorded in income. Accretion continues to be recorded as long as there is an expectation of future cash flows in excess of carrying amount from these loans. The carrying value of ACI loans contractually delinquent by more than 90 days but on which income was still being recognized was $18 million and $16 million at December 31, 2017 and 2016, respectively.
Commercial loans, other than ACI loans, are placed on non-accrual status when (i) management has determined that full repayment of all contractual principal and interest is in doubt, or (ii) the loan is past due 90 days or more as to principal or interest unless the loan is well secured and in the process of collection. Residential and consumer loans, other than ACI loans, are generally placed on non-accrual status when 90 days of interest is due and unpaid. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged to interest income. Commercial loans are returned to accrual status only after all past due principal and interest has been collected and full repayment of remaining contractual principal and interest is reasonably assured. Residential loans are generally returned to accrual status when less than 90 days of interest is due and unpaid. Past due status of loans is determined based on the contractual next payment due date. Loans less than 30 days past due are reported as current.
A loan modification is considered a TDR if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise grant. These concessions may take the form of temporarily or permanently reduced interest rates, payment abatement periods, restructuring of payment terms, extensions of maturity at below market terms, or in some cases, partial forgiveness of principal. Under GAAP, modified ACI loans accounted for in pools are not accounted for as TDRs and are not separated from their respective pools when modified. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy.
The following table summarizes loans modified in TDRs at December 31, 2017 (dollars in thousands):
Number of TDRs | Recorded Investment | Related Specific Allowance | ||||||||
Residential and other consumer: | ||||||||||
Covered | 5 | $ | 2,221 | $ | 118 | |||||
Non-covered | 11 | 1,234 | 63 | |||||||
Commercial: | ||||||||||
Taxi medallion loans | 186 | 87,942 | 10,235 | |||||||
Other | 18 | 39,067 | 6,521 | |||||||
220 | $ | 130,464 | $ | 16,937 | ||||||
Potential Problem Loans
Potential problem loans have been identified by management as those commercial loans included in the "substandard accruing" risk rating category. These loans are typically performing, but possess specifically identified credit weaknesses that, if not remedied, may lead to a downgrade to non-accrual status and identification as impaired in the near-term. Substandard accruing commercial loans totaled $185 million at December 31, 2017, substantially all of which were current as to principal and interest at December 31, 2017.
Loss Mitigation Strategies
Criticized or classified commercial loans in excess of certain thresholds are reviewed quarterly by the Criticized Asset Committee, which evaluates the appropriate strategy for collection to mitigate the amount of credit losses. Criticized asset reports for each relationship are presented by the assigned relationship manager and credit officer to the Criticized Asset Committee until such time as the relationships are returned to a satisfactory credit risk rating or otherwise resolved. The Criticized Asset Committee may require the transfer of a loan to our workout and recovery department, which is tasked to effectively manage the loan with the goal of minimizing losses and expenses associated with restructure, collection and/or liquidation of collateral. Commercial loans with a risk rating of substandard; impaired loans on non-accrual status; loans modified as TDRs; taxi medallion loans; or assets classified as OREO or repossessed assets are usually transferred to workout and recovery. Oversight of the workout and recovery department is provided by the Asset Recovery Committee.
We evaluate each residential loan in default to determine the most effective loss mitigation strategy, which may be modification, short sale, or foreclosure. Through the program's expiration on December 31, 2016, we offered loan modifications under the HAMP program to eligible borrowers in the residential portfolio. HAMP was a uniform loan modification process that provided eligible borrowers with sustainable monthly mortgage payments equal to a target 31% of their gross monthly income. We began offering a new modification program in late 2016 modeled after the FNMA standard modification program.
Analysis of the Allowance for Loan and Lease Losses
The ALLL relates to (i) loans originated since the FSB acquisition, (ii) estimated additional losses arising on non-ACI loans subsequent to the FSB Acquisition, and (iii) impairment recognized as a result of decreases in expected cash flows on ACI loans due to further credit deterioration. The impact of any additional provision for losses on covered loans is significantly mitigated by an increase in the FDIC indemnification asset. The determination of the amount of the ALLL is, by nature, highly complex and subjective. Future events that are inherently uncertain could result in material changes to the level of the ALLL. General economic conditions including but not limited to unemployment rates, the level of business investment and growth, real estate values, vacancy rates and rental rates in our primary market areas, the level of interest rates, and a variety of other factors that affect the ability of borrowers’ businesses to generate cash flows sufficient to service their debts will impact the future performance of the portfolio.
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Commercial loans
The allowance is comprised of specific reserves for loans that are individually evaluated and determined to be impaired as well as general reserves for loans that have not been identified as impaired.
Commercial relationships graded substandard or doubtful and on non-accrual status with committed credit facilities greater than or equal to $1.0 million, as well as loans modified in TDRs, are individually evaluated for impairment. Other commercial relationships on non-accrual status with committed balances under $1.0 million may also be evaluated for impairment, at management's discretion. All loans secured by taxi medallions have been placed on non-accrual status and are individually evaluated for impairment. For loans evaluated individually for impairment and determined to be impaired, a specific allowance is established based on the present value of expected cash flows discounted at the loan’s effective interest rate, the estimated fair value of the loan, or the estimated fair value of collateral less costs to sell. We recognized partial charge-offs at December 31, 2017 on taxi medallion loans, all of which are risk-rated substandard and on non-accrual status, as necessary to reduce the carrying value of the loans to our estimate of the value of New York City taxi medallions based on our cash flow template. Additionally, a specific allowance was recognized equal to the amount by which each loan exceeded 85% of the estimated value, in recognition of the continued declining trend in cash flows and lower prices observed on certain recent taxi medallion transfers. The amount of this specific allowance was determined based on management's judgment.
We believe that loans rated special mention, substandard or doubtful that are not individually evaluated for impairment exhibit characteristics indicative of a heightened level of credit risk. We apply a quantitative loss factor for loans rated special mention based on average annual probability of default and implied severity, derived from internal and external data. Loss factors for substandard and doubtful loans that are not individually evaluated are determined by using default frequency and severity information applied at the loan level. Estimated default frequencies and severities are based on available industry and internal data. In addition, we apply a floor to these calculated loss factors, based on the loss factor applied to the special mention portfolio.
Since the majority of the non-covered commercial loan portfolio is not yet seasoned enough to exhibit a loss trend, the quantitative loss factors for a majority of pass rated non-covered commercial loans is based on peer group average annual historical net charge-off rates by loan class and the Company’s internal credit risk rating system. In 2017, we revised the source of quantitative loss factors for certain loans, as follows:
• | Quantitative loss factors for the Bridge portfolios, small business loans and mortgage warehouse loans are based on the Company’s average historical net charge-off rates. |
• | The quantitative loss factor for municipal finance receivables is based on the portfolio's external ratings and Moody's historical transition matrix, as opposed to the historical cumulative default curve for municipal obligations that was used previously. |
• | The quantitative loss factor applied to the non-guaranteed portion of SBA loans is based on average historical charge-off rates published by the SBA. |
The net impact of these changes on the ALLL was not material.
Where applicable, the peer group used to calculate average annual historical net charge-off rates used in estimating general reserves is made up of the banks included in the OCC Midsize Bank Group plus two additional banks in the New York region that management believes to be comparable based on size and nature of lending operations. The OCC Midsize Bank Group primarily includes commercial banks with total assets ranging from $10 - $50 billion and included 27 banks at December 31, 2017. Peer bank data is obtained from the Statistics on Depository Institutions Report published by the FDIC for the most recent quarter available. These banks, as a group, are considered by management to be comparable to BankUnited in size, nature of lending operations and loan portfolio composition. We evaluate the composition of the peer group annually, or more frequently if, in our judgment, a more frequent evaluation is necessary. Our internal risk rating system comprises 13 credit grades; grades 1 through 8 are “pass” grades. The risk ratings are driven largely by debt service coverage. Peer group historical loss rates are adjusted upward for loans assigned a lower “pass” rating.
We generally use a 16-quarter loss experience period to calculate quantitative loss rates. We believe this look-back period to be consistent with the range of industry practice and appropriate to capture a sufficient range of observations reflecting the performance of our loans, which were originated in the current economic cycle. With the exception of the Pinnacle municipal finance portfolio, a four quarter loss emergence period is used in the calculation of general reserves. A twelve quarter loss emergence period is used in the calculation of general reserves for the Pinnacle portfolio.
The primary assumptions underlying estimates of expected cash flows for ACI commercial loans are default probability and severity of loss given default. Assessments of default probability and severity are based on net realizable value analyses
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prepared at the individual loan level. Based on our analysis, no ALLL related to ACI commercial loans was recorded at December 31, 2017 or 2016.
Residential and other consumer loans
Non-covered Loans
Due to the lack of similarity between the risk characteristics of non-covered loans and covered loans in the residential and home equity portfolios, management does not believe it is appropriate to use the historical performance of the covered residential mortgage portfolio as a basis for calculating the ALLL applicable to non-covered loans. The non-covered loan portfolio has not yet developed an observable loss trend. Therefore, the ALLL for non-covered residential loans is based primarily on relevant proxy historical loss rates. The ALLL for non-covered 1-4 single family residential loans is estimated using average annual loss rates on prime residential mortgage securitizations issued between 2003 and 2008 as a proxy. Based on the comparability of FICO scores and LTV ratios between loans included in those securitizations and loans in the Bank’s portfolio and the geographic diversity in the new purchased residential portfolio, we determined that prime residential mortgage securitizations provide an appropriate proxy for incurred losses in this portfolio class. A peer group 16-quarter average net charge-off rate is used to estimate the ALLL for the non-covered home equity and other consumer loan classes. See further discussion of peer group loss factors above. The non-covered home equity and other consumer loan portfolios are not significant components of the overall loan portfolio.
Covered non-ACI Loans
Based on an analysis of historical performance, OREO and short sale losses, recent trending data and other internal and external factors, we have concluded that historical performance by portfolio class is the best indicator of incurred loss for the non-ACI 1-4 single family residential and home equity portfolio classes. For each of these portfolio classes, a quarterly roll rate matrix is calculated by delinquency bucket to measure the rate at which loans move from one delinquency bucket to the next during a given quarter. An average 16-quarter roll rate matrix is used to estimate the amount within each delinquency bucket expected to roll to 120+ days delinquent. We assume no cure for those loans that are currently 120+ days delinquent. Loss severity given default is estimated based on internal data about OREO sales and short sales from the portfolio. The ALLL calculation incorporates a 100% loss severity assumption for home equity loans that are projected to roll to default. For non-ACI residential loans, the allowance is initially calculated based on UPB. The total of UPB less the calculated allowance is then compared to the carrying amount of the loans, net of unamortized credit related fair value adjustments established at acquisition. If the calculated balance net of the allowance is less than the carrying amount, an additional allowance is established. Any increase or decrease in the allowance for non-ACI residential loans will result in a corresponding increase or decrease in the FDIC indemnification asset. Substantially all of the non-ACI home equity loans were sold in 2017.
Qualitative Factors
Qualitative adjustments are made to the ALLL when, based on management’s judgment, there are internal or external factors impacting probable incurred losses not taken into account by the quantitative calculations. Potential qualitative adjustments are categorized as follows:
• | Portfolio performance trends, including trends in and the levels of delinquencies, non-performing loans and classified loans; |
• | Changes in the nature of the portfolio and terms of the loans, specifically including the volume and nature of policy and procedural exceptions; |
• | Portfolio growth trends; |
• | Changes in lending policies and procedures, including credit and underwriting guidelines; |
• | Economic factors, including unemployment rates and GDP growth rates; |
• | Changes in the value of underlying collateral; |
• | Quality of risk ratings, as evaluated by our independent credit review function; |
• | Credit concentrations; |
• | Changes in and experience levels of credit administration management and staff; and |
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• | Other factors identified by management that may impact the level of losses inherent in the portfolio, including but not limited to competition and legal and regulatory considerations. |
Covered ACI Loans
For ACI loans, a valuation allowance is established when periodic evaluations of expected cash flows reflect a deterioration resulting from credit related factors from the level of cash flows that were estimated to be collected at acquisition plus any additional expected cash flows arising from revisions in those estimates. We perform a quarterly analysis of expected cash flows for ACI loans.
Expected cash flows are estimated on a pool basis for ACI 1-4 single family residential and home equity loans. The analysis of expected pool cash flows incorporates updated pool level expected prepayment rate, default rate, delinquency level and loss severity given default assumptions. Prepayment, delinquency and default curves are derived primarily from roll rates generated from the historical performance of the portfolio over the immediately preceding four quarters. Loss severity given default assumptions are generated from the historical performance of the portfolio over the immediately preceding four quarters, while loss severity from loan sales is generated from historical performance over the immediately preceding twelve quarters. Estimates of default probability and loss severity given default also incorporate updated LTV ratios, at the loan level, based on Case-Shiller Home Price Indices for the relevant MSA. Costs and fees represent an additional component of loss on default and are projected based on historical experience over the last three years. The ACI home equity roll rates include the impact of delinquent, related senior liens and loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy.
No ALLL related to 1-4 single family residential ACI pools was recorded at December 31, 2017 or 2016. All of the loans in the home equity ACI pool were sold in the fourth quarter of 2017. No ALLL related to home equity ACI pool was recorded at December 31, 2016.
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The following tables provide an analysis of the ALLL, provision for loan losses and net charge-offs for the periods from December 31, 2012 through December 31, 2017 indicated (in thousands):
Covered Loans | |||||||||||||||
Non-Covered Loans | ACI Loans | Non-ACI Loans | Total | ||||||||||||
Balance at December 31, 2012 | $ | 41,228 | $ | 8,019 | $ | 9,874 | $ | 59,121 | |||||||
Provision for (recovery of) loan losses: | 33,702 | (2,891 | ) | 1,153 | 31,964 | ||||||||||
Charge-offs: | |||||||||||||||
1-4 single family residential | (10 | ) | — | (1,276 | ) | (1,286 | ) | ||||||||
Home equity loans and lines of credit | — | — | (2,858 | ) | (2,858 | ) | |||||||||
Other consumer loans | (484 | ) | — | — | (484 | ) | |||||||||
Commercial real estate | — | (1,162 | ) | — | (1,162 | ) | |||||||||
Construction and land | — | (77 | ) | — | (77 | ) | |||||||||
Commercial and industrial | (17,987 | ) | (996 | ) | (171 | ) | (19,154 | ) | |||||||
Total Charge-offs | (18,481 | ) | (2,235 | ) | (4,305 | ) | (25,021 | ) | |||||||
Recoveries: | |||||||||||||||
Home equity loans and lines of credit | — | — | 90 | 90 | |||||||||||
Other consumer loans | 123 | — | — | 123 | |||||||||||
Multi-family | — | — | 15 | 15 | |||||||||||
Commercial real estate | — | — | 191 | 191 | |||||||||||
Commercial and industrial | 743 | — | 2,484 | 3,227 | |||||||||||
Commercial lending subsidiaries | 15 | — | — | 15 | |||||||||||
Total Recoveries | 881 | — | 2,780 | 3,661 | |||||||||||
Net Charge-offs: | (17,600 | ) | (2,235 | ) | (1,525 | ) | (21,360 | ) | |||||||
Balance at December 31, 2013 | 57,330 | 2,893 | 9,502 | 69,725 | |||||||||||
Provision for (recovery of) loan losses: | 41,748 | 2,311 | (2,554 | ) | 41,505 | ||||||||||
Charge-offs: | |||||||||||||||
1-4 single family residential | — | — | (269 | ) | (269 | ) | |||||||||
Home equity loans and lines of credit | — | — | (2,737 | ) | (2,737 | ) | |||||||||
Other consumer loans | (1,083 | ) | (324 | ) | — | (1,407 | ) | ||||||||
Multi-family | — | (285 | ) | — | (285 | ) | |||||||||
Non-owner occupied commercial real estate | (52 | ) | (3,031 | ) | — | (3,083 | ) | ||||||||
Construction and land | — | (635 | ) | (13 | ) | (648 | ) | ||||||||
Owner occupied commercial real estate | — | (356 | ) | — | (356 | ) | |||||||||
Commercial and industrial | (6,033 | ) | (573 | ) | (477 | ) | (7,083 | ) | |||||||
Commercial lending subsidiaries | (1,586 | ) | — | — | (1,586 | ) | |||||||||
Total Charge-offs | (8,754 | ) | (5,204 | ) | (3,496 | ) | (17,454 | ) | |||||||
Recoveries: | |||||||||||||||
Home equity loans and lines of credit | — | — | 19 | 19 | |||||||||||
Other consumer loans | 498 | — | — | 498 | |||||||||||
Multi-family | — | — | 4 | 4 | |||||||||||
Non-owner occupied commercial real estate | — | — | 3 | 3 | |||||||||||
Commercial and industrial | 506 | — | 714 | 1,220 | |||||||||||
Commercial lending subsidiaries | 22 | — | — | 22 | |||||||||||
Total Recoveries | 1,026 | — | 740 | 1,766 | |||||||||||
Net Charge-offs: | (7,728 | ) | (5,204 | ) | (2,756 | ) | (15,688 | ) | |||||||
Balance at December 31, 2014 | $ | 91,350 | $ | — | $ | 4,192 | $ | 95,542 | |||||||
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Covered Loans | |||||||||||||||
Non-Covered Loans | ACI Loans | Non-ACI Loans | Total | ||||||||||||
Balance at December 31, 2014 | $ | 91,350 | $ | — | $ | 4,192 | $ | 95,542 | |||||||
Provision for (recovery of) loan losses: | 42,060 | — | 2,251 | 44,311 | |||||||||||
Charge-offs: | |||||||||||||||
1-4 single family residential | — | — | (16 | ) | (16 | ) | |||||||||
Home equity loans and lines of credit | — | — | (1,664 | ) | (1,664 | ) | |||||||||
Owner occupied commercial real estate | (263 | ) | — | — | (263 | ) | |||||||||
Commercial and industrial | (5,731 | ) | — | — | (5,731 | ) | |||||||||
Commercial lending subsidiaries | (7,725 | ) | — | — | (7,725 | ) | |||||||||
Total Charge-offs | (13,719 | ) | — | (1,680 | ) | (15,399 | ) | ||||||||
Recoveries: | |||||||||||||||
Home equity loans and lines of credit | — | — | 39 | 39 | |||||||||||
Other consumer loans | 32 | — | — | 32 | |||||||||||
Multi-family | — | — | 4 | 4 | |||||||||||
Non-owner occupied commercial real estate | 2 | — | — | 2 | |||||||||||
Commercial and industrial | 1,082 | — | 62 | 1,144 | |||||||||||
Commercial lending subsidiaries | 153 | — | — | 153 | |||||||||||
Total Recoveries | 1,269 | — | 105 | 1,374 | |||||||||||
Net Charge-offs: | (12,450 | ) | — | (1,575 | ) | (14,025 | ) | ||||||||
Balance at December 31, 2015 | 120,960 | — | 4,868 | 125,828 | |||||||||||
Provision for (recovery of) loan losses: | 52,592 | — | (1,681 | ) | 50,911 | ||||||||||
Charge-offs: | |||||||||||||||
1-4 single family residential | — | — | (442 | ) | (442 | ) | |||||||||
Home equity loans and lines of credit | — | — | (774 | ) | (774 | ) | |||||||||
Other consumer loans | (152 | ) | — | — | (152 | ) | |||||||||
Non-owner occupied commercial real estate | (128 | ) | — | — | (128 | ) | |||||||||
Construction and land | (93 | ) | — | — | (93 | ) | |||||||||
Owner occupied commercial real estate | (2,827 | ) | — | — | (2,827 | ) | |||||||||
Commercial and industrial | |||||||||||||||
Taxi medallion loans | (11,141 | ) | — | — | (11,141 | ) | |||||||||
Other commercial and industrial | (9,121 | ) | — | — | (9,121 | ) | |||||||||
Commercial lending subsidiaries | (2,432 | ) | — | — | (2,432 | ) | |||||||||
Total Charge-offs | (25,894 | ) | — | (1,216 | ) | (27,110 | ) | ||||||||
Recoveries: | |||||||||||||||
1-4 single family residential | |||||||||||||||
Home equity loans and lines of credit | — | — | 80 | 80 | |||||||||||
Other consumer loans | 26 | — | — | 26 | |||||||||||
Construction and land | — | — | — | — | |||||||||||
Owner occupied commercial real estate | 1,193 | — | — | 1,193 | |||||||||||
Commercial and industrial | |||||||||||||||
Other commercial and industrial | 698 | — | 49 | 747 | |||||||||||
Commercial lending subsidiaries | 1,278 | — | — | 1,278 | |||||||||||
Total Recoveries | 3,195 | — | 129 | 3,324 | |||||||||||
Net Charge-offs: | (22,699 | ) | — | (1,087 | ) | (23,786 | ) | ||||||||
Balance at December 31, 2016 | $ | 150,853 | $ | — | $ | 2,100 | $ | 152,953 | |||||||
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Covered Loans | |||||||||||||||
Non-Covered Loans | ACI Loans | Non-ACI Loans | Total | ||||||||||||
Balance at December 31, 2016 | $ | 150,853 | $ | — | $ | 2,100 | $ | 152,953 | |||||||
Provision for (recovery of) loan losses: | |||||||||||||||
1-4 single family residential | 862 | — | 100 | 962 | |||||||||||
Home equity loans and lines of credit | — | — | 1,318 | 1,318 | |||||||||||
Other consumer loans | 172 | — | — | 172 | |||||||||||
Multi-family | (1,015 | ) | — | — | (1,015 | ) | |||||||||
Non-owner occupied commercial real estate | 5,273 | — | — | 5,273 | |||||||||||
Construction and land | 243 | — | — | 243 | |||||||||||
Owner occupied commercial real estate | 4,797 | — | — | 4,797 | |||||||||||
Commercial and industrial | |||||||||||||||
Taxi medallion loans | 58,174 | — | — | 58,174 | |||||||||||
Other commercial and industrial | 7,262 | — | (60 | ) | 7,202 | ||||||||||
Commercial lending subsidiaries | (8,379 | ) | — | — | (8,379 | ) | |||||||||
Total Provision | 67,389 | — | 1,358 | 68,747 | |||||||||||
Charge-offs: | |||||||||||||||
1-4 single family residential | (1 | ) | — | (24 | ) | (25 | ) | ||||||||
Home equity loans and lines of credit | — | — | (3,303 | ) | (3,303 | ) | |||||||||
Non-owner occupied commercial real estate | (255 | ) | — | — | (255 | ) | |||||||||
Construction and land | (63 | ) | — | — | (63 | ) | |||||||||
Owner occupied commercial real estate | (2,612 | ) | — | — | (2,612 | ) | |||||||||
Commercial and industrial | |||||||||||||||
Taxi medallion loans | (56,615 | ) | — | — | (56,615 | ) | |||||||||
Other commercial and industrial | (18,320 | ) | — | — | (18,320 | ) | |||||||||
Commercial lending subsidiaries | — | — | — | — | |||||||||||
Total Charge-offs | (77,866 | ) | — | (3,327 | ) | (81,193 | ) | ||||||||
Recoveries: | |||||||||||||||
Home equity loans and lines of credit | — | — | 67 | 67 | |||||||||||
Other consumer loans | 26 | — | — | 26 | |||||||||||
Owner occupied commercial real estate | 2 | — | — | 2 | |||||||||||
Commercial and industrial | |||||||||||||||
Other commercial and industrial | 2,689 | — | 60 | 2,749 | |||||||||||
Commercial lending subsidiaries | 1,444 | — | — | 1,444 | |||||||||||
Total Recoveries | 4,161 | — | 127 | 4,288 | |||||||||||
Net Charge-offs: | (73,705 | ) | — | (3,200 | ) | (76,905 | ) | ||||||||
Balance at December 31, 2017 | $ | 144,537 | $ | — | $ | 258 | $ | 144,795 | |||||||
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The following tables show the distribution of the ALLL, broken out between covered and non-covered loans, at December 31 of the years indicated (dollars in thousands):
2017 | ||||||||||||||||||
Covered Loans | ||||||||||||||||||
Non-Covered Loans | ACI Loans | Non-ACI Loans | Total | %(1) | ||||||||||||||
Residential and other consumer: | ||||||||||||||||||
1 - 4 single family residential | $ | 10,140 | $ | — | $ | 257 | $ | 10,397 | 21.6 | % | ||||||||
Home equity loans and lines of credit | 7 | — | 1 | 8 | — | % | ||||||||||||
Other consumer loans | 315 | — | — | 315 | 0.1 | % | ||||||||||||
10,462 | — | 258 | 10,720 | 21.7 | % | |||||||||||||
Commercial: | ||||||||||||||||||
Multi-family | 23,994 | — | — | 23,994 | 15.0 | % | ||||||||||||
Non-owner occupied commercial real estate | 40,622 | — | — | 40,622 | 21.0 | % | ||||||||||||
Construction and land | 3,004 | — | — | 3,004 | 1.5 | % | ||||||||||||
Owner occupied commercial real estate | 13,611 | — | — | 13,611 | 9.4 | % | ||||||||||||
Commercial and industrial | ||||||||||||||||||
Taxi medallion loans | 12,214 | — | — | 12,214 | 0.6 | % | ||||||||||||
Other commercial and industrial | 29,698 | — | — | 29,698 | 18.8 | % | ||||||||||||
Commercial lending subsidiaries | 10,932 | — | — | 10,932 | 12.0 | % | ||||||||||||
134,075 | — | — | 134,075 | 78.3 | % | |||||||||||||
$ | 144,537 | $ | — | $ | 258 | $ | 144,795 | 100.0 | % | |||||||||
2016 | ||||||||||||||||||
Covered Loans | ||||||||||||||||||
Non-Covered Loans | ACI Loans | Non-ACI Loans | Total | %(1) | ||||||||||||||
Residential and other consumer: | ||||||||||||||||||
1 - 4 single family residential | $ | 9,279 | $ | — | $ | 181 | $ | 9,460 | 20.6 | % | ||||||||
Home equity loans and lines of credit | 7 | — | 1,919 | 1,926 | 0.3 | % | ||||||||||||
Other consumer loans | 117 | — | — | 117 | 0.1 | % | ||||||||||||
9,403 | — | 2,100 | 11,503 | 21.0 | % | |||||||||||||
Commercial: | ||||||||||||||||||
Multi-family | 25,009 | — | — | 25,009 | 19.8 | % | ||||||||||||
Non-owner occupied commercial real estate | 35,604 | — | — | 35,604 | 19.3 | % | ||||||||||||
Construction and land | 2,824 | — | — | 2,824 | 1.6 | % | ||||||||||||
Owner occupied commercial real estate | 11,424 | — | — | 11,424 | 9.0 | % | ||||||||||||
Commercial and industrial | ||||||||||||||||||
Taxi medallion loans | 10,655 | — | — | 10,655 | 0.9 | % | ||||||||||||
Other commercial and industrial | 38,067 | — | — | 38,067 | 16.6 | % | ||||||||||||
Commercial lending subsidiaries | 17,867 | — | — | 17,867 | 11.8 | % | ||||||||||||
141,450 | — | — | 141,450 | 79.0 | % | |||||||||||||
$ | 150,853 | $ | — | $ | 2,100 | $ | 152,953 | 100.0 | % | |||||||||
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2015 | ||||||||||||||||||
Covered Loans | ||||||||||||||||||
Non-Covered Loans | ACI Loans | Non-ACI Loans | Total | %(1) | ||||||||||||||
Residential and other consumer: | ||||||||||||||||||
1-4 single family residential | $ | 11,086 | $ | — | $ | 564 | $ | 11,650 | 21.9 | % | ||||||||
Home equity loans and lines of credit | 4 | — | 4,304 | 4,308 | 0.4 | % | ||||||||||||
Other consumer loans | 253 | — | — | 253 | 0.2 | % | ||||||||||||
11,343 | — | 4,868 | 16,211 | 22.5 | % | |||||||||||||
Commercial: | ||||||||||||||||||
Multi-family | 22,317 | — | — | 22,317 | 20.9 | % | ||||||||||||
Non-owner occupied commercial real estate | 26,179 | — | — | 26,179 | 17.5 | % | ||||||||||||
Construction and land | 3,587 | — | — | 3,587 | 2.1 | % | ||||||||||||
Owner occupied commercial real estate | 7,490 | — | — | 7,490 | 8.2 | % | ||||||||||||
Commercial and industrial | 33,661 | — | — | 33,661 | 16.7 | % | ||||||||||||
Commercial lending subsidiaries | 16,383 | — | — | 16,383 | 12.1 | % | ||||||||||||
109,617 | — | — | 109,617 | 77.5 | % | |||||||||||||
$ | 120,960 | $ | — | $ | 4,868 | $ | 125,828 | 100.0 | % | |||||||||
2014 | ||||||||||||||||||
Covered Loans | ||||||||||||||||||
Non-Covered Loans | ACI Loans | Non-ACI Loans | Total | %(1) | ||||||||||||||
Residential and other consumer: | ||||||||||||||||||
1-4 single family residential | $ | 7,116 | $ | — | $ | 945 | $ | 8,061 | 27.6 | % | ||||||||
Home equity loans and lines of credit | 17 | — | 3,247 | 3,264 | 1.0 | % | ||||||||||||
Other consumer loans | 190 | — | — | 190 | 0.2 | % | ||||||||||||
7,323 | — | 4,192 | 11,515 | 28.8 | % | |||||||||||||
Commercial: | ||||||||||||||||||
Multi-family | 14,970 | — | — | 14,970 | 15.8 | % | ||||||||||||
Non-owner occupied commercial real estate | 17,615 | — | — | 17,615 | 14.4 | % | ||||||||||||
Construction and land | 2,725 | — | — | 2,725 | 1.4 | % | ||||||||||||
Owner occupied commercial real estate | 8,273 | — | — | 8,273 | 8.4 | % | ||||||||||||
Commercial and industrial | 25,867 | — | — | 25,867 | 19.4 | % | ||||||||||||
Commercial lending subsidiaries | 14,577 | — | — | 14,577 | 11.8 | % | ||||||||||||
84,027 | — | — | 84,027 | 71.2 | % | |||||||||||||
$ | 91,350 | $ | — | $ | 4,192 | $ | 95,542 | 100.0 | % | |||||||||
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2013 | ||||||||||||||||||
Covered Loans | ||||||||||||||||||
Non-Covered Loans | ACI Loans | Non-ACI Loans | Total | %(1) | ||||||||||||||
Residential and other consumer: | ||||||||||||||||||
1-4 single family residential | $ | 6,271 | $ | — | $ | 827 | $ | 7,098 | 32.4 | % | ||||||||
Home equity loans and lines of credit | 12 | — | 8,243 | 8,255 | 1.9 | % | ||||||||||||
Other consumer loans | 2,187 | — | — | 2,187 | 2.4 | % | ||||||||||||
8,470 | — | 9,070 | 17,540 | 36.7 | % | |||||||||||||
Commercial: | ||||||||||||||||||
Multi-family | 3,947 | 323 | — | 4,270 | 12.6 | % | ||||||||||||
Non-owner occupied commercial real estate | 4,401 | 1,444 | 8 | 5,853 | 11.5 | % | ||||||||||||
Construction and land | 803 | 192 | 6 | 1,001 | 1.7 | % | ||||||||||||
Owner occupied commercial real estate | 6,774 | 369 | 6 | 7,149 | 8.5 | % | ||||||||||||
Commercial and industrial | 24,148 | 565 | 412 | 25,125 | 18.5 | % | ||||||||||||
Commercial lending subsidiaries | 8,787 | — | — | 8,787 | 10.5 | % | ||||||||||||
48,860 | 2,893 | 432 | 52,185 | 63.3 | % | |||||||||||||
$ | 57,330 | $ | 2,893 | $ | 9,502 | $ | 69,725 | 100.0 | % | |||||||||
(1) | Represents percentage of loans receivable in each category to total loans receivable. |
The balance of the ALLL for non-covered loans at December 31, 2017 decreased from the balance at December 31, 2016, in spite of the growth of the portfolio. This decrease was caused primarily by declines in quantitative loss factors applied to the majority of the non-covered loan portfolio and charge-offs taken, partially offset by the impact of the growth of the loan portfolio and an increase in reserves for criticized and classified loans not individually evaluated for impairment and for taxi medallion loans. Factors influencing the change in the ALLL related to specific loan types at December 31, 2017 as compared to December 31, 2016, include:
• | An $861 thousand increase for non-covered 1-4 single family residential loans was attributable to the growth in the corresponding portfolio, partially offset by declines in both the applicable quantitative historical loss rate and qualitative loss factors. |
• | A decrease of $1.0 million for multi-family loans reflected a decrease in the quantitative loss factor and a decline in the corresponding portfolio balance, offset in part by an increase in qualitative loss factors and in criticized and classified loans. |
• | An increase of $5.0 million for non-owner occupied commercial real estate loans was primarily driven by the growth of the corresponding portfolio. A net increase in qualitative loss factors and the impact of an increase in criticized and classified loans were offset by a decrease in the quantitative loss factor. |
• | An increase of $2.2 million for owner occupied commercial real estate loans was primarily attributable to increases in specific reserves for impaired loans. The impact of the growth of the corresponding portfolio was offset by a net decrease in quantitative and qualitative loss factors. |
• | An increase of $1.6 million for taxi medallion loans reflects the specific reserves recognized at December 31, 2017, as discussed previously. Increases in reserves were limited due to the level of charge-offs recognized during the year ended December 31, 2017. |
• | A decrease of $8.4 million for other commercial and industrial loans was driven by a decrease in reserves for impaired and other classified loans, primarily due to net charge-offs, and decreases in quantitative and qualitative loss factors, partially offset by growth in the corresponding portfolio. |
• | A $6.9 million decrease for commercial lending subsidiaries primarily reflected decreases in the quantitative loss factor and in qualitative loss factors related to portfolio growth trends and credit concentrations, for municipal finance receivables. |
For additional information about the ALLL, see Note 5 to the consolidated financial statements.
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Goodwill
Goodwill consists of $59 million recorded in conjunction with the FSB Acquisition, $8 million recorded in conjunction with the acquisition of two commercial lending subsidiaries in 2010 and $10 million recorded in conjunction with the SBF acquisition in May 2015. The Company has a single reporting unit. We perform goodwill impairment testing in the third quarter of each fiscal year. As of the 2017 impairment testing date, the estimated fair value of the reporting unit substantially exceeded its carrying amount; therefore, no impairment was indicated.
Deposits
A further breakdown of deposits as of December 31, 2017 and 2016 is shown below:
(1) Brokered deposits include certain time deposits at December 31, 2017 and 2016.The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $100,000 as of December 31, 2017 (in thousands):
Three months or less | $ | 1,077,250 | |
Over three through six months | 868,468 | ||
Over six through twelve months | 1,322,385 | ||
Over twelve months | 791,729 | ||
$ | 4,059,832 | ||
See Note 9 to the consolidated financial statements for more information about the Company's deposits.
FHLB Advances, Notes and Other Borrowings
In addition to deposits, we utilize FHLB advances to fund growth in interest earning assets; the advances provide us with additional flexibility in managing both term and cost of funding. FHLB advances are secured by FHLB stock, qualifying residential first mortgage, commercial real estate and home equity loans, and MBS.
See Note 10 to the consolidated financial statements for more information about the Company's FHLB advances and senior notes. Additionally, see Note 12 to the consolidated financial statements for more information about derivative instruments the Company uses to manage interest rate risk related to variability in cash flows due to changes in interest rates.
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 December 31, 2017 and 2016, BankUnited and the Company had capital levels that exceeded both the regulatory well-capitalized guidelines and all internal capital ratio targets. See Note 15 to the consolidated financial statements for more information about BankUnited's and the Company's regulatory capital ratios and requirements.
Stockholders' equity increased to $3.0 billion at December 31, 2017, an increase of $608 million, or 25.1%, from December 31, 2016, due primarily to the retention of earnings, including the discrete income tax benefit recorded during the
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fourth quarter of 2017, and to a lesser extent, the exercise of stock options resulting in proceeds of $62.1 million during the year.
Since our formation, stockholders' equity has been impacted primarily by the retention of earnings, and to a lesser extent, proceeds from the issuance of common shares and changes in unrealized gains and losses, net of taxes, on investment securities available for sale and cash flow hedges. Our rate of earnings retention is derived by dividing undistributed earnings per common share by earnings per common share. Our retention ratio was 85.0% and 60.2% for the years ended December 31, 2017 and 2016, respectively. We retain a high percentage of our earnings to support our planned growth.
In January 2018, the Board of Directors of the Company authorized a share repurchase program under which the Company may repurchase up to $150 million in shares of its outstanding common stock. Any repurchases will be made in accordance with applicable securities laws from time to time in open market or private transactions. The extent to which the Company repurchases shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, the Company’s capital position and amount of retained earnings, regulatory requirements and other considerations. No time limit was set for the completion of the share repurchase program, and the program may be suspended or discontinued at any time.
We filed a shelf registration statement with the SEC in October 2015 that allows the Company to periodically offer and sell in one or more offerings, individually or in any combination, our common stock, preferred stock and other non-equity securities. The shelf registration provides us with flexibility in issuing capital instruments and enables us to more readily access the capital markets as needed to pursue future growth opportunities and to ensure continued compliance with regulatory capital requirements. Our ability to issue securities pursuant to the shelf registration is subject to market conditions.
Liquidity
Liquidity involves our ability to generate adequate funds to support planned interest earning asset growth, meet deposit withdrawal requests, maintain reserve requirements, conduct routine operations, pay dividends, service outstanding debt and meet other contractual obligations.
Primary sources of liquidity include cash flows from operations, cash generated by the repayment and resolution of covered loans, cash payments received from the FDIC pursuant to the Single Family Shared-Loss Agreement, deposit growth, the available for sale securities portfolio and FHLB advances.
For the years ended December 31, 2017, 2016 and 2015, net cash provided by operating activities was $318.6 million, $308.5 million and $219.5 million, respectively. Accretion on ACI loans, which is reflected as a non-cash reduction in net income to arrive at operating cash flows, totaled $301.8 million, $303.9 million and $295.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. Accretable yield on ACI loans represents the excess of expected future cash flows over the carrying amount of the loans, and is recognized as interest income over the expected lives of the loans. Amounts recorded as accretion are realized in cash as individual loans are paid down or otherwise resolved; however, the timing of cash realization may differ from the timing of income recognition. These cash flows from the repayment or resolution of covered loans, inclusive of amounts that have been accreted through earnings over time, are recognized as cash flows from investing activities in the consolidated statements of cash flows upon receipt. Cash payments from the FDIC in the form of reimbursements of losses related to the covered loans under the Single Family Shared-Loss Agreement are also characterized as investing cash flows. Cash generated by the repayment and resolution of covered loans and reimbursements from the FDIC totaled $469.3 million, $558.5 million and $658.2 million for the years ended December 31, 2017, 2016 and 2015, respectively. Both cash generated by the repayment and resolution of covered loans and cash payments received from the FDIC have been and are expected to continue to be consistent and relatively predictable sources of liquidity until the expected termination of the Single Family Shared-Loss Agreement in 2019.
In addition to cash provided by operating activities, the repayment and resolution of covered loans and payments under the Single Family Shared-Loss Agreement from the FDIC, BankUnited’s liquidity needs, particularly liquidity to fund growth of interest earning assets, have been and continue to be met by deposit growth and FHLB advances. The investment portfolio also provides a source of liquidity.
BankUnited has access to additional liquidity through FHLB advances, other collateralized borrowings, wholesale deposits or the sale of available for sale securities. At December 31, 2017, unencumbered investment securities available for sale totaled $4.0 billion. At December 31, 2017, BankUnited had available borrowing capacity at the FHLB of $4.1 billion, unused borrowing capacity at the FRB of $770 million and unused Federal funds lines of credit totaling $70 million. Management also has the ability to exert substantial control over the rate and timing of growth of the non-covered loan portfolio, and resultant requirements for liquidity to fund loans.
Continued growth of deposits and the non-covered loan portfolio and runoff of the covered loan portfolio and FDIC indemnification asset are the most significant trends expected to impact the Bank’s liquidity in the near term.
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The ALCO policy has established several measures of liquidity which are monitored monthly by the ALCO and quarterly by the Board of Directors. One primary measure of liquidity monitored by management is the 30 day total liquidity ratio, defined as (a) the sum of cash and cash equivalents, pledgeable securities and a measure of funds expected to be generated by operations over the next 30 days; divided by (b) the sum of potential deposit runoff, liabilities maturing within the 30 day time frame and a measure of funds expected to be used in operations over the next 30 days. BankUnited’s liquidity is considered acceptable if the 30 day total liquidity ratio exceeds 100%. At December 31, 2017, BankUnited’s 30 day total liquidity ratio was 173%. Management also monitors a one year liquidity ratio, defined as (a) cash and cash equivalents, pledgeable securities, unused borrowing capacity at the FHLB, and loans and non-agency securities maturing within one year; divided by (b) forecasted deposit outflows and borrowings maturing within one year. This ratio allows management to monitor liquidity over a longer time horizon. The acceptable threshold established by the ALCO for this liquidity measure is 100%. At December 31, 2017, BankUnited’s one year liquidity ratio was 154%. Additional measures of liquidity regularly monitored by the ALCO include the ratio of wholesale funding to total assets, a measure of available liquidity to volatile liabilities and the ratio of brokered deposits to total deposits. At December 31, 2017, BankUnited was within acceptable limits established by the ALCO and the Board of Directors for each of these measures.
As a holding company, BankUnited, Inc. is a corporation separate and apart from its banking subsidiary, and therefore, provides for its own liquidity. BankUnited, Inc.’s main sources of funds include management fees and dividends from the Bank, access to capital markets and, to a lesser extent, its own available for sale securities portfolio. There are regulatory limitations that affect the ability of the Bank to pay dividends to BankUnited, Inc. Management believes that such limitations will not impact our ability to meet our ongoing near-term cash obligations.
We expect that our liquidity requirements will continue to be satisfied over the next 12 months through the sources of funds described above.
Interest Rate Risk
The principal component of the Company’s risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is interest rate risk, including the risk that assets and liabilities with similar re-pricing characteristics may not reprice at the same time or to the same degree. A primary objective of the Company’s asset/liability management activities is to maximize net interest income, while maintaining acceptable levels of interest rate risk. The ALCO is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with these policies. The guidelines established by the ALCO are approved at least annually by the Board of Directors.
Management believes that the simulation of net interest income in different interest rate environments provides the most meaningful measure of interest rate risk. Income simulation analysis is designed to capture not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them.
The income simulation model analyzes interest rate sensitivity by projecting net interest income over twelve and twenty-four month periods in a most likely rate scenario based on consensus forward interest rate curves versus net interest income in alternative rate scenarios. Simulations are generated based on both static and dynamic balance sheet assumptions. Management continually reviews and refines its interest rate risk management process in response to changes in the interest rate environment and economic climate. Currently, our model projects instantaneous rate shocks of down 100, plus 100, plus 200, plus 300 and plus 400 basis point shifts as well as flattening and inverted yield curve scenarios. We continually evaluate the scenarios being modeled with a view toward adapting them to changing economic conditions, expectations and trends.
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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, based on a dynamic forecasted balance sheet, in specified rate shock scenarios are within specified percentages of forecast net interest income in the most likely rate scenario over the next twelve months and in the second year. The following table illustrates the acceptable limits as defined by policy and the impact on forecasted net interest income of down 100, plus 100, plus 200, plus 300 and plus 400 basis point rate shock scenarios at December 31, 2017 and 2016:
Down 100 | Plus 100 | Plus 200 | Plus 300 | Plus 400 | ||||||||||
Policy Limits: | ||||||||||||||
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 December 31, 2017 - increase (decrease): | ||||||||||||||
In year 1 | (0.3 | )% | (0.1 | )% | (0.5 | )% | (1.4 | )% | (2.7 | )% | ||||
In year 2 | (3.5 | )% | 1.8 | % | 3.2 | % | 4.3 | % | 4.8 | % | ||||
Model Results at December 31, 2016 - increase (decrease) (1): | ||||||||||||||
In year 1 | (2.0 | )% | 1.5 | % | 2.8 | % | 3.4 | % | ||||||
In year 2 | (3.7 | )% | 2.6 | % | 4.6 | % | 6.6 | % | ||||||
(1) | Calculations not performed for a 400 basis point rate shock scenario at December 31, 2016 |
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 six rate scenarios, derived by implementing immediate parallel movements of plus and minus 100, 200, 300 and 400 basis points from current rates. We did not simulate decreases in interest rates greater than 100 basis points at December 31, 2017 due to the current low rate environment. The parameters established by the ALCO stipulate that the modeled decline in EVE is considered acceptable if the decline is less than 9%, 18%, 27% and 36% in plus or minus 100, 200, 300 and 400 basis point scenarios, respectively. As of December 31, 2017, our simulation for the Bank indicated percentage changes from base EVE of 1.9%, (3.8)%, (8.0)%, (12.4)% and (16.9)% in down 100, plus 100, plus 200, plus 300 and plus 400 basis point scenarios, respectively.
These measures fall within an acceptable level of interest rate risk per the policies established by the ALCO and the Board of Directors. In the event the models indicate an unacceptable level of risk, the Company could undertake a number of actions that would reduce this risk, including the sale or re-positioning of a portion of its available for sale investment portfolio, restructuring of borrowings, or the use of derivatives such as interest rate swaps and caps.
Many assumptions were used by the Company to calculate the impact of changes in interest rates, including the change in rates. Actual results may not be similar to the Company’s projections due to several factors including the timing and frequency of rate changes, market conditions, changes in depositor behavior and the shape of the yield curve. Actual results may also differ due to the Company’s actions, if any, in response to changing rates and conditions.
Derivative Financial Instruments
Interest rate swaps are one of the tools we use to manage interest rate risk. These derivative instruments are used to mitigate exposure to changes in interest rates on variable rate borrowings such as FHLB advances and to manage duration of liabilities. These interest rate swaps are designated as cash flow hedging instruments. The fair value of these instruments is included in other assets and other liabilities in our consolidated balance sheets and changes in fair value are reported in accumulated other comprehensive income. At December 31, 2017, outstanding interest rate swaps designated as cash flow hedges had an aggregate notional amount of $2.0 billion. The aggregate fair value of interest rate swaps designated as cash flow hedges included in other assets was $2.4 million.
Interest rate swaps and caps not designated as cash flow hedges had an aggregate notional amount of $2.3 billion at December 31, 2017. The aggregate fair value of these interest rate swaps and caps included in other assets was $25.3 million and the aggregate fair value included in other liabilities was $25.4 million. These interest rate swaps and caps were entered into as accommodations to certain of our commercial borrowers.
See Note 12 to the consolidated financial statements for additional information about derivative financial instruments.
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Off-Balance Sheet Arrangements
We routinely enter into commitments to extend credit to our customers, including commitments to fund loans or lines of
credit and commercial and standby letters of credit. The credit risk associated with these commitments is essentially the same as
that involved in extending loans to customers and they are subject to our normal credit policies and approval processes. While
these commitments represent contractual cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.
For more information on commitments, see Note 17 to the consolidated financial statements.
Contractual Obligations
The following table contains supplemental information regarding our significant outstanding contractual obligations, including interest to be paid on FHLB advances, long-term borrowings and time deposits, as of December 31, 2017 (in thousands):
Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | |||||||||||||||
FHLB advances | $ | 4,795,108 | $ | 4,566,103 | $ | 229,005 | $ | — | $ | — | |||||||||
4.875% Senior notes due 2025 | 556,000 | 19,500 | 39,000 | 39,000 | 458,500 | ||||||||||||||
Operating lease obligations | 136,675 | 22,340 | 38,670 | 27,482 | 48,183 | ||||||||||||||
Time deposits | 6,409,089 | 5,282,298 | 995,667 | 131,034 | 90 | ||||||||||||||
Capital lease obligations | 14,607 | 1,799 | 3,813 | 4,046 | 4,949 | ||||||||||||||
$ | 11,911,479 | $ | 9,892,040 | $ | 1,306,155 | $ | 201,562 | $ | 511,722 | ||||||||||
Non-GAAP Financial Measures
Tangible book value per common share and tangible common equity to assets ratio are non-GAAP financial measures. Management believes these measures are relevant to understanding the capital position and performance of the Company. Disclosure of these non-GAAP financial measures also provide a meaningful base for comparability to other financial institutions. The following table reconciles the non-GAAP financial measurements of tangible book value per common share and tangible common equity to assets ratio to their comparable GAAP financial measurements of book value per common share and equity to assets ratio, respectively, at December 31 of the years indicated (in thousands except share and per share data):
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Total stockholders' equity | $ | 3,026,062 | $ | 2,418,429 | $ | 2,243,898 | $ | 2,052,534 | $ | 1,928,698 | |||||||||
Less: goodwill and other intangible assets | 77,796 | 78,047 | 78,330 | 68,414 | 69,067 | ||||||||||||||
Tangible stockholders’ equity | $ | 2,948,266 | $ | 2,340,382 | $ | 2,165,568 | $ | 1,984,120 | $ | 1,859,631 | |||||||||
Common shares issued and outstanding | 106,848,185 | 104,166,945 | 103,626,255 | 101,656,702 | 101,013,014 | ||||||||||||||
Book value per common share | $ | 28.32 | $ | 23.22 | $ | 21.65 | $ | 20.19 | $ | 19.09 | |||||||||
Tangible book value per common share | $ | 27.59 | $ | 22.47 | $ | 20.90 | $ | 19.52 | $ | 18.41 | |||||||||
Total assets | $ | 30,346,986 | $ | 27,880,151 | $ | 23,883,467 | $ | 19,210,529 | $ | 15,046,649 | |||||||||
Equity to assets ratio | 9.97 | % | 8.67 | % | 9.40 | % | 10.68 | % | 12.82 | % | |||||||||
Tangible common equity to assets ratio | 9.72 | % | 8.39 | % | 9.07 | % | 10.33 | % | 12.36 | % | |||||||||
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Net income, earnings per diluted common share, return on average stockholders' equity and return on average assets, in each case excluding the impact of a discrete income tax benefit and related professional fees are non-GAAP financial measures. Management believes disclosure of these measures enhances readers' ability to compare the Company's financial performance for the current period to that of other periods presented. The following table reconciles these non-GAAP financial measurements to the comparable GAAP financial measurements of net income, earnings per diluted common share, return on average stockholders' equity and return on average assets for the years ended December 31, 2017 and 2015 (in thousands except share and per share data):
Year Ended December 31, 2017 | Year Ended December 31, 2015 | |||||||
Net income excluding the impact of a discrete income tax benefit and related professional fees: | ||||||||
Net income (GAAP) | $ | 614,273 | $ | 251,660 | ||||
Less discrete income tax benefit | (327,945 | ) | (49,323 | ) | ||||
Add back related professional fees (net of tax of $1,802 and $524) | 4,995 | 801 | ||||||
Net income excluding the impact of a discrete income tax benefit and related professional fees (non-GAAP) | $ | 291,323 | $ | 203,138 | ||||
Diluted earnings per common share, excluding the impact of a discrete income tax benefit and related professional fees: | ||||||||
Diluted earnings per common share (GAAP) | $ | 5.58 | $ | 2.35 | ||||
Less impact on diluted earnings per common share of discrete income tax benefit and related professional fees, before allocation to participating securities (non-GAAP) | (3.05 | ) | (0.47 | ) | ||||
Less impact on diluted earnings per common share of discrete income tax benefit and related professional fees allocated to participating securities (non-GAAP) | 0.12 | 0.02 | ||||||
Diluted earnings per common share, excluding the impact of a discrete income tax benefit and related professional fees (non-GAAP) | $ | 2.65 | $ | 1.90 | ||||
Impact on diluted earnings per common share of discrete income tax benefit and related professional fees, before allocation to participating securities: | ||||||||
Discrete income tax benefit and related professional fees, net of tax | $ | 322,950 | $ | 48,522 | ||||
Weighted average shares for diluted earnings per share (GAAP) | 105,857,487 | 102,972,150 | ||||||
Impact on diluted earnings per common share of discrete income tax benefit and related professional fees, before allocation to participating securities (non-GAAP) | $ | 3.05 | $ | 0.47 | ||||
Impact on diluted earnings per common share of discrete income tax benefit and related professional fees allocated to participating securities: | ||||||||
Discrete income tax benefit and related professional fees, net of tax, allocated to participating securities | $ | (12,424 | ) | $ | (1,881 | ) | ||
Weighted average shares for diluted earnings per share (GAAP) | 105,857,487 | 102,972,150 | ||||||
Impact on diluted earnings per common share of discrete income tax benefit and related professional fees allocated to participating securities (non-GAAP) | $ | (0.12 | ) | $ | (0.02 | ) | ||
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Year Ended December 31, 2017 | ||||
Return on average assets, excluding the impact of a discrete income tax benefit and related professional fees: | ||||
Return on average assets (GAAP) | 2.13 | % | ||
Less impact on return on average assets of discrete income tax benefit and related professional fees (non-GAAP) | (1.12 | )% | ||
Return on average assets, excluding the impact of a discrete income tax benefit and related professional fees (non-GAAP) | 1.01 | % | ||
Impact on return on average assets of discrete income tax benefit and related professional fees: | ||||
Discrete income tax benefit and related professional fees, net of tax | $ | 322,950 | ||
Average assets | 28,825,394 | |||
Impact on return on average assets of discrete income tax benefit and related professional fees (non-GAAP) | 1.12 | % | ||
Return on average stockholders' equity, excluding the impact of a discrete income tax benefit and related professional fees: | ||||
Return on stockholders' equity (GAAP) | 23.36 | % | ||
Less impact on return on stockholders' equity of discrete income tax benefit and related professional fees (non-GAAP) | (12.28 | )% | ||
Return on stockholders' equity, excluding the impact of a discrete income tax benefit and related professional fees (non-GAAP) | 11.08 | % | ||
Impact on return on average stockholders' equity of discrete income tax benefit and related professional fees: | ||||
Discrete income tax benefit and related professional fees, net of tax | $ | 322,950 | ||
Average stockholders' equity | 2,629,372 | |||
Impact on return on average stockholders' equity of discrete income tax benefit and related professional fees (non-GAAP) | 12.28 | % | ||
The effective tax rate excluding the impact of the discrete income tax benefit and the impact of the change in the federal statutory rate on existing deferred tax assets and liabilities is a non-GAAP financial measure. Management believes disclosure of this measure enhances readers' ability to compare the Company's financial performance for the current period to that of other periods presented. The following table reconciles this non-GAAP financial measurement to the comparable GAAP financial measurement of the effective tax rate for the years ended December 31, 2017 and 2015 (dollars in thousands):
Year Ended December 31, 2017 | Year Ended December 31, 2015 | |||||||
Effective income tax rate, excluding the impact of a discrete income tax benefit and impact of enactment of the Tax Cuts and Jobs Act of 2017: | ||||||||
Effective income tax rate (GAAP) | (51.9 | )% | 15.2 | % | ||||
Less impact on effective income tax rate of discrete income tax benefit and enactment of the Tax Cuts and Jobs Act of 2017 (non-GAAP) | 82.0 | % | 16.6 | % | ||||
Effective income tax rate, excluding the impact of a discrete income tax benefit and enactment of the Tax Cuts and Jobs Act of 2017 (non-GAAP) | 30.1 | % | 31.8 | % | ||||
Impact on effective income tax rate of discrete income tax benefit and enactment of the Tax Cuts and Jobs Act of 2017 (non-GAAP): | ||||||||
Discrete income tax benefit | $ | (327,945 | ) | $ | (49,323 | ) | ||
Tax benefit recognized from enactment of the Tax Cuts and Jobs Act of 2017 | (3,744 | ) | — | |||||
$ | (331,689 | ) | $ | (49,323 | ) | |||
Income before income taxes (GAAP) | 404,461 | 296,893 | ||||||
Impact on effective income tax rate of discrete income tax benefit and enactment of the Tax Cuts and Jobs Act of 2017 (non-GAAP) | (82.0 | )% | (16.6 | )% | ||||
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See the section entitled “Interest Rate Risk” included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
BankUnited, Inc. Consolidated Financial Statements for the Years ended December 31, 2017, 2016 and 2015 | |
Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016 | |
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015 | |
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2017, 2016 and 2015 | |
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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Company's principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under the framework in Internal Control—Integrated Framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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Report of Independent Registered Public Accounting Firm
To the stockholders and board of directors
BankUnited, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of BankUnited, Inc. and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/KPMG LLP
We have served as the Company's auditor since 2009.
Miami, Florida
February 28, 2018
Certified Public Accountants
82
Report of Independent Registered Public Accounting Firm
To the stockholders and board of directors
BankUnited, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited BankUnited, Inc.'s and subsidiaries’ (the "Company") internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the "consolidated financial statements"), and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/KPMG LLP
Miami, Florida
February 28, 2018
Certified Public Accountants
83
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31, 2017 | December 31, 2016 | ||||||
ASSETS | |||||||
Cash and due from banks: | |||||||
Non-interest bearing | $ | 35,246 | $ | 40,260 | |||
Interest bearing | 159,336 | 408,053 | |||||
Cash and cash equivalents | 194,582 | 448,313 | |||||
Investment securities available for sale, at fair value | 6,680,832 | 6,073,584 | |||||
Investment securities held to maturity | 10,000 | 10,000 | |||||
Non-marketable equity securities | 265,989 | 284,272 | |||||
Loans held for sale | 34,097 | 41,198 | |||||
Loans (including covered loans of $503,118 and $614,042) | 21,416,504 | 19,395,394 | |||||
Allowance for loan and lease losses | (144,795 | ) | (152,953 | ) | |||
Loans, net | 21,271,709 | 19,242,441 | |||||
FDIC indemnification asset | 295,635 | 515,933 | |||||
Bank owned life insurance | 252,462 | 239,736 | |||||
Equipment under operating lease, net | 599,502 | 539,914 | |||||
Goodwill and other intangible assets | 77,796 | 78,047 | |||||
Other assets | 664,382 | 406,713 | |||||
Total assets | $ | 30,346,986 | $ | 27,880,151 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Liabilities: | |||||||
Demand deposits: | |||||||
Non-interest bearing | $ | 3,162,032 | $ | 2,960,591 | |||
Interest bearing | 1,666,581 | 1,523,064 | |||||
Savings and money market | 10,715,024 | 9,251,593 | |||||
Time | 6,334,842 | 5,755,642 | |||||
Total deposits | 21,878,479 | 19,490,890 | |||||
Federal Home Loan Bank advances | 4,771,000 | 5,239,348 | |||||
Notes and other borrowings | 402,830 | 402,809 | |||||
Other liabilities | 268,615 | 328,675 | |||||
Total liabilities | 27,320,924 | 25,461,722 | |||||
Commitments and contingencies | |||||||
Stockholders' equity: | |||||||
Common stock, par value $0.01 per share, 400,000,000 shares authorized; 106,848,185 and 104,166,945 shares issued and outstanding | 1,068 | 1,042 | |||||
Paid-in capital | 1,498,227 | 1,426,459 | |||||
Retained earnings | 1,471,781 | 949,681 | |||||
Accumulated other comprehensive income | 54,986 | 41,247 | |||||
Total stockholders' equity | 3,026,062 | 2,418,429 | |||||
Total liabilities and stockholders' equity | $ | 30,346,986 | $ | 27,880,151 | |||
The accompanying notes are an integral part of these consolidated financial statements.
84
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Interest income: | |||||||||||
Loans | $ | 1,001,862 | $ | 896,154 | $ | 753,901 | |||||
Investment securities | 188,307 | 150,859 | 116,817 | ||||||||
Other | 14,292 | 12,204 | 10,098 | ||||||||
Total interest income | 1,204,461 | 1,059,217 | 880,816 | ||||||||
Interest expense: | |||||||||||
Deposits | 170,933 | 119,773 | 91,151 | ||||||||
Borrowings | 83,256 | 69,059 | 44,013 | ||||||||
Total interest expense | 254,189 | 188,832 | 135,164 | ||||||||
Net interest income before provision for loan losses | 950,272 | 870,385 | 745,652 | ||||||||
Provision for (recovery of) loan losses (including $1,358, $(1,681) and $2,251 for covered loans) | 68,747 | 50,911 | 44,311 | ||||||||
Net interest income after provision for loan losses | 881,525 | 819,474 | 701,341 | ||||||||
Non-interest income: | |||||||||||
Income from resolution of covered assets, net | 27,450 | 36,155 | 50,658 | ||||||||
Net loss on FDIC indemnification | (22,220 | ) | (17,759 | ) | (65,942 | ) | |||||
Service charges and fees | 20,864 | 19,463 | 17,876 | ||||||||
Gain (loss) on sale of loans, net (including $17,406, $(14,470) and $34,929 related to covered loans) | 27,589 | (4,406 | ) | 40,633 | |||||||
Gain on investment securities available for sale, net | 33,466 | 14,461 | 8,480 | ||||||||
Lease financing | 53,837 | 44,738 | 35,641 | ||||||||
Other non-interest income | 16,918 | 13,765 | 14,878 | ||||||||
Total non-interest income | 157,904 | 106,417 | 102,224 | ||||||||
Non-interest expense: | |||||||||||
Employee compensation and benefits | 237,824 | 223,011 | 210,104 | ||||||||
Occupancy and equipment | 75,386 | 76,003 | 76,024 | ||||||||
Amortization of FDIC indemnification asset | 176,466 | 160,091 | 109,411 | ||||||||
Deposit insurance expense | 22,011 | 17,806 | 14,257 | ||||||||
Professional fees | 23,676 | 14,249 | 14,185 | ||||||||
Telecommunications and data processing | 13,966 | 14,343 | 13,613 | ||||||||
Depreciation of equipment under operating lease | 35,015 | 31,580 | 18,369 | ||||||||
Other non-interest expense | 50,624 | 53,364 | 50,709 | ||||||||
Total non-interest expense | 634,968 | 590,447 | 506,672 | ||||||||
Income before income taxes | 404,461 | 335,444 | 296,893 | ||||||||
Provision (benefit) for income taxes | (209,812 | ) | 109,703 | 45,233 | |||||||
Net income | $ | 614,273 | $ | 225,741 | $ | 251,660 | |||||
Earnings per common share, basic (see Note 2) | $ | 5.60 | $ | 2.11 | $ | 2.37 | |||||
Earnings per common share, diluted (see Note 2) | $ | 5.58 | $ | 2.09 | $ | 2.35 | |||||
Cash dividends declared per common share | $ | 0.84 | $ | 0.84 | $ | 0.84 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
85
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Net income | $ | 614,273 | $ | 225,741 | $ | 251,660 | |||||
Other comprehensive income (loss), net of tax: | |||||||||||
Unrealized gains on investment securities available for sale: | |||||||||||
Net unrealized holding gain (loss) arising during the period | 29,724 | 14,271 | (21,657 | ) | |||||||
Reclassification adjustment for net securities gains realized in income | (20,247 | ) | (8,749 | ) | (5,130 | ) | |||||
Net change in unrealized gains on securities available for sale | 9,477 | 5,522 | (26,787 | ) | |||||||
Unrealized losses on derivative instruments: | |||||||||||
Net unrealized holding gain (loss) arising during the period | (1,559 | ) | 3,766 | (13,403 | ) | ||||||
Reclassification adjustment for net losses realized in income | 5,821 | 9,777 | 16,020 | ||||||||
Net change in unrealized losses on derivative instruments | 4,262 | 13,543 | 2,617 | ||||||||
Other comprehensive income (loss) | 13,739 | 19,065 | (24,170 | ) | |||||||
Comprehensive income | $ | 628,012 | $ | 244,806 | $ | 227,490 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
86
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 614,273 | $ | 225,741 | $ | 251,660 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Amortization and accretion, net | (95,145 | ) | (113,979 | ) | (164,376 | ) | |||||
Provision for loan losses | 68,747 | 50,911 | 44,311 | ||||||||
Income from resolution of covered assets, net | (27,450 | ) | (36,155 | ) | (50,658 | ) | |||||
Net loss on FDIC indemnification | 22,220 | 17,759 | 65,942 | ||||||||
(Gain) loss on sale of loans, net | (27,589 | ) | 4,406 | (40,633 | ) | ||||||
Income from bank owned life insurance | (5,508 | ) | (3,469 | ) | (3,102 | ) | |||||
Gain on investment securities available for sale, net | (33,466 | ) | (14,461 | ) | (8,480 | ) | |||||
Equity based compensation | 22,692 | 18,032 | 16,027 | ||||||||
Depreciation and amortization | 61,552 | 56,444 | 43,390 | ||||||||
Deferred income taxes | 57,801 | 30,189 | 29,471 | ||||||||
Proceeds from sale of loans held for sale | 158,621 | 163,088 | 169,139 | ||||||||
Loans originated for sale, net of repayments | (142,682 | ) | (148,195 | ) | (130,819 | ) | |||||
Other: | |||||||||||
(Increase) decrease in other assets | (314,121 | ) | 24,840 | (34,315 | ) | ||||||
Increase (decrease) in other liabilities | (41,319 | ) | 33,359 | 31,922 | |||||||
Net cash provided by operating activities | 318,626 | 308,510 | 219,479 | ||||||||
Cash flows from investing activities: | |||||||||||
Net cash paid in business combination | — | — | (277,553 | ) | |||||||
Purchase of investment securities available for sale | (3,131,798 | ) | (3,058,106 | ) | (2,093,508 | ) | |||||
Proceeds from repayments and calls of investment securities available for sale | 1,260,444 | 724,666 | 537,992 | ||||||||
Proceeds from sale of investment securities available for sale | 1,287,591 | 1,127,983 | 1,114,020 | ||||||||
Purchase of non-marketable equity securities | (248,405 | ) | (255,100 | ) | (141,599 | ) | |||||
Proceeds from redemption of non-marketable equity securities | 266,688 | 190,825 | 113,276 | ||||||||
Purchases of loans | (1,300,996 | ) | (1,266,097 | ) | (787,834 | ) | |||||
Loan originations, repayments and resolutions, net | (672,338 | ) | (1,394,916 | ) | (3,128,701 | ) | |||||
Proceeds from sale of loans, net | 196,413 | 171,367 | 207,425 | ||||||||
Decrease in FDIC indemnification asset for claims filed | 21,589 | 46,083 | 59,139 | ||||||||
Acquisition of equipment under operating lease, net | (94,603 | ) | (87,976 | ) | (187,329 | ) | |||||
Other investing activities | (37,161 | ) | (24,960 | ) | (24,020 | ) | |||||
Net cash used in investing activities | (2,452,576 | ) | (3,826,231 | ) | (4,608,692 | ) | |||||
(Continued) | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
87
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
Years Ended December 31, | |||||||||||
2017 | 2016 | 2,015 | |||||||||
Cash flows from financing activities: | |||||||||||
Net increase in deposits | 2,387,589 | 2,552,389 | 3,426,755 | ||||||||
Additions to Federal Home Loan Bank advances | 4,916,000 | 4,025,000 | 3,180,000 | ||||||||
Repayments of Federal Home Loan Bank advances | (5,385,000 | ) | (2,795,000 | ) | (2,480,350 | ) | |||||
Proceeds from issuance of notes, net | — | — | 392,252 | ||||||||
Dividends paid | (91,628 | ) | (89,824 | ) | (88,981 | ) | |||||
Exercise of stock options | 62,095 | 791 | 35,647 | ||||||||
Other financing activities | (8,837 | ) | 5,178 | 3,873 | |||||||
Net cash provided by financing activities | 1,880,219 | 3,698,534 | 4,469,196 | ||||||||
Net increase (decrease) in cash and cash equivalents | (253,731 | ) | 180,813 | 79,983 | |||||||
Cash and cash equivalents, beginning of period | 448,313 | 267,500 | 187,517 | ||||||||
Cash and cash equivalents, end of period | $ | 194,582 | $ | 448,313 | $ | 267,500 | |||||
Supplemental disclosure of cash flow information: | |||||||||||
Interest paid | $ | 247,548 | $ | 186,525 | $ | 130,963 | |||||
Income taxes paid, net | $ | 69,231 | $ | 16,464 | $ | 29,346 | |||||
Supplemental schedule of non-cash investing and financing activities: | |||||||||||
Transfers from loans to other real estate owned and other repossessed assets | $ | 13,313 | $ | 17,045 | $ | 17,541 | |||||
Dividends declared, not paid | $ | 23,055 | $ | 22,510 | $ | 22,380 | |||||
Obligations incurred in acquisition of affordable housing limited partnerships | $ | — | $ | 12,750 | $ | 57,139 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
88
BANKUNITED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
Common Shares Outstanding | Common Stock | Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total Stockholders’ Equity | |||||||||||||||||
Balance at December 31, 2014 | 101,656,702 | $ | 1,017 | $ | 1,353,538 | $ | 651,627 | $ | 46,352 | $ | 2,052,534 | |||||||||||
Comprehensive income | — | — | — | 251,660 | (24,170 | ) | 227,490 | |||||||||||||||
Dividends | — | — | — | (89,393 | ) | — | (89,393 | ) | ||||||||||||||
Equity based compensation | 664,928 | 7 | 16,020 | — | — | 16,027 | ||||||||||||||||
Forfeiture of unvested shares | (59,270 | ) | (1 | ) | 1 | — | — | — | ||||||||||||||
Exercise of stock options | 1,363,895 | 13 | 35,634 | — | — | 35,647 | ||||||||||||||||
Tax benefits from dividend equivalents and equity based compensation | — | — | 1,593 | — | — | 1,593 | ||||||||||||||||
Balance at December 31, 2015 | 103,626,255 | 1,036 | 1,406,786 | 813,894 | 22,182 | 2,243,898 | ||||||||||||||||
Comprehensive income | — | — | — | 225,741 | 19,065 | 244,806 | ||||||||||||||||
Dividends | — | — | — | (89,954 | ) | — | (89,954 | ) | ||||||||||||||
Equity based compensation | 651,760 | 7 | 18,026 | — | — | 18,033 | ||||||||||||||||
Forfeiture of unvested shares and shares surrendered for tax withholding obligations | (159,049 | ) | (1 | ) | (484 | ) | — | — | (485 | ) | ||||||||||||
Exercise of stock options | 47,979 | — | 791 | — | — | 791 | ||||||||||||||||
Tax benefits from dividend equivalents and equity based compensation | — | — | 1,340 | — | — | 1,340 | ||||||||||||||||
Balance at December 31, 2016 | 104,166,945 | $ | 1,042 | $ | 1,426,459 | $ | 949,681 | $ | 41,247 | $ | 2,418,429 | |||||||||||
Comprehensive income | — | — | — | 614,273 | 13,739 | 628,012 | ||||||||||||||||
Dividends | — | — | — | (92,173 | ) | — | (92,173 | ) | ||||||||||||||
Equity based compensation | 621,806 | 6 | 16,990 | — | — | 16,996 | ||||||||||||||||
Forfeiture of unvested shares and shares surrendered for tax withholding obligations | (271,954 | ) | (3 | ) | (7,294 | ) | — | — | (7,297 | ) | ||||||||||||
Exercise of stock options | 2,331,388 | 23 | 62,072 | — | — | 62,095 | ||||||||||||||||
Balance at December 31, 2017 | 106,848,185 | $ | 1,068 | $ | 1,498,227 | $ | 1,471,781 | $ | 54,986 | $ | 3,026,062 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
89
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note 1 Basis of Presentation and Summary of Significant Accounting Policies
BankUnited, Inc. is a national bank holding company with one wholly-owned subsidiary, BankUnited; collectively, the Company. BankUnited, a national banking association headquartered in Miami Lakes, Florida, provides a full range of banking and related services to individual and corporate customers through 87 banking centers located in 15 Florida counties and 6 banking centers located in the New York metropolitan area at December 31, 2017. The Bank also offers certain commercial lending and deposit products through national platforms.
In connection with the FSB Acquisition, BankUnited entered into two loss sharing agreements with the FDIC. The Loss Sharing Agreements consist of the Single Family Shared-Loss Agreement and the Commercial Shared-Loss Agreement. Assets covered by the Loss Sharing Agreements are referred to as covered assets or, in certain cases, covered loans. The Single Family Shared-Loss Agreement provides for FDIC loss sharing and the Bank’s reimbursement for recoveries to the FDIC through May 21, 2019 for single family residential loans and OREO. Loss sharing under the Commercial Shared-Loss Agreement terminated on May 21, 2014. The Commercial Shared-Loss Agreement continued to provide for the Bank’s reimbursement of recoveries to the FDIC through June 30, 2017 for all other covered assets, including commercial real estate, commercial and industrial and consumer loans, certain investment securities and commercial OREO. Pursuant to the terms of the Loss Sharing Agreements, the covered assets are subject to a stated loss threshold whereby the FDIC will reimburse BankUnited for 80% of losses related to the covered assets up to $4.0 billion and 95% of losses in excess of this amount, beginning with the first dollar of loss incurred.
The consolidated financial statements have been prepared in accordance with GAAP and prevailing practices in the banking industry.
The Company has a single reportable segment.
Accounting Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and disclosures of contingent assets and liabilities. Actual results could differ significantly from these estimates.
Significant estimates include the ALLL, the amount and timing of expected cash flows from covered assets and the FDIC indemnification asset, and the fair values of investment securities and other financial instruments. Management has used information provided by third party valuation specialists to assist in the determination of the fair values of investment securities.
Principles of Consolidation
The consolidated financial statements include the accounts of BankUnited, Inc. and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. VIEs are consolidated if the Company is the primary beneficiary; i.e., has (i) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The Company has variable interests in affordable housing limited partnerships that are not required to be consolidated because the Company is not the primary beneficiary.
Fair Value Measurements
Certain of the Company's assets and liabilities are reflected in the financial statements at fair value on either a recurring or non-recurring basis. Investment securities available for sale, servicing rights and derivative instruments are measured at fair value on a recurring basis. Assets measured at fair value or fair value less cost to sell on a non-recurring basis may include collateral dependent impaired loans, OREO and other repossessed assets, loans held for sale, goodwill, impaired long-lived assets and assets acquired and liabilities assumed in business combinations. These non-recurring fair value measurements typically involve the application of acquisition accounting, lower-of-cost-or-market accounting or the measurement of impairment of certain assets.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement
90
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
date. GAAP establishes a hierarchy that prioritizes inputs used to determine fair value measurements into three levels based on the observability and transparency of the inputs:
• | Level 1 inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. |
• | Level 2 inputs are observable inputs other than level 1 inputs, including quoted prices for similar assets and liabilities, quoted prices for identical assets and liabilities in less active markets and other inputs that can be corroborated by observable market data. |
• | Level 3 inputs are unobservable inputs supported by limited or no market activity or data and inputs requiring significant management judgment or estimation. |
The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs in estimating fair value. Unobservable inputs are utilized in determining fair value measurements only to the extent that observable inputs are unavailable. The need to use unobservable inputs generally results from a lack of market liquidity and diminished observability of actual trades or assumptions that would otherwise be available to value a particular asset or liability.
Transfers between levels of the fair value hierarchy are recorded as of the end of the reporting period.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, both interest bearing and non-interest bearing, including amounts on deposit at the Federal Reserve Bank, and federal funds sold. Cash equivalents have original maturities of three months or less. For purposes of reporting cash flows, cash receipts and payments pertaining to FHLB advances with original maturities of three months or less are reported net.
Investment Securities
Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Debt securities that the Company may not have the intent to hold to maturity and marketable equity securities are classified as available for sale at the time of acquisition and carried at fair value with unrealized gains and losses, net of tax, excluded from earnings and reported in AOCI, a separate component of stockholders' equity. Securities classified as available for sale may be used as part of the Company's asset/liability management strategy and may be sold in response to liquidity needs, regulatory changes, changes in interest rates, prepayment risk or other market factors. The Company does not maintain a trading portfolio. Purchase premiums and discounts on debt securities are amortized as adjustments to yield over the expected lives of the securities, using the level yield method. Premiums are amortized to the call date if the call is considered to be clearly and closely related to the host contract. Realized gains and losses from sales of securities are recorded on the trade date and are determined using the specific identification method.
The Company reviews investment securities for OTTI at least quarterly. An investment security is impaired if its fair value is lower than its amortized cost basis. The Company considers many factors in determining whether a decline in fair value below amortized cost represents OTTI, including, but not limited to:
• | the Company's intent to hold the security until maturity or for a period of time sufficient for a recovery in value; |
• | whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis; |
• | the length of time and extent to which fair value has been less than amortized cost; |
• | adverse changes in expected cash flows; |
• | collateral values and performance; |
• | the payment structure of the security including levels of subordination or over-collateralization; |
• | changes in the economic or regulatory environment; |
91
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
• | the general market condition of the geographic area or industry of the issuer; |
• | the issuer's financial condition, performance and business prospects; and |
• | changes in credit ratings. |
The relative importance assigned to each of these factors varies depending on the facts and circumstances pertinent to the individual security being evaluated.
The Company recognizes OTTI of a debt security for which there has been a decline in fair value below amortized cost if (i) management intends to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell the security, or if it is more likely than not it will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the amortized cost basis and fair value of the security. Otherwise, the amount by which amortized cost exceeds the fair value of a debt security that is considered to be other-than-temporarily impaired is separated into a component representing the credit loss, which is recognized in earnings, and a component related to all other factors, which is recognized in other comprehensive income. The measurement of the credit loss component is equal to the difference between the debt security's amortized cost basis and the present value of its expected future cash flows discounted at the security's effective yield.
The evaluation of OTTI of marketable equity securities focuses on whether evidence supports recovery of the unrealized loss within a timeframe consistent with temporary impairment. The entire amount by which cost basis exceeds the fair value of an equity security that is considered to be other-than-temporarily impaired is recognized in earnings.
Non-marketable Equity Securities
The Bank, as a member of the FRB system and the FHLB, is required to maintain investments in the stock of the FRB and FHLB. No market exists for this stock, and the investment can be liquidated only through redemption by the respective institutions, at the discretion of and subject to conditions imposed by those institutions. The stock has no readily determinable fair value and is carried at cost. Historically, stock redemptions have been at par value, which equals the Company's carrying value. The Company monitors its investment in FHLB stock for impairment through review of recent financial results of the FHLB, including capital adequacy and liquidity position, dividend payment history, redemption history and information from credit agencies. The Company has not identified any indicators of impairment of FHLB stock.
Loans Held for Sale
The guaranteed portion of SBA and USDA loans originated with the intent to sell are carried at the lower of cost or fair value, determined in the aggregate. A valuation allowance is established through a charge to earnings if the aggregate fair value of such loans is lower than their cost. Gains or losses recognized upon sale are determined on the specific identification basis.
Loans not originated or otherwise acquired with the intent to sell are transferred into the held for sale classification at the lower of carrying amount or fair value when they are specifically identified for sale and a formal plan exists to sell them. Acquired credit impaired loans accounted for in pools are removed from the pools at their carrying amounts when they are sold.
Loans
The Company's loan portfolio contains 1-4 single family residential first mortgages, home equity loans and lines of credit, consumer, multi-family, owner and non-owner occupied commercial real estate, construction and land, and commercial and industrial loans, mortgage warehouse lines of credit and direct financing leases. The Company segregates its loan portfolio between covered and non-covered loans. Covered loans are loans acquired from the FDIC in the FSB Acquisition that are covered under the Single Family Shared-Loss Agreement. Covered loans are further segregated between ACI loans and non-ACI loans.
Non-covered Loans
Non-covered loans, other than non-covered ACI loans, are carried at UPB, net of premiums, discounts, unearned income, deferred loan origination fees and costs, and the ALLL.
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December 31, 2017
Interest income on these loans is accrued based on the principal amount outstanding. Non-refundable loan origination fees, net of direct costs of originating or acquiring loans, as well as purchase premiums and discounts, are deferred and recognized as adjustments to yield over the contractual lives of the related loans using the level yield method.
Direct Financing Leases
Direct financing leases are carried at the aggregate of lease payments receivable and estimated residual value of the leased property, if applicable, less unearned income. Interest income on direct financing leases is recognized over the term of the leases to achieve a constant periodic rate of return on the outstanding investment. Initial direct costs are deferred and amortized over the lease term as a reduction to interest income using the effective interest method.
ACI Loans
ACI loans, all of which were acquired in the FSB Acquisition and the substantial majority of which are covered under the Single Family Shared-Loss Agreement, are those for which, at acquisition, management determined it probable that the Company would be unable to collect all contractual principal and interest payments due. These loans were recorded at estimated fair value at acquisition, measured as the present value of all cash flows expected to be received, discounted at an appropriately risk-adjusted discount rate. Initial cash flow expectations incorporated significant assumptions regarding prepayment rates, frequency of default and loss severity.
The difference between total contractually required payments on ACI loans and the cash flows expected to be received represents non-accretable difference. The excess of all cash flows expected to be received over the Company's recorded investment in the loans represents accretable yield and is recognized as interest income on a level-yield basis over the expected life of the loans.
The Company aggregated ACI 1-4 single family residential mortgage loans and home equity loans and lines of credit with similar risk characteristics into homogenous pools at acquisition. A composite interest rate and composite expectations of future cash flows are used in accounting for each pool. These loans were aggregated into pools based on the following characteristics:
• | delinquency status; |
• | product type, in particular, amortizing as opposed to option ARMs; |
• | loan-to-value ratio; and |
• | borrower FICO score. |
Loans that do not have similar risk characteristics, primarily commercial and commercial real estate loans, are accounted for on an individual loan basis using interest rates and expectations of cash flows for each loan.
The Company is required to develop reasonable expectations about the timing and amount of cash flows to be collected related to ACI loans and to continue to update those estimates over the lives of the loans. Expected cash flows from ACI loans are updated quarterly. If it is probable that the Company will be unable to collect all the cash flows expected from a loan or pool at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition, the loan or pool is considered impaired and a valuation allowance is established by a charge to the provision for loan losses. If there is an increase in expected cash flows from a loan or pool, the Company first reduces any valuation allowance previously established by the amount of the increase in the present value of expected cash flows, and then recalculates the amount of accretable yield for that loan or pool. The adjustment of accretable yield due to an increase in expected cash flows, as well as changes in expected cash flows due to changes in interest rate indices and changes in prepayment assumptions is accounted for prospectively as a change in yield. Additional cash flows expected to be collected are transferred from non-accretable difference to accretable yield and the amount of periodic accretion is adjusted accordingly over the remaining life of the loan or pool.
The Company may resolve an ACI loan either through a sale of the loan, by working with the customer and obtaining partial or full repayment, by short sale of the collateral, or by foreclosure. When a loan accounted for in a pool is resolved, it is removed from the pool at its allocated carrying amount. In the event of a sale of the loan, the Company recognizes a gain or loss on sale based on the difference between the sales proceeds and the carrying amount of the loan. For loans resolved through pre-payment or short sale of the collateral, the Company recognizes the difference between the amount of the payment received and the carrying amount of the loan in the income statement line item "Income from resolution of covered assets, net". For
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December 31, 2017
loans resolved through foreclosure, the difference between the fair value of the collateral obtained through foreclosure less estimated cost to sell and the carrying amount of the loan is recognized in the income statement line item "Income from resolution of covered assets, net". Any remaining accretable discount related to loans not accounted for in pools that are resolved by full or partial pre-payment, short sale or foreclosure is recognized in interest income at the time of resolution, to the extent collected.
Payments received earlier than expected or in excess of expected cash flows from sales or other resolutions may result in the carrying value of a pool being reduced to zero even though outstanding contractual balances and expected cash flows remain related to loans in the pool. Once the carrying value of a pool is reduced to zero, any future proceeds, which may include cash or real estate acquired in foreclosure, from the remaining loans, representing further realization of accretable yield, are recognized as interest income upon receipt.
Covered Non-ACI Loans
Loans acquired in the FSB Acquisition without evidence of deterioration in credit quality since origination were initially recorded at estimated fair value on the acquisition date. Non-ACI 1-4 single family residential mortgage loans and home equity loans and lines of credit with similar risk characteristics were aggregated into pools for accounting purposes at acquisition. Non-ACI loans are carried at the principal amount outstanding, adjusted for unamortized acquisition date fair value adjustments and the ALLL. Interest income is accrued based on the UPB and, with the exception of home equity loans and lines of credit, acquisition date fair value adjustments are amortized using the level-yield method over the expected lives of the related loans. For non-ACI 1-4 family residential mortgage loans accounted for in pools, prepayment estimates are used in determining the periodic amortization of acquisition date fair value adjustments. Acquisition date fair value adjustments related to revolving home equity loans and lines of credit are amortized on a straight-line basis.
Non-accrual Loans
Commercial loans, other than ACI loans, are placed on non-accrual status when (i) management has determined that full repayment of all contractual principal and interest is in doubt, or (ii) the loan is past due 90 days or more as to principal or interest unless the loan is well secured and in the process of collection. Given continued unstable conditions in the taxi industry, continued declines in ridership, and the relatively long amortization periods for most of these loans, there exists an increasing level of uncertainty with respect to the Company's ability to collect all contractual principal and interest on taxi medallion loans. Therefore, all taxi medallion loans have been placed on non-accrual status. Residential and consumer loans, other than ACI loans, are generally placed on non-accrual status when 90 days of interest is due and unpaid. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged to interest income. Payments received on nonaccrual commercial loans are applied as a reduction of principal. Interest payments are recognized as income on a cash basis on nonaccrual 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 returned to accrual status when there is no longer 90 days of interest due and unpaid. Past due status of loans is determined based on the contractual next payment due date. Loans less than 30 days past due are reported as current.
Contractually delinquent ACI loans are not classified as non-accrual as long as discount continues to be accreted on the loans or pools.
Impaired Loans
Loans, other than ACI loans, are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreements. Commercial relationships with committed balances greater than or equal to $1.0 million that have internal risk ratings of substandard or doubtful and are on non-accrual status, as well as loans that have been modified in TDRs, are individually evaluated for impairment. Other commercial relationships on non-accrual status with committed balances under $1.0 million may also be evaluated individually for impairment at management's discretion. All loans secured by taxi medallions are individually evaluated for impairment. The likelihood of loss related to loans assigned internal risk ratings of substandard or doubtful is considered elevated due to their identified credit weaknesses. Factors considered by management in evaluating impairment include payment status, financial condition of the borrower, collateral value, and other factors impacting the probability of collecting scheduled principal and interest payments when due.
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December 31, 2017
An ACI pool or loan is considered to be impaired when it is probable that the Company will be unable to collect all the cash flows expected at acquisition, plus additional cash flows expected to be collected arising from changes in estimates after acquisition. 1-4 single family residential and home equity ACI loans accounted for in pools are evaluated collectively for impairment on a pool by pool basis based on expected pool cash flows. Commercial ACI loans are individually evaluated for impairment based on expected cash flows from the individual loans. Discount continues to be accreted on ACI loans or pools as long as there are expected future cash flows in excess of the current carrying amount of the loans or pools.
Troubled Debt Restructurings
In certain situations due to economic or legal reasons related to a borrower's financial difficulties, the Company may grant a concession to the borrower for other than an insignificant period of time that it would not otherwise consider. At that time, except for ACI loans accounted for in pools, the related loan is classified as a TDR and considered impaired. The concessions granted may include rate reductions, principal forgiveness, payment forbearance, extensions of maturity at rates of interest below that commensurate with the risk profile of the loans, modification of payment terms and other actions intended to minimize economic loss. A TDR is generally placed on non-accrual status at the time of the modification unless the borrower was performing prior to the restructuring. Modified ACI loans accounted for in pools are not accounted for as TDRs, are not separated from the pools and are not classified as impaired loans.
Allowance for Loan and Lease Losses
The ALLL represents the amount considered adequate by management to absorb probable losses inherent in the loan portfolio at the balance sheet date. The ALLL consists of both specific and general components. The ALLL is established as losses are estimated to have occurred through a provision charged to earnings. Individual loans are charged off against the ALLL when management determines them to be uncollectible.
An assessment of collateral value is made at no later than 120 days delinquency for non-covered open- and closed-end loans secured by residential real estate; any outstanding loan balance in excess of fair value less cost to sell is charged off at no later than 180 days delinquency. Additionally, any outstanding balance in excess of fair value of collateral less cost to sell is charged off (i) within 60 days of receipt of notification of filing from the bankruptcy court, (ii) within 60 days of determination of loss if all borrowers are deceased or (iii) within 90 days of discovery of fraudulent activity. Covered non-ACI loans secured by residential real estate are generally charged off at final resolution which is consistent with the terms of the Single Family Shared-Loss Agreement. Consumer loans are typically charged off at 120 days delinquency. Commercial loans are charged off when management deems them to be uncollectible. Subsequent recoveries are credited to the ALLL.
Non-covered Loans
The non-covered residential and home equity portfolio segments have not yet developed an observable loss trend. Due to several factors, there is a lack of similarity between the risk characteristics of non-covered loans and covered loans in the residential and home equity portfolios. Therefore, management does not believe it is appropriate to use the historical performance of the covered residential loans as a basis for calculating the ALLL applicable to the non-covered loans. The ALLL for non-covered 1-4 single family residential loans is based on average annual loss rates on prime residential mortgage securitizations issued between 2003 and 2008. Loans included in these securitizations have credit characteristics, such as LTV and FICO scores, considered by management to be comparable to characteristics of loans in the non-covered 1-4 single family residential portfolio. The ALLL for non-covered home equity and other consumer loans is based on peer group average historical loss rates.
The credit quality of loans in the residential portfolio segment may be impacted by fluctuations in home values, unemployment, general economic conditions, borrowers' financial circumstances and fluctuations in interest rates.
The credit quality of commercial loans is impacted by general and industry specific economic conditions and other factors that may influence debt service coverage generated by the borrowers' businesses as well as fluctuations in the value of real estate and other collateral. For loans evaluated individually for impairment and determined to be impaired, a specific allowance is established based on the present value of expected cash flows discounted at the loan's effective interest rate, the estimated fair value of the loan, or for collateral dependent loans, the estimated fair value of collateral less costs to sell.
Commercial loans, other than ACI commercial loans, not individually determined to be impaired are grouped based on common risk characteristics. Quantitative loss factors for pass rated commercial loans in portfolio segments that have not yet
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December 31, 2017
developed an observable loss trend are based primarily on peer group average historical loss rates and the Bank's internal credit risk rating system. Quantitative loss factors for the Bridge portfolios, small business loans and mortgage warehouse loans are based on the Company's average historical net charge-off rates. The quantitative loss factor applied to the non-guaranteed portion of SBA loans is based on average historical charge-off rates published by the SBA. The quantitative loss factor for municipal loans and direct finance leases is based on the portfolio's external ratings and Moody's historical transition matrix. Quantitative loss rates are generally based on a four-quarter loss emergence period and a 16-quarter loss experience period; for municipal loans and leases, a 12-quarter loss emergence period is used.
The source of quantitative loss factors for the Bridge portfolios, municipal loans and leases, SBA loans, and mortgage warehouse loans was revised in 2017, with no material impact to the ALLL. Where applicable, the peer group used to calculate average annual historical net charge-off rates used in estimating the Bank's general reserves is a group of 27 banks made up of the banks included in the OCC Midsize Bank Group and two additional banks in the New York region that management believes to be comparable based on size and nature of lending operations.
The quantitative loss factor for loans rated special mention is based on average annual probability of default and implied severity, derived from internal and external data. Loss factors for substandard and doubtful loans that are not individually evaluated for impairment are determined by using default frequency and severity information applied at the loan level. Estimated default frequencies and severities are based on available industry data.
Qualitative adjustments are made to the ALLL when, based on management's judgment and experience, there are internal or external factors impacting incurred losses not taken into account by the quantitative calculations. Management has categorized potential qualitative adjustments into the following categories:
• | Portfolio performance trends, including trends in and the levels of delinquencies, non-performing loans and classified loans; |
• | Changes in the nature of the portfolio and terms of the loans, specifically including the volume and nature of policy and procedural exceptions; |
• | Portfolio growth trends; |
• | Changes in lending policies and procedures, including credit and underwriting guidelines; |
• | Economic factors, including unemployment rates and GDP growth rates; |
• | Changes in the value of underlying collateral; |
• | Quality of risk ratings, as evaluated by our independent credit review function; |
• | Credit concentrations; |
• | Changes in and experience levels of credit administration management and staff; and |
• | Other factors identified by management that may impact the level of losses inherent in the portfolio, including but not limited to competition, legal and regulatory requirements and unusual events. |
Covered Non-ACI Loans
Calculated loss frequency and severity percentages are applied to the UPB of non-ACI 1-4 single family residential mortgages and home equity loans and lines of credit to calculate the ALLL. Based on an analysis of historical portfolio performance, OREO and short sale data, and other internal and external factors, management has concluded that historical performance by portfolio class is the best indicator of incurred loss for the non-ACI 1-4 single family residential and home equity portfolio classes. For each of these portfolio classes, a quarterly roll rate matrix is used to measure the rate at which loans move from one delinquency bucket to the next during a given quarter. An average 16-quarter roll rate matrix is used to estimate the amount within each delinquency bucket expected to roll to 120+ days delinquent within a four quarter loss emergence period. Loss severity given default is estimated based on internal data about short sales and OREO sales. The ALLL calculation incorporates a 100% loss severity assumption for home equity loans and lines of credit projected to roll to 120 days delinquency. Substantially all non-ACI home equity loans and lines of credit were sold in the fourth quarter of 2017.
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December 31, 2017
ACI Loans
A specific valuation allowance related to an ACI loan or pool is established when quarterly evaluations of expected cash flows indicate it is probable that the Company will be unable to collect all of the cash flows expected at acquisition plus any additional cash flows expected to be collected arising from changes in estimate after acquisition. The amount of any necessary valuation allowance is measured by comparing the carrying value of the loan or pool to the updated net present value of expected cash flows for the loan or pool. In calculating the present value of expected cash flows for this purpose, changes in cash flows related to credit related factors are isolated from those related to changes in interest rate indices or prepayment assumptions. Alternatively, an improvement in the expected cash flows related to ACI loans results in a reduction of any previously established specific allowance with a corresponding credit to the provision for loan losses. A charge-off is taken for an individual ACI commercial loan when it is deemed probable that the loan will be resolved for an amount less than its carrying value.
Expected cash flows are estimated on a pool basis for ACI 1-4 single family residential and home equity loans. The analysis of expected pool cash flows incorporates updated pool level expected prepayment rate, default rate, delinquency level and loss severity given default assumptions. Prepayment, delinquency and default curves are derived primarily from roll rates generated from the historical performance of the portfolio over the immediately preceding four quarters. Loss severity given default for loans not projected to resolve through sale is generated from the historical performance of the portfolio over the immediately preceding four quarters, while loss severity from loan sales is generated from historical performance over the immediately preceding twelve quarters. Estimates of default probability and loss severity also incorporate updated LTV ratios, at the loan level, based on Case-Shiller Home Price Indices for the relevant MSA. Costs and fees represent an additional component of loss on default and are projected using the Bank's actual experience over the preceding twelve quarters.
The primary assumptions underlying estimates of expected cash flows for commercial ACI loans are default probability and severity of loss given default. Generally, updated cash flow assumptions are based primarily on net realizable value analyses prepared at the individual loan level. These analyses incorporate information about loan performance, collateral values, the financial condition of the borrower and other available information that may impact sources of repayment.
Reserve for Unfunded Commitments
The reserve for unfunded commitments represents the estimated probable losses related to unfunded lending commitments. The reserve is calculated in a manner similar to the general reserve for non-covered loans, while also considering the timing and likelihood that the available credit will be utilized as well as the exposure upon default. The reserve for unfunded commitments is presented within other liabilities on the consolidated balance sheets, distinct from the ALLL, and adjustments to the reserve for unfunded commitments are included in other non-interest expense in the consolidated statements of income.
FDIC Indemnification Asset
The FDIC indemnification asset was initially recorded at the time of the FSB Acquisition at fair value, measured as the present value of the estimated cash payments expected from the FDIC for probable losses on covered assets. The FDIC indemnification asset is measured separately from the related covered assets. It is not contractually embedded in the covered assets and it is not transferable with the covered assets should the Company choose to dispose of them.
Impairment of expected cash flows from covered assets results in an increase in cash flows expected to be collected from the FDIC. These increased expected cash flows from the FDIC are recognized as increases in the FDIC indemnification asset and as non-interest income in the same period that the impairment of the covered assets is recognized in the provision for loan losses. Increases in expected cash flows from covered assets result in decreases in cash flows expected to be collected from the FDIC. These decreases in expected cash flows from the FDIC are recognized immediately in earnings to the extent that they relate to a reversal of a previously recorded valuation allowance related to the covered assets. Any remaining decreases in cash flows expected to be collected from the FDIC are recognized prospectively through an adjustment of the rate of accretion or amortization on the FDIC indemnification asset, consistent with the approach taken to recognize increases in expected cash flows on the covered assets. Amortization of the FDIC indemnification asset results from circumstances in which, due to improvement in expected cash flows from the covered assets, expected cash flows from the FDIC are less than the carrying value of the FDIC indemnification asset. Accretion or amortization of the FDIC indemnification asset is recognized in earnings using the effective interest method over the period during which cash flows from the FDIC are expected to be collected, which is limited to the lesser of the contractual term of the indemnification agreement and the remaining life of the indemnified assets.
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December 31, 2017
Gains and losses from resolution of ACI loans are included in the income statement line item "Income from resolution of covered assets, net." These gains and losses represent the difference between the expected losses from ACI loans and consideration actually received in satisfaction of such loans that were resolved either by payment in full, foreclosure or short sale. The Company may also realize gains or losses on the sale or impairment of covered loans or covered OREO. When the Company recognizes gains or losses related to the resolution, sale or impairment of covered assets in earnings, corresponding changes in the estimated amount recoverable from the FDIC under the Loss Sharing Agreements are reflected in the consolidated financial statements as increases or decreases in the FDIC indemnification asset and in the consolidated statement of income line item "Net loss on FDIC indemnification."
Bank Owned Life Insurance
Bank owned life insurance is carried at the amount that could be realized under the contract at the balance sheet date, which is typically cash surrender value. Changes in cash surrender value are recorded in non-interest income.
Equipment Under Operating Lease
Equipment under operating lease is carried at cost less accumulated depreciation and is depreciated to estimated residual value using the straight-line method over the lease term. Estimated residual values are re-evaluated at least annually, based primarily on current residual value appraisals. Rental revenue is recognized on a straight-line basis over the contractual term of the lease.
A review for impairment of equipment under operating lease is performed at least annually or when events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. Impairment of assets is determined by comparing the carrying amount to future undiscounted net cash flows expected to be generated. If an asset is impaired, the measure of impairment is the amount by which the carrying amount exceeds the fair value of the asset.
Goodwill
Goodwill of $78 million at both December 31, 2017 and 2016 represents the excess of consideration transferred in business combinations over the fair value of net tangible and identifiable intangible assets acquired. Goodwill is not amortized, but is tested for impairment annually or more frequently if events or circumstances indicate that impairment may have occurred. The Company performs its annual goodwill impairment test in the third fiscal quarter. The Company has a single reporting unit. The impairment test compares the estimated fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, no impairment is indicated. If the fair value of the reporting unit is less than its carrying amount, impairment of goodwill is measured as the excess of the carrying amount over fair value. The estimated fair value of the reporting unit is based on the market capitalization of the Company's common stock. The estimated fair value of the reporting unit at each impairment testing date substantially exceeded its carrying amount; therefore, no impairment of goodwill was indicated.
Foreclosed Property and Repossessed Assets
Foreclosed property and repossessed assets consists of real estate assets acquired through, or in lieu of, loan foreclosure and personal property acquired through repossession. Such assets are included in other assets in the accompanying consolidated balance sheets. These assets are held for sale and are initially recorded at estimated fair value less costs to sell, establishing a new cost basis. Subsequent to acquisition, periodic valuations are performed and the assets are carried at the lower of the carrying amount at the date of acquisition or estimated fair value less cost to sell. Significant property improvements are capitalized to the extent that the resulting carrying value does not exceed fair value less cost to sell. Legal fees, maintenance, taxes, insurance and other direct costs of holding and maintaining these assets are expensed as incurred.
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December 31, 2017
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization and are included in other assets in the accompanying consolidated balance sheets. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The lives of improvements to existing buildings are based on the lesser of the estimated remaining lives of the buildings or the estimated useful lives of the improvements. Leasehold improvements are amortized over the shorter of the expected terms of the leases at inception, considering options to extend that are reasonably assured, or their useful lives. Direct costs of materials and services associated with developing or obtaining and implementing internal use computer software incurred during the application and development stage are capitalized and amortized over the estimated useful lives of the software. The estimated useful lives of premises and equipment are as follows:
• | buildings and improvements - 30 years; |
• | leasehold improvements - 5 to 20 years; |
• | furniture, fixtures and equipment - 5 to 7 years; |
• | computer equipment - 3 to 5 years; and |
• | software and software licensing rights - 3 to 5 years. |
Loan Servicing Rights
Loan servicing rights are measured at fair value, with changes in fair value subsequent to acquisition recognized in earnings. Prior to January 1, 2016, residential MSRs were measured using the amortization method subsequent to acquisition. This change in accounting policy had no impact on opening retained earnings at January 1, 2016.
Loan servicing rights are included in other assets in the accompanying consolidated balance sheets. Servicing fee income is recorded net of changes in fair value in other non-interest income. Neither the loan servicing rights nor related income have had a material impact on the Company's financial statements to date.
Investments in Affordable Housing Limited Partnerships
The Company has acquired investments in limited partnerships that manage or invest in qualified affordable housing projects and provide the Company with low-income housing tax credits and other tax benefits. These investments are included in other assets in the accompanying consolidated balance sheets. The Company accounts for investments in qualified affordable housing projects using the proportional amortization method if certain criteria are met. Under the proportional amortization method, the initial cost of the investment is amortized in proportion to the tax credits and other tax benefits received and the amortization is recognized in the income statement as a component of income tax expense. The investments are evaluated for impairment when events or changes in circumstances indicate that it is more likely than not that the carrying amount of the investment will not be realized.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for periods in which the differences are expected to reverse. The effect of changes in tax rates on deferred tax assets and liabilities are recognized in income in the period that includes the enactment date. A valuation allowance is established for deferred tax assets when management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. In making such determinations, the Company considers all available positive and negative evidence that may impact the realization of deferred tax assets. These considerations include the amount of taxable income generated in statutory carryback periods, future reversals of existing taxable temporary differences, projected future taxable income and available tax planning strategies.
The Company recognizes tax benefits from uncertain tax positions when it is more likely than not that the related tax positions will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the tax positions. An uncertain tax position is a position taken in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law. The Company measures tax benefits related to uncertain tax positions based on the largest benefit that has a greater than 50% likelihood of being realized
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December 31, 2017
upon settlement. If the initial assessment fails to result in recognition of a tax benefit, the Company subsequently recognizes a tax benefit if (i) there are changes in tax law or case law that raise the likelihood of prevailing on the technical merits of the position to more-likely-than-not, (ii) the statute of limitations expires, or (iii) there is a completion of an examination resulting in a settlement of that tax year or position with the appropriate agency. The Company recognizes interest and penalties related to uncertain tax positions, as well as interest income or expense related to tax settlements, in the provision for income taxes.
Equity Based Compensation
The Company periodically grants unvested or restricted shares of common stock and other share-based awards to key employees. For equity classified awards, compensation cost is measured based on the estimated fair value of the awards at the grant date and is recognized in earnings on a straight-line basis over the requisite service period for each award. Liability-classified awards are remeasured each reporting period at fair value until the award is settled, and compensation cost is recognized in earnings on a straight-line basis over the requisite service period for each award, adjusted for changes in fair value each reporting period. Compensation cost related to awards that embody performance conditions is recognized when it is probable that the performance conditions will be achieved. The number of awards expected to vest is estimated in determining the amount of compensation cost to be recognized related to share-based payment transactions.
The fair value of unvested shares is based on the closing market price of the Company's common stock at the date of grant. Market conditions embedded in awards are reflected in the grant-date fair value of the awards.
Derivative Financial Instruments and Hedging Activities
Interest rate derivative contracts
The Company uses interest rate derivative contracts, such as swaps, caps, floors and collars, in the normal course of business to meet the financial needs of its customers and to manage exposure to changes in interest rates. Interest rate contracts are recorded as assets or liabilities in the consolidated balance sheets at fair value. Interest rate swaps that are used as a risk management tool to hedge the Company's exposure to changes in interest rates have been designated as cash flow hedging instruments. The gain or loss resulting from changes in the fair value of interest rate swaps designated and qualifying as cash flow hedging instruments is initially reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period in which the hedged transaction affects earnings.
The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, the derivative expires or is sold, terminated, or exercised, management determines that the designation of the derivative as a hedging instrument is no longer appropriate or the occurrence of the forecasted transaction is no longer probable. When hedge accounting is discontinued, any subsequent changes in fair value of the derivative are recognized in earnings. The cumulative unrealized gain or loss related to a discontinued cash flow hedge continues to be reported in AOCI and is subsequently reclassified into earnings in the same period in which the hedged transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period, in which case the cumulative unrealized gain or loss reported in AOCI is reclassified into earnings immediately.
Cash flows resulting from derivative financial instruments that are accounted for as hedges are classified in the cash flow statement in the same category as the cash flows from the hedged items.
Changes in the fair value of interest rate contracts not designated as, or not qualifying as, hedging instruments are recognized currently in earnings.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. A gain or loss is recognized in earnings upon completion of the sale based on the difference between the sales proceeds and the carrying value of the assets. Control over the transferred assets is deemed to have been surrendered when: (i) the assets have been legally isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Advertising Costs
Advertising costs are expensed as incurred.
Earnings per Common Share
Basic earnings per common share is calculated by dividing income allocated to common stockholders for basic earnings per common share by the weighted average number of common shares outstanding for the period, reduced by average unvested stock awards. Unvested stock awards with non-forfeitable rights to dividends, whether paid or unpaid, and stand-alone dividend participation rights are considered participating securities and are included in the computation of basic earnings per common share using the two class method whereby net income is allocated between common stock and participating securities. In periods of a net loss, no allocation is made to participating securities as they are not contractually required to fund net losses. Diluted earnings per common share is computed by dividing income allocated to common stockholders for basic earnings per common share, adjusted for earnings reallocated from participating securities, by the weighted average number of common shares outstanding for the period increased for the dilutive effect of unexercised stock options, warrants and unvested stock awards using the treasury stock method. Contingently issuable shares are included in the calculation of earnings per common share as if the end of the respective period was the end of the contingency period.
Reclassifications
Certain amounts presented for prior periods have been reclassified to conform to the current period presentation.
New Accounting Pronouncements Adopted in 2017
ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments in this ASU clarified the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. A company performing the assessment under these amendments is required to assess the embedded call (put) options solely in accordance with a four-step decision sequence, without also considering whether the contingency is related to interest rates or credit risks. The adoption of this standard had no impact on the Company's consolidated financial position, results of operations or cash flows.
ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU simplified several aspects of the accounting for share-based payment transactions. The amendment requiring the recognition of excess tax benefits and deficiencies as income tax benefit or expense as opposed to additional paid-in-capital was applied prospectively and resulted in the recognition of $3.7 million in excess tax benefits in the consolidated statement of income line item "Provision for income taxes" for the year ended December 31, 2017, increasing net income by the same amount and increasing basic and diluted earnings per share by $0.03. The Company retrospectively adopted the amendments requiring the classification of excess tax benefits and deficiencies with other income tax cash flows as operating activities and cash paid when directly withholding shares as financing activities in the accompanying consolidated statements of cash flows; the impact of adoption was not material. The Company elected to continue its practice of estimating the number of awards expected to vest in determining the amount of compensation cost to be recognized related to share-based payment transactions.
ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU removed step two of the goodwill impairment test. The Company elected to early adopt this ASU in the third quarter of 2017. Adoption had no impact on the Company's consolidated financial position, results of operations or cash flows.
ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU required certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount were not impacted. The Company early-adopted this ASU with no material impact on the Company's consolidated financial position, results of operations or cash flows.
ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU eliminated the requirement to separately measure and report hedge ineffectiveness after initial qualification. For qualifying cash flow and net investment hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in OCI, and amounts deferred in AOCI are reclassified to earnings in the same
101
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings. The new guidance also permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test, such as a regression analysis, if the company can reasonably support an expectation of high effectiveness throughout the term of the hedge. The ASU allows for more hedging strategies to be eligible for hedge accounting. From a disclosure standpoint, to help users of the financial statements better understand the effects of hedge accounting, the guidance requires revised tabular disclosures that focus on the effect of hedge accounting by income statement line, and eliminates the requirement to disclose hedge ineffectiveness because this amount is no longer separately measured. The adoption of this ASU had no impact on the Company's consolidated financial position, results of operations or cash flows.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the Accounting Standards Codification. The amendments in this update affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts, including leases and insurance contracts, are within the scope of other standards. The amendments establish a core principle requiring the recognition of revenue to depict the transfer of goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. The amendments also require expanded disclosures concerning the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. Financial instruments and lease contracts are generally outside the scope of the ASU as are revenues that are in the scope of ASC 860 "Transfers and Servicing", ASC 460 "Guarantees" and ASC 815 "Derivatives and Hedging". The FASB has issued subsequent ASUs to clarify certain aspects of ASU 2014-09, without changing the core principle of the guidance and to defer the effective date of ASU 2014-09 to annual periods and interim periods within fiscal years beginning after December 15, 2017. Substantially all of the Company's revenues have historically been generated from activities that are outside the scope of the ASU. Service charges on deposit accounts, which totaled approximately $13 million for the year ended December 31, 2017 is the most significant category of revenue identified as within the scope of the ASU; however, management does not expect the amount and timing of recognition of such revenue to be impacted by adoption. The Company will apply this ASU for the first quarter of 2018 to contracts not completed on the date of adoption using the modified retrospective method. The Company does not expect adoption to have a significant impact on its financial condition, results of operations or cash flows and therefore does not expect to record any cumulative effect of initial application. Adoption of the ASU will result in some expanded disclosure about revenue from contracts with customers.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in the ASU that are expected to be applicable to the Company include provisions to: 1) eliminate the available for sale classification for equity securities and require investments in equity securities (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, provided that equity investments that do not have readily determinable fair values may be re-measured at fair value upon occurrence of an observable price change or recognition of impairment, 2) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, and 3) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The amendments also clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets, which is consistent with the Company's current practice. This ASU will be adopted by the Company for the first quarter of 2018 by means of a cumulative-effect adjustment to the balance sheet, except for amendments related to equity securities without readily determinable fair values, which will be applied prospectively. Equity investments that will no longer be reported as available for sale and for which fair value changes will be recognized in earnings after adoption totaled $64 million and had unrealized gains of $3.6 million at December 31, 2017. The Company expects to record a cumulative effect adjustment to reclassify unrealized gains on these equity securities, net of related income taxes, of $2.2 million from AOCI to retained earnings upon adoption. Adoption of the ASU will impact the Company's disclosures about the fair values of financial instruments.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU require a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for lease terms longer than one year. Accounting applied by lessors is largely unchanged by this ASU. The amendments in this ASU are effective for the Company for interim and annual periods in fiscal years beginning after
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
December 15, 2018. Early adoption is permitted; however, the Company does not intend to early adopt this ASU. Lessees and lessors are required to apply the provisions of the ASU at the beginning of the earliest period presented using a modified retrospective approach. Management is in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements, processes and controls. The Company has acquired and implemented software to facilitate calculation and reporting of the lease liability and right of use asset. Certain accounting policy decisions have been made including use of the incremental borrowing rate to determine the discount rate and assumptions around inclusion of renewals in lease terms. The most significant impact of adoption is expected to be the recognition, as lessee, of new right-of-use assets and lease liabilities on the consolidated balance sheet for real estate leases currently classified as operating leases. At its November 29, 2017 meeting, the FASB proposed allowing entities the option of applying the provisions of the ASU at the effective date without adjusting the comparative periods presented. The Company is monitoring these and other proposed modifications to the requirements of this ASU.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326); Measurement of Credit Losses on Financial Instruments. The ASU introduces new guidance which makes substantive changes to the accounting for credit losses. The ASU introduces the CECL model which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. This includes loans, loan commitments, standby letters of credit, net investments in leases recognized by a lessor and HTM debt securities. The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions and reasonable and supportable forecasts, and is generally expected to result in earlier recognition of credit losses. The ASU also modifies certain provisions of the current OTTI model for AFS debt securities. Credit losses on AFS debt securities will be limited to the difference between the security's amortized cost basis and its fair value, and be recognized through an allowance for credit losses rather than as a direct reduction in amortized cost basis. The ASU also provides for a simplified accounting model for purchased financial assets with more than insignificant credit deterioration since their origination. The ASU requires expanded disclosures including, but not limited to (i) information about the methods and assumptions used to estimate expected credit losses, including changes in the factors that influenced management's estimate and the reasons for those changes, (ii) for financing receivables and net investment in leases measured at amortized cost, further disaggregation of information about the credit quality of those assets and (iii) a rollforward of the allowance for credit losses for AFS and HTM securities. The amendments in this ASU are effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2019. Early adoption is permitted, however, the Company does not intend to early adopt this ASU. Management is in the process of evaluating the impact of adoption of this ASU on its consolidated financial statements, processes and controls and is not currently able to reasonably estimate the impact of adoption on the Company's consolidated financial position, results of operations or cash flows; however, adoption is likely to lead to significant changes in accounting policies related to, and the methods employed in estimating, the ALLL. It is possible that the impact will be material to the Company's consolidated financial position and results of operations. To date, the Company has completed a gap analysis, adopted a detailed implementation plan, established a formal governance structure for the project, selected and implemented credit loss models for key portfolio segments, chosen loss estimation methodologies for key portfolio segments, and selected a software solution to serve as its CECL platform.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU provide guidance on eight specific cash flow classification issues where there has been diversity in practice. The guidance in the ASU that is expected to be most applicable to the Company requires: (1) cash payments for debt prepayment or extinguishment costs to be classified as cash outflows for financing activities, (2) proceeds from settlement of insurance claims to be classified on the basis of the nature of the loss and (3) cash proceeds from settlement of bank-owned life insurance policies to be classified as cash flows from investing activities. Cash payments for premiums on bank-owned life insurance may be classified as cash flows for investing activities, operating activities or a combination thereof. The amendments in this ASU will be adopted for the first quarter of 2018 and will be applied retrospectively to each period presented. The provisions of this ASU are generally consistent with the Company's current practice; therefore, adoption is not expected to significantly impact the Company's consolidated cash flows.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from AOCI to retained earnings of stranded tax effects in AOCI resulting from enactment of the Tax Cuts and Jobs Act (the “Act”). The amount of that reclassification is the difference between (1) the amount initially charged or credited directly to other comprehensive income at the previously enacted federal corporate income tax rate that remains in AOCI and (2) the amount that would have been charged or credited using the newly enacted federal corporate income tax rate, excluding the effect of any valuation allowance previously charged to income from continuing operations. The amendments in this ASU
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
also require certain disclosures about stranded tax effects. The amendments in this ASU are effective for the Company for interim and annual periods beginning after December 15, 2018 with early adoption permitted. The Company intends to early adopt this ASU in the first quarter of 2018 with the amendments in this ASU being applied at the beginning of the period. Stranded tax effects resulting from the Act totaled approximately $11.7 million at December 31, 2017.
Note 2 Earnings Per Common Share
The computation of basic and diluted earnings per common share is presented below for the years ended December 31, 2017, 2016 and 2015 (in thousands, except share and per share data):
c | 2017 | 2016 | 2015 | ||||||||
Basic earnings per common share: | |||||||||||
Numerator: | |||||||||||
Net income | $ | 614,273 | $ | 225,741 | $ | 251,660 | |||||
Distributed and undistributed earnings allocated to participating securities | (23,250 | ) | (8,760 | ) | (9,742 | ) | |||||
Income allocated to common stockholders for basic earnings per common share | $ | 591,023 | $ | 216,981 | $ | 241,918 | |||||
Denominator: | |||||||||||
Weighted average common shares outstanding | 106,574,448 | 104,097,182 | 103,187,530 | ||||||||
Less average unvested stock awards | (1,104,035 | ) | (1,157,378 | ) | (1,128,416 | ) | |||||
Weighted average shares for basic earnings per common share | 105,470,413 | 102,939,804 | 102,059,114 | ||||||||
Basic earnings per common share | $ | 5.60 | $ | 2.11 | $ | 2.37 | |||||
Diluted earnings per common share: | |||||||||||
Numerator: | |||||||||||
Income allocated to common stockholders for basic earnings per common share | $ | 591,023 | $ | 216,981 | $ | 241,918 | |||||
Adjustment for earnings reallocated from participating securities | (263 | ) | 62 | 54 | |||||||
Income used in calculating diluted earnings per common share | $ | 590,760 | $ | 217,043 | $ | 241,972 | |||||
Denominator: | |||||||||||
Weighted average shares for basic earnings per common share | 105,470,413 | 102,939,804 | 102,059,114 | ||||||||
Dilutive effect of stock options | 387,074 | 716,366 | 913,036 | ||||||||
Weighted average shares for diluted earnings per common share | 105,857,487 | 103,656,170 | 102,972,150 | ||||||||
Diluted earnings per common share | $ | 5.58 | $ | 2.09 | $ | 2.35 | |||||
Included in participating securities above are unvested shares and 3,023,314 dividend equivalent rights outstanding at December 31, 2017 that were issued in conjunction with the IPO of the Company's common stock. These dividend equivalent rights expire in 2021 and participate in dividends on a one-for-one basis.
The following potentially dilutive securities were outstanding at December 31, 2017, 2016, and 2015 but excluded from the calculation of diluted earnings per common share for the periods indicated because their inclusion would have been anti-dilutive:
2017 | 2016 | 2015 | ||||||
Unvested shares and share units | 1,431,761 | 1,303,208 | 1,040,385 | |||||
Stock options and warrants | 1,850,279 | 1,850,279 | 1,851,376 | |||||
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note 3 Acquisition Activity
On May 1, 2015, BankUnited completed the acquisition of SBF from CertusHoldings, Inc. in an asset purchase transaction for a cash purchase price of $278 million. SBF's primary business activity is to originate loans under programs administered by the SBA. The SBF acquisition has allowed BankUnited to expand its small business lending platform on a national basis.
BankUnited acquired the SBF loan portfolio, as well as substantially all of SBF's operating assets, and assumed certain of its operating liabilities. The acquisition of SBF was determined to be a business combination and was accounted for using the acquisition method of accounting; accordingly, the assets acquired and liabilities assumed were recorded at their estimated fair values at the acquisition date.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed (in thousands):
Assets: | |||
Loans held for investment | $ | 173,809 | |
Loans held for sale | 82,143 | ||
Servicing rights | 10,418 | ||
Other assets | 4,397 | ||
Total assets | 270,767 | ||
Total liabilities | 3,620 | ||
Estimated fair value of net assets acquired | 267,147 | ||
Consideration issued | 277,553 | ||
Excess of consideration issued over fair value of net assets acquired | $ | 10,406 | |
Note 4 Investment Securities
Investment securities available for sale consisted of the following at December 31, 2017 and 2016 (in thousands):
2017 | |||||||||||||||
Amortized Cost | Gross Unrealized | Fair Value | |||||||||||||
Gains | Losses | ||||||||||||||
U.S. Treasury securities | $ | 24,981 | $ | — | $ | (28 | ) | $ | 24,953 | ||||||
U.S. Government agency and sponsored enterprise residential MBS | 2,043,373 | 16,094 | (1,440 | ) | 2,058,027 | ||||||||||
U.S. Government agency and sponsored enterprise commercial MBS | 233,522 | 1,330 | (344 | ) | 234,508 | ||||||||||
Private label residential MBS and CMOs | 613,732 | 16,473 | (1,958 | ) | 628,247 | ||||||||||
Private label commercial MBS | 1,033,022 | 13,651 | (258 | ) | 1,046,415 | ||||||||||
Single family rental real estate-backed securities | 559,741 | 3,823 | (858 | ) | 562,706 | ||||||||||
Collateralized loan obligations | 720,429 | 3,252 | — | 723,681 | |||||||||||
Non-mortgage asset-backed securities | 119,939 | 1,808 | — | 121,747 | |||||||||||
Preferred stocks | 59,912 | 3,631 | — | 63,543 | |||||||||||
State and municipal obligations | 640,511 | 17,606 | (914 | ) | 657,203 | ||||||||||
SBA securities | 534,534 | 16,208 | (60 | ) | 550,682 | ||||||||||
Other debt securities | 4,090 | 5,030 | — | 9,120 | |||||||||||
$ | 6,587,786 | $ | 98,906 | $ | (5,860 | ) | $ | 6,680,832 | |||||||
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
2016 | |||||||||||||||
Amortized Cost | Gross Unrealized | Fair Value | |||||||||||||
Gains | Losses | ||||||||||||||
U.S. Treasury securities | $ | 4,999 | $ | 6 | $ | — | $ | 5,005 | |||||||
U.S. Government agency and sponsored enterprise residential MBS | 1,513,028 | 15,922 | (1,708 | ) | 1,527,242 | ||||||||||
U.S. Government agency and sponsored enterprise commercial MBS | 126,754 | 670 | (2,838 | ) | 124,586 | ||||||||||
Private label residential MBS and CMOs | 334,167 | 42,939 | (2,008 | ) | 375,098 | ||||||||||
Private label commercial MBS | 1,180,386 | 9,623 | (2,385 | ) | 1,187,624 | ||||||||||
Single family rental real estate-backed securities | 858,339 | 4,748 | (1,836 | ) | 861,251 | ||||||||||
Collateralized loan obligations | 487,678 | 868 | (1,250 | ) | 487,296 | ||||||||||
Non-mortgage asset-backed securities | 187,660 | 2,002 | (2,926 | ) | 186,736 | ||||||||||
Preferred stocks | 76,180 | 12,027 | (4 | ) | 88,203 | ||||||||||
State and municipal obligations | 705,884 | 3,711 | (11,049 | ) | 698,546 | ||||||||||
SBA securities | 517,129 | 7,198 | (421 | ) | 523,906 | ||||||||||
Other debt securities | 3,999 | 4,092 | — | 8,091 | |||||||||||
$ | 5,996,203 | $ | 103,806 | $ | (26,425 | ) | $ | 6,073,584 | |||||||
Investment securities held to maturity at December 31, 2017 and 2016 consisted of one State of Israel bond with a carrying value of $10 million. Fair value approximated carrying value at December 31, 2017 and 2016. The bond matures in 2024.
At December 31, 2017, contractual maturities of investment securities available for sale, adjusted for anticipated prepayments of mortgage-backed and other pass-through securities, were as follows (in thousands):
Amortized Cost | Fair Value | ||||||
Due in one year or less | $ | 663,592 | $ | 674,291 | |||
Due after one year through five years | 3,196,717 | 3,232,157 | |||||
Due after five years through ten years | 2,229,852 | 2,264,131 | |||||
Due after ten years | 437,713 | 446,710 | |||||
Preferred stocks with no stated maturity | 59,912 | 63,543 | |||||
$ | 6,587,786 | $ | 6,680,832 | ||||
Based on the Company’s assumptions, the estimated weighted average life of the investment portfolio as of December 31, 2017 was 4.9 years. The effective duration of the investment portfolio as of December 31, 2017 was 1.7 years. The model results are based on assumptions that may differ from actual results.
The carrying value of securities pledged as collateral for FHLB advances, public deposits, interest rate swaps and to secure borrowing capacity at the FRB totaled $2.6 billion and $1.8 billion at December 31, 2017 and 2016, respectively.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The following table provides information about gains and losses on investment securities available for sale for the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | 2016 | 2015 | |||||||||
Proceeds from sale of investment securities available for sale | $ | 1,287,591 | $ | 1,127,983 | $ | 1,114,020 | |||||
Gross realized gains | $ | 37,530 | $ | 14,924 | $ | 8,955 | |||||
Gross realized losses | (4,064 | ) | — | (475 | ) | ||||||
Net realized gain | 33,466 | 14,924 | 8,480 | ||||||||
OTTI | — | (463 | ) | — | |||||||
Gain on investment securities available for sale, net | $ | 33,466 | $ | 14,461 | $ | 8,480 | |||||
During the year ended December 31, 2016, OTTI was recognized on two positions in one private label commercial MBS. These positions were sold at a loss before the end of 2016.
The following tables present the aggregate fair value and the aggregate amount by which amortized cost exceeded fair value for investment securities in unrealized loss positions, aggregated by investment category and length of time that individual securities had been in continuous unrealized loss positions at December 31, 2017 and 2016 (in thousands):
2017 | |||||||||||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||
U.S. Treasury securities | $ | 24,953 | $ | (28 | ) | $ | — | $ | — | $ | 24,953 | $ | (28 | ) | |||||||||
U.S. Government agency and sponsored enterprise residential MBS | 471,120 | (1,141 | ) | 13,028 | (299 | ) | 484,148 | (1,440 | ) | ||||||||||||||
U.S. Government agency and sponsored enterprise commercial MBS | 26,265 | (344 | ) | — | — | 26,265 | (344 | ) | |||||||||||||||
Private label residential MBS and CMOs | 330,068 | (1,858 | ) | 5,083 | (100 | ) | 335,151 | (1,958 | ) | ||||||||||||||
Private label commercial MBS | 81,322 | (258 | ) | — | — | 81,322 | (258 | ) | |||||||||||||||
Single family rental real estate-backed securities | 94,750 | (858 | ) | — | — | 94,750 | (858 | ) | |||||||||||||||
State and municipal obligations | 30,715 | (49 | ) | 60,982 | (865 | ) | 91,697 | (914 | ) | ||||||||||||||
SBA securities | 21,300 | (10 | ) | 15,427 | (50 | ) | 36,727 | (60 | ) | ||||||||||||||
$ | 1,080,493 | $ | (4,546 | ) | $ | 94,520 | $ | (1,314 | ) | $ | 1,175,013 | $ | (5,860 | ) | |||||||||
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
2016 | |||||||||||||||||||||||
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 | $ | 191,463 | $ | (628 | ) | $ | 112,391 | $ | (1,080 | ) | $ | 303,854 | $ | (1,708 | ) | ||||||||
U.S. Government agency and sponsored enterprise commercial MBS | 89,437 | (2,838 | ) | — | — | 89,437 | (2,838 | ) | |||||||||||||||
Private label residential MBS and CMOs | 122,142 | (1,680 | ) | 8,074 | (328 | ) | 130,216 | (2,008 | ) | ||||||||||||||
Private label commercial MBS | 169,535 | (2,370 | ) | 24,985 | (15 | ) | 194,520 | (2,385 | ) | ||||||||||||||
Single family rental real estate-backed securities | 139,867 | (842 | ) | 176,057 | (994 | ) | 315,924 | (1,836 | ) | ||||||||||||||
Collateralized loan obligations | 69,598 | (402 | ) | 173,983 | (848 | ) | 243,581 | (1,250 | ) | ||||||||||||||
Non-mortgage asset-backed securities | 139,477 | (2,926 | ) | — | — | 139,477 | (2,926 | ) | |||||||||||||||
Preferred stocks | 10,087 | (4 | ) | — | — | 10,087 | (4 | ) | |||||||||||||||
State and municipal obligations | 448,180 | (11,049 | ) | — | — | 448,180 | (11,049 | ) | |||||||||||||||
SBA securities | 4,204 | (13 | ) | 20,076 | (408 | ) | 24,280 | (421 | ) | ||||||||||||||
$ | 1,383,990 | $ | (22,752 | ) | $ | 515,566 | $ | (3,673 | ) | $ | 1,899,556 | $ | (26,425 | ) | |||||||||
The Company monitors its investment securities available for sale for OTTI on an individual security basis. No securities were determined to be other-than-temporarily impaired during the years ended December 31, 2017 and 2015. As discussed above, OTTI was recognized on two positions in one private label commercial MBS during the year ended December 31, 2016. The Company does not intend to sell securities that are in significant unrealized loss positions at December 31, 2017 and it is not more likely than not that the Company will be required to sell these securities before recovery of the amortized cost basis, which may be at maturity. At December 31, 2017, 71 securities were in unrealized loss positions. The amount of impairment related to 28 of these securities was considered insignificant, totaling approximately $277 thousand and no further analysis with respect to these securities was considered necessary. The basis for concluding that impairment of the remaining securities was not other-than-temporary is further described below:
U.S. Treasury securities
At December 31, 2017, one U.S. Treasury security was in unrealized loss position. The amount of impairment is less than 1% of amortized cost. The timely payment of principal and interest on this security is explicitly guaranteed by the U.S. Government. Given the limited severity of impairment and the expectation of timely payments of principal and interest, the impairment is considered to be temporary.
U.S. Government agency and sponsored enterprise residential and commercial MBS
At December 31, 2017, eleven U.S. Government agency and sponsored enterprise residential MBS and three U.S. Government agency and sponsored enterprise commercial MBS were in unrealized loss positions. For eight fixed rate securities, the amount of impairment for each of the securities was less than 3% of amortized cost and was primarily attributable to an increase in medium and long-term market interest rates subsequent to the date of acquisition. For the remaining six variable rate securities, the amount of impairment was less than 1% of amortized cost. The timely payment of principal and interest on these securities is explicitly or implicitly guaranteed by the U.S. Government. Given the limited severity of impairment and the expectation of timely payment of principal and interest, the impairments were considered to be temporary.
108
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Private label residential MBS and CMOs
At December 31, 2017, twelve private label residential MBS and CMOs were in unrealized loss positions, primarily as a result of an increase in medium and long-term market interest rates subsequent to acquisition. The amount of impairment of each of the individual securities was 2% or less of amortized cost. These securities were assessed for OTTI using credit and prepayment behavioral models that incorporate CUSIP level constant default rates, voluntary prepayment rates and loss severity and delinquency assumptions. The results of these assessments were not indicative of credit losses related to any of these securities as of December 31, 2017. Given the limited severity of impairment and the expectation of timely recovery of outstanding principal, the impairments were considered to be temporary.
Private label commercial MBS
At December 31, 2017, three private label commercial MBS were in unrealized loss positions. The amount of impairment of each of the individual securities was less than 1% of amortized cost. These securities were assessed for OTTI using credit and prepayment behavioral models incorporating assumptions consistent with the collateral characteristics of each security. The results of this analysis were not indicative of expected credit losses. Given the limited severity of impairment and the expectation of timely recovery of outstanding principal, the impairments were considered to be temporary.
Single family rental real estate-backed securities
At December 31, 2017, six single family rental real estate-backed securities were in unrealized loss positions. The unrealized losses were primarily due to increases in market interest rates since the purchase of the securities. The amount of impairment of each of the individual securities was less than 2% of amortized cost. Management's analysis of the credit characteristics, including loan-to-value and debt service coverage ratios, and levels of subordination for each of the securities is not indicative of projected credit losses. Given the limited severity of impairment and the absence of projected credit losses, the impairments were considered to be temporary.
State and municipal obligations
At December 31, 2017, six state and municipal obligations were in unrealized loss positions. The amount of impairment of each of the individual securities was less than 3% of amortized cost. All of the securities are rated investment grade by nationally recognized statistical ratings organizations. Management's evaluation of these securities for OTTI also encompassed the review of credit scores and analysis provided by a third party firm specializing in the analysis and credit review of municipal securities. Given the absence of expected credit losses and management's ability and intent to hold the securities until recovery, the impairments were considered to be temporary.
SBA Securities
At December 31, 2017, one SBA security was in an unrealized loss position. The amount of impairment was less than 1% of amortized cost. This security was purchased at a premium and the impairment was attributable primarily to increased prepayment speeds. The timely payment of principal and interest on this security is guaranteed by this U.S. Government agency. Given the limited severity of impairment and the expectation of timely payment of principal and interest, the impairment was considered to be temporary.
109
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note 5 Loans and Allowance for Loan and Lease Losses
At December 31, 2017 and 2016, loans consisted of the following (dollars in thousands):
2017 | ||||||||||||||||||
Covered Loans | Percent of Total | |||||||||||||||||
Non-Covered Loans | ACI | Non-ACI | Total | |||||||||||||||
Residential and other consumer: | ||||||||||||||||||
1-4 single family residential | $ | 4,116,814 | $ | 479,068 | $ | 26,837 | $ | 4,622,719 | 21.6 | % | ||||||||
Home equity loans and lines of credit | 1,654 | — | 361 | 2,015 | — | % | ||||||||||||
Other consumer loans | 20,512 | — | — | 20,512 | 0.1 | % | ||||||||||||
4,138,980 | 479,068 | 27,198 | 4,645,246 | 21.7 | % | |||||||||||||
Commercial: | ||||||||||||||||||
Multi-family | 3,215,697 | — | — | 3,215,697 | 15.0 | % | ||||||||||||
Non-owner occupied commercial real estate | 4,485,276 | — | — | 4,485,276 | 21.0 | % | ||||||||||||
Construction and land | 310,999 | — | — | 310,999 | 1.5 | % | ||||||||||||
Owner occupied commercial real estate | 2,014,908 | — | — | 2,014,908 | 9.4 | % | ||||||||||||
Commercial and industrial | 4,145,785 | — | — | 4,145,785 | 19.4 | % | ||||||||||||
Commercial lending subsidiaries | 2,553,576 | — | — | 2,553,576 | 12.0 | % | ||||||||||||
16,726,241 | — | — | 16,726,241 | 78.3 | % | |||||||||||||
Total loans | 20,865,221 | 479,068 | 27,198 | 21,371,487 | 100.0 | % | ||||||||||||
Premiums, discounts and deferred fees and costs, net | 48,165 | — | (3,148 | ) | 45,017 | |||||||||||||
Loans including premiums, discounts and deferred fees and costs | 20,913,386 | 479,068 | 24,050 | 21,416,504 | ||||||||||||||
Allowance for loan and lease losses | (144,537 | ) | — | (258 | ) | (144,795 | ) | |||||||||||
Loans, net | $ | 20,768,849 | $ | 479,068 | $ | 23,792 | $ | 21,271,709 | ||||||||||
110
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
2016 | ||||||||||||||||||
Covered Loans | Percent of Total | |||||||||||||||||
Non-Covered Loans | ACI | Non-ACI | Total | |||||||||||||||
Residential and other consumer: | ||||||||||||||||||
1-4 single family residential | $ | 3,422,425 | $ | 532,348 | $ | 36,675 | $ | 3,991,448 | 20.6 | % | ||||||||
Home equity loans and lines of credit | 1,120 | 3,894 | 47,629 | 52,643 | 0.3 | % | ||||||||||||
Other consumer loans | 24,365 | — | — | 24,365 | 0.1 | % | ||||||||||||
3,447,910 | 536,242 | 84,304 | 4,068,456 | 21.0 | % | |||||||||||||
Commercial: | ||||||||||||||||||
Multi-family | 3,824,973 | — | — | 3,824,973 | 19.8 | % | ||||||||||||
Non-owner occupied commercial real estate | 3,739,235 | — | — | 3,739,235 | 19.3 | % | ||||||||||||
Construction and land | 311,436 | — | — | 311,436 | 1.6 | % | ||||||||||||
Owner occupied commercial real estate | 1,736,858 | — | — | 1,736,858 | 9.0 | % | ||||||||||||
Commercial and industrial | 3,391,614 | — | — | 3,391,614 | 17.5 | % | ||||||||||||
Commercial lending subsidiaries | 2,280,685 | — | — | 2,280,685 | 11.8 | % | ||||||||||||
15,284,801 | — | — | 15,284,801 | 79.0 | % | |||||||||||||
Total loans | 18,732,711 | 536,242 | 84,304 | 19,353,257 | 100.0 | % | ||||||||||||
Premiums, discounts and deferred fees and costs, net | 48,641 | — | (6,504 | ) | 42,137 | |||||||||||||
Loans including premiums, discounts and deferred fees and costs | 18,781,352 | 536,242 | 77,800 | 19,395,394 | ||||||||||||||
Allowance for loan and lease losses | (150,853 | ) | — | (2,100 | ) | (152,953 | ) | |||||||||||
Loans, net | $ | 18,630,499 | $ | 536,242 | $ | 75,700 | $ | 19,242,441 | ||||||||||
Included in non-covered loans above are $34 million and $47 million at December 31, 2017 and 2016, respectively, of ACI commercial loans acquired in the FSB Acquisition.
Through two subsidiaries, the Bank provides commercial and municipal equipment and franchise financing utilizing both loan and lease structures. At December 31, 2017 and 2016, the commercial lending subsidiaries portfolio included a net investment in direct financing leases of $738 million and $643 million, respectively.
The following table presents the components of the investment in direct financing leases as of December 31, 2017 and 2016 (in thousands):
2017 | 2016 | ||||||
Total minimum lease payments to be received | $ | 792,064 | $ | 689,631 | |||
Estimated unguaranteed residual value of leased assets | 17,872 | 3,704 | |||||
Gross investment in direct financing leases | 809,936 | 693,335 | |||||
Unearned income | (76,900 | ) | (55,891 | ) | |||
Initial direct costs | 5,184 | 5,287 | |||||
$ | 738,220 | $ | 642,731 | ||||
111
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
As of December 31, 2017, future minimum lease payments to be received under direct financing leases were as follows (in thousands):
Years Ending December 31: | |||
2018 | $ | 189,017 | |
2019 | 158,846 | ||
2020 | 121,930 | ||
2021 | 74,536 | ||
2022 | 49,781 | ||
Thereafter | 197,954 | ||
$ | 792,064 | ||
During both of the years ended December 31, 2017 and 2016, the Company purchased 1-4 single family residential loans totaling $1.3 billion.
At December 31, 2017, the Company had pledged real estate loans with UPB of approximately $10.5 billion and recorded investment of approximately $10.0 billion as security for FHLB advances.
At December 31, 2017 and 2016, the UPB of ACI loans was $1.1 billion and $1.5 billion, respectively. The accretable yield on ACI loans represents the amount by which undiscounted expected future cash flows exceed recorded investment. Changes in the accretable yield on ACI loans for the years ended December 31, 2017, 2016, and 2015 were as follows (in thousands):
Balance at December 31, 2014 | $ | 1,005,312 | |
Reclassifications from non-accretable difference | 192,291 | ||
Accretion | (295,038 | ) | |
Balance at December 31, 2015 | 902,565 | ||
Reclassifications from non-accretable difference | 76,751 | ||
Accretion | (303,931 | ) | |
Balance at December 31, 2016 | 675,385 | ||
Reclassifications from non-accretable difference | 81,501 | ||
Accretion | (301,827 | ) | |
Balance at December 31, 2017 | $ | 455,059 | |
Reclassifications from non-accretable difference in the table above for the year ended December 31, 2017 included $16.3 million of remaining accretable yield included in the determination of the recorded investment in the pool of ACI home equity loans and lines of credit, which was sold in its entirety in the fourth quarter of 2017.
112
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Covered loan sales
During the years ended December 31, 2017, 2016 and 2015, the Company sold covered residential loans to third parties on a non-recourse basis. The following table summarizes the impact of these transactions (in thousands):
2017 | 2016 | 2015 | |||||||||
UPB of loans sold | $ | 203,970 | $ | 241,348 | $ | 249,038 | |||||
Cash proceeds, net of transaction costs | $ | 169,828 | $ | 171,367 | $ | 207,425 | |||||
Recorded investment in loans sold | 152,422 | 185,837 | 172,496 | ||||||||
Gain (loss) on sale of covered loans, net | $ | 17,406 | $ | (14,470 | ) | $ | 34,929 | ||||
Gain (loss) on FDIC indemnification, net | $ | (1,523 | ) | $ | 11,615 | $ | (28,051 | ) | |||
Allowance for loan and lease losses
Activity in the ALLL for the years ended December 31, 2017, 2016, and 2015 is summarized as follows (in thousands):
2017 | |||||||||||
Residential and Other Consumer | Commercial | Total | |||||||||
Beginning balance | $ | 11,503 | $ | 141,450 | $ | 152,953 | |||||
Provision for (recovery of) loan losses: | |||||||||||
Covered loans | 1,418 | (60 | ) | 1,358 | |||||||
Non-covered loans | 1,034 | 66,355 | 67,389 | ||||||||
Total provision | 2,452 | 66,295 | 68,747 | ||||||||
Charge-offs: | |||||||||||
Covered loans | (3,327 | ) | — | (3,327 | ) | ||||||
Non-covered loans | (1 | ) | (77,865 | ) | (77,866 | ) | |||||
Total charge-offs | (3,328 | ) | (77,865 | ) | (81,193 | ) | |||||
Recoveries: | |||||||||||
Covered loans | 67 | 60 | 127 | ||||||||
Non-covered loans | 26 | 4,135 | 4,161 | ||||||||
Total recoveries | 93 | 4,195 | 4,288 | ||||||||
Ending balance | $ | 10,720 | $ | 134,075 | $ | 144,795 | |||||
113
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
2016 | |||||||||||
Residential and Other Consumer | Commercial | Total | |||||||||
Beginning balance | $ | 16,211 | $ | 109,617 | $ | 125,828 | |||||
Provision for (recovery of) loan losses: | |||||||||||
Covered loans | (1,632 | ) | (49 | ) | (1,681 | ) | |||||
Non-covered loans | (1,814 | ) | 54,406 | 52,592 | |||||||
Total provision | (3,446 | ) | 54,357 | 50,911 | |||||||
Charge-offs: | |||||||||||
Covered loans | (1,216 | ) | — | (1,216 | ) | ||||||
Non-covered loans | (152 | ) | (25,742 | ) | (25,894 | ) | |||||
Total charge-offs | (1,368 | ) | (25,742 | ) | (27,110 | ) | |||||
Recoveries: | |||||||||||
Covered loans | 80 | 49 | 129 | ||||||||
Non-covered loans | 26 | 3,169 | 3,195 | ||||||||
Total recoveries | 106 | 3,218 | 3,324 | ||||||||
Ending balance | $ | 11,503 | $ | 141,450 | $ | 152,953 | |||||
2015 | |||||||||||
Residential and Other Consumer | Commercial | Total | |||||||||
Beginning balance | $ | 11,515 | $ | 84,027 | $ | 95,542 | |||||
Provision for (recovery of) loan losses: | |||||||||||
Covered loans | 2,317 | (66 | ) | 2,251 | |||||||
Non-covered loans | 3,988 | 38,072 | 42,060 | ||||||||
Total provision | 6,305 | 38,006 | 44,311 | ||||||||
Charge-offs: | |||||||||||
Covered loans | (1,680 | ) | — | (1,680 | ) | ||||||
Non-covered loans | — | (13,719 | ) | (13,719 | ) | ||||||
Total charge-offs | (1,680 | ) | (13,719 | ) | (15,399 | ) | |||||
Recoveries: | |||||||||||
Covered loans | 39 | 66 | 105 | ||||||||
Non-covered loans | 32 | 1,237 | 1,269 | ||||||||
Total recoveries | 71 | 1,303 | 1,374 | ||||||||
Ending balance | $ | 16,211 | $ | 109,617 | $ | 125,828 | |||||
114
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The following table presents information about the balance of the ALLL and related loans as of December 31, 2017 and 2016 (in thousands):
2017 | 2016 | ||||||||||||||||||||||
Residential and Other Consumer | Commercial | Total | Residential and Other Consumer | Commercial | Total | ||||||||||||||||||
Allowance for loan and lease losses: | |||||||||||||||||||||||
Ending balance | $ | 10,720 | $ | 134,075 | $ | 144,795 | $ | 11,503 | $ | 141,450 | $ | 152,953 | |||||||||||
Covered loans: | |||||||||||||||||||||||
Ending balance | $ | 258 | $ | — | $ | 258 | $ | 2,100 | $ | — | $ | 2,100 | |||||||||||
Ending balance: non-ACI loans individually evaluated for impairment | $ | 118 | $ | — | $ | 118 | $ | 529 | $ | — | $ | 529 | |||||||||||
Ending balance: non-ACI loans collectively evaluated for impairment | $ | 140 | $ | — | $ | 140 | $ | 1,571 | $ | — | $ | 1,571 | |||||||||||
Ending balance: ACI loans | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Non-covered loans: | |||||||||||||||||||||||
Ending balance | $ | 10,462 | $ | 134,075 | $ | 144,537 | $ | 9,403 | $ | 141,450 | $ | 150,853 | |||||||||||
Ending balance: loans individually evaluated for impairment | $ | 63 | $ | 18,776 | $ | 18,839 | $ | 12 | $ | 19,229 | $ | 19,241 | |||||||||||
Ending balance: loans collectively evaluated for impairment | $ | 10,399 | $ | 115,299 | $ | 125,698 | $ | 9,391 | $ | 122,221 | $ | 131,612 | |||||||||||
Ending balance: ACI loans | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Loans: | 0 | ||||||||||||||||||||||
Covered loans: | |||||||||||||||||||||||
Ending balance | $ | 503,118 | $ | — | $ | 503,118 | $ | 614,042 | $ | — | $ | 614,042 | |||||||||||
Ending balance: non-ACI loans individually evaluated for impairment | $ | 2,221 | $ | — | $ | 2,221 | $ | 12,396 | $ | — | $ | 12,396 | |||||||||||
Ending balance: non-ACI loans collectively evaluated for impairment | $ | 21,829 | $ | — | $ | 21,829 | $ | 65,404 | $ | — | $ | 65,404 | |||||||||||
Ending balance: ACI loans | $ | 479,068 | $ | — | $ | 479,068 | $ | 536,242 | $ | — | $ | 536,242 | |||||||||||
Non-covered loans: | |||||||||||||||||||||||
Ending balance | $ | 4,196,080 | $ | 16,717,306 | $ | 20,913,386 | $ | 3,495,775 | $ | 15,285,577 | $ | 18,781,352 | |||||||||||
Ending balance: loans, other than ACI loans, individually evaluated for impairment | $ | 1,234 | $ | 173,706 | $ | 174,940 | $ | 561 | $ | 176,932 | $ | 177,493 | |||||||||||
Ending balance: loans, other than ACI loans, collectively evaluated for impairment | $ | 4,194,846 | $ | 16,509,824 | $ | 20,704,670 | $ | 3,495,207 | $ | 15,061,707 | $ | 18,556,914 | |||||||||||
Ending balance: ACI loans | $ | — | $ | 33,776 | $ | 33,776 | $ | 7 | $ | 46,938 | $ | 46,945 | |||||||||||
115
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Credit quality information
The table below presents information about loans or ACI pools identified as impaired as of December 31, 2017 and 2016 (in thousands):
2017 | 2016 | ||||||||||||||||||||||
Recorded Investment | UPB | Related Specific Allowance | Recorded Investment | UPB | Related Specific Allowance | ||||||||||||||||||
Non-covered loans: | |||||||||||||||||||||||
With no specific allowance recorded: | |||||||||||||||||||||||
1-4 single family residential | $ | 120 | $ | 122 | $ | — | $ | — | $ | — | $ | — | |||||||||||
Non-owner occupied commercial real estate | 10,922 | 10,838 | — | 510 | 512 | — | |||||||||||||||||
Construction and land | 1,175 | 1,175 | — | 1,238 | 1,238 | — | |||||||||||||||||
Owner occupied commercial real estate | 22,002 | 22,025 | — | 16,834 | 16,894 | — | |||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||
Taxi medallion loans | 13,560 | 13,559 | — | 18,107 | 18,107 | — | |||||||||||||||||
Other commercial and industrial | 345 | 374 | — | 6,172 | 6,172 | — | |||||||||||||||||
Commercial lending subsidiaries | — | — | — | 10,620 | 10,510 | — | |||||||||||||||||
With a specific allowance recorded: | |||||||||||||||||||||||
1-4 single family residential | 1,114 | 1,090 | 63 | 561 | 546 | 12 | |||||||||||||||||
Multi-family | 23,173 | 23,175 | 1,732 | — | — | — | |||||||||||||||||
Owner occupied commercial real estate | 3,075 | 3,079 | 2,960 | 491 | 513 | 263 | |||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||
Taxi medallion loans | 92,507 | 92,508 | 12,214 | 73,131 | 73,147 | 5,948 | |||||||||||||||||
Other commercial and industrial | 3,626 | 3,624 | 1,540 | 29,452 | 29,463 | 9,168 | |||||||||||||||||
Commercial lending subsidiaries | 3,321 | 3,296 | 330 | 21,712 | 21,605 | 3,850 | |||||||||||||||||
Total: | |||||||||||||||||||||||
Residential and other consumer | $ | 1,234 | $ | 1,212 | $ | 63 | $ | 561 | $ | 546 | $ | 12 | |||||||||||
Commercial | 173,706 | 173,653 | 18,776 | 178,267 | 178,161 | 19,229 | |||||||||||||||||
$ | 174,940 | $ | 174,865 | $ | 18,839 | $ | 178,828 | $ | 178,707 | $ | 19,241 | ||||||||||||
Covered loans: | |||||||||||||||||||||||
Non-ACI loans: | |||||||||||||||||||||||
With no specific allowance recorded: | |||||||||||||||||||||||
1-4 single family residential | $ | 1,061 | $ | 1,203 | $ | — | $ | 1,169 | $ | 1,391 | $ | — | |||||||||||
Home equity loans and lines of credit | — | — | — | 2,255 | 2,286 | — | |||||||||||||||||
With a specific allowance recorded: | |||||||||||||||||||||||
1-4 single family residential | 1,160 | 1,314 | 118 | 1,272 | 1,514 | 181 | |||||||||||||||||
Home equity loans and lines of credit | — | — | — | 7,700 | 7,804 | 348 | |||||||||||||||||
$ | 2,221 | $ | 2,517 | $ | 118 | $ | 12,396 | $ | 12,995 | $ | 529 | ||||||||||||
Non-covered impaired loans include commercial real estate ACI loans modified in TDRs with a carrying value of $1.3 million as of December 31, 2016. Interest income recognized on impaired loans and pools for the year ended December 31, 2017 was approximately $9.6 million. The interest income recognized on impaired loans for the years ended December 31, 2016 and 2015 was not material.
116
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The following table presents the average recorded investment in impaired loans for the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | 2016 | 2015 | |||||||||||||||||||||
Non-Covered Loans | Covered Non-ACI Loans | Non-Covered Loans | Covered Non-ACI Loans | Non-Covered Loans | Covered Non-ACI Loans | ||||||||||||||||||
Residential and other consumer: | |||||||||||||||||||||||
1-4 single family residential | $ | 868 | $ | 2,345 | $ | 301 | $ | 3,067 | $ | 82 | $ | 3,655 | |||||||||||
Home equity loans and lines of credit | — | 8,403 | — | 9,225 | 4,830 | ||||||||||||||||||
868 | $ | 10,748 | 301 | $ | 12,292 | 82 | $ | 8,485 | |||||||||||||||
Commercial: | |||||||||||||||||||||||
Multi-family | 4,259 | — | 291 | ||||||||||||||||||||
Non-owner occupied commercial real estate | 5,537 | 710 | 1,001 | ||||||||||||||||||||
Construction and land | 2,789 | 797 | — | ||||||||||||||||||||
Owner occupied commercial real estate | 19,882 | 14,645 | 5,117 | ||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||
Taxi medallion loans | 108,977 | 45,012 | — | ||||||||||||||||||||
Other commercial and industrial | 38,275 | 40,443 | 35,976 | ||||||||||||||||||||
Commercial lending subsidiaries | 22,865 | 15,052 | 14,835 | ||||||||||||||||||||
202,584 | 116,659 | 57,220 | |||||||||||||||||||||
$ | 203,452 | $ | 116,960 | $ | 57,302 | ||||||||||||||||||
In addition to the above, a pool of ACI home equity loans and lines of credit was impaired during 2017. All of the loans from this pool were sold in the fourth quarter of 2017. The average balance of impaired ACI home equity loans and lines of credit for the year ended December 31, 2017 was $3.9 million.
117
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The following table presents the recorded investment in loans on non-accrual status as of December 31, 2017 and 2016 (in thousands):
2017 | 2016 | ||||||||||||||
Non-Covered Loans | Covered Non-ACI Loans | Non-Covered Loans | Covered Non-ACI Loans | ||||||||||||
Residential and other consumer: | |||||||||||||||
1-4 single family residential | $ | 9,705 | $ | 1,010 | $ | 566 | $ | 918 | |||||||
Home equity loans and lines of credit | — | 331 | — | 2,283 | |||||||||||
Other consumer loans | 821 | — | 2 | — | |||||||||||
10,526 | $ | 1,341 | 568 | $ | 3,201 | ||||||||||
Commercial: | |||||||||||||||
Non-owner occupied commercial real estate | 12,716 | 559 | |||||||||||||
Construction and land | 1,175 | 1,238 | |||||||||||||
Owner occupied commercial real estate | 29,020 | 19,439 | |||||||||||||
Commercial and industrial | |||||||||||||||
Taxi medallion loans | 106,067 | 60,660 | |||||||||||||
Other commercial and industrial | 7,049 | 16,036 | |||||||||||||
Commercial lending subsidiaries | 3,512 | 32,645 | |||||||||||||
159,539 | 130,577 | ||||||||||||||
$ | 170,065 | $ | 131,145 | ||||||||||||
Non-covered loans contractually delinquent by 90 days or more and still accruing totaled $1.9 million and $1.6 million at December 31, 2017 and 2016, 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 $4.1 million and $3.5 million for the years ended December 31, 2017 and 2016, respectively.
Management considers delinquency status to be the most meaningful indicator of the credit quality of 1-4 single family residential, home equity and consumer loans. Delinquency statistics are updated at least monthly. See "Aging of loans" below for more information on the delinquency status of loans. Original LTV and original FICO score are also important indicators of credit quality for the non-covered 1-4 single family residential portfolio.
Internal risk ratings are considered the most meaningful indicator of credit quality for commercial loans. Internal risk ratings are a key factor in identifying loans that are individually evaluated for impairment and impact management’s estimates of loss factors used in determining the amount of the ALLL. Internal risk ratings are updated on a continuous basis. Generally, relationships with balances in excess of defined thresholds, ranging from $1 million to $3 million, are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. Loans exhibiting potential credit weaknesses that deserve management’s close attention and that if left uncorrected may result in deterioration of the repayment capacity of the borrower are categorized as special mention. Loans with well-defined credit weaknesses, including payment defaults, declining collateral values, frequent overdrafts, operating losses, increasing balance sheet leverage, inadequate cash flow, project cost overruns, unreasonable construction delays, past due real estate taxes or exhausted interest reserves, are assigned an internal risk rating of substandard. A loan with a weakness so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors has not been charged off, will be assigned an internal risk rating of doubtful.
118
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The following tables summarize key indicators of credit quality for the Company's loans as of December 31, 2017 and 2016. Amounts include premiums, discounts and deferred fees and costs (in thousands):
1-4 Single Family Residential credit exposure for non-covered loans, based on original LTV and FICO score:
2017 | ||||||||||||||||||||
FICO | ||||||||||||||||||||
LTV | 720 or less | 721 - 740 | 741 - 760 | 761 or greater | Total | |||||||||||||||
60% or less | $ | 92,316 | $ | 117,319 | $ | 185,193 | $ | 815,828 | $ | 1,210,656 | ||||||||||
60% - 70% | 101,158 | 103,506 | 147,592 | 590,693 | 942,949 | |||||||||||||||
70% - 80% | 149,958 | 183,376 | 324,887 | 1,139,969 | 1,798,190 | |||||||||||||||
More than 80% | 33,776 | 32,563 | 30,404 | 125,415 | 222,158 | |||||||||||||||
$ | 377,208 | $ | 436,764 | $ | 688,076 | $ | 2,671,905 | $ | 4,173,953 | |||||||||||
2016 | ||||||||||||||||||||
FICO | ||||||||||||||||||||
LTV | 720 or less | 721 - 740 | 741 - 760 | 761 or greater | Total | |||||||||||||||
60% or less | $ | 87,035 | $ | 113,401 | $ | 163,668 | $ | 751,291 | $ | 1,115,395 | ||||||||||
60% - 70% | 80,694 | 94,592 | 124,180 | 523,970 | 823,436 | |||||||||||||||
70% - 80% | 110,509 | 148,211 | 276,425 | 907,450 | 1,442,595 | |||||||||||||||
More than 80% | 22,115 | 9,058 | 15,470 | 42,280 | 88,923 | |||||||||||||||
$ | 300,353 | $ | 365,262 | $ | 579,743 | $ | 2,224,991 | $ | 3,470,349 | |||||||||||
119
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Commercial credit exposure, based on internal risk rating:
2017 | |||||||||||||||||||||||||||||||
Commercial and Industrial | |||||||||||||||||||||||||||||||
Multi-Family | Non-Owner Occupied Commercial Real Estate | Construction and Land | Owner Occupied Commercial Real Estate | Taxi Medallion Loans | Other Commercial and Industrial | Commercial Lending Subsidiaries | Total | ||||||||||||||||||||||||
Pass | $ | 3,124,819 | $ | 4,360,827 | $ | 305,043 | $ | 1,954,464 | $ | — | $ | 3,965,241 | $ | 2,478,998 | $ | 16,189,392 | |||||||||||||||
Special mention | 34,837 | 33,094 | — | 22,161 | — | 37,591 | 55,551 | 183,234 | |||||||||||||||||||||||
Substandard | 59,297 | 80,880 | 5,441 | 33,145 | 104,682 | 27,010 | 27,950 | 338,405 | |||||||||||||||||||||||
Doubtful | — | — | — | 2,972 | 1,385 | 1,918 | — | 6,275 | |||||||||||||||||||||||
$ | 3,218,953 | $ | 4,474,801 | $ | 310,484 | $ | 2,012,742 | $ | 106,067 | $ | 4,031,760 | $ | 2,562,499 | $ | 16,717,306 | ||||||||||||||||
2016 | |||||||||||||||||||||||||||||||
Commercial and Industrial | |||||||||||||||||||||||||||||||
Multi-Family | Non-Owner Occupied Commercial Real Estate | Construction and Land | Owner Occupied Commercial Real Estate | Taxi Medallion Loans | Other Commercial and Industrial | Commercial Lending Subsidiaries | Total | ||||||||||||||||||||||||
Pass | $ | 3,811,822 | $ | 3,694,931 | $ | 309,675 | $ | 1,672,199 | $ | 40,460 | $ | 3,112,590 | $ | 2,255,444 | $ | 14,897,121 | |||||||||||||||
Special mention | 12,000 | 7,942 | — | 33,274 | — | 19,009 | — | 72,225 | |||||||||||||||||||||||
Substandard | 5,852 | 28,935 | 1,238 | 30,377 | 138,035 | 68,704 | 31,572 | 304,713 | |||||||||||||||||||||||
Doubtful | — | — | — | — | 178 | 8,162 | 3,178 | 11,518 | |||||||||||||||||||||||
$ | 3,829,674 | $ | 3,731,808 | $ | 310,913 | $ | 1,735,850 | $ | 178,673 | $ | 3,208,465 | $ | 2,290,194 | $ | 15,285,577 | ||||||||||||||||
120
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Aging of loans:
The following table presents an aging of loans as of December 31, 2017 and 2016. Amounts include premiums, discounts and deferred fees and costs (in thousands):
2017 | 2016 | ||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||
Non-covered loans: | |||||||||||||||||||||||||||||||||||||||
1-4 single family residential | $ | 4,145,079 | $ | 17,224 | $ | 6,094 | $ | 5,556 | $ | 4,173,953 | $ | 3,457,606 | $ | 10,355 | $ | 325 | $ | 2,063 | $ | 3,470,349 | |||||||||||||||||||
Home equity loans and lines of credit | 1,633 | 21 | — | — | 1,654 | 1,120 | — | — | — | 1,120 | |||||||||||||||||||||||||||||
Other consumer loans | 19,958 | 15 | — | 500 | 20,473 | 24,306 | — | — | — | 24,306 | |||||||||||||||||||||||||||||
Multi-family | 3,218,953 | — | — | — | 3,218,953 | 3,829,674 | — | — | — | 3,829,674 | |||||||||||||||||||||||||||||
Non-owner occupied commercial real estate | 4,464,967 | 7,549 | — | 2,285 | 4,474,801 | 3,730,470 | 754 | — | 584 | 3,731,808 | |||||||||||||||||||||||||||||
Construction and land | 309,309 | — | — | 1,175 | 310,484 | 309,675 | — | — | 1,238 | 310,913 | |||||||||||||||||||||||||||||
Owner occupied commercial real estate | 2,004,397 | 1,292 | 499 | 6,554 | 2,012,742 | 1,726,826 | 1,557 | 797 | 6,670 | 1,735,850 | |||||||||||||||||||||||||||||
Commercial and industrial | |||||||||||||||||||||||||||||||||||||||
Taxi medallion loans | 88,394 | 6,048 | 3,333 | 8,292 | 106,067 | 137,856 | 7,037 | 4,563 | 29,217 | 178,673 | |||||||||||||||||||||||||||||
Other commercial and industrial | 4,025,784 | 4,291 | 291 | 1,394 | 4,031,760 | 3,198,008 | 2,515 | 954 | 6,988 | 3,208,465 | |||||||||||||||||||||||||||||
Commercial lending subsidiaries | 2,561,647 | 852 | — | — | 2,562,499 | 2,284,435 | 12 | 3,247 | 2,500 | 2,290,194 | |||||||||||||||||||||||||||||
$ | 20,840,121 | $ | 37,292 | $ | 10,217 | $ | 25,756 | $ | 20,913,386 | $ | 18,699,976 | $ | 22,230 | $ | 9,886 | $ | 49,260 | $ | 18,781,352 | ||||||||||||||||||||
Covered loans: | |||||||||||||||||||||||||||||||||||||||
Non-ACI loans: | |||||||||||||||||||||||||||||||||||||||
1-4 single family residential | $ | 21,076 | $ | 1,603 | $ | — | $ | 1,010 | $ | 23,689 | $ | 29,406 | $ | 481 | $ | — | $ | 918 | $ | 30,805 | |||||||||||||||||||
Home equity loans and lines of credit | 30 | — | — | 331 | 361 | 43,129 | 1,255 | 534 | 2,077 | 46,995 | |||||||||||||||||||||||||||||
$ | 21,106 | $ | 1,603 | $ | — | $ | 1,341 | $ | 24,050 | $ | 72,535 | $ | 1,736 | $ | 534 | $ | 2,995 | $ | 77,800 | ||||||||||||||||||||
ACI loans: | |||||||||||||||||||||||||||||||||||||||
1-4 single family residential | $ | 448,125 | $ | 10,388 | $ | 2,719 | $ | 17,836 | $ | 479,068 | $ | 500,272 | $ | 13,524 | $ | 2,990 | $ | 15,562 | $ | 532,348 | |||||||||||||||||||
Home equity loans and lines of credit | — | — | — | — | — | 3,460 | 148 | 23 | 263 | 3,894 | |||||||||||||||||||||||||||||
$ | 448,125 | $ | 10,388 | $ | 2,719 | $ | 17,836 | $ | 479,068 | $ | 503,732 | $ | 13,672 | $ | 3,013 | $ | 15,825 | $ | 536,242 | ||||||||||||||||||||
1-4 single family residential and home equity ACI loans that are contractually delinquent by more than 90 days and accounted for in pools that are on accrual status because discount continues to be accreted totaled $18 million and $16 million at December 31, 2017 and 2016, respectively.
121
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Loan Concentrations:
At December 31, 2017 and 2016, 1-4 single family residential loans outstanding were collateralized by property located in the following states (dollars in thousands):
2017 | |||||||||||||||||
Percent of Total | |||||||||||||||||
Non-Covered Loans | Covered Loans | Total | Non-Covered Loans | Total Loans | |||||||||||||
California | $ | 1,094,058 | $ | 23,780 | $ | 1,117,838 | 26.2 | % | 23.9 | % | |||||||
New York | 873,360 | 16,847 | 890,207 | 20.9 | % | 19.0 | % | ||||||||||
Florida | 552,556 | 281,396 | 833,952 | 13.2 | % | 17.8 | % | ||||||||||
Virginia | 181,912 | 22,290 | 204,202 | 4.4 | % | 4.4 | % | ||||||||||
Others | 1,472,067 | 158,444 | 1,630,511 | 35.3 | % | 34.9 | % | ||||||||||
$ | 4,173,953 | $ | 502,757 | $ | 4,676,710 | 100.0 | % | 100.0 | % | ||||||||
2016 | |||||||||||||||||
Percent of Total | |||||||||||||||||
Non-Covered Loans | Covered Loans | Total | Non-Covered Loans | Total Loans | |||||||||||||
California | $ | 904,107 | $ | 37,330 | $ | 941,437 | 26.1 | % | 23.3 | % | |||||||
Florida | 487,294 | 300,198 | 787,492 | 14.0 | % | 19.5 | % | ||||||||||
New York | 763,824 | 16,403 | 780,227 | 22.0 | % | 19.3 | % | ||||||||||
Virginia | 152,113 | 30,818 | 182,931 | 4.4 | % | 4.5 | % | ||||||||||
Others | 1,163,011 | 178,404 | 1,341,415 | 33.5 | % | 33.4 | % | ||||||||||
$ | 3,470,349 | $ | 563,153 | $ | 4,033,502 | 100.0 | % | 100.0 | % | ||||||||
No other state represented borrowers with more than 4.0% of 1-4 single family residential loans outstanding at December 31, 2017 or 2016. At December 31, 2017, 43.4% and 36.4% of loans in the non-covered commercial portfolio were to borrowers in Florida and the New York tri-state area, respectively. At December 31, 2016, 43.1% and 39.2% of loans in the non-covered commercial portfolio were to borrowers in Florida and the New York tri-state area, respectively.
Foreclosure of residential real estate
The carrying amount of foreclosed residential real estate properties included in "Other assets" in the accompanying consolidated balance sheets, all of which were covered, totaled $3 million and $5 million at December 31, 2017 and 2016, respectively. The recorded investment in residential mortgage loans in the process of foreclosure totaled $11 million and $8 million at December 31, 2017 and 2016, respectively, substantially all of which were covered loans.
122
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Troubled debt restructurings
The following tables summarize loans that were modified in TDRs during the years ended December 31, 2017, 2016 and 2015, as well as loans modified during the years ended December 31, 2017, 2016 and 2015 that experienced payment defaults during the periods (dollars in thousands):
2017 | |||||||||||||
Loans Modified in TDRs During the Period | TDRs Experiencing Payment Defaults During the Period | ||||||||||||
Number of TDRs | Recorded Investment | Number of TDRs | Recorded Investment | ||||||||||
Non-covered loans: | |||||||||||||
1-4 single family residential | 7 | $ | 676 | 5 | $ | 595 | |||||||
Multi-family | 2 | 23,173 | — | — | |||||||||
Owner occupied commercial real estate | 3 | 4,685 | — | — | |||||||||
Commercial and industrial | |||||||||||||
Taxi medallion loans | 110 | 48,526 | 8 | 2,725 | |||||||||
Other commercial and industrial | 2 | 1,378 | — | — | |||||||||
124 | $ | 78,438 | 13 | $ | 3,320 | ||||||||
2016 | |||||||||||||
Loans Modified in TDRs During the Period | TDRs Experiencing Payment Defaults During the Period | ||||||||||||
Number of TDRs | Recorded Investment | Number of TDRs | Recorded Investment | ||||||||||
Non-covered loans: | |||||||||||||
1-4 single family residential | 2 | $ | 326 | — | $ | — | |||||||
Owner occupied commercial real estate | 3 | 5,117 | 1 | 491 | |||||||||
Commercial and industrial | |||||||||||||
Taxi medallion loans | 74 | 64,854 | 15 | 8,657 | |||||||||
Other commercial and industrial | 8 | 23,247 | 2 | 1,482 | |||||||||
Commercial lending subsidiaries | 6 | 6,735 | 1 | 2,500 | |||||||||
93 | $ | 100,279 | 19 | $ | 13,130 | ||||||||
Covered loans: | |||||||||||||
Non-ACI loans: | |||||||||||||
Home equity loans and lines of credit | 17 | $ | 2,016 | 1 | $ | 370 | |||||||
ACI loans: | |||||||||||||
Owner occupied commercial real estate | 1 | $ | 825 | — | $ | — | |||||||
123
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
2015 | |||||||||||||
Loans Modified in TDRs During the Period | TDRs Experiencing Payment Defaults During the Period | ||||||||||||
Number of TDRs | Recorded Investment | Number of TDRs | Recorded Investment | ||||||||||
Non-covered loans: | |||||||||||||
Non-owner occupied commercial real estate | 1 | $ | 548 | — | $ | — | |||||||
Commercial and industrial | |||||||||||||
Taxi medallion loans | 2 | 1,260 | 1 | 627 | |||||||||
3 | $ | 1,808 | 1 | $ | 627 | ||||||||
Covered loans: | |||||||||||||
Non-ACI loans: | |||||||||||||
1-4 single family residential | 2 | $ | 239 | — | $ | — | |||||||
Home equity loans and lines of credit | 28 | 6,208 | 7 | 1,231 | |||||||||
30 | $ | 6,447 | 7 | $ | 1,231 | ||||||||
ACI loans: | |||||||||||||
Owner occupied commercial real estate | 1 | $ | 500 | — | $ | — | |||||||
Modifications during the years ended December 31, 2017, 2016 and 2015 included interest rate reductions, restructuring of the amount and timing of required periodic payments, extensions of maturity and covenant waivers. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy. The total amount of such loans is not material. Modified ACI loans accounted for in pools are not considered TDRs, are not separated from the pools and are not classified as impaired loans.
Note 6 FDIC Indemnification Asset
When the Company recognizes gains or losses related to covered assets in its consolidated financial statements, changes in the estimated amount recoverable from the FDIC under the Loss Sharing Agreements with respect to those gains or losses are also reflected in the consolidated financial statements. Covered loans may be resolved through prepayment, short sale of the underlying collateral, foreclosure, sale of the loans or charge-off. For loans resolved through prepayment, short sale or foreclosure, the difference between consideration received in satisfaction of the loans and the carrying value of the loans is recognized in the consolidated statement of income line item “Income from resolution of covered assets, net.” Losses from the resolution of covered loans increase the amount recoverable from the FDIC under the Loss Sharing Agreements. Gains from the resolution of covered loans reduce the amount recoverable from the FDIC under the Loss Sharing Agreements. Similarly, differences in proceeds received on the sale of covered OREO and covered loans and their carrying amounts result in gains or losses and reduce or increase the amount recoverable from the FDIC under the Loss Sharing Agreements. Increases in valuation allowances or impairment charges related to covered assets also increase the amount estimated to be recoverable from the FDIC. These additions to or reductions in amounts recoverable from the FDIC related to transactions in the covered assets are recorded in the consolidated statement of income line item “Net loss on FDIC indemnification” and reflected as corresponding increases or decreases in the FDIC indemnification asset.
In addition, through June 30, 2017, recoveries of previously indemnified losses on assets that were formerly covered under the Commercial Shared-Loss Agreement resulted in reimbursements due to the FDIC. These transactions are included in the tables below. Amounts payable to the FDIC resulting from these transactions are recognized in other liabilities in the accompanying consolidated balance sheet at December 31, 2016.
124
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The following tables summarize the components of the gains and losses associated with covered assets, along with the related additions to or reductions in the amounts recoverable from the FDIC under the Loss Sharing Agreements, as reflected in the consolidated statements of income for the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | |||||||||||
Transaction Income (Loss) | Net Loss on FDIC Indemnification | Net Impact on Pre-tax Earnings | |||||||||
Provision for losses on covered loans | $ | (1,358 | ) | $ | 1,039 | $ | (319 | ) | |||
Income from resolution of covered assets, net | 27,450 | (21,912 | ) | 5,538 | |||||||
Gain on sale of covered loans | 17,406 | (1,514 | ) | 15,892 | |||||||
Loss on covered OREO | (203 | ) | 167 | (36 | ) | ||||||
$ | 43,295 | $ | (22,220 | ) | $ | 21,075 | |||||
2016 | |||||||||||
Transaction Income (Loss) | Net Loss on FDIC Indemnification | Net Impact on Pre-tax Earnings | |||||||||
Recovery of losses on covered loans | $ | 1,681 | $ | (1,472 | ) | $ | 209 | ||||
Income from resolution of covered assets, net | 36,155 | (28,946 | ) | 7,209 | |||||||
Loss on sale of covered loans | (14,470 | ) | 11,615 | (2,855 | ) | ||||||
Loss on covered OREO | (1,301 | ) | 1,044 | (257 | ) | ||||||
$ | 22,065 | $ | (17,759 | ) | $ | 4,306 | |||||
2015 | |||||||||||
Transaction Income (Loss) | Net Loss on FDIC Indemnification | Net Impact on Pre-tax Earnings | |||||||||
Provision for losses on covered loans | $ | (2,251 | ) | $ | 1,826 | $ | (425 | ) | |||
Income from resolution of covered assets, net | 50,658 | (40,395 | ) | 10,263 | |||||||
Gain on sale of covered loans | 34,929 | (28,051 | ) | 6,878 | |||||||
Loss on covered OREO | (1,014 | ) | 678 | (336 | ) | ||||||
$ | 82,322 | $ | (65,942 | ) | $ | 16,380 | |||||
125
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Changes in the FDIC indemnification asset, and in the liability to the FDIC for recoveries related to assets previously covered under the Commercial Shared-Loss Agreement, for the years ended December 31, 2017, 2016 and 2015, were as follows (in thousands):
Balance at December 31, 2014 | $ | 974,335 | |
Amortization | (109,411 | ) | |
Reduction for claims filed | (59,139 | ) | |
Net loss on FDIC indemnification | (65,942 | ) | |
Balance at December 31, 2015 | 739,843 | ||
Amortization | (160,091 | ) | |
Reduction for claims filed | (46,083 | ) | |
Net loss on FDIC indemnification | (17,759 | ) | |
Balance at December 31, 2016 | 515,910 | ||
Amortization | (176,466 | ) | |
Reduction for claims filed | (21,589 | ) | |
Net loss on FDIC indemnification | (22,220 | ) | |
Balance at December 31, 2017 | $ | 295,635 | |
The balances at December 31, 2017 and 2016 are reflected in the consolidated balance sheets as follows (in thousands):
2017 | 2016 | ||||||
FDIC indemnification asset | $ | 295,635 | $ | 515,933 | |||
Other liabilities | — | (23 | ) | ||||
$ | 295,635 | $ | 515,910 | ||||
Note 7 Equipment Under Operating Lease
Equipment under operating lease consists primarily of railcars and other transportation equipment. The components of equipment under operating lease as of December 31, 2017 and 2016 are summarized as follows (in thousands):
2017 | 2016 | ||||||
Equipment under operating lease | $ | 674,434 | $ | 589,716 | |||
Less: accumulated depreciation | (74,932 | ) | (49,802 | ) | |||
Equipment under operating lease, net | $ | 599,502 | $ | 539,914 | |||
The Company recognized impairment of $4.1 million during the year ended December 31, 2016, related to a group of tank cars impacted by new safety regulations. This impairment charge is included in "Depreciation of equipment under operating lease" in the accompanying consolidated statements of income. No impairment was recognized during the years ended December 31, 2017 and 2015.
126
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
At December 31, 2017, scheduled minimum rental payments under operating leases were as follows (in thousands)
Years Ending December 31: | |||
2018 | $ | 50,173 | |
2019 | 46,547 | ||
2020 | 40,956 | ||
2021 | 31,425 | ||
2022 | 25,185 | ||
Thereafter through 2032 | 58,304 | ||
$ | 252,590 | ||
Note 8 Premises and Equipment and Lease Commitments
Premises and equipment are included in other assets in the accompanying consolidated balance sheets and are summarized as follows as of December 31, 2017 and 2016 (in thousands):
2017 | 2016 | ||||||
Buildings and improvements | $ | 18,793 | $ | 22,470 | |||
Leasehold improvements | 70,298 | 68,403 | |||||
Furniture, fixtures and equipment | 35,675 | 36,094 | |||||
Computer equipment | 21,078 | 18,559 | |||||
Software and software licensing rights | 42,908 | 38,002 | |||||
Aircraft and automobiles | 11,744 | 11,857 | |||||
200,496 | 195,385 | ||||||
Less: accumulated depreciation | (121,477 | ) | (104,268 | ) | |||
Premises and equipment, net | $ | 79,019 | $ | 91,117 | |||
Buildings and improvements includes $11 million related to property under capital lease at both December 31, 2017 and 2016.
Depreciation and amortization expense related to premises and equipment, including amortization of assets recorded under capital leases, was $19.4 million, $21.3 million and $22.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company leases branch and office facilities under operating leases, most of which contain renewal options under various terms. Total rent expense under operating leases for the years ended December 31, 2017, 2016 and 2015 was $27.5 million, $27.6 million, and $27.1 million, respectively.
127
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
As of December 31, 2017, future minimum rentals under non-cancelable operating leases with initial or remaining terms in excess of one year were as follows (in thousands):
Years ending December 31: | |||
2018 | $ | 22,340 | |
2019 | 21,129 | ||
2020 | 17,541 | ||
2021 | 15,770 | ||
2022 | 11,712 | ||
Thereafter through 2034 | 48,183 | ||
$ | 136,675 | ||
Note 9 Deposits
The following table presents average balances and weighted average rates paid on deposits for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
2017 | 2016 | 2015 | ||||||||||||||||||
Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | Average Balance | Average Rate Paid | |||||||||||||||
Demand deposits: | ||||||||||||||||||||
Non-interest bearing | $ | 3,069,565 | — | % | $ | 2,968,192 | — | % | $ | 2,732,654 | — | % | ||||||||
Interest bearing | 1,586,390 | 0.81 | % | 1,382,717 | 0.60 | % | 1,169,921 | 0.49 | % | |||||||||||
Money market | 9,364,498 | 0.85 | % | 7,946,447 | 0.64 | % | 6,313,340 | 0.57 | % | |||||||||||
Savings | 365,603 | 0.21 | % | 415,205 | 0.23 | % | 536,026 | 0.32 | % | |||||||||||
Time | 6,094,336 | 1.27 | % | 5,326,630 | 1.12 | % | 4,305,857 | 1.11 | % | |||||||||||
$ | 20,480,392 | 0.83 | % | $ | 18,039,191 | 0.66 | % | $ | 15,057,798 | 0.61 | % | |||||||||
Time deposit accounts with balances of $100,000 or more totaled approximately $4.1 billion and $3.9 billion at December 31, 2017 and 2016, respectively. Time deposit accounts with balances of $250,000 or more totaled $2.3 billion and $2.1 billion at December 31, 2017 and 2016, respectively.
The following table presents maturities of time deposits as of December 31, 2017 (in thousands):
Maturing in: | |||
2018 | $ | 5,228,690 | |
2019 | 630,719 | ||
2020 | 345,861 | ||
2021 | 101,715 | ||
2022 | 27,809 | ||
Thereafter | 48 | ||
$ | 6,334,842 | ||
Included in deposits at December 31, 2017 are public funds deposits of $2.6 billion and brokered deposits of $2.4 billion. Investment securities available for sale with a carrying value of $1.2 billion were pledged as security for public funds deposits at December 31, 2017.
128
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Interest expense on deposits for the years ended December 31, 2017, 2016 and 2015 was as follows (in thousands):
2017 | 2016 | 2015 | |||||||||
Interest bearing demand | $ | 12,873 | $ | 8,343 | $ | 5,782 | |||||
Money market | 79,645 | 50,802 | 36,005 | ||||||||
Savings | 752 | 972 | 1,739 | ||||||||
Time | 77,663 | 59,656 | 47,625 | ||||||||
$ | 170,933 | $ | 119,773 | $ | 91,151 | ||||||
Note 10 Borrowings
The following table presents information about outstanding FHLB advances as of December 31, 2017 (dollars in thousands):
Range of Interest Rates | ||||||||||||
Amount | Minimum | Maximum | Weighted Average Rate | |||||||||
Maturing in: | ||||||||||||
2018—One month or less | $ | 2,425,000 | 1.20 | % | 1.42 | % | 1.35 | % | ||||
2018—Over one month | 2,121,000 | 1.25 | % | 1.69 | % | 1.43 | % | |||||
2019 | 100,000 | 1.46 | % | 1.57 | % | 1.52 | % | |||||
2020 | 125,000 | 1.67 | % | 1.78 | % | 1.73 | % | |||||
Carrying value | $ | 4,771,000 | ||||||||||
The table above reflects contractual maturities of outstanding advances and does not incorporate the impact that interest rate swaps designated as cash flow hedges have on the duration of borrowings. The terms of the Company's security agreement with the FHLB require a specific assignment of collateral consisting of qualifying first mortgage loans, commercial real estate loans, home equity lines of credit and mortgage-backed securities with unpaid principal amounts discounted at various stipulated percentages at least equal to 100% of outstanding FHLB advances. As of December 31, 2017, the Company had pledged investment securities and real estate loans with an aggregate carrying amount of approximately $10.7 billion as collateral for advances from the FHLB.
At December 31, 2017 and 2016 outstanding senior notes payable and other borrowings consisted of the following (dollars in thousands):
2017 | 2016 | ||||||
Principal amount of 4.875% senior notes | $ | 400,000 | $ | 400,000 | |||
Unamortized discount and debt issuance costs | (6,275 | ) | (6,908 | ) | |||
393,725 | 393,092 | ||||||
Capital lease obligations | 9,105 | 9,717 | |||||
$ | 402,830 | $ | 402,809 | ||||
The senior notes mature on November 17, 2025 with interest payable semiannually. The notes have an effective interest rate of 5.12%, after consideration of issuance discount and costs. The notes may be redeemed by the Company, in whole or in part, at any time prior to August 17, 2025 at the greater of a) 100% of the principal balance or b) the sum of the present values of the remaining scheduled payments of principal and interest on the securities discounted to the redemption date at i) the rate on a United States Treasury security with a maturity comparable to the remaining maturity of the senior notes that would be used to price new issues of corporate debt securities with a maturity comparable to the remaining maturity of the senior notes plus ii) 40 basis points. The senior notes may be redeemed at any time after August 17, 2025 at 100% of principal plus accrued and unpaid interest.
129
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
At December 31, 2017, BankUnited had available borrowing capacity at the FHLB of approximately $4.1 billion, unused borrowing capacity at the FRB of approximately $770 million and unused Federal funds lines of credit with other financial institutions totaling $70 million.
Note 11 Income Taxes
The components of the provision (benefit) for income taxes for the years ended December 31, 2017, 2016 and 2015 were as follows (in thousands):
2017 | 2016 | 2015 | |||||||||
Current: | |||||||||||
Federal | $ | (251,880 | ) | $ | 51,806 | $ | 18,230 | ||||
State | (15,733 | ) | 27,708 | (2,468 | ) | ||||||
(267,613 | ) | 79,514 | 15,762 | ||||||||
Deferred: | |||||||||||
Federal | 46,377 | 35,045 | 20,509 | ||||||||
State | 11,424 | (4,856 | ) | 8,962 | |||||||
57,801 | 30,189 | 29,471 | |||||||||
$ | (209,812 | ) | $ | 109,703 | $ | 45,233 | |||||
A reconciliation of expected income tax expense at the statutory federal income tax rate of 35% to the Company’s effective income tax rate for the years ended December 31, 2017, 2016 and 2015 follows (dollars in thousands):
2017 | 2016 | 2015 | ||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||
Tax expense calculated at the statutory federal income tax rate | $ | 141,561 | 35.00 | % | $ | 117,405 | 35.00 | % | $ | 103,912 | 35.00 | % | ||||||||
Increases (decreases) resulting from: | ||||||||||||||||||||
Income not subject to tax | (29,511 | ) | (7.30 | )% | (23,215 | ) | (6.92 | )% | (14,279 | ) | (4.81 | )% | ||||||||
State income taxes, net of federal tax benefit | 19,332 | 4.78 | % | 15,894 | 4.74 | % | 12,889 | 4.34 | % | |||||||||||
Uncertain tax positions - lapse of statute of limitations | (2,696 | ) | (0.66 | )% | — | — | % | (6,166 | ) | (2.08 | )% | |||||||||
Discrete income tax benefit | (327,945 | ) | (81.08 | )% | — | — | % | (49,323 | ) | (16.61 | )% | |||||||||
Other, net | (10,553 | ) | (2.61 | )% | (381 | ) | (0.12 | )% | (1,800 | ) | (0.60 | )% | ||||||||
$ | (209,812 | ) | (51.87 | )% | $ | 109,703 | 32.70 | % | $ | 45,233 | 15.24 | % | ||||||||
The discrete income tax benefit recognized in the year ended December 31, 2017 related to a matter that arose during an ongoing audit of the Company's 2013 federal income tax return. During that audit, the Company asserted that U.S. federal income taxes paid in respect of certain income previously reported by the Company on its 2012, 2013 and 2014 federal income tax returns related to the basis assigned to certain loans acquired in the FSB Acquisition should be refunded to the Company, in light of guidance issued after the relevant returns had been filed (including Treasury Regulations finalized in October 2017 clarifying and modifying the treatment of such acquired loans). The IRS issued a FAA in the fourth quarter of 2017 agreeing with the Company's position. In light of this communication, the Company concluded that it is more likely than not to realize this income tax benefit and recorded the benefit in the fourth quarter of 2017. Prior to receipt of the FAA, the Company had not taken a position reflecting this benefit on any original or amended income tax returns. The discrete income tax benefit recognized includes expected refunds of federal income tax of $295.0 million, as well as $8.7 million in estimated interest on the federal refund and estimated refunds of $24.2 million from certain state and local taxing jurisdictions.
The Company is continuing to evaluate whether it has claims in other state jurisdictions and whether it may have any claims for federal or state income taxes relating to tax years prior to 2012. The Company has not reached any conclusion as to
130
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
when or to what extent it may have any claims relating to such other state and local taxing jurisdictions or in respect of prior tax years.
The discrete income tax benefit recognized in the year ended December 31, 2015 related to additional tax basis recognized with respect to certain assets. The additional tax basis results in increased taxable losses or reduced taxable income upon the final disposition of those assets.
The Tax Cuts and Jobs Act of 2017 was signed into law on December 22, 2017, reducing the statutory corporate federal income tax rate from 35 percent to 21 percent, effective January 1, 2018. A tax benefit of $3.7 million, representing the impact of the rate change on deferred tax assets and liabilities existing at the date of enactment, was recognized in earnings during the quarter ended December 31, 2017 and is included in the "Other, net" line item in the reconciliation above.
The components of deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows (in thousands):
2017 | 2016 | ||||||
Deferred tax assets: | |||||||
Excess of tax basis over carrying value of acquired loans | $ | 66,395 | $ | 130,004 | |||
Allowance for loan and lease losses | 33,309 | 52,670 | |||||
Net operating loss and tax credit carryforwards | 15,892 | 11,641 | |||||
Other | 31,859 | 51,911 | |||||
Gross deferred tax assets | 147,455 | 246,226 | |||||
Deferred tax liabilities: | |||||||
Net unrealized gains on investment securities available for sale | 24,657 | 30,566 | |||||
Lease financing, due to differences in depreciation | 113,161 | 145,700 | |||||
Other | 13,468 | 7,020 | |||||
Gross deferred tax liabilities | 151,286 | 183,286 | |||||
Net deferred tax asset (liability) | $ | (3,831 | ) | $ | 62,940 | ||
Based on the evaluation of available evidence, management has concluded that it is more likely than not that the existing deferred tax assets will be realized. The primary factors supporting this conclusion are the amount of taxable income available for carryback and the amount of future taxable income that will result from the scheduled reversal of existing deferred tax liabilities.
At December 31, 2017, remaining carryforwards included federal net operating loss carryforwards in the amount of $10.0 million, expiring from 2029 through 2032, Florida net operating loss carryforwards in the amount of $100.4 million, expiring from 2030 through 2036, and state tax credit carryforwards in the amount of $9.4 million, expiring through 2018.
Deferred tax benefits of $2.0 million were recognized for the year ended December 31, 2015 related to enacted changes in state tax laws.
The Company has investments in affordable housing limited partnerships which generate federal Low Income Housing Tax Credits and other tax benefits. The balance of these investments, included in other assets in the accompanying consolidated balance sheet, was $64 million and $71 million at December 31, 2017 and 2016, respectively. Unfunded commitments for affordable housing investments, included in other liabilities in the accompanying consolidated balance sheet, were $26 million and $53 million at December 31, 2017 and 2016, respectively. The maximum exposure to loss as a result of the Company's involvement with these limited partnerships at December 31, 2017 was approximately $72 million. While the Company believes the likelihood of potential losses from these investments is remote, the maximum exposure was determined by assuming a scenario where the projects completely fail and do not meet certain government compliance requirements resulting in recapture of the related tax credits. These investments did not have a material impact on income tax expense for the years ended December 31, 2017, 2016 and 2015.
131
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The Company has a liability for unrecognized tax benefits relating to uncertain state tax positions in several jurisdictions. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for the years ended December 31, 2017, 2016 and 2015 follows (in thousands):
2017 | 2016 | 2015 | |||||||||
Balance, beginning of period | $ | 72,736 | $ | 43,412 | $ | 36,622 | |||||
Additions for tax positions related to the current year | 1,882 | 2,713 | 2,909 | ||||||||
Additions for tax positions related to prior periods | 1,661 | 25,168 | 11,618 | ||||||||
Reductions due to changes in tax positions taken | (15,316 | ) | — | — | |||||||
Reductions due to settlements with taxing authorities | — | (200 | ) | (246 | ) | ||||||
Reductions due to lapse of the statute of limitations | (2,229 | ) | — | (5,438 | ) | ||||||
58,734 | 71,093 | 45,465 | |||||||||
Interest and penalties | 486 | 1,643 | (2,053 | ) | |||||||
Balance, end of period | $ | 59,220 | $ | 72,736 | $ | 43,412 | |||||
As of December 31, 2017, 2016 and 2015, the Company had $43.6 million, $45.0 million and $27.0 million of unrecognized state tax benefits, net of federal tax benefits, that if recognized would have impacted the effective tax rate. Unrecognized tax benefits related to state income tax contingencies that may decrease during the 12 months subsequent to December 31, 2017 as a result of settlements with taxing authorities range from zero to $41.2 million.
Interest and penalties related to unrecognized tax benefits are included in the provision for income taxes in the consolidated statements of income. At December 31, 2017 and 2016, accrued interest and penalties included in the consolidated balance sheets, net of federal tax benefits, were $3.2 million and $2.5 million, respectively. The total amounts of interest and penalties, net of federal tax benefits, recognized through income tax expense were $0.3 million, $1.1 million and $(1.8) million in 2017, 2016 and 2015, respectively.
The Company and its subsidiaries file a consolidated federal income tax return as well as combined state income tax returns where combined filings are required. Income tax returns for the tax years ended December 31, 2017, 2016, 2015, 2014 and 2013 remain subject to examination in the U.S. Federal and various state tax jurisdictions. The tax years ended December 31, 2009, 2010, 2011 and 2012 remain subject to examination by certain states.
Note 12 Derivatives and Hedging Activities
The Company uses interest rate swaps to manage interest rate risk related to liabilities that expose the Company to variability in cash flows due to changes in interest rates. The Company enters into LIBOR-based interest rate swaps that are designated as cash flow hedges with the objective of limiting the variability of interest payment cash flows resulting from changes in the benchmark interest rate LIBOR. Changes in the fair value of interest rate swaps designated as cash flow hedging instruments are reported in AOCI and subsequently reclassified into interest expense in the same period in which the related interest on the floating-rate debt obligations affects earnings.
The Company also enters into interest rate 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. The impact on earnings related to changes in fair value of these derivatives for the years ended December 31, 2017, 2016 and 2015 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 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 borrower
132
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
counterparties through its normal loan underwriting and credit monitoring policies and procedures. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.
The CME amended its rules effective January 2017 to legally characterize 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 December 31, 2017.
The following tables set forth certain information concerning the Company’s interest rate contract derivative financial instruments and related hedged items at December 31, 2017 and 2016 (dollars in thousands):
2017 | |||||||||||||||||||||
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 | 1.77% | 3-Month Libor | 4.3 | $ | 2,046,000 | Other assets / Other liabilities | $ | 2,350 | $ | — | ||||||||||
Derivatives not designated as hedges: | |||||||||||||||||||||
Pay-fixed interest rate swaps | 3.87% | Indexed to 1-month Libor | 6.4 | 1,028,041 | Other assets / Other liabilities | 10,856 | (13,173 | ) | |||||||||||||
Pay-variable interest rate swaps | Indexed to 1-month Libor | 3.87% | 6.4 | 1,028,041 | Other assets / Other liabilities | 14,410 | (12,189 | ) | |||||||||||||
Interest rate caps purchased, indexed to 1-month Libor | 2.81% | 1.3 | 145,354 | Other assets | 11 | — | |||||||||||||||
Interest rate caps sold, indexed to 1-month Libor | 2.81% | 1.3 | 145,354 | Other liabilities | — | (11 | ) | ||||||||||||||
$ | 4,392,790 | $ | 27,627 | $ | (25,373 | ) | |||||||||||||||
133
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
2016 | |||||||||||||||||||||
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 | 1.58% | 3-Month Libor | 3.3 | $ | 1,715,000 | Other assets / Other liabilities | $ | 19,648 | $ | (3,112 | ) | |||||||||
Pay-fixed forward-starting interest rate swaps | Variability of interest cash flows on variable rate borrowings | 3.43% | 3-Month Libor | 10.5 | 300,000 | Other liabilities | — | (27,866 | ) | ||||||||||||
Derivatives not designated as hedges: | |||||||||||||||||||||
Pay-fixed interest rate swaps | 3.77% | Indexed to 1-month Libor | 6.8 | 912,000 | Other assets / Other liabilities | 9,949 | (20,383 | ) | |||||||||||||
Pay-variable interest rate swaps | Indexed to 1-month Libor | 3.77% | 6.8 | 912,000 | Other assets / Other liabilities | 20,383 | (9,949 | ) | |||||||||||||
Interest rate caps purchased, indexed to 1-month Libor | 2.96% | 2.3 | 189,057 | Other assets | 252 | — | |||||||||||||||
Interest rate caps sold, indexed to 1-month Libor | 2.96% | 2.3 | 189,057 | Other liabilities | — | (252 | ) | ||||||||||||||
$ | 4,217,114 | $ | 50,232 | $ | (61,562 | ) | |||||||||||||||
The following table provides information about the amount of loss reclassified from AOCI into interest expense for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):
Amount of Loss Reclassified from AOCI on Derivatives | Location of Loss Reclassified from AOCI into Income | ||||||||||||
2017 | 2016 | 2015 | |||||||||||
Interest rate contracts | $ | (9,621 | ) | $ | (16,161 | ) | $ | (21,610 | ) | Interest expense on borrowings | |||
Interest rate contracts | — | — | (4,869 | ) | Interest expense on deposits | ||||||||
$ | (9,621 | ) | $ | (16,161 | ) | $ | (26,479 | ) | |||||
During the years ended December 31, 2017, 2016 and 2015, 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 December 31, 2017, the amount of net loss expected to be reclassified from AOCI into earnings during the next twelve months was $1.2 million.
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.
134
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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 December 31, 2017 and 2016 (in thousands):
2017 | |||||||||||||||||||||||
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 | $ | 13,217 | $ | — | $ | 13,217 | $ | (7,996 | ) | $ | (5,221 | ) | $ | — | |||||||||
Derivative liabilities | (13,173 | ) | — | (13,173 | ) | 7,996 | 4,962 | (215 | ) | ||||||||||||||
$ | 44 | $ | — | $ | 44 | $ | — | $ | (259 | ) | $ | (215 | ) | ||||||||||
2016 | |||||||||||||||||||||||
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 | $ | 29,849 | $ | — | $ | 29,849 | $ | (27,485 | ) | $ | — | $ | 2,364 | ||||||||||
Derivative liabilities | (51,362 | ) | — | (51,362 | ) | 27,485 | 23,796 | (81 | ) | ||||||||||||||
$ | (21,513 | ) | $ | — | $ | (21,513 | ) | $ | — | $ | 23,796 | $ | 2,283 | ||||||||||
The difference between the amounts reported for interest rate swaps subject to master netting agreements and the total fair value of interest rate contract derivative financial instruments reported in the consolidated balance sheets is related to interest rate contracts entered into with borrowers not subject to master netting agreements.
At December 31, 2017, the Company had pledged investment securities available for sale with a carrying amount of $31 million as collateral for interest rate swaps in a liability position. Financial collateral of $7.0 million was pledged by counterparties to the Company for interest rate swaps in an asset position. 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.
135
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note 13 Stockholders’ Equity
Accumulated Other Comprehensive Income
Changes in AOCI are summarized as follows for the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | |||||||||||
Before Tax | Tax Effect | Net of Tax | |||||||||
Unrealized gains on investment securities available for sale: | |||||||||||
Net unrealized holding gain arising during the period | $ | 49,131 | $ | (19,407 | ) | $ | 29,724 | ||||
Amounts reclassified to gain on investment securities available for sale, net | (33,466 | ) | 13,219 | (20,247 | ) | ||||||
Net change in unrealized gains on investment securities available for sale | 15,665 | (6,188 | ) | 9,477 | |||||||
Unrealized losses on derivative instruments: | |||||||||||
Net unrealized holding loss arising during the period | (2,577 | ) | 1,018 | (1,559 | ) | ||||||
Amounts reclassified to interest expense on borrowings | 9,621 | (3,800 | ) | 5,821 | |||||||
Net change in unrealized losses on derivative instruments | 7,044 | (2,782 | ) | 4,262 | |||||||
Other comprehensive income | $ | 22,709 | $ | (8,970 | ) | $ | 13,739 | ||||
2016 | |||||||||||
Before Tax | Tax Effect | Net of Tax | |||||||||
Unrealized gains on investment securities available for sale: | |||||||||||
Net unrealized holding gain arising during the period | $ | 23,588 | $ | (9,317 | ) | $ | 14,271 | ||||
Amounts reclassified to gain on investment securities available for sale, net | (14,461 | ) | 5,712 | (8,749 | ) | ||||||
Net change in unrealized gains on investment securities available for sale | 9,127 | (3,605 | ) | 5,522 | |||||||
Unrealized losses on derivative instruments: | |||||||||||
Net unrealized holding gain arising during the period | 6,225 | (2,459 | ) | 3,766 | |||||||
Amounts reclassified to interest expense on borrowings | 16,161 | (6,384 | ) | 9,777 | |||||||
Net change in unrealized losses on derivative instruments | 22,386 | (8,843 | ) | 13,543 | |||||||
Other comprehensive income | $ | 31,513 | $ | (12,448 | ) | $ | 19,065 | ||||
2015 | |||||||||||
Before Tax | Tax Effect | Net of Tax | |||||||||
Unrealized gains on investment securities available for sale: | |||||||||||
Net unrealized holding loss arising during the period | $ | (34,470 | ) | $ | 12,813 | $ | (21,657 | ) | |||
Amounts reclassified to gain on investment securities available for sale, net | (8,480 | ) | 3,350 | (5,130 | ) | ||||||
Net change in unrealized gains on investment securities available for sale | (42,950 | ) | 16,163 | (26,787 | ) | ||||||
Unrealized losses on derivative instruments: | |||||||||||
Net unrealized holding loss arising during the period | (22,635 | ) | 9,232 | (13,403 | ) | ||||||
Amounts reclassified to interest expense on deposits | 4,869 | (1,923 | ) | 2,946 | |||||||
Amounts reclassified to interest expense on borrowings | 21,610 | (8,536 | ) | 13,074 | |||||||
Net change in unrealized losses on derivative instruments | 3,844 | (1,227 | ) | 2,617 | |||||||
Other comprehensive loss | $ | (39,106 | ) | $ | 14,936 | $ | (24,170 | ) | |||
136
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The categories of AOCI and changes therein are presented below for the years ended December 31, 2017, 2016 and 2015(in thousands):
Unrealized Gains on Investment Securities Available for Sale | Unrealized Losses on Derivative Instruments | Total | |||||||||
Balance at December 31, 2014 | $ | 68,322 | $ | (21,970 | ) | $ | 46,352 | ||||
Other comprehensive loss | (26,787 | ) | 2,617 | (24,170 | ) | ||||||
Balance at December 31, 2015 | $ | 41,535 | $ | (19,353 | ) | $ | 22,182 | ||||
Other comprehensive income | 5,522 | 13,543 | 19,065 | ||||||||
Balance at December 31, 2016 | $ | 47,057 | $ | (5,810 | ) | $ | 41,247 | ||||
Other comprehensive income | 9,477 | 4,262 | 13,739 | ||||||||
Balance at December 31, 2017 | $ | 56,534 | $ | (1,548 | ) | $ | 54,986 | ||||
Other
In conjunction with a previous acquisition, the Company issued 1,834,160 warrants to purchase its common stock. The warrants expire in November 2018 and are exercisable at an exercise price of $9.47, in exchange for which the holder is entitled to receive 0.0827 shares of BKU common stock and cash of $1.73.
In January 2018, our Board of Directors authorized a share repurchase program under which the Company may repurchase up to $150 million of its outstanding common stock. Any repurchases will be made in accordance with applicable securities laws from time to time in open market or private transactions. The authorization does not require the Company to acquire any specified number of common shares and may be commenced, suspended or discontinued without prior notice.
Note 14 Equity Based and Other Compensation Plans
Description of Equity Based Compensation Plans
In connection with the IPO of the Company's common stock in 2011, the Company adopted the 2010 Plan. In 2014, the Board of Directors and the Company's stockholders approved the 2014 Plan. The 2010 Plan and 2014 Plans are administered by the Board of Directors or a committee thereof and provide for the grant of non-qualified stock options, SARs, restricted shares, deferred shares, performance shares, unrestricted shares and other share-based awards to selected employees, directors or independent contractors of the Company and its affiliates. The number of shares of common stock authorized for award under the 2010 Plan is 7,500,000, of which 246,151 shares remain available for issuance as of December 31, 2017. The number of shares of common stock available for issuance under the 2014 Plan is 4,000,000, of which 2,892,439 shares remain available for issuance as of December 31, 2017. Shares of common stock delivered under the plans may consist of authorized but unissued shares or previously issued shares reacquired by the Company. The term of a share option or SAR issued under the plans may not exceed ten years from the date of grant and the exercise price may not be less than the fair market value of the Company's common stock at the date of grant. Unvested awards generally become fully vested in the event of a change in control, as defined.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Compensation Expense Related to Equity Based Awards
The following table summarizes compensation cost related to equity based awards for the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | 2016 | 2015 | |||||||||
Compensation cost of equity based awards: | |||||||||||
Unvested and restricted share awards | $ | 18,087 | $ | 16,885 | $ | 15,573 | |||||
Executive share-based awards | 3,416 | 1,482 | 294 | ||||||||
Incentive awards | 1,289 | — | — | ||||||||
Total compensation cost of equity based awards | 22,792 | 18,367 | 15,867 | ||||||||
Related tax benefits | (8,576 | ) | (6,899 | ) | (5,965 | ) | |||||
Compensation cost of equity based awards, net of tax | $ | 14,216 | $ | 11,468 | $ | 9,902 | |||||
Share Awards
Unvested share awards
A summary of activity related to unvested share awards for the years ended December 31, 2017, 2016 and 2015 follows:
Number of Share Awards | Weighted Average Grant Date Fair Value | |||||
Unvested share awards outstanding, December 31, 2014 | 829,225 | $ | 30.06 | |||
Granted | 664,928 | 32.06 | ||||
Vested | (394,498 | ) | 28.72 | |||
Canceled or forfeited | (59,270 | ) | 29.82 | |||
Unvested share awards outstanding, December 31, 2015 | 1,040,385 | 31.86 | ||||
Granted | 651,760 | 31.00 | ||||
Vested | (428,167 | ) | 31.79 | |||
Canceled or forfeited | (143,278 | ) | 31.31 | |||
Unvested share awards outstanding, December 31, 2016 | 1,120,700 | 31.46 | ||||
Granted | 621,806 | 40.24 | ||||
Vested | (553,007 | ) | 31.67 | |||
Canceled or forfeited | (81,022 | ) | 34.51 | |||
Unvested share awards outstanding, December 31, 2017 | 1,108,477 | $ | 36.06 | |||
Unvested share awards are generally valued at the closing price of the Company's common stock on the date of grant. 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 during the years ended December 31, 2017, 2016, and 2015 (in thousands, except per share data):
2017 | 2016 | 2015 | |||||||||
Range of the closing price on date of grant | $33.21 - $40.84 | $29.78 - $33.76 | $31.35 - $38.63 | ||||||||
Aggregate grant date fair value of shares vesting | $ | 17,514 | $ | 13,613 | $ | 11,330 | |||||
Substantially all of the shares vest in equal annual installments over a period of three years from the date of grant. Unvested shares participate in dividends declared on the Company's common stock on a one-for-one basis.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Unrecognized compensation cost for unvested share awards outstanding at December 31, 2017 totaled $22.7 million, which will be recognized over a weighted average remaining period of 1.84 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 in equal tranches over three years. PSUs are initially granted based on a target value. The number of PSUs that ultimately vest at the end of a three-year performance measurement period will be based on the achievement of performance criteria pre-established by the Compensation Committee of the Board of Directors. The performance criteria established for the PSUs granted in 2017 and 2016 include both performance and market conditions. Upon vesting, the share units will be converted to common stock on a one-for-one basis, or may be settled in cash at the Company's option. The share units will accumulate dividends declared on the Company's common stock from the date of grant to be paid subsequent to vesting.
A summary of activity related to executive share-based awards for the years ended December 31, 2017 and 2016 follows:
RSU | PSU | ||||
Unvested executive share-based awards outstanding, December 31, 2015 | — | — | |||
Granted | 97,852 | 57,873 | |||
Vested | (19,291 | ) | — | ||
Unvested executive share-based awards outstanding, December 31, 2016 | 78,561 | 57,873 | |||
Granted | 47,848 | 47,848 | |||
Vested | (35,241 | ) | — | ||
Unvested executive share-based awards outstanding, December 31, 2017 | 91,168 | 105,721 | |||
RSUs granted during the year ended December 31, 2016 included a grant of 39,979 RSUs that vest five years from the date of grant. The first tranche of RSUs granted vested on December 31, 2016. The Company cash settled these share units in the amount of $0.8 million during the first quarter of 2017. As a result of this cash settlement, all RSUs and PSUs have been determined to be liability instruments and will be remeasured at fair value each reporting period until the awards are settled. The RSUs vested on December 31, 2017 will be settled during the first quarter of 2018.
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.
The total liability for these executive share-based awards was $3.9 million at December 31, 2017. The total unrecognized compensation cost of $5.3 million for unvested executive share-based awards at December 31, 2017 will be recognized over a weighted average remaining period of 2.07 years.
Based on the closing price of the Company's common stock on the date of grant, 25,321 and 41,645 unvested share awards were granted to certain of the Company's executives in 2017 and 2015, respectively, based on the achievement of performance criteria pre-established by the Compensation Committee. These shares are included in the summary of activity related to unvested share awards above.
Incentive awards
Beginning in 2017, the Company's annual incentive compensation arrangements 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. The awards vest in equal installments over a period of three years from the date of grant. The total liability for the incentive share awards was $1.3 million at December 31, 2017. The total unrecognized compensation
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
cost of $3.9 million for these share awards at December 31, 2017 will be recognized over a weighted average remaining period of 3.00 years.
Option Awards
A summary of activity related to stock option awards for the years ended December 31, 2017, 2016 and 2015 follows:
Number of Option Awards | Weighted Average Exercise Price | |||||
Option awards outstanding, December 31, 2014 | 5,015,047 | $ | 26.49 | |||
Exercised | (1,363,895 | ) | 26.14 | |||
Option awards outstanding, December 31, 2015 | 3,651,152 | 26.62 | ||||
Exercised | (47,979 | ) | 16.50 | |||
Canceled or forfeited | (1,097 | ) | 63.74 | |||
Option awards outstanding, December 31, 2016 | 3,602,076 | 26.74 | ||||
Exercised | (2,331,388 | ) | 26.63 | |||
Option awards outstanding and exercisable, December 31, 2017 | 1,270,688 | $ | 26.93 | |||
The intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 was $25.8 million, $0.9 million and $8.7 million, respectively.
There were no option awards granted during the years ended December 31, 2017, 2016 and 2015. Additional information about options outstanding and exercisable at December 31, 2017 is presented in the following table:
Outstanding and Exercisable Options | ||||||||
Range of Exercise Prices | Number of Options | Weighted Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||
$11.14 | 13,160 | 1.73 | $ | 389 | ||||
$15.94 - $19.97 | 29,145 | 2.59 | 672 | |||||
$22.18 - $22.31 | 41,417 | 3.47 | 764 | |||||
$27 | 1,170,847 | 3.08 | 16,064 | |||||
$63.74 | 16,119 | 0.93 | — | |||||
1,270,688 | 3.04 | $ | 17,889 | |||||
Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan for a select group of key management or highly compensated employees whereby a participant, upon election, may defer a portion of eligible compensation. The deferred compensation plan provides for discretionary Company contributions. Generally, the Company has elected not to make contributions. The Company credits each participant's account with income based on either an annual interest rate determined by the Company's Compensation Committee or returns of selected investment portfolios, as elected by the participant. A participant's elective deferrals and interest thereon are at all times 100% vested. Company contributions and interest thereon will become 100% vested upon the earlier of a change in control, as defined, or the participant's death, disability, attainment of normal retirement age or the completion of two years of service. Participant deferrals and any associated earnings will be paid upon separation from service or based on a specified distribution schedule, as elected by the participant. Deferred compensation expense was $1.5 million, $1.5 million and $0.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. Deferred compensation liabilities of $21 million and $20 million were included in other liabilities in the accompanying consolidated balance sheets at December 31, 2017 and 2016, respectively.
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
BankUnited 401(k) Plan
Under the terms of the 401(k) Plan sponsored by the Company, eligible employees may contribute a portion of compensation not exceeding the limits set by law. Employees are eligible to participate in the plan after one month of service. The 401(k) Plan allows a matching employer contribution equal to 100% of elective deferrals that do not exceed 1% of compensation, plus 70% of elective deferrals that exceed 1% but are less than 6% of compensation. Matching contributions are fully vested after two years of service. For the years ended December 31, 2017, 2016 and 2015, BankUnited made matching contributions to the 401(k) Plan of approximately $5.5 million, $5.2 million and $4.9 million, respectively.
Note 15 Regulatory Requirements and Restrictions
The Company and the Bank are subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated pursuant to regulation. The capital amounts and classification also are subject to qualitative judgments by the regulators about components, risk weightings and other factors. Banking regulations identify five capital categories for insured depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2017 and 2016, all capital ratios of the Company and the Bank exceeded the "well capitalized" levels under the regulatory framework for prompt corrective action. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, common equity tier 1 and tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital to average tangible assets (leverage ratio).
The following tables provide information regarding regulatory capital for the Company and the Bank as of December 31, 2017 and 2016 (dollars in thousands):
2017 | ||||||||||||||||||||
Actual | Required to be Considered Well Capitalized | Required to be Considered Adequately Capitalized | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
BankUnited, Inc.: | ||||||||||||||||||||
Tier 1 leverage | $ | 2,892,069 | 9.72 | % | N/A (1) | N/A (1) | $ | 1,189,944 | 4.00 | % | ||||||||||
CET1 risk-based capital | $ | 2,892,069 | 13.11 | % | $ | 1,434,193 | 6.50 | % | $ | 992,903 | 4.50 | % | ||||||||
Tier 1 risk-based capital | $ | 2,892,069 | 13.11 | % | $ | 1,765,161 | 8.00 | % | $ | 1,323,871 | 6.00 | % | ||||||||
Total risk based capital | $ | 3,041,004 | 13.78 | % | $ | 2,206,451 | 10.00 | % | $ | 1,765,161 | 8.00 | % | ||||||||
BankUnited: | ||||||||||||||||||||
Tier 1 leverage | $ | 3,107,920 | 10.47 | % | $ | 1,483,796 | 5.00 | % | $ | 1,187,037 | 4.00 | % | ||||||||
CET1 risk-based capital | $ | 3,107,920 | 14.13 | % | $ | 1,429,999 | 6.50 | % | $ | 989,999 | 4.50 | % | ||||||||
Tier 1 risk-based capital | $ | 3,107,920 | 14.13 | % | $ | 1,759,999 | 8.00 | % | $ | 1,319,999 | 6.00 | % | ||||||||
Total risk based capital | $ | 3,255,221 | 14.80 | % | $ | 2,199,999 | 10.00 | % | $ | 1,759,999 | 8.00 | % | ||||||||
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
2016 | ||||||||||||||||||||
Actual | Required to be Considered Well Capitalized | Required to be Considered Adequately Capitalized | ||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
BankUnited, Inc.: | ||||||||||||||||||||
Tier 1 leverage | $ | 2,298,450 | 8.41 | % | N/A (1) | N/A (1) | $ | 1,092,921 | 4.00 | % | ||||||||||
CET1 risk-based capital | $ | 2,298,450 | 11.63 | % | $ | 1,284,498 | 6.50 | % | $ | 889,268 | 4.50 | % | ||||||||
Tier 1 risk-based capital | $ | 2,298,450 | 11.63 | % | $ | 1,580,921 | 8.00 | % | $ | 1,185,691 | 6.00 | % | ||||||||
Total risk based capital | $ | 2,459,470 | 12.45 | % | $ | 1,976,151 | 10.00 | % | $ | 1,580,921 | 8.00 | % | ||||||||
BankUnited: | ||||||||||||||||||||
Tier 1 leverage | $ | 2,534,402 | 9.30 | % | $ | 1,361,959 | 5.00 | % | $ | 1,089,567 | 4.00 | % | ||||||||
CET1 risk-based capital | $ | 2,534,402 | 12.89 | % | $ | 1,278,277 | 6.50 | % | $ | 884,961 | 4.50 | % | ||||||||
Tier 1 risk-based capital | $ | 2,534,402 | 12.89 | % | $ | 1,573,265 | 8.00 | % | $ | 1,179,948 | 6.00 | % | ||||||||
Total risk based capital | $ | 2,694,048 | 13.70 | % | $ | 1,966,581 | 10.00 | % | $ | 1,573,265 | 8.00 | % | ||||||||
(1) There is no Tier 1 leverage ratio component in the definition of a well-capitalized bank holding company.
For purposes of risk based capital computations, the FDIC Indemnification asset and the covered assets are risk-weighted at 20% due to the conditional guarantee represented by the Loss Sharing Agreements.
BankUnited is subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above certain minimums, and to remain "well-capitalized" under the prompt corrective action regulations. The Company does not expect that any of these laws, regulations or policies will materially affect the ability of BankUnited to pay dividends in the future.
Levels of capital required to be well capitalized or adequately capitalized as reflected above do not include a capital conservation buffer that is being phased in between 2016 and 2019. When fully phased in on January 1, 2019, the Bank and the Company will have to maintain this capital conservation buffer composed of CET1 capital equal to 2.50% of risk-weighted assets above the amounts required to be adequately capitalized, as reflected above, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Capital ratios required to be considered well-capitalized exceed the ratios required under the capital conservation buffer requirement at December 31, 2017.
BankUnited is required by the Board of Governors of the Federal Reserve System to maintain reserve balances in the form of vault cash or deposits with the FRB. At December 31, 2017, the reserve requirement for BankUnited was $91 million.
Note 16 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—Fair value measurements are based on quoted prices in active markets when available; these measurements are classified within level 1 of the fair value hierarchy. These securities typically include U.S. Treasury securities and certain preferred stocks. If quoted prices in active markets are not available, fair values are estimated using quoted prices of securities with similar characteristics, quoted prices of identical securities in less active markets, discounted cash flow techniques, or matrix pricing models. These securities are generally classified within level 2 of the fair value hierarchy and include U.S. Government agency securities, U.S. Government agency and sponsored enterprise MBS, preferred stock investments for which level 1 valuations are not available, corporate debt securities, non-mortgage asset-backed securities, single family rental real estate-backed securities, certain private label residential MBS and CMOs, private label commercial MBS, collateralized loan obligations and state and municipal obligations. Pricing of these securities is generally
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
primarily spread driven. Observable inputs that may impact the valuation of these securities include benchmark yield curves, credit spreads, reported trades, dealer quotes, bids, issuer spreads, current rating, historical constant prepayment rates, historical voluntary prepayment rates, structural and waterfall features of individual securities, published collateral data, and for certain securities, historical constant default rates and default severities. Investment securities available for sale generally classified within level 3 of the fair value hierarchy include certain private label MBS and trust preferred securities. The Company typically values these securities using third-party proprietary pricing models, primarily discounted cash flow valuation techniques, which incorporate both observable and unobservable inputs. Unobservable inputs that may impact the valuation of these securities include risk adjusted discount rates, projected prepayment rates, projected default rates and projected loss severity.
The Company uses third-party pricing services in determining fair value measurements for investment securities. To obtain an understanding of the methodologies and assumptions used, management reviews written documentation provided by the pricing services, conducts interviews with valuation desk personnel and reviews model results and detailed assumptions used to value selected securities as considered necessary. Management has established a robust price challenge process that includes a review by the treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from expectations is challenged. If considered necessary to resolve any discrepancies, a price will be obtained from an additional independent valuation source. The Company does not typically adjust the prices provided, other than through this established challenge process. The results of price challenges are subject to review by executive management. The Company has also established a quarterly process whereby prices provided by its primary pricing service for a sample of securities are validated. Any price discrepancies are resolved based on careful consideration of the assumptions and inputs employed by each of the pricing sources.
Servicing rights—Commercial servicing rights are valued using a discounted cash flow methodology incorporating contractually specified servicing fees and market based assumptions about prepayments, discount rates, default rates and costs of servicing. Prepayment and default assumptions are based on historical industry data for loans with similar characteristics. Assumptions about costs of servicing are based on market convention. Discount rates are based on rates of return implied by observed trades of underlying loans in the secondary market. Fair value of residential MSRs is estimated using a discounted cash flow technique that incorporates market‑based assumptions including estimated prepayment speeds, contractual servicing fees, cost to service, discount rates, escrow account earnings, ancillary income, and estimated defaults. Due to the nature of the valuation inputs and the limited availability of market pricing, servicing rights are classified as level 3.
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.
143
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The following tables present assets and liabilities measured at fair value on a recurring basis at December 31, 2017 and 2016 (in thousands):
2017 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Investment securities available for sale: | |||||||||||||||
U.S. Treasury securities | $ | 24,953 | $ | — | $ | — | $ | 24,953 | |||||||
U.S. Government agency and sponsored enterprise residential MBS | — | 2,058,027 | — | 2,058,027 | |||||||||||
U.S. Government agency and sponsored enterprise commercial MBS | — | 234,508 | — | 234,508 | |||||||||||
Private label residential MBS and CMOs | — | 576,033 | 52,214 | 628,247 | |||||||||||
Private label commercial MBS | — | 1,046,415 | — | 1,046,415 | |||||||||||
Single family rental real estate-backed securities | — | 562,706 | — | 562,706 | |||||||||||
Collateralized loan obligations | — | 723,681 | — | 723,681 | |||||||||||
Non-mortgage asset-backed securities | — | 121,747 | — | 121,747 | |||||||||||
Preferred stocks | 63,543 | — | — | 63,543 | |||||||||||
State and municipal obligations | — | 657,203 | — | 657,203 | |||||||||||
SBA securities | — | 550,682 | — | 550,682 | |||||||||||
Other debt securities | — | 3,791 | 5,329 | 9,120 | |||||||||||
Servicing rights | — | — | 30,737 | 30,737 | |||||||||||
Derivative assets | — | 27,627 | — | 27,627 | |||||||||||
Total assets at fair value | $ | 88,496 | $ | 6,562,420 | $ | 88,280 | $ | 6,739,196 | |||||||
Derivative liabilities | $ | — | $ | 25,373 | $ | — | $ | 25,373 | |||||||
Total liabilities at fair value | $ | — | $ | 25,373 | $ | — | $ | 25,373 | |||||||
144
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
2016 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Investment securities available for sale: | |||||||||||||||
U.S. Treasury securities | $ | 5,005 | $ | — | $ | — | $ | 5,005 | |||||||
U.S. Government agency and sponsored enterprise residential MBS | — | 1,527,242 | — | 1,527,242 | |||||||||||
U.S. Government agency and sponsored enterprise commercial MBS | — | 124,586 | — | 124,586 | |||||||||||
Private label residential MBS and CMOs | — | 254,488 | 120,610 | 375,098 | |||||||||||
Private label commercial MBS | — | 1,187,624 | — | 1,187,624 | |||||||||||
Single family rental real estate-backed securities | — | 861,251 | — | 861,251 | |||||||||||
Collateralized loan obligations | — | 487,296 | — | 487,296 | |||||||||||
Non-mortgage asset-backed securities | — | 186,736 | — | 186,736 | |||||||||||
Preferred stocks | 86,890 | 1,313 | — | 88,203 | |||||||||||
State and municipal obligations | — | 698,546 | — | 698,546 | |||||||||||
SBA securities | — | 523,906 | — | 523,906 | |||||||||||
Other debt securities | — | 3,519 | 4,572 | 8,091 | |||||||||||
Servicing rights | — | — | 27,159 | 27,159 | |||||||||||
Derivative assets | — | 50,232 | — | 50,232 | |||||||||||
Total assets at fair value | $ | 91,895 | $ | 5,906,739 | $ | 152,341 | $ | 6,150,975 | |||||||
Derivative liabilities | $ | — | $ | 61,562 | $ | — | $ | 61,562 | |||||||
Total liabilities at fair value | $ | — | $ | 61,562 | $ | — | $ | 61,562 | |||||||
There were no transfers of financial assets between levels of the fair value hierarchy during the years ended December 31, 2017 and 2016.
The following tables reconcile changes in the fair value of assets and liabilities measured at fair value on a recurring basis and classified in level 3 of the fair value hierarchy during the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | |||||||||||
Private Label Residential MBS | Other Debt Securities | Servicing Rights | |||||||||
Balance at beginning of period | $ | 120,610 | $ | 4,572 | $ | 27,159 | |||||
Gains (losses) for the period included in: | |||||||||||
Net income | 25,547 | — | (5,821 | ) | |||||||
Other comprehensive income | (27,569 | ) | 766 | — | |||||||
Discount accretion | 6,181 | 280 | — | ||||||||
Purchases or additions | — | — | 9,399 | ||||||||
Sales | (45,524 | ) | — | — | |||||||
Settlements | (27,031 | ) | (289 | ) | — | ||||||
Transfers into level 3 | — | — | — | ||||||||
Transfers out of level 3 | — | — | — | ||||||||
Balance at end of period | $ | 52,214 | $ | 5,329 | $ | 30,737 | |||||
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
2016 | |||||||||||
Private Label Residential MBS | Other Debt Securities | Servicing Rights | |||||||||
Balance at beginning of period | $ | 140,883 | $ | 4,532 | $ | 20,017 | |||||
Gains (losses) for the period included in: | |||||||||||
Net income | — | — | (6,023 | ) | |||||||
Other comprehensive income | (2,229 | ) | (9 | ) | — | ||||||
Discount accretion | 5,947 | 116 | — | ||||||||
Purchases or additions | — | — | 13,165 | ||||||||
Settlements | (23,991 | ) | (67 | ) | — | ||||||
Transfers into level 3 | — | — | — | ||||||||
Transfers out of level 3 | — | — | — | ||||||||
Balance at end of period | $ | 120,610 | $ | 4,572 | $ | 27,159 | |||||
2015 | |||||||||||
Private Label Residential MBS | Other Debt Securities | Servicing Rights | |||||||||
Balance at beginning of period | $ | 168,077 | $ | 4,918 | $ | — | |||||
Gains (losses) for the period included in: | |||||||||||
Net income | — | — | (2,062 | ) | |||||||
Other comprehensive income | (7,469 | ) | (434 | ) | — | ||||||
Discount accretion | 6,524 | 148 | — | ||||||||
Purchases or additions | — | — | 13,610 | ||||||||
Settlements | (26,249 | ) | (100 | ) | — | ||||||
Transfers into level 3 | — | — | — | ||||||||
Transfers out of level 3 | — | — | — | ||||||||
Balance at end of period | $ | 140,883 | $ | 4,532 | $ | 11,548 | |||||
The balance of servicing rights at the beginning of 2016 includes $8.5 million of residential MSRs, which the Company elected to measure at fair value effective January 1, 2016.
Gains on private label residential MBS recognized in net income during the year ended December 31, 2017 are included in the consolidated statement of income line item "Gain on investment securities available for sale, net." Changes in the fair value of servicing rights are included in the consolidated statement of income line item “Other non-interest income.” Changes in fair value include changes due to valuation assumptions, primarily discount rates and prepayment speeds, as well as other changes such as runoff and the passage of time. The amount of net unrealized losses included in earnings for the years ended December 31, 2017 and 2016 that were related to servicing rights held at December 31, 2017 and 2016 totaled approximately $1.0 million and $1.8 million, respectively, and were primarily due to changes in discount rates and prepayment speeds.
Securities for which fair value measurements are categorized in level 3 of the fair value hierarchy at December 31, 2017 consisted of pooled trust preferred securities with a fair value of $5 million and private label residential MBS and CMOs with a fair value of $52 million. The trust preferred securities are not material to the Company’s financial statements. Private label residential MBS consisted of senior and mezzanine tranches collateralized by prime fixed rate and hybrid 1-4 single family residential mortgages originated before 2005, some of which contain option-arm features. Substantially all of these securities have variable rate coupons. Weighted average subordination levels at December 31, 2017 were 17.3% and 9.7% for investment grade and non-investment grade securities, respectively.
146
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The following table provides information about the valuation techniques and unobservable inputs used in the valuation of private label residential MBS and CMOs falling within level 3 of the fair value hierarchy as of December 31, 2017 (dollars in thousands):
Fair Value at | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||||||
December 31, 2017 | ||||||||||
Investment grade | $ | 32,997 | Discounted cash flow | Voluntary prepayment rate | 9.00% - 27.80% (16.94%) | |||||
Probability of default | 0.00% - 4.10% (1.18%) | |||||||||
Loss severity | 15.00% - 86.00% (30.56%) | |||||||||
Discount rate | 1.68% - 8.11% (3.64%) | |||||||||
Non-investment grade | $ | 19,217 | Discounted cash flow | Voluntary prepayment rate | 0.70% - 27.80% (15.37%) | |||||
Probability of default | 0.00% - 7.00% (2.00%) | |||||||||
Loss severity | 15.00% - 83.00% (31.04%) | |||||||||
Discount rate | 2.31% - 9.13% (6.03%) | |||||||||
The significant unobservable inputs impacting the fair value measurement of private label residential MBS and CMOs include voluntary prepayment rates, probability of default, loss severity given default and discount rates. Generally, increases in probability of default, loss severity or discount rates would result in a lower fair value measurement. Alternatively, decreases in probability of default, loss severity or discount rates would result in a higher fair value measurement. For securities with less favorable credit characteristics, decreases in voluntary prepayment speeds may be interpreted as a deterioration in the overall credit quality of the underlying collateral and as such, lead to lower fair value measurements. The fair value measurements of those securities with higher levels of subordination will be less sensitive to changes in these unobservable inputs other than discount rates, while securities with lower levels of subordination will show a higher degree of sensitivity to changes in these unobservable inputs other than discount rates. Generally, a change in the assumption used for probability of default is accompanied by a directionally similar change in the assumption used for loss severity given default and a directionally opposite change in the assumption used for voluntary prepayment rate.
The following table provides information about the valuation techniques and significant unobservable inputs used in the valuation of servicing rights as of December 31, 2017 (dollars in thousands):
Fair Value at | Valuation Technique | Unobservable Input | Range (Weighted Average) | |||||||
December 31, 2017 | ||||||||||
Residential MSRs | $ | 19,622 | Discounted cash flow | Prepayment rate | 7.31% - 26.98% (12.12%) | |||||
Discount rate | 9.50% - 9.58% (9.51%) | |||||||||
Commercial servicing rights | $ | 11,115 | Discounted cash flow | Prepayment rate | 0.66% - 10.99% (8.79%) | |||||
Discount rate | 8.41% - 15.26% (12.69%) | |||||||||
Increases in prepayment rates or discount rates would result in lower fair value measurements and decreases in prepayment rates or discount rates would result in higher fair value measurements. Although the prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions.
Assets and liabilities measured at fair value on a non-recurring basis
Following is a description of the methodologies used to estimate the fair values of assets and liabilities that may be measured at fair value on a non-recurring basis, and the level within the fair value hierarchy in which those measurements are typically classified.
Impaired loans, OREO and other repossessed assets—The carrying amount of collateral dependent impaired loans is typically based on the fair value of the underlying collateral, which may be real estate, taxi medallions, or other business assets, less estimated costs to sell. The carrying value of OREO is initially measured based on the fair value of the real estate acquired in foreclosure and subsequently adjusted to the lower of cost or estimated fair value, less estimated cost to sell. Fair values of
147
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
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, other than taxi medallions, or collateral consisting of other business assets may be based on third-party appraisals or internal analyses that use market approaches to valuation incorporating primarily unobservable inputs.
The fair value of New York City taxi medallions is based primarily on an internal analysis that utilizes an income approach to valuation. This analysis utilizes data obtained from the NYTLC about the fleet in general and in some cases, our portfolio specifically, and management's assumptions, based on external data when available, about revenues, costs and expenses, to estimate the value that can reasonably be supported by the cash flow generating capacity of a medallion. We further discount the results of this analysis in recognition of estimated selling costs and declining trends in medallion values. We also consider prices of recent medallion transfers as published by the NYTLC; however, the market for taxi medallions is illiquid and information about the circumstances underlying observed transfers is unavailable, therefore, information about recent transfers is not considered sufficient to establish a reliable estimate of value. Taxi medallions in municipalities other than New York City are generally valued based on published information about recent transfer prices; the valuation of these assets did not have a material impact on the Company's consolidated financial statements for any period presented as the taxi medallion portfolio is heavily concentrated in New York City.
Fair value measurements related to collateral dependent impaired loans, OREO and other repossessed assets are classified within level 3 of the fair value hierarchy.
Equipment under operating lease—Fair values of equipment under operating lease are typically based upon discounted cash flow analysis, considering expected lease rates and estimated end of life residual values. These fair value measurements are classified within level 3 of the fair value hierarchy.
The following tables present the carrying value of assets for which non-recurring changes in fair value have been recorded for the years ended December 31, 2017, 2016 and 2015 (in thousands):
2017 | |||||||||||||||||||
Losses from Fair Value Changes | |||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Years Ended December 31, 2017 | |||||||||||||||
OREO and repossessed assets | $ | — | $ | — | $ | 5,790 | $ | 5,790 | $ | (2,078 | ) | ||||||||
Impaired loans | $ | — | $ | — | $ | 93,051 | $ | 93,051 | $ | (65,716 | ) | ||||||||
2016 | ||||||||||||||||||||
Losses from Fair Value Changes | ||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Years Ended December 31, 2016 | ||||||||||||||||
OREO and repossessed assets | $ | — | $ | — | $ | 12,466 | $ | 12,466 | $ | (1,156 | ) | |||||||||
Impaired loans | $ | — | $ | — | $ | 78,121 | $ | 78,121 | $ | (25,573 | ) | |||||||||
Equipment under operating lease | $ | — | — | $ | — | $ | 8,173 | $ | 8,173 | $ | (4,100 | ) | ||||||||
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BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
2015 | |||||||||||||||||||
Losses from Fair Value Changes | |||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Years Ended December 31, 2016 | |||||||||||||||
OREO and repossessed assets | $ | — | $ | — | $ | 7,389 | $ | 7,389 | $ | (1,206 | ) | ||||||||
Impaired loans | $ | — | $ | — | $ | 30,812 | $ | 30,812 | $ | (9,865 | ) | ||||||||
Residential MSRs | $ | — | $ | — | $ | 8,469 | $ | 8,469 | $ | (15 | ) | ||||||||
Included in the tables above are impaired taxi medallion loans with carrying values of $86.0 million and $50.7 million at December 31, 2017 and 2016, respectively, the majority of which were in New York City. Losses of $62.4 million and $12.7 million were recognized on impaired taxi medallion loans during the years ended December 31, 2017 and 2016, respectively. There were no impaired taxi medallion loans at December 31, 2015. In addition, OREO and repossessed assets reported above included repossessed taxi medallions with carrying values of $2.1 million and $2.5 million at December 31, 2017 and 2016, respectively. Losses of $1.3 million and $0.2 million were recognized on repossessed taxi medallions during the years ended December 31, 2017 and 2016, respectively.
Decreases in the value of medallions are largely driven by decreases in revenues generated from the medallions. Inputs that had the most significant impact on the valuation of New York City taxi medallions at December 31, 2017 are presented below:
Average Amount | ||
Average fare per trip | $16.04 | |
Number of trips per shift | 15.3 | |
Days worked per month | 25.9 | |
Second shift rental achievement | 53.9 | % |
149
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
The following table presents the carrying value and fair value of financial instruments and the level within the fair value hierarchy in which those measurements are classified at December 31, 2017 and 2016 (dollars in thousands):
2017 | 2016 | ||||||||||||||||
Level | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
Assets: | |||||||||||||||||
Cash and cash equivalents | 1 | $ | 194,582 | $ | 194,582 | $ | 448,313 | $ | 448,313 | ||||||||
Investment securities available for sale | 1/2/3 | 6,680,832 | 6,680,832 | 6,073,584 | 6,073,584 | ||||||||||||
Investment securities held to maturity | 3 | 10,000 | 10,000 | 10,000 | 10,000 | ||||||||||||
Non-marketable equity securities | 2 | 265,989 | 265,989 | 284,272 | 284,272 | ||||||||||||
Loans held for sale | 2 | 34,097 | 37,847 | 41,198 | 45,833 | ||||||||||||
Loans: | |||||||||||||||||
Covered | 3 | 502,860 | 922,888 | 611,942 | 1,200,291 | ||||||||||||
Non-covered | 3 | 20,768,849 | 20,759,567 | 18,630,499 | 18,713,495 | ||||||||||||
FDIC Indemnification asset | 3 | 295,635 | 148,356 | 515,933 | 256,691 | ||||||||||||
Derivative assets | 2 | 27,627 | 27,627 | 50,232 | 50,232 | ||||||||||||
Liabilities: | |||||||||||||||||
Demand, savings and money market deposits | 2 | $ | 15,543,637 | $ | 15,543,637 | $ | 13,735,248 | $ | 13,735,248 | ||||||||
Time deposits | 2 | 6,334,842 | 6,324,010 | 5,755,642 | 5,759,787 | ||||||||||||
FHLB advances | 2 | 4,771,000 | 4,774,160 | 5,239,348 | 5,244,188 | ||||||||||||
Notes and other borrowings | 2 | 402,830 | 435,361 | 402,809 | 403,733 | ||||||||||||
Derivative liabilities | 2 | 25,373 | 25,373 | 61,562 | 61,562 | ||||||||||||
The following methods and assumptions were used to estimate the fair value of each class of financial instruments, other than those described above:
Cash and cash equivalents
The carrying value of cash and cash equivalents approximates fair value due to their short-term nature and generally negligible credit risk.
Investment securities held to maturity
Investment securities held to maturity includes one bond issued by the State of Israel, with fair value obtained from a third party pricing service.
Non-marketable equity securities
Non-marketable equity securities include FHLB and FRB stock. There is no market for these securities, which can be liquidated only by redemption by the issuer. These securities are valued at par, which has historically represented the redemption price and is therefore considered to approximate fair value.
Loans held for sale
The fair value of the portion of small business loans guaranteed by U.S. Government agencies being held for sale is estimated using pricing on recent sales of similar loans by the Company in active markets.
150
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Covered loans
Fair values are estimated based on a discounted cash flow analysis. Estimates of future cash flows incorporate various factors that may include the type of loan and related collateral, estimated collateral values, estimated voluntary prepayment rates, estimated default probability and loss severity given default, whether the interest rate is fixed or variable, term of loan and whether or not the loan is amortizing. The fair values of loans accounted for in pools are estimated on a pool basis. Discount rates for residential loans are based on observable fixed income market data for products with similar credit characteristics.
Non-covered loans
Fair values of residential loans are estimated using a discounted cash flow analysis with discount rates based on yields at which similar loans are trading in the secondary market, which reflect assumptions about credit risk. Fair values of commercial and consumer loans are estimated using a discounted cash flow analysis with discount rates based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The ALLL related to commercial and consumer loans is considered a reasonable estimate of the required adjustment to fair value to reflect the impact of credit risk. This estimate may not represent an exit value as defined in ASC 820.
FDIC indemnification asset
The fair value of the FDIC indemnification asset has been estimated using a discounted cash flow technique incorporating assumptions about the timing and amount of future projected cash payments from the FDIC related to the resolution of covered assets. The factors that impact estimates of future cash flows are similar to those impacting estimated cash flows from covered loans. The discount rate is determined by adjusting the risk free rate to incorporate uncertainty in the estimate of the timing and amount of future cash flows and illiquidity.
Deposits
The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using a discounted cash flow technique based on rates currently offered for deposits of similar remaining maturities.
FHLB advances
Fair value is estimated by discounting contractual future cash flows using the current rate at which borrowings with similar terms and remaining maturities could be obtained by the Company.
Senior notes
Fair value is estimated based on quoted prices of identical securities in less active markets.
Note 17 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.
151
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Unfunded commitments under lines of credit
Unfunded commitments under lines of credit include commercial, commercial real estate, home equity and consumer lines of credit to existing customers. Some of these commitments may mature without being fully funded.
Commercial and standby letters of credit
Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support trade transactions or guarantee arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Total lending related commitments outstanding at December 31, 2017 were as follows (in thousands):
Commitments to fund loans | $ | 376,525 | |
Commitments to purchase loans | 401,270 | ||
Unfunded commitments under lines of credit | 2,278,201 | ||
Commercial and standby letters of credit | 82,854 | ||
$ | 3,138,850 | ||
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.
152
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note 18 Condensed Financial Statements of BankUnited, Inc.
Condensed financial statements of BankUnited, Inc. are presented below (in thousands):
Condensed Balance Sheets
December 31, 2017 | December 31, 2016 | ||||||
Assets: | |||||||
Cash and cash equivalents | $ | 131,696 | $ | 87,718 | |||
Investment securities available for sale, at fair value | 63,543 | 78,293 | |||||
Investment in BankUnited, N.A. | 3,239,717 | 2,652,535 | |||||
Deferred tax asset, net | 9,456 | 16,738 | |||||
Other assets | 8,462 | 5,345 | |||||
Total assets | $ | 3,452,874 | $ | 2,840,629 | |||
Liabilities and Stockholders' Equity: | |||||||
Notes payable | $ | 393,725 | $ | 393,092 | |||
Other liabilities | 33,087 | 29,108 | |||||
Stockholders' equity | 3,026,062 | 2,418,429 | |||||
Total liabilities and stockholders' equity | $ | 3,452,874 | $ | 2,840,629 | |||
Condensed Statements of Income
Years Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Income: | |||||||||||
Interest and dividends on investment securities available for sale | $ | 3,580 | $ | 4,280 | $ | 4,866 | |||||
Service fees from subsidiary | 18,787 | 21,957 | 17,404 | ||||||||
Equity in earnings of subsidiary | 639,250 | 242,874 | 256,456 | ||||||||
Other | — | — | 235 | ||||||||
Total | 661,617 | 269,111 | 278,961 | ||||||||
Expense: | |||||||||||
Interest on borrowings | 20,132 | 20,100 | 2,457 | ||||||||
Employee compensation and benefits | 27,032 | 27,143 | 22,099 | ||||||||
Other | 5,047 | 4,466 | 4,356 | ||||||||
Total | 52,211 | 51,709 | 28,912 | ||||||||
Income before income taxes | 609,406 | 217,402 | 250,049 | ||||||||
Benefit for income taxes | (4,867 | ) | (8,339 | ) | (1,611 | ) | |||||
Net income | $ | 614,273 | $ | 225,741 | $ | 251,660 | |||||
153
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Condensed Statements of Cash Flows
Years Ended December 31, | |||||||||||
2017 | 2016 | 2015 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 614,273 | $ | 225,741 | $ | 251,660 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Equity in undistributed earnings of subsidiaries | (519,250 | ) | (157,374 | ) | (176,456 | ) | |||||
Equity based compensation | 22,692 | 18,032 | 16,027 | ||||||||
Other | 3,343 | 7,438 | 1,878 | ||||||||
Net cash provided by operating activities | 121,058 | 93,837 | 93,109 | ||||||||
Cash flows from investing activities: | |||||||||||
Capital contributions to subsidiary | (55,000 | ) | — | (575,000 | ) | ||||||
Purchase of investment securities available for sale | — | (20,150 | ) | — | |||||||
Proceeds from repayments, sale, maturities and calls of investment securities available for sale | 15,000 | 19,401 | 46,031 | ||||||||
Other | (250 | ) | (3 | ) | (285 | ) | |||||
Net cash used in investing activities | (40,250 | ) | (752 | ) | (529,254 | ) | |||||
Cash flows from financing activities: | |||||||||||
Proceeds from issuance of notes payable | — | — | 392,252 | ||||||||
Dividends paid | (91,628 | ) | (89,824 | ) | (88,981 | ) | |||||
Proceeds from exercise of stock options | 62,095 | 791 | 35,647 | ||||||||
Other | (7,297 | ) | 856 | 1,593 | |||||||
Net cash provided by (used in) financing activities | (36,830 | ) | (88,177 | ) | 340,511 | ||||||
Net increase (decrease) in cash and cash equivalents | 43,978 | 4,908 | (95,634 | ) | |||||||
Cash and cash equivalents, beginning of period | 87,718 | 82,810 | 178,444 | ||||||||
Cash and cash equivalents, end of period | $ | 131,696 | $ | 87,718 | $ | 82,810 | |||||
Supplemental schedule of non-cash investing and financing activities: | |||||||||||
Dividends declared, not paid | $ | 23,055 | $ | 22,510 | $ | 22,380 | |||||
Dividends received by BankUnited, Inc. from the Bank totaled $120 million, $85.5 million and $80 million for the years ended December 31, 2017, 2016, and 2015, respectively.
154
BANKUNITED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note 19 Quarterly Financial Information (Unaudited)
Financial information by quarter for the years ended December 31, 2017 and 2016 follows (in thousands, except per share data):
2017 | |||||||||||||||||||
Fourth Quarter | Third Quarter | Second Quarter | First Quarter | Total | |||||||||||||||
Interest income | $ | 312,645 | $ | 309,443 | $ | 298,835 | $ | 283,538 | $ | 1,204,461 | |||||||||
Interest expense | 73,819 | 68,179 | 59,246 | 52,945 | 254,189 | ||||||||||||||
Net interest income before provision for loan losses | 238,826 | 241,264 | 239,589 | 230,593 | 950,272 | ||||||||||||||
Provision for loan losses | 5,174 | 37,854 | 13,619 | 12,100 | 68,747 | ||||||||||||||
Net interest income after provision for loan losses | 233,652 | 203,410 | 225,970 | 218,493 | 881,525 | ||||||||||||||
Non-interest income | 46,541 | 53,326 | 29,893 | 28,144 | 157,904 | ||||||||||||||
Non-interest expense | 161,271 | 156,705 | 160,435 | 156,557 | 634,968 | ||||||||||||||
Income before income taxes | 118,922 | 100,031 | 95,428 | 90,080 | 404,461 | ||||||||||||||
Provision (benefit) for income taxes | (298,872 | ) | 32,252 | 29,021 | 27,787 | (209,812 | ) | ||||||||||||
Net income | $ | 417,794 | $ | 67,779 | $ | 66,407 | $ | 62,293 | $ | 614,273 | |||||||||
Earnings per common share, basic | $ | 3.80 | $ | 0.62 | $ | 0.60 | $ | 0.57 | $ | 5.60 | |||||||||
Earnings per common share, diluted | $ | 3.79 | $ | 0.62 | $ | 0.60 | $ | 0.57 | $ | 5.58 | |||||||||
2016 | |||||||||||||||||||
Fourth Quarter | Third Quarter | Second Quarter | First Quarter | Total | |||||||||||||||
Interest income | $ | 277,965 | $ | 269,981 | $ | 260,464 | $ | 250,807 | $ | 1,059,217 | |||||||||
Interest expense | 50,466 | 48,246 | 46,154 | 43,966 | 188,832 | ||||||||||||||
Net interest income before provision for loan losses | 227,499 | 221,735 | 214,310 | 206,841 | 870,385 | ||||||||||||||
Provision for loan losses | 8,462 | 24,408 | 14,333 | 3,708 | 50,911 | ||||||||||||||
Net interest income after provision for loan losses | 219,037 | 197,327 | 199,977 | 203,133 | 819,474 | ||||||||||||||
Non-interest income | 29,287 | 25,075 | 28,857 | 23,198 | 106,417 | ||||||||||||||
Non-interest expense | 156,223 | 148,004 | 144,112 | 142,108 | 590,447 | ||||||||||||||
Income before income taxes | 92,101 | 74,398 | 84,722 | 84,223 | 335,444 | ||||||||||||||
Provision (benefit) for income taxes | 28,807 | 23,550 | 27,997 | 29,349 | 109,703 | ||||||||||||||
Net income | $ | 63,294 | $ | 50,848 | $ | 56,725 | $ | 54,874 | $ | 225,741 | |||||||||
Earnings per common share, basic | $ | 0.59 | $ | 0.47 | $ | 0.53 | $ | 0.51 | $ | 2.11 | |||||||||
Earnings per common share, diluted | $ | 0.59 | $ | 0.47 | $ | 0.52 | $ | 0.51 | $ | 2.09 | |||||||||
Earnings for the fourth quarter 2017 benefited from a discrete income tax benefit of $327.9 million. See Note 11 to the consolidated financial statements for more information about the discrete income tax benefits.
155
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, 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 as of December 31, 2017.
Changes in Internal Control over Financial Reporting
None.
Management's Report on Internal Control Over Financial Reporting
Management's report, which is included in Part II, Item 8 of this Form 10-K, is incorporated herein by reference.
Attestation Report of the Registered Public Accounting Firm
The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included in Part II, Item 8 of this Form 10-K.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding the directors and executive officers of BankUnited, Inc. and information regarding Section 16(a) compliance, the Audit and Risk Committees, the Company's code of ethics, background of the directors and director nominations appearing under the captions "Section 16(a) Beneficial Ownership Reporting Compliance," "Committees of the Board of Directors," "Corporate Governance Guidelines, Code of Conduct and Code of Ethics," "Director Nominating Process and Diversity" and "Election of Directors" in the Company's Proxy Statement for the 2018 annual meeting of stockholders is hereby incorporated by reference.
Item 11. Executive Compensation
Information appearing under the captions "Director Compensation" and "Executive Compensation" in the 2018 Proxy Statement (other than the "Compensation Committee Report," which is deemed furnished herein by reference) is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information setting forth the security ownership of certain beneficial owners and management appearing under the caption "Beneficial Ownership of the Company's Common Stock" and information in the "Equity Compensation Plans" table appearing under the caption "Equity Compensation Plan Information" in the 2018 Proxy Statement is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain related transactions appearing under the captions "Certain Related Party Relationships" and information regarding director independence appearing under the caption "Director Independence" in the 2018 Proxy Statement is hereby incorporated by reference.
156
Item 14. Principal Accountant Fees and Services
Information appearing under the captions "Auditor Fees and Services" and "Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors" in the 2018 Proxy Statement is hereby incorporated by reference.
157
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) | List of documents filed as part of this report: |
1) | Financial Statements: |
Management's Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2017, 2016 and 2015
2) | Financial Statement Schedules: |
Financial statement schedules are omitted as not required or not applicable or because the information is included in the Consolidated Financial Statements or notes thereto.
3) | List of Exhibits: |
The exhibit list in the Exhibit Index is incorporated herein by reference as the list of exhibits required as part of this report.
158
EXHIBIT INDEX
Exhibit Number | Description | Location | ||
159
Exhibit Number | Description | Location | ||
160
Exhibit Number | Description | Location | ||
101.INS | XBRL Instance 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 | ||
____________________________________
† | Schedules and similar attachments to the Purchase and Assumption Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant will furnish supplementally a copy of any omitted schedules or similar attachment to the SEC upon request. |
161
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
BANKUNITED, INC. | |||||||
Date: | February 28, 2018 | By: | /s/ RAJINDER P. SINGH | ||||
Name: | Rajinder P. Singh | ||||||
Title: | President and Chief Executive Officer | ||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ RAJINDER P. SINGH | Chief Executive Officer (Principal Executive Officer) | February 28, 2018 | ||
Rajinder P. Singh | ||||
/s/ LESLIE N. LUNAK | Chief Financial Officer (Principal Financial and Accounting Officer) | February 28, 2018 | ||
Leslie N. Lunak | ||||
/s/ JOHN A. KANAS | Chairman of the Board of Directors | February 28, 2018 | ||
John A. Kanas | ||||
/s/ TERE BLANCA | Director | February 28, 2018 | ||
Tere Blanca | ||||
/s/ EUGENE F. DEMARK | Director | February 28, 2018 | ||
Eugene F. Demark | ||||
/s/ MICHAEL J. DOWLING | Director | February 28, 2018 | ||
Michael J. Dowling | ||||
/s/ DOUGLAS J. PAULS | Director | February 28, 2018 | ||
Douglas J. Pauls | ||||
/s/ A. GAIL PRUDENTI | Director | February 28, 2018 | ||
A. Gail Prudenti | ||||
/s/ WILLIAM S. RUBENSTEIN | Director | February 28, 2018 | ||
William S. Rubenstein | ||||
/s/ SANJIV SOBTI | Director | February 28, 2018 | ||
Sanjiv Sobti | ||||
/s/ A. ROBERT TOWBIN | Director | February 28, 2018 | ||
A. Robert Towbin | ||||
/s/ LYNNE WINES | Director | February 28, 2018 | ||
Lynne Wines | ||||
162