BankUnited, Inc. (BKU) FY 2021 MD&A

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of BankUnited, Inc. and its subsidiary (the "Company", "we", "us" and "our") and should be read in conjunction with the consolidated financial statements, accompanying footnotes and supplemental financial data included herein. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Forward-looking Statements" and "Risk Factors." We assume no obligation to update any of these forward-looking statements.

Overview

The following discussion and analysis presents the more significant factors that affected our financial condition as of December 31, 2021 and 2020 and results of operations for each of the years then ended. Refer to Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K filed with the SEC on February 26, 2021 for a discussion and analysis of the more significant factors that affected periods prior to 2020.

Performance Highlights

In evaluating our financial performance, we consider the level of and trends in net interest income, the net interest margin, the cost of deposits, levels and composition of non-interest income and non-interest expense, performance ratios such as the return on average equity and return on average assets and asset quality ratios, including the ratio of non-performing loans to total loans, non-performing assets to total assets, trends in criticized and classified assets and portfolio delinquency and charge-off trends. We consider growth in and the composition of earning assets and deposits, trends in funding mix and cost of funds. We analyze these ratios and trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable financial institutions.

Performance highlights include:

•Net income for the year ended December 31, 2021 was $415.0 million, or $4.52 per diluted share, compared to $197.9 million, or $2.06 per diluted share, for the year ended December 31, 2020. For the year ended December 31, 2021, the return on average stockholders' equity was 13.3% and the return on average assets was 1.16%.

•For the year ended December 31, 2021, the Company recorded a recovery of credit losses of $(67.1) million compared to a provision for credit losses of $178.4 million for the year ended December 31, 2020. Year over year volatility in the provision related to the expected economic impact of the onset of the COVID-19 pandemic in 2020 and subsequent recovery in 2021.

•The net interest margin, calculated on a tax-equivalent basis, expanded to 2.38% for the year ended December 31, 2021 from 2.35% for the year ended December 31, 2020. Net interest income increased by $43.9 million compared to the year ended December 31, 2020. While the yield on interest earning assets for the year ended December 31, 2021 declined by 0.45% compared to the year ended December 31, 2020, this was more than offset by a 0.56% decline in the cost of interest bearing liabilities and a reduction in interest bearing liabilities as a percentage of total liabilities.

•Total loans declined by $101 million for the year ended December 31, 2021. Portfolio composition shifted to a greater proportion of residential loans, which grew by $2.0 billion during the year while commercial loans in total declined by $2.1 billion. This trend was indicative of the environment predicated by the COVID-19 pandemic, which was characterized by relatively strong residential markets coupled with comparatively lower demand and risk appetite for commercial lending. Investment securities grew by $888 million for the year ended December 31, 2021 as liquidity was deployed into the securities portfolio.

•The average cost of total deposits decreased to 0.24% for the year ended December 31, 2021 from 0.77% for the year ended December 31, 2020. On a spot basis, the APY on total deposits declined to 0.16% at December 31, 2021 from 0.36% at December 31, 2020. This decline in the cost of deposits reflects both our ongoing strategy to increase non-interest bearing deposits as a percentage of total deposits and to reduce rates paid on interest-bearing deposits, as well as declines in market rates generally.

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•Total deposits increased by $1.9 billion for the year ended December 31, 2021. Non-interest bearing demand deposits grew by $2.0 billion during the year ended December 31, 2021, while average non-interest bearing demand deposits grew by $2.7 billion over the same period. At December 31, 2021, non-interest bearing demand deposits represented 30% of total deposits compared to 25% of total deposits at December 31, 2020 and 18% of total deposits at December 31, 2019. Total deposits grew by $3.1 billion for the year ended December 31, 2020. Deposit growth over the past two years has been, in part, influenced by excess liquidity in the system generally. The following charts illustrate the composition of deposits at the dates indicated:

•As expected, as the economy emerges from the COVID-19 crisis and our borrowers' operating results improve, criticized and classified loans continued to decline. During the year ended December 31, 2021, total criticized and classified loans declined by $1.2 billion to $1.5 billion, from $2.7 billion at December 31, 2020. The ratio of non-performing loans to total loans declined to 0.87% at December 31, 2021 from 1.02% at December 31, 2020. Loans under short-term deferral or modified under the CARES Act totaled $205 million at December 31, 2021, down from a total of $794 million at December 31, 2020.

•During the fourth quarter of 2021, the Bank reached a settlement with the Florida Department of Revenue related to certain tax matters for the 2009-2019 tax years and recorded a tax benefit of $43.9 million, net of federal impact. Unrelated to the Florida settlement, the Bank recorded an additional $25.2 million tax benefit during the fourth quarter of 2021 related to a reduction in the liability for unrecognized tax benefits arising from expiration of statutes of limitation in the Federal and certain state jurisdictions.

•The following table details $40.4 million of notable items that impacted income before income taxes during the fourth quarter of 2021 (income (expense) in thousands):

•Book value per common share and tangible book value per common share continued to accrete, increasing to $35.47 and $34.56, respectively, at December 31, 2021 from $32.05 and $31.22, respectively at December 31, 2020.

•During the year ended December 31, 2021, the Company repurchased approximately 7.8 million shares of its common stock for an aggregate purchase price of $318 million, at a weighted average price of $40.95 per share. In February

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2022, the Company's Board of Directors authorized the repurchase of up to an additional $150 million in shares of its outstanding common stock.

•The Company's and Bank's capital ratios exceeded all regulatory "well capitalized" guidelines. The charts below present the Company's and Bank's regulatory capital ratios compared to regulatory guidelines at the dates indicated:

BankUnited, Inc.

BankUnited, N.A.

Strategic Priorities

Our vision is to be the leading regional commercial and small business bank, with a distinctive value proposition based on strong service-oriented relationships, robust digital enabled customer experiences, and operational excellence with an entrepreneurial work environment that empowers employees to deliver their best. Management has identified the following strategic priorities for our Company:

•Maximizing risk adjusted returns through a combination of sustainable, diversified and prudently managed organic growth and capital optimization;

•Growing core customer relationships on both sides of the balance sheet;

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•Commercial loan growth;

•Playing where we can win;

•Continuing to build a foundational and scalable small business and middle-market franchise;

•Focusing on niche business segments where our delivery model is a differentiator;

•Investing in digital capabilities, automation and data analytics - using technology to enable success;

•Retaining the ability to pivot nimbly when opportunities arise;

•Maintaining an efficient, effective and scalable support model through operational excellence;

•While our primary growth strategy is organic, we will continue to monitor the M&A landscape.

Some of the challenges confronting our Company, certain of which may impact the banking industry more broadly, include:

•Navigating an uncertain interest rate environment;

•Economic conditions may not turn out to be as favorable as current consensus forecasts indicate, either due to a resurgence of the COVID-19 pandemic to the extent that it significantly impacts the level of economic activity, or other unforeseen macro-economic factors. An economic downturn could limit the demand for our products and services.

•Achieving planned commercial loan growth in an uncertain and competitive environment;

•Talent attraction and retention;

•Timely completion of planned technology initiatives.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP and follow general practices within the banking industry. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.

Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below involve a heightened level of management judgment due to the complexity, subjectivity and sensitivity involved in their application.

Note 1 to the consolidated financial statements contains a further discussion of our significant accounting policies.

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ACL

The ACL represents management's estimate of current expected credit losses, or the amount of amortized cost basis not expected to be collected, on our loan portfolio and the amount of credit loss impairment on our AFS securities portfolio. Determining the amount of the ACL is considered a critical accounting estimate because of its complexity and because it requires extensive judgment and estimation. Estimates that are particularly susceptible to change that may have a material impact on the amount of the ACL include:

•our evaluation of current conditions;

•our determination of a reasonable and supportable economic forecast and selection of the reasonable and supportable forecast period;

•our evaluation of historical loss experience;

•our evaluation of changes in composition and characteristics of the loan portfolio, including internal risk ratings;

•our estimate of expected prepayments;

•the value of underlying collateral, which may impact loss severity and certain cash flow assumptions for collateral-dependent, criticized and classified loans;

•our selection and evaluation of qualitative factors; and

•our estimate of expected cash flows on AFS debt securities in unrealized loss positions.

Our selection of models and modeling techniques may also have a material impact on the estimate.

Note 1 to the consolidated financial statements describes the methodology used to determine the ACL.

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements.

Results of Operations

Net Interest Income

Net interest income is the difference between interest earned on interest earning assets and interest incurred on interest bearing liabilities and is the primary driver of core earnings. Net interest income is impacted by the mix of interest earning assets and interest bearing liabilities, the ratio of interest earning assets to total assets and of interest bearing liabilities to total funding sources, movements in market interest rates, the shape of the yield curve, levels of non-performing assets and pricing pressure from competitors.

The mix of interest earning assets is influenced by loan demand, market and competitive conditions in our primary lending markets, by management's continual assessment of the rate of return and relative risk associated with various classes of earning assets and liquidity considerations. The mix of interest bearing liabilities is influenced by the Company's liquidity profile, management's assessment of the desire for lower cost funding sources weighed against relationships with customers and growth expectations, our ability to attract and retain core deposit relationships, competition for deposits in the Company's markets and the availability and pricing of other sources of funds.

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

(1)On a tax-equivalent basis where applicable. The tax-equivalent adjustment for tax-exempt loans was $13.3 million, $14.9 million and $16.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. The tax-equivalent adjustment for tax-exempt investment securities was $2.7 million, $3.1 million and $4.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

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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):

Net interest income, calculated on a tax-equivalent basis, was $811.7 million for the year ended December 31, 2021, compared to $769.8 million for the year ended December 31, 2020, an increase of $41.9 million. The increase in net interest income was comprised of decreases in tax-equivalent interest income and interest expense of $110.2 million and $152.1 million, respectively, for the year ended December 31, 2021, compared to the year ended December 31, 2020. The decrease in tax-equivalent interest income was driven primarily by decreases in interest income from loans and investment securities of $65.0 million and $41.6 million, respectively, for the year ended December 31, 2021 compared to the year ended December 30, 2020. These decreases resulted from the impact on asset portfolio yields of declines in market interest rates in early 2020, leading to runoff of assets originated in a higher rate environment and origination of assets at lower prevailing rates. These declines in yields were partially offset by increases in the average balance of interest earning assets, primarily investment securities. The decline in interest expense for the year ended December 31, 2021 compared to the year ended December 31, 2020 was attributable to lower prevailing rates, strategic initiatives implemented to reduce the cost of deposits and the decline in average interest bearing liabilities.

Both average yields on interest earning assets and average rates paid on interest bearing liabilities have been declining over the periods presented, reflecting the macro interest rate environment and ongoing initiatives to reduce the cost and improve the mix of deposits.

The net interest margin, calculated on a tax-equivalent basis, was 2.38% for the year ended December 31, 2021, compared to 2.35% for the year ended December 31, 2020. The reduction in cost of interest bearing liabilities outpaced the decline in the yield on interest earning assets for the year.

Offsetting factors impacting the net interest margin for the year ended December 31, 2021 compared to the year ended December 31, 2020 included:

•The tax-equivalent yield on loans decreased to 3.53% for the year ended December 31, 2021, from 3.76% for the year ended December 31, 2020. Factors contributing to this decrease included a shift in portfolio composition from commercial to residential loans, a decline in benchmark interest rates which impacted the rates earned on both existing floating rate assets and new production, and the runoff of loans originated in a higher rate environment. These factors were partially offset by accelerated amortization of origination fees on PPP loans which positively impacted the yield on loans.

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•The tax-equivalent yield on investment securities declined to 1.57%, for the year ended December 31, 2021 from 2.25% for the year ended December 31, 2020. This decrease resulted from the impact of purchases of lower-yielding securities; the amortization, maturities and prepayment of securities purchased in a higher rate environment; and faster prepayment speeds on securities purchased at a premium.

•The average rate paid on interest bearing deposits decreased to 0.34% for the year ended December 31, 2021,from 1.00% for the year ended December 31, 2020. This decrease reflected declines in prevailing interest rates and continued execution of initiatives taken to lower rates paid on deposits, including the re-pricing of term deposits.

•Average interest bearing liabilities declined by $1.8 billion for the year ended December 31, 2021, compared to the year ended December 31, 2020. Average non-interest bearing demand deposits increased by $2.7 billion for those same comparative periods. These changes positively impacted the net interest margin.

Provision for Credit Losses

The provision for credit losses is a charge or credit to earnings required to maintain the ACL at a level consistent with management’s estimate of expected credit losses on financial assets carried at amortized cost at the balance sheet date. The amount of the provision is impacted by changes in current economic conditions, as well as in management's reasonable and supportable economic forecast, loan originations and runoff, changes in portfolio mix, risk rating migration and portfolio seasoning, changes in specific reserves, changes in expected prepayment speeds and other assumptions. The provision for credit losses also includes amounts related to off-balance sheet credit exposures and may include amounts related to accrued interest receivable and AFS debt securities.

The following table presents the components of the provision for credit losses for the periods indicated (in thousands):

The most impactful factors driving the recovery of credit losses for the year ended December 31, 2021 were improvements in current and forecasted economic conditions.

The evolving COVID-19 situation and its actual and forecasted impact on economic conditions have led and may continue to lead to volatility in the provision for credit losses.

The determination of the amount of the ACL is complex and involves a high degree of judgment and subjectivity. See “Analysis of the Allowance for Credit Losses” below for more information about how we determine the appropriate level of the ACL.

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Non-Interest Income

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

The increase in deposit service charges for the year ended December 31, 2021 resulted primarily from higher treasury management fee income, related to growth in commercial non-interest bearing DDA relationships as well as expanded product offerings and pricing discipline stemming from our BankUnited 2.0 initiatives.

The increase in gain on sale of loans for the year ended December 31, 2021 compared to 2020 related primarily to a gain of $18.2 million on the sale of a portfolio of single-family residential loans.

The decrease in income from lease financing for the year ended December 31, 2021 compared to the year ended December 31, 2020 related to the decrease in the balance of operating lease equipment and re-leasing of certain assets at lower rates.

Non-Interest Expense

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

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Employee compensation and benefits

Employee compensation and benefits increased by $26.4 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily due to higher variable compensation accruals for both incentives and regular annual discretionary bonuses in 2021. Additionally, the Company paid a special bonus in the fourth quarter of 2021 totaling $6.8 million.

Deposit insurance expense

Deposit insurance expense decreased by $3.2 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, reflecting a decrease in the assessment rate.

Professional Fees

Professional fees for the year ended December 31, 2021 includes $4.2 million related to a tax settlement with the state of Florida.

Technology and telecommunications

The increases in technology and telecommunications expense are reflective of a variety of technology investments including digital, payments and data analytics capabilities.

Discontinuance of cash flow hedges

We recognized a loss on discontinuance of cash flow hedges totaling $44.8 million related to the termination of pay-fixed interest rate swaps with a notional amount of $401 million at a weighted average pay rate of 3.24% during the fourth quarter of 2021.

Depreciation and impairment of operating lease equipment

Depreciation and impairment of operating lease equipment for the year ended December 31, 2021 included an impairment charge of $2.8 million related to certain sand cars.

Income Taxes

The provision for income taxes for the years ended December 31, 2021 and 2020 was $34.4 million and $51.5 million, respectively. The Company's effective income tax rate was 7.66% and 20.66% for the years ended December 31, 2021, and 2020, respectively. The effective income tax rate for the year ended December 31, 2021 was impacted by a settlement with the Florida Department of Revenue related to certain tax matters for the 2009-2019 tax years and a reduction in the liability for unrecognized tax benefits arising primarily from expiration of statutes of limitation in the Federal and certain state jurisdictions. See Note 9 to the consolidated financial statements for information about income taxes.

Analysis of Financial Condition

For the year ended December 31, 2021 we saw growth in total deposits of $1.9 billion, with non-interest bearing demand deposits increasing by $2.0 billion. Borrowings decreased by $1.2 billion and liquidity was deployed into the securities portfolio, which grew by $888 million. Total loans declined by $101 million for 2021; however, there was a shift in loan portfolio composition as the residential portfolio grew by $2.0 billion and the commercial portfolio in the aggregate declined by $2.1 billion. These trends were continuations of those seen in the prior year, and reflective of the environment predicated by the COVID-19 pandemic as systemic liquidity grew, residential loan demand and the residential housing market remained strong, while commercial loan demand was muted and our risk appetite for commercial lending was more limited. The shift in deposit mix is also consistent with management's key strategic objective of growing non-interest bearing deposits and improving the overall quality of the deposit base.

Led by growth in average investment securities, average interest-earning assets increased by $1.3 billion to $34.1 billion for the year ended December 31, 2021 from $32.8 billion for the year ended December 31, 2020, while average interest bearing liabilities declined by $1.8 billion over the same period. Average non-interest bearing deposits increased by $2.7 billion to $8.5 billion for the year ended December 31, 2021.

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Investment Securities

The following table shows the amortized cost and carrying value, which, with the exception of investment securities held to maturity, is fair value, of investment securities at the dates indicated:

Our investment strategy has focused on insuring adequate liquidity, maintaining a suitable balance of high credit quality, diverse assets, managing interest rate risk, and generating acceptable returns given our established risk parameters. We have sought to maintain liquidity by investing a significant portion of the portfolio in high quality liquid securities including U.S. Treasury and U.S. Government Agency and sponsored enterprise securities. Investment grade municipal securities provide liquidity and attractive tax-equivalent yields. We have also invested in highly rated structured products, including private-label commercial and residential MBS, collateralized loan obligations, single family real estate-backed securities and non-mortgage asset-backed securities that, while somewhat less liquid, provide us with attractive yields. Relatively short effective portfolio duration helps mitigate interest rate risk. Based on the Company’s assumptions, the estimated weighted average life of the investment portfolio as of December 31, 2021 was 4.2 years and the effective duration of the portfolio was 1.5 years.

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The investment securities available for sale portfolio was in a net unrealized gain position of $3.8 million at December 31, 2021. Net unrealized gains at December 31, 2021 included $55.4 million of gross unrealized gains and $51.6 million of gross unrealized losses. Investment securities available for sale in unrealized loss positions at December 31, 2021 had an aggregate fair value of $5.3 billion. The ratings distribution of our AFS securities portfolio at December 31, 2021 is depicted in the chart below:

We evaluate the credit quality of individual securities in the portfolio quarterly to determine whether we expect to recover the amortized cost basis of the investments in unrealized loss positions. This evaluation considers, but is not necessarily limited to, the following factors, the relative significance of which varies depending on the circumstances pertinent to each individual security:

•Whether we intend to sell the security prior to recovery of its amortized cost basis;

•Whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis;

•The extent to which fair value is less than amortized cost;

•Adverse conditions specifically related to the security, an industry or geographic area;

•Changes in the financial condition of the issuer or underlying loan obligors;

•The payment structure and remaining payment terms of the security, including levels of subordination or over-collateralization;

•Failure of the issuer to make scheduled payments;

•Changes in credit ratings;

•Relevant market data;

•Estimated prepayments, defaults, and the value and performance of underlying collateral at the individual security level.

We do not intend to sell securities in significant unrealized loss positions at December 31, 2021. Based on an assessment of our liquidity position and internal and regulatory guidelines for permissible investments and concentrations, it is not more likely than not that we will be required to sell securities in significant unrealized loss positions prior to recovery of amortized cost basis, which may be at maturity.

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U.S. Government, Government Agency and Government Sponsored Enterprise Securities

The timely payment of principal and interest on securities issued by the U.S. government, U.S. government agencies and U.S. government sponsored enterprises is explicitly or implicitly guaranteed by the U.S. Government. As such, there is an assumption of zero credit loss and the Company expects to recover the entire amortized cost basis of these securities.

Private Label Securities

None of the impaired private label securities had missed principal or interest payments or had been downgraded by a NRSRO at December 31, 2021. The Company performed an analysis comparing the present value of cash flows expected to be collected to the amortized cost basis of impaired private label securities. This analysis was based on a scenario that we believe to be more severe than our reasonable and supportable economic forecast at December 31, 2021, and incorporated assumptions about voluntary prepayment rates, collateral defaults, delinquencies, other collateral quality measures, loss severity, recovery lag and other relevant factors. Our analysis also considered the structural characteristics of each security and the level of credit enhancement provided by that structure. Based on the results of this analysis, none of the private label AFS securities in unrealized loss positions were projected to sustain credit losses at December 31, 2021.

The following table presents subordination levels and average internal stress scenario losses for select portfolio segments at December 31, 2021:

For further discussion of our analysis of impaired investment securities AFS for credit loss impairment see Note 3 to the consolidated financial statements.

We use third-party pricing services to assist us in estimating the fair value of investment securities. We perform a variety of procedures to ensure that we have a thorough understanding of the methodologies and assumptions used by the pricing services including obtaining and reviewing written documentation of the methods and assumptions employed, conducting interviews with valuation desk personnel and reviewing model results and detailed assumptions used to value selected securities as considered necessary. Our classification of prices within the fair value hierarchy is based on an evaluation of the nature of the significant assumptions impacting the valuation of each type of security in the portfolio. We have established a robust price challenge process that includes a review by our treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from our expectations based on recent observed trading activity and other information available in the marketplace that would impact the value of the security is challenged. Responses to the price challenges, which generally include specific information about inputs and assumptions incorporated in the valuation and their sources, are reviewed in detail. If considered necessary to resolve any discrepancies, a price will be obtained from additional independent valuation sources. We do not typically adjust the prices provided, other than through this established challenge process. Our primary pricing services utilize observable inputs when available, and employ unobservable inputs and proprietary models only when observable inputs are not available. As a matter of course, the services validate prices by comparison to recent trading activity whenever such activity exists. Quotes obtained from the pricing services are typically non-binding.

The majority of our investment securities are classified within level 2 of the fair value hierarchy. U.S. Treasury securities and marketable equity securities are classified within level 1 of the hierarchy. While at the onset of the COVID-19 pandemic, we observed increased volatility and dislocation in the market for certain securities, we believe the fiscal and monetary response to the crisis was effective in supporting liquidity and stabilizing markets. These circumstances did not lead to a change in the categorization of any fair value estimates within the fair value hierarchy.

For additional discussion of the fair values of investment securities, see Note 14 to the consolidated financial statements.

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The following table shows the weighted average prospective yields, categorized by scheduled maturity, for AFS investment securities as of December 31, 2021. Scheduled maturities have been adjusted for anticipated prepayments when applicable. Yields on tax-exempt securities have been calculated on a tax-equivalent basis, based on a federal income tax rate of 21%:

Loans

The loan portfolio comprises the Company’s primary interest-earning asset. The following table shows the composition of the loan portfolio at the dates indicated (dollars in thousands):

For the year ended December 31, 2021, total loans declined by $101 million, while total loans, excluding the PPP, grew by $432 million.

Growth in residential and other consumer loans for the year ended December 31, 2021 totaled $2.0 billion, including $603 million in GNMA early buyout loans. In the aggregate, excluding PPP, commercial loans declined by $1.6 billion for the year ended December 31, 2021. Line utilization remained below historical levels and accelerated prepayment activity continued. MWL line utilization declined to 56% at December 31, 2021 compared to 62% at December 31, 2020, we believe related to some normalization in this segment after a period of high refinance activity.

PPP loans declined by $533 million during the year ended December 31, 2021, resulting primarily from full or partial forgiveness on loans under the First and Second Draw programs.

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Residential mortgages and other consumer loans

The following table shows the composition of residential and other consumer loans at the dates indicated (in thousands):

The 1-4 single family residential loan portfolio, excluding government insured residential loans, is primarily comprised of loans purchased through established correspondent channels. 1-4 single family residential mortgage loans are primarily closed-end, first lien jumbo mortgages for the purchase or re-finance of owner occupied property. The loans have terms ranging from 10 to 30 years, with either fixed or adjustable interest rates. At December 31, 2021, $697 million or 11% were secured by investor-owned properties.

The Company acquires non-performing FHA and VA insured mortgages from third party servicers who have exercised their right to purchase these loans out of GNMA securitizations (collectively, "government insured pool buyout loans" or "buyout loans"). Buyout loans that re-perform, either through modification or self-cure, may be eligible for re-securitization. The Company and the servicer share in the economics of the sale of these loans into new securitizations. The balance of buyout loans totaled $2.0 billion at December 31, 2021. The Company is not the servicer of these loans.

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

See Note 4 to the consolidated financial statements for information about geographic concentrations in the 1-4 single family residential portfolio.

The following table presents a breakdown of the 1-4 single family residential mortgage portfolio, excluding government insured residential loans, categorized between fixed rate loans and ARMs at the dates indicated below (dollars in thousands):

The shift from a higher proportion of ARM loans to a higher proportion of fixed rate loans is broadly reflective of borrower preferences in a low interest rate environment.

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Commercial loans and leases

Commercial loans include commercial and industrial loans and leases, loans secured by owner-occupied commercial real-estate, multi-family properties and other income-producing non-owner occupied commercial real estate, a limited amount of construction and land loans, SBA loans, mortgage warehouse lines of credit, PPP loans, municipal loans and leases originated by Pinnacle and franchise and equipment finance loans and leases originated by Bridge.

The following charts present the distribution of the commercial loan portfolio at the dates indicated (dollars in millions):

Commercial real estate loans include term loans secured by non-owner occupied income producing properties including rental apartments, mixed-use properties, industrial properties, retail shopping centers, free-standing single-tenant buildings, office buildings, warehouse facilities, hotels, real estate secured lines of credit, as well as credit facilities to institutional real estate entities such as REITs and commercial real estate investment funds.

The following table presents the distribution of commercial real estate loans by property type along with weighted average DSCRs and LTVs at December 31, 2021 (dollars in thousands):

DSCRs and LTVs in the table above are based on the most recent information available. Geographic distribution in the table above is based on location of the underlying collateral property.

The Company’s commercial real estate underwriting standards most often provide for loan terms of five to seven years, with amortization schedules of no more than thirty years. LTV ratios are typically limited to no more than 75%. Construction and land loans, included by property type in the table above, represented 0.7% of the total loan portfolio at December 31, 2021.

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Included in the table above are approximately $122 million of mixed-use properties in New York, consisting of $57 million categorized as multi-family, $46 million categorized as retail and $19 million categorized as office. The New York multi-family portfolio included $474 million of loans collateralized by properties with some or all of the units subject to rent regulation at December 31, 2021, substantially all of which were stabilized properties.

The following tables present the distribution of stabilized rent-regulated multi-family loans, by DSCR and LTV at December 31, 2021 (in thousands):

The LTVs in the table above are based on the most recent appraisal obtained, which may not be fully reflective of changes in valuations that may result from the impact of rent regulation reform. Loans with DSCR less than 1.00 may be those with temporary rent deferments, unit vacancies or increases in expenses exceeding rental receipts, such as real estate taxes. Certain types of ancillary income are excluded from the DSCR calculations.

Commercial and industrial loans are typically made to small, middle market and larger corporate businesses and not-for-profit entities and include equipment loans, secured and unsecured working capital facilities, formula-based loans, trade finance, SBA product offerings and business acquisition finance credit facilities. These loans may be structured as term loans, typically with maturities of five to seven years, or revolving lines of credit which may have multi-year maturities. The Bank also provides financing to state and local governmental entities generally within our geographic markets. Commercial loans included loans meeting the regulatory definition of shared national credits totaling $3.2 billion at December 31, 2021, the majority of which were relationship based loans to borrowers in Florida and New York. The Bank makes loans secured by owner-occupied commercial real estate that typically have risk profiles more closely aligned with that of commercial and industrial loans than with other types of commercial real estate loans.

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The following table presents the exposure in the commercial and industrial portfolio by industry, including $1.9 billion of owner-occupied commercial real estate loans, at December 31, 2021 (in thousands):

Through its commercial lending subsidiaries, Pinnacle and Bridge, the Bank provides equipment and franchise financing on a national basis using both loan and lease structures. Pinnacle provides essential-use equipment financing to state and local governmental entities directly and through vendor programs and alliances. Pinnacle offers a full array of financing structures including equipment lease purchase agreements and direct (private placement) bond re-fundings and loan agreements. Bridge has two operating divisions. The franchise finance division offers franchise acquisition, expansion and equipment financing, typically to experienced operators in well-established concepts. The franchise finance portfolio is made up primarily of quick service restaurant and fitness concepts comprising 53% and 40% of the portfolio, respectively. The equipment finance division provides primarily transportation equipment financing through a variety of loan and lease structures.

The following table presents the franchise portfolio by concept at December 31, 2021:

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The Company has originated PPP loans under both the First and Second Draw Programs. These loans bear interest at 1% and are guaranteed as to principal and interest by the SBA. PPP loans have terms of 2 and 5 years under the First and Second Draw Programs, respectively, and are eligible for earlier forgiveness under the terms of the PPP in prescribed circumstances. The following table summarizes PPP loan balances at December 31, 2021, and the amount of interest income related to accelerated amortization of origination fees on loans that were partially or fully forgiven, under each program during the year ended December 31, 2021 (in thousands):

Geographic Concentrations

The Company's commercial and commercial real estate portfolios are concentrated in Florida and the Tri-state area. 58% and 33% of commercial real estate loans were secured by collateral located in Florida and the Tri-state area, respectively; while 37% and 23% of all other commercial loans were to borrowers in Florida and the Tri-state area, respectively.

The following table presents the five states with the largest concentration of commercial loans and leases originated through Bridge, Pinnacle and our mortgage warehouse finance unit at the dates indicated (dollars in thousands):

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Loan Maturities

The following table sets forth, as of December 31, 2021, the maturity distribution of our loan portfolio by category, excluding government insured residential loans. Commercial and other consumer loans are presented by contractual maturity, including scheduled payments for amortizing loans. Contractual maturities of residential loans have been adjusted for an estimated rate of voluntary prepayments, based on historical trends, current interest rates, types of loans and refinance patterns (in thousands):

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The following table shows the distribution of those loans that mature in more than one year between fixed and adjustable interest rate loans as of December 31, 2021 (in thousands):

Excluded from the tables above are government insured residential loans. Resolution of these loans is generally accomplished through the re-securitization and sale of the loans after they re-perform, either through modification or self-cure, or through pursuit of the applicable guarantee.

Operating lease equipment, net

Operating lease equipment, net of accumulated depreciation totaled $641 million at December 31, 2021, including off-lease equipment, net of accumulated depreciation of $107 million. The portfolio consists primarily of railcars, non-commercial aircraft and other transport equipment. Our operating lease customers are North American commercial end users. We have a total of 5,061 railcars with a carrying value of $368 million at December 31, 2021, including hoppers, tank cars, boxcars, auto carriers, center beams and gondolas. The largest concentrations of rail cars were 2,400 hopper cars and 1,589 tank cars, primarily used to ship sand and petroleum products, respectively, for the energy industry.

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

At December 31, 2021, the breakdown of carrying values of operating lease equipment, excluding equipment off-lease, by the year leases are scheduled to expire was as follows (in thousands):

Asset Quality

Commercial Loans

We have a robust credit risk management framework, an experienced team to lead the workout and recovery process for the commercial and commercial real estate portfolios and a dedicated internal credit review function. Loan performance is monitored by our credit administration, portfolio management and workout and recovery departments. Generally, commercial relationships with balances in excess of defined thresholds are re-evaluated at least annually and more frequently if circumstances indicate that a change in risk rating may be warranted. The defined thresholds range from $1 million to $3 million. Homogenous groups of smaller balance commercial loans may be monitored collectively. The credit quality and risk rating of commercial loans as well as our underwriting and portfolio management practices are regularly reviewed by our internal credit review department.

We believe internal risk rating is the best indicator of the credit quality of commercial loans. The Company utilizes a 16-grade internal asset risk classification system as part of its efforts to monitor and maintain commercial asset quality. The special mention rating is considered a transitional rating for loans exhibiting potential credit weaknesses that could result in deterioration of repayment prospects at some future date if not checked or corrected and that deserve management’s close attention. These borrowers may exhibit declining cash flows or revenues or increasing leverage. Loans with well-defined credit weaknesses that may result in a loss if the deficiencies are not corrected are assigned a risk rating of substandard. These borrowers may exhibit payment defaults, inadequate cash flows from current operations, operating losses, increasing balance sheet leverage, project cost overruns, unreasonable construction delays, exhausted interest reserves, declining collateral values, frequent overdrafts or past due real estate taxes. Loans with weaknesses so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors have not been charged off, are assigned an internal risk rating of doubtful. Since the onset of the COVID-19 pandemic, risk ratings have been re-evaluated for the substantial majority of the commercial portfolio, in some cases more than once, with a particular focus on portfolio segments we identified

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for enhanced monitoring and loans for which we granted temporary payment deferrals or modifications in light of the pandemic. We continue to closely monitor the risk rating of commercial loans in light of the evolving COVID-19 situation.

The following table summarizes the Company's commercial credit exposure, based on internal risk rating, at the dates indicated (dollars in thousands):

Our internal risk ratings at December 31, 2021 continued to be influenced by the impact of the COVID-19 pandemic and the measures and restrictions employed to contain the spread of the virus on the economy, our borrowers and the sectors in which they operate. Management has taken what we believe to be a proactive and objective approach to risk rating the commercial loan portfolio since the onset of the pandemic. Levels of criticized and classified loans, particularly in the special mention and substandard accruing categories, increased over the course of 2020 as a direct result of the impact of the COVID-19 pandemic. As expected given the trajectory of the economic recovery, levels of criticized and classified loans have declined during the year ended December 31, 2021 by $1.2 billion. If the economic recovery and its impact on individual borrowers evolve in line with our current expectations and economic forecast, we would expect to see the level of criticized and classified loans continue to decline in 2022. However, uncertainty remains around the future trajectory of the COVID-19 virus and the economic recovery. In light of that uncertainty, it is possible that criticized and classified loan levels may not decline or that they may increase.

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The following table provides additional information about special mention and substandard accruing loans, at the dates indicated (dollars in thousands). Non-performing loans are discussed further in the section entitled "Non-performing Assets" below.

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Payment Deferrals and Modifications

We believe, in the current environment, information about loans that are on temporary payment deferral or have been modified as a result of the COVID-19 pandemic provides additional insight into segments or sub-segments of the portfolio that experienced some level of stress related to the pandemic and into how those loans are performing as the economy recovers. The following table summarizes deferral and modification activity in the commercial portfolio, as of December 31, 2021 and 2020 (dollars in thousands):

(1)    There were no loans under short term deferral at December 31, 2021.

All of the loans that have rolled off of modification as shown in the table above have paid off or resumed regular payments. CARES Act modifications represent modifications for periods greater than 90 days and most commonly have taken the form of 9 to 12 month interest only periods. The majority of loan modifications that took place after the onset of the COVID-19 pandemic have not been categorized as TDRs, in accordance with interagency and authoritative guidance and the provisions of the CARES Act, which expired effective January 1, 2022.

Operating Lease Equipment, net

Seven operating leases with a carrying value of assets under lease totaling $43 million, all of which were exposures to the energy industry, were internally risk rated substandard at December 31, 2021. On a quarterly basis, management performs an impairment analysis on assets with indicators of potential impairment. Potential impairment indicators include evidence of changes in residual value, macro-economic conditions, an extended period of time off-lease, criticized or classified status, or management's intention to sell the asset at an amount potentially below its carrying value. During the years ended December 31, 2021 and 2020, impairment charges recognized related to operating lease equipment were $2.8 million and $0.7 million, respectively.

The primary risks inherent in the equipment leasing business are asset risk resulting from ownership of the equipment on lease and credit risk. Asset risk arises from fluctuations in supply and demand for the underlying leased equipment. The equipment is leased to commercial end users with original lease terms generally ranging from three to ten years. We are exposed to the risk that, at the end of the lease term, the value of the asset will be lower than expected, potentially resulting in reduced future lease income over the remaining life of the asset or a lower sale value. Asset risk may also lead to changes in depreciation as a result of changes in the residual values of the leased assets or impairment of asset carrying values.

Asset risk is evaluated and managed by a dedicated internal staff of asset managers, managed by seasoned equipment finance professionals with a broad depth and breadth of experience in the leasing business. Additionally, we have partnered with an industry leading, experienced service provider who provides fleet management and servicing relating to the railcar fleet, including lease administration and reporting, a Regulation Y compliant full service maintenance program and railcar re-marketing. Risk is managed by setting appropriate residual values at inception and systematic reviews of residual values based on independent appraisals, performed at least annually. Additionally, our internal management team and our external service

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provider closely follow the rail markets, monitoring traffic flows, supply and demand trends and the impact of new technologies and regulatory requirements. Demand for railcars is sensitive to shifts in general and industry specific economic and market trends and shifts in trade flows from specific events such as natural or man-made disasters, including events such as the COVID-19 pandemic. We seek to mitigate these risks by leasing to a stable end user base, by maintaining a relatively young and diversified fleet of assets that are expected to maintain stronger and more stable utilization rates despite impacts from unexpected events or cyclical trends and by staggering lease maturities. We regularly monitor the impact of oil prices on the estimated residual value of rail cars being used in the petroleum/natural gas extraction sector.

Credit risk in the leased equipment portfolio results from the potential default of lessees, possibly driven by obligor specific or industry-wide conditions, and is economically less significant than asset risk, because in the operating lease business, there is no extension of credit to the obligor. Instead, the lessor deploys a portion of the useful life of the asset. Credit losses, if any, will manifest through reduced rental income due to missed payments, time off lease, or lower rental payments due either to a restructuring or re-leasing of the asset to another obligor. Credit risk in the operating lease portfolio is managed and monitored utilizing credit administration infrastructure, processes and procedures similar to those used to manage and monitor credit risk in the commercial loan portfolio. We also mitigate credit risk in this portfolio by leasing to high credit quality obligors.

Bridge had exposure to the energy industry of $297 million at December 31, 2021. The majority of the energy exposure was in the operating lease equipment portfolio where energy exposure totaled $258 million. The remaining energy exposure, totaling approximately $39 million was comprised of loans and direct or sales type finance leases.

Residential and Other Consumer Loans

Our residential mortgage portfolio, excluding GNMA buyout loans, consists primarily of loans purchased through established correspondent channels. Most of our purchases are of performing jumbo mortgage loans which have FICO scores above 700, primarily are owner-occupied and full documentation, and have a current LTV of 80% or less although loans with LTVs higher than 80% may be extended to selected credit-worthy borrowers. We perform due diligence on the purchased loans for credit, compliance, counterparty, payment history and property valuation.

We have a dedicated residential credit risk management function, and the residential portfolio is monitored by our internal credit review function. Residential mortgage loans and consumer loans are not individually risk rated. Delinquency status is the primary measure we use to monitor the credit quality of these loans. We also consider original LTV and most recently available FICO score to be significant indicators of credit quality for the 1-4 single family residential portfolio, excluding government insured residential loans.

The following charts present information about the 1-4 single family residential portfolio, excluding government insured loans, by FICO distribution, LTV distribution and vintage at December 31, 2021:

FICO scores are generally updated at least annually, and were most recently updated in the third quarter of 2021. LTVs are typically based on valuation at origination since we do not routinely update residential appraisals.

At December 31, 2021, the majority of the 1-4 single family residential loan portfolio, excluding government insured residential loans, was owner-occupied, with 83% primary residence, 6% second homes and 11% investment properties.

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1-4 single family residential loans excluding government insured residential loans past due more than 30 days totaled $76 million and $66 million at December 31, 2021 and 2020, respectively. The amount of these loans 90 days or more past due was $17 million and $9 million at December 31, 2021 and 2020, respectively. Delinquency statistics as of December 31, 2021 may not be fully reflective of the impact of the COVID-19 pandemic on residential borrowers due to payment deferral programs. Loans on deferral that are in compliance with the terms of the deferral program are not reported as delinquent.

At December 31, 2021, $33 million or less than 1% of 1-4 single family residential loans, excluding government insured residential loans, remained under short-term deferral or had been modified due to the COVID-19 pandemic. Through December 31, 2021, $533 million of residential loans, excluding government insured loans, had been granted at least one short term payment deferral. The following table presents information about residential loans granted payment deferrals as a result of the COVID-19 pandemic as of December 31, 2021, excluding government insured residential loans (dollars in thousands):

(1)    Includes $11 million of loans under short-term deferral and $22 million of loans modified under the CARES Act that are continuing to make payments at December 31, 2021.

For residential borrowers, relief has typically initially taken the form of 90 day payment deferrals, with deferred payments due at the end of the 90 day period. At the end of the initial 90 day deferral period, residential borrowers may either (i) make all payments due, (ii) be granted an additional deferral period or (iii) enter into a modification or repayment plan.

Note 4 to the consolidated financial statements presents additional information about key credit quality indicators and delinquency status of the loan portfolio.

Non-Performing Assets

Non-performing assets generally consist of (i) non-accrual loans, including loans that have been modified in TDRs or CARES Act modifications and placed on non-accrual status, (ii) accruing loans that are more than 90 days contractually past due as to interest or principal, excluding PCD loans for which management has a reasonable basis for an expectation about future cash flows and government insured residential loans, and (iii) OREO and repossessed assets.

The following table and charts summarize the Company's non-performing loans and non-performing assets at the dates indicated (dollars in thousands):

(1)    Non-performing loans and assets include the guaranteed portion of non-accrual SBA loans totaling $46.1 million or 0.19% of total loans and 0.13% of total assets, at December 31, 2021, and $51.3 million or 0.22% of total loans and 0.15% of total assets, at December 31, 2020.

Contractually delinquent government insured residential loans are typically GNMA early buyout loans and are excluded from non-performing loans as defined in the table above due to their government guarantee. The carrying value of such loans contractually delinquent by more than 90 days was $730 million and $562 million at December 31, 2021 and 2020, respectively.

Decreases in the ratio of the ACL to total loans and the ACL to non-performing loans for the year ended December 31, 2021 were attributable to the recovery of provision for credit losses and charge-offs recognized during the year. See "Results of Operations - Provision for Credit Losses" above and “Analysis of the Allowance for Credit Losses” below for further discussion of trends in the Provision for Credit Losses and the ACL.

At December 31, 2021, the ratios of non-performing loans to total loans and non-performing assets to total assets had declined to at or below pre-pandemic levels. The following chart presents trends in non-performing loans and non-performing assets:

The following chart presents trends in non-performing loans by portfolio sub-segment (in millions):

The ultimate impact of the COVID-19 pandemic on non-performing asset levels and net charge-offs may be delayed due to government assistance and loan deferral programs.

Commercial loans are placed on non-accrual status when (i) management has determined that full repayment of all contractual principal and interest is in doubt, or (ii) the loan is past due 90 days or more as to principal or interest unless the loan is well secured and in the process of collection. Residential and consumer loans, other than government insured pool buyout loans, are generally placed on non-accrual status when they are 90 days past due. Residential loans that have rolled off of short-term deferral and have not caught up on their deferred payments may also be placed on non-accrual; these loans are typically pending modification. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged to interest income. Commercial loans are returned to accrual status only after all past due principal and interest has

been collected and full repayment of remaining contractual principal and interest is reasonably assured. Residential loans are generally returned to accrual status when less than 90 days past due. Past due status of loans is determined based on the contractual next payment due date. Loans less than 30 days past due are reported as current.

TDRs

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

Under inter-agency and authoritative guidance and consistent with the CARES Act, short-term deferrals or modifications related to COVID-19 were typically not categorized as TDRs. Additionally, section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act on December 27, 2020, effectively suspended the guidance related to TDRs codified in ASC 310-40 until the earlier of January 1, 2022 or sixty days after the date of the suspension of the declared state of emergency related to the COVID-19 pandemic. None of the COVID-19 related deferrals the Company has granted to date that fall under these provisions have been categorized as TDRs. See the sections entitled "Asset Quality - Commercial Loans - Payment Deferrals and Modifications" and "Asset Quality - Residential and Other Consumer Loans" for further discussion.

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

(1)    Includes 435 government insured residential loans modified in TDRs totaling $76.4 million at December 31, 2021, and 326 government insured residential loans modified in TDRs totaling $52.8 million at December 31, 2020.

See Note 4 to the consolidated financial statements for additional information about TDRs.

Loss Mitigation Strategies

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

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

In response to the COVID-19 pandemic and its potential economic impact to our customers, we implemented a short-term program that complies with interagency guidance and the CARES Act under which we have provided temporary relief, and in some cases longer term modifications, on a case by case basis to borrowers directly impacted by COVID-19 who were not more than 30 days past due as of December 31, 2019. See the sections entitled "Asset Quality - Commercial Loans - Payment Deferrals" and "Asset Quality - Residential and Other Consumer Loans" for further details about COVID-19 related payment deferrals and modifications. Under the inter-agency guidance and consistent with the CARES Act, deferrals or modifications related to COVID-19 will generally not be categorized as TDRs. Loans subject to these temporary deferrals or modifications, if in compliance with the contractual terms of the deferral or modification agreements, will typically not be reported as past due or non-performing. The CARES Act expired effective January 1, 2022.

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Analysis of the Allowance for Credit Losses

The ACL is management's estimate of the amount of expected credit losses over the life of the loan portfolio, or the amount of amortized cost basis not expected to be collected, at the balance sheet date. This estimate encompasses information about historical events, current conditions and reasonable and supportable economic forecasts. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Uncertainty remains around the impact the continually evolving COVID-19 situation will have on the economy broadly, and on our borrowers specifically. In light of this uncertainty, we believe it is possible that the ACL estimate could change, potentially materially, in future periods, in either direction. Changes in the ACL may result from changes in current economic conditions, our economic forecast, loan portfolio composition and circumstances not currently known to us that may impact the financial condition and operations of our borrowers, among other factors.

Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. For loans that do not share similar risk characteristics with other loans such as collateral dependent loans and TDRs, expected credit losses are estimated on an individual basis. Expected credit losses are estimated over the contractual terms of the loans, adjusted for expected prepayments, generally excluding expected extensions, renewals, and modifications.

For the substantial majority of portfolio segments and subsegments, including residential loans other than government insured loans, and most commercial and commercial real estate loans, expected losses are estimated using econometric models.

See Note 1 to the consolidated financial statements for more detailed information about our ACL methodology and related accounting policies.

The following table provides an analysis of the ACL, provision for credit losses related to the funded portion of loans and net charge-offs by loan segment for the periods indicated (in thousands):

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

(1)Adoption date of ASU 2016-13.

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

The following table presents the ACL as a percentage of loans at the dates indicated:

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Significant offsetting factors contributing to the change in the ACL during the year ended December 31, 2021 are depicted in the chart below (in millions):

Changes in the ACL during the year ended December 31, 2021

As depicted in the chart above, the primary reasons for the decrease in the ACL from December 31, 2020 to December 31, 2021 were improvements in the economy and the economic forecast and net charge-offs. Other largely offsetting factors impacting the change in the ACL included (i) changes in portfolio composition including the decline in commercial loan balances and shift into residential as a percentage of the portfolio, (ii) increases in specific reserves and (iii) improved borrower financial performance as reflected in the reduction in criticized and classified assets.

The ACL for residential and other consumer loans decreased by $9.5 million during the year ended December 31, 2021, from 0.29% to 0.11% of loans. This decrease was primarily driven by improved HPI and the impact of loans that rolled off of deferral and resumed regular payments.

The ACL for the CRE portfolio sub-segment, including multi-family, non-owner occupied CRE and construction and land, decreased by $75.8 million during the year ended December 31, 2021, from 1.52% to 0.51% of loans. The decrease in the ACL for CRE related to (i) changes in portfolio composition resulting from payoffs and improvements in the credit quality of existing loans as reflected in the reduction in criticized and classified loans, (ii) improvements in the commercial property forecasts, particularly vacancy rates in the multi-family and retail segments, (iii) improvements in economic conditions and the economic forecast related to unemployment and interest rates; and (iv) net charge-offs.

The ACL for the commercial and industrial sub-segment, including owner-occupied commercial real estate, decreased by $23.0 million during the year ended December 31, 2021, from 1.07% to 0.84% of loans. Significant factors contributing to the decrease included net charge-offs and improvements in economic conditions.

The ACL for the BFG franchise finance decreased by $19.6 million during the year ended December 31, 2021, from 6.61% to 4.90% of loans. This decrease is primarily attributed to improved levels of criticized and classified loans and net charge-offs.

The estimate of the ACL at December 31, 2021 was informed by economic scenarios published in December 2021, economic information provided by additional sources, information about borrower financial condition and collateral values, data reflecting the impact of recent events on individual borrowers and other relevant information. The economic forecast used

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in modeling the ACL as of December 31, 2021 was a third-party provided baseline forecast. Some of the assumptions and data points informing the reasonable and supportable economic forecast used in estimating the ACL at December 31, 2021 included:

•Labor market assumptions, which reflected national unemployment at 3.9% for the first quarter of 2022, steadily declining to normalized levels of full employment of 3.5% through the end of 2022;

•Annualized growth in GDP at 5.4% for the first quarter of 2022, normalizing to an average of 3.5% through 2022;

•VIX trending at stabilized levels through the forecast horizon; and

•S&P 500 averaging near 4,300 through the reasonable and supportable forecast period.

Additional variables and assumptions not explicitly stated also contributed to the overall impact economic conditions and the economic forecast had on the ACL estimate. Furthermore, while the variables presented above are at the national level, many of the variables are regionalized at the market and submarket level in the models.

Changes in the ACL since the adoption of ASU 2016-13

The ACL decreased from $136.0 million or 0.59% of total loans at January 1, 2020, the date of adoption of ASU 2016-13, to $126.5 million or 0.53% of total loans at December 31, 2021. This decrease is primarily attributed to lower loss rates on pass-rated loans. Factors leading to those lower loss rates included, but were not necessarily limited to:

•For commercial portfolio segments:

◦a decrease in weighted average remaining lives for most segments;

◦a decrease in the amount of loans outstanding;

◦an improved economic forecast as compared to the date of adoption, particularly with respect to unemployment and stock market volatility;

◦an improved commercial property forecast; and

◦reduced "through the cycle" PDs due to improvements, on balance, in our pass-rated commercial borrowers' financial condition.

•For the residential segment:

◦improved unemployment forecasts;

◦improved HPI path; and

◦an increased proportion of government insured loans, which carry no reserves, as a percentage of total residential loans.

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

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Deposits

A further breakdown of deposits at the dates indicated is shown below:

The estimated amount of uninsured deposits at December 31, 2021 and December 31, 2020 was $20.2 billion and $17.4 billion, respectively. Time deposit accounts with balances of $250,000 or more totaled $603 million and $1.1 billion at December 31, 2021 and December 31, 2020, respectively. The following table shows scheduled maturities of uninsured time deposits as of December 31, 2021 (in thousands):

Borrowings

In addition to deposits, we utilize FHLB advances as a funding source; the advances provide us with additional flexibility in managing both term and cost of funding and in managing interest rate risk. FHLB advances are secured by qualifying residential first mortgage and commercial real estate loans, and MBS. The following table presents information about the contractual balance of outstanding FHLB advances as of December 31, 2021 (dollars in thousands):

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.

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The table below presents information about outstanding interest rate swaps hedging the variability of interest cash flows on the FHLB advances included in the table above, as of December 31, 2021 (dollars in thousands):

During the year ended December 31, 2021, derivative positions designated as cash flow hedges with a notional amount totaling $401 million, at a weighted average pay rate of 3.24%, were discontinued following the Company's determination that the related forecasted transactions were not probable of occurring.

The Bank utilizes federal funds purchased to manage the daily cash position. See Note 7 to the consolidated financial statements for more information about the Company's FHLB advances and notes. Additionally, see Note 10 to the consolidated financial statements for more information about derivative instruments the Company uses to manage risk.

Liquidity and Capital Resources

Liquidity involves our ability to generate adequate funds to support planned interest earning asset growth, meet deposit withdrawal and credit line usage requests, maintain reserve requirements, conduct routine operations, pay dividends, service outstanding debt and meet other contractual obligations.

BankUnited's ongoing liquidity needs have been and continue to be met primarily by cash flows from operations, deposit growth, the investment portfolio and FHLB advances. FRB discount window borrowings provide an additional source of contingent liquidity. For the years ended December 31, 2021, 2020 and 2019 net cash provided by operating activities was $1.2 billion, $864 million and $636 million, respectively.

Available liquidity includes cash, borrowing capacity at the Federal Home Loan Bank of Atlanta and the Federal Reserve Discount Window, Federal Funds lines of credit and unpledged agency securities. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Bank's amortizing securities and loan portfolios, and the sale of investment securities. Management also has the ability to exert substantial control over the rate and timing of loan production, and resultant requirements for liquidity to fund new loans. Since the onset of the COVID-19 pandemic, we have not experienced unusual deposit outflows or volatility; we have, in fact experienced growth in on-balance sheet liquidity.

The ALM policy establishes limits or operating thresholds for a number of measures of liquidity which are typically monitored monthly by the ALCO and quarterly by the Board of Directors. The primary measures used to dimension liquidity risk are the ratio of available liquidity to volatile liabilities and a liquidity stress test coverage ratio. Other measures employed to monitor and manage liquidity include but are not limited to a 30-day total liquidity ratio, a one-year liquidity ratio, a wholesale funding ratio, concentrations of large deposits, a measure of on-balance sheet available liquidity and the ratio of non-interest bearing deposits to total deposits, which is reflective of the quality and cost, rather than the quantity, of available liquidity. At December 31, 2021, BankUnited was operating within acceptable thresholds and limits as prescribed by the ALM policy for each of these measures.

The ALM policy stipulates that BankUnited’s liquidity is considered within policy limits or thresholds if the available liquidity/volatile liabilities ratio, 30-day total liquidity ratio and one-year liquidity ratios exceed 100%. At December 31, 2021, BankUnited’s available liquidity/volatile liabilities ratio was 328%, the 30-day total liquidity ratio was 250% and the one-year liquidity ratio was 347%. The ALM policy also prescribes that the liquidity stress test coverage ratio exceed 100%; at December 31, 2021, that ratio was 187%. The Company has a comprehensive contingency liquidity funding plan and conducts a quarterly liquidity stress test, the results of which are reported to the risk committee of the Board of Directors.

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As a holding company, BankUnited, Inc. is a corporation separate and apart from its banking subsidiary, and therefore, provides for its own liquidity. BankUnited, Inc.’s main sources of funds include management fees and dividends from the Bank, access to capital markets and its own securities portfolio. There are regulatory limitations that may affect the ability of the Bank to pay dividends to BankUnited, Inc. Management believes that such limitations will not impact our ability to meet our ongoing near-term cash obligations.

The following table presents the Company's material cash requirements for the following twelve months as of December 31, 2021 (in thousands):

(1)Includes interest.to be paid on the outstanding contractual obligation.

At December 31, 2021, the Company had $3.6 billion in term deposits with a contractual maturity of twelve months or less. The majority of term deposits are expected to roll over into new instruments; this amount therefore does not represent future anticipated cash requirements. Additionally, as discussed in Note 15 to the consolidated financial statements, the Bank had $497 million in outstanding commitments to fund loans and $3.9 billion in unfunded commitments under existing lines of credit at December 31, 2021. Many of these commitments are expected to expire without being fully funded and, therefore, also do not necessarily represent future cash requirements.

We expect that our liquidity needs and cash requirements will continue to be satisfied over the next twelve months through the sources of funds described above.

Pursuant to the FDIA, the federal banking agencies have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. At December 31, 2021 and 2020, the Company and the Bank had capital levels that exceeded both the regulatory well-capitalized guidelines and all internal capital ratio targets. The Company has elected the option to temporarily delay the effects of CECL on regulatory capital for two years, followed by a three-year transition period. See Note 13 to the consolidated financial statements for more information about the Company's and the Bank's regulatory capital ratios.

We believe we are well positioned, from a capital perspective, to withstand a severe downturn in the economy. We continue to evolve our stress testing framework and adapt it to evolving macro-economic conditions as necessary. The majority of our commercial portfolio is subject to quarterly stress test analysis. On an annual basis, we also run a rigorous stress test of our entire balance sheet and, where applicable, we incorporate considerations for evolving macro-economic themes. The most recent balance sheet wide stress test was performed in mid-2021 for the portfolio as of December 31, 2020 using the 2021 DFAST severely adverse scenario. The results of this stress test projected regulatory capital ratios in excess of all well capitalized thresholds in the severely adverse scenario.

We have an active shelf registration statement on file with the SEC that allows the Company to periodically offer and sell in one or more offerings, individually or in any combination, our common stock, preferred stock and other non-equity securities. The shelf registration provides us with flexibility in issuing capital instruments and enables us to more readily access the capital markets as needed to pursue future growth opportunities and to ensure continued compliance with regulatory capital requirements. Our ability to issue securities pursuant to the shelf registration is subject to market conditions.

Interest Rate Risk

A principal component of the Company’s risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is interest rate risk, including the risk that assets and liabilities with similar re-pricing characteristics may not reprice at the same time or to the same degree. A primary objective of the Company’s asset/liability management activities is to maximize net interest income, while maintaining acceptable levels of interest rate risk. The ALCO is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with these policies. The thresholds established by the ALCO are approved at least annually by the Board of Directors or its Risk Committee.

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