10-K 1 d10k.txt FORM 10-K FOR THE PERIOD ENDED 9/30/2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended September 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File Number 5-43936 BANKUNITED FINANCIAL CORPORATION (Exact name of Registrant as specified in its charter) Florida 65-0377773 (State or other (I.R.S. Employer jurisdiction of Identification Number) incorporation or organization) 255 Alhambra Circle, 33134 Coral Gables, Florida (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (305) 569-2000 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 par value 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No 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 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. [_] The aggregate market value of the Class A Common Stock and Class B Common Stock held by non-affiliates of the Registrant, based upon the average price on December 24, 2001, was $365,727,087*. The Class A Common Stock is the only publicly traded voting security of the Registrant. The shares of the Registrant's common stock outstanding as of December 24, 2001 were as follows:
Number of Class Shares ----- ---------- Class A Common Stock, $.01 par value 24,576,863 Class B Common Stock, $.01 par value 500,194
DOCUMENTS INCORPORATED BY REFERENCE The Registrant's Definitive Proxy Statement for its 2002 Annual Meeting of Stockholders will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K pursuant to General Instruction G(3) of the Form 10-K. Information from such Definitive Proxy Statement will be incorporated by reference into Part III, Items 10, 11, 12 and 13 hereof. -------- * Based on reported beneficial ownership of all directors and executive officers of the Registrant; this determination does not, however, constitute an admission of affiliated status for any of these individual stockholders. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- BANKUNITED FINANCIAL CORPORATION Form 10-K Index
Page ---- PART I Item 1. Business............................................................................. 2 Market Area and Competition.......................................................... 3 Lending Activities................................................................... 4 Asset Quality........................................................................ 11 Investments and Mortgage-Backed Securities........................................... 12 Mortgage Loan Servicing.............................................................. 13 Sources of Funds..................................................................... 14 Activities of Subsidiaries........................................................... 18 Employees............................................................................ 19 Regulation........................................................................... 19 Taxation............................................................................. 25 Item 2. Properties........................................................................... 27 Item 3. Legal Proceedings.................................................................... 27 Item 4. Submission of Matters to a Vote of Security Holders.................................. 27 Item 4A. Executive Officers of the Registrant................................................. 28 PART II Item 5. Market for Registrant's Common Stock and Related Stockholders Matters................ 30 Item 6. Selected Financial Data.............................................................. 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 33 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................... 49 Item 8. Consolidated Financial Statements and Supplementary Data............................. 56 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 98 PART III Item 10. Directors and Executive Officers of BankUnited....................................... 98 Item 11. Executive Compensation............................................................... 98 Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 98 Item 13. Certain Relationships and Related Transactions....................................... 98 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 99
1 FORWARD-LOOKING STATEMENTS When used in this Form 10-K or future filings by BankUnited Financial Corporation ("BankUnited") with the Securities and Exchange Commission, in BankUnited's press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the word or phrases "will likely result," "expect," "will continue," "anticipate," "estimate," "project," " believe" and similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. BankUnited wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including general economic factors and conditions, changes in levels of market interest rates, credit risks of lending activities, competitive and regulatory factors, and expansion strategies could affect BankUnited's financial performance and could cause BankUnited's actual results for future periods to differ materially from those anticipated or projected. BankUnited does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. PART I Item 1. Business Business of BankUnited Financial Corporation General BankUnited, a Florida based corporation, is a full-service financial institution. BankUnited's primary business currently consists of the operations of BankUnited FSB, (the "Bank"), its principal subsidiary. The Bank was founded in 1984 as a savings and loan association. In 1993, the Bank was converted to a federally chartered savings bank and became a wholly-owned subsidiary of BankUnited, pursuant to a plan of reorganization approved by its stockholders. Through the Bank's 36 full-service branches located in south Florida, BankUnited offers various retail and business deposit products, as well as a variety of value-added, fee-based banking services to retail customers and businesses in its market. The Bank also offers residential, consumer and commercial loans. The Bank's revenues consist primarily of interest earned on loans and investments and fees paid for our financial services and products. Our expenses are interest paid on deposits and borrowings and expenses incurred in providing our services and products. At September 30, 2001, BankUnited had assets of $5.2 billion, deposits of $2.7 billion and stockholders' equity of $0.3 billion. Change in Business Focus and New Management In fiscal 1999, we adopted a community banking strategy of expanding our deposit base and fee-generating products, and originating and retaining residential, consumer and commercial loans. By this change, we moved away from our traditional savings and loan model. We hired a new management team with extensive retail and commercial banking experience in our market area to facilitate this change in our business focus. These executives previously managed various operations of Barnett Bank in South Florida. Under our new management team we embarked on a thorough review of our business model as well as the qualifications and effectiveness of our personnel. We changed our strategy and operations to focus on originating residential, consumer and commercial real estate and cashflow-based commercial loans. We also introduced new products and services to meet the needs of both consumer and commercial customers. We now add branch locations in strategic target areas with family-oriented demographics and small to mid-sized businesses. 2 Since the second quarter of fiscal 1999, we have significantly increased loan production, developed enhanced deposit products and recorded stronger earnings. The Bank is offering loans in sectors that we did not previously emphasize and the composition of our residential loan portfolio has shifted as a result of increased loan originations and a decrease in purchased loans. BankUnited currently has thirty-five banking offices in southeast Florida and one in southwest Florida and anticipates opening two to seven additional branch offices in fiscal year 2002. BankUnited continuously re-evaluates existing branch locations to ensure that its markets are optimally served. The Bank is a member of the Federal Home Loan Bank of Atlanta (the "FHLB") and is subject to comprehensive regulation, examination and supervision by the Office of Thrift Supervision (the "OTS") and the Federal Deposit Insurance Corporation (the "FDIC"). Deposits in the Bank are insured by the Savings Association Insurance Fund to the maximum extent permitted by law. Market Area and Competition BankUnited conducts business in Miami-Dade, Broward, Palm Beach and Collier counties ("South Florida") which geographic region, at June 30, 2001, had a total of approximately $94.5 billion in deposits at commercial banks and savings institutions (43.3% of the total of $217.9 billion of deposits in Florida). BankUnited intends to expand its retail and commercial deposit base by providing convenient locations, competitive rates and high-quality personalized service to consumers and businesses in its target markets. We are improving our distribution channel by expanding our retail branch network or acquiring existing financial institutions or their branch offices. BankUnited encounters strong competition in attracting retail and business deposits and loans. BankUnited's most direct competition for deposits historically has been from commercial banks, brokerage houses, other savings associations, and credit unions located in its market area. Recently, BankUnited has also experienced competition from out-of-state organizations that offer premium deposit rates to offset their lack of physical locations in the market area. Many non-bank competitors actively seek a share of deposit business and some brokerage houses compete directly for small business loans. BankUnited also competes in its market area with the branch offices of several regional and super-regional commercial banks and savings associations that are substantially larger and have more extensive operations than BankUnited, including several formerly independent entities, which have recently been acquired by larger institutions headquartered out of state. The consolidation of the financial services industry has created opportunities and challenges for BankUnited. Mergers among institutions have disrupted many customer relationships and created an opening for BankUnited to acquire new customers. Larger institutions, however, have been able to achieve economies of scale in operational processes, offer a broader and more sophisticated product mix, have a reduced cost of capital and offer more extensive electronic banking facilities. BankUnited's goal is to compete for savings and other deposits by offering depositors a higher level of personal service, together with a wide range of deposit products offered at competitive rates. The competition in originating real estate and other loans comes principally from commercial banks, mortgage banking companies and other savings associations. BankUnited competes for loan originations primarily through the interest rates and loan fees that it charges, the types of loans that it offers, and the efficiency and quality of service that it provides. While BankUnited has been, and intends to continue to be, primarily a residential lender, BankUnited has increased its emphasis on commercial real estate, construction, commercial and consumer lending, as discussed more fully below. Factors that affect competition in lending include general and local economic conditions, current interest rates and volatility of the mortgage markets. Management continues to evaluate market needs and products to meet those needs that also allow BankUnited to control profitable growth of its assets and liabilities. As with its deposit products, BankUnited's strategy is to promote a higher level of personal service and to position itself as a community bank offering a full range of financial services. 3 Lending Activities From inception in 1984 through 1998, BankUnited's primary source of earning assets was the purchase of one-to-four family residential mortgage loans in the secondary market. During the last six months of fiscal 1998 and the first six months of fiscal 1999, BankUnited experienced significant prepayment of these loans and as a result BankUnited discontinued purchasing One-Year CMT loans which are adjustable-rate mortgages with an index tied to the weekly average yield on one-year U.S. Treasury securities adjusted to a constant maturity published by the Federal Reserve ("One-Year CMT"), altered its practice of purchasing loans in the secondary market, and turned its focus to producing assets. BankUnited's current lending strategy includes originating residential mortgages and continuing to expand commercial real estate, real estate construction, commercial business, and small business lending, as well as offering consumer loans, such as home equity loans and lines, and automobile loans. The credit approval process generally involves both a credit scoring process and traditional underwriting methodologies. BankUnited's credit approval policies and procedures are updated as necessary to encompass new products and services. Loan Portfolio. BankUnited's loan portfolio primarily consists of mortgage loans secured by one-to-four family residential and commercial real estate. As of September 30, 2001, BankUnited's loan portfolio totaled $3.7 billion, of which $3.2 billion or 85.3% consisted of one-to-four family residential mortgage loans. At the present time, BankUnited's residential real estate loans are primarily "conventional" loans not insured by the Federal Housing Administration (the "FHA") or guaranteed by the Veterans Administration (the "VA"). BankUnited is, however, approved to originate FHA and VA loans. As of September 30, 2001, the remainder of BankUnited's loan portfolio consisted of $158.5 million of commercial real estate loans (4.2% of total loans); $132.4 million of commercial business loans (3.5% of total loans); $148.4 million of construction and land loans (4.0% of total loans); $84.7 million of consumer loans (2.3% of total loans); and $20.6 million of multi-family (five-or-more units) residential real estate loans (0.5 % of total loans). At September 30, 2001, $1.3 billion, or 35.1% of BankUnited's total loan portfolio, consisted of purchased mortgage loans and loan participations, serviced by others. These loans were primarily one-to-four family residential mortgage loans. We expect this percentage to decrease since BankUnited no longer purchases wholesale residential mortgage loans in the secondary market. At September 30, 2001, BankUnited's loan portfolio included $737.8 million of residential mortgage loans to non-resident aliens, which was 19.7% of total loans before net items. See "One-to-Four Family Residential Mortgage Lending" for additional information on BankUnited's loans to non-resident aliens. 4 Set forth below is a table showing BankUnited's loan origination, purchase and sale activity for the periods indicated.
Year End September 30, ------------------------------------ 2001 2000 1999 ----------- ---------- ----------- (Dollars in thousands) Total loans receivable, net, at beginning of period(1)......... $ 3,670,769 $3,302,866 $ 3,042,014 Loans funded: Residential real estate..................................... 934,405 667,466 592,899 Commercial real estate, business and consumer............... 658,755 256,733 130,226 ----------- ---------- ----------- Total loans funded(1).......................................... 1,593,160 924,199 723,125 Loans purchased(2)............................................. -- 5,465 803,329 Loans sold..................................................... (35,116) (10,210) (23,564) Loans securitized.............................................. (200,901) -- -- Principal repayments and amortization of discounts and premiums (1,268,559) (543,292) (1,228,540) Net charge offs................................................ (4,192) (3,720) (1,960) (Increase) decrease in allowance for loan losses, net.......... (2,908) 2,795 (4,019) Transfers to real estate owned, net............................ (2,604) (7,334) (7,519) ----------- ---------- ----------- Total loans receivable, net, at end of period(1)............... $ 3,749,649 $3,670,769 $ 3,302,866 =========== ========== ===========
-------- (1) Includes loans held for sale. (2) Loans purchased are primarily one-to-four family residential real estate loans. The following table sets forth certain information with respect to the composition of BankUnited's loan portfolio, including mortgage loans held for sale, as of the dates indicated.
As of September 30, ----------------------------------------------------------------------------------------------- 2001 2000 1999 1998 -------------------- -------------------- -------------------- -------------------- Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) First and second mortgage loans: One-to-four family residential loans.. $3,198,331 85.3% $3,218,868 87.8% $3,010,427 91.1% $2,788,838 91.6% Multi-family residential loans.............. 20,619 0.5% 70,856 1.9% 30,057 0.9% 24,392 0.8% Commercial real estate.............. 158,451 4.2% 155,569 4.2% 141,090 4.3% 145,819 4.8% Construction......... 114,790 3.1% 38,786 1.1% 15,425 0.5% 7,827 0.3% Land................. 33,620 0.9% 34,489 0.9% 23,659 0.7% 5,410 0.2% ----------------------------------------------------------------------------------------------------------------------- Total first and second mortgage loans.... 3,525,811 94.0% 3,518,568 95.9% 3,220,658 97.5% 2,972,286 97.7% Consumer loans........ 84,698 2.3% 66,480 1.8% 33,878 1.0% 30,401 1.0% Commercial business loans................ 132,438 3.5% 83,023 2.3% 48,173 1.5% 15,550 0.5% ----------------------------------------------------------------------------------------------------------------------- Total loans receivable 3,742,947 99.8% 3,668,071 100.0% 3,302,709 100.0% 3,018,237 99.2% ----------------------------------------------------------------------------------------------------------------------- Deferred loan fees, premium and disc 22,642 0.6% 15,730 0.4% 12,264 0.4% 29,905 1.0% Allowance for loan losses............... (15,940) (0.4)% (13,032) (0.4)% (12,107) (0.4)% (6,128) (0.2)% ----------------------------------------------------------------------------------------------------------------------- Loans receivable, net $3,749,649 100.0% $3,670,769 100.0% $3,302,866 100.0% $3,042,014 100.0% ----------------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------------------
1997 -------------------- Amount Percent(1) ---------- ---------- First and second mortgage loans: One-to-four family residential loans.. $1,565,815 88.6% Multi-family residential loans.............. 32,163 1.8% Commercial real estate.............. 130,197 7.4% Construction......... 7,477 0.4% Land................. 7,997 0.5% ----------------------------------------------- Total first and second mortgage loans.... 1,743,649 98.7% Consumer loans........ 1,748 0.1% Commercial business loans................ 10,890 0.6% ----------------------------------------------- Total loans receivable 1,756,287 99.4% ----------------------------------------------- Deferred loan fees, premium and disc 13,129 0.8% Allowance for loan losses............... (3,693) (0.2)% ----------------------------------------------- Loans receivable, net $1,765,723 100.0% ----------------------------------------------- -----------------------------------------------
-------- (1) Percent is calculated using loans receivable, net in the denominator. 5 Applicable regulations permit BankUnited to engage in various categories of secured and unsecured commercial and consumer lending, in addition to residential real estate financing, subject to limitations on the percentage of total assets attributable to certain categories of loans. An additional limitation imposed by regulation requires that certain types of loans only be made in aggregate amounts that do not exceed specified percentages of the institution's capital. The following table sets forth, as of September 30, 2001, the amount of loans (including mortgage loans held for sale) by category and expected principal repayments. These repayments are based on contractual maturities and historical experience of prepayments.
Outstanding at September 30, 2006- 2008- 2011 and 2001 2002 2003 2004 2005 2007 2010 Thereafter -------------- -------- -------- -------- -------- -------- -------- ---------- (Dollars in thousands) First and second mortgage loans: One-to-four-family residential..... $3,198,331 $582,472 $420,589 $445,910 $284,580 $678,405 $419,015 $367,360 Multi-family residential........... 20,619 5,873 6,920 5,281 1,057 1,488 -- -- Commercial real estate............. 158,451 67,177 34,405 18,167 19,899 18,803 -- -- Construction....................... 114,790 61,248 48,884 4,035 154 284 185 -- Land............................... 33,620 28,184 5,146 89 72 106 23 -- ---------------------------------------------------------------------------------------------------------------------- Total first and second mortgage loans 3,525,811 744,954 515,944 473,482 305,762 699,086 419,223 367,360 ---------------------------------------------------------------------------------------------------------------------- Consumer loans....................... 84,698 19,409 13,127 9,565 7,047 9,978 13,750 11,822 Commercial business loans............ 132,438 93,111 12,358 16,948 8,756 1,142 40 83 ---------------------------------------------------------------------------------------------------------------------- Total loans.......................... $3,742,947 $857,474 $541,429 $499,995 $321,565 $710,206 $433,013 $379,265 ---------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------
6 As of September 30, 2001, approximately $2.2 billion or 59.5% of BankUnited's loans receivable before net items (42.3% of total assets) were secured by properties located in Florida and approximately $0.3 billion or 8.1% of loans receivable before net items (5.8% of total assets) were secured by properties located in California. No other state comprises more than 5.0%. Because of this concentration, regional economic circumstances in those states could affect the level of BankUnited's non-performing loans. The following table sets forth, as of September 30, 2001, the distribution of the amount of BankUnited's loans receivable before net items (including mortgage loans held for sale) by state.
Outstanding at State September 30, 2001 ----- ---------------------- (Dollars in thousands) Florida(l)............................................ $2,172,836 California............................................ 286,126 New York.............................................. 122,027 Colorado.............................................. 75,213 New Jersey............................................ 74,194 Massachusetts......................................... 73,191 Virginia.............................................. 72,074 Texas................................................. 68,939 Maryland.............................................. 61,760 Illinois.............................................. 52,968 Connecticut........................................... 49,417 Arizona............................................... 39,400 North Carolina........................................ 39,309 Michigan.............................................. 38,695 Washington............................................ 38,589 Georgia............................................... 36,733 Pennsylvania.......................................... 32,958 Ohio.................................................. 26,300 Utah.................................................. 22,734 Nevada................................................ 19,796 Oregon................................................ 17,318 Tennessee............................................. 14,020 Minnesota............................................. 13,223 South Carolina........................................ 11,472 Indiana............................................... 8,775 Missouri.............................................. 8,767 District of Columbia.................................. 8,281 New Mexico............................................ 7,642 Kansas................................................ 7,314 Alabama............................................... 7,126 Oklahoma.............................................. 5,389 Idaho................................................. 4,778 Arkansas.............................................. 4,722 Kentucky.............................................. 4,283 Wisconsin............................................. 4,154 Louisiana............................................. 4,136 Iowa.................................................. 3,377 Wyoming............................................... 3,213 New Hampshire......................................... 2,857 Delaware.............................................. 2,477 Hawaii................................................ 2,418 Maine................................................. 1,953 Nebraska.............................................. 1,935 Montana............................................... 1,786 Rhode Island.......................................... 1,586 Mississippi........................................... 1,307 Alaska................................................ 1,266 Vermont............................................... 1,231 Other................................................. 605 Not secured by real estate............................ 182,277 ---------- Total loans........................................... $3,742,947 ==========
-------- (1) Does not include $0.9 million of tax certificates representing liens secured by properties in Florida. 7 One-to-Four Family Residential Mortgage Lending. BankUnited's lending primarily involves originating loans secured by first mortgages on real estate improved with single-family dwellings. During fiscal 1999, BankUnited completely phased-out the practice of purchasing wholesale residential mortgage loans in the secondary market and focused on originating these loans. BankUnited originates one-to-four family residential mortgage loans through its branches and its network of non-affiliated wholesale brokers. During fiscal 2001, approximately 73.4% of BankUnited's one-to-four family residential mortgage loan originations came from customer relationships introduced by brokers. We currently maintain relationships with approximately 200 wholesale brokers located mainly in South Florida. This network allows BankUnited to generate loan volume and cost effectively acquire new account relationships with brokers in our market areas. We can service and cross-sell these loan customers through our branch system. This network also generates residential loans to non-resident aliens secured by homes in Florida. Loan fundings in the wholesale program, together with branch lending, reached $934.4 million, $667.5 million, and $592.9 million for the years ended September 30, 2001, 2000, and 1999, respectively. The Bank services loans that it originates and endeavors to purchase loans servicing-released when available and appropriate. At September 30, 2001, $3.2 billion or 85.3%, of BankUnited's total loan portfolio consisted of one-to-four family residential loans, of which $1.8 billion, or 56.2%, were adjustable-rate mortgage ("ARM") loans and $1.4 billion, or 43.8%, were fixed-rate mortgage loans. BankUnited's first mortgage loans purchased or originated are generally repayable over 15 or 30 years. Residential loans typically remain outstanding for shorter periods than their contractual maturities because borrowers prepay the loans in full upon sale of the mortgaged property or upon refinancing of the original loan. BankUnited's ARMs generally have interest rates that adjust after an initial 1 month, 3 month, or 3, 5 or 7 year fixed-rate term ("hybrid" ARMs) and, to a lesser extent, semi-annually or annually with subsequent interest rate adjustments at a margin over the One-Year CMT or the 12 month moving average of the monthly average yield on U.S. Treasury securities adjusted to a constant maturity of one year published by the Federal Reserve ("MTA's"). Further, a portion of these ARMs provide for initial rates of interest which are significantly below the rates which would prevail were the contractual interest rate index and margin used for repricing applied initially. Such loans are commonly referred to as being in their teaser rate period. These loans adjust to the contractual rate on the first scheduled interest rate adjustment date. The maximum interest rate adjustment of BankUnited's ARMs is generally 1% semi-annually and 6% over the life of the loan, above or below the initial rate on the loan for semi-annual adjustable, or 2% annually and 6% over the life of the loan, above or below the initial rate on the loan for annual adjustable and hybrid ARMs. The maximum interest rate adjustments for Hybrid ARM's, which are tied to the MTA index generally range from none to 2%, periodically, and up to 13.8% over the life of the loan. Applicable regulations permit BankUnited to lend up to 100% of the appraised value of the real property securing a loan ("loan-to-value ratio"). When terms are favorable, BankUnited may purchase or originate single-family mortgage loans, other than wholesale loans, with loan-to-value ratios between 80% and 95%. In most of these cases, BankUnited will, as a matter of policy, require the borrower to obtain private mortgage insurance which insures that portion of the loan exceeding the 80% loan-to-value ratio, thereby reducing the risk to no more than 80% of appraised value. All loans are reviewed by BankUnited's underwriters to ensure that underwriting guidelines are met or that waivers are obtained in situations where mitigating factors exist. For loan originations, upon receipt of a completed loan application from an applicant, BankUnited generally orders a credit report, confirms income, employment and other significant information of the applicant and obtains an appraisal of the property securing the loan. BankUnited obtains the appraisal of the property from an independent third party to determine the adequacy of the collateral, and such appraisal is confirmed by one of the underwriters. BankUnited has adopted written, non-discriminatory underwriting standards for use in the underwriting and review of every loan considered for origination or purchase. These underwriting standards are reviewed and approved annually by BankUnited's Board of Directors. BankUnited's underwriting standards for residential 8 mortgage loans generally conform to standards established by the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation (the "FHLMC"), except that BankUnited's underwriting standards allow it to make loans (i) to non-resident aliens, as discussed below, (ii) exceeding the FNMA or FHLMC loan amount limits, and (iii) in cases where specific characteristics of the loan or borrower may compensate for the lack of conformity with the FNMA or FHLMC criteria. Borrowers are required to obtain casualty insurance and, if applicable, flood insurance in amounts at least equal to the outstanding loan balance or the maximum amount allowed by law. BankUnited also requires that a survey be conducted and title insurance be obtained, insuring the priority of its mortgage lien. BankUnited originates first mortgage loans to non-resident aliens in a manner similar to that described above for other residential loans. At September 30, 2001, approximately $737.8 million, or 19.7%, of the BankUnited's loan portfolio were first mortgage loans to non-resident aliens. The vast majority of these loans are secured by single-family residences located in Florida. Loans to non-resident aliens generally afford BankUnited an opportunity to receive rates of interest higher than those available from other single-family residential loans. Nevertheless, certain aspects of such loans may involve a greater degree of risk than conforming single-family residential mortgage loans. The ability to obtain access to the borrower is more limited for non-resident aliens, as is the ability to attach or verify assets located in foreign countries. BankUnited has attempted to minimize these risks through its underwriting standards for such loans including generally more conservative loan-to-value ratios and qualification based on verifiable assets located in the United States. Commercial Real Estate and Multi-Family Lending. BankUnited's commercial real estate lending division originates or participates in multi-family and commercial real estate loans. BankUnited sells a participating interest in the majority of the larger loans for risk management purposes in the normal course of business. The lending policy limits the Bank's risk generally to $25 million for a single loan and generally no more than $40 million to a single borrower. We believe the rapid consolidation of the south Florida banking market has created, and will continue to create, opportunities to originate commercial real estate loans for multi-family and commercial real estate developments. We have originated numerous development loans, largely by targeting top tier local real estate developers in Miami-Dade, Broward, Palm Beach and Collier Counties, who benefit from our market expertise, localized decision-making and rapid response time. BankUnited's strategy is to promote commercial lending together with private banking, as both areas seek to develop long-term relationships with select businesses, real estate investors, and professionals. At September 30, 2001, BankUnited had $179.1 million of commercial real estate loans and multi-family loans, representing a total of 4.8% of BankUnited's loan portfolio. BankUnited's commercial real estate loan portfolio includes loans secured by apartment buildings, office buildings, industrial/warehouses, retail centers and other properties, which are located in BankUnited's primary market area. Commercial real estate loans generally are originated in amounts up to 75% of the appraised value of the property securing the loan. Because commercial real estate and commercial lending requests are generally more complicated and involve larger dollar amounts, evaluation of such credit requests continues to rely on traditional credit analysis, including income projection, participation by the buyer, breakeven analysis and internal and external collateral evaluations. In determining whether to originate or purchase commercial real estate loans, BankUnited also considers such factors as the financial condition and track record of the borrower, and the debt service coverage of the property. Commercial real estate loans are made at both fixed- and adjustable-interest rates, typically for terms of less than 60 months, but may be up to 15 years. Loans secured by commercial real estate generally involve a greater degree of risk than one-to-four family residential mortgage loans. Commercial real estate loans typically involve large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties usually depends on the successful operation of the real estate project that secures the loans and, thus, may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy, particularly the interest rate environment. 9 Real Estate Construction Lending. BankUnited makes real estate construction loans to individuals for the construction of their residences, as well as to builders and real estate developers for the construction of one-to-four family residences and commercial and multi-family real estate. At September 30, 2001, BankUnited had $114.8 million of construction loans representing a total of 3.1% of BankUnited's loan portfolio. Construction loans to individuals for their private residences are structured to be converted to permanent loans with the Bank at the end of the construction phase. Such residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans. The Bank's residential construction loans typically have terms of up to nine months and have rates higher than permanent residential mortgage loans offered by the Bank. During the construction phase, the borrower pays interest only. Generally, the maximum loan-to-value ratio of an owner occupied single-family construction loan is 90%. The Bank makes construction loans on commercial real estate projects secured by apartments, retail centers, industrial warehouse properties, office buildings, medical facilities or other property. These loans are structured to be converted to permanent loans at the end of the construction phase, which generally runs from 12 to 24 months. These construction loans have rates, that are higher than permanent commercial real estate loans currently offered by the Bank and the terms are generally consistent with those of permanent loans. These loans generally provide for the payment of interest and loan fees from loan proceeds. The loans are underwritten to the same standards as commercial real estate loans described above. Because of the uncertainties inherent in estimating construction costs and the market for the project upon completion, it is often difficult to determine the total loan funds that will be required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of a project. Construction loans to borrowers other than owner-occupants also involve many of the same risks discussed above regarding commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. Land. BankUnited makes land loans to individuals for the purchase of land for their residences, as well as to builders and real estate developers for purchase of land for future commercial development. Generally, the Bank requires for all land loans that they be developed within twelve to eighteen months. As a matter of policy the Bank does not make speculative land loans. At September 30, 2001, BankUnited had $33.6 million of land loans representing a total of 0.9% of BankUnited's loan portfolio. Commercial Business and Small Business Lending. Commercial and small business loans totaled $132.4 million as of September 30, 2001, representing 3.5% of total loans. Commercial business loans are made to companies with annual sales revenue in excess of $10.0 million in BankUnited's market area. Small business loans are made to companies with annual sales revenue less than $10.0 million; the loans do not typically exceed $1.0 million. BankUnited also offers payroll and merchant services through outside vendors, as well as in-house treasury management services. BankUnited makes both secured and unsecured loans, although the majority of these loans are on a secured basis. Accounts receivable, inventory, equipment, and/or general corporate assets of the borrowers, as well as the personal guarantee of the principal, typically secure the loans. The loans typically have fixed- and variable prime-based interest rates and are originated for terms ranging from 1 to 5 years. In its loan underwriting, BankUnited evaluates the value of the collateral securing the loan and assesses the borrower's creditworthiness and ability to repay. Exceptions to credit policy guidelines are discouraged, but may be available depending on all the circumstances. While these loans generally are made for shorter terms and at higher yields than one-to-four-family residential loans, such loans generally involve a higher level of risk than one-to-four-family residential loans because the risk of borrower default is greater and the collateral may be more difficult to liquidate and more likely to decline in value. Consumer Lending. Consumer loans totaled $84.7 million as of September 30, 2001, representing 2.3% of total loans. This portfolio consists primarily of automobile loans and home equity lines of credit. During fiscal 1999, BankUnited ceased its strategy of purchasing indirect paper from auto dealers and shifted its emphasis to primarily home equity lines and consumer loans. BankUnited cross-sells home equity lines of credit and 10 consumer loans through its retail branch network to its growing deposit customer base. The origination and servicing of residential loans presents BankUnited with additional opportunities to expand its lending relationships by establishing home equity lines of credit for these customers. Consumer loans, with the exception of home equity lines of credit, are offered primarily on a fixed-rate, short-term basis. The underwriting standards employed by BankUnited for consumer loans include a determination of the applicant's payment history on other debts, an assessment of the borrower's ability to make payments on the proposed loan and other indebtedness and a review of the value of the security. In addition, BankUnited utilizes an on-line application and credit scoring system to assist in determining an applicant's creditworthiness. BankUnited's consumer loans tend to have higher interest rates and shorter maturities than one-to-four family residential loans because the risk of borrower default is greater and the collateral is more likely to decline in value. BankUnited's home equity lines of credit are originated on owner-occupied, one-to-four family residential properties. These loans are generally limited to aggregate outstanding indebtedness secured by up to 90% of the appraised value of the property. Such lines are underwritten based upon guidelines established by BankUnited in order to evaluate the borrower's ability and willingness to repay the debt. Asset Quality Federal regulations require a savings institution to review its assets on a regular basis and, if appropriate, to classify assets as "substandard," "doubtful," or "loss" depending on the likelihood of loss. General allowances for loan losses are required to be established for assets classified as substandard or doubtful. For assets classified as loss, the institution must either establish specific allowances equal to the amount classified as a loss or charge off such amount. Assets that do not require classification as substandard but that possess credit deficiencies or potential weaknesses deserving management's close attention are required to be designated as "special mention." The deputy director of the appropriate OTS regional office may approve, disapprove or modify any classifications of assets and any allowance for loan losses established. BankUnited's Portfolio Management Committee reviews and classifies BankUnited's assets and reports the results to the Board of Directors monthly. Additionally, under standard banking practices, an institution's asset quality is also measured by the level of non-performing loans in the institution's portfolio and real estate acquired in foreclosure ("REO"). Non-performing loans consist of (i) non-accrual loans; (ii) loans that are more than 90 days contractually past due as to interest or principal but that are well-secured and (iii) loans that have been renegotiated to provide a deferral of interest or principal because of a deterioration in the financial condition of the borrower. BankUnited issues delinquency notices to borrowers when loans are 30 or more days past due, and places these loans on non-accrual status when more than 90 days past due. When a loan is placed on non-accrual status, BankUnited reverses all accrued and uncollected interest and also begins appropriate legal procedures to obtain repayment of the loan or otherwise satisfy the obligation. As of September 30, 2001, BankUnited had $35.2 million in substandard assets of which $31.6 million are classified as non-performing assets. Substandard assets consisted of the following:
As of September 30, 2001 ------------- (Dollars in thousands) One-to-four family residential loans.. $16,810 Multi-family residential.............. 162 Commercial real estate................ 8,540 Commercial business and consumer loans 7,831 REO................................... 1,832 ------- Total Substandard Assets........... $35,175 =======
11 In addition, $1.9 million of commercial business loans and $0.5 million of land loans for which reserves have been established were classified as loss as of September 30, 2001. BankUnited's allowance for loan losses is established and maintained based upon management's evaluation of the risks inherent in BankUnited's loan portfolio including the economic trends and other conditions in specific geographic areas as they relate to the nature of BankUnited's portfolio. BankUnited's one-to four family residential loans and consumer loans are homogeneous in nature and no single loan is individually significant in terms of its size or potential risk of loss. Therefore, management evaluates these loans as a group of loans. Management utilizes historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan administration and resolution, the views of its regulators, and other relevant factors, such as assumptions and projections of current economic and market conditions in order to determine the adequacy of the allowance for loan losses on these loans. For individually impaired commercial real estate loans, an estimated value of the property or collateral securing the loan is determined through an appraisal, where possible. In instances where BankUnited has not taken possession of the property or does not otherwise have access to the premises and therefore cannot obtain an appraisal, a real estate broker's opinion as to the value of the property is obtained based primarily on a drive-by inspection. If the unpaid balance of the loan is greater than the estimated fair value of the property, a reserve is established for the difference between the carrying value and the estimated fair value. Other impaired loans such as non-mortgage commercial loans are evaluated individually as well. For these loans, a determination is made of the value of the collateral, if any, through examination of current financial information. If the unpaid balance of the loan is greater than estimated fair value of the property, a reserve is established for the difference between the carrying value and the estimated fair value. Allowances are also established on all classes of the performing portfolio, for loans other than one-to-four family, and represent loss allowances that have been established to recognize the probable and inherent losses in the loan portfolio. In determining the adequacy of the reserves, management considers changes in the size and composition of the loan portfolio, historical loan loss experience, current economic and market conditions and BankUnited's credit administration and asset management philosophies and procedures. Because of the many factors that can affect recoverability, as discussed more fully in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Asset Quality," the estimated loss on individual loans or groups of loans may not be the same as the actual loss incurred, if any. As a self-correcting mechanism, to reduce the differences between estimated and actual losses, BankUnited's current process evaluates the actual losses that occur on all loans to determine whether refinements are necessary to improve procedures for estimating losses. This evaluation includes examining causes for actual losses and determining whether all of the factors resulting in the losses were considered in the estimation process. If not, the evaluation process is refined to consider those factors. Applied appropriately, this mechanism reduces, but will not eliminate, differences that occur between estimated and actual loan losses due to events and circumstances beyond the control of BankUnited. Investments and Mortgage-Backed Securities BankUnited maintains an investment portfolio consisting primarily of federal agency securities, trust preferred securities and tax certificates. Federal regulations limit the instruments in which BankUnited may invest its funds. BankUnited's current investment policy permits purchases primarily of investments rated in one of the three highest grades by a nationally recognized rating agency. Mortgage-backed securities are primarily acquired for their liquidity, yield, and credit characteristics. Such securities may be used as collateral for borrowing or pledged as collateral for certain deposits, including public funds deposits. Mortgage-backed securities acquired include fixed- and adjustable-rate agency securities (GNMA, FNMA and FHLMC), private issue securities and collateralized mortgage obligations. BankUnited also securitizes residential mortgage loans with FNMA and FHLMC. 12 BankUnited's portfolio also includes tax certificates issued by various counties in the State of Florida. Tax certificates represent tax obligations that are auctioned by county taxing authorities on an annual basis in order to collect delinquent real estate taxes. Although tax certificates have no stated maturity, the certificate holder has the right to collect the delinquent tax amount, plus interest, and can file for a tax deed if the delinquent tax amount is unpaid at the end of two years. Tax certificates have a claim superior to most other liens. If the holder does not file for the deed within seven years, the certificate becomes null and void. BankUnited discontinued purchasing tax certificates in fiscal 1999. Also included in BankUnited's investment portfolio are trust preferred securities issued by affiliates of FDIC-insured financial institutions or their holding companies. Such securities are primarily acquired for their liquidity and yield characteristics. The following table sets forth information regarding BankUnited's investments and mortgage-backed securities as of the dates indicated. Amounts shown are carrying value. For additional information regarding BankUnited's investments and mortgage-backed securities, including the carrying values and approximate market values of such securities, see Notes to Consolidated Financial Statements.
As of September 30 ---------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) Federal agency securities...... $ 55,067 $ 5,341 $ 6,752 Tax certificates............... 876 5,699 14,815 Mortgage-backed securities..... 832,728 342,355 347,224 Other(1)....................... 80,069 17,124 18,307 -------- -------- -------- Total investment securities. $968,740 $370,519 $387,098 ======== ======== ======== Weighted average yield...... 6.53% 6.93% 6.74% ======== ======== ========
-------- (1) Includes $39.9 million, $14.3 million and $14.7 million of trust preferred securities of other issuers as of September 30, 2001, 2000 and 1999 respectively. The following table sets forth information regarding the maturities of BankUnited's investments as of September 30, 2001. Amounts shown are carrying value:
Periods to Maturity from September 30, 2001 As of ------------------------------------------------ September 30, Within 1 Through 5 Through Over 10 Equity 2001 1 Year 5 Years 10 Years Years Securities ------------- ------ --------- --------- -------- ---------- (Dollars in thousands) Federal agency securities. $ 55,067 $ -- $5,066 $ -- $ 50,001 $ -- Tax certificates(1)....... 876 876 -- -- -- -- Mortgage-backed securities 832,728 2,296 159 2,556 827,717 -- Other..................... 80,069 4,990 -- $6,222 64,151 4,706 -------- ------ ------ ------ -------- ------ Total.................. $968,740 $8,162 $5,225 $8,778 $941,869 $4,706 ======== ====== ====== ====== ======== ====== Weighted average yield.... 6.53% 6.51% 6.07% 5.91% 6.57% N/A ======== ====== ====== ====== ======== ======
-------- (1) Maturities are based on contractual maturities. Mortgage Loan Servicing BankUnited's mortgage loans servicing agreements generally provide for loan servicing fees ranging from 0.25% to 0.50% per annum of the declining principal amount of the loans, plus any late charges or other ancillary fees. Loan servicing fees for loans serviced under mortgage-backed securities programs are either subject to 13 negotiation with the sponsoring agency or in certain instances set by the sponsoring agency. Servicing fees for loans sold to private investors are determined by agreement with the investor. Income from servicing is calculated based upon the contractual servicing fee, net of amortization of the carrying value of the mortgage servicing rights. At September 30, 2001, 2000 and 1999 BankUnited serviced mortgage loans for investors with unpaid principal balances of approximately $348.7 million, $343.6 million and $421.8 million, respectively, which are not reflected in the accompanying Consolidated Statements of Financial Condition. BankUnited is subject to certain costs and risks related to servicing delinquent loans. Servicing agreements relating to the mortgage-backed security programs of FNMA and FHLMC require the servicer to advance funds to make scheduled payments of interest, taxes and insurance, and in some instances principal, if such payments have not been received from the borrowers. However, BankUnited recovers substantially all of the advanced funds upon cure of default by the borrower, or through foreclosure proceedings and claims against agencies or companies that have insured or guaranteed the loans. Certain servicing agreements for loans sold directly to other investors require BankUnited to remit funds to the loan purchaser only upon receipt of payments from the borrower and, accordingly, the investor bears the risk of loss. BankUnited, however, is subject to the risk that declines in the market rates of interest for mortgage loans or other economic conditions will result in a revaluation of its servicing assets as borrowers refinance or otherwise prepay higher interest rate loans (see "Item 7a. Quantitative and Qualitative Disclosure about Market Risk"). Sources of Funds BankUnited's primary sources of funds for its investment and lending activities are customer deposits, loan repayments, funds from operations, the issuance of BankUnited Capital stock (including trust preferred securities), Senior Notes and FHLB advances. Deposits. BankUnited offers a full variety of deposit accounts ranging from passbook accounts to certificates of deposit with maturities of up to five years. BankUnited also offers transaction accounts, which include personal and commercial checking accounts, negotiable order of withdrawal ("NOW") accounts, insured money market deposit accounts and the Diamond Program accounts. The Diamond Program is a package account that offers a suite of financial services. The rates paid on deposits are established periodically by management based on BankUnited's need for funds and the rates being offered by BankUnited's competitors with the goal of remaining competitive without offering the highest rates in the market area. Shortly after fiscal year end 2001, the Diamond Program was replaced by the Signature Program, which offers a similar suite of financial services with added value at various levels. During a high interest rate environment when rates are expected to decline, BankUnited has placed emphasis on attracting deposits into passbook accounts, money market accounts, short-term certificates of deposit and other short-term savings alternatives. These short-term deposits are more sensitive to market conditions than long-term fixed-rate certificates and reduce BankUnited's cost of funds. While market-sensitive savings instruments permit BankUnited to reduce its cost of funds during periods of declining interest rates, such savings instruments also increase BankUnited's vulnerability to periods of high interest rates. Conversely, during a low interest rate environment when rates are expected to increase, more emphasis is placed on attracting deposits into long-term, fixed-rate certificates. There are no regulatory interest rate ceilings on BankUnited's accounts (See "Item 7a. Quantitative and Qualitative Disclosure about Market Risk"). 14 The following table sets forth information concerning BankUnited's deposits by account type and the weighted average nominal rates at which interest is paid thereon as of the dates indicated:
As of September 30, ------------------------------------------------- 2001 2000 1999 --------------- --------------- --------------- Amount Rate Amount Rate Amount Rate ---------- ---- ---------- ---- ---------- ---- (Dollars in thousands) Passbook accounts........................ $ 596,534 3.64% $ 324,894 4.86% $ 379,503 4.57% ---------- ---------- ---------- Checking: Non-interest bearing................... 89,726 -- 72,253 -- 50,075 -- NOW accounts........................... 128,576 1.97% 116,032 2.73% 125,617 2.75% Insured money market................... 92,975 3.01% 90,531 4.79% 92,785 4.04% ---------- ---------- ---------- Total transaction accounts............ 311,277 278,816 268,477 ---------- ---------- ---------- Total passbook and checking accounts.. 907,811 603,710 647,980 ---------- ---------- ---------- Certificates: 30-89 day certificates of deposit...... 2,258 3.31% 1,128 3.83% 2,260 4.40% 3-5 month certificates of deposit...... 211,672 4.16% 19,547 5.66% 28,943 4.63% 6-8 month certificates of deposit...... 131,364 4.28% 130,461 6.09% 273,090 4.92% 9-11 month certificates of deposit..... 111,960 5.32% 280,019 6.45% 138,684 5.26% 12-17 month certificates of deposit.... 452,012 5.51% 776,084 6.33% 688,792 5.21% 18-23 month certificates of deposit.... 155,021 6.02% 184,924 6.18% 83,369 5.55% 24-29 month certificates of deposit.... 189,096 5.23% 148,593 5.85% 102,394 5.66% 30-35 month certificates of deposit.... 40,685 5.93% 32,493 6.09% 26,550 5.97% 36-60 month certificates of deposit.... 178,266 5.99% 151,279 6.18% 109,686 6.13% Public Funds........................... 273,000 6.31% 281,300 6.02% 178,050 4.98% ---------- ---------- ---------- Total certificates.................... 1,745,334 2,005,828 1,631,818 ---------- ---------- ---------- Totals............................... $2,653,145 $2,609,538 $2,279,798 ========== ========== ========== Weighted average rates............. 4.60% 5.67% 4.83%
At September 30, 2001, 2000 and 1999, there were overdrafts of approximately $405,000, $606,000 and $551,000, respectively. The following table sets forth information by various categories regarding the amount of BankUnited's certificate accounts (under $100,000) as of September 30, 2001 that mature during the period indicated.
Periods to Maturity from September 30, 2001 ------------------------------------------- As of More September 30, Within 1 1 to 2 2 to 3 than 3 2001 Year Years Years Years ------------- -------- -------- ------- ------- (Dollars in thousands) Certificate accounts 2.00% to 2.99 %..................................... $ 4,305 $ 3,620 $ 632 $ 10 $ 43 3.00% to 3.99%...................................... 125,118 109,515 14,975 515 113 4.00% to 4.99%...................................... 439,932 318,877 103,511 17,217 327 5.00% to 5.99%...................................... 144,189 88,224 30,589 22,415 2,961 6.00% to 6.99%...................................... 309,315 262,558 30,656 9,135 6,966 7.00% to 7.99%...................................... 70,777 58,695 9,892 421 1,769 ---------- -------- -------- ------- ------- Total certificate accounts (under $100,000)..... $1,093,636 $841,489 $190,255 $49,713 $12,179 ========== ======== ======== ======= =======
15 The following table sets forth information by various rate categories regarding the amounts of the BankUnited's jumbo ($100,000 and over) certificate accounts as of September 30, 2001 that mature during the periods indicated.
Periods to Maturity from September 30, 2001 ------------------------------------------- As of More September 30, Within 1 1 to 2 2 to 3 than 3 2001 Year Years Years Years ------------- -------- -------- ------- ------ (Dollars in thousands) Jumbo certificate accounts.......... 2.00% to 2.99%................... $ 1,274 $ 1,074 $ 100 $ 100 $ -- 3.00% to 3.99%................... 53,610 44,796 8,713 -- 101 4.00% to 4.99%................... 164,314 118,281 26,885 19,148 -- 5.00% to 5.99%................... 84,536 31,284 15,630 37,118 504 6.00% to 6.99%................... 198,740 112,637 58,799 24,487 2,817 7.00% to 7.99%................... 149,224 114,252 33,101 610 1,261 -------- -------- -------- ------- ------ Total Jumbo certificate accounts. $651,698 $422,324 $143,228 $81,463 $4,683 ======== ======== ======== ======= ======
Included in the table of jumbo certificate accounts above, are $273.0 million in certificates of deposit issued to the State of Florida, referred to as public funds, which have interest rates ranging from 3.40% to 7.23%. These certificates are collateralized with GNMA, FNMA, and FHLMC mortgage-backed securities with market values of approximately $138.9 million at September 30, 2001. Of BankUnited's total deposits, excluding public funds, at September 30, 2001, 2000 and 1999, 15.9%, 16.8%, and 13.0%, respectively, were certificates of deposit of $100,000 or more issued to the general public. Although jumbo certificates of deposit are generally more rate sensitive than smaller size deposits, management believes that BankUnited will retain many of these deposits. Borrowings. When BankUnited's primary sources of funds are not sufficient to meet deposit outflows, loan originations and other cash requirements, BankUnited may borrow funds from the FHLB of Atlanta and from other sources. The FHLB system acts as an additional source of funding for financial institutions. In addition, BankUnited uses subordinated notes, securities sold under agreements to repurchase and trust preferred securities in order to increase available funds. FHLB borrowings, known as "advances," are made on a secured basis, and the terms and rates charged for FHLB advances vary in response to general economic conditions. As a shareholder of the FHLB of Atlanta, the Bank is authorized to apply for advances from this bank. FHLB of Atlanta offers a wide variety of borrowing plans, each with its own maturity and interest rate. A significant portion of BankUnited's advances were obtained through a convertible advances program that permits the FHLB to convert an advance from a fixed-rate basis to a floating-rate basis at its discretion on a specified "call" date which generally occurs every three months following an initial period ranging from three months to three years. Should the FHLB elect to exercise this option, BankUnited can either accept the converted advance or repay it in full. BankUnited also has advances under the FHLB "knockout" advance program. In general, a knockout advance is structured as a fixed-rate advance that the FHLB may convert to a floating rate indexed to the 3-month LIBOR rate if, at the end of any given three-month period after the non-conversion period, the 3-month LIBOR rate equals or exceeds an agreed upon threshold rate. Should a particular advance be converted by the FHLB, its rate will reset quarterly for the remainder of the term. The FHLB of Atlanta will consider various factors, including an institution's regulatory capital position, net income, quality and composition of assets, lending policies and practices, and level of current borrowings from all sources, in determining the amount of credit to extend to an institution. In addition, an institution that fails to 16 meet the qualified thrift lender test may have restrictions imposed on its ability to obtain FHLB advances. The Bank currently meets the qualified thrift lender test. During the 1997 and 1998 fiscal years, BankUnited issued an aggregate of $227.2 million in Junior Subordinated Deferrable Interest Debentures, which were purchased by its Delaware trust subsidiaries primarily with proceeds from the sale of trust preferred securities. See Notes to Consolidated Financial Statements for a description of the Junior Subordinated Deferrable Interest Debentures and the trust preferred securities. In November 1999, the Board of Directors of BankUnited authorized the purchase from time to time in the open market, or otherwise, of up to 300,000 shares of trust preferred securities issued by BankUnited's trust subsidiaries. As of September 30, 2001, BankUnited had purchased a total of 167,299 shares of trust preferred securities issued by its trust subsidiaries on the open market at a cost of $11.4 million. During November 1998, the Bank established a medium-term note program which permits the issuance, from time to time, of up to a total of $500 million aggregate principal amount of the Senior Notes, with maturities from 9 months to 10 years from the date of issuance. As a condition of issuance, interest, principal and any redemption premium on all offered Senior Notes are supported by an irrevocable standby letter of credit of the FHLB of Atlanta. The Senior Notes provide an additional source of funding, potentially with longer maturities with attractive rates. In February 1999, the Bank issued and sold $200 million of Senior Notes that mature five years from the date of issuance and bear interest at an annual rate of 5.40% payable semiannually. The Bank used the net proceeds from the sale of the notes for general corporate purposes, loan financing, and assisting in the Bank's asset/liability management. The notes are rated "Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard and Poor's Rating Services. Securities sold under agreements to repurchase is another source of borrowed funds which is available to BankUnited. Under this type of borrowing, securities are pledged against borrowed funds and are released when the funds are repaid. BankUnited uses this type of borrowing alternative on a short-term basis maturities are usually within thirty to sixty days from inception. At September 30, 2001, BankUnited held $283.1 million in repurchase agreements, $16.6 million of which matured overnight, $216.5 million of which matured in October and $50.0 million of which matured in November. As of September 30, 2001, BankUnited had $297.9 million in investments and mortgage-backed securities pledged against these agreements. The following tables set forth information as to BankUnited's borrowings as of the dates and for the periods indicated.
At September 30, ---------------------------------------------------------- 2001 2000 1999 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Balance Rate Balance Rate Balance Rate ---------- -------- ---------- -------- ---------- -------- (Dollars in thousands) Period End Balances: FHLB advances(1)................... $1,509,721 5.35% $1,251,426 6.28% $1,096,447 5.46% company obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures of BankUnited(2)...... 203,592 9.50% 212,393 9.53% 218,500 9.53% Senior notes....................... 200,000 5.40% 200,000 5.40% 200,000 5.40% Securities sold under agreements to repurchase(3)................. 283,116 3.61% 9,205 6.42% 31,701 5.34% ---------- ---- ---------- ---- ---------- ---- Total borrowings............... $2,196,429 5.51% $1,673,024 6.47% $1,546,648 6.02% ========== ==== ========== ==== ========== ====
17
For the Year Ended September 30, ---------------------------------------------------------- 2001 2000 1999 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Balance Rate Balance Rate Balance Rate ---------- -------- ---------- -------- ---------- -------- (Dollars in thousands) Average Balances: FHLB advances(1)................... $1,109,337 6.08% $1,008,161 5.88% $ 917,560 5.41% Company obligated mandatorily redeemable trust preferred securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures of BankUnited(2)...... 206,316 9.66% 215,600 9.69% 218,500 9.68% Senior notes....................... 200,000 5.67% 200,000 5.71% 132,055 5.76% Securities sold under agreements to repurchase(3)................. 112,062 4.40% 10,621 8.23% 25,311 5.86% ---------- ---- ---------- ---- ---------- ---- Total borrowings............... $1,627,715 6.37% $1,434,382 6.45% $1,293,426 6.18% ========== ==== ========== ==== ========== ====
-------- (1) The maximum amount of FHLB advances outstanding during the years ended September 30, 2001, 2000 and 1999 was $1.5 billion, $1.3 billion and $1.1 billion, respectively. (2) The maximum amount of trust preferred securities outstanding was $218.5 million during the years ended September 30, 2001, 2000 and 1999. (3) The maximum amount of securities sold under agreements to repurchase at any month-end during the years ended September 30, 2001, 2000 and 1999 was $316.7 million, $30.8 million, and $96.9 million, respectively. Activities of Subsidiaries T&D Properties of South Florida, Inc., a Florida corporation ("T&D"), is a wholly owned operating subsidiary of the Bank that holds tax certificates and holds title to, maintains, manages and supervises the disposition of real property acquired through tax deeds. T&D was established in 1991 for the purpose of insulating the Bank from risk of liability concerning the maintenance, management and disposition of real property. Bay Holdings, Inc., a Florida corporation ("Bay Holdings"), is a wholly owned operating subsidiary of the Bank that holds title to, maintains, manages and supervises the disposition of one-to-four family residential property acquired through foreclosure. Bay Holdings was established in 1994 for the purpose of insulating the Bank from risk of liability concerning maintenance, management and disposition of one-to-four family residential property. BankUnited Capital, BankUnited Capital II and BankUnited Capital III (the "Trusts") are Delaware statutory business trusts wholly owned by BankUnited. BankUnited Capital was formed in 1996, and BankUnited Capital II and BankUnited Capital III were formed in 1997, for the purpose of issuing Trust Preferred Securities and investing the proceeds in Junior Subordinated Deferrable Interest Debentures issued by BankUnited. BUFC Financial Services, Incorporated, a Florida corporation ("BUFC"), is a wholly owned operating subsidiary of BankUnited organized in 1997 for the purpose of selling annuities, insurance and securities products. BUFC sells fixed and variable annuities and mutual funds to customers of the Bank and others. Licensed insurance agents/registered securities representatives under the supervision of a registered broker-dealer conduct the program separate from the business of the Bank. BUFC also sells long-term care insurance products. 18 CRE Properties, Inc., a Florida corporation, is a wholly owned operating subsidiary of the Bank that holds title to, and maintains, manages and supervises the disposition of commercial real estate acquired through foreclosure. CRE Properties, Inc. was established in 1998 for the purpose of insulating the Bank from risk of liability concerning maintenance, management and disposition of commercial real estate. Employees At September 30, 2001, BankUnited had 558 full-time equivalent employees. BankUnited's employees are not represented by a collective bargaining group, and BankUnited considers its relations with its employees to be excellent. BankUnited provides employee benefits customary in the savings industry, which include group medical, dental and life insurance, a 401(k) profit sharing plan and paid vacations. BankUnited also provides incentive compensation plans (including stock bonus and stock option plans) for officers, directors and employees. Regulation General BankUnited is a unitary savings and loan holding company and is subject to OTS regulations, examination, supervision and reporting requirements pursuant to certain provisions of the Home Owners' Loan Act (the "HOLA") and the Federal Deposit Insurance Act (the "FDIA"). As an insured institution and a subsidiary of a savings and loan holding company, the Bank is subject to extensive regulation and examination by the OTS, its primary federal regulator and its deposit accounts are insured by the Federal Deposit Insurance Corporation (the "FDIC") through the Savings Association Insurance Fund (the "SAIF"). Savings and Loan Holding Company Regulations Activities Limitations. Because BankUnited is a unitary savings and loan holding company which was in existence or applied for before May 4, 1999, and the Bank meets the definition of a qualified thrift lender ("QTL"), as discussed below, BankUnited generally has the broadest authority to engage in various types of business activities, including nonfinancial activities. The Gramm-Leach-Bliley Act ("GLB"), which became law in November 1999 prohibits companies that become unitary savings and loan holding companies pursuant to an application filed with the OTS after May 4, 1999 from engaging in nonfinancial activities or affiliating with nonfinancial entities. In addition, a holding company that acquires another institution and maintains it as a separate subsidiary or whose sole subsidiary fails to meet the QTL test will become subject to the activities limitations applicable to multiple savings and loan holding companies. The Director of the OTS has oversight authority for all holding company affiliates, and is authorized under federal law to take enforcement action if there is reasonable cause to believe that the continuation by a savings bank holding company of any particular activity constitutes a serious risk to the financial safety, soundness, or stability of the holding company's subsidiary savings institution. The Director of the OTS may, as necessary, limit the payment of dividends by the savings institution, limit transactions between the savings institution, the holding company and the subsidiaries or affiliates of either or limit any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Transactions with Affiliates. Transactions between the Bank and its affiliates are regulated under the HOLA and OTS regulations, which incorporate Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act and Regulation O adopted by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). An "affiliate" of a savings institution generally includes entities controlling the savings institution and entities under common control with the institution. BankUnited and its subsidiaries, therefore, are affiliates of the Bank under these regulations. 19 The laws and regulations governing affiliate transactions require that covered transactions and certain other transactions with affiliates be on terms and conditions consistent with safe and sound banking practices which are substantially the same, or at least as favorable to the institution or its subsidiary, as those for comparable transactions with non-affiliated parties. These laws and regulations also impose quantitative restrictions on the amount of covered transactions in which an institution may engage and set collateralization requirements on covered transactions. "Covered transactions" generally include loans or extensions of credit to an affiliate, purchases of securities issued by an affiliate, purchases of assets from an affiliate (except as may be exempted by order or regulation), and certain other transactions. In addition, a savings institution is prohibited from extending credit to an affiliate (other than a subsidiary of the institution), unless the affiliate is engaged only in activities that the Federal Reserve Board has determined, by regulation, to be permissible for bank holding companies. Limitations are also imposed on loans and extensions of credit from an institution to its executive officers, directors and principal shareholders and each of their related interests. Acquisitions. The HOLA prohibits a savings bank holding company from directly or indirectly acquiring, without prior OTS approval, control of a savings association or savings association holding company, all or substantially all of the assets of a savings association or savings association holding company (including through an acquisition by merger, consolidation or purchase of assets, of any savings association), or more than 5% of the voting shares of a non-subsidiary savings association or savings association holding company. In determining whether to approve any such transaction, the OTS will consider, among other things, the competitive effects of the transaction, financial and managerial resources, future prospects of the holding company and its bank or thrift subsidiaries following the transaction, and compliance records of such subsidiaries with the Community Reinvestment Act. Annual Reporting and Examinations. Under HOLA and OTS regulations, a savings bank holding company must file periodic reports with the OTS and comply with OTS record keeping requirements. BankUnited is also subject to holding company examination by the OTS. Savings Institution Regulations Federal savings institutions such as the Bank are chartered by the OTS, are members of the FHLB system, and have their deposits insured by the SAIF. They are subject to comprehensive OTS and FDIC regulations that are intended primarily to protect depositors. Federal laws empower federal savings institutions like the Bank to accept deposits and pay interest on them, make loans on residential and other real estate, make limited amounts of consumer loans and commercial loans, invest in corporate obligations, government debt securities and other securities, offer various banking services to their customers, and engage in, directly or through subsidiaries, activities such as trust operations and real estate investment, subject to applicable requirements for notice to, or approval by, the institution's primary federal regulator. SAIF-insured, federally chartered institutions may not enter into certain transactions unless applicable regulatory tests are met or they obtain necessary approvals. They are also required to file reports with the OTS describing their activities and financial condition, and periodic examinations by the OTS test compliance by institutions with various regulatory requirements, some of which are described below. Insurance of Accounts. The Bank's deposits are insured by the SAIF up to $100,000 for each insured account holder, subject to applicable terms and conditions, the maximum amount currently permitted by law. As an insurer, the FDIC issues regulations and conducts examinations of its insured members. SAIF insurance of deposits may be terminated by the FDIC, after notice and hearing, upon a finding that an institution has engaged in unsafe and unsound practices, cannot continue operations because it is in an unsafe and unsound condition, or has violated any applicable law, regulation, rule, order or condition imposed by the OTS or FDIC. When conditions warrant, the FDIC may impose less severe sanctions as an alternative to termination of insurance. The Bank's management does not know of any present condition pursuant to which the FDIC would seek to impose sanctions on the Bank or terminate insurance of its deposits. 20 The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation. Under the system, institutions which the FDIC considers well capitalized and financially sound pay the lowest premium, while institutions that are less than adequately capitalized and of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. The FDIC is authorized to increase or decrease assessment rates on a semiannual basis, up to a maximum increase or decrease of 5 basis points after aggregating all increases and decreases, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as is established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. In September 1996, Congress enacted legislation to eliminate any competitive disadvantage between the Bank Insurance Fund (the "BIF") and SAIF member institutions, from SAIF deposit insurance premiums, which were generally higher than BIF deposit insurance premiums. The legislation provided for a one-time assessment to be imposed on all deposits assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the SAIF. As a result of the special assessment, the Bank's deposit insurance premiums were initially reduced to 6.7 basis points, and as of 1996 the SAIF deposits assessment was reduced to zero. These premiums are subject to change in future periods. In addition to deposit insurance assessments, the FDIC is authorized to collect assessments against insured deposits to be paid to the Finance Corporation ("FICO") to service FICO debt incurred in the 1980s. The FICO assessment rate is adjusted quarterly. Before 2000, the FICO assessment rate for SAIF-insured deposits was five times higher than the rate for BIF-insured deposits. Beginning in 2000, SAIF- and BIF-insured deposits are being assessed at the same rate by FICO. During fiscal 2001, the annualized rate was $0.02 cents per $100 of insured deposits. Regulatory Capital Requirements. OTS regulations incorporate a risk-based capital requirement that is designed to be no less stringent than the capital standard applicable to national banks. It is modeled in many respects on, but not identical to, the risk-based capital requirements adopted by the FDIC. Associations whose exposure to interest-rate risk is deemed to be above normal will be required to deduct a portion of such exposure in calculating their risk-based capital. The OTS may establish, on a case-by-case basis, individual minimum capital requirements for a savings association that vary from the requirements that otherwise would apply under the OTS capital regulations. The OTS has not established such individual minimum capital requirements for the Bank, and, as of September 30, 2001, the Bank exceeded all applicable regulatory requirements. See Notes to Consolidated Financial Statements. Under current law and regulations, there are no capital requirements directly applicable to BankUnited. In addition, the OTS and other federal banking regulators have established capital levels for institutions to implement the "prompt corrective action" provisions of the FDICIA. Based on these capital levels, insured institutions will be categorized as well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized. If an institution becomes categorized as "undercapitalized" under the definitions established by the "prompt corrective action" provisions of the FDICIA, it will become subject to certain restrictions. The FDICIA requires federal banking regulators, including the OTS, to take prompt corrective action to solve the problems of those institutions that fail to satisfy their applicable minimum capital requirements. The level of regulatory scrutiny and restrictions imposed become increasingly severe as an institution's capital level falls. An institution's category depends upon where its capital levels are in relation to relevant capital measures, which include a risk-based capital measure, a leverage ratio capital measure, and certain other factors. A "well capitalized" institution must have a ratio of total capital to risk-weighted assets (a "total risk-based capital ratio") 21 of 10% or more, a ratio of core capital to risk-weighted assets ("Tier I risk-based capital ratio") of 6% or more and a ratio of core capital to adjusted total assets ("Tier 1 leverage ratio") of 5% or more, and may not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the OTS. An institution will be categorized as "adequately capitalized" if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more, and either a leverage ratio of 4% or more or a leverage ratio of 3% or more and a CAMEL rating of 1. Any institution that is neither well capitalized nor adequately capitalized will be considered undercapitalized. The Bank is a well capitalized institution under the definitions as adopted. In the case of an institution that is categorized as "undercapitalized," or worse, such an institution must submit a capital restoration plan to the OTS. An undercapitalized depository institution generally will not be able to acquire other banks or thrifts, establish additional branches, pay dividends, or engage in any new lines of business unless consistent with its capital plan. A "significantly undercapitalized" institution will be subject to additional restrictions on its affiliate transactions, the interest rates paid by the institution on its deposits, the institution's asset growth, compensation of senior executive officers, and activities deemed to pose excessive risk to the institution. Regulators may also order a significantly undercapitalized institution to hold elections for new directors, terminate any director or senior executive officer employed for more than 180 days prior to the time the institution became significantly undercapitalized, or hire qualified senior executive officers approved by the regulators. The FDICIA provides that an institution that is "critically undercapitalized" must be placed in conservatorship or receivership within 90 days of becoming categorized as such unless the institution's regulator and the FDIC jointly determine that some other course of action would result in a lower resolution cost to the institution's insurance fund. Thereafter, the institution's regulator must periodically reassess its determination to permit a particular critically undercapitalized institution to continue to operate. A conservator or receiver must be appointed for the institution at the end of an approximately one-year period following the institution's initial classification as critically undercapitalized unless a number of stringent conditions are met, including a determination by the regulator and the FDIC that the institution has positive net worth and a certification by such agencies that the institution is viable and not expected to fail. Federal law requires that the federal banking agencies risk-based capital guidelines take into account various factors including interest rate risk, concentration of credit risk, risks associated with nontraditional activities, and the actual performance and expected risk of loss of multi-family mortgages. In 1994, the federal banking agencies jointly revised their capital standards to specify that concentration of credit and nontraditional activities are among the factors that the agencies will consider in evaluating capital adequacy. In that year, the OTS and FDIC amended their risk-based capital standards with respect to the risk weighting of loans made to finance the purchase or construction of multi-family residences. The OTS adopted final regulations adding an interest rate risk component to the risk-based capital requirements for savings associations such as the Bank, although implementation of the regulation has been delayed. Management believes that the effect of including such an interest rate risk component in the calculation of risk-adjusted capital will not cause the Bank to cease to be well-capitalized. The final rules establishing the capital levels for purposes of the FDICIA also indicate that the federal regulators intend to lower or eliminate the core capital requirement from the definitions of well capitalized, adequately capitalized and undercapitalized after the requirement to deduct an IRR component from total capital becomes effective. This action has not yet been taken. See "Regulatory Capital Requirements" above. In addition to the foregoing prompt corrective action provisions, the FDICIA also sets forth requirements that the federal banking agencies, including the OTS, review their capital standards every two years to ensure that their standards require sufficient capital to facilitate prompt corrective action and to minimize loss to the SAIF and the BIF. 22 Restrictions on Dividends and Other Capital Distributions. OTS Regulations limit the ability of savings institutions to pay dividends and make other capital distributions. Savings institutions, such as the Bank, which are subsidiaries of a savings and loan holding company, must provide the OTS with at least 30 days written notice before declaring any dividend or obtaining board approval of any capital distribution. All such capital distributions are also subject to the OTS' right to object on safety and soundness grounds. In addition, a savings institution must obtain prior approval from the OTS if (i) it fails to meet certain regulatory conditions which qualify it for expedited treatment under OTS regulations, (ii) after giving effect to the proposed distribution, the association's capital distributions in a calendar year would exceed its year-to-date net income plus retained net income for the preceding two years, (iii) the association would not be at least adequately capitalized following the distribution, or (iv) the distribution would violate a statute, regulation, regulatory agreement or a regulatory condition to which the association is subject. The OTS may disapprove a notice or deny an application, in whole or in part, if the association would be undercapitalized or worse after the distribution, if the OTS determines that the distribution raises safety or soundness concerns, or if the distribution violates any applicable statute, regulation, agreement between the OTS and the association or condition imposed by an OTS-approved application or notice. Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank ("FHLB") system, which consists of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board. The FHLBs provide a central credit facility for member institutions, The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations as of the close of each calendar year, or 5% of its borrowings from the FHLB of Atlanta (including advances and letters of credit issued by the FHLB on the Bank's behalf). The Bank is currently in compliance with this requirement, with a $75.5 million investment in stock of the FHLB of Atlanta as of September 30, 2001. The FHLB of Atlanta makes advances to members in accordance with policies and procedures periodically established by the Federal Housing Finance Board and the Board of Directors of the FHLB of Atlanta. Currently outstanding advances from the FHLB of Atlanta are required to be secured by a member's shares of stock in the FHLB of Atlanta and by certain types of mortgages and other assets. Eligible collateral is further limited in certain respects. Interest rates charged for advances vary depending on maturity, the cost of funds to the FHLB of Atlanta and the purpose of the borrowing. As of September 30, 2001, advances from the FHLB of Atlanta totaled $1.5 billion. The Bank is also required to maintain cash reserve requirements at the Federal Home Loan Bank. At September 30, 2001 this cash reserve requirement was $20.8 million. Qualified Thrift Lender Test. The qualified thrift lender test measures the proportion of a savings institution's assets invested in loans or securities supporting residential construction and home ownership. A savings institution qualifies as a QTL if its qualified thrift investments equal or exceed 65% of its portfolio assets on a monthly average basis in nine of every 12 months. Qualified thrift investments, include (i) certain housing-related loans and investments, (ii) certain obligations of the FSLIC, the FDIC, the FSLIC Resolution Fund and the RTC, (iii) loans to purchase or construct churches, schools, nursing homes and hospitals (subject to certain limitations), (iv) consumer loans (subject to certain limitations), (v) shares of stock issued by any FHLB, and (vi) shares of stock issued by the FHLMC or the FNMA (subject to certain limitations). Portfolio assets consist of total assets minus (a) goodwill and other intangible assets, (b) the value of properties used by the savings institution to conduct its business, and (c) certain liquid assets in an amount not exceeding 20% of total assets. Any savings institution that fails to become or remain a QTL must either convert to a national bank charter or be subject to restrictions specified in the OTS regulations. Any such savings institution that does not become a bank will be: (i) prohibited from making any new investment or engaging in activities that would not be 23 permissible for national banks; (ii) prohibited from establishing any new branch office in a location that would not be permissible for a national bank in the institution's home state; (iii) ineligible to obtain new advances from any FHLB; and (iv) subject to limitations on the payment of dividends comparable to the statutory and regulatory dividend restrictions applicable to national banks. Also, beginning three years after the date on which the savings association ceases to be a QTL, the savings association will be prohibited from retaining any investment or engaging in any activity not permissible for a national bank and would be required to repay any outstanding advances to any FHLB. A savings institution may re-qualify as a QTL if it thereafter complies with the QTL test. At September 30, 2001, the Bank exceeded the QTL requirements. General Lending Regulations The Bank's lending activities are subject to federal regulation, including the Equal Credit Opportunity Act, the Truth in Lending Act, the Real Estate Settlement Procedures Act and the Community Reinvestment Act. Because the Bank is a federally-chartered savings bank, the Bank generally may extend credit as authorized under federal law, without regard to state laws purporting to regulate or affect its credit activities, other than state contract and commercial laws, real property laws, homestead laws, tort laws, criminal laws and other state laws designated by the OTS. Community Reinvestment Act. Under the Community Reinvestment Act (the "CRA"), as implemented by OTS regulations, a savings institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a financial institution, to assess the institution's record of meeting the credit needs of its community and to take such records into account in its evaluation of certain applications. Under regulations adopted by the OTS with the other federal banking agencies, there are three tests for the evaluation of a savings institution's performance. The lending test evaluates a savings institution's record of helping to meet the credit needs of its assessment area through its lending activities, by considering an institution's home mortgage, small business, small farm, and community development lending. The investment test evaluates a savings institution's record of helping to meet the needs of its assessment area through qualified investments that benefit its assessment area or a broader statewide or regional area including the assessment area, and the service test evaluates a savings institution by analyzing both the availability and the effectiveness of the institution's systems for delivering retail banking services and the extent and innovativeness of its community development services. Based upon the savings institution's performance under the lending, investment and service tests, and any other tests which may be applicable to the institution under the regulations, the OTS assigns the savings institution one of four ratings prescribed under the regulations. The four possible ratings of meeting community credit needs are outstanding, satisfactory, needs to improve, and substantial noncompliance. Based upon the most recent OTS examination performed in fiscal 2000, the Bank's CRA rating is satisfactory. Loans-to-one-borrower Limitations. The loans-to-one borrower limits applicable to national banks also apply to savings institutions. Generally, under current limits, loans and extensions of credit outstanding at one time to a single borrower and not fully secured may not exceed 15% of the savings institution's unimpaired capital and unimpaired surplus. Loans and extensions of credit fully secured by certain readily marketable collateral may represent an additional 10% of unimpaired capital and unimpaired surplus. As of September 30, 2001, the Bank was in compliance with the loans-to-one-borrower limitations. Federal Reserve System The Bank is subject to certain regulations promulgated by the Federal Reserve Board. Pursuant to such regulations, savings institutions are required to maintain reserves against their transaction accounts (primarily 24 interest-bearing and noninterest-bearing checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. In addition, Federal Reserve Board regulations limit the periods within which depository institutions must provide availability for and pay interest on deposits to transaction accounts. Depository institutions are required to disclose their check-hold policies and any changes to those policies in writing to customers. The Bank is in compliance with all such Federal Reserve Board regulations. Numerous other regulations promulgated by the Federal Reserve Board affect the business operations of the Bank. These include regulations relating to equal credit opportunity, electronic fund transfers, collection of checks, truth in lending, truth in savings and availability of funds. Other Regulation Regulation of Non-Banking Affiliates. BUFC Financial Services, Incorporated ("BUFC"), an insurance agency subsidiary of BankUnited doing business in the State of Florida, sells fixed and variable annuities, mutual funds and long-term care insurance products. BUFC's activities must comply with Florida insurance laws and regulations, and BUFC employees are licensed insurance agents and subject to continuing education, licensing and oversight by the Florida Department of Insurance. In addition, BUFC's employees are also registered representatives of Essex National Securities, Inc., a broker-dealer regulated by the NASD. BUFC's activities are further regulated by regulations and guidelines jointly adopted by the federal banking agencies, which specify requirements for the sale of non-deposit insurance products, including, without limitation, requirements pertaining to disclosures, physical separation of activities from banking activities and due diligence and oversight functions. Legislative and Regulatory Developments Pursuant to the GLB, the federal banking agencies have jointly adopted a privacy regulation with which savings institutions must comply on and after July 1, 2001. Subject to certain exceptions, the privacy regulation requires each financial institution to give a consumer notice of its privacy policies and practices before disclosing nonpublic personal information about the consumer to any non-affiliated third party, to give each customer notice of its privacy policies and procedures at the time a customer relationship is established and annually thereafter, and to give each consumer an opt out notice and reasonable opportunity for the customer to opt out of having his nonpublic personal information disclosed by the financial institution to non-affiliated third parties. The Bank has worked diligently to make all necessary and appropriate preparations to comply with the new privacy requirements. Taxation BankUnited reports its income and expenses under an accrual method of accounting and, prior to 1994, filed federal income tax returns on a calendar year basis. Since 1994, BankUnited and its subsidiaries have elected to file consolidated tax returns on the basis of a fiscal year ending September 30. The Tax Reform Act of 1986 (the "1986 Act"), which was signed into law on October 22, 1986, revised the income tax laws applicable to corporations in general and to savings institutions, such as the Bank, in particular. Except as specifically noted, the discussion below relates to taxable years beginning after December 31, 1986. BankUnited has not been notified of a proposed examination of its federal income tax returns by the Internal Revenue Service (the "IRS"). Bad Debt Reserves Deductions. Prior to legislation enacted in August 1996, the Internal Revenue Code (the "Code") permitted savings institutions, such as the Bank, to establish a reserve for bad debts and to make annual additions thereto, which additions might, within specified formula limits, be deducted in determining taxable income. The bad debt reserve deduction was generally based upon a savings institution's actual loss 25 experience (the "experience method"). In addition, provided that certain definitional tests relating to the composition of assets and sources of income were met, a savings institution was permitted to elect annually to compute the allowable addition to its bad debt reserve for losses on qualifying real property loans (generally loans secured by improved real estate) by reference to a percentage of its taxable income (the "percentage of taxable income method"). Under the percentage of taxable income method, a savings institution was permitted, in general, to claim a deduction for additions to bad debt reserves equal to 8% of the savings institution's taxable income. Taxable income for this purpose was defined as taxable income before the bad debt deduction, but without regard to any deduction allowable for any addition to the reserve for bad debt. Certain adjustments were also required for gains on the sale of corporate stock and tax exempt obligations. For this purpose, the taxable income of a savings institution for a taxable year was calculated after utilization of net operating loss carry forwards. In August of 1996, legislation was enacted that repealed the reserve method of accounting (including the percentage of taxable income method) used by many thrifts, including the Bank, to calculate their bad debt deduction for federal income tax purposes. The legislation required thrifts to account for bad debts for federal income tax purposes on the same basis as commercial banks for tax years beginning after December 31, 1995. As such, thrifts with assets whose tax basis exceeds $500,000,000 were required to adopt the specific charge off method in computing its bad debt deduction. As such, the Bank has used the specific charge off method in computing its bad debt deduction for tax years beginning after December 31, 1995. As a result of this change in accounting method, the Bank must recapture the excess of its September 30, 1996 bad debt reserve over the reserve in existence on December 31, 1987. This recapture will occur over a six-year period, commencing with the first taxable year beginning after December 31, 1997, provided the institution meets certain residential lending requirements. This legislation has not had a material impact on BankUnited or the Bank. Distributions. Under the Code, the Bank's December 31, 1987 reserve must be recaptured into taxable income as a result of certain non-dividend distributions. A distribution is a non-dividend distribution to the extent that, for federal income tax purposes, (i) it is in redemption of shares, (ii) it is pursuant to a liquidation of the institution, or (iii) in the case of a current distribution it, together with all other such distributions during the taxable year, exceeds the Bank's current and post-1951 accumulated earnings and profits. The amount charged against the Bank's bad debt reserves in respect of a distribution will be includable in its gross income and will equal the amount of such distribution, increased by the amount of federal income tax resulting from such inclusion. Alternative Minimum Tax In addition to the income tax, corporations are generally subject to an alternative minimum tax at a rate of 20%. The alternative minimum tax is imposed on the sum of regular taxable income (with certain adjustments) and tax preference items, less any available exemption ("AMTI"). The alternative minimum tax is imposed to the extent that it exceeds a corporation's regular income tax liability. The items of tax preference that constitute AMTI for 1990 and thereafter include 75% of the difference between the taxpayer's adjusted current earnings and AMTI (determined without regard to this preference and prior to any deduction for net operating loss carry forwards or carry backs). In addition, net operating loss carry forwards cannot offset more than 90% of AMTI. Interest Allocable to Tax-exempt Obligations The 1986 Act eliminates for financial institutions the deduction for interest expense allocable to the purchase or carrying of most tax-exempt obligations for taxable years ending after December 31, 1986, with respect to tax-exempt obligations acquired after August 7, 1986 excluding certain financial institution-qualified issues. For all qualified issues and for non-qualified tax-exempt obligations acquired after 1982 and before August 7, 1986, 20% of allocable interest expense deductions will be disallowed. 26 State Taxation The State of Florida imposes a corporate income tax on BankUnited, at a rate of 5.5% of BankUnited's taxable income as determined for Florida income tax purposes. Taxable income for this purpose is based on federal taxable income with certain adjustments. Foreclosures Tax legislation enacted in August of 1996 significantly changed the tax treatment with respect to foreclosures for taxable years beginning after December 31, 1995. Prior to this legislation, a thrift's acquisition of property by means of foreclosure was not treated as a taxable event for federal tax purposes. No gain or loss was recognized at the time of foreclosure and no portion of the debt could be treated as worthless. In addition, prior to the August 1996 legislation, thrift institutions were allowed a tax benefit for write-downs of foreclosed property to fair market value. Finally, for thrifts that computed its bad debt deduction under the experience method, gains or losses realized from the sale of foreclosed property were not taken into account in computing taxable income, but were credited or charged to the thrift's bad debt reserve. As a result of enacted tax legislation, thrift foreclosures are treated as a taxable event for federal tax purposes for property acquired after December 31, 1995. As such, a thrift may recognize gain, loss or a bad debt deduction at the time of foreclosure depending on the method by which the property was acquired. In addition, write downs of foreclosed property to fair market value no longer give rise to a tax benefit. Finally, gains and losses realized upon the sale of foreclosed property are included in taxable income of the thrift. Item 2. Properties Currently BankUnited operates 35 full-service banking offices located in South Florida and one in West Florida, of which 33 are leased and 3 are owned. BankUnited's banking offices have square footage ranging from 970 square feet to 5,000 square feet with lease terms ranging from the year 2002 to the year 2010. BankUnited's executive and administrative offices are located at 255 Alhambra Circle, Coral Gables, Florida 33134 where, as of September 30, 2001, BankUnited leased approximately 18,000 square feet of space pursuant to a lease agreement that begins to terminate with respect to portions of the premises in 2004. BankUnited also leases approximately 40,000 square feet of space for its operation center, which is located at 7815 NW 148 Street, Miami Lakes, Florida 33016, pursuant to a lease agreement that begins to terminate with respect to portions of the premises in 2002. BankUnited has multiple options to renew leases at all banking offices and other locations. BankUnited owns an office condominium, which is currently not leased. For further information regarding BankUnited's lease obligations, see Notes to Consolidated Financial Statements. Item 3. Legal Proceedings. BankUnited and its subsidiaries, from time to time, are involved as plaintiff or defendant in various legal actions arising in the normal course of their businesses. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management that no proceedings exist, either individually or in the aggregate, which, if determined adversely to BankUnited and its subsidiaries, would have a material effect on BankUnited's consolidated financial condition, results of operations or cash flows. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of BankUnited's security holders during the fourth quarter of the fiscal year ended September 30, 2001. 27 Item 4a. Executive Officers of the Registrant. The following table sets forth information concerning the executive officers and directors of BankUnited and the Bank.
Name Age Positions with Company and Business Experience ---- --- ---------------------------------------------- Alfred R. Camner....... 57 Director, Chairman of the Board and Chief Executive Officer (1993 to present), President (1993 to 1998, April 2001 to present) and Chief Operating Officer (April 2001 to present) of BankUnited; Director, Chairman of the Board and Chief Executive Officer (1984 to present) and President (1984 to 1993, 1994 to 1998) of the Bank; Senior Managing Director (1996 to present) of Camner, Lipsitz and Poller, Professional Association, attorneys-at-law; General Counsel to CSF Holdings, Inc. and its subsidiary, Citizens Federal Bank (1973 to 1996); Director, Executive Committee member of Loan America Financial Corporation (1985 to 1994). Mehdi Ghomeshi......... 45 Executive Vice Chairman of the Board (2001 to present) and Director, President and Chief Operating Officer of BankUnited and the Bank (December 1998 to 2001); Market President of NationsBank, South Florida (January 1998 to December 1998); President and Chief Operating Officer of Barnett Bank, South Florida (1996 to 1998); Director of Special Assets and Risk Management, Barnett Banks, Inc. (1995 to 1996); Executive Vice President, Commercial Real Estate, Barnett Bank of South Florida (1993 to 1995). Lawrence H. Blum....... 58 Director and Vice Chairman of the Board of BankUnited (1993 to present) and the Bank (1984 to present); Managing Director (1992 to present) and partner (1974 to present) of Rachlin, Cohen & Holtz, certified public accountants. Marc D. Jacobson....... 59 Director (1993 to present) and Secretary (1993 to 1997) of BankUnited; Director (1984 to present) and Secretary (1985 to 1996) of the Bank; Vice President of Head-Beckham Ameri Insurance Agency, Inc., and its predecessor, Head-Beckham Insurance Agency, Inc. (1990 to present). Allen M. Bernkrant..... 71 Director of BankUnited (1993 to present) and the Bank (1985 to present); Private investor in Miami, Florida (1990 to present). Marc Lipsitz........... 60 Director (1996 to present) and Secretary (1997 to present) of BankUnited; Managing Director (1996 to present) of Camner, Lipsitz and Poller, Professional Association, attorneys-at-law and its predecessor, Stuzin and Camner, Professional Association, attorneys-at-law; General Counsel of Jefferson National Bank (1993 to 1996); Partner, Stroock, Stroock & Lavan, attorneys-at-law (1991 to 1993). Neil H. Messinger, M.D. 63 Director of BankUnited and the Bank (1996 to present); Radiologist; President (1986 to present), Radiological Associates, Professional Association; Chairman (1986 to present) of Imaging Services of Baptist Hospital.
28 Executive Officers of BankUnited And/or the Bank Who Are Not Directors:
Name Age Positions with Company and Business Experience ---- --- ---------------------------------------------- Lisa Barrera......... 38 Senior Executive Vice President (April 2001 to present), Executive Vice President Production Manager (November 2000 to April 2001), Executive Vice President Mortgage Operations (March 2000 to November 2000), Senior Vice President Mortgage Operations (February 1999 to March 2000), of the Bank. Vice President/Regional Sales and Service Center Manager (1994 to 1999) of NationsBank Mortgage Corporation, formerly Barnett Mortgage Corporation. Senior Vice President/Corporate Operations Manager (1989 to 1994) of Loan America Financial Corporation. Iliana Castillo-Frick 46 Senior Executive Vice President (April 2001 to present) and Executive Vice President, Human Resources Director (April 2000 to April 2001) of the Bank. Vice President/Staffing Manager (February 1998 to March 2000); Vice President /Human Resources Manager (October 1995 to January 1998); Assistant Vice President/Senior Human Resources Generalist (April 1994 to September 1995), of Bank of America formerly Barnett Banks, Inc. Michael J. Clutter... 54 Senior Executive Vice President (April 2001 to present), Executive Vice President, Credit Policy, of the Bank (March 1999 to April 2001); Senior Vice President-Credit Administration (1984 to 1999) of Barnett Bank, Broward County and its successor by merger, NationsBank, Inc. Janette L. Davis..... 46 Senior Executive Vice President (April 2001 to present), Executive Vice President, Retail Banking, of the Bank (February 1999 to April 2001); Senior Vice President/Region Executive (1998 to 1999), Group Senior Vice President, Market Executive (1996 to 1998) and Vice President, Office Manager (1992 to 1996) of Barnett Bank, South Florida and its successor by merger, NationsBank, Inc. Humberto Lopez....... 42 Senior Executive Vice President (April 2001 to present), Executive Vice President, Finance, of the Bank (January 1999 to April 2001) and Chief Financial Officer of BankUnited and the Bank (December 1999 to present); Director (1998 to 1999), PricewaterhouseCoopers LLP; Chief Financial Officer (1997 to 1998) of Barnett Bank, South Florida and its successor by merger, NationsBank, Inc., Regional Finance Manager (1996 to 1997) and Regional Controller (1993 to 1996) of Barnett Banks, Inc. and its successor by merger, NationsBank, Inc. Vincent F. Post, Jr.. 48 Senior Executive Vice President (April 2001 to present) Executive Vice President, Commercial Real Estate Banking, of the Bank (1998 to April 2001); Executive Vice President (1996 to 1998) and Group Senior Vice President (1994 to 1996) of Barnett Bank, South Florida and its successor by merger, NationsBank, Inc.
All executive officers serve at the discretion of the Board of Directors and are elected annually by the Board. 29 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholders Matters. Stock Information BankUnited's Class A Common Stock, $.01 par value ("Class A Common Stock"), is traded in the over-the-counter market and quoted in the Nasdaq-Amex Stock Market ("Nasdaq"). BankUnited's Class B Common Stock, $.01 par value ("Class B Common Stock"), is not currently traded on any established public market. At December 24, 2001, there were 507 and 14 holders of record of BankUnited's Class A Common Stock and Class B Common Stock, respectively. The number of holders of record of the Class A Common Stock includes nominees of various depository trust companies for an undeterminable number of individual stockholders. Class B Common Stock is convertible into Class A Common Stock at a ratio (subject to adjustment on the occurrence of certain events) of one share of Class A Common Stock for each share of Class B Common Stock surrendered for conversion. There were no common stock dividends declared or paid in fiscal 2001 or 2000. See Notes to Consolidated Financial Statements for a discussion of restrictions on the Bank's payment of dividends to BankUnited. The following tables set forth, for the periods indicated, the range of high and low bid prices for the Class A Common Stock quoted on Nasdaq. Stock price data in the Nasdaq reflects inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
Class A Common Stock ------------- Price ------------- High Low ------ ------ Fiscal Year Ended September 30, 2001: 1st Quarter....................... $ 8.50 $ 6.69 2nd Quarter....................... $11.88 $ 7.91 3rd Quarter....................... $14.95 $10.25 4th Quarter....................... $15.90 $12.00 Fiscal Year Ended September 30, 2000: 1st Quarter....................... $ 9.07 $ 6.88 2nd Quarter....................... $ 8.00 $ 6.78 3rd Quarter....................... $ 7.38 $ 5.94 4th Quarter....................... $ 7.81 $ 6.13
30 Item 6. Selected Financial Data.
As of or for the Fiscal Year Ended September 30, -------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands, except statistical data and earnings per share) Operations Data: Interest income...................................................... $ 324,077 $ 295,315 $ 233,550 $ 207,567 $ 108,774 Interest expense..................................................... 246,793 219,146 187,515 167,543 75,960 ---------- ---------- ---------- ---------- ---------- Net interest income.................................................. 77,284 76,169 46,035 40,024 32,814 Provision for loan losses............................................ 7,100 4,645 7,939 1,700 1,295 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses.................. 70,184 71,524 38,096 38,324 31,519 ---------- ---------- ---------- ---------- ---------- Non-interest income: Service fees, net.................................................. 6,495 4,295 3,785 1,139 2,993 Net gain (loss) on sales of loans, investments and mortgage-backed securities........................................................ 3,235 71 (5) 4,429 819 Net (loss) gain on sale of other assets............................ (15) -- 1 6 1 Other.............................................................. 3,877 1,709 1,019 651 247 ---------- ---------- ---------- ---------- ---------- Total non-interest income............................................ 13,592 6,075 4,800 6,225 4,060 ---------- ---------- ---------- ---------- ---------- Non-interest expenses: Employee compensation and benefits................................. 22,629 19,819 15,970 10,943 8,880 Occupancy and equipment............................................ 9,046 8,332 8,029 4,854 3,568 Insurance.......................................................... 1,000 1,221 1,683 1,185 948 Professional fees.................................................. 3,267 3,193 3,084 1,891 1,605 Other.............................................................. 18,455 19,959 19,627 13,310 7,946 ---------- ---------- ---------- ---------- ---------- Total non-interest expense......................................... 54,397 52,524 48,393 32,183 22,947 ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes, extraordinary item and preferred stock dividends........................................... 29,379 25,075 (5,497) 12,366 12,632 Provision (benefit) for income taxes................................. 11,106 10,247 (1,903) 5,009 5,033 ---------- ---------- ---------- ---------- ---------- Net income (loss) before extraordinary item and preferred stock dividends........................................................... 18,273 14,828 (3,594) 7,357 7,599 Extraordinary item (net of tax)...................................... 823 936 -- -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) before preferred stock dividends................... 19,096 15,764 (3,594) 7,357 7,599 Preferred stock dividends............................................ 649 790 773 897 2,890 ---------- ---------- ---------- ---------- ---------- Net income (loss) after preferred stock dividends.................... $ 18,447 $ 14,974 $ (4,367) $ 6,460 $ 4,709 ========== ========== ========== ========== ========== Financial Condition Data: Total assets......................................................... $5,238,195 $4,552,069 $4,078,471 $3,738,383 $2,145,406 Loans receivable, net, and mortgage-backed securities(1)............. 4,332,336 3,700,492 3,246,455 3,215,360 1,781,652 Investments, overnight deposits, tax certificates, reverse repurchase agreements, certificates of deposit and other earning assets.............................................................. 461,276 401,481 295,213 194,791 186,955 Total liabilities.................................................... 4,937,749 4,349,482 3,888,334 3,539,091 2,045,761 Deposits............................................................. 2,653,145 2,609,538 2,279,798 2,124,824 1,195,892 Long-term debt....................................................... 1,349,721 1,086,426 966,447 766,466 191,484 Company obligated mandatory redeemable trust preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures of BankUnited................................... 203,592 212,393 218,500 218,500 116,000 Borrowings........................................................... 2,196,429 1,673,024 1,546,648 1,361,114 817,484 Total stockholders' equity........................................... 300,446 202,587 190,137 199,292 99,645 Common stockholders' equity.......................................... 297,620 193,241 180,984 190,627 75,649
(Continued on the next page) 31
As for the Fiscal Year Ended September 30, --------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ---------- (Dollars in thousands, except statistical data and earnings per share) Per Common Share Data: Basic earnings (loss) per common share................. $ 0.91 $ 0.82 $ (0.24) $ 0.41 $ 0.57 Diluted earnings (loss) per common share................. $ 0.87 $ 0.81 $ (0.24) $ 0.39 $ 0.54 Weighted average number of common shares and common equivalent shares assumed outstanding during the period: Basic........................ 20,228,072 18,220,508 18,312,548 15,692,566 8,210,890 Diluted...................... 21,353,850 18,779,837 18,312,548 16,666,415 9,148,229 Book value per common share... $ 11.88 $ 10.61 $ 9.88 $ 10.50 $ 7.94 Fully converted tangible book value per common share....... $ 10.32 $ 8.78 $ 8.05 $ 8.66 $ 6.88 Select Financial Ratios: Performance Ratios: Return (loss) on average assets(2).................... 0.42% 0.38% (0.10)% 0.24% 0.51% Return (loss) on average tangible common equity....... 9.46 9.68 (3.79) 4.94 9.34 Return (loss) on average total equity (2)............. 8.20 8.09 (1.85) 4.53 8.06 Interest rate spread.......... 1.55 1.74 1.12 1.11 2.07 Net interest margin........... 1.76 1.91 1.27 1.32 2.31 Dividend payout ratio(3)...... 3.40 5.01 NM 12.19 38.03 Ratio of earnings to combined fixed charges and preferred stock dividends(4): Excluding interest on deposits 1.27 1.25 0.92 1.14 1.26 Including interest on deposits 1.11 1.11 0.96 1.06 1.10 Loans receivable, net, and mortgage-backed securities to total deposits............ 163.29 141.81 142.40 151.32 148.98 Non-interest expense to average assets............... 1.20 1.27 1.28 1.03 1.55 Efficiency ratio(5)........... 56.97 61.07 94.70 64.86 57.56 Asset Quality Ratios: Ratio of non-performing loans to total loans............... 0.76% 0.58% 0.70% 0.64% 0.72% Ratio of non-performing assets to total loans, real estate owned and tax certificates................. 0.84 0.68 0.85 0.73 0.79 Ratio of non-performing assets to total assets....... 0.60 0.55 0.69 0.61 0.67 Ratio of net charge-offs to average total loans.......... 0.11 0.11 0.06 0.02 0.04 Ratio of loan loss allowance to total loans............... 0.42 0.35 0.36 0.20 0.21 Ratio of loan loss allowance to non-performing Loans...... 56.00 61.20 52.45 31.51 28.96 Capital Ratio: Ratio of average common equity to average Total assets....................... 4.94% 4.49% 4.08% 4.18% 3.40% Ratio of average total equity to average Total assets...... 5.13 4.72 5.16 5.19 6.36 Core capital-to-assets ratio(6)..................... 7.12 7.49 7.86 8.72 8.07 Risk-based capital-to-assets ratio(6)..................... 14.66 14.84 15.54 17.54 11.27
- ---------- (1) Does not include mortgage loans held for sale. (2) Return is calculated before payment of Preferred Stock dividends and after extraordinary items. (3) The ratio of total dividends declared during the period (including dividends on the Bank's and BankUnited's Preferred Stock and BankUnited's Class A and Class B Common Stock) to total earnings for the period before dividends. (4) The ratio of earnings to combined fixed charges and Preferred Stock dividends excluding interest on deposits is calculated by dividing income before taxes and extraordinary items by interest on borrowings plus 33% of rental expense plus Preferred Stock dividends On a pretax basis. The ratio of earnings to combined fixed charges and Preferred Stock dividends including interest on deposits is calculated by dividing income before taxes and extraordinary items by interest on deposits plus interest on borrowings plus 33% of rental expenses plus Preferred Stock dividends on a pretax basis. (5) Efficiency ratio is calculated by dividing non-interest expenses less non-interest income, excluding net gains on sale of assets, by net interest income. (6) Regulatory capital ratio of the bank. NM = Not meaningful 32 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. General The following discussion and analysis and the related financial data present a review of the consolidated operating results and financial condition of BankUnited for the fiscal years ended September 30, 2001, 2000 and 1999. This discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition, results of operations and future prospects of BankUnited, and is intended to supplement, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto. BankUnited is a Florida-incorporated savings and loan holding company for the Bank. The Bank was founded in 1984 as a savings and loan association. In 1993, the Bank was converted to a federally chartered savings bank and became a wholly-owned subsidiary of BankUnited, pursuant to a plan of re-organization approved by its shareholders. BankUnited's principal business currently consists of the operation of its wholly-owned subsidiary, the Bank. In addition to managing the business activities of the Bank, BankUnited invests primarily in U.S. Government and federal agency securities, mortgage-backed securities and other permitted investments. The Bank's primary business has traditionally been to attract retail deposits from the general public and to invest those deposits, together with borrowings, principal repayments and other funds, primarily in one-to-four family residential mortgage loans, and to a lesser extent, mortgage-backed securities, commercial real estate mortgage loans, multi-family mortgage loans, commercial business loans and consumer loans. The Bank has also invested in other permitted investments. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. References to BankUnited include the activities of all of its subsidiaries, including the Bank and its subsidiaries, if the context so requires. BankUnited's results of operations are dependent primarily on its net interest income, which is the difference between the interest earned on its assets, primarily its loan and securities portfolios, and its cost of funds, which consists of the interest paid on its deposits and borrowings. BankUnited's results of operations are also affected by its provision for loan losses as well as non-interest income, non-interest expenses and income tax expense. Non-interest expenses consist of employee compensation and benefits, occupancy and equipment, insurance, professional fees, telecommunications and data processing, loan servicing expense, and other operating expenses. Results of operations are also dependent on the dollar volume and asset quality of BankUnited's loans and investments. In addition to the foregoing, results of BankUnited's operations, like those of other financial institution holding companies, are affected by BankUnited's asset and liability management policies, as well as factors beyond BankUnited's control, such as general economic conditions and the monetary and fiscal policies of the federal government. Lending activities are affected by the demand for mortgage financing and other types of loans, which is in turn affected by the interest rates at which such financings may be offered and other factors affecting the supply of housing and the availability of funds. Deposit flows and costs of funds are influenced by yields available on competing investments and by general market rates of interest. Fiscal 2001 Highlights During fiscal 2001, BankUnited increased its asset size to $5.2 billion and reported net income of $18.4 million, resulting in basic earnings of $0.91 and diluted earnings of $0.87 per share. BankUnited completed a secondary public offering of Class A Common Stock and was added to the Russel 2000(C) Index and the broader Russel 3000(C) Index. The increase in assets for the year stems mainly from a growth in loan production of 18% over last year to reach $1.3 billion. In addition, the secondary equity offering raised over $78 million. A portion of the proceeds was used to redeem BankUnited's outstanding 9% Noncumulative Perpetual Preferred Stock (the "9% Preferred Stock"). BankUnited plans to use the remaining net proceeds from the offering for general corporate purposes, which may include expanding operations through new branches and possible acquisitions. During fiscal 2001, BankUnited opened four new branches bringing the total number of banking offices to thirty-six. 33 The increase in loan production allowed BankUnited to sell assets, which were in excess of its portfolio needs and to realize gains on loan sales and sales of securitized assets of $2.1 million. Also, as part of BankUnited's asset/liability management process, it sold $160 million of investment securities, which resulted in gains of $1.1 million. Liquidity and Capital Resources BankUnited's primary source of funds is cash provided by investing activities and includes principal and interest payments on loans, mortgage-backed securities and other securities. For fiscal years ended September 30, 2001, 2000 and 1999, principal repayments on loans and mortgage-backed securities and proceeds from maturities of other securities totaled $1.4 billion, $657.9 million and $1.4 billion, respectively. During fiscal 1998 BankUnited began experiencing significant acceleration of prepayments on certain mortgage loans and mortgage-backed securities due to the decrease in long-term interest rates that continued through the second quarter of fiscal 1999. During the quarter ended June 30, 1999, long-term interest rates rose slightly causing the volume of mortgage loan refinancing to decrease, slowing the prepayment rate of BankUnited's loan portfolio. This trend continued until the end of the first fiscal quarter of 2001. At the end of the first fiscal quarter of 2001 and continuing through the end of the fiscal year, interest rates began to decline again causing the volume of prepayments to increase through the end of the fiscal year. Other significant sources of funds provided by investing activities include the sale of mortgage-backed securities. During fiscal 2001 BankUnited took advantage of its ability to originate loans by selling off some of those assets, which were in excess of its portfolio needs. This practice generated proceeds of $147.0 million from the sale of securitized loans and $136.0 million from the sale of mortgage-backed securities. BankUnited's other sources of funds are provided by financing activities, which principally includes borrowings, deposits and proceeds received from the issuance of stock. Net cash provided by financing activities during the fiscal year ended September 30, 2001 increased to $642.3 million from $461.8 million, for the fiscal year ended September 30, 2000. This increase was mainly attributable to increases in securities sold under the agreement to repurchase, FHLB advances and deposits of $273.9 million, $258.3 million and $43.6 million, respectively. In addition, BankUnited raised over $74.8 million from the issuance of stock. These increases were slightly offset by a $7.1 million decrease from the repurchase of trust-preferred securities. The increase in borrowings, in conjunction with the increase in outstanding stock from the additional offering of shares, is in line with BankUnited's asset/liability management process of efficiently utilizing borrowings and capital for the continued expansion of the Bank's operations and increasing stockholder value. BankUnited's primary use of funds, in its operating and investing activities, has been the funding of loans and the purchase of mortgage-backed securities and other securities. During the fiscal year ended September 30, 2001, BankUnited funded a total of $1.6 billion in loans, and purchased $824.2 million of mortgage-backed securities and other securities. For the same period in 2000, BankUnited's loans fundings totaled $924.2 million, and purchases of mortgage-backed securities and other securities totaled $59.7 million. In the normal course of business, BankUnited routinely enters into various commitments, primarily relating to the origination and purchase of loans, the purchase of securities and standby letters of credit. Total commitments outstanding at September 30, 2001 to originate loans were $83.6 million. In addition, BankUnited had $13.5 million in standby letters of credit outstanding at September 30, 2001 compared to commitments of $84.3 million and standby letters of credit outstanding of $15.5 million at September 30, 2000. BankUnited anticipates that it will have sufficient funds available to meet its current commitments in the normal course of business. BankUnited's total stockholders' equity was $300.4 million at September 30, 2001, an increase of $97.8 million, or 48.3%, from $202.6 million at September 30, 2000. The increase stems primarily from an additional offering of Class A Common stock, which raised $73.6 million, net of offering expense plus current year net 34 income after preferred stock dividends of $18.4 million. In addition, there were increases from accumulated other comprehensive income of $11.2 million and stock issued from the exercise of stock options and other stock awards of $1.5 million. These increases were offset by the redemption of BankUnited's 9% Noncumulative Perpetual Preferred Stock of $7.0 million. In December 1998, the Executive Committee was authorized by the Board of Directors to purchase up to 1,000,000 shares of BankUnited's Class A Common Stock, in such circumstances, as the Committee deems advantageous, with the intent to increase shareholder value. Various criteria are considered by the Executive Committee, such as the market price in relation to book value, market liquidity and whether the purchase would be the best use of BankUnited's resources. To date, BankUnited has purchased 333,000 of its Class A Common Stock at an average price of $8.39 per share, recorded at cost as Treasury Stock. In May 1999, BankUnited's Board of Directors authorized the purchase of shares of its 9% Noncumulative Perpetual Preferred Stock (the "9% Preferred Stock") on the open market as deemed appropriate and, if the market is appropriate, the retirement of the 9% Preferred Stock. During fiscal 2000, BankUnited purchased a total of 1,000 shares of its 9% Preferred Stock on the open market at a cost of $7,250. During fiscal 2001, BankUnited redeemed all of the remaining 697,000 shares of its outstanding 9% Preferred Stock at a price of $10.00 per share. Federal savings banks such as the Bank are also required to maintain capital at levels specified by applicable minimum capital ratios. At September 30, 2001, the Bank was in compliance with all capital requirements and met the definition of a "well capitalized" institution under applicable federal regulations. Asset Quality At September 30, 2001, non-performing assets totaled $31.6 million as compared to $25.3 million and $28.3 million at September 30, 2000 and 1999, respectively. Expressed as a percentage of total assets, non-performing assets stood at 0.60% as of September 30, 2001 as compared to 0.55% as of September 30, 2000 and 0.69% as of September 30, 1999. The increase in non-performing assets in fiscal 2001 primarily resulted from increases in non-accrual loans of $7.5 million. Non-accrual loans increased primarily due to a $4.4 million increase in one-to-four family residential loan delinquencies and a $3.6 million increase in commercial mortgage loan delinquencies. The increase was offset by a decrease of $0.5 million in commercial business loan delinquencies. The following table sets forth information concerning BankUnited's non-performing assets for the periods indicated:
September 30, ------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- (Dollars in thousands) Non-accrual loans(1)............................................. $27,429 $19,751 $21,428 $15,999 $10,866 Restructured loans(2)............................................ 1,034 1,283 962 1,137 1,888 Loans past due 90 days and still accruing........................ -- 261 693 2,313 -- ------- ------- ------- ------- ------- Total non-performing loans(3).................................... 28,463 21,295 23,083 19,449 12,754 Non-accrual tax certificates..................................... 1,264 1,671 1,703 1,225 958 Real estate owned................................................ 1,832 2,286 3,548 1,974 611 ------- ------- ------- ------- ------- Total non-performing assets...................................... $31,559 $25,252 $28,334 $22,648 $14,323 ======= ======= ======= ======= ======= Allowance for losses on tax certificates......................... 934 986 1,168 469 697 Allowance for loan losses........................................ 15,940 13,032 12,107 6,128 3,693 ------- ------- ------- ------- ------- Total allowance.................................................. $16,874 $14,018 $13,275 $ 6,597 $ 4,390 ======= ======= ======= ======= ======= Non-performing assets as a percentage of total assets............ 0.60% 0.55% 0.69% 0.61% 0.67% Non-performing loans as a percentage of total loans(4)........... 0.76% 0.58% 0.70% 0.64% 0.72% Allowance for loan losses as a percentage of total loans(4)...... 0.42% 0.35% 0.36% 0.20 0.21% Allowance for loan losses as a percentage of non-performing loans 56.00% 61.20% 52.45% 31.51% 28.96% Net charge-offs as a percentage of average total loans........... 0.11% 0.11% 0.06% 0.02% 0.04%
35 -------- (1) Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with original terms was $1.3 million, $1.1 million, $1.3 million, $1.0 million and $0.6 million for the years ended September 30, 2001, 2000, 1999, 1998 and 1997, respectively. The amount of interest income on such non-accrual loans included in net income for the years ended September 30, 2001, 2000, 1999, 1998 and 1997 was $0.9 million, $0.7 million, $0.5 million, $0.4 million and $0.4 million, respectively. (2) All restructured loans were accruing. (3) In addition, management had concerns as to the borrower's ability to comply with present repayment terms on $1.4 million, $2.1 million and $6.5 million of accruing loans as of September 30, 2001, 2000 and 1999, respectively. Management estimates that on these loans the loss, if any, will not be significant. (4) Based on balances prior to deductions for allowance for loan losses. General Discussion BankUnited's allowance for loan losses is established and maintained at levels management deems adequate to cover probable losses on loans based upon a periodic evaluation based on current information of the risks inherent in its loan portfolio. When evaluating loan loss allowances, management reviews performing and non-performing loans separately. There are several elements that management evaluates to estimate the loan loss allowance for BankUnited's loan portfolio. BankUnited applies procedural discipline in determining the amounts of each element of the allowance for loan losses. The elements evaluated, and how they are applied to each portion of the portfolio, are as follows: . Estimated losses on various pools of non-performing loans and groups of non-performing loans. This element is evaluated for each of the portfolios of one-to-four family residential loans, multi-family residential loans and consumer loans due to their homogeneous nature and the fact that no single loan is individually significant in terms of its size and potential risk of loss. Therefore, management evaluates these loans as separate groups of loans. Economic factors, historical loan losses, current trends in delinquencies and charge-offs, peer group analysis, and other relevant factors are considered in order to determine the adequacy of the allowance for loan losses. . Losses based upon specific evaluations of known losses on individual loans. Non-performing commercial mortgage, construction, business, and land loans are reviewed individually to determine the appropriate allowance for loan loss based upon the same factors as those described above as well as plans for problem loan administration and resolution. Where possible, the estimated value of the property underlying commercial mortgage loans is arrived at through an appraisal. In instances where BankUnited has not taken possession of the property or does not otherwise have access to the premises and therefore cannot obtain an appraisal, a real estate broker's opinion as to the value of the property is obtained. Construction loans, business loans, and land loans are evaluated individually based on a thorough examination of the current financial information of the borrower and an estimate of the value of the collateral, if any. If the carrying value of any of these loans is greater than the estimated net realizable value of the property or of the collateral securing these loans, a reserve is established for the difference. Management evaluates different factors in establishing the necessary allowance amount including appraisals, site reviews and financial information and statements. . BankUnited's entire loan portfolio is also evaluated in light of facts and circumstances such as economic trends and other conditions in specific geographical areas. The identification of impaired loans is conducted in conjunction with the review of the adequacy of the allowance for loan losses. Loss allowances are established for specifically identified impaired loans based on the fair value of the underlying collateral in accordance with SFAS No. 114. 36 Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. Adjustments to impairment losses resulting from changes in the fair value of an impaired loan's collateral are included in the provision for loan losses. Upon disposition of an impaired loan, any related valuation allowance is removed from the allowance for loan losses. The allowance for loan losses is adjusted by additions charged to operations as a provision for loan losses and by loan recoveries, with actual losses charged as reductions to the allowance. The following table sets forth information regarding BankUnited's allowance for loan losses for the periods indicated:
For the Years Ended September 30, ----------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------ ------ (Dollars in thousands) Allowance for loan losses, balance (at beginning of period) $13,032 $12,107 $ 6,128 $3,693 $2,158 Provisions for loan losses................................. 7,100 4,645 7,939 1,700 1,295 Allowance from acquisitions................................ -- -- -- 1,262 775 Loans charged off: One-to-four family residential loans.................... (371) (997) (702) (508) (604) Commercial real estate.................................. -- -- (733) -- -- Construction............................................ -- -- (197) -- -- Commercial business..................................... (3,726) (2,595) (21) (30) -- Consumer................................................ (160) (267) (395) (61) -- ------- ------- ------- ------ ------ Total loans charged off............................. (4,257) (3,859) (2,048) (599) (604) ------- ------- ------- ------ ------ Recoveries: One-to-four family residential loans.................... 5 74 49 33 48 Commercial real estate.................................. -- 8 1 -- -- Commercial business..................................... 46 53 -- 30 21 Consumer................................................ 14 4 38 9 -- ------- ------- ------- ------ ------ Total loans recovered............................... 65 139 88 72 69 ------- ------- ------- ------ ------ Allowance for loan losses, balance (at end of period)...... $15,940 $13,032 $12,107 $6,128 $3,693 ======= ======= ======= ====== ======
Historically, recoveries of charged off loans have been minimal since charged off loans have been primarily one-to-four family residential loans and typically the only substantial asset available to BankUnited is the real estate securing the loan, which is acquired through foreclosure and sold. BankUnited is not aware of any significant liability related to REO or loans that may be foreclosed. 37 The following table sets forth the allocation of general allowance for loan losses by loan category for the periods indicated.
As of September 30, ---------------------------------------------------------------- 2001 2000 1999 -------------------- -------------------- -------------------- % of Loans in % of Loans in % of Loans in Each Category Each Category Each Category to Total to Total to Total Loans Before Loans Before Loans Before Amount Net Items Amount Net Items Amount Net Items ------- ------------- ------- ------------- ------- ------------- (Dollars in thousands) Balance at end of period applicable to: One-to-four family residential Mortgages....................... $ 3,616 85.4% $ 4,045 87.8% $ 4,200 91.1% Multi-family residential.......... 270 0.6 927 1.9 442 0.9 Commercial real estate............ 3,131 4.2 2,163 4.2 2,873 4.3 Construction...................... 1,377 3.1 465 1.1 154 0.5 Land.............................. 867 0.9 1,166 0.9 1,171 0.7 Commercial business............... 5,298 3.5 2,435 2.3 1,798 1.5 Consumer.......................... 1,351 2.3 1,206 1.8 848 1.0 Unallocated....................... 30 N/A 625 N/A 621 N/A ------- ----- ------- ----- ------- ----- Total allowances for loan Losses...................... $15,940 100.0% $13,032 100.0% $12,107 100.0% ======= ===== ======= ===== ======= =====
As of September 30, ---------------------------------------- 1998 1997 ------------------- ------------------- % of Loans in % of Loans in Each Category Each Category to Total to Total Loans Before Loans Before Amount Net Items Amount Net Items ------ ------------- ------ ------------- (Dollars in Thousands) Balance at end of period applicable to: One-to-four family residential Mortgages. $1,917 92.4% $1,873 89.2% Multi-family residential................. 98 0.8 61 1.8 Commercial real estate................... 2,081 4.8 1,486 7.4 Construction............................. 225 0.3 62 0.4 Land..................................... 265 0.2 48 0.5 Commercial business...................... 307 0.5 108 0.6 Consumer................................. 356 1.0 22 0.1 Unallocated.............................. 879 N/A 33 N/A ------ ----- ------ ----- Total allowances for loan losses..... $6,128 100.0% $3,693 100.0% ====== ===== ====== =====
Management believes that the allowance for loan losses of $15.9 million as of September 30, 2001 is adequate given the strength of BankUnited's collateral position and the attention given to loan review and classifications. There can be no assurance that additional provisions for loan losses will not be required in future periods. Discussion of Financial Condition Changes for the Years Ended September 30, 2001 and 2000 Total assets increased 13.0% from $4.6 billion at September 30, 2000 to $5.2 billion at September 30, 2001. The overall increase of $0.6 million in assets was principally made up of increases in investments, mortgage- 38 backed securities and lending of $112.7 million, $490.4 million and $78.9 million, respectively. These increases were funded in part by $18.4 million of net income, $73.6 million in net proceeds from the additional secondary offering of stock, and increased borrowings of $273.9 million from securities sold under the agreements to repurchase and $258.3 million from FHLB advances. The increase in borrowings, in conjunction with the increase in outstanding stock from the additional offering of shares, is in line with BankUnited's asset/liability management process of efficiently utilizing borrowings and capital for the continued expansion of the Bank's operations and increasing shareholder value. The following is a discussion of material changes from September 30, 2000 to September 30, 2001 in the Statement of Financial Condition. Tax Certificates. BankUnited's investment in tax certificates decreased $4.8 million, or 84.2%, to $0.9 million at September 30, 2001 from $5.7 million at September 30, 2000. The decrease is a result of certificate redemptions, repayments and is consistent with the decision in fiscal 1999 to discontinue investing in this line of business. Investments. Investments held to maturity increased by $61.3 million to $66.4 million at September 30, 2001 from $5.1 million at September 30, 2000. The increase is primarily due to purchases of $66.2 million, partially offset by repayments of $5.0 million. Investments available for sale increased $51.3 million to $68.7 million as of September 30, 2001, as compared to $17.4 million as of September 30, 2000. The increase is primarily due to purchases of $49.3 and net unrealized gains of $2.4 million, which were slightly offset by repayments of $0.4 million. Mortgage-Backed Securities. Mortgage-backed securities held to maturity decreased $27.6 million, or 12.4%, to $195.0 million at September 30, 2001 from $222.6 million at September 30, 2000. The decrease was due to repayments of $78.4 million offset by purchases of $50.3 million and amortization of premiums and discounts of $0.5 million. BankUnited's available for sale mortgage-backed securities portfolio increased $517.9 million to $637.7 million as of September 30, 2001 from $119.8 million as of September 30, 2000. This increase was due to purchases of $673.6 million, including $15.2 million of purchases settling in October 2001, the securitization of $200.9 million of loans, and unrealized gains on the underlying securities of $15.7 million. Decreases to mortgage-backed securities available for sale include proceeds from the sale of mortgage-backed securities including securitized loans of $306.6 million, which includes $25.5 million of sales settling in October 2001 and is net of $1.8 million of realized gains. Other decreases include repayments of $65.1 million and amortization of discounts and premiums of $.04 million. Loans. BankUnited's loans receivable, net (including loans held for sale) increased $78.9 million from September 30, 2000 to September 30, 2001. Loan fundings of $1,593.2 million, were offset by repayments of $1,268.6 million (net of accretion of discount and amortization of premium), securitizations of $200.9 million, loan sales of $35.1 million, net of realized gains of $1.4 million, a provision for loan loss of $7.1 million, and transfers to real estate owned of $2.6 million. Mortgage loans held for sale decreased $62.6 million to $250.0 million as of September 30, 2001 as compared to $312.6 million at September 30, 1999 principally due to residential loan repayments of $78.6 million, the securitization of $63.1 million from the loans held for sale portfolio, and sales of $17.5 million, net of realized gain of $1.4 million. These decreases were partially offset by transfers from the loan portfolio of $63.1 million and originations of loans held for sale of $33.5 million. 39 Other Interest Earning Assets. Other interest earning assets increased $12.9 million, or 20.6%, to $75.6 million at September 30, 2001 from $62.7 million at September 30, 2000. This category primarily represents stock in the FHLB, which BankUnited is required to purchase in proportion to FHLB advances. Bank Owned Life Insurance. In third quarter of fiscal 2001, the Bank purchased $20.0 million of life insurance, which represents life insurance policies on the lives of certain Bank officers, which will be used to offset the projected cost of the Bank's benefit plans for all employees. Through September 30, 2001, the cash value of the life insurance policies increased by $0.5 million. The Bank did not own such life insurance policies at September 30, 2000. Due from Broker. Due from broker of $25.5 million represents the amount of securities sold at the end of September of 2001, which settle in October 2001. At the end of September 30, 2000, there were no amounts due from broker. Deposits. Deposits increased by $43.6 million, or 1.7%, to $2.7 billion at September 30, 2001, due to an increases in passbook savings of $271.6 million, non-interest bearing checking accounts of $17.5 million, NOW accounts of $12.5 million and insured money market accounts of $2.4 million. These increases were offset by a decrease in certificates of deposit of $260.4 million. Securities Sold Under Agreements To Repurchase. Securities sold under agreements to repurchase increased by $273.9 million to $283.1 million at September 30, 2001 from $9.2 million at September 30, 2000. The increase was used to fund the purchase of securities. FHLB Advances. FHLB advances increased approximately $258.3 million, or 19.9% to $1.5 billion at September 30, 2001 from $1.3 billion at September 30, 2000. The increase was used to fund the purchase of securities. Trust Preferred Securities. Trust Preferred securities decreased by $8.8 million or 4.1% from $212.4 million at September 30, 2000 to $203.6 million at September 30, 2001. In November 1999, the Board of Directors of BankUnited authorized the purchase from time to time in the open market, or otherwise, of up to 300,000 shares of trust preferred securities issued by BankUnited's trust subsidiaries. As of September 30, 2001, BankUnited had purchased a total of 167,299 shares of trust preferred securities issued by its trust subsidiaries on the open market at a cost of $11.4 million, 8,800 shares were purchased during fiscal 2001. Stockholders' Equity. BankUnited's total stockholders' equity was $300.4 million at September 30, 2001, an increase of $97.8 million, or 48.3%, from $202.6 million at September 30, 2000. The increase stems primarily from an additional offering of Class A Common stock, which raised $73.6 million, net of offering expense plus current year net income after preferred stock dividends of $18.4 million. In addition, there were increases from accumulated other comprehensive income of $11.2 million and stock issued from the exercise of stock options and other stock awards of $1.5 million. These increases were offset by the repurchase and retirement of BankUnited's 9% Noncumulative Perpetual Preferred Stock of $6.9 million. The proceeds from the additional offering of Class A Common Stock will be used for general corporate purposes consistent with our business strategy for growth and expansion. In May 1999, BankUnited's Board of Directors authorized the purchase of shares of its 9% Noncumulative Perpetual Preferred Stock (the "9% Preferred Stock") on the open market as deemed appropriate and, if the market is appropriate, the retirement of the 9% Preferred Stock. During fiscal 2000, BankUnited purchased a total of 1,000 shares of its 9% Preferred Stock on the open market at a cost of $7,250. During fiscal 2001, BankUnited redeemed and retired all 697,000 shares of its outstanding 9% Preferred Stock at a price of $10.00 per share. 40 In December 1998, the Board of Directors of BankUnited authorized the purchase from time to time in the open market, or otherwise, of up to 1,000,000 shares of BankUnited's Class A Common Stock at such prices as the Executive Committee shall deem advantageous. This is in addition to the authority granted to purchase shares for compensation and benefit programs. Through September 30, 2001, BankUnited purchased a total of 333,000 shares of its Class A Common Stock on the open market at a cost of $2.8 million, which was purchased prior to fiscal 2001. As of the date of filing of this Annual Report on Form 10-K, no additional purchases have been made. Comparison of Operating Results for the Fiscal Years Ended September 30, 2001 and 2000 General Net income after preferred stock dividends increased by $3.4 million, or 22.7%, to $18.4 million for the year ended September 30, 2001, compared to $15.0 million for the year ended September 30, 2000. The increase in fiscal 2001 is mainly attributed to increases in non-interest income of $7.5 million and net interest income before provision for loan loss of $1.1 million, offset by increases in provision for loan loss of $2.5 million and non-interest expense of $1.9 million. Net Interest Income. Net interest income before provision for loan losses increased $1.1 million, or 1.4%, to $77.3 million for the year ended September 30, 2001 from $76.2 million for the year ended September 30, 2000. This marginal increase is the net result of volume related increases in the excess of interest earning assets over interest bearing liabilities, which generated an additional $10.1 million in net interest income offset by decreases attributable to a decline in interest rates and rate/volume (change in rate multiplied by the change in volume), reducing net interest income by $7.3 million and $1.7 million, respectively. Interest Income. Interest income increased by $28.8 million or 9.8%, to $324.1 million for the year ended September 30, 2001, compared to $295.3 million for the year ended September 30, 2000. This increase is predominantly volume related and reflects increases in the average balances of loans receivable, net, mortgage-backed securities and collateralized mortgage obligations, and long-term investments and FHLB stock of $151.1 million, $201.5 million and $71.3 million, respectively. These increases in average balances resulted in an increase in interest income due to volume of $11.2 million, $14.1 million and $5.5 million generated from loans receivable, net, mortgage backed securities and collateralized mortgage obligations, and long-term investments and FHLB stock, respectively. In addition, there was a reduction in the average balance of short-term investments of $19.5 million, which resulted in a decrease in interest income of $1.5 million due to volume, slightly offsetting the increases discussed above. While prepayments precipitated from the decline in interest rates during the last three quarters of fiscal 2001, BankUnited sufficiently increased loan production to raise the average balance in the loan portfolio and thus increase interest income by $11.2 million in the year ended September 30, 2001 compared to the year ended September 30, 2000. The secondary offering of stock during fiscal 2001, which raised $73.6 million in net proceeds, allowed BankUnited to increase its borrowing capacity. While maintaining its regulatory capital ratios, BankUnited will use this increase in capital to expand its operations. The increase in the average balance of mortgage-backed securities and collateralized mortgage obligations, and long-term investments and FHLB stock stems from BankUnited's effort to maximize interest earned until such time that BankUnited utilizes this capital for expansion. The increase in those investments resulted in increases in interest income of $14.1 million and $5.5 million, respectively. Interest Expense. Interest expense increased by $27.7 million or 12.6%, to $246.8 million for the year ended September 30, 2001, compared to $219.1 million for the year ended September 30, 2000. This increase has a volume related component of $18.7 million and a rate related component of $8.8 million. 41 For the reasons indicated in the interest income portion of this discussion, BankUnited increased its average FHLB advances and other borrowings by $202.6 million to $1.2 billion for the year ended September 30, 2001 from $1.0 billion for the year ended September 30, 2000. This increase of 20.3% in the average balance resulted in additional interest expense due to volume of $12.0 million for the year ended September 30, 2001 compared to the prior year. The average balance of trust-preferred securities for the year ended September 30, 2001 was $206.3 million, which represents a decrease from the prior year of $9.3 million. (See Trust Preferred Securities in the Discussion of Financial Condition Changes for the Years Ended September 30, 2001 and 2000). This decrease in the average balance caused a reduction in interest expense of $0.9 million for the year ended September 30, 2001 compared to the prior year. The average balances of savings and certificates of deposit increased for the year ended September 30, 2001, compared to the year ended September 30, 2000 from $355.3 million to $427.1 million and from $1.8 billion to $1.9 billion, respectively. The increase in average balances resulted in an increase in interest expense due to volume of $3.4 million for savings and $3.4 million for certificates of deposit. BankUnited's net interest margin for the year ended September 30, 2001 was 1.76% versus 1.91% for the same period in the prior year, a drop of 15 basis points. The decrease in the interest margin can be largely attributed to the re-pricing characteristics of Certificates of Deposits. These Certificates of Deposits, which comprise a major portion of our deposits base, do not react as quickly to interest rate changes as these deposits are longer in term. This lag in re-pricing allowed certificates that were renewing in the first half of the year to renew at rates above their original rate. As a result, the rates paid on certificates increased by 54 basis points, from 5.65% in fiscal 2000 to 6.19% in fiscal 2001. Conversely, as interest rates remain low for an extended period, this lag reverses and the overall costs of Certificates decreases. This was the case in the second half of fiscal 2001. Yields Earned and Rates Paid. The following table sets forth certain information relating to the categories of BankUnited's interest-earning assets and interest-bearing liabilities for the periods indicated, including the effect on yields of the accelerated amortization of purchase premiums on the One-Year CMT loan portfolio and a related security recorded in the first quarter of fiscal 1999 and the third and fourth quarter of fiscal 1998 due to the high level of prepayments, the $14.8 million charge in the second quarter of fiscal 1999 related to the write-off of purchase premiums on the One-Year CMT loan portfolio and the continuing accelerated amortization of purchase premiums on a related security. All yield and rate information is calculated on an annualized basis by dividing the income or expense item for the period by the average balances during the period of the appropriate balance sheet item. Net interest margin is calculated by dividing net interest income by average interest-earning assets. Non-accrual loans are included for the appropriate periods, whereas recognition of interest on such loans is discontinued and any remaining accrued interest receivable is reversed, in conformity with generally accepted accounting principles and federal regulations. The yields and net interest margins appearing in the following table have been calculated on a pre-tax basis. 42
For the Year Ended September 30, ------------------------------------------------------------------------------------------------ 2001 2000 1999 As of -------------------------- -------------------------- -------------------------- 09/30/01 Average Yield/ Average Yield/ Average Yield/ Yield/Rate(1) Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------- ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ (Dollars in thousands) Interest-earning assets: Loans receivable, net (2)... 7.40% $3,666,749 $273,174 7.45% $3,515,652 $260,690 7.42% $3,038,086 $199,704 6.57% Mortgage-backed securities (2)....................... 6.58 555,745 38,473 6.92 354,271 24,866 7.02 337,333 18,493 5.48 Short-term investments (3).. 3.29 23,853 1,699 7.12 43,331 3,229 7.45 144,842 7,590 5.24 Tax certificates............ 0.14 2,879 640 22.22 10,585 784 7.41 26,666 1,882 7.06 Long-term investments and FHLB stock, net........... 6.07 145,145 10,091 6.95 73,816 5,746 7.78 80,042 5,881 7.35 ---- ---------- -------- ----- ---------- -------- ---- ---------- -------- ---- Total interest- earning assets................... 7.00% 4,394,371 324,077 7.37% 3,997,655 295,315 7.39% 3,626,969 233,550 6.44% ---- ---------- -------- ----- ---------- -------- ---- ---------- -------- ---- Interest-bearing liabilities: NOW/Money Market............ 1.67% 299,123 7,277 2.43% 264,577 6,777 2.56% 272,922 7,820 2.87% Savings..................... 3.64 427,095 19,349 4.53 355,320 16,825 4.74 360,019 16,010 4.45 Certificate of deposits..... 5.44 1,883,395 116,508 6.19 1,823,606 103,027 5.65 1,599,661 82,825 5.18 Trust preferred securities.. 9.50 206,316 19,929 9.66 215,600 20,899 9.69 218,500 21,154 9.68 Senior notes................ 5.4 200,000 11,333 5.67 200,000 11,429 5.71 132,055 7,612 5.76 FHLB advances and other Borrowings................ 4.96 1,221,398 72,397 5.93 1,018,782 60,189 5.91 942,871 52,094 5.52 ---- ---------- -------- ----- ---------- -------- ---- ---------- -------- ---- Total interest-bearing liabilities.............. 4.97% $4,237,327 $246,793 5.82% $3,877,885 $219,146 5.65% $3,526,028 $187,515 5.32% ==== ========== ======== ===== ========== ======== ==== ========== ======== ==== Excess of interest- earning assets over interest-bearing liabilities................. $ 157,044 $ 119,770 $ 100,941 ========== ========== ========== Net interest income.......... $ 77,284 $ 76,169 $ 46,035 ======== ======== ======== Interest rate spread......... 2.03% 1.55% 1.74% 1.12% ==== ===== ==== ==== Net interest margin.......... 2.23% 1.76% 1.91% 1.27% ==== ===== ==== ==== Ratio of interest- earning assets to interest-bearing liabilities................. 103.71% 103.09% 102.86% ========== ========== ==========
-------- (1) The yields and rates along with the corresponding interest rate spread and net interest margin represent the yields earned and rates paid on BankUnited's interest-earning assets and interest-bearing liabilities, respectively, as of the close of business on September 30, 2001 and do not include any estimates of the effect accelerated amortization of purchased premiums would have on the yields earned. (2) The yields and rates along with the corresponding interest rate spread and net interest margin for the fiscal year ended September 30, 1999 reflect the accelerated amortization of purchase premiums on the One-Year CMT loan portfolio and a related security in the first quarter of fiscal 1999 and the $14.8 million charge in the second quarter of fiscal 1999 related to the write-off of purchase premiums on the One-Year CMT loan portfolio and the continuing accelerated amortization of purchase premiums on a related security. The yields and rates along with the corresponding interest rate spread and net interest margin for the fiscal year ended September 30, 1998 reflect the accelerated amortization of purchase premiums on the one-year CMT loan portfolio in the third and fourth quarter of fiscal 1998. (3) Short-term investments include FHLB overnight deposits, securities purchased under agreements to resell, federal funds sold and certificates of deposit. 43 Rate/Volume Analysis. The following table presents, for the periods indicated, the changes in interest income and the changes in interest expense attributable to the changes in interest rates and the changes in the volume of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (change in volume multiplied by prior year rate); (ii) changes in rate (change in rate multiplied by prior year volume); (iii) changes in rate/volume (change in rate multiplied by change in volume); and (iv) total changes.
Year Ended September 30, Year Ended September 30, 2001 v 2000 2000 v 1999 ------------------------------------ ------------------------------------ Increase (Decrease) Due to Increase (Decrease) Due to Changes Changes Changes Changes in Total Changes Changes in Total in in Rate/ Increase in in Rate/ Increase Volume Rate Volume (Decrease) Volume Rate Volume (Decrease) ------- ------- ------- ---------- ------- ------- ------- ---------- (Dollars in thousands) Interest income attributable to: Loans............................ $11,211 $ 1,055 $ 218 $12,484 $31,392 $25,574 $ 4,020 $60,986 Mortgage-backed securities and collateralized mortgage obligations.................... 14,143 (354) (182) 13,607 929 5,184 260 6,373 Short-term investments(1)....... (1,451) (143) 64 (1,530) (5,320) 3,204 (2,245) (4,361) Tax Certificates................ (571) 1,568 (1,141) (144) (1,135) 92 (56) (1,099) Long-term investments and FHLB stock..................... 5,549 (613) (591) 4,345 (457) 351 (29) (135) ------- ------- ------- ------- ------- ------- ------- ------- Total interest-earning assets.. 28,881 1,513 (1,632) 28,762 25,409 34,405 1,950 61,764 ------- ------- ------- ------- ------- ------- ------- ------- Interest expense attributable to: NOW/Money Market................ 884 (344) (40) 500 (239) (828) 24 (1,043) Savings......................... 3,402 (746) (132) 2,524 (209) 1,044 (20) 815 Certificates of Deposit......... 3,378 9,847 256 13,481 11,595 7,549 1,058 20,202 Trust preferred securities...... (900) (65) (5) (970) (281) 27 (1) (255) Senior Notes.................... -- (80) (16) (96) 3,917 (66) (34) 3,817 FHLB advances and other borrowings..................... 11,975 204 29 12,208 4,194 3,610 290 8,094 ------- ------- ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities................... 18,739 8,816 92 27,647 18,977 11,336 1,317 31,630 ------- ------- ------- ------- ------- ------- ------- ------- Increase (decrease) in net interest income............... $10,142 $(7,303) $(1,724) $ 1,115 $ 6,432 $23,069 $ 633 $30,134 ======= ======= ======= ======= ======= ======= ======= =======
-------- (1) Short term investments include FHLB overnight deposits, securities purchased under agreements to resell, federal funds sold and certificates of deposit. Provision for Loan Losses. The provision for loan losses increased $2.5 million to $7.1 million for the year ended September 30, 2001 compared to $4.6 million for the year ended September 30, 2000. This increase was necessary due to an increase in non-accrual loans which increased from $19.8 million at September 30, 2000 to $27.4 million at September 30, 2001, as well as an increase in outstanding loans. The increase in non-accruals as well as loan activity was primarily in consumer and commercial loans. Non-interest Income. Non-interest income increased $7.5 million to $13.6 million for the year ended September 30, 2001, compared to $6.1 million for the year ended September 30, 2000. The increase includes gains on the sale of investments, loans and mortgage-backed securities in the aggregate of $3.2 million for the year ended September 30, 2001, compared to $71,000 for the prior year. Included in the $3.2 million gain for fiscal 2001, is a gain of $2.0 million from the securitization and sale of residential mortgage loans. This activity is the result of BankUnited's asset/liability management process and the practice of selling assets, which are in excess of portfolio needs. The increase in non-interest income of $7.5 million also includes an increase in service fees on deposits of approximately $2.5 million, partially offset by a decrease of approximately $277,000 in loan servicing income, net. 44 Finally, non-interest income increased by $2.2 million from the sale of specialized financial products sold through our affiliate organization BUFC Financial Services. Non-interest Expenses. Operating expenses increased $1.9 million to $54.4 million for the year ended September 30, 2001 compared to $52.5 million for the year ended September 30, 2000. The increase in expenses is primarily attributable to additional staff and facilities necessitated by BankUnited's growth levels increasing compensation expense by $2.8 million, occupancy and equipment by $0.7 million, and telecommunications and data processing of $0.4 million. These increases are partially offset by the decreases in loan servicing expenses of $1.1 million and advertising and promotion expense of $0.9 million. Comparison of Operating Results for the Fiscal Years Ended September 30, 2000 and 1999 General Net income after preferred stock dividends increased to $15 million for the year ended September 30, 2000, compared to a loss of $4.4 million for the year ended September 30, 1999. The loss in fiscal 1999 was attributed to the charges related to the change in business focus. See "New Management and Change in Business Focus" above. The increase in net income after preferred stock dividends for the year ended September 30, 2000 consisted of an increase in interest and fees on loans of $61 million, a reduction in provision for loan losses of $3.3 million, offset by an increase in interest expense of $31.6 million and an increase in tax expense of $12.2 million. Net Interest Income. Net interest income before provision for loan losses increased $30.1 million, or 65.4%, to $76.2 million for the year ended September 30, 2000 from $46.0 million for the year ended September 30, 1999. Net interest margin increased to 1.91% for the year ended September 30, 2000, compared to 1.27% for the same prior year period. For the year ended September 30, 2000, the increase in the net interest margin was due to an increase in the yield on interest-earning assets to 7.39% from 6.44% in 1999, primarily attributable to the increased yields on total loans, partially offset by a 33 basis point increase in the cost of interest-bearing liabilities to 5.65% from 5.32% in 1999. Interest income increased $61.7 million, or 26.4%, to $295.3 million for the year ended September 30, 2000 from $233.6 million for the year ended September 30, 1999. Interest income for fiscal year 2000 was affected by the increase in outstanding commercial and commercial real estate loans combined with an increased annual interest rate yield of 9.19% as compared to 8.45% at September 30, 2000 and 1999, respectively, for commercial loans and 9.08% as compared to 8.72% at September 30, 2000 and 1999, respectively, for commercial real estate loans. Interest expense for the year ended September 30, 2000, increased $31.6 million, or 16.9%, to $219.1 million from $187.5 million for the year ended September 30, 1999, primarily due to increases in interest expense on interest-bearing deposits. Interest expense on interest-bearing deposits increased $19.9 million, or 18.7%, to $126.6 million for the year ended September 30, 2000, from $106.7 million for the prior year as a result of an increase in the average balance of interest-bearing deposits to $2.4 billion for the year ended September 30, 2000, from $2.2 billion for the prior year, and a 40 basis point increase in the average cost of interest-bearing deposits to 5.18% for the year ended September 30, 2000, from 4.78% for the prior year. Interest expense on the trust preferred securities decreased $255,000, or 1.2% to $20.9 million for the year ended September 30, 2000, from $21.2 million for the prior year, as a result of a decrease in the average balance of the trust preferred securities to $215.6 million for the year ended September 30, 2000 from $218.5 million for the prior year due to the acquisition of 158,499 shares of these securities by BankUnited during fiscal 2000. Other factors influencing the level of interest expense include the issuance of the Bank's Senior Notes during the second quarter of fiscal 1999, which generated interest expense of $7.6 million for the year ended September 30, 1999 as compared to $11.4 million for the year ended September 30, 2000, at a weighted average cost of 5.71%; and a $8.1 million increase in interest expense on FHLB advances and other borrowings to $60.2 million for the year ended September 30, 2000 from $52.1 million for the prior year, resulting from an increase in the average balance of FHLB advances and other borrowings to $1.0 billion for the year ended September 30, 45 2000, from $942.9 million for the prior year. Overall, the average rate paid on interest-bearing liabilities increased 33 basis points to 5.65% on an average balance of $3.9 billion for the year ended September 30, 2000, from 5.32% on an average balance of $3.5 billion for the year ended September 30, 1999. Provision for Loan Losses. The provision for loan losses decreased $3.3 million to $4.6 million for the year ended September 30, 2000 compared to $7.9 million for the year ended September 30, 1999. Included in the $7.9 million provision is a $6.3 million provision recorded in the second quarter of 1999 as a result of management's review of interest earning assets. Second Quarter 1999 Evaluation In connection with the change in business focus (see "Change in Business Focus and New Management"), management performed a rigorous review of the loan portfolio in the second quarter of fiscal 1999, using its extensive workout experience, peer group data, industry data, economic information and regulatory guidance. As part of this review, management refined the techniques used to evaluate non-performing residential mortgage loans. This review differed from prior reviews in that BankUnited's new management reviewed every single performing loan, in the commercial and commercial mortgage loan portfolio. In prior quarters performing loans had been reviewed on a cycle basis. As a result of this review, BankUnited recorded a provision for loan loss allowance of $6.3 million, $2.8 million of which was attributed to an increase in the volume of loans in the non-performing category and $0.9 million of which resulted from a refinement in the technique used by management to estimate loan losses in the non-performing residential portfolio. The remaining balance of $2.6 million is derived from further deterioration of non-performing loans and management's evaluation of the remaining portfolio. Non-interest Income. Non-interest income increased $1.3 million to $6.1 million for the year ended September 30, 2000 compared to $4.8 million for the year ended September 30, 1999. The increase is mainly attributed to an increase in service charges on deposits of approximately $276,000, an increase in service charges and fees on loans of approximately $744,000, and a $656,000 increase in sale of investment products through BUFC. These increases were partially offset by a decrease of approximately $400,000 of loan servicing income, net of the amortization of loan mortgage servicing rights. Non-interest Expenses. Operating expenses increased $4.1 million to $52.5 million for the year ended September 30, 2000 compared to $48.4 million for the year ended September 30, 1999. The increase in expenses is primarily attributable to the increased staff levels necessitated by BankUnited's growth. Income Taxes. The income tax provision increased to a net expense of $10.2 million, for the year ended September 30, 2000, compared to a net benefit of $1.9 million for the year ended September 30, 1999. This increase was due to BankUnited's strategic changes which increased income before taxes, extraordinary item and preferred stock dividends to $25.1 million for the period ended September 30, 2000 versus a loss of $5.5 million for the same period in 1999. Extraordinary Item. In November 1999, the Board of Directors of BankUnited authorized the purchase, from time to time, in the open market, or otherwise, of up to 300,000 shares of the Trust Preferred Securities. During fiscal 2000, BankUnited purchased 158,499 shares of the Trust Preferred Securities, at a cost of $4.4 million, resulting in an extraordinary gain as a result of their early extinguishment in the amount of $0.9 million, net of $0.6 million in taxes. Impact of Inflation and Changing Prices The financial statements and related financial data and notes presented herein have been prepared in accordance with Generally Accepted Accounting Principles (GAAP), which require the measurements of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. 46 As a financial institution, virtually all of BankUnited's assets and liabilities are monetary in nature. As a result, BankUnited is not significantly affected by the general levels of inflation. BankUnited's net income is mainly dependent on the spread between the average yield earned on its interest-earning assets and the average cost incurred on its interest-bearing liabilities. Therefore, BankUnited's net income is more significantly impacted by changes in interest rates (see Item 7a. "Quantitative and Qualitative Disclosures about Market Risk"). Although interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, interest rates are affected by actions of Federal Reserve designed to control inflation. 47 Selected Quarterly Financial Data Set forth below is selected quarterly data for the fiscal years ended September 30, 2001 and 2000.
Fiscal Year 2001 ------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (Dollars in thousands, except for per share data) Net interest income.................................................. $17,938 $18,145 $18,761 $22,440 Provision for loan losses............................................ 1,200 1,600 1,650 2,650 Non-interest income.................................................. 2,063 2,936 3,876 4,717 Non-interest expense................................................. 12,931 12,781 13,737 14,948 ------- ------- ------- ------- Income before taxes, extraordinary item and preferred stock dividends 5,870 6,700 7,250 9,559 Income taxes......................................................... 2,408 2,528 2,663 3,507 ------- ------- ------- ------- Net income before extraordinary item and preferred stock dividends... 3,462 4,172 4,587 6,052 Extraordinary item (net of taxes).................................... 550 211 61 1 ------- ------- ------- ------- Net income before preferred stock dividends.......................... 4,012 4,383 4,648 6,053 Preferred stock dividends............................................ 198 198 205 48 ------- ------- ------- ------- Net income applicable to common stock................................ $ 3,814 $ 4,185 $ 4,443 $ 6,005 ======= ======= ======= ======= Basic: Net income before extraordinary item.............................. $ 0.18 $ 0.22 $ 0.23 $ 0.24 ------- ------- ------- ------- Net income after extraordinary item............................... $ 0.21 $ 0.23 $ 0.23 $ 0.24 ======= ======= ======= ======= Diluted: Net income before extraordinary item.............................. $ 0.18 $ 0.21 $ 0.22 $ 0.23 ------- ------- ------- ------- Net income after extraordinary item............................... $ 0.21 $ 0.22 $ 0.22 $ 0.23 ======= ======= ======= =======
Fiscal Year 2000 ------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (Dollars in thousands, except for per share data) Net interest income.................................................. $19,189 $19,638 $19,634 $17,708 Provision for loan losses............................................ 1,200 1,000 1,000 1,445 Non-interest income.................................................. 1,307 1,570 1,602 1,596 Non-interest expense................................................. 12,988 13,753 13,777 12,006 ------- ------- ------- ------- Income before taxes, extraordinary item and preferred stock dividends 6,308 6,455 6,459 5,853 Income taxes......................................................... 2,579 2,635 2,631 2,402 ------- ------- ------- ------- Net income before extraordinary item and preferred stock dividends... 3,729 3,820 3,828 3,451 Extraordinary item (net of taxes).................................... 431 261 9 235 ------- ------- ------- ------- Net income before preferred stock dividends.......................... 4,160 4,081 3,837 3,686 Preferred stock dividends............................................ 197 198 198 197 ------- ------- ------- ------- Net income applicable to common stock................................ $ 3,963 $ 3,883 $ 3,639 $ 3,489 ======= ======= ======= ======= Basic: Net income before extraordinary item.............................. $ 0.19 $ 0.20 $ 0.20 $ 0.18 ------- ------- ------- ------- Net income after extraordinary item............................... $ 0.22 $ 0.21 $ 0.20 $ 0.19 ======= ======= ======= ======= Diluted: Net income before extraordinary item.............................. $ 0.19 $ 0.20 $ 0.20 $ 0.18 ------- ------- ------- ------- Net income after extraordinary item............................... $ 0.21 $ 0.21 $ 0.20 $ 0.19 ======= ======= ======= =======
48 Item 7a. Quantitative and Qualitative Disclosure about Market Risk. Interest Rate Sensitivity As a financial intermediary BankUnited invests in various types of interest-earning assets (primarily loans, mortgage-backed securities, and investment securities) which are funded largely by interest-bearing liabilities (primarily deposits, FHLB advances, and trust preferred securities). Such financial instruments have varying levels of sensitivity to changes in market interest rates that creates interest rate risk for the Bank. Accordingly, BankUnited's net interest income, the most significant component of its net income, is subject to substantial volatility due to changes in interest rates or market yield curves, particularly if there are differences, or gaps, in the repricing frequencies of its interest-earning assets and the interest-bearing liabilities which fund them. BankUnited monitors such interest rate gaps and seeks to manage its interest rate risk by adjusting the repricing frequencies of its interest-earning assets and interest-bearing liabilities. The Bank also uses interest rate caps to limit its interest rate risk. In addition to reviewing reports which summarize BankUnited's various interest sensitivity gaps, management utilizes a simulation model which measures the financial impact certain interest rate scenarios are likely to have on the Bank. As discussed more fully below, a variety of factors influence the repricing characteristics and the market values of BankUnited's interest-earning assets and interest-bearing liabilities, but many of these factors are difficult to quantify. The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific time period if it will contractually mature or reprice, or if by management assumption, it is likely to be impacted by prepayments, run-off, early withdrawal, or other such forces which can impact the timing and amount of a given financial instrument's cash flows. An interest rate sensitivity gap is the difference between the amount of interest-earning assets anticipated to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice within that same period. A gap is considered to be positive when the amount of interest rate sensitive assets maturing or repricing within a specific time frame exceeds the amount of interest rate sensitive liabilities maturing or repricing within that same time frame. Conversely, a gap is considered to be negative when, within a given period of time, the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period where the general level of interest rates is rising, a bank with a negative gap over that period is likely to experience a decline in net interest income. Alternatively, a bank with a positive gap will typically experience an increase in net interest income. Significant Assumptions Utilized in Managing Interest Rate Risk Assessing and managing BankUnited's exposure to interest rate risk involves significant assumptions concerning the exercise of options which are considered to be imbedded in many of the financial instruments on BankUnited's balance sheet, the expected movement and relationship of various interest rate indices, the impact of lag and cap risk, and the general availability of mortgages. Imbedded Options. A substantial portion of BankUnited's loans and mortgage-backed securities are residential mortgage loans that contain an imbedded option allowing borrowers to repay all, or a portion, of their loan prior to maturity without penalty. The existence of this imbedded prepayment option can adversely impact BankUnited's financial performance. In general, marketable securities tend to exhibit an increase in market value when the level of interest rates falls, and they tend to exhibit a decrease in market value when the level of interest rates rises. Mortgage loans having imbedded prepayment options, and the securities which contain them, do tend to decrease in market value as interest rates rise. However increases in market value due to a decrease in interest rates are typically suppressed since in a lower rate environment borrowers are more likely to prepay, or refinance, their mortgage loans. Consequently, the adverse impact an investment in mortgage loans or mortgage securities may have on BankUnited's market value of equity, should interest rates rise, may exceed the beneficial impact should interest rates fall by a like amount. 49 Additionally, in an increasing interest rate environment BankUnited's funding costs may be expected to increase more quickly than would BankUnited's earnings from its residential mortgage loan assets. This could result in a deterioration in BankUnited's net interest margin. However, due to the asymmetry discussed previously, improvement in BankUnited's net interest margin due to a general decrease in interest rates, may be less than the deterioration in BankUnited's net interest margin given a similar increase in the general level of interest rates. A borrower's propensity for prepayment is dependent upon a number of factors, some of which are: the loan's current interest rate versus the rate at which the borrower would be able to refinance, the economic benefit expected to be obtained from refinancing, the borrower's financial ability to refinance, the availability of mortgage loans in general, and numerous other economic and non-economic factors, some of which may vary by geographic region. In an interest rate environment where long-term interest rates are declining and related mortgage refinancing opportunities are readily available, prepayments of ARMs and higher rate, fixed-rate mortgages tend to accelerate. With respect to ARM loans, a borrower's incentive to prepay or refinance his loan is typically influenced by the interest rate index to which the interest rate on his loan is tied, the amount by which the loan rate is to differ from its associated index (the margin), the extent to which interest rate caps (if any) are expected to limit future interest rate adjustments, the extent to which payment caps (if any) are expected to limit future payment obligations, and other less quantifiable factors. BankUnited has phased out its practice of purchasing mortgage loans in the secondary market, particularly ARM loans, and has put increased emphasis on originating its own loans. Over time, this has mitigated BankUnited's exposure to the adverse impact accelerated premium amortization has on its net interest income. Investment securities, other than those with early call provisions, generally do not contain significant imbedded options that results in greater degree of repayment predictability. While savings and checking deposits generally may be withdrawn upon customer request without prior notice, on an overall basis, one customer's withdrawal is likely to be offset by another customer's deposit resulting in a dependable source of funds. Time deposits are generally subject to early withdrawal penalties, which results in the large majority of these deposits being maintained until maturity. Similarly, term FHLB advances have prepayment penalties, which discourage early repayment by the Bank. BankUnited's trust preferred securities may be redeemed at varying times and $59 million of these securities may be redeemed through 2016 at a premium. (See Notes to Consolidated Financial Statements for further discussion of the trust preferred securities). BankUnited borrows from the FHLB in the form of advances to fund operations. These advances have a variety of terms, rates and repayment provisions. A significant portion of BankUnited's advances were obtained through a convertible advances program that permits the FHLB to convert an advance from a fixed-rate basis to a 50 floating-rate basis at its discretion. It is highly probable that the advances will be converted in a rising interest rate environment. Should the FHLB elect to exercise this option, BankUnited's cost of funds may be affected adversely. BankUnited also borrows under the "knockout" advance program offered by the FHLB. In general, a knockout advance is structured as a fixed rate advance that the FHLB may convert to a floating rate indexed to the 3-month LIBOR rate if, at the end of any three month period after the non-conversion period, the 3-month LIBOR rate equals or exceeds an agreed upon threshold rate. In general BankUnited seeks to set the threshold at a rate that is higher than current market interest rates. Should a particular advance be converted by the FHLB, its rate will reset quarterly for the remainder of its term. BankUnited also limits its interest rate risk by purchasing interest rate caps. At present BankUnited holds five interest rate cap contracts totaling $800 million. The contracts require the counter-party to pay the BankUnited quarterly interest payments based on the notional amount and the difference between the index and the cap rate, if and when the index exceeds the cap rate, in return for a one time fee paid by the BankUnited (See Notes to the Consolidated Financial Statements for further discussion of interest rate caps). Management does not include the caps in its assessment of interest rate risk of the Bank due to the extreme level of interest rates that would need to occur for the Bank to receive a benefit. During fiscal year 2000, BankUnited borrowed a total of $250 million in knockout advances, each with a 10-year term and a one year non-callable period. The initial rates on these advances range from 5.92% to 6.94% while the threshold rates range from 8.50% to 9.75%. BankUnited has chosen to borrow under the knockout advance program because, as long as these advances remain unconverted by the FHLB, the stability of BankUnited's net interest margin will be enhanced. However, if the 3-month LIBOR rate were to rise to these threshold rates so as to allow the FHLB to convert one or more of BankUnited's knockout advances, the funding cost associated with the converted advance would become higher and more volatile, negatively impacting BankUnited's net interest margin. These same knockout advances were outstanding at September 30, 2001. Interest Rate Indices. BankUnited's ARM loans and mortgage-backed securities are primarily indexed to the One-Year CMT or MTA indices (see "Business--Lending Activities"). To the extent such loans and mortgage-backed securities are funded by deposits, FHLB advances, and other interest-bearing liabilities whose interest costs are influenced by indices not highly correlated with the One-Year CMT or MTA indices, an environment of changing interest rates may impact the various indices differently which may lead to significant changes in the value of, and the net earnings generated from, BankUnited's financial instruments. Each index is unique, and as such, is uniquely influenced by various economic and non-economic forces. Therefore, historical relationships between various indices may not necessarily be indicative of future relationships. Cap Risks and Lag Risks. At September 30, 2001 BankUnited's residential loan portfolio included $1.8 billion of ARMs (48.6% of BankUnited's total loan portfolio). The ARMs purchased by BankUnited typically have annual interest rate adjustment caps that limit rate changes to 2% per year. Further, a portion of these ARMs provide for initial rates of interest which are significantly below the rates which would prevail were the contractual interest rate index and margin used for repricing applied initially. Such loans are commonly referred to as being in their teaser rate period. In times of sharply rising interest rates, these caps may serve to limit the increase in interest income generated from certain interest-earning assets. Conversely, in an environment of sharply falling interest rates, they may reduce the decline in BankUnited's interest income. Over periods of time where the general level of interest rates has had time to fluctuate, the alternating positive and negative effects generated by such interest rate caps will be largely offsetting. Over shorter periods, however, and to the extent any caps are actually limiting the interest rate adjustment of any assets, they can increase the volatility of BankUnited's net interest income, and to a lesser extent, its market value of equity. 51 Availability of Mortgage Loans. BankUnited's net income depends significantly on its ability to originate or acquire mortgage loan assets on acceptable terms and at favorable spreads over the its borrowing costs. Should BankUnited be unable to originate or acquire such mortgage loans, its results of operations will be adversely affected. In originating or acquiring mortgage loans, BankUnited competes with REITs, investment banking firms, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, competing lenders, FNMA, FHLMC, GNMA, and other entities which purchase mortgage loans, some of which have greater financial resources than BankUnited. Increased competition for the origination or acquisition of eligible mortgage loans or a diminution in the supply could result in BankUnited having to incur higher costs and accept lower yields. This, in turn, would reduce the amount by which BankUnited's yield on earning assets would exceeds its cost of funding those assets. The availability of mortgage loans meeting BankUnited's criteria is dependent upon, among other things, the size and level of activity in the residential real estate lending market, which in turn depends on other factors including the level of interest rates, regional and national economic conditions and changes in residential real estate values. To the extent the BankUnited is unable to originate or acquire a sufficient volume of mortgage loans meeting its criteria, BankUnited's operating results could be adversely affected. 52 Gap Table. The following table sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at September 30, 2001, expected to reprice or mature in each of the future time periods shown.
At September 30, 2001 Interest Sensitivity Period (1) ---------------------------------------------------------- 6 Months 6 Months- Over 1- Over 5- Over or Less 1 Year 5 Years 10 Years 10 Years ---------- --------- ---------- --------- ---------- (Dollars in thousands) Interest-earning assets: Investments, tax certificates, Federal funds sold, FHLB overnight deposits and other interest earning assets, at cost.......................................... $ 393,578 $ 5,257 $ 15,097 $ 4,661 $ 42,683 Mortgage-backed securities................................ 99,181 69,298 306,968 200,062 157,219 Loans: Adjustable-rate mortgages................................. 676,614 264,854 899,659 9,415 1,436 Fixed-rate mortgages...................................... 161,660 130,664 656,765 407,741 313,790 Commercial and consumer loans............................. 168,865 9,201 23,568 9,695 4,234 ---------- -------- ---------- --------- ---------- Total loans.............................................. 1,007,139 404,719 1,579,992 426,851 319,460 ---------- -------- ---------- --------- ---------- Total interest-earning assets............................ $1,499,898 $479,274 $1,902,057 $ 631,574 $ 519,362 ========== ======== ========== ========= ========== Interest-bearing liabilities: Customer deposits: Money market and NOW accounts............................. $ 25,240 $ 25,242 $ 151,586 $ 19,483 $ -- Passbook accounts......................................... 41,740 41,757 334,057 178,980 -- Certificate accounts...................................... 860,623 403,242 481,469 -- -- ---------- -------- ---------- --------- ---------- Total customer deposits.................................. 927,603 470,241 967,112 198,463 -- ---------- -------- ---------- --------- ---------- Borrowings: FHLB advances............................................. 385,000 75,000 355,721 694,000 -- Senior Notes.............................................. -- -- -- -- -- Trust Preferred........................................... -- -- -- -- 203,592 Other borrowings.......................................... 233,116 -- 200,000 50,000 -- ---------- -------- ---------- --------- ---------- Total borrowings......................................... 618,116 75,000 555,721 744,000 203,592 ---------- -------- ---------- --------- ---------- Total interest-bearing liabilities....................... $1,545,719 $545,241 $1,522,833 $ 942,463 $ 203,592 ========== ======== ========== ========= ========== Derivative instruments affecting interest rate sensitivity.. $ 200,000 $ -- $ 600,000 $ -- $ -- ========== ======== ========== ========= ========== Total interest-earning assets less interest-bearing liabilities ("GAP")........................................ $ 154,179 $(65,967) $ 979,224 $(310,889) $ 315,770 ========== ======== ========== ========= ========== Ratio of GAP to total assets.............................. 2.94% (1.26)% 18.69% (5.94)% 6.03% ========== ======== ========== ========= ========== Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities.......................... $ 154,179 $ 88,212 $1,067,436 $ 756,547 $1,072,317 ========== ======== ========== ========= ========== Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities, as a percentage of total assets..................................................... 2.94% 1.68% 20.37% 14.43% 20.46% ========== ======== ========== ========= ==========
Total ---------- Interest-earning assets: Investments, tax certificates, Federal funds sold, FHLB overnight deposits and other interest earning assets, at cost.......................................... $ 461,276 Mortgage-backed securities................................ 832,728 Loans: Adjustable-rate mortgages................................. 1,851,978 Fixed-rate mortgages...................................... 1,670,620 Commercial and consumer loans............................. 215,563 ---------- Total loans.............................................. 3,738,161 ---------- Total interest-earning assets............................ $5,032,165 ========== Interest-bearing liabilities: Customer deposits: Money market and NOW accounts............................. $ 221,551 Passbook accounts......................................... 596,534 Certificate accounts...................................... 1,745,334 ---------- Total customer deposits.................................. 2,563,419 ---------- Borrowings: FHLB advances............................................. 1,509,721 Senior Notes.............................................. -- Trust Preferred........................................... 203,592 Other borrowings.......................................... 483,116 ---------- Total borrowings......................................... 2,196,429 ---------- Total interest-bearing liabilities....................... $4,759,848 ========== Derivative instruments affecting interest rate sensitivity.. $ 800,000 ========== Total interest-earning assets less interest-bearing liabilities ("GAP")........................................ $1,072,317 ========== Ratio of GAP to total assets.............................. 20.46% ========== Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities.......................... Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities, as a percentage of total assets.....................................................
In preparing the table above, certain assumptions have been made with regard to the reprising of maturities of certain assets and liabilities. Assumptions as to prepayments on first and second mortgages loans and mortgage-backed securities were obtained from prepayment rate tables and provide assumptions corresponding to recent actual reprising experienced in the marketplace. Assumptions have also been made with regard to payments on tax certificates based on historical experience. Money market, NOW accounts and passbook accounts are assumed to decay based on duration estimates determined by management. The rates paid in these accounts are determined by management, based on market conditions and other factors, and may reprice more slowly than assumed. All other assets and liabilities have been repriced based on the earlier of repricing or contractual maturity. The mortgage prepayments rate table, deposit decay rates and the historical assumptions used regarding payments on tax certificates should not be regarded as indicative of the actual reprising that may be experienced by BankUnited. 53 In addition to preparing and reviewing periodic gap reports which help identify repricing mismatches, management uses simulation models which estimate the impact on net interest income of various interest rate scenarios, balance sheet trends and strategies. These simulations cover the following financial instruments: short-term financial instruments, securities, loans, deposits, borrowings and off-balance sheet financial instruments. These simulations incorporate assumptions about balance sheet dynamics, such as loan and deposit growth and pricing, changes in funding mix and asset and liability repricing and maturity characteristics. Simulations are run under various interest rate scenarios to determine the impact on net income and capital. From these scenarios, interest rate risk is quantified and appropriate strategies are developed and implemented. The overall interest rate risk position and strategies are reviewed on an ongoing basis by senior management. Based on the information and assumptions in effect on September 30, 2001, management estimates the impact of a gradual and parallel 100 basis-point rise or fall in interest rates over the next 12 months to be between 1% and 4% of net interest income. BankUnited recognizes that there are numerous assumptions and estimates associated with the simulations described above which may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the simulation model assumes that the composition of BankUnited's interest sensitive assets and liabilities existing at the beginning of a period remains relatively constant over the period being measured and also assumes that the change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. In addition, prepayment estimates and other assumptions within the model are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision. Accordingly, although the simulation model may provide an indication of BankUnited's interest rate risk exposure at a particular point in time, such measurements are not intended to provide for a precise forecast of the effect of changes in market interest rates on BankUnited's net interest income and will differ from actual results. BankUnited's operations are affected by many factors beyond its control such as the overall condition of the economy, monetary and fiscal policies of the federal government, and regulations specific to the banking industry. Revenues generated from lending activities are impacted by loan demand, which in turn impacts the interest rates at which such loans may be made, the supply of housing, the availability of funds to lend, and the cost of obtaining such funds. BankUnited currently utilizes, on a limited basis, derivative financial instruments designed to reduce the interest rate risks associated with certain other financial instruments. Specifically, Interest Rate Cap contracts have been acquired by BankUnited to reduce its exposure to the increased funding costs that would likely result in an increasing interest rate environment. As was discussed previously, increased funding costs are not likely to be fully counterbalanced by an offsetting increase in BankUnited's yield on interest earning assets. (See Notes to Consolidated Financial Statements for further discussion of the Interest Rate Cap contracts.) The Interest Rate Cap contracts are treated as fair-value hedges and it is anticipated that any change in their fair value will be substantially offset by an opposite change in the fair value of the financial instruments intended to hedge. The indices used in these contracts are the Constant Maturity Treasury ("CMT") and the Constant Maturity Swap ("CMS"). 54 The following table sets forth information concerning the interest rate cap contracts.
Notional Amount Index Cap Rate Termination Date --------------- ----------- -------- ---------------- (dollars in thousands) $100,000 5-Year CMT 7.50% March 23, 2002 100,000 10-Year CMT 7.25% March 23, 2002 100,000 5-Year CMS 8.85% March 23, 2003 400,000 10-Year CMS 9.35% March 23, 2003 100,000 10-Year CMS 8.85% March 23, 2003 -------- $800,000 ========
BankUnited entered into these contracts for the purpose of hedging a portion of BankUnited's interest rate risk against rising interest rates on certain borrowings from the Federal Home Loan Bank. As of September 30, 2001, the 5-Year CMT rate was 3.79%, the 10-Year CMT rate was 4.58%, the 5-Year CMS rate was 4.54% and the 10-Year CMS rate was 5.25%. There can be no assurance, however, of the degree to which BankUnited will be able to match its short-term, interest-earning assets to its short-term, interest-bearing liabilities. Neither can there be any assurances of BankUnited's ability to manage related liquidity risks. 55 BANKUNITED FINANCIAL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Certified Public Accountants............................................ 57 Consolidated Statements of Financial Condition as of September 30, 2001 and September 30, 2000 58 Consolidated Statements of Operations for the Years Ended September 30, 2001, 2000 and 1999... 59 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2001, 2000 and 1999.................................................................................... 60 Consolidated Statements of Cash Flows for the Years Ended September 30, 2001, 2000 and 1999... 63 Notes to Consolidated Financial Statements.................................................... 65
56 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of BankUnited Financial Corporation In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of BankUnited Financial Corporation and its subsidiaries at September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP Miami, Florida October 29, 2001 57 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, ---------------------- 2001 2000 ---------- ---------- (Dollars in thousands, except per share data) Assets: Cash........................................................... $ 45,113 $ 28,681 Federal Home Loan Bank overnight deposits...................... 246,902 247,640 Federal funds sold and securities purchased under agreements to resell....................................................... 2,738 63,000 Tax certificates (net of reserves of $934 and $986 at September 30, 2001 and 2000, respectively)............................. 876 5,699 Investments held to maturity (fair value of approximately $66,495 and $4,985 at September 30, 2001 and 2000, respectively)................................................ 66,417 5,062 Investments available for sale, at fair value.................. 68,719 17,403 Mortgage-backed securities, held to maturity (fair value of approximately $203,864 and $220,484 at September 30, 2001 and 2000, respectively).......................................... 194,979 222,592 Mortgage-backed securities available for sale, at fair value... 637,749 119,763 Loans receivable, net.......................................... 3,499,608 3,358,137 Mortgage loans held for sale (fair value of approximately $253,490 and $313,840 at September 30, 2001 and 2000, respectively)................................................ 250,041 312,632 Other interest-earning assets.................................. 75,625 62,676 Office properties and equipment, net........................... 16,054 16,158 Real estate owned.............................................. 1,832 2,286 Accrued interest receivable.................................... 30,157 26,648 Mortgage servicing rights...................................... 5,837 6,227 Goodwill....................................................... 28,357 29,911 Due from broker................................................ 25,469 -- Bank owned life insurance...................................... 20,516 -- Prepaid expenses and other assets.............................. 21,206 27,554 ---------- ---------- Total assets................................................. $5,238,195 $4,552,069 ========== ========== Liabilities and Stockholders' Equity: Liabilities: Deposits....................................................... $2,653,145 $2,609,538 Securities sold under agreements to repurchase................. 283,116 9,205 Advances from Federal Home Loan Bank........................... 1,509,721 1,251,426 Senior notes................................................... 200,000 200,000 Company obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures of BankUnited.... 203,592 212,393 Interest payable (primarily on deposits and advances from Federal Home Loan Bank)...................................... 14,265 12,041 Advance payments by borrowers for taxes and insurance.......... 31,999 25,651 Due to broker.................................................. 15,178 -- Accrued expenses and other liabilities......................... 26,733 29,228 ---------- ---------- Total liabilities............................................ 4,937,749 4,349,482 ---------- ---------- Commitments and contingencies (Notes 7 and 17) Stockholders' equity: Preferred stock, Series B and Series 9%, $0.01 par value. Authorized shares--10,000,000; issued shares--355,821 and 992,938 at September 30, 2001 and 2000, respectively. Outstanding shares--355,821 and 991,938 at September 30, 2001 and 2000, respectively....................................... 4 10 Class A Common Stock, $0.01 par value. Authorized shares--30,000,000. Issued shares--24,871,219 and 18,093,575 at September 30, 2001 and 2000, respectively; Outstanding shares--24,538,219 and 17,760,575 at September 30, 2001 and 2000, respectively........................................... 249 180 Class B Common Stock, $0.01 par value. Authorized shares--3,000,000; issued and outstanding shares-- 505,669 and 446,262 at September 30, 2001 and 2000, respectively..... 5 5 Additional paid-in capital..................................... 249,788 181,692 Retained earnings.............................................. 47,502 29,055 Treasury stock, 333,000 shares of class A Common Stock at September 30, 2001 and 2000, and 1,000 shares of Preferred 9% at September 30, 2000, at cost (none at September 30, 2001).. (2,794) (2,801) Accumulated other comprehensive income (loss).................. 5,692 (5,554) ---------- ---------- Total stockholders' equity................................... 300,446 202,587 ---------- ---------- Total liabilities and stockholders' equity................... $5,238,195 $4,552,069 ========== ==========
See accompanying notes to consolidated financial statements 58 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, ---------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands, except earnings per share) Interest income: Interest and fees on loans.......................................................... $273,174 $260,690 $199,704 Interest on mortgage-backed securities.............................................. 38,473 24,866 18,493 Interest on short-term investments.................................................. 1,699 3,229 7,590 Interest and dividends on long-term investments and other interest-earning assets... 10,731 6,530 7,763 -------- -------- -------- Total interest income.............................................................. 324,077 295,315 233,550 -------- -------- -------- Interest expense: Interest on deposits................................................................ 143,134 126,629 106,655 Interest on borrowings.............................................................. 83,730 71,618 59,706 Preferred dividends of subsidiary trust............................................. 19,929 20,899 21,154 -------- -------- -------- Total interest expense............................................................. 246,793 219,146 187,515 -------- -------- -------- Net interest income before provision for loan losses................................ 77,284 76,169 46,035 Provision for loan losses............................................................. 7,100 4,645 7,939 -------- -------- -------- Net interest income after provision for loan losses................................. 70,184 71,524 38,096 -------- -------- -------- Non-interest income: Service fees, net................................................................... 6,495 4,295 3,785 Insurance commission................................................................ 2,733 1,503 847 Gain on sale of investments and mortgaged-backed securities......................... 1,837 -- -- Net gain on sale of loans and other assets.......................................... 1,383 71 (4) Other............................................................................... 1,144 206 172 -------- -------- -------- Total non-interest income.......................................................... 13,592 6,075 4,800 -------- -------- -------- Non-interest expenses: Employee compensation and benefits.................................................. 22,629 19,819 15,970 Occupancy and equipment............................................................. 9,046 8,332 8,029 Loan servicing expense.............................................................. 4,623 5,699 6,433 Telecommunications and data processing.............................................. 3,388 3,025 2,688 Professional fees--legal and accounting............................................. 3,267 3,193 3,084 Advertising and promotion expense................................................... 2,356 3,289 1,430 Amortization of goodwill............................................................ 1,554 1,565 1,555 Insurance........................................................................... 1,000 1,221 1,683 Real estate owned operations........................................................ (168) (307) 152 Other operating expenses............................................................ 6,702 6,688 7,369 -------- -------- -------- Total non-interest expenses........................................................ 54,397 52,524 48,393 -------- -------- -------- Income (loss) before income taxes, extraordinary item and preferred stock dividends. 29,379 25,075 (5,497) Provision (benefit) for income taxes.................................................. 11,106 10,247 (1,903) -------- -------- -------- Income (loss) before extraordinary item and preferred stock dividends.............. 18,273 14,828 (3,594) Extraordinary item (net of tax of $514 and $586 for 2001 and 2000, respectively)...... 823 936 -- -------- -------- -------- Net income (loss) before preferred stock dividends.................................. 19,096 15,764 (3,594) Preferred stock dividends............................................................. 649 790 773 -------- -------- -------- Net income (loss) after preferred stock dividends................................... $ 18,447 $ 14,974 $ (4,367) ======== ======== ======== Earnings (loss) per share: Basic: Net income (loss) before extraordinary item........................................ $ 0.87 $ 0.77 $ (0.24) Extraordinary item................................................................. 0.04 0.05 -- -------- -------- -------- Net income (loss).................................................................. $ 0.91 $ 0.82 $ (0.24) ======== ======== ======== Diluted: Net income (loss) before extraordinary item........................................ $ 0.83 $ 0.76 $ (0.24) Extraordinary item................................................................. 0.04 0.05 -- -------- -------- -------- Net income (loss).................................................................. $ 0.87 $ 0.81 $ (0.24) ======== ======== ======== Weighted average common shares outstanding: Basic............................................................................... 20,228 18,220 18,313 Diluted............................................................................. 21,354 18,780 18,313
See accompanying notes to consolidated financial statements. 59 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 2001, 2000 and 1999 ---------------------------------------------------- Class A Class B Preferred Stock Common Stock Common Stock ----------------- ------------------ -------------- Shares Amount Shares Amount Shares Amount -------- ------ ---------- ------ ------- ------ (Dollars in thousands) Balance at September 30, 1998........................... 926,697 $ 9 17,816,213 $178 331,743 $ 3 Comprehensive loss: Net loss for the year ended September 30, 1999....... -- -- -- -- -- -- Payment of dividends on preferred stock.............. -- -- -- -- -- -- Other comprehensive loss, net of tax................. -- -- -- -- -- -- Total comprehensive loss............................ -- -- -- -- -- -- Issuance of Series B Preferred Stock.................. 26,241 -- -- -- -- -- Issuance of Class A and Class B Common Stock.......... -- -- 64,176 1 811 -- Conversion of Class B to Class A Common Stock......... -- -- 97,048 1 (97,048) (1) Purchase of Class A Common Stock...................... -- -- (183,000) -- -- -- Stock options and warrants exercised.................. 40,000 1 58,984 -- 222,961 3 Common stock issued through preferred stock dividends. -- -- 13,009 -- -- -- -------- --- ---------- ---- ------- --- Balance at September 30, 1999........................... 992,938 10 17,866,430 180 458,467 5 Comprehensive income: Net income for the year ended September 30, 2000..... -- -- -- -- -- -- Payment of dividends on preferred stock.............. -- -- -- -- -- -- Other comprehensive loss, net of tax................. -- -- -- -- -- -- Total comprehensive income.......................... -- -- -- -- -- -- Dividend on B Preferred paid in Class A Common Stock.. -- -- 4,244 -- -- -- Conversion of Class B to Class A Common Stock......... -- -- 20,205 -- (20,205) -- Purchase of Class A Common Stock...................... -- -- (150,000) -- -- -- Purchase of preferred stock........................... (1,000) -- -- -- -- -- Stock options and other awards........................ -- -- 19,696 -- 8,000 -- -------- --- ---------- ---- ------- --- Balance at September 30, 2000........................... 991,938 10 17,760,575 180 446,262 5 Comprehensive income: Net income for the year ended September 30, 2001..... -- -- -- -- -- -- Payment of dividends on preferred stock.............. -- -- -- -- -- -- Other comprehensive income, net of tax............... -- -- -- -- -- -- Total comprehensive income.......................... -- -- -- -- -- -- Stock Offering--Class A Common stock.................. -- -- 6,555,000 66 -- -- Conversion of Class B to Class A Common Stock......... -- -- 238 -- (238) -- Redemption of preferred stock......................... (696,117) (7) -- -- -- -- Stock options and other awards........................ 60,000 1 222,406 3 59,645 -- -------- --- ---------- ---- ------- --- Balance at September 30, 2001........................... 355,821 $ 4 24,538,219 $249 505,669 $ 5 ======== === ========== ==== ======= ===
(Continued on next page) 60 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued)
Accumulated Other Comprehensive Total Paid-in Retained Treasury Income (Loss) Stockholders' Capital Earnings Stock Net of Tax Equity -------- -------- -------- ----------------- ------------- (Dollars in thousands) Balance at September 30, 1998........................... $178,777 $18,448 $ -- $ 1,877 $199,292 Comprehensive loss: Net loss for the year ended September 30, 1999....... -- (3,594) -- -- (3,594) Payments of dividends on preferred stock............. -- (773) -- -- (773) Other comprehensive loss, net of tax................. -- -- -- (5,667) (5,667) -------- Total comprehensive loss............................ (10,034) Issuance of Series B Preferred Stock.................. 111 -- -- -- 111 Issuance of Class A and Class B Common Stock.......... 325 -- -- -- 326 Conversion of Class B to Class A Common Stock......... -- -- -- -- -- Purchase of Class A Common Stock...................... -- -- (1,684) -- (1,684) Stock options and warrants exercised.................. 2,007 -- -- -- 2,011 Common stock issued through preferred stock dividends. 115 -- -- -- 115 -------- ------- ------- ------- -------- Balance at September 30, 1999........................... 181,335 14,081 (1,684) (3,790) 190,137 Comprehensive income: Net income for the year ended September 30, 2000..... -- 15,764 -- -- 15,764 Payment of dividends on preferred stock.............. -- (790) -- -- (790) Other comprehensive loss, net of tax................. -- -- -- (1,764) (1,764) -------- Total comprehensive income.......................... 13,210 Dividend on B Preferred paid in Class A Common Stock.. 33 -- -- -- 33 Conversion of Class B to Class A Common Stock......... -- -- -- -- -- Purchase of Class A Common Stock...................... -- -- (1,110) -- (1,110) Purchase of preferred stock........................... -- -- (7) -- (7) Stock options and other awards........................ 324 -- -- -- 324 -------- ------- ------- ------- -------- Balance at September 30, 2000........................... 181,692 29,055 (2,801) (5,554) 202,587 Comprehensive income: Net income for the year ended September 30, 2001..... -- 19,096 -- -- 19,096 Payment of dividends on preferred stock.............. -- (649) -- -- (649) Other comprehensive income, net of tax............... -- -- -- 11,246 11,246 -------- Total comprehensive income.......................... -- -- -- -- 29,693 Stock Offering-Class A Common Stock................... 73,568 -- -- -- 73,634 Conversion of Class B to Class A Common Stock......... -- -- -- -- -- Redemption of preferred stock......................... (6,961) -- 7 -- (6,961) Stock options and other awards........................ 1,489 -- -- -- 1,493 -------- ------- ------- ------- -------- Balance at September 30, 2001........................... $249,788 $47,502 $(2,794) $ 5,692 $300,446 ======== ======= ======= ======= ========
(Continued on next page) 61 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(Continued) For the Years Ended September 30, 2001, 2000 and 1999 The beginning balance at September 30, 1998 of each series of BankUnited's preferred stock was as follows:
Shares Amount ------- ------ (Dollars in thousands) Series B. 229,580 $2 Series 9% 697,117 7 ------- -- Total.... 926,697 $9 ======= ==
The ending balance at September 30, 2001 of each series of BankUnited's preferred stock was as follows:
Shares Amount ------- ------ (Dollars in thousands) Series B 355,821 $4 ======= ==
The following table presents additional information concerning BankUnited's other comprehensive income (loss):
For the Years Ended September 30, -------------------------------- 2001 2000 1999 ------- ------- ------- (Dollars in thousands) Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the period, net of tax expense (benefit) of $6,889, $(1,185) and $(3,567) for 2001, 2000 and 1999, respectively............................................................ $11,004 $(1,893) $(5,698) Less reclassification adjustments for: Amortization of unrealized losses on transferred securities, net of tax expense of $86, $80 and $19 for 2001, 2000 and 1999, respectively......... 138 129 31 Realized gains on securities sold included in net income, net of tax expense of $64............................................................ 104 -- -- ------- ------- ------- Total other comprehensive income (loss), net of tax................................ $11,246 $(1,764) $(5,667) ======= ======= =======
See accompanying notes to consolidated financial statements. 62 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, -------------------------------- 2001 2000 1999 --------- --------- --------- (Dollars in thousands) Cash flows from operating activities: Net income (loss)............... $ 19,096 $ 15,764 $ (3,594) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for loan losses.... 7,100 4,645 7,939 Provision for losses on tax certificates............ -- -- 1,147 Depreciation and amortization................ 3,080 3,026 3,243 Adjustments to the carrying value of real estate owned................ 396 966 1,582 Amortization of fees, discounts and premiums, net......................... 5,820 3,649 24,358 Amortization of mortgage servicing rights............ 1,675 1,593 1,471 Amortization of goodwill..... 1,554 1,565 1,555 Amortization of unrealized losses on transferred mortgage-backed securities.. 224 209 50 Amortization of restricted stock and other awards...... 316 316 210 Amortization of issuance cost of Senior Notes........ 533 629 508 Net (gain) loss on sale of loans, mortgage-backed securities and other assets...................... (3,220) (71) 4 Increase in bank owned life insurance cash surrender value............. (516) -- -- Net gain on sale of real estate owned................ (332) (647) (154) Extraordinary gain on repurchase of trust preferred securities........ (1,337) (1,522) -- Loans originated for sale...... (33,491) (9,287) (140,399) Proceeds from sale of loans.... 36,514 10,210 23,559 (Increase) decrease in accrued interest receivable.. (3,509) (1,880) 8,096 Increase in interest payable on deposits and FHLB advances..................... 2,224 1,836 2,380 (Decrease) increase in accrued taxes................ (1,868) 3,480 (1,224) (Decrease) increase in other liabilities.................. (7,672) (5,440) 3,359 Decrease (increase) in prepaid expenses and other assets....................... 5,411 (4,300) 16,442 Other, net..................... (1,204) (188) 329 --------- --------- --------- Net cash provided by (used in) operating activities................. 30,794 24,553 (49,139) --------- --------- --------- Cash flows from investing activities: Net increase in loans.......... (297,065) (385,007) (180,260) Purchase of investment securities held to maturity.. (66,227) -- -- Purchase of investment securities available for sale......................... (49,263) (1,000) (3,915) Purchase of mortgage-backed securities held to maturity.. (50,320) (49,824) (19,581) Purchase of mortgage-backed securities available for sale......................... (658,406) (8,883) (166,205) Purchase of other earning assets....................... (84,949) (50,399) (49,649) Purchase of bank owned life insurance.................... (20,000) -- -- Proceeds from repayments of investment securities held to maturity.................. 5,000 -- 9,500 Proceeds from repayments of investment securities available for sale........... 350 2,250 5,800 Proceeds from repayments of mortgage-backed securities held to maturity............. 78,374 30,510 115,990 Proceeds from repayments of mortgage-backed securities available for sale........... 65,116 31,999 57,663 Proceeds from repayments of other earning assets......... 72,000 42,650 46,035 Proceeds from sale of mortgage-backed securities held to maturity............. 21 -- -- Proceeds from sale of mortgage-backed securities available for sale........... 282,960 -- -- Proceeds from sale of real estate owned................. 2,994 8,398 4,542 Purchase of office properties and equipment..... (3,072) (3,418) (4,689) Net decrease in tax certificates................. 4,823 9,116 24,045 --------- --------- --------- Net cash used in investing activities....... (717,664) (373,608) (160,724) --------- --------- ---------
(Continued on next page) 63 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Years Ended September 30, -------------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) Cash flows from financing activities: Net increase in deposits........................................................... 43,607 329,740 154,974 Net increase in Federal Home Loan Bank advances.................................... 258,295 154,979 74,981 Net increase (decrease) in other borrowings........................................ 273,911 (22,496) 110,553 Increase in capitalized costs for senior notes..................................... -- (300) (2,261) Repurchase of trust preferred securities........................................... (7,060) (4,368) -- Net proceeds from issuance of stock................................................ 74,811 125 2,011 Purchase of BankUnited's Class A Common Stock...................................... -- (1,117) (1,684) Redemption of preferred stock...................................................... (6,961) -- -- Dividends paid on preferred stock.................................................. (649) (757) (658) Increase in advances from borrowers for taxes and insurance........................ 6,348 6,035 6,971 -------- -------- -------- Net cash provided by financing activities........................................ 642,302 461,841 344,887 -------- -------- -------- (Decrease) increase in cash and cash equivalents..................................... (44,568) 112,786 135,024 Cash and cash equivalents at beginning of year....................................... 339,321 226,535 91,511 -------- -------- -------- Cash and cash equivalents at end of year............................................. $294,753 $339,321 $226,535 ======== ======== ======== Supplemental disclosure of non-cash investing and financing activities: Interest paid on deposits and borrowings........................................... $244,569 $217,310 $185,136 Income taxes paid.................................................................. $ 11,395 $ 8,615 $ -- Purchase of mortgage-backed securities settling in October, 2001................... $ 15,178 $ -- $ -- Sales of mortgage-backed securities settling in October, 2001...................... $ 25,469 $ -- $ -- Securitization of loans receivable................................................. $200,901 $ -- $ -- Transfers from loans to real estate owned.......................................... $ 2,604 $ 7,334 $ 7,519 Transfer of loans from a mortgage-backed securities................................ $ -- $ -- $ 14,600 Transfer of loans from held for sale to portfolio.................................. $ -- $ -- $ 73,825 Transfer of loans from portfolio to held for sale.................................. $ 63,060 $ -- $288,319 Transfer of mortgage-backed securities from available for sale to held to maturity. $ -- $ -- $156,370
See accompanying notes to consolidated financial statements. 64 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 (1) Summary of Significant Accounting Policies The accounting and reporting policies of BankUnited Financial Corporation ("BankUnited") and subsidiaries conform to accounting principles generally accepted in the United States of America and to general practices within the savings and loan industry. Presented below is a description of BankUnited's principal accounting policies. (a) Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of BankUnited and its subsidiaries, including BankUnited, FSB (the "Bank"). The Bank provides a full range of banking services to individual and corporate customers through its branches in South and West Florida. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. All significant inter-company transactions and balances have been eliminated. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated statements of financial condition and operations for the period. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the effect of prepayments on premiums on purchased loans, the valuation of mortgage servicing rights, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. (b) Cash and Cash Equivalents For the purpose of reporting cash flows, cash and cash equivalents include cash, Federal Home Loan Bank overnight deposits, and securities purchased under agreement to resell with original maturities of three months or less. The collateral held by the bank for securities purchased under the agreements to resell is the securities underlying those agreements. (c) Investments and Mortgage-backed Securities Mortgage-backed securities and other investments available for sale are carried at fair value, inclusive of unrealized gains and losses, and net of discount accretion and premium amortization computed using the level yield method. Net unrealized gains and losses are included in comprehensive income (loss) net of applicable income taxes. Mortgage-backed securities and investments held-to-maturity are carried at amortized cost. Mortgage-backed securities and investment securities that BankUnited has the positive intent and ability to hold to maturity are designated as held-to-maturity securities. Gains or losses on sales of mortgage securities and investments are recognized on the specific identification basis. 65 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 Tax certificates are considered investments held to maturity and, accordingly, are carried at cost less a valuation allowance. Interest is accrued on tax certificates until payoff or until deemed uncollectible. When deemed uncollectible, accrued but uncollected interest is reversed. (d) Allowance for Loan Losses BankUnited's allowance for loan losses is established and maintained based upon management's evaluation of the risks inherent in BankUnited's loan portfolio including the economic trends and other conditions in specific geographic areas as they relate to the nature of BankUnited's portfolio. BankUnited's one-to four family residential loans and consumer loans are homogeneous in nature and no single loan is individually significant in terms of its size or potential risk of loss. Therefore, management evaluates these loans as a group of loans. Management utilizes historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan administration and resolution, the views of its regulators, and other relevant factors, such as assumptions and projections of current economic and market conditions in order to determine the adequacy of the allowance for loan losses on these loans. For individually impaired commercial real estate loans, an estimated value of the property or collateral securing the loan is determined through an appraisal, where possible. In instances where BankUnited has not taken possession of the property or does not otherwise have access to the premises and therefore cannot obtain an appraisal, a real estate broker's opinion as to the value of the property is obtained based primarily on a drive-by inspection. If the unpaid balance of the loan is greater than the estimated fair value of the property, a reserve is established for the difference between the carrying value and the estimated fair value. Other impaired loans such as non-mortgage commercial loans are evaluated individually as well. For these loans, a determination is made of the value of the collateral, if any, through examination of current financial information. If the unpaid balance of the loan is greater than estimated fair value of the property, a reserve is established for the difference between the carrying value and the estimated fair value. Allowances are also established on all classes of the performing portfolio and represent loss allowances that have been established to recognize the probable losses inherent in the loan portfolio. In determining the adequacy of the reserves, management considers changes in the size and composition of the loan portfolio, historical loan loss experience, current economic and market conditions and BankUnited's credit administration and asset management philosophies and procedures. Because of the many factors that can affect recoverability, the estimated loss on individual loans or groups of loans may not be the same as the actual loss incurred, if any. As a self-correcting mechanism, to reduce the differences between estimated and actual losses, BankUnited's current process evaluates the actual losses that occur on all loans to determine whether refinements are necessary to improve procedures for estimating losses. This evaluation includes examining causes for actual losses and determining whether all of the factors resulting in the losses were considered in the estimation process. If not, the evaluation process is refined to consider those factors. Applied appropriately, this mechanism reduces, but will not eliminate, differences that occur between estimated and actual loan losses due to events and circumstances beyond the control of BankUnited. Management believes that the allowance for loan losses is adequate. While management uses historical and current available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require changes to the allowance based on their judgments about information available to them at the time of their examination. (e) Loans Receivable Loans receivable are considered long-term investments and, accordingly, are carried at historical cost. Loans held for sale are recorded at the lower of cost or market, determined in the aggregate. In determining cost, deferred loan origination fees and costs are adjusted to the principal balances of the related loans. 66 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 (f) Loan Origination Fees, Commitment Fees, Loan Premiums and Related Costs Loan origination fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on BankUnited's historical prepayment experience. Commitment fees and costs relating to commitments are recognized over the commitment period on a straight-line basis. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield. Premiums (discounts) paid on purchased loans are capitalized and recognized as an adjustment to interest income over the contractual life of the loans, adjusted for estimated prepayments based on BankUnited's historical prepayment experience. If actual prepayments exceed those estimated by BankUnited, premium (discount) amortization (accretion) is increased (decreased) through charges to interest income in the period the excess prepayments occur. (g) Other Interest-Earning Assets Other interest-earning assets includes Federal Home Loan Bank of Atlanta (FHLB) stock and an equity investment in the Community Reinvestment Group. The fair value is estimated to be the carrying value which is par. (h) Office Properties and Equipment Office properties and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is provided using the estimated service lives of the assets for furniture, fixtures and equipment (7 to 10 years), and computer equipment and software (3 to 5 years), or with leasehold improvements, the term of the lease or the useful life of the improvement, whichever is shorter. Repair and maintenance costs are charged to operations as incurred, and improvements are capitalized. (i) Accrued Interest Receivable Recognition of interest on the accrual method is discontinued when interest or principal payments are greater than 90 days in arrears. At the time a loan is placed on non-accrual status, previously accrued and uncollected interest is reversed against interest income in the current period. Loans are returned to accrual status when they become less than 90 days delinquent. (j) Real Estate Owned Property acquired through foreclosure or deed in lieu of foreclosure is carried at the lower of the related principal balance at foreclosure or estimated fair value less estimated costs to sell the property. Any excess of the loan balance over the fair value less estimated costs to sell the property is charged to the allowance for loan losses. The carrying value is reviewed periodically and, when necessary, any decline in the value of the real estate is charged to operations. Significant property improvements which enhance the salability of the property are capitalized to the extent that the carrying values do not exceed their estimated realizable values. Maintenance and carrying costs on the property are charged to operations as incurred. In connection with real estate owned, management obtains independent appraisals for properties. 67 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 (k) Mortgage Servicing Rights In connection with the securitization and sale of loans, BankUnited may retain the rights to service such loans for investors. A servicing asset or liability and other retained interests are recognized as an allocation of the carrying amount of the assets sold between the asset sold and the servicing obligation and other retained interests based on the relative fair value of the assets sold to the interests retained. BankUnited may also acquire mortgage servicing rights, which are recorded at cost. Mortgage servicing assets are amortized in proportion to and over the period of estimated net servicing income. Estimated net servicing income is determined using the estimated future balance of the underlying mortgage loan portfolio which, absent new purchases, declines over time from prepayments and cash flows. BankUnited evaluates the mortgage servicing assets for impairment based on the fair value of the servicing assets by strata. BankUnited stratifies the servicing assets by product and interest rates. Management obtains from an independent third party, on an annual basis, a market valuation of the mortgage servicing rights. Management reviews the assumptions in calculating the market value, which is then compared to BankUnited's carrying value. If necessary, mortgage servicing rights are adjusted to the lower of cost or market. BankUnited receives fees from investors for servicing mortgage loans. Servicing fees, generally expressed as a percent of the unpaid principal balance, are collected from the borrowers' payments. Late charge income and other ancillary fees, net of amortization of servicing assets, are also included in servicing income. (l) Goodwill Goodwill is amortized on a straight-line basis over its estimated beneficial life of 10 to 25 years. BankUnited reviews the carrying value of goodwill if and when economic events occur which may affect its remaining life, by estimating discounted and undiscounted cash flows as a means of determining and recognizing impairments. To date, no known economic events have occurred which were detrimental to the carrying value of goodwill. (See (r) Impact of New Accounting Pronouncements for a discussion on Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets.") (m) Bank Owned Life Insurance Bank owned life insurance is carried at an amount that could be realized under the insurance contract as of the date of the consolidated statement of financial condition. The change in contract value is recorded as an adjustment of the premiums paid in determining the expense or income to be recognized under the contract. (n) Income Taxes BankUnited and its subsidiaries file consolidated income tax returns. Deferred income taxes have been provided for elements of income and expense which are recognized for financial reporting purposes in periods different than such items are recognized for income tax purposes. BankUnited accounts for income taxes utilizing the liability method, which applies the enacted statutory rates in effect at the statement of financial condition date to differences between the book and tax bases of assets and liabilities. The resulting deferred tax liabilities and assets are adjusted to reflect changes in tax laws. (o) Earnings (Loss) per Share Basic earnings (loss) per common share is computed on the weighted average number of common shares outstanding during the year. Earnings (loss) per common share, assuming dilution, assume the maximum dilutive effect of the average number of shares from stock options and the conversion equivalents of preferred stocks and certain warrants. 68 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 (p) Stock Options Stock options are granted to employees and directors at the fair market value of the underlying stock on the date of the grant. The proceeds from the exercise of options are credited to common stock for the par value of the shares issued, and the excess, adjusted for any tax benefit, is credited to paid-in capital. (q) Segment Reporting Public companies are required to report certain financial information about significant revenue-producing segments of the business for which such information is available and utilized by the chief operating decision maker. Specific information to be reported for individual operating segments includes a measure of profit and loss, certain revenue and expense items, and total assets. As a community-oriented financial institution, substantially all of BankUnited's operations involve the delivery of loan and deposit products to customers. Management makes operation decisions and assesses performance based on an ongoing review of these community-banking operations, which constitute BankUnited's only operating segment for financial reporting purposes. (r) Impact of New Accounting Pronouncements BankUnited adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138 (collectively, "SFAS No. 133"), on October 1, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives designated as part of a hedge transaction are recorded each period in current earnings for fair value hedges or other comprehensive income for cash flow hedges. At October 1, 2000, BankUnited was party to interest rate caps with a notional face value of $800.0 million. These caps are used to hedge the interest rate risk relating to the callable options of the FHLB advances. In conjunction with the adoption of SFAS No. 133 on October 1, 2000, BankUnited accounted for the interest rate caps as fair value hedges, and in accordance with the transition provisions of SFAS No. 133, recorded a cumulative effect adjustment loss of approximately $453,000, net of tax, which was reflected in earnings. This was done in order to recognize, at fair value, all derivative instruments that are designated as fair value hedging instruments. The loss of $453,000 was offset by a corresponding gain of approximately $453,000, net of tax, which was also reflected in earnings. The gain was to recognize the difference, attributable to the interest rate risks, between the carrying values and fair values of the related embedded call options in the FHLB advances. During fiscal year 2001, BankUnited recorded fair value adjustments of approximately $404,000 as losses in earnings to recognize the change in the fair value of existing derivative instruments. Fair value adjustments of $391,000 were recorded as gains in earnings to recognize the change in the fair value of the related embedded call options in the FHLB advances. Both gains and losses are recorded as a component of interest on borrowings in the Statement of Operations. Effective April 1, 2001, BankUnited adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it 69 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 140 also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. In June of 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Except for goodwill and intangible assets acquired after June 30, 2001, which are immediately subject to its provisions, SFAS No. 142 is effective starting with fiscal years beginning after December 15, 2001. Early adoption is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The provisions of SFAS No. 142 no longer allow the amortization of goodwill, and certain intangible assets that have indefinite useful lives, and requires that impairment of goodwill on those assets be tested annually. In addition, SFAS No. 142 requires the following additional disclosures for goodwill and other intangible assets: . Changes in the carrying amount of goodwill from period-to-period; . The carrying amount of goodwill by major intangible asset class, and . The estimated intangible amortization for the next five years. BankUnited adopted SFAS No. 142 effective October 1, 2001. Upon initial application of SFAS No. 142, BankUnited does not anticipate impairment losses for goodwill resulting from a transitional impairment test. However, BankUnited has not yet fully determined the impact that the adoption of other elements of SFAS No. 142, including the possible future impairment charges on goodwill, may have on its financial position or results of operations. BankUnited expects that the elimination of goodwill amortization will positively impact pretax net income by approximately $1.5 million in fiscal year 2002. In October of 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and was written to provide a single model for the disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." BankUnited will adopt the provision of SFAS No. 144 effective October 1, 2002. Adoption of SFAS No. 144 is not expected to have a material impact on BankUnited's financial position, results of operations or cash flows. (s) Financial Statement Reclassifications Certain prior period amounts have been reclassified to conform to the September 30, 2001 consolidated financial statements. 70 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 (2) Earnings (Loss) per Share Earnings (loss) per common share is calculated as follows:
For Years Ended September 30, -------------------------------- 2001 2000 1999 ------- ------- ------- (Dollars in thousands, except per share amounts) Basic earnings (loss) per share: Numerator: Net income (loss) after preferred stock dividends.......... $18,447 $14,974 $(4,367) ======= ======= ======= Denominator: Weighted average common shares outstanding................. 20,228 18,220 18,313 ======= ======= ======= Basic earnings (loss) per share............................... $ 0.91 $ 0.82 $ (0.24) ======= ======= ======= Diluted earnings (loss) per share: Numerator: Net income (loss) after preferred stock dividends.......... $18,447 $14,974 $(4,367) Plus: Reduction of preferred stock dividends..................... 179 163 -- ------- ------- ------- Diluted net income (loss) available to common stock........... $18,626 $15,137 $(4,367) ======= ======= ======= Denominator: Weighted average common shares outstanding................. 20,228 18,220 18,313 Plus: Number of common shares from the conversion of options and warrants(1).............................................. 657 117 -- Number of common shares from the conversion of dilutive preferred stock(2)....................................... 469 443 -- ------- ------- ------- Diluted weighted average shares outstanding................... 21,354 18,780 18,313 ======= ======= ======= Diluted earnings (loss) per share............................. $ 0.87 $ 0.81 $ (0.24) ======= ======= =======
-------- (1) For the year ended September 30, 1999, there were 345,000 common stock equivalent shares of dilutive options that were not included in the computation of diluted earnings per share because of their antidilutive effect (none for the years ended September 30, 2001 and 2000). (2) For the year ended September 30, 1999, there were 378,000 of common stock equivalent shares of convertible preferred stock that were not included in the computation of diluted earnings per share because of their antidilutive effect (none for the years ended September 30, 2001 and 2000). 71 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 (3) Tax Certificates Tax certificates are certificates representing delinquent real estate taxes owed to the respective counties. A substantial percentage of tax certificates are for properties located in southeast Florida. BankUnited's policy was to purchase tax certificates only for properties located in Florida. As a result of the review of interest-earning assets in the second quarter of fiscal 1999, the decision was made to discontinue purchasing tax certificates. The net carrying value of tax certificates was $0.9 million and $5.7 million at September 30, 2001 and 2000, respectively. Included in these amounts at September 30, 2001 and 2000, were $0.8 million and $4.1 million, respectively, of tax certificates for which BankUnited had made application for tax deeds. BankUnited maintains loss reserves for tax certificates that were $0.9 million and $1.0 million at September 30, 2001 and 2000, respectively. (4) Securities Purchased under Agreements to Resell Interest income from securities purchased under agreements to resell aggregated approximately $0.2 million, $1.9 million and $6.1 million for the years ended September 30, 2001, 2000 and 1999, respectively. The following sets forth information concerning BankUnited's securities purchased under agreements to resell for the periods indicated:
As of or for the years ended September 30, ----------------------------------------- 2001 2000 1999 ------ -------- -------- (Dollars in thousands) Maximum amount of outstanding agreements at any month end during the period.............................. $9,682 $113,000 $370,000 Average amount outstanding during the period......... $3,850 $ 29,426 $122,879 Weighted average interest rate for the period........ 6.35% 6.53% 5.08% Maturity............................................. less than 30 days
(5) Investments and Mortgage-backed Securities Investments Presented below is an analysis of the carrying values and approximate fair value of investments held to maturity.
September 30, 2001 -------------------------------------- Gross Gross Carrying Unrealized Unrealized Fair Value Gains Losses Value -------- ---------- ---------- ------- (Dollars in thousands) U.S. Government agency securities.......... $50,001 $ -- $(362) $49,639 Trust preferred securities of other issuers 16,355 683 (243) 16,795 State of Israel bonds...................... 61 -- -- 61 ------- ---- ----- ------- Total................................... $66,417 $683 $(605) $66,495 ======= ==== ===== =======
September 30, 2000 ------------------------------------- Gross Gross Carrying Unrealized Unrealized Fair Value Gains Losses Value -------- ---------- ---------- ------ (Dollars in thousands) U.S. Government agency securities $5,001 $-- $(77) $4,924 State of Israel bonds............ 61 -- -- 61 ------ --- ---- ------ Total......................... $5,062 $ $(77) $4,985 ====== === ==== ======
72 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 Presented below is an analysis of the investments designated as available for sale.
September 30, 2001 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Carrying Cost Gains Losses Value --------- ---------- ---------- -------- (Dollars in thousands) U.S. government agency securities.......... $ 4,999 $ 67 $ -- $ 5,066 Equity securities.......................... 3,359 1,347 -- 4,706 Trust preferred securities of other issuers 42,109 143 (2,305) 39,947 Other...................................... 19,000 -- -- 19,000 ------- ------ ------- ------- Total................................... $69,467 $1,557 $(2,305) $68,719 ======= ====== ======= ======= September 30, 2000 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Carrying Cost Gains Losses Value --------- ---------- ---------- -------- (Dollars in thousands) U.S. government agency securities.......... $ 350 $ -- $ (10) $ 340 Equity securities.......................... 2,905 -- (115) 2,790 Trust preferred securities of other issuers 17,313 -- (3,040) 14,273 ------- ------ ------- ------- Total................................... $20,568 $ -- $(3,165) $17,403 ======= ====== ======= =======
Investments securities at September 30, 2001, by contractual maturity, are shown below.
Held to Maturity Available for Sale - ---------------- ------------------ Carrying Fair Amortized Carrying Value Value Cost Value -------- ------- --------- -------- (Dollars in thousands) Due in one year or less............... $ -- $ -- $ 4,960 $ 4,990 Due after one year through five years. -- -- 4,999 5,066 Due after five years through ten years -- -- 6,222 6,222 Due after ten years................... 66,417 66,495 49,927 47,735 Equity securities (maturity n/a)...... -- -- 3,359 4,706 ------- ------- -------- ------- $66,417 $66,495 $ 69,467 $68,719 ======= ======= ======== =======
Mortgage-backed securities The carrying value and approximate fair value of mortgage-backed securities held to maturity are summarized as follows:
September 30, 2001 --------------------------------------- Gross Gross Carrying Unrealized Unrealized Fair Value Gains Losses Value -------- ---------- ---------- -------- (Dollars in thousands) GNMA mortgage-backed securities.... $ 57,423 $3,326 $-- $ 60,749 FNMA mortgage-backed securities.... 32,071 1,252 -- 33,323 FHLMC mortgage-backed securities... 55,965 2,534 -- 58,499 Collateralized mortgage obligations 38,646 1,492 -- 40,138 Mortgage pass-through certificates. 10,874 281 -- 11,155 -------- ------ --- -------- Total........................... $194,979 $8,885 $-- $203,864 ======== ====== === ========
73 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001
September 30, 2000 --------------------------------------- Gross Gross Carrying Unrealized Unrealized Fair Value Gains Losses Value -------- ---------- ---------- -------- (Dollars in thousands) GNMA mortgage-backed securities.... $ 85,201 $1,006 $ (88) $ 86,119 FNMA mortgage-backed securities.... 1,741 -- (16) 1,725 FHLMC mortgage-backed securities... 66,947 -- (1,099) 65,848 Collateralized mortgage obligations 51,772 -- (2,484) 49,288 Mortgage pass-through certificates. 16,931 594 (21) 17,504 -------- ------ ------- -------- Total........................... $222,592 $1,600 $(3,708) $220,484 ======== ====== ======= ========
The carrying value and amortized cost of mortgage-backed securities available for sale are summarized as follows:
September 30, 2001 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Carrying Cost Gains Losses Value --------- ---------- ---------- -------- (Dollars in thousands) GNMA mortgage-backed securities.... $ 56,068 $ 1,482 $-- $ 57,550 FNMA mortgage-backed securities.... 217,449 4,175 -- 221,624 FHLMC mortgage-backed securities... 105,080 2,182 -- 107,262 Collateralized mortgage obligations 116,397 2,613 (3) 119,007 Mortgage pass-through certificates. 130,471 1,835 -- 132,306 -------- ------- --- -------- Total........................... $625,465 $12,287 $(3) $637,749 ======== ======= === ========
September 30, 2000 ---------------------------------------- Gross Gross Amortized Unrealized Unrealized Carrying Cost Gains Losses Value --------- ---------- ---------- -------- (Dollars in thousands) GNMA mortgage-backed securities.... $ 27,486 $167 $ (101) $ 27,552 FNMA mortgage-backed securities.... 4,539 24 (110) 4,453 FHLMC mortgage-backed securities... 12,835 8 (167) 12,676 Collateralized mortgage obligations 75,679 60 (3,284) 72,455 Mortgage pass-through certificates. 2,592 41 (6) 2,627 -------- ---- ------- -------- Total........................... $123,131 $300 $(3,668) $119,763 ======== ==== ======= ========
Mortgage-backed securities at September 30, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity Available for Sale - --------------------- -------------------- Carrying Amortized Carrying Value Fair Value Cost Value --------- ----------- ---------- --------- (Dollars in thousands) Due in one year or less............... $ -- $ -- $ 2,264 $ 2,296 Due after one year through five years. -- -- 155 159 Due after five years through ten years -- -- 2,465 2,556 Due after ten years................... 194,979 203,864 620,581 632,738 --------- ----------- ---------- --------- $194,979 $ 203,864 $ 625,465 $ 637,749 ========= =========== ========== =========
74 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 During the fourth quarter of fiscal 1999, BankUnited transferred $158.9 million in mortgage-backed securities, with an aggregate market value of $156.4 million at the date of transfer, from available-for-sale to held-to-maturity. The resulting $2.5 million unrealized loss was recorded as a discount and as a component of other comprehensive income (loss) to be amortized over the life of the related security in a manner consistent with premiums and discounts. Gross proceeds on sales of mortgage-backed securities and collateralized mortgage obligations were $283.0 million for the year ended September 30, 2001. Gross realized gains were $1.8 million on sales of mortgage-backed securities and collateralized mortgage obligations during the year ended September 30, 2001. There were no sales of mortgage-backed securities and collateralized mortgage obligations during the years ended September 30, 2000 and 1999. During fiscal 2001, BankUnited sold mortgage-backed securities with a carrying value of approximately $21,000 from the held to maturity portfolio. The sale did not call into question BankUnited's intent to hold other securities to maturity because one of the following criteria was met with each sale: (1) BankUnited had collected in excess of 85% of the principal outstanding, or (2) the security was within 90 days of maturity. The net loss on sale of these securities was approximately $1,200. At September 30, 2001, GNMA, FNMA and FHLMC mortgage-backed securities with market values of approximately $138.9 million were pledged as collateral for public funds on deposit. At September 30, 2001, investment and mortgage-backed securities with an aggregate carrying value of approximately $297.9 million were pledged as collateral for repurchase agreements. When BankUnited sells receivables in securitizations of residential mortgage loans, it retains servicing rights and securities, which are retained interests in the securitized receivables. Gain or loss on the sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interest based on their relative fair value at the date of the transfer. Fair value is derived from current market information and assumptions for similar products. During fiscal year ended September 30, 2001, BankUnited securitized $200.9 million of residential mortgage loans, $121.9 million of which are loans serviced by others. These loans were securitized with FNMA and FHLMC and transferred into BankUnited's mortgage-backed securities available for sale portfolio, which is carried at fair value. BankUnited subsequently sold $146.2 million of the resulting securities, recognizing gains of $0.7 million. The remaining securities at September 30, 2001 were FNMA's serviced by others and had a carrying value of $48.5 million. BankUnited utilizes current market information for similar products to determine the weighted-average life in years, annual prepayments and discount rates, which are key economic assumptions used in determining fair value of the securities. In these securitization transactions, with the exception of loans serviced by others, BankUnited retains servicing responsibilities. BankUnited receives annual servicing fees approximating 0.25% of the outstanding receivable balance. The fair value of servicing assets retained upon the securitization of residential mortgage loans and the sale of the resulting securities during the fiscal year ended September 30, 2001, is $1.3 million. 75 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 The investors in the securitized assets have no recourse to BankUnited's other assets for failure of debtors to pay when due. BankUnited's retained interests are subordinate to investors' interests. The value of the retained interest is subject to prepayment risk on the transferred financial assets, and the general level of interest rates. At September 30, 2001, key economic assumptions and the sensitivity of the current fair value of residual securities to immediate 10 percent and 20 percent adverse changes in those assumptions are as follows:
Retained FNMA securities ------------------------ (Dollars in thousands) Carrying amount (fair value) of retained securities.. $48,532 Weighted average life in years....................... 3.7 Annual prepayment assumption......................... 21.3% Impact on fair value of 10 percent adverse change. $ (142) Impact on fair value of 20 percent adverse change. $ (671) Annual cash flow discount rate....................... 5.83% Impact on fair value of 10 percent adverse change. $ (832) Impact on fair value of 20 percent adverse change. $(1,642)
Credit losses do not affect the valuation due to FNMA's full guarantee to BankUnited for losses on loans collateralizing the securities. The sensitivities presented above are hypothetical and are presented for informational purposes only. As the amounts indicate, the fair values due to a variation in any assumption generally cannot be extrapolated because the relationship of the change in any assumption to the change in fair value may not be linear. The effect of a change in a particular assumption on the fair value of the retained securities is calculated without considering the changes in other assumptions. However, changes in one assumption may result in changes in another. The following table represents quantitative information about delinquencies, net credit losses, and components of securitized financial assets and other assets managed together with them:
Principal Amount of Total Principal Loans 60 Days Amount of or More Past Net Credit Loans Due(1) Losses during --------------- ------------- the year ended At September 30, 2001 September 30, 2001(2) ----------------------------- --------------------- (Dollars in thousands) Securitized residential mortgage loans.... $46,747 -- --
-------- (1) Loans 60 days or more past due are based on end of period total loans. (2) Net credit losses are charge-offs and are based on total loans outstanding. 76 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 (6) Loans Receivable Loans receivable (including loans held for sale) consist of the following:
As of September 30, ------------------------------------------ 2001 2000 -------------------- -------------------- Percent Percent of of Amount Total (1) Amount Total (1) ---------- --------- ---------- --------- (Dollars in thousands) Mortgage loans: One-to-four family........................... $3,198,331 85.3% $3,218,868 87.8% Multi-family................................. 20,619 0.5 70,856 1.9 Commercial real estate....................... 158,451 4.2 155,569 4.2 Construction................................. 114,790 3.1 38,786 1.1 Land......................................... 33,620 0.9 34,489 0.9 ---------- ----- ---------- ----- Total mortgage loans...................... 3,525,811 94.0 3,518,568 95.9 ---------- ----- ---------- ----- Other loans: Commercial................................... 132,438 3.5 83,023 2.3 Consumer..................................... 84,698 2.3 66,480 1.8 ---------- ----- ---------- ----- Total other loans......................... 217,136 5.8 149,503 4.1 ---------- ----- ---------- ----- Total loans............................... 3,742,947 99.8 3,668,071 100.0 Unearned discounts, premiums and deferred loan fees, net............................................... 22,642 0.6 15,730 0.4 Allowance for loan losses........................... (15,940) (0.4) (13,032) (0.4) ---------- ----- ---------- ----- Loans receivable, net............................... $3,749,649 100.0% $3,670,769 100.0% ========== ===== ========== =====
-------- (1) Percent of total is calculated using loans receivable, net in the denominator. Of the total loan portfolio of $3.7 billion at September 30, 2001, approximately $2.2 billion, or 59.5%, represented loans secured by properties in Florida and $0.3 billion, or 8.1%, represented loans secured by properties in California. No other state represented more than 5% of BankUnited's loan portfolio. At September 30, 2001, the Bank had pledged approximately $2.0 billion of mortgage loans as collateral for advances from the Federal Home Loan Bank of Atlanta. Changes in the allowance for loan losses are as follows:
For Years Ended September 30, ---------------------------- 2001 2000 1999 ------- ------- ------- (Dollars in thousands) Balance at beginning of the period............... $13,032 $12,107 $ 6,128 Provision..................................... 7,100 4,645 7,939 Loan charge-off............................... (4,257) (3,859) (2,048) Recoveries.................................... 65 139 88 ------- ------- ------- Balance at end of period...................... $15,940 $13,032 $12,107 ======= ======= =======
As of September 30, 2001, and 2000 BankUnited had non-accrual loans of $27.4 million, and $19.8 million, respectively. For the years ended September 30, 2001, 2000 and 1999 the average amounts of non-accrual loans were $24.7 million, $18.4 million, and $20.7 million, respectively. Gross interest income that would have been recorded on non-accrual loans had they been current in accordance with original terms was $1.3 million, $1.1 million, and $1.3 million, for the years ended September 30, 2001, 2000, and 1999, respectively. The 77 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 amount of interest income on such non-accrual loans included in operations, prior to their non-accrual status, for the years ended September 30, 2001, 2000 and 1999 was $0.9 million, $0.7 million, and $0.5 million, respectively. No income is recognized on loans while in non-accrual status. The following table sets forth information concerning specific impaired loans:
As of September 30, 2001 As of September 30, 2000 ------------------------ ------------------------ No. Allowance No. Allowance of Carrying for loan of Carrying for loan loans amount losses loans amount losses ----- -------- --------- ----- -------- --------- (Dollars in thousands) (Dollars in thousands) Land............... 1 $ 469 $ 469 1 $ 999 $ 749 Commercial business 59 7,872 3,387 8 517 517 -- ------ ------ - ------ ------ 60 $8,341 $3,856 9 $1,516 $1,266 == ====== ====== = ====== ======
(7) Other interest earning assets Other interest earning assets include FHLB stock and an equity investment in the Community Reinvestment Group of $75.5 million and $105,000 as of September 30, 2001 and $62.6 million and $105,000, respectively as of September 30, 2000. (8) Office Properties and Equipment Office properties and equipment are summarized as follows:
As of September 30, --------------------- 2001 2000 -------- ------- (Dollars in thousands Office buildings......................................... $ 2,694 $ 2,642 Leasehold improvements................................... 9,577 9,025 Furniture, fixtures and equipment........................ 10,350 9,431 Computer equipment and software.......................... 6,360 4,947 -------- ------- Total................................................. 28,981 26,045 Less: accumulated depreciation........................... (12,927) (9,887) -------- ------- Office properties and equipment, net..................... $ 16,054 $16,158 ======== =======
Depreciation expense was $3.1 million, $3.0 million, and $2.4 million, for the years ended September 30, 2001, 2000 and 1999, respectively. BankUnited has entered into non-cancelable leases with approximate minimum future rentals as follows:
Years Ending September 30, Amount -------------------------- ---------------------- (Dollars in thousands) 2002.................................................... $ 4,934,834 2003.................................................... 4,639,463 2004.................................................... 3,916,589 2005.................................................... 3,348,202 2006.................................................... 3,331,839 Thereafter.............................................. 10,923,043 ----------- Total................................................ $31,093,970 ===========
78 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 Rent expense for the years ended September 30, 2001, 2000, and 1999 was $4.0 million, $3.5 million, and $3.2 million, respectively. For the years ended September 30, 2000 and 1999, rent expense was net of sublease income of approximately $22,300 and $0.3 million, respectively (none for the year ended September 30, 2001). (9) Deposits The following table sets forth information concerning BankUnited's deposits by account type and the weighted average nominal rates at which interest is paid thereon as of the dates indicated:
As of September 30, -------------------------------- 2001 2000 --------------- --------------- Amount Rate Amount Rate ---------- ---- ---------- ---- (Dollars in thousands) Passbook accounts............................... $ 596,534 3.64% $ 324,894 4.86% ---------- ---------- Checking: Non-interest-bearing......................... 89,726 -- 72,253 -- NOW accounts................................. 128,576 1.97% 116,032 2.73% Insured money market......................... 92,975 3.01% 90,531 4.79% ---------- ---------- Total checking accounts.................. 311,277 278,816 ---------- ---------- Total passbook and checking accounts..... 907,811 603,710 ---------- ---------- Certificates of deposit: Less than 3-month certificates of deposit.... 2,258 3.31% 1,128 3.83% 3-5-month certificates of deposit............ 211,672 4.16% 19,547 5.66% 6-11-month certificates of deposit........... 243,324 4.76% 410,480 6.34% 12-month or more certificates of deposit..... 1,015,080 5.64% 1,293,373 6.23% Public funds................................. 273,000 6.31% 281,300 6.02% ---------- ---------- Total certificates of deposit............ 1,745,334 2,005,828 ---------- ---------- Total................................. $2,653,145 $2,609,538 ========== ========== Weighted average rate........................... 4.60% 5.67% ==== ====
Deposit accounts with balances of $100,000 or more totaled approximately $1.0 billion and $821.3 million at September 30, 2001 and 2000, respectively. Included in balances of $100,000 or more are $273.0 million in public funds at September 30, 2001 and $281.3 million in public funds at September 30, 2000. At September 30, 2001, 2000 and 1999, there were overdrafts of approximately $405,000, $606,000 and $551,000, respectively. Interest expense on deposits for the years ended September 30, 2001, 2000 and 1999 was as follows:
September 30, -------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) NOW and insured money market deposits.............. $ 7,277 $ 6,777 $ 7,820 Passbook accounts.................................. 19,349 16,825 16,010 Certificates of deposit............................ 116,508 103,027 82,825 -------- -------- -------- $143,134 $126,629 $106,655 ======== ======== ========
79 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 The amounts and scheduled maturities of certificate accounts at September 30, are as follows:
Year Ending September 30, Amount ------------------------- ---------------------- (Dollars in thousands) 2002................................................... $1,263,813 2003................................................... 333,483 2004................................................... 131,176 2005................................................... 12,409 2006................................................... 4,353 Thereafter............................................. 100 ---------- Total............................................... $1,745,334 ==========
Early withdrawal penalties on deposits are recognized as a reduction of interest on deposits. For the years ended September 30, 2001, 2000 and 1999, early withdrawal penalties totaled $301,000, $336,000 and $221,000, respectively. (10) Securities Sold under Agreements to Repurchase Interest expense on securities sold under an agreement to repurchase aggregated $4.9 million, $0.9 million and $1.4 million for the years ended September 30, 2001, 2000 and 1999, respectively. The following sets forth information concerning repurchase agreements for the periods indicated:
As of and for the Years Ended September 30, ---------------------------- 2001 2000 1999 -------- ------- ------- (Dollars in thousands) Maximum amount of outstanding agreements at any month end during the period...................................... $316,738 $30,806 $96,862 Average amount outstanding during the period............. $112,062 $10,621 $25,311 Weighted average interest rate for the period............ 4.40% 8.23% 5.46%
All except $50.0 million of the $283.1 million of repurchase agreements outstanding at September 30, 2001 mature in October 2001. The remaining $50.0 million of repurchase agreements outstanding at September 30, 2001 mature in November 2001. At September 30, 2001, 2000 and 1999, BankUnited had $297.9 million, $11.1 million and $34.4 million, respectively, of investment and mortgage-backed securities pledged under repurchase agreements. 80 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 (11) Advances from Federal Home Loan Bank Advances from the Federal Home Loan Bank of Atlanta incur interest and have contractual repayments as follows:
September 30, ---------------------- Repayable During Year Ending September 30, Interest Rate 2001(6) 2000 ------------------------------------------ ------------- ---------- ---------- (Dollars in thousands) 2001....................... 5.54% - 6.94% $ -- $ 365,000 2002....................... 3.59% - 7.33% 360,000 25,000 2003....................... 4.26% - 7.24% 175,000 75,000 2004....................... 4.49% - 7.17% 180,000 55,000 2005....................... 7.43% 100,000 100,000 2006....................... 6.65% 1,403 1,426 2008(4).................... 5.50% 25,000 25,000 2009(1).................... 4.43% - 5.48% 125,000 125,000 2010(2),(3)................ 5.44% - 6.94% 480,000 480,000 2011(5).................... 4.70% - 5.67% 64,000 -- ---------- ---------- Total............................................. $1,510,403 $1,251,426 ========== ==========
-------- (1) Advances for $125 million are callable by the FHLB in 2002. (2) Advances for $105 million are callable by the FHLB in 2002 and $125 million are callable by FHLB in 2003. (3) Knock-out convertible advances for $250 million convertable by the FHLB in 2001 were never converted. (4) Advances for $25 million are callable by FHLB in 2003. (5) Advances for $45 million are callable by the FHLB in 2003 and $19 million are callable by the FHLB in 2004. (6) The contractual repayments at September 30, 2001 above do not reflect fair value adjustments made in accordance with FAS No. 133 which are reflected in the Consolidated Statement of Financial Condition. The terms of a security agreement with the FHLB of Atlanta include a specific assignment of collateral that requires the maintenance of qualifying first mortgage loans as pledged collateral with unpaid principal amounts at least equal to 100% of the FHLB advances, when discounted at 85% of the unpaid principal balance. The FHLB of Atlanta stock, which is recorded at cost of $75.5 million, is also pledged as collateral for these advances. (12) Senior Notes During November 1998, the Bank established a program to issue up to $500 million aggregate principal amount of its Senior Notes backed by an irrevocable standby letter of credit of the FHLB of Atlanta. These notes may have either a fixed or floating rate of interest determined at the time of issuance and will mature no sooner than 9 months and no more than 10 years from the date of issue. On February 2, 1999, the Bank issued and sold $200 million of Senior Notes which mature five years from the date of issuance and bear interest at an annual rate of 5.40%, payable semiannually. (13) Company Obligated Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Deferrable Interest Debentures of BankUnited BankUnited Capital, BankUnited Capital II and BankUnited Capital III are wholly-owned trust subsidiaries of BankUnited which were created under Delaware law for the purpose of issuing trust preferred securities and investing the proceeds from the sale thereof in Junior Subordinated Deferrable Interest Debentures issued by BankUnited (the "Junior Subordinated Debentures"). BankUnited Capital, BankUnited Capital II and 81 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 BankUnited Capital III issued trust preferred securities in the aggregate amounts of $70.0 million, $46.0 million and $102.5 million, respectively, and issued common securities in the aggregate amounts of $2.8 million, $1.8 million and $4.1 million, respectively. All of the proceeds of the trust preferred securities and the common securities were invested in the Junior Subordinated Debentures. The sole assets of each trust are the Junior Subordinated Debentures. BankUnited Capital holds $61.8 million of Junior Subordinated Debentures which pay a preferential cumulative cash distribution at an annual rate of 10.25% and mature December 31, 2026. BankUnited Capital II holds $47.6 million of Junior Subordinated Debentures which pay a preferential cumulative cash distribution at an annual rate of 9.60% and mature on June 30, 2027. BankUnited Capital III holds $102.9 million of Junior Subordinated Debentures which pay a preferential cumulative cash distribution at an annual rate of 9% and mature March 31, 2028. In conjunction with the purchase and extinguishments of trust preferred securities, Junior Subordinated Debentures totaling $14.9 million were also extinguished. The Trust Preferred Securities pay preferential cumulative cash distributions at the same annual rate as the Junior Subordinated Debentures held by the trust subsidiary issuer. Considered together, back-up undertakings made by BankUnited with respect to the Trust Preferred Securities constitute a full and unconditional guarantee by BankUnited of the obligations of the Trust Preferred Securities. In November 1999, the Board of Directors of BankUnited authorized the purchase, from time to time, in the open market, or otherwise, of up to 300,000 shares of trust preferred securities issued by its trust subsidiaries (the "trust preferred securities"). BankUnited purchased 8,800 shares of Trust Preferred Securities at a cost of $7.1 million during the year ended September 30, 2001. As a result of the early extinguishment of the Trust Preferred Securities which were acquired, the purchases resulted in extraordinary gains of $0.8 million, net of $0.5 million in taxes, for the year ended September 30, 2001. (14) Regulatory Capital The Bank's required, actual and excess regulatory capital levels as of September 30, 2001 and 2000 are as follows:
Regulatory Capital ---------------------------------------------------------- Required Actual Excess ------------------ ------------------ ------------------ 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- (Dollars in thousands) Core capital............ $154,858 $134,512 $367,604 $335,761 $212,746 $201,249 3.00% 3.00% 7.12% 7.49% 4.12% 4.49% Risk based capital...... $208,053 $187,794 $381,160 $348,283 $173,107 $160,489 8.00% 8.00% 14.66% 14.84% 6.66% 6.84%
Under the Office of Thrift Supervision (OTS) regulations adopted to implement the "prompt corrective action" provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA"), a "well capitalized" institution must have a risk-based capital ratio of 10%, a core capital ratio of 5% and a Tier 1 risk-based capital ratio of 6%. (The "Tier 1 risk-based capital" ratio is the ratio of core capital to risk-weighted assets.) The Bank is a well capitalized institution under the definitions as adopted. Regulatory capital and net 82 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 income amounts as of and for the years ended September 30, 2001, 2000 and 1999 did not differ from regulatory capital and net income amounts reported to the OTS. Payment of dividends by the Bank is limited by federal regulations, which provide for certain levels of permissible dividend payments depending on the Bank's regulatory capital and other relevant factors. (15) Stockholders' Equity BankUnited has the following capital structure: Preferred Stock--Issued in series with rights and preferences to be designated by the Board of Directors. As of September 30, 2001, 10,000,000 shares of Preferred Stock were authorized, of which 7,152,883 shares were not designated to a particular series. Noncumulative Convertible Preferred Stock, Series B: Authorized shares--1,000,000 shares as of September 30, 2001 and September 30, 2000. Issued and outstanding shares--355,821 as of September 30, 2001 and 295,821 as of September 30, 2000. Dividends--noncumulative cash dividends payable quarterly in cash or shares of Class A Common Stock at the option of the holder, at the fixed annual rate of $0.55 per share beginning October 1, 1997 and $0.7375 per share prior to that date. Preference on liquidation--voluntary liquidation at the applicable redemption price per share and involuntary liquidation at $7.375 per share. Redemption--Not redeemable until October 1, 2007 or later unless earlier redemption is approved by the holders of at least 50 percent of the Series B Preferred shares. Voting rights--two-and-one-half votes per share. Convertibility--convertible into 1.4959 shares (adjusted for all stock dividends) of Class B Common Stock for each share of Noncumulative Convertible Preferred Stock, Series B, surrendered for conversion, subject to adjustment on the occurrence of certain events. Issuances--During fiscal year ended September 30, 2001, 60,000 shares were issued pursuant to the exercise of options. During the fiscal year ended September 30, 2000, no Series B Preferred Stock was issued. 9% Noncumulative Perpetual Preferred Stock: Authorized shares--1,847,117 shares as of September 30, 2001 and 2000. Issued--697,117 as of September 30, 2000 (none at September 30, 2001). 83 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 Outstanding--696,117 as of September 30, 2000 (none at September 30, 2001). Dividends--non-cumulative cash dividends payable quarterly at the fixed annual rate of $0.90 per share. Preference on liquidation--voluntary liquidation at the applicable redemption price per share and involuntary liquidation at $10.00 per share. Redemption--at the option of BankUnited at a redemption price of $10.00 per share. For fiscal year ended September 30, 2001 BankUnited redeemed all of its outstanding shares of its 9% Noncumulative Perpetual Preferred Stock at a price of $10.00 per share. Voting rights--nonvoting, except under certain circumstances. Issuances--For fiscal year ended September 30, 2000 BankUnited acquired 1,000 shares of its 9% Noncumulative Perpetual Preferred Stock at a price of $7.25 per share recorded at cost as Treasury Stock. There were no issuance of shares during fiscal years ended September 30, 2001 and 1999. Class A Common Stock Issued in series with rights and preferences to be designated by the Board of Directors. As of September 30, 2001 and 2000, 30,000,000 shares of Class A Common Stock were authorized, of which all shares were designated to a series. Series I Class A Common Stock: Authorized shares--30,000,000 at September 30, 2001 and 2000. Issued--24,871,219 shares as of September 30, 2001 and 18,093,575 shares as of September 30, 2000. Outstanding--24,538,219 shares as of September 30, 2001 and 17,760,575 shares as of September 30, 2000. Dividends--as declared by the Board in the case of a dividend on the Class A Common Stock alone or not less than 110% of the amount per share of any dividend declared on the Class B Common Stock. Voting rights--one tenth of one vote per share. Issuances--During the fiscal year ended September 30, 2001, BankUnited issued 6,555,000 shares in an additional stock offering, 222,406 shares with the exercise of options, awards, and issuances to directors and officers of BankUnited, and 238 shares upon the conversion of Class B Common Stock into Class A Common Stock. During the fiscal year ended September 30, 2000, BankUnited issued 19,696 shares with the exercise of options, awards, and issuances to directors and officers of BankUnited, 4,244 shares in dividends on BankUnited's Series B Preferred Stock paid in Class A Common and 20,205 shares upon the conversion of Class B Common Stock into Class A Common Stock. Additionally, BankUnited acquired 150,000 shares of its Class A Common Stock at a price of $7.40 per share recorded at cost as Treasury Stock. 84 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 Class B Common Stock: Authorized shares--3,000,000 at September 30, 2001 and 2000. Issued and outstanding--505,669 shares as of September 30, 2001 and 446,262 shares as of September 30, 2000. Dividends--as declared by the Board of Directors. Voting rights--one vote per share. Convertibility--convertible into one share of Class A Common Stock for each share of Class B Common Stock surrendered for conversion, subject to adjustment on the occurrence of certain events. Issuances--During the fiscal year ended September 30, 2001, BankUnited issued 59,645 shares in connection with the exercise of stock options and 238 shares of Class B Common Stock were converted into Class A Common Stock. During the fiscal year ended September 30, 2000, BankUnited issued 8,000 shares in connection with the exercise of stock options and 20,205 shares of Class B Common Stock were converted into Class A Common Stock. (16) Stock Bonus Plan, Option Agreements and Other Benefit Plans BankUnited maintains the 1992 Stock Bonus Plan whereby it is authorized to issue up to 125,000 shares of Class A and Class B Common Stock to provide long-term incentives and rewards to officers, directors and employees of BankUnited. As of September 30, 2001, 72,042 shares of Class A Common Stock and 54,779 shares of Class B Common Stock had been issued under the 1992 Stock Bonus Plan. As of September 30, 2001, there were 21,637 shares available for grant under the 1992 Stock Bonus Plan, due to stock awards which had been forfeited by officers and employees who terminated service with BankUnited prior to full vesting of such awards. BankUnited also maintains a non-statutory stock option plan under which options for up to 825,000 shares of Class A and Class B Common Stock have been granted. As of September 30, 2001, 15,952 shares were available for the grant of options under this plan due to stock awards, that had been forfeited by officers and employees who terminated service with BankUnited prior to full vesting of such awards, and 304,817 options had been exercised. BankUnited also maintains the 1994 Incentive Stock Option Plan ("1994 plan") under which options for up to 250,000 shares of Class A and Class B Common Stock have been granted. As of September 30, 2001, 95,819 shares were available for the grant of options under this plan, due to options, that have been forfeited by officers and employees who terminated service with BankUnited prior to full vesting of these options, and options for 46,410 shares had been exercised. In October 1994, BankUnited's Board of Directors approved several non-qualified stock option agreements (the "Agreements") under which options to purchase shares of Class B Common Stock were granted at the fair market price of the Class B Common Stock on the date of the grant. The terms of the agreements, which originally expired on October 23, 1994, were extended pursuant to Stockholders' approval to October 23, 1999. 85 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 As of September 30, 1999, all options granted pursuant to the Agreements had been exercised at the exercise price of $4.64 per share. BankUnited maintains the 1996 Incentive Compensation and Stock Award Plan ("1996 plan"). Under the 1996 plan, the Compensation Committee of the Board of Directors may grant options to purchase, or may issue in connection with stock awards, stock bonuses and restricted stock, up to (as amended in January 2001) 3,150,000 shares of Class A and Class B Common Stock and up to 650,000 shares of Series B Preferred. Since inception to September 30, 2001, options to purchase 2,422,969 shares of Class A Common Stock, 312,500 shares of Class B Common Stock and 497,000 shares of Series B Preferred Stock have been granted. Officers and employees who terminated service with BankUnited prior to full vesting of these options have forfeited options for 605,585 shares of Class A Common Stock. Under the 1996 plan, 95,346 shares of Class A Common stock and 100,000 shares of Series B Preferred have been exercised. In addition, under the 1996 Special Awards Program, 266,277 shares of Common A Stock, 3,000 shares of Common B Stock and 47,003 of Series B Preferred Stock have been issued pursuant to other awards under the Plan of which 15,130 shares of class A Common Stock had been forfeited by officers and employees who terminated service with BankUnited prior to the full vesting of these awards. As of September 30, 2001, 765,969 shares of Class A and Class B Common Stock and 105,997 shares of Series B Preferred Stock were available for grant under this plan. Options granted under BankUnited's stock option plans expire ten years after the date of grant and are exercisable at the fair market value of the stock on the date of grant. The vesting and exercisability of options granted under the 1994 Incentive Stock Option Plan and the 1996 Incentive Compensation and Stock Award Plan is determined by the Compensation Committee of BankUnited's Board of Directors at the time of the grant, and an option may be immediately vested and exercisable or become so over a period of years. If an option vests over a period of years, it is subject to forfeiture as to any portion which is not exercisable upon termination of employment. The following table presents additional data concerning BankUnited's outstanding stock options:
Number of Option Price Aggregate Shares per Share Option Price --------- -------------- ------------ Options outstanding, September 30, 1998 2,025,315 $3.11 - $13.91 $16,770,736 Options granted........................ 796,534 6.56 - 13.18 6,872,153 Options exercised...................... (321,959) 3.11 - 10.85 (1,808,462) Options expired........................ (209,365) 5.73 - 8.00 (1,517,153) Reduction of option price(1)........... -- 7.28 - 13.91 (2,404,174) --------- -------------- ----------- Options outstanding, September 30, 1999 2,290,525 3.11 - 13.18 17,913,100 Options granted........................ 668,610 6.13 - 8.63 5,613,991 Options exercised...................... (26,020) 3.75 - 6.60 (127,394) Options expired........................ (338,717) 3.32 - 11.00 (2,611,064) --------- -------------- ----------- Options outstanding, September 30, 2000 2,594,398 3.11 - 13.18 20,788,633 Options granted........................ 728,818 6.75 - 14.85 6,531,415 Options exercised...................... (167,458) 3.11 - 10.85 (1,156,731) Options expired........................ (73,291) 3.11 - 13.11 (598,142) --------- -------------- ----------- Options outstanding, September 30, 2001 3,082,467 $3.23 - $14.85 $25,565,175 ========= ============== ===========
86 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 -------- (1) On October 14, 1998, BankUnited repriced options to purchase Class A Common Stock, Class B Common Stock and Series B Preferred Stock which had exercise prices which exceeded the fair market value of the underlying stock on that date. As a result of this repricing the exercise price of options to purchase 456,368 shares of Class A Common Stock and 595,800 shares of Class B Common Stock was reduced to $7.25 per share, and the exercise price of options to purchase 315,000 shares of Series B Preferred Stock was reduced to $10.8452 per share. Summarized below is information about stock options outstanding and exercisable at September 30, 2001.
Outstanding Exercisable -------------------------- ------------------ Exercise Price Number of Average Average Number of Average Range Shares Life(1) Price(2) Shares Price(2) -------------- --------- ------- -------- --------- -------- 3.23 - 4.16 38,320 0.3 $ 3.55 38,320 $ 3.55 4.95 - 7.28.. 1,306,549 5.0 $ 6.96 1,160,457 $ 6.94 7.44 - 11.00. 1,533,048 8.0 $ 8.82 562,094 $10.03 12.15 - 14.85. 204,550 9.5 $13.81 67,550 $13.27 --------- --------- 3,082,467 1,828,421 ========= =========
-------- (1) Weighted average contractual life remaining in years. (2) Weighted average exercise price. BankUnited has adopted SFAS No. 123, "Accounting for Stock-Based Compensation" and as permitted by SFAS No. 123, BankUnited continues to follow the measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, does not recognize compensation expense for its stock-based incentive plans. Had compensation cost for BankUnited's stock-based incentive compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the methodology prescribed by SFAS No. 123, BankUnited's net income (loss) and earnings (loss) per share for fiscal 2001, 2000 and 1999 would have been reduced to the pro forma amounts indicated below:
For the Years Ended September 30, -------------------------------- 2001 2000 1999 ------- ------- ------- (Dollars in thousands, except per share amounts) Net income (loss): As Reported.................... $18,447 $14,974 $(4,367) Pro Forma...................... $17,590 $14,301 $(5,935) Basic earnings (loss) per share: As Reported.................... $ 0.91 $ 0.82 $ (0.24) Pro Forma...................... $ 0.87 $ 0.78 $ (0.32) Diluted earnings (loss) per share: As Reported.................... $ 0.87 $ 0.81 $ (0.24) Pro Forma...................... $ 0.83 $ 0.77 $ (0.32)
The pro forma results of operations reported above are not likely to be representative of the effects on reported income of future years due to vesting arrangements and additional option grants. 87 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 The fair value of each option has been estimated on the date of the grant using the Black Scholes option pricing model, with the following historical weighted average assumptions applied to grants in fiscal 2001, 2000 and 1999:
For the Years Ended September 30, ------------------ 2001 2000 1999 ---- ---- ----- Dividend yields......... -- -- -- Expected volatility..... 38.0% 38.0% 40.00% Risk-free interest rates 5.62% 6.21% 4.76% Expected life (in years) 7.00 7.00 6.96
Based upon the above assumptions, the weighted average fair value of options granted during the years ended September 2001, 2000 and 1999 was $2,299,708, $2,917,000 and $3,993,000, respectively. On September 7, 1999, the trustee of the 401(k) Plan and the trustees of the Profit Sharing Plan approved a merger and transfer agreement between the plans effective September 30, 1999. Under the terms of this agreement, the net assets of the Profit Sharing Plan were transferred and assigned to the 401(k) Plan as of September 30, 1999. The 401(k) Plan was then renamed the BankUnited 401(k) Profit Sharing Plan (the "Plan"). Under the terms of the combined plan, eligible employees are permitted to contribute up to 15% of their annual salary to the Plan. BankUnited currently makes quarterly matching contributions at a rate of 75% of employee contributions, up to a maximum of 6% of an employees' salary, in BankUnited's Class A Common Stock. Employees are eligible to participate in the plan after six months of service and begin vesting in BankUnited's contribution after two years of service at the rate of 25% per year up to 100%. For fiscal 2001 and 2000, the Bank made total matching contributions of approximately $529,000 and $371,000, respectively. Prior to September 7, 1999, BankUnited had a 401(k) savings plan (the "401(k) Plan") and a separate Profit Sharing Plan. For the year ended September 30, 1999, BankUnited made total matching contributions of approximately $159,500. (17) Income Taxes The components of the provision (benefit) for income taxes for the years ended September 30, 2001, 2000 and 1999 are as follows:
For the Years Ended September 30, -------------------------------- 2001 2000 1999 ------- ------- ------- (Dollars in thousands) Current-federal. $11,534 $ 8,538 $ 192 Current-state... 1,154 842 7 Deferred-federal (1,503) 796 (1,941) Deferred-state.. (79) 71 (161) ------- ------- ------- Total........ $11,106 $10,247 $(1,903) ======= ======= =======
88 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 BankUnited's effective tax (benefit) rate differs from the statutory federal income tax (benefit) rate as follows:
Years Ended September 30, ------------------------------------------ 2001 2000 1999 ------------ ------------ -------------- Amount % Amount % Amount % ------- ---- ------- ---- ------- ----- (Dollars in thousands) Tax (benefit) at federal income tax rate $10,283 35.0% $ 8,776 35.0% $(1,868) (34.0)% Increase resulting from: State tax.............................. 699 2.4% 594 2.4% (192) (3.5) Other, net............................. 124 0.4% 877 3.5% 157 2.9 ------- ---- ------- ---- ------- ----- Total................................ $11,106 37.8% $10,247 40.9% $(1,903) (34.6)% ======= ==== ======= ==== ======= =====
The tax effects of significant temporary differences included in the deferred tax asset as of September 30, 2001 and 2000 were:
September 30, ---------------------- 2001 2000 ------ ------ (Dollars in thousands) Deferred tax asset: Non-accrual interest.................................................... $ 680 $ 650 Loan loss and other reserves............................................ 6,168 5,041 Fixed assets............................................................ -- 14 Unrealized holding losses on securities available for sale.............. -- 2,624 Unrealized holding losses on securities transferred to held to maturity. 770 856 Loan fees............................................................... -- 81 Other................................................................... 106 316 ------ ------ Gross deferred tax asset............................................ 7,724 9,582 ------ ------ Deferred tax liability: FHLB stock dividends.................................................... 30 31 Deferrals and amortizations............................................. 1,356 1,349 Fixed assets............................................................ 363 -- Unrealized holding gain on securities available for sale................ 4,333 -- Other................................................................... -- 1,099 ------ ------ Gross deferred tax liability........................................ 6,082 2,479 ------ ------ Net deferred tax asset.............................................. $1,642 $7,103 ====== ======
At September 30, 2001, BankUnited had $409,000 in tax bad debt reserves originating before December 31, 1987 for which deferred taxes have not been provided. The amount becomes taxable under the Internal Revenue Code upon the occurrence of certain events, including certain non-dividend distributions. BankUnited does not anticipate any actions that would ultimately result in the recapture of this amount for income tax purposes. 89 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 The components of deferred income tax (benefit) provision relate to the following:
Years Ended September 30, ------------------------ 2001 2000 1999 ------- ------ ------- (Dollars in thousands) Differences in book/tax depreciation $ 377 $ (584) $ 702 Delinquent interest................. (30) (33) (292) FHLB stock dividends................ (1) (3) (72) Loan fees........................... 81 (81) -- Loan loss and other reserves........ (1,127) (286) (3,044) Deferrals and amortization.......... 7 (480) 610 Purchase accounting and other....... (889) 2,334 (6) ------- ------ ------- Total deferred taxes............. $(1,582) $ 867 $(2,102) ======= ====== =======
(18) Commitments and Contingencies In the normal course of business, BankUnited enters into instruments that are not recorded in the consolidated financial statements, but are required to meet the financing needs of its customers. These financial instruments include commitments to extend credit, purchase whole loans and securities, standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement BankUnited has in particular classes of financial instruments. BankUnited's exposure to credit loss in the event of nonperformance by the other party on the financial instrument is represented by the contractual amount and collateral value, if any, of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Total commitments to extend credit at September 30, 2001 were as follows:
September 30, 2001 ------------------------ Fixed Variable Rate Rate Total ------- -------- ------- (Dollars in thousands) Commitments to fund loans...... $ 1,875 $81,746 $83,621 Domestic letters of credit..... 13,011 -- 13,011 International letters of credit 446 -- 446 ------- ------- ------- Total....................... $15,332 $81,746 $97,078 ======= ======= =======
BankUnited evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by BankUnited, upon extension of credit is based on management's credit evaluation of the customer. Collateral varies but may include accounts receivable, property, plant and equipment, residential real estate, and income-producing commercial properties. 90 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 Standby letters of credit are conditional commitments issued by BankUnited to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. BankUnited requires collateral to support those commitments. BankUnited currently holds five interest rate cap contracts with a major Wall Street firm, having an aggregate notional amount of $800.0 million. Each contract requires the counter-party to pay BankUnited quarterly interest payments based on the notional amount and the difference between the index and the cap rate, if and when the index exceeds the cap rate, in return for a one-time payment by BankUnited. The indices used in these contracts are the 5-Year Treasury rate adjusted to a constant maturity (the "5-Year CMT rate"), the 10-Year Treasury rate adjusted to a constant maturity (the "10-Year CMT rate"), the 5-Year Constant Maturity Swap rate (the "5-Year CMS rate") and the 10-Year Constant Maturity Swap rate (the "10-Year CMS rate"). The following table sets forth information concerning the interest rate cap contracts:
Notional Amount Index Cap Rate Termination Date --------------- ----------- -------- ---------------- (Dollars in thousands) $100,000 5-Year CMT 7.50% March 23, 2002 100,000 10-Year CMT 7.25% March 23, 2002 100,000 5-Year CMS 8.85% March 23, 2003 400,000 10-Year CMS 9.35% March 23, 2003 100,000 10-Year CMS 8.85% March 23, 2003 -------- $800,000 ========
BankUnited entered into these contracts for the purpose of hedging a portion of BankUnited's interest rate risk against rising interest rates on certain borrowings from the Federal Home Loan Bank. As of September 30, 2001, the 5-Year CMT rate was 3.79%, the 10-Year CMT rate was 4.58%, the 5-Year CMS rate was 4.54% and the 10-Year CMS rate was 5.25%. The following table provides additional information regarding the interest rate caps contracts:
As of September 30, 2001 ---------------------- (Dollars in thousands) Aggregate notional amount....................................... $800,000 Aggregate fair value............................................ $ 26
BankUnited and the Bank have employment agreements with certain members of senior management. The employment agreements, which establish the duties and compensation of the executives, have terms ranging from two and one-half years to five years. BankUnited is a party to certain claims and litigation arising in the ordinary course of business. In the opinion of management, the resolution of such claims and litigation will not materially affect BankUnited's consolidated financial position or results of operations. 91 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 (19) Related Party Transactions BankUnited employs the services of a law firm, of which BankUnited's Chairman of the Board and Chief Executive Office is senior managing director and of which another director of BankUnited is managing director. For the years ended September 30, 2001, 2000 and 1999, total fees, a portion of which were capitalized, paid to this law firm totaled approximately $2.1 million, $2.5 million and $2.5 million, respectively. BankUnited employs the services of an insurance agency, of which a director of BankUnited is a senior vice president. For the years ended September 30, 2001, 2000 and 1999, total premiums paid to this agency totaled approximately $543,000, $523,000 and $428,000, respectively. Commissions are less than 15% of the premiums paid. The spouse of the same director is president and owner of an insurance agency, which received approximately $60,966 and $46,300 in commissions on premium paid for health and dental insurance policies obtained by BankUnited through that agency for the years ended September 30, 2001 and 2000, respectively, none in 1999. In fiscal 1997, BankUnited leased property for a new branch, which is 25% owned by BankUnited's Chairman of the Board. The lease expires in June 2009. The annual rent for the property is approximately $131,000. Lease terms are comparable to those prevailing in the area for similar transactions involving non-affiliated parties at the time the lease was signed. At September 30, 2001, one of the board of directors had an outstanding loan balance with BankUnited of approximately $145,210, none outstanding as of September 30, 2000. 92 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 (20) BankUnited Financial Corporation The following summarizes the major categories of BankUnited's (parent company only) financial statements: Condensed Statements of Financial Condition
As of September 30, --------------------- 2001 2000 -------- -------- (Dollars in thousands Assets: Cash.......................................................................... $ 55,441 $ 228 FHLB overnight deposits....................................................... 415 7,579 Tax certificates.............................................................. 282 632 Investments, net (market value of approximately $60 at September 30, 2001 and 2000)....................................................................... 60 60 Investments available for sale, at market..................................... 20,896 16,039 Mortgage-backed securities available for sale, at market...................... 10,723 11,261 Accrued interest receivable................................................... 828 939 Investment in the Bank........................................................ 402,799 362,827 Investment in subsidiaries.................................................... 8,218 8,385 Other assets.................................................................. 14,267 20,381 -------- -------- Total assets.............................................................. $513,929 $428,331 ======== ======== Liabilities and Capital: Liabilities................................................................... $ 1,151 $ 4,611 Junior subordinated deferrable interest debentures............................ 212,332 221,133 -------- -------- Total liabilities......................................................... 213,483 225,744 -------- -------- Stockholders' equity: Preferred stock............................................................... 4 10 Common stock.................................................................. 254 185 Paid-in capital............................................................... 249,788 181,692 Retained earnings............................................................. 47,502 29,055 Treasury stock................................................................ (2,794) (2,801) Accumulated other comprehensive income (loss), net of tax..................... 5,692 (5,554) -------- -------- Total stockholders' equity................................................ 300,446 202,587 -------- -------- Total liabilities and stockholders' equity................................ $513,929 $428,331 ======== ========
93 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 Condensed Statements of Operations
For the Years Ended September 30, -------------------------- 2001 2000 1999 ------- ------- -------- (Dollars in thousands) Interest income................................................................ $ 4,534 $ 4,225 $ 4,563 Interest expense............................................................... 21,967 22,121 21,990 Equity income of the subsidiaries.............................................. 30,078 26,858 9,036 Operating expenses............................................................. 1,762 1,665 2,943 ------- ------- -------- Income (loss) before income taxes, extraordinary item and preferred stock dividends.................................................................... 10,883 7,297 (11,334) Income tax benefit............................................................. (7,390) (7,531) (7,740) ------- ------- -------- Net income (loss) before extraordinary item and preferred stock dividends...... 18,273 14,828 (3,594) Extraordinary item (net of tax of $514 and $586 in 2001 and 2000, respectively) 823 936 -- ------- ------- -------- Net income (loss) before preferred stock dividends............................. 19,096 15,764 (3,594) Preferred stock dividends...................................................... 649 790 773 ------- ------- -------- Net income (loss) after preferred stock dividends.............................. $18,447 $14,974 $ (4,367) ======= ======= ========
Condensed Schedule of Other Comprehensive Income (Loss)
For the Years Ended September 30, ------------------------ 2001 2000 1999 ------- ------- ------- (Dollars in thousands) Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) arising during the period, net of tax expense (benefit) of $6,889, $(1,185) and $(3,567) for 2001, 2000 and 1999, respectively..................................................................... $11,004 $(1,893) $(5,698) Less reclassification adjustment for: Amortization of unrealized losses on transferred securities, net of tax expense of $86, $80, and $19 for 2001, 2000 and 1999, respectively.......................... 138 129 31 Realized gains on securities sold included in net income, net of tax expense of $64 104 -- -- ------- ------- ------- Total other comprehensive income (loss), net of tax............................. $11,246 $(1,764) $(5,667) ======= ======= =======
94 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 Condensed Statements of Cash Flows
For the Years Ended September 30, -------------------------------- 2001 2000 1999 -------- -------- -------- (Dollars in thousands) Cash flows from operating activities: Net income (loss).................................................... $ 19,096 $ 15,764 $ (3,594) Less: Undistributed income of the subsidiaries....................... (30,078) (26,857) (9,036) Extraordinary gain on repurchase of trust preferred securities....... (1,337) (1,522) -- Other................................................................ 1,714 2,935 (10,229) -------- -------- -------- Net cash used in operating activities.............................. (10,605) (9,680) (22,859) -------- -------- -------- Cash flows from investing activities: Purchase of investment securities available for sale................. (2,565) -- (3,915) Proceeds from repayments of mortgage-backed securities available for sale............................................................... 661 2,771 7,770 Proceeds from sales of mortgage-backed securities available for sale. 67 9,091 -- Net decrease (increase) in tax certificates.......................... 350 (87) (8) -------- -------- -------- Net cash (used in) provided by investing activities.............. (1,487) 11,775 3,847 -------- -------- -------- Cash flows from financing activities: Repurchase of trust preferred securities............................. (7,060) (4,368) -- Dividend from Bank................................................... -- 7,300 12,137 Net proceeds from issuance of stock.................................. 74,811 125 2,010 Purchase of treasury shares.......................................... -- (1,117) (1,684) Dividends paid on preferred stock.................................... (649) (757) (658) Redemption of preferred stock........................................ (6,961) -- -- -------- -------- -------- Net cash provided by financing activities........................ 60,141 1,183 11,805 -------- -------- -------- Increase (decrease) in cash and cash equivalents........................ 48,049 3,278 (7,207) Cash and cash equivalents at beginning of year.......................... 7,807 4,529 11,736 -------- -------- -------- Cash and cash equivalents at end of year................................ $ 55,856 $ 7,807 $ 4,529 ======== ======== ========
95 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 (21) Estimated Fair Value of Financial Instruments The information set forth below provides disclosure of the estimated fair value of BankUnited's financial instruments. Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented would be indicative of the value negotiated in an actual sale. The fair value estimates do not consider the tax effect that would be associated with the disposition of the assets or liabilities at their fair value estimates. Fair values are estimated for loan portfolios with similar financial characteristics. Loans are segregated by category, such as commercial, commercial real estate, residential mortgage, second mortgages, and other installment. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing status. The fair value of loans, except residential mortgage loans, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit risk inherent in the loan. The estimate of average maturity is based on historical experience with prepayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions. For residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for national historical prepayment estimates using discount rates based on a compilation of secondary market sources published by the OTS in their "Asset and Liability Price Tables" for September 30, 2001. The fair value of the tax certificates is estimated at book value as these investments historically have had relatively short lives and their yields approximate market rates. The fair value of mortgage-backed securities and investment securities is estimated based on bid prices available from securities dealers. The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The fair value of the 10 1/4% Trust Preferred Securities is estimated at book value as these securities are privately-placed and have no active market. The fair value of the 9.60% and 9% Trust Preferred Securities is estimated based on quoted market prices. The fair value of borrowings, which include FHLB advances, securities sold under agreements to repurchase and senior notes is determined by discounting the scheduled cash flows through maturity using estimated market discount rates that reflect the interest rate currently available in the market. Other interest earning assets, which is primarily FHLB stock, is carried at par, which is its fair value. The carrying value of other interest earning assets, which is primarily FHLB stock, approximates their fair value. 96 BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 2001 The fair value of the off-balance sheet financial instruments is estimated based on the OTS's valuation as contained in its September 30, 2001 "Interest Rate Risk Exposure Report" prepared for the Bank by the OTS from information provided by the Bank. The fair value of interest rate caps is determined through a third party valuation analysis.
As of September 30, 2001 ------------------------- Carrying Value Fair Value -------------- ---------- (Dollars in thousands) Financial assets: Cash and cash equivalents............... $ 294,753 $ 294,753 Tax certificates and other investments.. 136,012 136,148 Mortgage-backed securities.............. 832,728 841,613 Loans receivable........................ 3,749,649 3,807,464 Other interest-earning assets........... 75,625 75,625 Financial liabilities: Deposits................................ $2,653,145 $2,681,435 Borrowings.............................. 1,992,837 2,101,729 Trust Preferred Securities.............. 203,592 196,091 Interest rate cap contracts............. 26 26 Off-balance sheet financial instruments. -- 161 As of September 30, 2000 ------------------------- Carrying Value Fair Value -------------- ---------- (Dollars in thousands) Financial assets: Cash and cash equivalents............... $ 339,321 $ 339,321 Tax certificates and other investments.. 28,164 28,087 Mortgage-backed securities.............. 342,355 340,247 Loans receivable........................ 3,670,769 3,634,638 Mortgage servicing rights............... 6,227 6,895 Other interest-earning assets........... 62,676 62,676 Financial liabilities: Deposits................................ $2,609,538 $2,622,965 Borrowings.............................. 1,460,631 1,464,637 Trust Preferred Securities.............. 212,393 204,465 Interest rate cap contracts............. 1,167 430 Off-balance sheet financial instruments. -- 636
97 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of BankUnited. The information contained under the caption "Election of Directors" to appear in BankUnited's definitive proxy statement relating to BankUnited's 2002 Annual Meeting of Stockholders, which definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of BankUnited's fiscal year covered by this report on Form 10-K (hereinafter referred to as the "Annual Meeting Proxy Statement"), is incorporated herein by reference. Information concerning the executive officers of BankUnited is included in Part I of this Report on Form 10-K. Item 11. Executive Compensation. The information contained under the caption "Executive Compensation" to appear in the Annual Meeting Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" to appear in the Annual Meeting Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information contained under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" to appear in the Annual Meeting Proxy Statement is incorporated herein by reference. 98 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The Following Documents Are Filed as Part of this Report: (1) Financial Statements. The following consolidated financial statements of BankUnited and the report of the independent certified public accountants thereon filed with this report: Report of Independent Certified Public Accountants (PricewaterhouseCoopers LLP). . Consolidated Statements of Financial Condition as of September 30, 2001 and 2000. Consolidated Statements of Operations for the years ended September 30, 2001, 2000 and 1999. Consolidated Statements of Stockholders' Equity for the years ended September 30, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2000 and 1999. Notes to Consolidated Financial Statements. (2) Financial Statement Schedules. Schedules are omitted because the conditions requiring their filing are not applicable or because the required information is provided in the Consolidated Financial Statements, including the Notes thereto. (3) Exhibits.* 2.1 Agreement and Plan of Merger, dated July 15, 1996, between BankUnited and Suncoast Savings and Loan Association, FSA. (Exhibit 2.1 to BankUnited's Form S-4 Registration Statement, File No. 333-13211, as filed with the Securities and Exchange Commission on October 1, 1996). 2.2 Agreement and Plan of Merger between BankUnited and Consumers Bancorp, Inc. dated September 19, 1997 (Exhibit 2.2 to BankUnited's Form S-4 Registration Statement, File No. 333-39921, as filed with the Securities and Exchange Commission on November 10, 1997). 2.3 Agreement and Plan of Merger between BankUnited and Central Bank dated December 30, 1997 (Exhibit 20.1 to BankUnited's Form 8-K dated December 30, 1997, as filed with the Securities and Exchange Commission on January 2, 1998). 3.1 Articles of Incorporation of BankUnited (Exhibit 3.1 to BankUnited's Form 10-Q Report for the quarter ended December 31, 1998, as filed with the Securities and Exchange Commission on February 16, 1999). 3.2 Bylaws of BankUnited. 4.1 Statement of Designation of Series 1 Class A Common Stock and Class B Common Stock of BankUnited (included as an appendix to Exhibit 3.1). 4.2 Statement of Designation of Noncumulative Convertible Preferred Stock, Series A of BankUnited (included as appendix to Exhibit 3.1). 4.3 Statement of Designation of Noncumulative Convertible Preferred Stock, Series B of BankUnited (included as appendix to Exhibit 3.1). 4.4 Statement of Designation of Noncumulative Convertible Preferred Stock, Series C of BankUnited (Included as appendix to Exhibit 3.1). 4.5 Statement of Designation of Noncumulative Convertible Preferred Stock, Series C-II of BankUnited (included as appendix to Exhibit 3.1). 4.6 Statement of Designation of 8% Noncumulative Convertible Preferred Stock, Series 1993 of BankUnited (included as appendix to Exhibit 3.1).
99 4.7 Statement of Designation of 9% Noncumulative Perpetual Preferred Stock of BankUnited (included as an appendix to Exhibit 3.1). 4.8 Statement of Designation of 8% Noncumulative Convertible Preferred Stock, Series 1996 of BankUnited (included as appendix to Exhibit 3.1). 4.9 Form of Letter Agreement between BankUnited and the holders of shares of BankUnited's Noncumulative Convertible Preferred Stock, Series B (Exhibit 4.7 to BankUnited's Form 10-K Report for the year ended September 30, 1998, as filed with the Securities and Exchange Commission on December 29, 1998 [the "1998 10-K"]). 4.10 BankUnited and its subsidiaries have certain long-term debt outstanding. None of the instruments evidencing such debt authorizes an amount of securities in excess of 10% of the total assets of BankUnited and its subsidiaries on a consolidated basis; therefore, copies of such instruments are not included as exhibits to this Annual Report on Form 10-K. BankUnited agrees to furnish copies to the Securities and Exchange Commission upon request. 10.1 Non-Statutory Stock Option Plan, as amended, (Exhibit 4.9 to BankUnited's Form S-8 Registration Statement, File No. 33-76882, as filed with the Securities and Exchange Commission on March 24, 1994). ** 10.2 1992 Stock Bonus Plan, as amended (Exhibit 10.2 to BankUnited's Form 10-K Report for the year ended September 30, 1994 [the "1994 10-K"]).** 10.3 1994 Incentive Stock Option Plan. (Exhibit 10.3 to the 1994 10-K).** 10.4 The Bank's Profit Sharing Plan. (Exhibit 10.4 to BankUnited's Form S-2 Registration Statement, File No. 33-80791, as filed with the Securities and Exchange Commission on December 22, 1995).** 10.5 1996 Incentive Compensation and Stock Award Plan, as amended by approval of BankUnited's stockholders on January 26, 2000 (Exhibit 10.2 to BankUnited's Report on Form 10-Q for the quarter ended December 31, 1999, as filed with the Securities and Exchange Commission on February 14, 2000).** 10.6 Form of Employment Agreement between BankUnited and Alfred R. Camner (Exhibit 10.6 to the 1998 10-K)*** 10.7 Form of Employment Agreement between the Bank and Alfred R. Camner (Exhibit 10.7 to the 1998 10-K)*** 10.8 Form of Employment Agreement between the Bank and Mehdi Ghomeshi (Exhibit 99.2 to BankUnited's Amendment No. 1 to Form S-3 Registration Statement, File No. 333-60892, as filed with the Securities and Exchange Commission on May 25, 2001).*** 10.8.1 Form of Employment Agreement between BankUnited and Mehdi Ghomeshi (Exhibit 99.1 to Amendment No. 1 to BankUnited's Form S-3 Registration Statement, File No. 333-60892, as filed with the Securities and Exchange Commission on May 25, 2001).*** 10.9 Form of Change of Control Agreement between the Bank and Earline G. Ford (Exhibit 10.11 to BankUnited's Form 10-K for the year ended September 20, 1996, as filed with the Securities and Exchange Commission on December 23, 1996).*** 10.10 Form of Change of Control Agreement between the Bank and executive officers (Exhibit 10.10 to BankUnited's Report on form 10-K for the year ended September 30, 1999[the "1999 10-K']).*** 10.11 Underwriting Agreement (Exhibit 1.1 to BankUnited's Amendment No. 1 to Form S-3 Registration Statement, File No. 333-60892, as filed with the Securities and Exchange Commission on May 25, 2001). 12.1 Statement regarding calculation of ratio of earnings to combined fixed charges and preferred stock dividends.
100 21.1 Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Power of attorney (set forth on the signature page in Part IV of this Report on Form 10-K for the year ended September 30, 2001).
-------- * Exhibits followed by a parenthetical reference are incorporated herein by reference from the documents described therein. ** Exhibits 10.1-10.5 are compensatory plans or arrangements. *** Contracts with Management. (b) Reports on Form 8-K. During the quarter ended September 30, 2001, no Current Reports on Form 8-K were filed by BankUnited. 101 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on December 28, 2001. BANKUNITED FINANCIAL CORPORATION /S/ ALFRED R. CAMNER By: _________________________________ Alfred R. Camner Chairman of the Board, President, Chief Executive Officer and Chief Operating Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on December 28, 2001 on behalf of the Registrant by the following persons and in the capacities indicated. /S/ ALFRED R. CAMNER Chairman of the Board, President, Chief Executive Officer, ---------------------- Chief Operating Officer and Director (Principal Executive Alfred R. Camner Officer) ---------------------- Executive Vice Chairman of the Board Mehdi Ghomeshi /S/ LAWRENCE H. BLUM Vice Chairman of the Board and Director ---------------------- Lawrence H. Blum /S/ MARC LIPSITZ Director and Corporate Secretary ---------------------- Marc Lipsitz ---------------------- Director Marc D. Jacobson /S/ ALLEN M. BERNKRANT Director ---------------------- Allen M. Bernkrant /S/ NEIL MESSINGER Director ---------------------- Neil Messinger /S/ HUMBERTO L. LOPEZ Senior Executive Vice President and Chief Financial Officer ---------------------- Humberto L. Lopez
102 EXHIBIT INDEX EXHIBIT DESCRIPTION ------- ----------- 12.1 Statement regarding calculation of ratio of earnings to Combined fixed charges and preferred stock dividends. 21.1 Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP.