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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
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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.
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* 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.
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BANKUNITED FINANCIAL CORPORATION
Form 10-K Index
Page
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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,
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2001 2000 1999
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(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
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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)
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Total loans receivable, net, at end of period(1)............... $ 3,749,649 $3,670,769 $ 3,302,866
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(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,
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2001 2000 1999 1998
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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%
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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%
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Total loans receivable 3,742,947 99.8% 3,668,071 100.0% 3,302,709 100.0% 3,018,237 99.2%
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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)%
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Loans receivable, net $3,749,649 100.0% $3,670,769 100.0% $3,302,866 100.0% $3,042,014 100.0%
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1997
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Amount Percent(1)
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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%
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Total first and
second
mortgage loans.... 1,743,649 98.7%
Consumer loans........ 1,748 0.1%
Commercial business
loans................ 10,890 0.6%
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Total loans receivable 1,756,287 99.4%
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Deferred loan fees,
premium and disc 13,129 0.8%
Allowance for loan
losses............... (3,693) (0.2)%
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Loans receivable, net $1,765,723 100.0%
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(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 --
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Total first and second mortgage loans 3,525,811 744,954 515,944 473,482 305,762 699,086 419,223 367,360
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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
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Total loans.......................... $3,742,947 $857,474 $541,429 $499,995 $321,565 $710,206 $433,013 $379,265
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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
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(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
==========
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(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 f