Item 1. Business
General
BankUnited Financial Corporation is the holding company for BankUnited, FSB (the “Bank”), the largest banking institution headquartered in Florida based on assets. (As used in this Form 10-K, “BankUnited,” “we,” “us” and “our” refers to BankUnited Financial Corporation and its subsidiaries on a consolidated basis.) BankUnited’s primary business consists of the Bank’s operations. The Bank, which was founded in 1984, offers a broad array of banking products and services to consumers and businesses located primarily in south Florida.
BankUnited’s revenues consist mainly of interest earned on loans and investments and fees received for our financial services and products. Sources of funds also include deposits, borrowings, proceeds from issuances of our equity securities, sales of loans and securities, and loan servicing income. BankUnited’s expenses consist primarily of interest paid on deposits and borrowings and expenses incurred in providing services and products. At September 30, 2003, BankUnited had assets of $7.1 billion, loans of $4.2 billion, liabilities of $6.7 billion, deposits of $3.2 billion and stockholders’ equity of $447 million. The Bank’s distribution system includes 45 full service banking offices, four mortgage production offices, an extensive wholesale network for originating loans through mortgage broker relationships, and channels for conducting business through automated teller machines, PC banking, telebanking and internet banking.
Fiscal 2003 Developments
BankUnited continued to build its management team during fiscal 2003 and realigned responsibilities in accordance with its marketing strategies. The Bank strengthened its commercial lending and commercial real estate lending teams and infrastructure to expand these business lines. These business lines are making a transition from focusing on large corporate participations to emphasizing middle market commercial relationships that are more stable. A new “micro-market” strategy was launched for the consumer banking area and expanded to encompass small business customers. This strategy focuses on the specific needs of the diverse communities comprising the south Florida market, with the goal of providing a neighborhood banking experience combined with a competitive array of products and services.
Employees
At September 30, 2003, BankUnited had 736 full-time equivalent employees. Management considers relations with its employees to be good.
Market Area and Competition
BankUnited’s main competitors for deposits and loans are other banking institutions, savings associations, lenders and financial institutions. These competitors include out-of-state organizations that offer premium rates to offset their lack of physical locations in our market area, as well as regional and super-regional institutions that are substantially larger and have more extensive operations than BankUnited. BankUnited competes for deposits and loans by emphasizing competitive rates, personalized service with high customer service standards and responsive decision-making. The experience and involvement of our management team in our market area and our localized decision-making are expected to help us compete against other institutions. Larger institutions, however, are sometimes able to achieve economies of scale, offer a broader and more sophisticated product mix, have a reduced cost of capital and offer more extensive electronic banking facilities.
Lending Activities
BankUnited’s lending activities are targeted mainly at increasing customer relationships and loan originations in its commercial lending and commercial real estate areas, and on continuing to increase residential mortgage loan originations and consumer loan originations, including specialty consumer mortgage loan originations.
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 regulatory limitation requires that certain types of loans only be made in aggregate amounts that do not exceed specified percentages of the Bank’s capital.
One-to-four Family Residential Mortgage Lending. BankUnited originates both adjustable and fixed rate one-to-four family loans typically secured by first mortgages on the borrower’s primary or secondary residence. BankUnited offers an extensive array of residential mortgage products and originates loans for both the Bank’s loan portfolio and for sale or securitization in the secondary market to governmental agencies or other investors. Mortgage loans are originated primarily through our network of mortgage brokers, internal retail loan originators, our branch sales force and our mortgage operations centers. These distribution channels allow BankUnited to cost-effectively generate high levels of loan volume as well as to offer additional products and services to loan customers through its retail banking offices.
BankUnited’s first mortgage loans generally have contractual maturities of between 15 and 30 years. However, 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.
At September 30, 2003, $3.6 billion, or 84% of total loans, including loans held for sale, consisted of one-to-four family residential loans, including specialty consumer mortgage loans made through the consumer lending area, of which $2.3 billion, or 64%, were adjustable rate mortgage (“ARM”) loans and $1.3 billion, or 36%, were fixed rate mortgage loans. BankUnited’s ARMs generally have interest rates that adjust after an initial fixed-rate period. More than half of BankUnited’s ARM loans reprice after an initial period of five years.
BankUnited’s total loan portfolio at September 30, 2003 included approximately $207 million, or 5%, of purchased one-to-four family residential mortgage loans serviced by others. The balance of these loans, which were purchased prior to 2000 and comprised $692 million, or 17%, of BankUnited’s total loan portfolio as of September 30, 2002, declined significantly during 2003 due to loan pre-payments, and is expected to continue decreasing. BankUnited ceased purchasing wholesale residential mortgage loans in the secondary market during fiscal 1999 and expects to continue focusing on originations.
For the fiscal years ended 2003, 2002, and 2001, interest income generated from one-to-four family residential mortgage loans represented 91%, 91%, and 88%, respectively, of total interest income.
Consumer Lending. BankUnited’s consumer lending originations are generated through our branch network, and consist of our specialty consumer mortgage loans, home equity loans and lines, and to a lesser extent, lines of credit, automobile and boat loans.
Our specialty consumer mortgage loans offer our customers the convenience of an accelerated application, review and approval process. The loans are both adjustable and fixed rate first mortgage loans secured by owner occupied, single-family residences. These loans have contractual terms of up to 30 years, with the majority of these loans having 15 year maturities, but tend to prepay at a much faster rate than their contractual maturities. Origination of these specialty consumer mortgages totaled $420 million, or 74% of total consumer lending production for fiscal 2003, as compared to $264 million, or 71% of total consumer lending production for
fiscal 2002. For financial statement and tabular presentation purposes, the specialty consumer mortgage loan balances of $613 million as of September 30, 2003 and $317 million as of September 30, 2002 are combined with one-to-four family residential mortgages.
Home equity lines of credit are made with adjustable rates indexed to the prime rate, and generally have maturities of 15 years or less with mandatory repayment during the last 5 years. Home equity loans are fixed rate loans with maturities up to 15 years. Automobile and boat loans are offered on a fixed rate 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 collateral. In addition, BankUnited utilizes an on-line application and credit scoring system to assist in determining an applicant’s creditworthiness.
Commercial Real Estate and Multi-Family Lending. BankUnited’s commercial real estate lending area originates and participates in commercial real estate loans, and to a lesser degree, multi-family loans. This business line also makes real estate construction loans and land loans. Loans made by this business line may have fixed or variable interest rates. BankUnited’s commercial real estate strategy is to increase originations by developing long-term relationships with businesses, real estate developers, investors, and other professionals in the real estate market. The commercial real estate loan portfolio includes loans secured by apartment buildings, office buildings, industrial/warehouses, retail centers and other properties located primarily in BankUnited’s market area.
Real Estate Construction Lending. BankUnited makes real estate construction loans to builders and real estate developers for the construction of commercial and single and multi-family real estate. These loans are primarily secured by single family homes, condominiums, apartments, retail centers, industrial warehouse properties, office buildings, medical facilities or other property. The loans are structured to be converted to permanent loans at the end of the construction phase, which usually runs from 12 to 60 months. The loans generally provide for the payment of interest and loan fees from loan proceeds and are underwritten to the same standards as commercial real estate loans. 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 a project’s ultimate success. Construction loans to borrowers other than owner-occupants also involve many of the same risks applicable to commercial real estate loans and tend to be sensitive to general economic conditions.
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 the purchase of land slated for future commercial development. The Bank generally requires that the properties securing land loans be developed within 12 to 18 months and these loans generally have a lower loan-to-value ratio than other commercial real estate loans.
Commercial Lending. BankUnited makes and participates in both secured and unsecured commercial business loans to companies in its market area. The strategy for commercial lending focuses on forming and maintaining customer relationships with primarily middle market companies doing business in south Florida. The majority of BankUnited’s commercial business loan portfolio is secured by real estate, accounts receivable, inventory, equipment, and/or general corporate assets of the borrowers, as well as the personal guarantee of the principal. BankUnited also makes and participates in loans guaranteed by third parties. Commercial business loans not secured by real estate may have fixed or variable interest rates and are typically originated for maturities ranging from one to five years. While commercial business loans are generally made for shorter maturities and at higher yields than mortgage loans, these loans may involve a higher level of risk because of the difficulty in liquidating the underlying collateral in the event of default. We are diversifying our commercial lending and small business portfolios in pursuit of higher returns within the context of our conservative credit culture.
See “Discussion of Financial Condition Changes in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”), for more information on the composition of
BankUnited’s loan portfolio by type of loan, including mortgage loans held for sale, at the end of each of the five past fiscal years, and for information on asset quality.
Mortgage Loan Servicing
BankUnited sells a portion of the mortgage loans that it originates, primarily through securitization of residential mortgage loans that conform to Federal National Mortgage Association “FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) standards. Loans that are securitized are delivered to FNMA or FHLMC, and BankUnited receives a security, guaranteed as to payment of principal and interest, which it may retain or sell to investors. In addition to servicing the loans that it originates, BankUnited generally retains the right to service loans that it has securitized and sold to investors or sponsoring agencies under mortgage-backed securities programs. BankUnited receives fees for servicing loans, which are collected from the borrowers’ payments and generally expressed as a percentage of the unpaid principal balance. The fees received for mortgage servicing rights arising from the securitization and sale of loans to sponsoring agencies are either negotiated or set by the sponsoring agencies. The fees received for mortgage servicing rights arising from the securitization and sale of loans to independent third parties are negotiated with those parties. At September 30, 2003, 2002, and 2001 BankUnited was servicing approximately $1 billion, $559 million, and $349 million in loans for others. As of September 30, 2003, BankUnited had mortgage servicing rights with a carrying amount of $12.9 million. BankUnited, however, is subject to the risk that a decline in the market rates of interest for mortgage loans or other economic conditions may cause 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” and MD&A for more information about mortgage servicing rights.
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, even if such payments have not been received from the borrowers. In general, 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.
Deposits
BankUnited offers transaction accounts which include personal and commercial checking accounts, and negotiable order of withdrawal (“NOW”) accounts. BankUnited also offers a variety of deposit products ranging from money market and regular savings accounts to certificates of deposit with maturities of up to five years. Core deposits, which include all deposits except certificates of deposit, provide BankUnited with a source of funds that have a lower cost. For this reason, BankUnited’s strategy focuses on building core deposits through its marketing initiatives and service efforts, branch expansion, and the offering of competitive products and rates.
The following table sets forth average amounts and average rates paid on each of BankUnited’s deposit categories for the periods indicated:
See note (7) Deposits to the notes to Consolidated Financial Statements for more information about BankUnited’s deposits.
Investments and Mortgage-Backed Securities
BankUnited maintains an investment portfolio consisting of U.S. Government and agency securities, mortgage-backed securities, trust preferred securities issued by others, and other investments. Federal regulations limit the instruments in which BankUnited may invest its funds. BankUnited’s current investment policy permits purchases primarily of securities which are rated investment grade by a nationally recognized rating agency, however, substantially all of the investments in BankUnited’s portfolio at September 30, 2003 were rated in one of the two highest grades.
The majority of BankUnited’s investment portfolio consists of mortgage-backed securities which 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 (Government National Mortgage Association, FNMA and FHLMC), private issue securities and collateralized mortgage obligations. BankUnited also securitizes residential mortgage loans with FNMA and FHLMC. At September 30, 2003, BankUnited’s investments and mortgage backed securities totaled $2.4 billion. See MD&A and notes (1) Summary of Significant Accounting Policies and (4) Investments and Mortgage-Backed Securities to the Notes to Consolidated Financial Statements for more information on BankUnited’s investments and mortgage-backed securities.
Borrowings
BankUnited has borrowings consisting of advances from the Federal Home Loan Bank of Atlanta (“FHLB”), securities sold under agreements to repurchase, notes, and trust preferred securities, and subordinated debentures. These borrowings may be entered into on a short-term or long-term basis. Generally, any borrowing having an original maturity of one year or greater is considered long-term. For more information on borrowings see MD&A and note (8) Borrowings to the Notes to Consolidated Financial Statements.
Activities of Subsidiaries
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 for these purposes in 1994.
BankUnited Capital, BankUnited Capital II, and BankUnited Capital III are trusts that were created under Delaware law in 1996, 1997 and 1997, respectively. BankUnited Statutory Trust I was formed in 2001; BankUnited Statutory Trust II, BankUnited Statutory Trust III, BankUnited Statutory Trust IV and BankUnited Statutory Trust V were formed in 2002; and BankUnited Statutory Trust VI was formed in 2003, as trusts under Connecticut law. BUFC Statutory Trust VII was formed in 2003 as a Delaware trust. In fiscal 2003, all of the outstanding preferred and common securities of BankUnited Capital II and BankUnited Capital III were redeemed. BankUnited Financial Corporation owns all of the common stock outstanding of each of the other trusts. Trust preferred securities issued by the trusts are held by investors. Each of the trusts was formed for the purpose of issuing trust preferred securities and investing the proceeds from the sale thereof solely in junior subordinated debentures issued by BankUnited. See note (8) Borrowings to the Notes to Consolidated Financial Statements for more information on these trust subsidiaries.
BankUnited Financial Services, Incorporated, is a Florida corporation and wholly owned subsidiary of BankUnited Financial Corporation. It was organized in 1997 for the purpose of selling annuities, mutual funds and other insurance and securities products to customers of the Bank and others.
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 for these purposes in 1998.
BU Delaware, Inc. is a Delaware corporation and wholly owned subsidiary of the Bank formed in 2002. BU Delaware, Inc. holds and manages investments, and owns all of the common stock of BU REIT, Inc.
BU REIT, Inc. (the “REIT”) is a Florida corporation formed in 2002. It has elected to be taxed as a real estate investment trust for both federal and Florida income tax purposes for calendar years 2002 and forward. The REIT holds a 100% participation interest in certain of the Bank’s residential mortgage loans. All of the REIT’s outstanding common stock is owned by BU Delaware, Inc. The REIT’s outstanding shares of non-voting preferred stock are owned primarily by the Bank, and non-voting preferred shares representing less than one percent of the REIT’s total equity are held by certain non-executive officers of the Bank and others.
Regulation
General
BankUnited is a unitary savings and loan holding company and is subject to Office of Thrift Supervision (“OTS”) regulation and examination pursuant to the Home Owner’s Loan Act (the “HOLA”). The Bank is a federal savings bank and is subject to regulation and examination by the OTS, our primary federal regulator. The Bank’s is also subject to regulation by the Federal Deposit Insurance Corporation (the “FDIC”), which insures the Bank’s deposit accounts through the Savings Association Insurance Fund (the “SAIF’).
Savings and Loan Holding Company Regulations
Activities Limitations. As a unitary savings and loan holding company that existed before May 4, 1999 and a qualified thrift lender, BankUnited generally has the broadest authority to engage in various types of business activities, including nonfinancial activities. This authority could be restricted if BankUnited was to fail to meet the qualified thrift lender test. The Gramm-Leach-Bliley Act (“GLB”) could also limit this authority if BankUnited were to acquire a non-OTS regulated subsidiary or a subsidiary institution that was not merged into the Bank. The Director of the OTS may take enforcement action against the holding company if there is reasonable cause to believe that a particular activity is a serious risk to the financial safety, soundness, or stability of the Bank, and may limit any activities of the Bank that pose a serious risk of causing the liabilities of the holding company and its affiliates to be imposed on the Bank.
Acquisitions. The holding company generally may not directly or indirectly acquire control of a savings association or savings association holding company, or substantially all of the assets or more than 5% of the voting shares of a savings association or savings association holding company, without prior OTS approval. No director or officer of a savings and loan holding company, or person owning or controlling by proxy or otherwise more than 35% of such company’s stock, may acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company, without prior OTS approval.
Reporting and Examinations. The holding company must file periodic reports with the OTS and comply with OTS record keeping requirements. BankUnited is also subject to examination by the OTS.
Securities Regulation and Corporate Governance. BankUnited’s common stock is registered with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934, and BankUnited is subject to restrictions, reporting requirements and review procedures under federal securities laws and regulations. BankUnited is also subject to the rules and reporting requirements of the Nasdaq Stock Market, on which its Class A Common Stock is traded. Like other issuers of publicly traded securities, BankUnited must also comply with the corporate governance reforms enacted under the Sarbanes-Oxley Act of 2002 (“The Sarbanes-Oxley Act”) and the rules of the Securities and Exchange Commission (the “Commission”) and Nasdaq
Stock Market adopted pursuant to the Sarbanes Oxley Act. Among other things, these reforms, which go into effect at various dates, require certification of financial statements by the chief executive officer and chief financial officer, prohibit the provision of specified services by independent auditors and require pre-approval of independent auditor services, define director independence and require certain committees, and a majority of a subject company’s board of directors, to consist of independent directors, establish additional disclosure requirements in reports filed with the Commission, require expedited filing of reports, require management evaluation and auditor attestation of internal controls, prohibit loans by the company (but not by certain depository institutions) to directors and officers, set record-keeping requirements, mandate complaint procedures for the reporting of accounting and audit concerns by employees, and establish penalties for non-compliance.
Savings Institution Regulations
The Bank is chartered by the OTS, is a member of the FHLB system, and insured by the SAIF. Federal laws empower the Bank to accept deposits and pay interest on them, make real estate loans, consumer loans and commercial loans, invest in corporate obligations, government debt securities and other securities, offer various banking services, and, subject to OTS notice and approval requirements, engage in activities such as trust operations and real estate investment. FDIC approval or notice may also be required for some activities. The Bank must file reports with the OTS and is subject to periodic examination by the OTS.
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 FDIC examines the Bank and may terminate SAIF deposit insurance or impose sanctions if it finds that the Bank has engaged in unsafe and unsound practices, cannot continue operations because it is in an unsafe and unsound condition, or has violated regulatory requirements. 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.
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. 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. 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. 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. During fiscal 2003 assessment rates for SAIF insured institutions ranged from 0% of insured deposits for well capitalized institutions with minor supervisory concerns to 27% of insured deposits for undercapitalized institutions with substantial supervisory concerns. If the FDIC were to significantly increase its assessment rates, such action could adversely affect the Bank’s earnings. If the reserve ratio for the SAIF falls below the required level, the fund may re-institute deposit insurance assessments for all institutions. In addition to deposit insurance assessments, the FDIC may collect assessments against insured deposits to service debt incurred in the 1980s. The assessment rate is adjusted quarterly.
Regulatory Capital Requirements. OTS regulations incorporate a risk-based capital requirement that is designed to be at least as stringent as the capital standard applicable to national banks and that is similar to FDIC requirements. Associations whose exposure to interest-rate risk is deemed to be above normal must deduct a portion of such exposure in calculating their risk-based capital. As of September 30, 2003, the Bank exceeded all applicable regulatory requirements. See note (10) Regulatory Capital to the Notes to Consolidated Financial Statements. There are currently no regulatory capital requirements directly applicable to holding companies.
Regulators have also established capital levels for institutions to implement the “prompt corrective action” provisions of the Federal Deposit Insurance Corporation improvement Act (“FDICIA”). Insured institutions are
categorized under the following levels: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized. An institution’s category depends upon its capital levels 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) of 10% or more, a ratio of capital to risk-weighted assets (Tier 1 risk-based capital ratio) of 6% or more and a ratio of 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 Tier 1 leverage ratio of 4% or more or a Tier 1 leverage ratio of 3% or more, if the institution is assigned a composite rating of 1. The composite rating is the numeric rating assigned by the OTS under its rating system, as a result of the most recent OTS examination. Any institution that is neither well capitalized nor adequately capitalized will be considered undercapitalized. The OTS would be required to take prompt corrective action to resolve the Bank’s situation if the Bank failed to satisfy these minimum capital requirements. The Bank is a well capitalized institution under the definitions as adopted.
Risk-based capital guidelines take into account various factors, including concentration of credit risk, risks associated with nontraditional activities, and the actual performance and expected risk of loss of multi-family mortgages. OTS regulations include an interest-rate risk component to the risk-based capital requirements for savings associations such as the Bank. Management monitors interest rate risk based on the OTS’s and BankUnited’s standards, and 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 being well-capitalized. The FDIC also requires the OTS to review its capital standards every two years to ensure that its standards require sufficient capital to facilitate prompt corrective action and to minimize loss to the SAIF and the Bank Insurance Fund (‘‘BIF’’).
Restrictions on Dividends and Other Capital Distributions. The Bank must provide the OTS with at least 30 days written notice before declaring any dividend or approving any capital distribution. The OTS may object to any distribution on safety and soundness grounds and prior approval, instead of notice, may be required in some cases.
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 promulgated by the Federal Reserve Board. The OTS issued a final rule effective November 6, 2003 conforming its regulations on affiliate transactions with Regulation W, a new regulation adopted by the Federal Reserve Bank Board which comprehensively implements sections 23A and 23B of the Federal Reserve Act and imposing additional restrictions on savings associations under §11(a) of the Home Owners’ Loan Act (“HOLA”). “Affiliates” of the Bank include the holding company and all subsidiaries other than those of the Bank. Under these regulations, “covered transactions” and certain other transactions with affiliates must be on terms and conditions that are consistent with safe and sound banking practices and 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 limit the amount of covered transactions in which the Bank may engage and set collateralization requirements. “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, and certain other transactions. The Bank may not extend credit to an affiliate other than a Bank subsidiary, unless the affiliate engages only in activities 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. A savings association is also restricted from purchasing or investing in securities issued by any affiliate other than shares of the affiliate.
Qualified Thrift Lender Test. The qualified thrift lender test (QTL) 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) housing-related loans and investments, (ii) obligations of the FDIC, (iii) loans to purchase or construct churches, schools, nursing homes and hospitals, (iv) consumer loans, (v) shares of stock issued by any FHLB, and (vi) shares of stock issued by the FHLMC or the FNMA. 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. If the Bank fails to remain a QTL, it must either convert to a national bank charter or be subject to restrictions specified under OTS regulations. A savings institution may re-qualify as a QTL if it thereafter complies with the QTL test. At September 30, 2003, the Bank exceeded the QTL requirements.
General Lending Regulations
Consumer Regulations. The Bank’s lending activities are subject to federal regulations, including the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the Community Reinvestment Act. Pursuant to OTS regulations, 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 consisting 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 for financial institutions and does not limit an institutions’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OTS to assess the Bank’s record of meeting the community’s credit needs and to take such records into account in its evaluation of certain applications.
Under OTS regulations there are three tests for evaluating a savings institution’s CRA 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 institutions’s systems for delivering retail banking services and the extent and innovativeness of its community development services. The OTS assigns the savings institution a rating of outstanding, satisfactory, needs to improve or substantial noncompliance. Based upon the most recent OTS examination completed in fiscal 2000, the Bank’s CRA rating is satisfactory.
Loans-to-one-borrower Limitations. The loans-to-one borrower limitations applicable to national banks also apply to savings institutions. Under current limits, loans and extensions of credit outstanding at one time to a single borrower and not fully secured generally 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, 2003, the Bank was in compliance with the loans-to-one-borrower limitations.
Other Regulation
Federal Reserve System. The Bank must comply with Federal Reserve Board regulations requiring the maintenance of reserves against its transaction accounts (primarily interest-bearing and non-interest-bearing checking accounts) and non-personal time deposits. As of September 30, 2003, the Bank had $650 thousand in cash reserves maintained at the FHLB for this purpose. The balances maintained to meet these requirements may
be used to satisfy liquidity requirements imposed by the OTS. Federal Reserve Board regulations also limit the periods within which depository institutions must provide availability for and pay interest on deposits to transaction accounts, and require depository institutions to disclose their check-hold policies and any changes to those policies in writing to customers. The Bank is in compliance with these regulations. Other Federal Reserve Board regulations affecting business operations include those relating to equal credit opportunity, electronic fund transfers, collection of checks, truth in lending, truth in savings and availability of funds.
Consumer Financial Privacy Regulations. Pursuant to the GLB, the federal banking agencies have jointly adopted a privacy regulation with which savings institutions have had to comply since 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.
Regulation of Non-Banking Affiliates. BankUnited Financial Services, Incorporated (“BUFS”) is an insurance agency subsidiary of BankUnited that sells fixed and variable annuities and mutual funds. BUFS’s activities must comply with Florida insurance laws and regulations, and its employees are licensed insurance agents subject to continuing education, licensing and oversight by the Florida Department of Insurance. BUFS’s employees are also registered representatives of Essex National Securities, Inc., a broker-dealer regulated by the National Association of Securities Dealers (“NASD”), with which BankUnited has a brokerage agreement. BUFS’s activities are also subject to regulations adopted by the federal banking agencies, requiring that sales of non-deposit insurance products comply with standards for disclosures, physical separation of activities from banking activities, due diligence, oversight, consumer privacy and other functions.
Legislative and Regulatory Developments
USA PATRIOT ACT The final rules on USA PATRIOT Act Section 326 Customer Identification Programs were effective as of October 1, 2003. Under the Section 326 rules, each institution must develop a Customer Identification Program (CIP) as part of it Bank Secrecy Act compliance program. The objective of the CIP is for banks to determine the true identity of its customers based on risk factors such as: types of accounts; methods of opening accounts; types of identifying information; and characteristics of the bank. Information to be collected includes, but is not limited to: name, address, and identifying number on every new customer (with certain exceptions, like government agencies and publicly traded companies), and the date of birth for individuals prior to opening an account. This information must be verified within a reasonable time through documentary or non-documentary methods. Furthermore, all new customers must be screened against any Section 326 government lists of known or suspected terrorists within a reasonable time after opening the account.
HMDA and Regulation C. Financial institutions must implement programs to respond to significant changes in the Home Mortgage Disclosure Act (“HMDA”) and Regulation C promulgated thereunder, which will go into effect in 2004. Regulation C has been revised to expand the collection and reporting of data including: disclosure of pricing data on higher cost loans; information on ethnicity as well as race; details about the rate and rate spread; and whether the application was for a pre-approval.
Income Taxes
BankUnited and its subsidiaries are subject to income taxes at the federal level and are individually subject to state taxation based on the laws of each state in which an entity operates. BankUnited and its subsidiaries other than BU REIT, Inc. file a consolidated federal tax return with a fiscal year ending on September 30. BU REIT, Inc. files a separate tax return with a calendar year-end. BankUnited and its subsidiaries will file separate tax returns for each state jurisdiction affected in 2003. No tax return is currently subject to examination.
Bad Debt Reserve Deductions
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. Under Federal legislation thrifts are required 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 like the Bank with assets whose tax basis exceeds $500 million are required to use the specific charge off method in computing its bad debt deduction. 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 commenced over a six-year period, with the first taxable year beginning after December 31, 1997. This legislation has not had a material impact on BankUnited.
Available Information
BankUnited’s Internet address is www.buexpress.com. Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports are available, free of charge, through our website as soon as reasonably practicable after their filing with the Securities and Exchange Commission.
Segment Reporting
See note (1) Summary of Significant Accounting Policies (q) Segment Reporting to the Notes to Consolidated Financial Statements for BankUnited’s policy on segment reporting.
Item 2.
Item 2.
Properties
BankUnited leases executive and administrative office space located at 225 Alhambra Circle, Coral Gables, Florida 33134, pursuant to a lease terminating in 2014. In addition to its operations center in Miami Lakes, Florida, BankUnited operates three mortgage-production offices located in Tampa, Chicago, and Rockville, Maryland with lease terms extending through 2008. There is also a lease on the operations center, which terminates in 2007.
Currently BankUnited operates 45 full-service banking offices located in south Florida, two of which are owned and 43 of which are leased with terms extending through 2013. There are 17 offices located in Miami Dade County, 18 in Broward County, eight in Palm Beach County, and two in Collier County.
BankUnited has multiple options to renew leases at all leased banking offices and other locations.
Item 3.
Item 3.
Legal Proceedings
BankUnited and its subsidiaries, from time to time, are involved as plaintiff or defendant in various legal actions arising in the normal course of their businesses. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management that no proceedings exist, either individually or in the aggregate, which, if determined adversely to BankUnited and its subsidiaries, would have a material effect on BankUnited’s consolidated financial condition, results of operations or cash flows.
Item 4.
Item 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of BankUnited’s security holders during the fourth quarter of the fiscal year ended September 30, 2003.
Item 4A.
Directors and Executive Officers of the Registrant
The following table sets forth information concerning BankUnited’s directors and executive officers.
Alfred R. Camner has served as Chairman of the Board and Chief Executive Officer of BankUnited Financial Corporation (the “Company”) since 1993, as President from 1993 to 1998 and 2001 to 2002, and as Chief Operating Officer from 2001 to 2002. He has served as the Bank’s Chairman of the Board and Chief Executive Officer since 1984, as its President from 1984 to 1993, 1994 to 1998, and 2001 to 2002, and as its Chief Operating Officer from 2001 to 2002. He is the Senior Managing Director of the law firm of Camner, Lipsitz and Poller, P. A. and has held that position since 1996. Mr. Camner was General Counsel to CSF Holdings, Inc. and its subsidiary, Citizens Federal Bank, from 1973 to 1996. He was also a Director and Executive Committee member of Loan America Financial Corporation from 1985 to 1994.
Lawrence H. Blum has served as Vice Chairman of the Board of Directors of the Company since 1993, and as its Secretary since 2002. He has served as the Bank’s Vice Chairman of the Board since 1984, and its Secretary since 2002. Mr. Blum has served as the Managing Director of Rachlin, Cohen & Holtz LLP, certified public accountants and consultants, since 1993, and has been a partner there since 1974.
Ramiro A. Ortiz has served as a director, President and Chief Operating Officer of the Company and of the Bank since August 2002. He previously served as the Chairman and Chief Executive Officer, from July 2002 to August 2002, as President, from 1996 to August 2002, and as Executive Vice President of Community Banking, from 1987 to 1996, of SunTrust Bank, Miami. He was the Chairman of the Greater Miami Chamber of Commerce from 2001 to 2002 and the Campaign Co-Chair of the United Way of Dade County in 1999.
Allen M. Bernkrant has served as a director of the Company since 1993, and of the Bank since 1985. He has been a private investor in Miami, Florida since 1990.
Sharon A. Brown has served as a director of the Company and of the Bank since January 2003. She served at the University of Miami School of Business Administration as the Director of Alumni and External Affairs from 2002 to 2003, and as Assistant Dean for Administration and Development from 1992 to 2001. Ms. Brown was a Partner from 1979 to 1992 at Coopers and Lybrand, certified public accountants, where her clients
included financial institutions, nonprofit organizations and major organizations in government and education. She is a member of the Audit Committee of the School Board of Miami-Dade County, and served on the five-member citizen board appointed in 1998 to oversee the financial recovery of the City of Miami. She served as a Director of the United Way of Miami-Dade County from 1988-2003.
Marc D. Jacobson has served as a director of the Company since 1993, and as the Company’s Secretary from 1993 to 1997. He has served as a director of the Bank since 1984, and as its Secretary from 1985 to 1996. Mr. Jacobson has been the Senior Vice President of Head-Beckham AmerInsurance Agency, Inc., and its predecessor, Head-Beckham Insurance Agency, Inc., since 1990.
Hardy C. Katz has served as a director of the Company and the Bank since March 2002. He has been the Vice President of Finance for Communications and Show Management, Inc., a trade show marketing and management company, and Industry Publishers, Inc., a publishing company, since 1972. Mr. Katz has also served as the managing partner of BiZBashFla, LLC, a publishing and trade show company, since 2003.
Neil H. Messinger, M.D has served as a director of the Company and the Bank since 1996. He is a Radiologist and has served as the President of Radiological Associates, Professional Association, since 1986. Dr. Messinger has also been the Chairman of Imaging Services of Baptist Hospital since 1986.
Edward L. Pinckney has served as a director of the Company and the Bank since May 2002. He became an assistant coach of the Villanova University Men’s Basketball team in May 2003, and was a television and radio broadcaster and commentator for ESPN and the Miami Heat from 1997 until May 2003. Mr. Pinckney also served as the Manager and Coach of the Miami Pro Summer League, L.C., which he established in 2000, and was a professional basketball player from 1985 to 1997.
Albert E. Smith joined the Board of and the Company and the Bank in November 2003. He has served as the President of Florida Memorial College since 1993 and served as President of South Carolina State College from 1986 to 1993. Dr. Smith currently serves as a director of the Greater Miami Chamber of Commerce and the Orange Bowl Committee and as the Vice Chair on the Miami-Dade County Social and Economic Development Council. He is a member of the Executive Committee of The College Fund/UNCF.
Humberto L. Lopez has served as Senior Executive Vice President of Finance of the Company and the Bank since 2001, and as Executive Vice President of Finance of the Company and the Bank from 1999 to 2001. He has served as the Chief Financial Officer of the Company and the Bank since 1999. Mr. Lopez was a Director at PricewaterhouseCoopers LLP from 1998 to 1999. He also served as the Chief Financial Officer from 1997 to 1998, of Barnett Bank, South Florida and its successor by merger, Nations Bank, NA in south Florida, and the Regional Financial Officer from 1993 to 1996, of Barnett Banks, Inc.
John Kuczwanski has served as the Executive Vice President of Residential Lending of the Bank since 2002. He served as the Managing Director of Sierra Grove Associates from 1995 to 2002 and was the President of Loan America Financial Corporation from 1985 to 1995. Mr. Kuczwanski served as Executive Vice President of Citizens Federal Bank from 1982 to 1985.
Felix M. Garcia was appointed the Bank’s Executive Vice President of Risk Management in June 2003. He served as the Executive Vice President and Senior Lender at Eagle National Bank, from 2002 to 2003, Executive Vice President and Head of Domestic Lending at Hamilton Bank from 2000 to 2002, and Executive Vice President and Head of Corporate Lending at Union Planters Bank from 1999 to 2000. Mr. Garcia also served as Executive Vice President from 1985 to 1999, and Chief Credit Officer from 1993 to 1999, at Republic National Bank.
Douglas B. Sawyer has served as Executive Vice President of Consumer Banking for the Bank since October 2003, and as Executive Vice President of Wealth Management since February 2003. He previously served as the Executive Vice President of Retail from 2002 to 2003, Executive Vice President of Private Client Services from 2000 to 2002, and Senior Vice President from 1997 to 2000, for SunTrust Bank, Miami.
Robert A. Marsden has served as the Executive Vice President of Operations for the Bank since 2002. He served as the Executive Vice President of Operations from 1998 to 2002 of SunTrust Bank, Miami and was an Account Manager from 1995 to 1998 at The SCA Group.
Roberta R. Kressel has served as the Executive Vice President of Human Resources for the Bank since January 2003. She was Vice President of Human Resources from 2001 to 2002 at Kemper National Services. Ms. Kressel also served as Senior Vice President, Human Resources Relationship Manager from 2000 to 2001, and Senior Vice President, Human Resources Manager from 1998 to 2000, at SunTrust Bank, South Florida and SunTrust Bank, Miami.
Carlos R. Fernandez-Guzman has served as the Executive Vice President of Marketing for the Bank since February 2003. He served as the Executive Vice President, Chief Operating Officer and Director from 1999 to 2003, of XTec, Incorporated. Mr. Fernandez-Guzman was also the President, Chief Operating Officer and Director from 1995 to 1999 at CTI, and the Executive Vice President of Market Development, from 1992 to 1995, at American Savings of Florida.
Abel L. Iglesias was appointed the Executive Vice President of Corporate and Commercial Banking for the Bank in May 2003. He served as the Executive Vice President and Chief Lending Officer of Colonial Bank, South Florida Region, from 1998 to May 2003. Mr. Iglesias was the Executive Vice President and Chief Lending Officer of Eastern National Bank from 1992 to 1998.
Clay F. Wilson was appointed the Executive Vice President of Commercial Real Estate for the Bank in May 2003, and served as Senior Vice President of Commercial Real Estate from 1999 to 2003. He served as the Group Senior Vice President of Commercial Real Estate from 1996 to 1999, and the Vice President of Commercial Real Estate from 1991 to 1996, of Barnett Bank, South Florida and its successor by merger, NationsBank, Inc. in south Florida.
Gary Laurash has served as Senior Vice President and Treasurer of the Company since January 2003 and of the Bank since 2000. Mr. Laurash served as the First Vice President of MBNA America from 1998 to 2000 and as the First Vice President/Administration Director of MBNA Marketing Systems, Inc. from 1996 to 1998.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Stock and Related Stockholder Matters
Stock Information
BankUnited’s Class A Common Stock, $.01 par value (“Class A Common Stock”), is traded in the over-the-counter market and quoted in the Nasdaq-Amex Stock Market, National Market (“NASDAQ”) under the symbol “BKUNA”. BankUnited’s Class B Common Stock, $.01 par value (“Class B Common Stock”), is not traded on any established public market.
At December 5, 2003, there were 518 and 12 holders of record of BankUnited’s Class A Common Stock and Class B Common Stock, respectively. The number of holders of record of the Class A Common Stock includes nominees of various depository trust companies for an undeterminable number of individual stockholders. Class B Common Stock is convertible into Class A Common Stock at a ratio (subject to adjustment upon the occurrence of certain events) of one share of Class A Common Stock for each share of Class B Common Stock surrendered for conversion.
No dividends were declared or paid in fiscal 2003 or 2002 on Common Stock. See note (10) Regulatory Capital to the Notes to Consolidated Financial Statements for a discussion of restrictions on the Bank’s payment of dividends to BankUnited.
For the range of high and low bid prices for the Class A Common Stock quoted on Nasdaq for each quarter of fiscal 2003 and 2002, see Selected Quarterly Financial Data.
Item 6.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with BankUnited’s Consolidated Financial Statements and Notes thereto.
(Continued on the next page)
(1) Does not include mortgage loans held for sale.
(2) Includes repurchase agreements, advances from the Federal Home Loan Bank of Atlanta, senior notes, and trust preferred securities and subordinated debentures.
(3) The effect of stock options and convertible securities was anti-dilutive for the year ended September 30, 1999.
(4) Return is calculated before payment of preferred stock dividends.
(5) The ratio of total dividends declared during the period (including dividends on the Bank’s and BankUnited’s preferred stock and BankUnited’s Class A and Class B Common Stock) to total earnings for the period before dividends.
(6) Efficiency ratio is calculated by dividing non-interest expenses by the sum of net interest income, and non-interest income.
(7) Regulatory capital ratio of the bank.
NM = Not meaningful
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion and analysis and the related financial data present a review of the consolidated operating results and financial condition of BankUnited for the fiscal years ended September 30, 2003, 2002 and 2001. This discussion and analysis is presented to assist the reader in understanding and evaluating the financial condition, results of operations and future prospects of BankUnited, and is intended to supplement, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto.
BankUnited’s results of operations are dependent primarily on its net interest income, which is the difference between the interest earned on its assets, primarily its loan and securities portfolios, and its cost of funds, which consists of the interest paid on its deposits and borrowings. BankUnited’s results of operations are also affected by its provision for loan losses as well as non-interest income, non-interest expenses and income tax expense. Non-interest expenses consist of employee compensation and benefits, occupancy and equipment, insurance, professional fees, telecommunications and data processing, loan servicing expense, and other operating expenses. Results of operations are also dependent on the dollar volume and asset quality of BankUnited’s loans and investments.
In addition to the foregoing, results of BankUnited’s operations, like those of other financial institution holding companies, are affected by BankUnited’s asset and liability management policies, as well as factors beyond BankUnited’s control, such as general economic conditions and the monetary and fiscal policies of the federal government. Lending activities are affected by the demand for mortgage financing and other types of loans, and are thus influenced by interest rates and other factors affecting the supply of housing and the availability of funds. Deposit flows and costs of funds are influenced by yields available on competing investments and by general market rates of interest.
Fiscal 2003 Highlights
During fiscal 2003, BankUnited increased assets by 19% to $7.1 billion and reported $39.1 million in net income, an improvement of 29% over 2002. Basic and diluted earnings per share for the year were $1.45 and $1.36, respectively, compared to $1.20 and $1.12, respectively, for 2002. Earnings per share for fiscal 2003 include the dilutive effect of 3,936,500 shares of Class A common stock issued in the May 2003 secondary public offering. Fiscal 2003 marks BankUnited’s fourth consecutive year of record net income. Other notable BankUnited milestones include:
•
Loan production for 2003 improved by 31% compared to 2002, to reach $3 billion
•
Core deposits increased in 2003 by 16% to $1.4 billion
•
Non-interest bearing deposits increased by 69% to $198 million as of September 30, 2003
•
Non-interest income reached $28 million, up 63% over 2002
•
Retired $162 million of high interest debt
•
Raised $72.8 million in a secondary public offering of BankUnited Class A Common Stock
•
Market capitalization increased by 56% to $629 million as of September 30, 2003
Critical Accounting Policies
BankUnited’s financial position and results of operations are impacted by management’s application of accounting policies involving judgments made to arrive at the carrying value of certain assets. In implementing its policies, management must make estimates and assumptions about the effect of matters that are inherently less
than certain. Actual results could differ significantly from these estimates which could materially affect the reported amounts of our assets, liabilities, income and expenses. For a detailed discussion of BankUnited’s significant accounting policies, see note (1) Summary of Significant Accounting Policies to the Notes to Consolidated Financial Statements. The most critical accounting policies applied by BankUnited are those that relate to the allowance for loan losses, and the valuation of mortgage servicing rights.
Estimates of the amount of the allowance for portfolio loan losses, and the valuation of loans held for sale both affect the carrying amount of the loan portfolio.
The allowance for loan losses is a subjective judgment that management must make regarding the loan portfolio, and is established and maintained at levels that management believes are adequate to cover losses resulting from the inability of borrowers to make required payments on loans. Estimates for loan losses are made by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan administration and resolution, the views of regulators, changes in the size and composition of the loan portfolio, and peer group information. In addition, the economic climate and direction, increases or decreases in overall lending rates, political conditions, legislation directly or indirectly impacting the banking industry, and economic conditions affecting specific geographical areas in which BankUnited conducts business are all considered. Where there is a question as to the impairment of a specific loan, management obtains valuations of the property or collateral securing the loan, and current financial information of the borrower, including financial statements, when available. Since the calculation of appropriate loan loss allowances relies on management’s estimates and judgments relating to inherently uncertain events, actual results may differ from these estimates. For a more detailed discussion on the allowance for loan losses, see Asset Quality and, (e) Allowance for Loan Losses in note (1) Summary of Significant Accounting Policies to the Notes to Consolidated Financial Statements.
Several estimates impact mortgage servicing rights, including the amount of gains or losses recognized upon the securitization and sale of residential mortgage loans, the amortization of the assets, and the periodic valuation of the assets. The initial and ongoing valuation and amortization of mortgage servicing rights is significantly impacted by interest rates, prepayment experience and the credit performance of the underlying loans. In general, in periods of declining interest rates, the value of these assets declines due to prepayments on loans serviced. For a more detailed discussion on mortgage servicing rights, see discussion Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Interest Rate Sensitivity
As a financial intermediary BankUnited invests in various types of interest-earning assets (primarily loans, mortgage-backed securities, and investment securities) which are funded largely by interest-bearing liabilities (primarily deposits, FHLB advances, and trust preferred securities). None of these financial instruments are entered into for trading purposes. Such financial instruments have varying levels of sensitivity to changes in market interest rates that creates interest rate risk for the Bank. Accordingly, BankUnited’s net interest income, the most significant component of its net income, is impacted by changes in market interest rates and yield curves, particularly if there are differences, or gaps, in the repricing frequencies of its interest-earning assets and the interest-bearing liabilities which fund them. BankUnited monitors such interest rate gaps and seeks to manage its interest rate risk by adjusting the repricing frequencies of its interest-earning assets and interest-bearing liabilities. In addition to reviewing reports which summarize BankUnited’s various interest sensitivity gaps, management utilizes a simulation model which measures the financial impact certain interest rate scenarios are likely to have on the Bank. As discussed more fully below, a variety of factors influence the repricing characteristics and the market values of BankUnited’s interest-earning assets and interest-bearing liabilities, but many of these factors are difficult to quantify.
The matching of the repricing characteristics of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific time period if it will contractually mature or reprice, or if by management assumption, it is likely to be impacted by prepayments, run-off, early withdrawal, or other such forces which can impact the timing and amount of a given financial instrument’s cash flows. An interest rate sensitivity gap is the difference between the amount of interest-earning assets anticipated to mature or reprice within a specific time period and the amount of interest-bearing liabilities anticipated to mature or reprice within that same period. A gap is considered to be positive when the amount of interest rate sensitive assets maturing or repricing within a specific time frame exceeds the amount of interest rate sensitive liabilities maturing or repricing within that same time frame. Conversely, a gap is considered to be negative when, within a given period of time, the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period where the general level of interest rates is rising, a bank with a negative gap over that period is likely to experience a decline in net interest income; while a bank with a positive gap will typically experience an increase in net interest income.
Significant Assumptions Utilized in Managing Interest Rate Risk
Assessing and managing BankUnited’s exposure to interest rate risk involves significant assumptions concerning the exercise of options which are considered to be embedded in many of the financial instruments on BankUnited’s balance sheet, the expected movement and relationship of various interest rate indices, the impact of lag and cap risk, and the general availability of mortgages.
Embedded Options. As of September 30, 2003, a substantial portion of BankUnited’s loans and mortgage-backed securities consist of mortgage loans that contain an embedded option allowing borrowers to repay all, or a portion of, their loan prior to maturity, frequently without penalty. The existence of this embedded prepayment option can adversely impact BankUnited’s financial performance. In general, fixed rate securities tend to exhibit an increase in market value when the level of interest rates falls, and they tend to exhibit a decrease in market value when the level of interest rates rises. Mortgage loans having embedded prepayment options, and the securities which contain them, tend to decrease in market value as interest rates rise. However increases in market value due to a decrease in interest rates are typically suppressed since in a lower rate environment borrowers are more likely to prepay, or refinance, their mortgage loans. Consequently, the adverse impact an investment in mortgage loans or mortgage securities may have on BankUnited’s market value of equity, should interest rates rise, may exceed the beneficial impact should interest rates fall by a like amount.
Additionally, in an increasing interest rate environment BankUnited’s funding costs may be expected to increase more quickly than would BankUnited’s earnings from its mortgage loan assets. This could result in a deterioration in BankUnited’s net interest margin. However, due to the asymmetry discussed previously, improvement in BankUnited’s net interest margin due to a general decrease in interest rates may be less than the deterioration in BankUnited’s net interest margin given a similar increase in the general level of interest rates.
A borrower’s propensity for prepayment is dependent upon a number of factors, some of which are: the loan’s current interest rate versus the rate at which the borrower would be able to refinance, the economic benefit expected to be obtained from refinancing, the borrower’s financial ability to refinance, the availability of mortgage loans in general, and numerous other economic and non-economic factors, some of which may vary by geographic region.
Savings and checking deposits generally may be withdrawn upon customer request without prior notice. However, on an overall basis, one customer’s withdrawal is likely to be offset by another customer’s deposit resulting in a dependable source of funds. Time deposits are generally subject to early withdrawal penalties, which results in the large majority of these deposits being maintained until maturity. Similarly, term FHLB advances have prepayment penalties, which discourage early repayment by the Bank.
BankUnited’s trust preferred securities may be redeemed at par plus accrued interest receivable after five years from the issuance date, except for securities issued by BankUnited Capital, which have a ten year call provision.
See note (8) Borrowings to the Notes to Consolidated Financial Statements for further discussion of the trust preferred securities.
BankUnited borrows from the FHLB in the form of advances to fund operations. These advances have a variety of terms, rates and repayment provisions. A significant portion of the Bank’s advances have been obtained through a convertible advances program that permits the FHLB to call an advance at its discretion on a specified “call” date which generally occurs every three months following an initial period ranging from three months to four years. Should the FHLB elect to exercise this option, the Bank can either convert the advance from a fixed rate basis to a floating rate basis or repay it in full. It is highly probable that the advances would be converted in a rising interest rate environment. Should the FHLB elect to exercise this option, BankUnited’s cost of funds may be affected adversely.
The Bank 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 call at the end of any given three-month period after the non-conversion period, if the 3-month LIBOR rate equals or exceeds an agreed upon threshold rate. Should a particular advance be called by the FHLB, the Bank can either convert the advance from a fixed-rate basis to a floating rate basis or pay it in full.
During fiscal year 2000, BankUnited borrowed a total of $250 million in knockout advances, each with a 10-year term and a one year non-callable period. The initial rates on these advances range from 5.92% to 6.94% while the threshold rates range from 8.50% to 9.75%. BankUnited has chosen to borrow under the knockout advance program because, as long as these advances remain unconverted by the FHLB, the stability of BankUnited’s net interest margin will be enhanced. However, if the 3-month LIBOR rate were to rise to these threshold rates so as to allow the FHLB to call one or more of BankUnited’s knockout advances, the funding cost associated with the advance would become higher and more volatile, negatively impacting BankUnited’s net interest margin. These same knockout advances were outstanding at September 30, 2003.
Interest Rate Indices. BankUnited’s ARM loans and mortgage-backed securities are primarily indexed to the One-Year Constant Maturity Treasury (“CMT”) or Monthly Treasury Average (“MTA”) indices. BankUnited’s commercial and consumer loans may be indexed to Prime or LIBOR. To the extent such loans and
mortgage-backed securities are funded by deposits, FHLB advances, and other interest-bearing liabilities whose interest costs are influenced by indices not highly correlated with the above indices, an environment of changing interest rates may impact the various indices differently which may lead to significant changes in the value of, and the net earnings generated from, BankUnited’s financial instruments. Historical relationships between various indices may not necessarily be indicative of future relationships. BankUnited in the normal course of business uses liabilities which are correlated with these indices.
Lag Risk. Lag risk results from timing differences between repricing of adjustable-rate assets and liabilities. The effect of this timing difference, or “lag”, would be favorable in a falling interest rate environment and negative during periods of rising interest rates. This lag risk can produce short-term volatility in the net interest margin during periods of interest rate movements even though over time the lag effect will balance out. As an illustration we have loans indexed to the MTA. The MTA Index is based on a 12 month moving average of the prior twelve months of treasury rates. In periods of rapidly moving interest rates loans tied to this index will not reprice to the current level of rates for 12 months while liabilities generally reprice to current market interest rates immediately.
Cap Risk. In times of sharply rising interest rates, caps may serve to limit the increase in interest income generated from certain interest-earning assets. Conversely, in an environment of sharply falling interest rates, they may reduce the decline in BankUnited’s interest income. Over periods of time where the general level of interest rates has had time to fluctuate, the alternating positive and negative effects generated by such interest rate caps will be largely offsetting. Over shorter periods, however, and to the extent any caps are actually limiting the interest rate adjustment of any assets, they can increase the volatility of BankUnited’s net interest income, and to a lesser extent, its market value of equity.
BankUnited has mitigated its cap risk by originating loans that do not have caps and certain hybrid ARM loans that will adjust up to 500 basis points at the first adjustment period. This first adjustment period can range from 3 years to 7 years. BankUnited anticipates the majority of these hybrid ARM loans will prepay prior to the first adjustment.
Availability of Mortgage Loans. The availability of mortgage loans meeting BankUnited’s criteria is dependent upon, among other things, the size and level of activity in the residential real estate lending market, which in turn depends on other factors including the level of interest rates, regional and national economic conditions and changes in residential real estate values. To the extent that BankUnited is unable to originate or acquire a sufficient volume of mortgage loans meeting its criteria, BankUnited’s operating results could be adversely affected.
In originating or acquiring mortgage loans, BankUnited competes with REITs, investment banking firms, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, competing lenders, FNMA, FHLMC, GNMA, and other entities which purchase mortgage loans, some of which have greater financial resources than BankUnited. Increased competition for the origination or acquisition of eligible mortgage loans or a diminution in the supply could result in BankUnited having to incur higher costs and accept lower yields. This, in turn, would reduce the amount by which BankUnited’s yield on earning assets would exceeds its cost of funding those assets.
The following table sets forth the re-pricing gap between interest-sensitive assets and interest-sensitive liabilities expected to mature or re-price within the same period of time. This gap analysis is a static view as of September 30, 2003. The analysis reflects assumptions made as to the prepayment of residential mortgage loans and mortgage-backed securities. Assumptions are also made as to the re-pricing period of deposits that have no stated maturity and are not contractually subject to re-pricing except as determined by BankUnited. Other interest-bearing assets and liabilities have been scheduled to re-price based on the earlier contractual re-pricing or final maturity date of the contract.
Assumptions as to the prepayment of mortgage-backed securities and residential mortgage loans are based upon expected prepayment speeds and an analysis of current market conditions. Money market, savings and NOW accounts are assumed to re-price based upon deposit decay estimates determined by BankUnited. Pricing of these deposits is determined by BankUnited based upon market conditions and other factors. The conditions and assumptions utilized in this analysis may not be appropriate at another point in time. Consequently, the interpretation of this information is subjective.
Gap Table. The following table sets forth the amount of interest-earning assets and interest-bearing liabilities outstanding at September 30, 2003, expected to reprice or mature in each of the future time periods shown.
(1)
Based on projected decay rates and/or repricing periods.
In addition to preparing and reviewing periodic gap reports which help identify repricing mismatches, BankUnited uses simulation models which estimate the impact on net interest income of various interest rate scenarios, balance sheet trends and strategies. These simulations incorporate assumptions about balance sheet dynamics, such as loan and deposit growth and pricing, changes in funding mix and asset and liability repricing and maturity characteristics based on BankUnited’s expectations for the next 12 months. Simulations are run under various interest rate scenarios to determine the impact on net income and capital. From these scenarios, interest rate risk is quantified and appropriate strategies are developed and implemented. The overall interest rate risk position and strategies are reviewed on an ongoing basis by senior management. Based on the information and assumptions in effect on September 30, 2003, management estimates the impact of a gradual and parallel 100 basis-point rise or fall in interest rates over the next 12 months to be between 0.22% and 3.00% of net interest income.
BankUnited recognizes that there are numerous assumptions and estimates associated with the simulations described above which may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the simulation model assumes that the composition of BankUnited’s interest sensitive assets and liabilities existing at the beginning of a period remains relatively constant over the period being measured and also assumes that the change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. In addition, prepayment estimates and other assumptions within the model are subjective in nature, involve uncertainties and, therefore, cannot be determined with precision.
Accordingly, although the simulation model may provide an indication of BankUnited’s interest rate risk exposure at a particular point in time, such measurements are not intended to provide for a precise forecast of the effect of changes in market interest rates on BankUnited’s net interest income and may differ from actual results.
BankUnited’s operations are affected by many factors beyond its control such as the overall condition of the economy, monetary and fiscal policies of the federal government, and regulations specific to the banking industry. Revenues generated from lending activities are impacted by loan demand, which in turn impacts the interest rates at which such loans may be made, the supply of housing, the availability of funds to lend, and the cost of obtaining such funds.
Derivative and Hedging Activities. BankUnited uses derivative instruments as part of its interest rate risk management activities to reduce risks associated with its borrowing activities. Derivatives used for interest rate risk management include various interest rate swaps and caps that relate to the pricing of specific on-balance sheet instruments and forecasted transactions. In connection with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), we recognize all derivatives as either assets or liabilities on the consolidated balance sheet and report them at fair value with realized and unrealized gains and losses included in either earnings or in other comprehensive income, depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting.
BankUnited has interest rate swap agreements that qualify as fair value hedges and those that qualify as cash flow hedges. Fair value hedges are used to hedge fixed rate debt. BankUnited uses cash flow hedges to hedge interest rate risk associated with variable rate debt.
In connection with its interest rate management activities, BankUnited may use other derivatives as economic hedges of on-balance sheet assets and liabilities or forecasted transactions which do not qualify for hedge accounting under SFAS 133. Accordingly, these derivatives are reported at fair value on the consolidated balance sheet with realized gains and losses included in earnings.
By using derivative instruments, BankUnited is exposed to credit and market risk. Credit risk, which is the risk that a counterparty to a derivative instrument will fail to perform, is equal to the extent of the fair value gain in a derivative. Credit risk is created when the fair value of a derivative contract is positive, since this generally
indicates that the counterparty owes us. When the fair value of a derivative is negative, no credit risk exists since BankUnited would owe the counterparty. BankUnited minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties as evaluated by management. Market risk is the adverse effect on the value of a financial instrument from a change in interest rates or implied volatility of rates. We manage the market risk associated with interest rate contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The market risk associated with derivatives used for interest rate risk management activity is fully incorporated into our market risk sensitivity analysis.
See note (17) Estimated Fair Value of Financial Instruments for the fair value of derivatives as of September 30, 2003.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
BankUnited Financial Corporation
In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of BankUnited Financial Corporation and its subsidiaries at September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2003 in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
October 31, 2003
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
See accompanying notes to consolidated financial statements
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended September 30, 2003, 2002 and 2001
See accompanying notes to consolidated financial statements
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY-(Continued)
For the Years Ended September 30, 2003, 2002 and 2001
The following table presents additional information concerning BankUnited’s other comprehensive income (loss):
See accompanying notes to consolidated financial statements.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued on next page)
See accompanying notes to consolidated financial statements.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -(Continued)
See accompanying notes to consolidated financial statements.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of BankUnited Financial Corporation (“BankUnited”) and subsidiaries conform to accounting principles generally accepted in the United States of America and to general practices within the savings and loan industry. Presented below is a description of BankUnited’s principal accounting policies.
(a) Basis of Presentation and Principles of Consolidation
With the exception of two of BankUnited’s trust subsidiaries, (see FASB Interpretation No. 46 in (s) Impact of New Accounting Pronouncements of this note,) the consolidated financial statements include the accounts of BankUnited and its subsidiaries, including BankUnited, FSB (the “Bank”). The Bank provides a full range of banking services to individual and corporate customers through its branches in south Florida. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by the Office of Thrift Supervision. All significant inter-company transactions and balances have been eliminated.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated statements of financial condition and operations for the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of mortgage servicing rights.
(b) Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include cash, Federal Home Loan Bank overnight deposits, federal funds sold and securities purchased under agreement to resell with original maturities of three months or less. The collateral held by the Bank for securities purchased under agreements to resell consists of the securities underlying those agreements. At September 30, 2003, BankUnited had $650 thousand in restricted cash reserves on deposit maintained by the Federal Home Loan Bank of Atlanta, (“FHLB”) in compliance with Federal Reserve regulations.
(c) Investments and Mortgage-backed Securities
Mortgage-backed securities and other investments available for sale are carried at fair value, inclusive of unrealized gains and losses, and net of discount accretion and premium amortization computed using the level yield method. Net unrealized gains and losses are included in comprehensive income (loss) net of applicable income taxes. Gains or losses on sales of mortgage securities and investments are recognized on the specific identification basis.
(d) Loans
Loans held in the portfolio are considered long-term investments and, accordingly, are carried at historical cost. Loans held for sale are recorded at the lower of cost or market, determined in the aggregate. Deferred loan origination fees and costs are included in the carrying value of loans.
(e) Allowance for Loan Losses
BankUnited’s allowance for loan losses is established and maintained at a level management deems prudent and adequate to cover probable losses on loans based upon a periodic evaluation of current information of the
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
risks inherent in its loan portfolio. When evaluating loan loss allowances, management reviews performing and non-performing loans separately. There are several elements that management evaluates to estimate the loan loss allowance for BankUnited’s loan portfolio. The elements evaluated, and how they are applied to each portion of the portfolio, are as follows:
·
An allowance for loan losses present in the performing portion of the loan portfolio. This allowance is established based on historical loan loss analysis supplemented by peer loss analysis.
·
An allowance for estimated losses on various pools of non-performing loans is made. This element is evaluated for each of the portfolio components based on the internal loan grading sytem. Historical loan losses, current trends in delinquencies and charge-offs, peer group analysis, and other relevant factors are considered in order to determine the adequacy of the allowance for loan losses.
·
An allowance for losses based upon specific evaluations of impaired loans in accordance with SFAS No. 114 is made. These loans are loans, other than consumer and residential loans, for which collection in full according to the contractual terms is doubtful and which are classified as such in the Bank’s internal loan grading system. Impaired loans are evaluated individually based on an examination of the current financial information of the borrower and an estimate of the value of the collateral, if any. If the carrying value of any of these loans is greater than the estimated net realizable value of the property or of the collateral securing these loans, a reserve is established for the difference.
·
An additional risk management allowance is made based on factors such as general economic and political conditions, concentrations of credit, economic trends and other conditions in specific geographical markets. This element also considers the uncertainty as to the applicability of historical loss factors as we expand into new markets for commercial and commercial real estate lending with different risk characteristics. A portion of this allowance has been assigned to specific categories of loans. An unallocated portion represents management’s assessment of loss and uncertainties associated with the loan portfolio as a whole.
Loss allowances are established for performing loans and pools of non-performing loans in accordance with Statement of Financial Accounting Standards, (“SFAS”) No. 5, “Accounting for Contingencies.” The identification of impaired loans is conducted in conjunction with the review of the adequacy of the allowance for loan losses. Loss allowances are established for specifically identified impaired loans based on the fair value of the underlying collateral in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.”
Losses are included in the allowance for loan losses through a charge to the provision for loan losses. The allowance for loan losses is adjusted by additions for loan recoveries, with actual losses charged as reductions to the allowance.
(f) Deferred Fees, net
Loan origination fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on BankUnited’s historical prepayment experience. Commitment fees and costs relating to commitments are recognized over the commitment period. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
(g) Other Earning Assets
Other earning assets includes Federal Home Loan Bank of Atlanta (FHLB) stock and an equity investment under the Community Reinvestment Act. The fair value is estimated to be the carrying value, which is par.
(h) Office Properties and Equipment, net
Office properties and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated based on the straight line method using the estimated service lives of the assets for furniture, fixtures and equipment (seven to ten years), and computer equipment and software (three to five years), or with leasehold improvements, the term of the lease or the useful life of the improvement, whichever is shorter. Repair and maintenance costs are charged to operations as incurred, and improvements are capitalized.
(i) Accrued Interest Receivable
Recognition of interest on the accrual method is discontinued when interest or principal payments on loans are greater than 90 days in arrears. At the time a loan is placed on non-accrual status, previously accrued and uncollected interest is reversed against interest income in the current period. Loans are returned to accrual status when they become less than 90 days delinquent.
(j) Real Estate Owned
Property acquired through foreclosure or deed in lieu of foreclosure is carried at the lower of the related principal balance at foreclosure or estimated fair value less estimated costs to sell the property. Any excess of the loan balance over the fair value less estimated costs to sell the property is charged to the allowance for loan losses at the time of foreclosure. The carrying value is reviewed periodically and, when necessary, any decline in the value of the real estate is charged to operations. Significant property improvements which enhance the salability of the property are capitalized to the extent that the carrying values do not exceed their estimated realizable values. Maintenance and carrying costs on the property are charged to operations as incurred. In connection with real estate owned, management obtains independent appraisals for properties.
(k) Mortgage Servicing Rights
In connection with the securitization and sale of loans, BankUnited generally retains the rights to service such loans for investors. Gains or losses related to servicing assets resulting from the securitization and sale of loans depends on the carrying amount of the financial assets involved in the sale, allocated between the assets sold and the retained interests based on their relative fair value at the date of sale. BankUnited receives fees for servicing mortgage loans which are generally expressed as a percent of the unpaid principal balance, and collected from the borrowers’ payments. Late fees charged and other ancillary fees, net of amortization of servicing assets, are also included in servicing income.
Mortgage servicing assets are amortized in proportion to and over the period of estimated net servicing income. Estimated net servicing income is determined using the estimated future balance of the underlying mortgage loan portfolio which, absent new purchases, declines over time from prepayments and cash flows. BankUnited evaluates the mortgage servicing assets for impairment based on the fair value of the servicing assets by strata. BankUnited stratifies the servicing assets by product and interest rates. Management obtains from an independent third party, on a semi-annual basis, a valuation of the mortgage servicing rights. Management
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
reviews the assumptions in calculating the fair value, which is then compared to BankUnited’s carrying value. If necessary, mortgage servicing rights are adjusted to the lower of cost or fair value.
Servicing agreements relating to the mortgage-backed security programs of the Federal National Mortgage Association, (“FNMA”), and the Federal Home Loan Mortgage Corporation, (“FHLMC”) require the servicer to advance funds to make scheduled payments of interest, taxes and insurance, and in some instances principal, even 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.
(l) Goodwill
Goodwill represents the excess of purchase price over the fair value of net assets acquired by BankUnited. On October 1, 2001, BankUnited adopted SFAS No. 142, “Goodwill and Other Intangible Assets” for the accounting for goodwill and other intangible assets. The provisions of SFAS No. 142 no longer allow the amortization of goodwill and requires that impairment of goodwill be tested annually. BankUnited measures goodwill impairment for the company as a whole by comparing the fair value of its net assets to the carrying value. Market capitalization, which is an indication of the value the market places on a company, is the basis for the fair value of net assets. See (s) Impact of New Accounting Pronouncements.
(m) Bank Owned Life Insurance
Bank owned life insurance is carried at an amount that could be realized under the insurance contract as of the date of the consolidated statement of financial condition. The change in contract value is recorded as an adjustment to the premiums paid in determining the expense or income to be recognized under the contract.
(n) Income Taxes
BankUnited and its subsidiaries, other than BU.REIT, Inc., file a consolidated federal income tax return. BankUnited and its subsidiaries will file separate tax returns for each state jurisdiction effected in 2003. Deferred income taxes have been provided for elements of income and expense which are recognized for financial reporting purposes in periods different than those for which such items are recognized for income tax purposes. BankUnited accounts for income taxes utilizing the liability method, which applies the enacted statutory rates in effect at the statement of financial condition date to differences between the book and tax bases of assets and liabilities. The resulting deferred tax liabilities and assets are adjusted to reflect changes in tax laws.
(o) Earnings per Share
Basic earnings per common share is computed on the weighted average number of common shares outstanding during the year. Diluted earnings per common share, assume the maximum dilutive effect of the average number of shares from stock options and the conversion equivalents of preferred stocks.
(p) Stock Options and Restricted Stock
Stock options are granted to employees and directors at the fair market value of the underlying stock on the date of the grant. The proceeds from the exercise of options are credited to common stock for the par value of the shares issued, and the excess, adjusted for any tax benefit, is credited to paid-in capital.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
Restricted stock is issued to employees and directors from time to time. Restricted stock is recorded on the books of BankUnited based on the market price of the stock on the date of issuance. Equity is credited with the par value of the stock and paid in capital is credited with the balance of the market value at the date of issuance. Also at the date of issuance, the value of the stock is recorded in paid-in-capital as contra equity. Non- performance based restricted stock vests ratably over the period assigned by the Compensation Committee and is amortized out of contra equity with a charge to compensation expense and a credit to the contra equity paid-in-capital account. Performance-based restricted stock is subject to performance goals and is also recorded as compensation expense with a credit to the contra equity paid-in-capital account ratably when the performance criteria are met and vesting begins.
(q) Segment Reporting
Public companies are required to report certain financial information about significant revenue-producing segments of the business for which such information is available and utilized by the chief operating decision maker. Specific information to be reported for individual operating segments includes a measure of profit and loss, certain revenue and expense items, and total assets. As a community-oriented financial institution, substantially all of BankUnited’s operations involve the delivery of loan and deposit products to customers. Management makes operation decisions and assesses performance based on an ongoing review of these community-banking operations, which constitute BankUnited’s only operating segment for financial reporting purposes.
(r) Derivative Instruments Held for Purposes Other Than Trading
BankUnited enters into derivative contracts as a means of reducing its interest rate exposures. No derivatives are held for trading purposes. At inception these contracts, i.e., hedging instruments, are evaluated in order to determine if they qualify for hedge accounting. The hedging instrument must be highly effective in achieving offsetting changes in the hedge instrument and hedged item attributable to the risk being hedged. Any ineffectiveness which arises during the hedging relationship is recognized in noninterest expense in the period in which it arises. All derivatives are valued at fair value and included in other assets or other liabilities. For fair value hedges, the changes in the fair value of the hedged item and changes in fair value of the derivative are recognized in noninterest income. For cash flow hedges, the unrealized changes in fair value to the extent effective are recognized in other comprehensive income. The fair value of cash flow hedges related to forecasted transactions is recognized in noninterest expense in the period when the forecasted transaction occurs.
Residential mortgage loan commitments related to loans to be sold are required to be accounted for as derivatives at fair value, along with all forward sales contracts for loans to be sold. The commitments and forward sales contracts are recorded as either assets or liabilities in the consolidated statement of financial condition with the changes in fair value recorded in the consolidated statement of operations.
(s) Impact of New Accounting Pronouncements
SFAS No. 142
In June 2001, the Financial Accounting Standards Board, (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets.” This statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
Except for goodwill and intangible assets acquired after June 30, 2001, which were immediately subject to its provisions, SFAS No. 142 was effective starting with fiscal years beginning after December 15, 2001. Early adoption was permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The provisions of SFAS No. 142 no longer allow the amortization of goodwill, and certain intangible assets that have indefinite useful lives, and requires that impairment of goodwill and intangible assets be tested annually.
BankUnited adopted SFAS No. 142 effective October 1, 2001. Upon initial application of SFAS No. 142, BankUnited did not incur impairment losses for goodwill resulting from a transitional impairment test. The elimination of goodwill amortization has positively impacted pretax net income by approximately $1.5 million in fiscal year 2002. The following table provides pro-forma information on net income and earnings per share had amortization of goodwill not been expensed in the year ended September 30, 2001:
Earnings per share for fiscal 2003 include the effect of 3,936,500 shares of Class A Common Stock issued in May 2003 in a secondary public offering.
SFAS No. 145
In May of 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002”. Under SFAS No. 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. This was an exception to Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB No. 30”), which defines extraordinary items as events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence.
SFAS No. 145 eliminates Statement No. 4 and, thus, the exception to applying APB No. 30 to all gains and losses related to extinguishments of debt (other than extinguishment of debt to satisfy sinking-fund
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
requirements). As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in APB No. 30. Applying APB No. 30 distinguishes transactions that are part of an entity’s recurring operations from those that are unusual or infrequent in nature or that meet the criteria for classification as an extraordinary item. The provisions of SFAS No. 145 related to the rescission of Statement No. 4 must be applied for fiscal years beginning after May 15, 2002. BankUnited adopted the provisions of SFAS No. 145 related to the rescission of Statement No. 4 beginning October 1, 2002, which resulted in a reclassification of extraordinary item related to early extinguishment of debt, to non-interest income in the consolidated statement of operations for prior periods.
SFAS No. 148
In December of 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation -Transition and Disclosure.” Under SFAS No. 148, alternative methods of transition are provided for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS 123, “Accounting for Stock Based Compensation” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
As permitted by SFAS No. 123, BankUnited continues to follow the intrinsic value method of accounting for stock-based compensation under the provisions of Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees.” Accordingly, the alternative methods of transition for the fair value based method of accounting for stock-based employee compensation provided by SFAS No. 148 do not apply to BankUnited. BankUnited is required under the provisions of SFAS No. 148 amending SFAS 123 and APB No. 28, “Interim Financial Reporting,” to provide additional disclosures in both annual and interim financial statements.
Had compensation cost for BankUnited’s stock-based compensation plans been determined based on the fair value at the grant dates for stock option awards consistent with the methodology prescribed by SFAS No. 123, BankUnited’s net income and earnings per share for fiscal 2003, 2002 and 2001, using the Black Scholes option pricing model, would have been reduced to the pro forma amounts indicated below:
(1)
BankUnited recognizes the tax effect of option exercises in additional paid in capital.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
The pro forma results of operations reported above are not likely to be representative of the effects on reported income of future years due to vesting arrangements and additional option grants. The fair value of each option has been estimated on the date of the grant using the Black Scholes option pricing model, with the following historical weighted average assumptions applied to grants in fiscal 2003, 2002 and 2001:
SFAS No. 149
In April of 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 clarifies certain issues and amends definitions contained in SFAS 133 to ensure that contracts with comparable characteristics are accounted for similarly. This statement is effective for contracts entered into or modified after June 30, 2003, except for hedging transactions designated after June 30, 2003, in which case it is effective in accordance with the respective effective dates outlined in SFAS No. 133. Although applicable to BankUnited, SFAS No. 149 has not had a significant impact on its consolidated financial condition or results of operations.
SFAS No. 150
In May of 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liability and equity. Although applicable to BankUnited, SFAS No. 150 has not had a significant impact on its consolidated financial condition or results of operations.
FASB Interpretation No. 45
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (“FIN 45”) an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. This interpretation also incorporates, without change, the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others,” which is being superseded. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Although applicable to BankUnited, FIN 45 has not had a significant impact on its consolidated financial condition or results of operations.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
FASB Interpretation No. 46
In January of 2003, FASB issued FASB Interpretation No. 46 (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. FIN 46 establishes the criteria used to identify variable interest entities and to determine whether or not to consolidate a variable interest entity. This interpretation is effective immediately for variable interest entities created after January 31, 2003 and in the first fiscal year or interim period beginning after December 15, 2003, for variable interest entities in which a variable interest was acquired prior to February 1, 2003. Under the criteria established by FIN 46, BankUnited has not consolidated two of its wholly-owned trust subsidiaries created after January 31, 2003. The result was to recognize investments in its these trust subsidiaries in other assets and to report the amount of subordinated debentures issued by BankUnited Financial Corporation to its trust subsidiaries in the liability section of BankUnited’s Consolidated Statement of Financial Condition. Prior to FIN 46, BankUnited eliminated the investments in all of its trust subsidiaries and reported trust preferred securities in the liability section of BankUnited’s Consolidated Statement of Financial Condition. FIN 46 has not had a significant impact on BankUnited’s consolidated financial condition or results of operations.
(t) Financial Statement Reclassifications
Certain prior period amounts have been reclassified to conform to the September 30, 2003 consolidated financial statements.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
(2) Earnings per Share
Earnings per share is calculated as follows:
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
(3) Investments and Mortgage-backed Securities
Investments
Presented below is an analysis of investments designated as available for sale.
(1)
“Other” includes preferred stock of FHLMC and FNMA, mutual funds and bonds.
Investment securities at September 30, 2003, by contractual maturity, are shown below.
Gross proceeds from sales of investment securities were $41 million and $7.2 million for the years ended September 30, 2003 and 2002, respectively. Net realized gains from these sales were $1.5 million and $1.3 million for the years ended September 30, 2003 and 2002, respectively. There were no sales during the year ended September 30, 2001.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
Mortgage-backed securities
Presented below is an analysis of mortgage-backed securities designated as available for sale:
Mortgage-backed securities at September 30, 2003, by contractual maturity and adjusted for anticipated prepayments, are shown below.
BankUnited made a strategic decision in the fourth quarter of fiscal 2002, to sell some of the mortgage-backed securities which were classified as held to maturity. In doing so, the remainder of the entire investment portfolio, including investment securities, were re-classified to investments available for sale with a resulting net unrealized gain of $2.1 million, after taxes of $1.4 million.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
Gross proceeds from sales of mortgage-backed securities and collateralized mortgage obligations were $1 billion, $334 million, and $283 million for the years ended September 30, 2003, 2002, and 2001, respectively. Net realized gains were $3.1 million, $236 thousand, and $1.8 million on sales of mortgage-backed securities and collateralized mortgage obligations during the years ended September 30, 2003 and 2002 and 2001, respectively.
At September 30, 2003, GNMA, FNMA and FHLMC mortgage-backed securities with market values of approximately $163 million were pledged as collateral for public funds on deposit. At September 30, 2003, investment and mortgage-backed securities with an aggregate carrying value of approximately $530 million were pledged as collateral for repurchase agreements.
When BankUnited securitizes residential mortgage loans, the resulting securities are considered retained securities for accounting purposes until sold. At September 30, 2003, BankUnited’s retained securities from securitized loans, not including mortgage servicing rights, had a fair value of $37.3 million. These securities are included in BankUnited’s total mortgage-backed securities available for sale portfolio of $2.1 billion as of September 30, 2003. The total principal amount of loans underlying the retained securities at September 30, 2003 was $37.3 million, none of which was 60 days or more past due. Credit losses do not affect the valuation due to FNMA’s and FHLMC’s full guarantee to BankUnited for losses on loans collateralizing the securities.
During the fiscal year ended September 30, 2003, BankUnited securitized $751 million of residential mortgage loans. These loans were securitized with FNMA and FHLMC and transferred into BankUnited’s mortgage-backed securities available for sale portfolio. During the same period BankUnited sold $733 million of securitized loans, recognizing net gains of $6.6 million.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
(4) Loans Receivable
Loans receivable held for investment consist of the following:
(1)
As of September 30, 2003, BankUnited had $37 million of non-accrual loans and $276 thousand of loans past due more than 90 days and still accruing. As of September 30, 2002, BankUnited had $28 million of non-accrual loans and no loans were more than 90 days past due and still accruing.
As of September 30, 2003, approximately $3.5 billion, or 95%, of loans secured by real estate, including loans held for sale, were secured by properties in Florida. No other state represented more than 5% of BankUnited’s loan portfolio.
At September 30, 2003, the Bank had pledged approximately $3 billion of mortgage loans as collateral for advances from the Federal Home Loan Bank of Atlanta.
Changes in the allowance for loan losses are as follows:
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
The following table sets forth information concerning specific impaired loans:
(5) FHLB stock and other earning assets
FHLB stock and other earning assets is summarized as follows:
(6) Office Properties and Equipment
Office properties and equipment are summarized as follows:
Depreciation expense was $3.6 million, $3.5 million, and $3.1 million, for the years ended September 30, 2003, 2002 and 2001, respectively.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
BankUnited has entered into non-cancelable leases with approximate minimum future rentals as follows:
Rent expense for the years ended September 30, 2003, 2002, and 2001 was $5.7 million, $4.8 million, and $4.0 million, respectively.
(7) Deposits
At September 30, 2003 and 2002, BankUnited had outstanding non-interest bearing deposits of $197,512 and $117,062, and interest bearing deposits of $3,038,594 and $2,859,109, respectively. At September 30, 2003 and 2002, there were overdrafts of approximately $1.9 million and $600 thousand, respectively. Certificate accounts with balances of $100 thousand or more totaled approximately $740 million and $1.3 billion at September 30, 2003 and 2002, respectively.
The following table sets forth maturities of certificates of deposit equal to or greater than $100 thousand as of September 30, 2003.
(1)
Included in the table above are $300 million of certificates of deposit issued to the State of Florida, referred to as public funds, with interest rates ranging from 1.23% to 6.65%. These certificates are collateralized with GNMA, FNMA, and FHLMC mortgage-backed securities with an aggregate market value of approximately $163 million at September 30, 2003.
Interest expense on deposits for the years ended September 30, 2003, 2002 and 2001 was as follows:
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
Early withdrawal penalties on certificates of deposit are recognized as a reduction of interest expense on deposits. For the years ended September 30, 2003, 2002 and 2001, early withdrawal penalties totaled $250 thousand, $197 thousand and $301 thousand, respectively.
(8) Borrowings
Securities Sold under Agreements to Repurchase
Interest expense on securities sold under agreements to repurchase aggregated $7.6 million, $7.7 million and $4.9 million for the years ended September 30, 2003, 2002 and 2001, respectively.
The following sets forth information concerning repurchase agreements for the periods indicated:
At September 30, 2003, BankUnited held $517 million in repurchase agreements, $47 million of which matured overnight, and $320 million of which also matured in October 2003. Of the $517 million outstanding at September 30, 2003, $100 million was callable by the counter party every three months as follows: $50 million until maturity in October of 2007, and $50 million until maturity in February 2011. An additional $50 million becomes callable in March of 2004, every three months, until maturity in March of 2007. As of September 30, 2003, BankUnited had $589 million in investments and mortgage-backed securities pledged against these agreements.
Advances from Federal Home Loan Bank
Advances from the Federal Home Loan Bank of Atlanta incur interest and have contractual repayments as follows:
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
The terms of a security agreement with the FHLB of Atlanta include a specific assignment of collateral that requires the maintenance of qualifying first mortgage loans as pledged collateral with unpaid principal amounts at least equal to 100% of the FHLB advances, when discounted at 85% of the unpaid principal balance. The FHLB of Atlanta stock, which is recorded at cost of $123 million, is also pledged as collateral for these advances.
Senior Notes
In February 1999, the Bank issued and sold $200 million of Senior Notes that mature in February 2004 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. 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. Repayment of the Senior Notes will be funded through BankUnited’s asset/liability management activities.
Trust Preferred Securities and Subordinated Debentures
BankUnited operates wholly-owned trust subsidiaries (“Trust Subsidiaries”) for the purpose of issuing Trust Preferred Securities and investing the proceeds from the sale thereof in Junior Subordinated Deferrable Interest Debentures issued by BankUnited (the “Subordinated Debentures”). All of the proceeds of the Trust Preferred Securities plus common securities issued by the Trust Subsidiaries are invested in Subordinated Debentures, which represent the sole assets of the Trust Subsidiaries. The Trust Preferred Securities pay preferential cumulative cash distributions at the same rate as the Junior Subordinated Debentures held by the Trust Subsidiaries. Considered together, back-up undertakings made by BankUnited with respect to the Trust Preferred Securities constitute a full and unconditional guarantee by BankUnited of the obligations of the Trust Preferred Securities. The carrying amount of trust preferred securities and subordinated debentures in BankUnited’s Consolidated Statement of Financial Condition of $162 million as of September 30, 2003, represents Trust Preferred Securities issued by its consolidated Trust Subsidiaries and the Subordinated Debentures issued to two non-consolidated Trust Subsidiaries. In addition BankUnited adjusts the carrying amount of certain Trust Preferred Securities in accordance with the hedge accounting requirements of SFAS No. 133.
The following table provides information for each of BankUnited’s Trust Subsidiaries with outstanding Trust Preferred Securities as of September 30, 2003:
(1)
BankUnited uses interest rate swap contracts to hedge interest rate risk on these instruments and applies hedge accounting in accordance with SFAS No. 133. See note (9) Accounting for Derivatives and Hedging Activities. Included in the carrying amount of these Trust Preferred Securities is, $688 thousand of hedge accounting adjustments.
(2)
Not to exceed 12.50% prior to December 18, 2006.
(3)
Not to exceed 11.00% prior to March 26, 2007.
(4)
Not to exceed 11.90% prior to September 26, 2007.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
(5)
Not to exceed 11.80% prior to November 15, 2007.
(6)
Not to exceed 11.75% prior to December 19, 2007.
(7)
Not to exceed 11.75% prior to March 26, 2008.
(8)
Not to exceed 11.75% prior to April 3, 2008.
(9)
In accordance with FIN 46, BankUnited has not consolidated these Trust Subsidiaries.
On February 26, 2003, BankUnited Financial Corporation announced that it would redeem all of the 9.60% Junior Subordinated Debentures held by its trust subsidiary, BankUnited Capital II, and BankUnited Capital II would redeem all of its outstanding 9.60% Cumulative Trust Preferred Securities (Nasdaq: BKUNZ). The Trust Preferred Securities, with an aggregate liquidation amount of $46 million, were redeemed on March 28, 2003 at a price of $25.00 per share plus accumulated and unpaid interest.
On May 20, 2003, BankUnited Financial Corporation announced that it would partially redeem the outstanding 9% Junior Subordinated Debentures held by its trust subsidiary BankUnited Capital III, and BankUnited Capital III would partially redeem its outstanding Cumulative Trust Preferred Securities (NYSE: BUFPrC). On May 30, 2003, BankUnited Financial Corporation announced that it would redeem and retire the remaining outstanding 9% Junior Subordinated Debentures held by its trust subsidiary BankUnited Capital III, and BankUnited Capital III would redeem and retire its remaining 9% Cumulative Trust Preferred Securities. The Trust Preferred Securities, with an aggregate liquidation amount of $103 million, were redeemed on June 30, 2003 at a price of $25.00 per share plus accumulated and unpaid interest.
In connection with the redemption of trust preferred securities during fiscal 2003, BankUnited recorded $5.5 million of expenses which were recorded in other non-interest income.
(9) Accounting for Derivatives and Hedging Activities
Loan Commitments
BankUnited commits to make one-to-four family residential mortgage loans, subject to certain requirements, with potential borrowers at specified interest rates for short periods of time, usually thirty days. If the borrowers do not allow the commitments to expire, the loans are funded, and either placed into BankUnited’s loan portfolio or held for sale. Based on historical experience, and the underlying loan characteristics, BankUnited estimates the amount of commitments that will ultimately become loans held for sale and treats those as derivatives during the commitment period. As derivatives, the changes in the fair value of the commitments are recorded in current earnings under other non-interest income with an offset to the balance sheet in other assets. Fair values are based on observable market prices from third parties. During the year ended September 30, 2003, BankUnited recorded $548 thousand in net losses from fair value adjustments on these commitments. At September 30, 2003, the estimated notional amount of these commitments BankUnited expected to be funded was $34.6 million.
Forward Sales Commitments
To economically hedge the fair value exposure on loan commitments to a change in interest rates during the commitment period, BankUnited enters into forward sales contracts with similar terms. Since both the loan commitments and the forward sales contracts are derivatives, this hedging relationship does not qualify for hedge accounting under SFAS No. 133. Accordingly, the fair value adjustments on the forward contracts are also recorded in earnings under other non-interest income with an offset to the balance sheet in other liabilities. These forward contracts may also extend beyond the commitment period and are also used to offset the fair value exposure of loans held for sale to a change in interest rates. This relationship exists until either the loan is sold or until the forward contract expires. During the year ended September 30, 2003, BankUnited recorded $47 thousand in net losses from fair value adjustments on these forward contracts.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
Interest Rate Swaps
BankUnited enters into interest rate swap contracts as fair value and cash flow hedges (“hedges”) for the purpose of hedging long-term fixed and variable interest costs on trust preferred securities and subordinated debentures (“hedged item”). All terms of the interest rate swap contracts, with the exception of the right to defer interest payments, are the same as those of the hedged item. BankUnited expects these interest rate swap contracts to be highly effective in offsetting interest costs of its long-term debt, and therefore applies hedge accounting treatment.
Hedges used by BankUnited to offset interest costs from fixed long-term debt are treated as qualifying fair value hedges. The accounting treatment for fair value hedges is to record the change in fair value during the period of both the hedge and the hedged item into current earnings. During the year ended September 30, 2003, BankUnited recorded a total of $3 million in non-interest income from a change in fair value of its fair value interest rate swap hedges with and offsetting amount to non-interest income for a change in fair value of the hedged item. There was no ineffectiveness during the period ended September 30, 2003.
Hedges used by BankUnited to offset interest costs from variable long-term debt are treated as qualifying cash flow hedges. The accounting treatment for cash flow hedges is to record the effective portion of the gain or loss on the hedge as a component of other comprehensive income, net of tax, with an offsetting amount recorded in either other assets or other liabilities. The amounts recorded in other accumulated comprehensive income will be reclassified into current earnings in the same period in which the hedged item affects earnings. During the year ended September 30, 2003, BankUnited recorded a total of $383 thousand, net of taxes, in other comprehensive losses resulting from the effective portion of its cash flow hedges. There was no ineffectiveness during the period ended September 30, 2003. BankUnited expects $241 thousand of the amounts currently reported in other comprehensive income to be reclassified into earnings within the next twelve months.
During the second quarter of fiscal 2003, BankUnited settled an interest rate swap which was used to hedge the 9.60% Cumulative Trust Preferred Securities issued by BankUnited Capital II. This settlement was made in conjunction with the redemption of the 9.60% Trust Preferred Securities which took place simultaneously and resulted in a gain of $87 thousand. During the third quarter of fiscal 2003 BankUnited settled an interest rate swap which was used to hedge the 10.25% Cumulative Trust Preferred Securities issued by BankUnited Capital. This settlement resulted in a deferred gain of $2.6 million. See note (8) Borrowings, for a further discussion of the redemption of the BankUnited Capital II securities.
Interest Rate Caps
BankUnited enters into interest rate cap contracts, from time to time, for the purpose of hedging interest rates on borrowings. Each contract requires the counter-party to pay BankUnited quarterly payments based on the notional amount of the contract and the difference between the index used in the contract and the cap rate, if and when the index exceeds the cap rate, in return for a one-time payment by BankUnited. BankUnited accounts for these contracts as fair value derivatives and at September 30, 2003, had interest rate cap contracts outstanding with a notional amount of $40 million. During fiscal 2003, BankUnited recorded, $377 thousand in losses related to interest rate caps contracts.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
(10) Regulatory Capital
The Bank’s regulatory capital levels as of September 30, 2003, 2002, and 2001 were as follows:
(1)
Based on Office of Thrift Supervision regulations adopted to implement the “prompt corrective action” provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991.
(2)
Tier 1 risk-based capital ratio is the ratio of core capital to risk weighted assets.
Regulatory capital and net income amounts as of and for the years ended September 30, 2003, 2002 and 2001 did not differ from regulatory capital and net income amounts reported to the OTS.
Payment of dividends by the Bank is limited by federal regulations, which provide for certain levels of permissible dividend payments depending on the Bank’s regulatory capital and other relevant factors.
(11) Stockholders’ Equity
BankUnited has a capital structure with the following characteristics:
Preferred Stock:
Issued in series with rights and preferences to be designated by the Board of Directors. As of September 30, 2003, 10,000,000 shares of Preferred Stock were authorized, 2,000,000 of which were designated to a particular series and 8,000,000 of which were not designated.
Noncumulative Convertible Preferred Stock, Series B (“Series B Preferred”)-
·
Dividends - Quarterly noncumulative cash dividends are paid at an annual rate of $0.55 per share.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
·
Redemption - Not redeemable until October 1, 2007 or later unless approved by the holders of at least 50% of the Series B Preferred shares.
·
Voting Rights - Two and one half votes per share.
·
Preference on Liquidation - Voluntary liquidation at the applicable redemption price per share and involuntary at $7.375 per share.
·
Convertibility - Convertible into 1.4959 shares (adjusted for all stock dividends) of Class B Common Stock for each share of Series B Preferred surrendered for conversion, subject to adjustment on the occurrence of certain events.
Common Stock:
Issued in series with rights and preferences to be designated by the Board of Directors. As of September 30, 2003, 60,000,000 shares of Class A Common Stock and 3,000,000 shares of Class B Common Stock were authorized. The Board has designated 40,000,000 shares of Class A Common Stock to a series.
Class A Common Stock
·
Dividends - As declared by the Board of Directors in the case of a dividend alone or not less than 110% of the amount per share of any dividend declared on the Class B Common Stock.
·
Voting Rights - One tenth of one vote per share.
Class B Common Stock
·
Dividends - As declared by the Board of Directors.
·
Voting Rights - One vote per share.
·
Convertibility - Each share of Class B Common Stock is convertible into one share of Class A Common Stock.
BankUnited announced on October 24, 2002, that its Board of Directors had authorized a stock repurchase program on its Class A Common Stock. Under the program, BankUnited may purchase up to 1,000,000 shares of its Class A Common Stock in open market transactions, from time to time, at such prices and on such conditions as the Executive Committee of the Board determines to be advantageous. BankUnited initiated this program because its believes that the volatility of the financial markets, in general, have at times generated a market price that does not adequately reflect the real value of BankUnited stock or the level of confidence that management and the Board of Directors have in BankUnited’s ability to implement its strategy and achieve continued growth. The basis for the carrying value of BankUnited’s treasury stock is the purchase price or fair value of the shares in the open market at the time of purchase.
(12) Stock Bonus Plan, Option Agreements and Other Benefit Plans
At September 30, 2003, BankUnited had certain stock-based compensation plans designed to provide incentives to current and prospective officers, directors and employees of BankUnited and its subsidiaries. Under the plans, BankUnited may award stock options, stock appreciation rights, restricted stock, deferred stock, bonus stock and awards in lieu of obligations, dividend equivalents, other stock-based awards and performance awards.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
The following table summarizes terms of BankUnited’s stock-based incentive compensation plans as of September 30, 2003:
ISO - Incentive Stock Option
NQ - Non-qualified Stock Option
Options granted under BankUnited’s stock option plans expire ten years after the date of grant and are exercisable at the fair market value of the stock on the date of grant. The vesting and exercisability of options is determined by the Compensation Committee of BankUnited’s Board of Directors at the time of the grant, and an option may be immediately vested and exercisable or become so over a period of years. If an option vests over a period of years, it is subject to forfeiture as to any portion which is not exercisable upon termination of employment unless otherwise provided by the option agreement or Compensation Committee.
The following table presents additional data concerning activity of BankUnited’s outstanding stock options for the three years ended September 30, 2003:
The weighted-average grant date fair value of options granted during the years ended September 30, 2003, 2002, and 2001 was $8.1 million, $3.9 million and $2.3 million, respectively.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
Summarized below is information about stock options outstanding and exercisable at September 30, 2003.
(1)
Weighted average contractual life remaining in years.
(2)
Weighted average exercise price per share.
The following table provides information on restricted stock for the periods presented.
BankUnited sponsors a 401(k) profit sharing plan for its eligible employees. Under the terms of the combined plan, eligible employees are permitted to contribute up to 15% of their annual salary to the Plan. BankUnited currently makes quarterly matching contributions in the form of BankUnited Class A Common stock at a rate of 75% of employee contributions up to a maximum matching contribution of 4.5% of the employees salary. Employees are eligible to participate in the plan after six months of service and begin vesting in BankUnited’s contribution after two years of service at the rate of 25% per year up to 100%. For fiscal 2003, 2002 and 2001, the Bank made total matching contributions of approximately $720 thousand, $659 thousand, and $529 thousand, respectively.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
(13) Income Taxes
The components of the provision for income taxes for the years ended September 30, 2003, 2002 and 2001 are as follows:
BankUnited’s effective tax (benefit) rate differs from the statutory federal income tax (benefit) rate as follows:
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
The tax effects of significant temporary differences included in the net deferred tax liability as of September 30, 2003 and 2002 were:
BankUnited files a consolidated federal income tax return with its subsidiaries other than BU REIT, Inc. on a fiscal year ending on September 30. BU REIT, Inc. files a separate tax return on a calendar-year basis. A deferral of income recognition for federal income taxes for 2003 resulted from the difference in fiscal reporting periods and the timing of dividend payments from BU REIT, Inc. to BankUnited. A deferred tax liability of $17.8 million resulted from this timing difference. The effect of this income deferral also resulted in a net operating loss for federal income tax reporting. A deferred tax asset of $3.2 million may be carried forward to 2023 but is expected to be realized in 2004.
At September 30, 2003, BankUnited had $409 thousand in tax bad debt reserves originating before December 31, 1987 for which deferred taxes have not been provided. The amount becomes taxable under the Internal Revenue Code upon the occurrence of certain events, including certain non-dividend distributions. BankUnited does not anticipate any actions that would ultimately result in the recapture of this amount for income tax purposes.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
The components of deferred income tax benefit relate to the following:
(14) Commitments and Contingencies
BankUnited is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to fund loans, lines of credit, and commercial and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition. BankUnited’s exposure to credit loss is represented by the contractual amount of these commitments. BankUnited follows the same credit policies in making commitments as it does for on-balance-sheet instruments.
Total commitments at September 30, 2003 and 2002 were as follows:
Commitments to fund loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to fund loans generally have fixed expiration dates or other termination clauses and may require payment of a fee. Unfunded commitments under lines of credit, include consumer, commercial, and commercial real estate lines of credit to existing customers. The commitments under lines of credit may expire without being drawn upon, therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by BankUnited, is based on management’s credit evaluation of the customer.
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
Commercial and standby letters of credit are conditional commitments issued by BankUnited to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support trade transactions or guarantee arrangements. Generally letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. BankUnited generally holds collateral supporting those commitments if deemed necessary.
BankUnited and the Bank have employment agreements with certain members of senior management. The employment agreements, which establish the duties and compensation of the executives, have terms ranging from one year to five years, and include specific provisions for salary, bonus and other benefits.
BankUnited and its subsidiaries, from time to time, are involved as plaintiff or defendant in various legal actions arising in the normal course of their businesses. While the ultimate outcome of any such proceedings cannot be predicted with certainty, it is the opinion of management that no proceedings exist, either individually or in the aggregate, which, if determined adversely to BankUnited and its subsidiaries, would have a material effect on BankUnited’s consolidated financial condition, results of operations or cash flows.
(15) Related Party Transactions
From time to time, BankUnited, as an insured depository institution as defined under Section 3 of the Federal Deposit Insurance Act, makes loans in the ordinary course of its business as a financial institution to directors, officers and employees of BankUnited, as well as to members of their immediate families and affiliates, to the extent consistent with applicable laws and regulations. As of September 30, 2003, and 2002 these loans totaled to $6.3 million, and $2 million, respectively.
The following table provides an analysis of changes in the amounts of related party loans during fiscal 2003:
(1)
Other represents loans to individuals who are no longer related parties.
During the 2003, 2002 and 2001 fiscal years, BankUnited retained the law firm of Camner, Lipsitz and Poller, Professional Association (“CLP”), as general counsel. Alfred R. Camner, Chief Executive Officer and Chairman of the Board of BankUnited is the Senior Managing Director of CLP. During the 2003, 2002 and 2001 fiscal years, BankUnited paid CLP approximately $3.7 million, $2.3 million, and $2.1 million, respectively in legal fees allocable to loan closings, foreclosures, litigation, corporate and other matters. A substantial portion of the fees allocable to loan closings are reimbursed by borrowers.
During the 2003, 2002 and 2001 fiscal years, BankUnited obtained policies for directors’ and officers’ liability insurance, banker’s blanket bond insurance, commercial multi-peril insurance, and workers’ compensation insurance through Head-Beckham AmerInsurance Agency, Inc. (“Head-Beckham”). Based on information provided by Head-Beckham, Head-Beckham received approximately $92 thousand, $75 thousand,
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
and $84 thousand, respectively, in commissions on premiums paid for these policies. Marc Jacobson, a director of BankUnited, is a senior vice president and member of the Board of Directors of Head-Beckham. Based on information from American Central Insurance Agency (American Central), of which Mr. Jacobson’s wife is the president and owner, American Central received approximately $131 thousand, $111 thousand, and $61 thousand during fiscal years 2003, 2002, and 2001 respectively, in commissions on premiums paid for health and dental insurance policies obtained by BankUnited through that agency.
In 1997, BankUnited entered into a lease for property located in the West Miami Airport area, on which it opened a branch office. The property was owned by a partnership owned 25% by Alfred Camner. BankUnited paid this partnership approximately $131 thousand in fiscal 2002 and 2001, and $110 thousand in fiscal 2003. During fiscal 2003, the partnership sold the underlying subject property to an unaffiliated entity and ceased receiving payments from BankUnited, thus terminating the related party relationship.
(16) BankUnited Financial Corporation
The following summarizes the major categories of BankUnited’s (holding company only) financial statements:
Condensed Statements of Financial Condition
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
Condensed Statements of Operations
Condensed Statements of Cash Flows
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
September 30, 2003
(17) Estimated Fair Value of Financial Instruments
The information set forth below provides disclosure of the estimated fair value of BankUnited’s financial instruments. Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no readily available market for some of these financial instruments, management has no basis to determine whether the fair value presented would be indicative of the value negotiated in an actual sale. The fair value estimates do not consider the tax effect that would be associated with the disposition of the assets or liabilities at their fair value estimates.
Fair values for investments and mortgage-backed securities are based on quoted market prices or dealer quotes. If quoted prices are not available, fair value is estimated using quoted market prices for similar securities.
Fair values are estimated for loan portfolios with similar financial characteristics. Loans are segregated by category, such as commercial, commercial real estate, residential mortgage, second mortgages, and other installment. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing status. The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit risk inherent in the loan. The estimate of average maturity is based on historical experience with prepayments for each loan classification modified, as required, by an estimate of the effect of current economic and lending conditions.
The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows.
The fair value of borrowings, which include FHLB advances, securities sold under agreements to repurchase and senior notes is determined by discounting the scheduled cash flows through maturity using estimated market discount rates that reflect the interest rate currently available in the market.
The carrying value of FHLB stock and other earning assets, approximates fair value.
(1)
Including loans held for sale.
(2)
Excluding trust preferred securities and subordinated debentures.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures
An evaluation of the effectiveness of the design and operation of BankUnited’s disclosure controls and procedures was carried out by BankUnited within 90 days prior to the filing date of this report, under the supervision and with the participation of BankUnited’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that BankUnited’s disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed by BankUnited in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Subsequent to the date of the most recent evaluation of BankUnited’s internal controls, there were no significant changes in BankUnited’s internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the captions “Election of Directors” and “Miscellaneous Section (16)a Beneficial Ownership Reporting Compliance” to appear in BankUnited’s definitive proxy statement relating to BankUnited’s 2003 Annual Meeting of Stockholders, which definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of BankUnited’s fiscal year covered by this report on Form 10-K (hereinafter referred to as the “Annual Meeting Proxy Statement”), is incorporated herein by reference. Information concerning the executive officers and directors of BankUnited is included in Part I of this Report on Form 10-K.
We have adopted a “Code of Ethics for the Chief Executive Officer and Senior Financial Officers” that applies to our chief executive officer, chief financial officer and chief accounting officer, and controller. This code of ethics is filed as an exhibit to this Annual Report on Form 10-K. We intend to satisfy the requirements under Item 10 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of this code of ethics by posting such information on our internet website (www.buexpress.com).
Item 11.
Item 11. Executive Compensation.
The information contained under the caption “Executive Compensation” to appear in the Annual Meeting Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information contained under the caption “Security Ownership of Certain Beneficial Owners and Management” to appear in the Annual Meeting Proxy Statement is incorporated herein by reference.
Stock Compensation Plan Information
The following table sets forth information as of September 30, 2003, with respect to stock compensation plans under which equity securities are authorized for issuance.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information contained under the captions “Compensation Committee Interlocks and Insider Participation” and “Certain Relationships and Related Transactions” to appear in the Annual Meeting Proxy Statement is incorporated herein by reference. See, also, note (15) Related Party Transactions in the Notes to Consolidated Financial Statements.
Item 14.
Item 14. Principal Accountant Fees and Services.
The information contained under the caption “Audit Fees” to appear in the Annual Meeting Proxy Statement is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The Following Documents Are Filed as Part of this Report:
*
Exhibits followed by a parenthetical reference are incorporated herein by reference from the documents described therein. All references to the “Commission” shall signify the Securities and Exchange Commission.
**
Compensatory plans or arrangements.
***
Contracts with Management.
(b) Reports on Form 8-K.
A current report on Form 8-K was filed on July 22, 2003 relating to BankUnited’s July 22, 2003 press release setting forth its third quarter 2003 earnings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on December 18, 2003.
BANKUNITED FINANCIAL CORPORATION
/s/ Alfred R. Camner
By:
Alfred R. Camner
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alfred R. Camner , Ramiro A. Ortiz and Lawrence H. Blum and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on December 18, 2003 on behalf of the Registrant by the following persons and in the capacities indicated.
/S/ ALFRED R. CAMNER
Alfred R. Camner
Chairman of the Board, Chief Executive Officer, and Director (Principal Executive Officer)
/S/ RAMIRO A. ORTIZ
Ramiro A. Ortiz
President, Chief Operating Officer, and Director
/s/ LAWRENCE H. BLUM
Lawrence H. Blum
Vice Chairman of the Board, Secretary and Director
/s/ MARC D. JACOBSON
Marc D. Jacobson
Director
/s/ Allen M. Bernkrant
Allen M. Bernkrant
Director
/s/ NEIL H. MESSINGER, M. D.
Neil H. Messinger, M. D.
Director
/s/ HARDY C. KATZ
Hardy C. Katz
Director
/s/ EDWARD L. PINCKNEY
Edward L. Pinckney
Director
/s/ SHARON A. BROWN
Sharon A. Brown
Director
/s/ ALBERT E. SMITH
Albert E. Smith
Director
/s/ HUMBERTO L. LOPEZ
Humberto L. Lopez
Senior Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Exhibit Index