UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 5-43936
BANKUNITED FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 65-0377773
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
255 ALHAMBRA CIRCLE, CORAL GABLES 33134
(Address of principal executive offices) (Zip Code)
(305) 569-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ___
The number of shares outstanding of the registrant's common stock at the close
of business on August 13, 1999 was 17,930,105 shares of Class A Common Stock,
$.01 par value, and 433,328 shares of Class B Common Stock, $.01 par value.
This Form 10-Q contains 34 pages.
The Index to Exhibits appears on page 33.
<PAGE>
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
Form 10-Q Report for the Quarter Ended June 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition as of
June 30, 1999 (unaudited) and September 30, 1998 3
Consolidated Statements of Operations (unaudited)
for the Three and Nine Months Ended June 30, 1999
and June 30, 1998 4
Consolidated Statements of Stockholders' Equity
(unaudited) for the Nine Months Ended June 30,
1999 and June 30, 1998 5
Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended June 30, 1999
and June 30, 1998 6
Condensed Notes to Consolidated Financial
Statements (unaudited) 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 31
</TABLE>
2
<PAGE>
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, 1999 SEPTEMBER 30,
(UNAUDITED) 1998
- -------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C>
ASSETS
Cash $ 21,617 $ 26,243
Federal Home Loan Bank overnight deposits 98,575 65,268
Securities purchased under agreements to resell 135,000 --
Tax certificates (net of reserves of $1,166 at June 30, 1999 and
$469 at September 30, 1998) 18,413 40,007
Investments held to maturity (market value of approximately
$5,007 at June 30, 1999 and $14,699 at September 30, 1998) 5,055 14,542
Investments available for sale, at market 20,104 23,661
Mortgage-backed securities, held to maturity (market value
of approximately $34,462 at June 30, 1999
and $143,505 at September 30, 1998) 34,487 146,146
Mortgage-backed securities available for sale, at market 316,349 199,610
Loans receivable, net 2,683,957 2,869,604
Mortgage loans held for sale (market value of approximately $438,857
at June 30, 1999 and $179,503 at September 30, 1998) 436,701 172,410
Other interest earning assets 52,177 51,313
Office properties and equipment, net 15,112 14,198
Real estate owned 3,286 1,974
Accrued interest receivable 25,103 32,864
Mortgage servicing rights 8,721 8,917
Goodwill 31,898 32,106
Prepaid expenses and other assets 26,170 39,520
----------- -----------
Total assets $ 3,932,725 $ 3,738,383
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits $ 2,228,745 $ 2,124,824
Securities sold under agreements to repurchase 722 121,148
Advances from Federal Home Loan Bank 1,041,447 1,021,466
Senior notes 200,000 --
Company obligated mandatorily redeemable trust preferred securities of
subsidiary trusts holding solely junior subordinated deferrable interest
debentures of BankUnited 218,500 218,500
Interest payable (primarily on deposits and advances from Federal Home
Loan Bank) 12,462 7,825
Advance payments by borrowers for taxes and insurance 12,675 12,645
Accrued expenses and other liabilities 29,798 32,683
----------- -----------
Total liabilities 3,744,349 3,539,091
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, Series B and Series 9%, $0.01 par value
Authorized shares - 10,000,000; issued and outstanding shares -
952,938 at June 30, 1999 and 926,697 at September 30, 1998 10 9
Class A Common Stock, $.01 par value. Authorized shares - 30,000,000;
issued and outstanding shares - 18,026,878 at June 30, 1999 and
17,816,213 at September 30, 1998 180 178
Class B Common Stock, $.01 par value. Authorized shares - 3,000,000;
issued and outstanding shares - 395,477 at June 30, 1999 and 331,743
at September 30, 1998 4 3
Additional paid-in capital 180,366 178,777
Retained earnings 10,670 18,448
Accumulated other comprehensive (loss) income, net of tax (2,854) 1,877
----------- -----------
Total stockholders' equity 188,376 199,292
----------- -----------
Total liabilities and stockholders' equity $ 3,932,725 $ 3,738,383
=========== ===========
</TABLE>
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
(UNAUDITED)
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 51,462 $ 43,317 $ 142,585 $125,944
Interest on mortgage-backed securities 5,418 6,603 12,572 12,560
Interest on short-term investments 3,009 1,725 6,670 3,696
Interest and dividends on long-term investments
and other earning assets 1,681 2,036 6,141 6,179
--------- --------- --------- --------
Total interest income 61,570 53,681 167,968 148,379
--------- --------- --------- --------
Interest expense:
Interest on deposits 25,715 25,716 80,250 65,916
Interest on borrowings 14,676 14,526 44,318 41,921
Preferred dividends of trust subsidiaries 5,288 5,288 15,865 11,664
--------- --------- --------- --------
Total interest expense 45,679 45,530 140,433 119,501
--------- --------- --------- --------
Net interest income before provision for loan losses 15,891 8,151 27,535 28,878
Provision for loan losses 450 300 7,186 1,350
--------- --------- --------- --------
Net interest income after provision for loan losses 15,441 7,851 20,349 27,528
--------- --------- --------- --------
Non-interest income:
Service fees, net 829 403 2,905 1,360
Net gain (loss) on sale of loans and mortgage-backed securities - 1,752 (8) 3,291
Other 360 348 794 511
--------- --------- --------- --------
Total non-interest income 1,189 2,503 3,691 5,162
--------- --------- --------- --------
Non-interest expenses:
Employee compensation and benefits 3,983 2,816 11,494 7,990
Occupancy and equipment 1,653 1,196 5,893 3,290
Insurance 434 284 1,231 822
Professional fees - legal and accounting 620 258 1,976 1,449
Data processing 319 339 1,123 798
Loan servicing expense 1,449 1,319 4,930 3,943
Other operating expenses 2,677 1,842 8,646 4,957
--------- --------- --------- --------
Total non-interest expenses 11,135 8,054 35,293 23,249
--------- --------- --------- --------
Income (loss) before income taxes and
preferred stock dividends 5,495 2,300 (11,253) 9,441
Provision (benefit) for income taxes 2,164 949 (4,050) 3,823
--------- --------- --------- --------
Net income (loss) before preferred stock dividends 3,331 1,351 (7,203) 5,618
Preferred stock dividends of BankUnited 192 185 576 699
--------- --------- --------- --------
Net income (loss) after preferred stock dividends $ 3,139 $ 1,166 $ (7,779) $ 4,919
========= ========= ========= ========
Earnings (Loss) Per Share:
Basic $ 0.17 $ 0.07 $ (0.43) $ 0.33
========= ========= ========= ========
Diluted $ 0.17 $ 0.07 $ (0.43) $ 0.31
========= ========= ========= ========
Weighted average number of common shares
assumed outstanding during the period:
Basic 18,413 16,667 18,286 14,959
========= ========= ========= ========
Diluted 19,195 17,395 18,286 16,009
========= ========= ========= ========
</TABLE>
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30, 1998 AND 1999
---------------------------------------------------------------------------------
(Unaudited)
ACCUMULATED
OTHER
PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL
--------- ------ -------- -------- ------------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 $ 22 $ 95 $ 86,679 $ 11,988 $ 861 $ 99,645
Comprehensive income:
Net income -- -- -- 5,618 -- 5,618
Dividends declared on preferred stock -- -- -- (699) -- (699)
Other comprehensive income, net of tax -- -- -- -- 561 561
---------
Total comprehensive income 5,480
Issuance of preferred stock -- -- 920 -- -- 920
Redemption of preferred stock (13) 16 (506) -- -- (503)
Stock issued through the
exercise of options, restricted
stock grants, directors'
compensation and employee
stock grants -- 2 2,608 -- -- 2,610
Common stock issued in connection
with the Consumer Bancorp
acquisition -- 6 7,027 -- -- 7,033
Common stock issued in connection
with the Central Bank acquisition -- 14 21,012 -- -- 21,026
Common stock issued through
public offering -- 48 58,664 -- -- 58,712
Common stock issued through
preferred stock dividends -- -- 38 -- -- 38
--------- --------- --------- --------- --------- ---------
Balance, June 30, 1998 $ 9 $ 181 $ 176,442 $ 16,907 $ 1,422 $ 194,961
========= ========= ========= ========= ========= =========
Balance, September 30, 1998 $ 9 $ 181 $ 178,777 $ 18,448 $ 1,877 $ 199,292
Comprehensive loss:
Net loss -- -- -- (7,203) -- (7,203)
Dividends declared on preferred stock -- -- -- (575) -- (575)
Other comprehensive loss, net of tax -- -- -- -- (4,731) (4,731)
---------
Total comprehensive loss (12,509)
Stock issued through the
exercise of options, restricted
stock grants, directors'
compensation and employee
stock grants 1 3 1,502 -- -- 1,506
Common stock issued through
preferred stock dividends -- -- 87 -- -- 87
--------- --------- --------- --------- --------- ---------
Balance, June 30, 1999 $ 10 $ 184 $ 180,366 $ 10,670 $ (2,854) $ 188,376
========= ========= ========= ========= ========= =========
</TABLE>
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
--------------------------
1999 1998
--------- ----------
(Unaudited; in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,203) $ 5,618
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision for loan losses 7,186 1,350
Provision for losses on tax certificates 1,148 176
Depreciation and amortization 1,749 1,132
Amortization of fees, discounts and premiums 22,791 4,223
Amortization of mortgage servicing rights 1,049 1,069
Amortization of goodwill 1,161 677
Net (gain) loss on sales of loans and mortgage-backed securities 8 (3,291)
Net gain on the sale of real estate owned (123) (40)
Loans originated for sale (140,399) (202,411)
Proceeds from sale of loans 23,307 119,308
Decrease (increase) in accrued interest receivable 7,761 (2,782)
Increase in interest payable on deposits and FHLB advances 4,637 4,630
Increase (decrease) in accrued taxes (4,579) 3,266
Increase in other liabilities 3,871 12,091
Decrease (increase) in prepaid expenses and other assets 14,073 (9,322)
Purchase of mortgage servicing rights (480) -
Other, net 1,728 (453)
--------- ----------
Net cash used in operating activities (62,315) (64,759)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans 7,751 (1,248,548)
Purchase of investment securities (2,845) (15,063)
Purchase of mortgage-backed securities (166,205) (101,392)
Purchase of other earning assets (25,749) (36,215)
Proceeds from repayments of investment securities 15,000 11,300
Proceeds from repayments of mortgage-backed securities 151,012 163,523
Proceeds from repayments of other earning assets 24,885 24,924
Proceeds from sale of mortgage-backed securities - 16,641
Proceeds from the sale of real estate owned 2,070 918
Purchases of office properties and equipment (3,569) (5,887)
Net decrease (increase) in tax certificates 21,594 (876)
Purchase of Consumers, net of acquired cash equivalents - 13,995
Cash and cash equivalents of Central at date of acquisition - 4,910
--------- ----------
Net cash provided by (used in) investing activities 23,944 (1,171,770)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 103,921 657,403
Net increase in Federal Home Loan Bank Advances 19,981 371,948
Net decrease in other borrowings (120,426) -
Proceeds from issuance of senior notes 200,000 -
Capitalized cost for senior notes (2,124) -
Net proceeds from issuance of preferred stock - 523
Net proceeds from issuance of common stock 1,159 58,712
Net proceeds from issuance of trust preferred securities - 98,900
Preferred Stock , Series 9% tender offer - (43)
Preferred Stock, Series 1996 redemption - (85)
Preferred Stock, Series 1993 redemption - (314)
Dividends paid on BankUnited's preferred stock (489) (661)
Increase (decrease) in advances from borrowers for taxes and insurance 30 (565)
--------- ----------
Net cash provided by financing activities 202,052 1,185,818
--------- ----------
Increase (decrease) in cash and cash equivalents 163,681 (50,711)
Cash and cash equivalents at beginning of period 91,511 89,984
--------- ----------
Cash and cash equivalents at end of period $ 255,192 $ 39,273
========= ==========
Supplemental Disclosures:
Interest paid on deposits and borrowings $ 135,796 $ 104,175
========= ==========
Transfer of loans to real estate owned $ 4,339 $ 1,555
========= ==========
Transfer of loans from held for sale to portfolio $ 73,825 $ -
========= ==========
Transfer of loans from portfolio to held for sale $ 288,319 $ -
========= ==========
Income taxes paid $ - $ 1,764
========= ==========
</TABLE>
SEE CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of BankUnited Financial Corporation ("BankUnited") and its
subsidiaries, including BankUnited, FSB (the "Bank"). All significant
intercompany transactions and balances have been eliminated.
The unaudited consolidated financial statements have been prepared in
conformity with Rule 10- 01 of Regulation S-X of the Securities and Exchange
Commission and therefore do not include information or footnotes necessary for a
complete presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles ("GAAP").
However, all adjustments (consisting of normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the financial
statements have been included. Operating results for the three-month and
nine-month periods ended June 30, 1999 are not necessarily indicative of the
results which may be expected for the year ending September 30, 1999. For
further information, refer to the Consolidated Financial Statements and Notes
thereto included in BankUnited's Annual Report on Form 10-K for the fiscal year
ended September 30, 1998.
Certain prior period amounts have been reclassified to conform to the
June 30, 1999 consolidated financial statements.
7
<PAGE>
2. EARNINGS PER SHARE
The following table reconciles basic and diluted earnings (loss) per
share for the three and nine months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Numerator:
Net income (loss) after preferred
stock dividends.......................... $ 3,139 $ 1,166 $ (7,779) $ 4,919
=========== =========== =========== ============
Denominator:
Weighted average common shares
outstanding............................... 18,413 16,667 18,286 14,959
=========== =========== =========== ============
Basic earnings (loss) per share(3).............. $ 0.17 $ 0.07 $ (0.43) $ 0.33
=========== =========== =========== ============
DILUTED EARNINGS (LOSS) PER SHARE:
Numerator:
Net income (loss) after preferred
stock dividends........................... $ 3,139 $ 1,166 $ (7,779) $ 4,919
Plus:
Reduction of preferred stock dividends.... 35 - - 79
----------- ----------- ----------- ------------
Diluted net income (loss) available to
common shareholders....................... $ 3,174 $ 1,166 $ (7,779) $ 4,998
=========== =========== =========== ============
Denominator:
Weighted average common shares
outstanding............................... 18,413 16,667 18,286 14,959
Plus:
Number of common shares from the
conversion of options and warrants(1).. 399 728 - 733
Number of common shares from the conversion
of dilutive preferred stock(2)........ 383 - - 317
----------- ----------- ----------- ------------
Diluted weighted average common
shares outstanding........................ 19,195 17,395 18,286 16,009
=========== =========== =========== ============
Diluted earnings (loss) per share(3)............ $ 0.17 $ 0.07 $ (0.43) $ 0.31
=========== =========== =========== ============
</TABLE>
(1) For the nine months ended June 30, 1999, there were 315,038 common
stock equivalent shares of dilutive options that were not included in
the computation of diluted loss per share because of their antidilutive
effect.
(2) For the three months ended June 30, 1998 there were 340,552 common
stock equivalent shares of convertible preferred stock outstanding that
were not included in the computation of diluted earnings per share
because of their antidilutive effect.
For the nine months ended June 30, 1999 and 1998 there were 360,493 and
310,627 common stock equivalent shares, respectively, of convertible
preferred stock outstanding that were not included in the computation
of diluted earnings (loss) per share because of their antidilutive
effect.
(3) During July and August 1999, BankUnited acquired on the open market
100,000 shares of it's Class A Common Stock. The acquisition of these
shares would not have had a material impact on earnings (loss) per
share for the three and nine months ended June 30, 1999.
8
<PAGE>
3. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In October 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This Statement amends FASB
Statement No. 65, "Accounting for Certain Mortgage Banking Activities," to
require that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. This Statement is effective for the first fiscal
quarter beginning after December 15, 1998. The adoption of this Statement is
reflected in the financial statements contained in this Quarterly Report on Form
10-Q, but has not had, and is not expected to have, a material impact on the
financial position or results of operations of BankUnited.
In July 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133." This statement
delays the effective date of FASB Statement No. 133," Accounting for Derivative
Instruments and Hedging Activities" to all fiscal quarters of all fiscal years
beginning after June 15, 2000. Management does not expect the adoption of this
Statement for its current derivative instruments to have any material effect on
BankUnited's financial position or results of operations.
4. CAPITAL
In December 1998, the Board of Directors of BankUnited authorized the
purchase from time to time in open market transactions of up to 1,000,000 shares
of BankUnited's Class A Common Stock at such prices as the Executive Committee
deems advantageous. During July and August 1999, BankUnited purchased 100,000
shares of its Class A Common Stock on the open market.
In May 1999, BankUnited's Board of Directors authorized the purchase of
shares of its 9% Noncumulative Perpetual Preferred Stock (the "9% Preferred
Stock") on the open market as deemed appropriate, and, if the market is
appropriate, the retirement of the 9% Preferred Stock. As of the date of filing
of this Quarterly Report on Form 10-Q, BankUnited had not yet purchased any
shares of its 9% Preferred Stock.
The Office of Thrift Supervision ("OTS") requires that the Bank meet
minimum regulatory, core and risk-based capital requirements. Currently, the
Bank exceeds all regulatory capital requirements. The Bank's required, actual
and excess regulatory capital levels as of June 30, 1999 were as follows:
<TABLE>
<CAPTION>
REQUIRED ACTUAL EXCESS
---------------- ----------------- -----------------------
% OF % OF % OF
AMOUNT ASSETS AMOUNT ASSETS AMOUNT ASSETS
------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Core Capital $115,353 3.0% $307,222 7.99% $ 191,869 4.99%
Risk-Based Capital $157,235 8.0% $318,699 16.21% $ 161,464 8.21%
</TABLE>
9
<PAGE>
5. COMPREHENSIVE INCOME
BankUnited adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective October 1, 1998. BankUnited's comprehensive income includes all items
which comprise net income plus other comprehensive income which includes the
unrealized holding gains and losses on available for sale securities. For the
three and nine months ended June 30, 1999 and 1998, BankUnited's other
comprehensive income (loss) was as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
(in thousands)
<S> <C> <C> <C> <C>
Other comprehensive income (loss), net of taxes:
Unrealized holding gains (losses) arising
during the period......................... $ (3,533) $ 773 $ (4,731) $ 823
Less: reclassification adjustment for
gains included in net income (loss)....... - - - (262)
----------- ----------- ----------- ------------
Total other comprehensive income (loss) ........... $ (3,533) $ 773 $ (4,731) $ 561
=========== =========== =========== ============
</TABLE>
6. CONTINGENCIES AND OFF-BALANCE SHEET ACTIVITIES
During November 1998, the Bank established a program to issue from time
to time up to a total of $500 million aggregate principal amount of its Senior
Notes (the "Senior Notes") backed by an irrevocable stand-by letter of credit of
the FHLB of Atlanta. These notes may have either a fixed or floating rate of
interest, determined at the time of issuance, and will mature no sooner than 9
months and no more than 10 years from the date of issuance. The Bank intends to
use the net proceeds from the sale of the Senior Notes for general corporate
purposes that will ultimately promote home financing or other housing activity
and encourage and assist the Bank's asset/liability management. The notes have
been rated "Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard &
Poor's Ratings Services. On February 2, 1999, the Bank issued and sold $200.0
million of Senior Notes which mature five years from the date of issuance and
bear interest at an annual rate of 5.40%, payable semiannually.
During April 1998, the Bank entered into two interest rate cap
contracts with a major Wall Street firm in notional amounts of $90.0 million and
$60.0 million, terminating on October 23, 1999 and April 23, 2000, respectively.
The contracts require the counter-party to pay the Bank quarterly interest
payments based on the notional amounts and the difference between the "London
Inter Bank Offering Rate" (the "LIBOR rate") and 5.90% when the LIBOR rate
exceeds 5.90%, in return for a one-time payment by the Bank.
During May 1998, the Bank entered into a third interest rate cap
contract with another major Wall Street firm in a notional amount of $75.0
million terminating on May 30, 2000. The contract requires the counter-party to
pay the Bank quarterly interest payments based on the notional amount and the
difference between the LIBOR rate and 6.10% when the LIBOR rate exceeds 6.10%,
in return for a one-time payment by the Bank.
The Bank entered into these contracts for the purpose of hedging a
portion of BankUnited's interest rate risk against rising interest rates on
certain short-term borrowings. As of June 30, 1999, the 3-month LIBOR rate was
5.36%.
10
<PAGE>
BankUnited is a party to certain claims and litigation arising in the
ordinary course of business. In the opinion of management, the resolution of
such claims and litigation will not materially affect BankUnited's consolidated
financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis and the related financial data
present a review of the consolidated operating results and financial condition
of BankUnited Financial Corporation ("BankUnited") for the three and nine month
periods ended June 30, 1999 and 1998. This discussion and analysis should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
contained in BankUnited's Annual Report on Form 10-K for the year ended
September 30, 1998.
This Quarterly Report on Form 10-Q contains forward-looking statements.
Additional written or oral forward-looking statements may be made by BankUnited
from time to time in filings with the Securities and Exchange Commission or
otherwise. Such forward-looking statements are within the meaning of that term
in Section 27A of the Securities Act of 1933, as amended, (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such statements may include, but not be limited to, projections
of income, borrowing costs, prepayment rates, and plans for future operations or
acquisitions, as well as assumptions relating to the foregoing. The words
"believe," "expect," "anticipate," "estimate," "project," "intend," and similar
expressions identify forward-looking statements that are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward- looking statements.
GENERAL
BankUnited is a Florida-incorporated savings and loan holding company
for BankUnited, FSB (the "Bank"). BankUnited's principal business currently
consists of the operation of its wholly-owned subsidiary, the Bank. The Bank's
primary business is attracting retail deposits from the general public and
investing those deposits, together with borrowings, principal repayments and
other funds, primarily in one-to-four family residential mortgage loans and to a
lesser extent, mortgage-backed securities, commercial real estate loans,
multi-family mortgage loans, commercial business loans and consumer loans. The
Bank also invests in other permitted investments. The Bank is subject to the
regulations of certain federal agencies and undergoes periodic examinations by
those regulatory authorities. References to BankUnited include the activities of
all of its subsidiaries, including the Bank and its subsidiaries, if the context
so requires.
BankUnited's results of operations are dependent primarily on its net
interest income, which is the difference between the interest earned on its
assets, primarily its loan and securities portfolios, and its cost of funds,
which consists of the interest paid on its deposits and borrowings. BankUnited's
results of operations are also affected by its provision for loan losses as well
as non-interest income, non-interest expenses and income tax expense.
Non-interest expenses consist of employee compensation and benefits, occupancy
and equipment, insurance, professional fees, data processing, loan servicing
expense and other operating expenses. The earnings of BankUnited are also
significantly affected by general economic and
11
<PAGE>
competitive conditions, particularly changes in market interest rates and the
U.S. Treasury yield curves, government policies and actions of regulatory
authorities.
SIGNIFICANT DEVELOPMENTS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999
THIRD QUARTER HIGHLIGHTS
BankUnited reported record earnings for the third quarter of fiscal
1999 consisting entirely of core earnings and not as a result of the sale of
assets. The primary reason for the increase in core earnings was a sharp
improvement in BankUnited's interest spread for the three months ended June 30,
1999 to 1.62% from 0.75% for the three months ended June 30, 1998. In addition,
BankUnited's efficiency ratio improved to 62.58% from 68.08% for the same
quarter of 1998. As a result of BankUnited pursuing its strategy of becoming an
asset-generating entity, residential loan originations increased to $168.3
million or 69.4% over the same quarter period last year. BankUnited's new focus
on commercial lending, consumer lending and small business banking has resulted
in record increases in production over the same quarter period last year for
loan originations and commitments to lend of 99.1% for commercial lending and
149.7% for consumer lending and $8.4 million in production for the newly created
small business banking division. In support of its commitment to its business
customers, BankUnited opened two branches this quarter, including one in
Downtown Miami.
SECOND QUARTER RESTRUCTURING CHARGES
BankUnited's restructuring resulted in a special charge of $15.1
million, as well as a provision for loan losses of $6.3 million, a provision for
tax certificate investment losses of $1.1 million and certain other
miscellaneous charges of $2.0 million.
BankUnited's earnings had been severely hampered during several
quarters prior to the restructuring due to the high levels of prepayments
associated with one-year CMT loans ("One-Year CMT") acquired in the secondary
market. One-Year CMT loans are adjustable-rate mortgages with an index tied to
the yield on one-year U.S. Treasury securities adjusted to a constant maturity
published by the Federal Reserve. During the second quarter of fiscal 1999,
BankUnited reviewed its various sources of revenues and made a determination to
change its overall strategy and become an asset-generating entity. In that
regard, BankUnited decided to stop purchasing One-Year CMT loans and reduce its
dependence on the purchase of residential mortgages in the secondary market. In
addition, it transferred all of the remaining One-Year CMT loans to held for
sale as of March 31, 1999. Included in the $15.1 million charge was a $14.8
million charge consisting of $13.0 million of purchase premiums which was
required to write down the carrying value of the purchased One-Year CMT loan
portfolio to the lower of cost or market and a $1.8 million charge for
accelerated amortization of purchase premiums on a related security. BankUnited
also made the decision to discontinue indirect consumer lending and tax
certificate investing because it was clear from management's review that
BankUnited could not anticipate future benefits from continuing these lines of
business.
The review also led to a rigorous review of BankUnited's loan
portfolio. This examination resulted in a provision for loan losses of $6.3
million. See "Results of Operations-Provision for Loan Losses." BankUnited also
made a $1.1 million provision for losses on its tax certificates in connection
with its decision to discontinue this line of business and a review of the
quality of the assets. The miscellaneous charges of $2.0 million included $1.0
million in costs associated with becoming Year 2000 compliant.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
BankUnited's primary source of funds is cash provided by investing
activities and includes principal and interest payments on loans,
mortgage-backed securities and other securities. For the nine months ended June
30, 1999 and 1998, principal repayments on loans and mortgage-backed securities
and proceeds from maturities of other securities remained constant at $1.2
billion. For the three months ended June 30, 1999 and 1998, principal repayments
on loans and mortgage-backed securities and proceeds from maturities of other
securities totaled $296.5 million and $587.4 million, respectively. BankUnited
began experiencing significant acceleration of prepayments on certain mortgage
loans and mortgage backed securities in the quarter ended June 30, 1998 due to
the decrease in long-term interest rates which continued through the quarter
ended March 31, 1999. During the quarter ended June 30, 1999, long-term interest
rates rose slightly causing the volume of mortgage loan refinancing to decrease.
This has had the effect of slowing the prepayment rate of BankUnited's loan
portfolio.
BankUnited's other sources of funds are provided by financing
activities and includes borrowings and deposits. Net cash provided by financing
activities during the nine months ended June 30, 1999 decreased to $202.1
million from $1.2 billion, for the nine months ended June 30, 1998. The overall
decrease in the sources of funds resulted from the reduction in funds needed to
purchase residential loans in the secondary market. The decrease in securities
sold under agreements to repurchase was partially offset by the issuance of the
Bank's Senior Notes (the "Senior Notes"). During November 1998, the Bank
established a medium-term note program which permits the issuance, from time to
time, of up to a total of $500 million aggregate principal amount of the Senior
Notes, with maturities ranging from 9 months to 10 years from the date of
issuance. As a condition of issuance, interest, principal and any redemption
premium on all offered Senior Notes are supported by an irrevocable stand-by
letter of credit of the FHLB of Atlanta. The Senior Notes provide an additional
source of funding, potentially with longer maturities with attractive rates. On
February 2, 1999, the Bank issued and sold $200.0 million of Senior Notes which
mature five years from the date of issuance and bear interest at an annual rate
of 5.40% payable semiannually.
BankUnited's primary uses of funds in its operating and investing
activities has been the origination and purchase of loans and the purchase of
mortgage-backed securities and other securities. During the nine months ended
June 30, 1999, BankUnited's originations of loans totaled $479.2 million,
purchases of loans totaled $683.8 million and purchases of mortgage-backed
securities and other securities totaled $194.8 million. For the same period in
1998, BankUnited's originations of loans totaled $268.3 million, purchases of
loans totaled $2.2 billion and purchases of mortgage-backed securities and other
securities totaled $152.8 million. The decrease in purchases of loans during the
nine months ended June 30, 1999 is the result of BankUnited's decision to reduce
its purchases of residential loans in the secondary market and to turn its
emphasis to originating its own loans.
The Bank is required under applicable federal regulations to maintain
specified levels of liquid investments in cash, United States government
securities and other qualifying investments. Regulations currently in effect
require the Bank to maintain liquid assets of not less than 4.0% of its net
withdrawable accounts plus short-term borrowings. The Bank had liquid assets of
11.66% and 7.18% as of June 30, 1999 and September 30, 1998, respectively, in
compliance with this requirement.
Federal savings banks such as the Bank are also required to maintain
capital at levels specified by applicable minimum capital ratios. At June 30,
1999, the Bank was in compliance with all capital requirements and met the
definition of a "well capitalized" institution under applicable federal
regulations.
13
<PAGE>
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. The
following tables set forth certain information relating to the categories of
BankUnited's interest-earning assets and interest-bearing liabilities for the
periods indicated, including the effect on yields of the accelerated
amortization of purchase premiums on the One-Year CMT loan portfolio and a
related security recorded in the first quarter of fiscal 1999 and the third
quarter of fiscal 1998 due to the high level of prepayments and the $14.8
million charge in the second quarter of fiscal 1999 related to the write-off of
purchase premiums on the One-Year CMT loan portfolio and the continuing
acceleration of amortization of purchase premiums on a related security. See
"Second Quarter Restructuring Charges." All yield and rate information is
calculated on an annualized basis. Yield and rate information for a period is
average information for the period calculated by dividing the income or expense
item for the period by the average balances during the period of the appropriate
balance sheet item. Net interest margin is the product of average
interest-earning assets and the annualized yield earned minus the product of
average interest-bearing liabilities and the annualized rate paid, divided by
average interest-earning assets. Nonaccrual loans are included in asset balances
for the appropriate period, whereas recognition of interest on such loans is
discontinued and any remaining accrued interest receivable is reversed, in
conformity with federal regulations. The yields and net interest margins
appearing in the following tables have been calculated on a pre-tax basis.
14
<PAGE>
YIELDS EARNED AND RATES PAID
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
1999 1998
----------------------------------- ---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 2,940,542 $ 51,462 6.99% $ 2,576,474 $ 43,317 6.72%
Mortgage-backed securities
and collateralized mortgage
obligations 343,075 5,418 6.32 453,535 6,603 5.82
Short-term investments (2) 230,159 3,009 5.17 120,343 1,725 5.67
Tax certificates 22,443 427 7.60 30,041 565 7.52
Long-term investments and
FHLB stock 68,293 1,254 7.37 83,921 1,471 7.02
------------ --------- ------ ------------ --------- ------
Total interest-earning assets $ 3,604,512 $ 61,570 6.82% $ 3,264,314 $ 53,681 6.57%
------------ --------- ------ ------------ --------- ------
Interest-bearing liabilities:
NOW/money market $ 291,745 $ 2,022 2.78% $ 151,584 $ 1,445 3.82%
Savings 367,705 3,957 4.32 187,753 2,240 4.79
Certificates of deposit 1,571,575 19,736 5.04 1,543,507 22,031 5.73
Trust preferred securities 218,500 5,288 9.68 218,500 5,288 9.68
FHLB advances and other
borrowings 1,059,292 14,676 5.49 1,025,291 14,526 5.62
------------ --------- ------ ------------ --------- ------
Total interest-bearing
liabilities $ 3,508,817 $ 45,679 5.20% $ 3,126,635 $ 45,530 5.82%
------------ --------- ----- ------------ --------- ------
Excess of interest-earning assets
over interest-bearing liabilities $ 95,695 $ 137,679
============ ============
Net interest income $ 15,891 $ 8,151
========= =========
Interest rate spread 1.62% 0.75%
====== ======
Net interest margin 1.76% 1.00%
====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 102.73% 104.40%
============== ======
</TABLE>
- ----------------------
(1) The yields and rates along with the corresponding interest rate spread
and net interest margin for the three months ended June 30, 1998
reflect the accelerated amortization of purchase premiums on the
one-year CMT loan portfolio in the third quarter of fiscal 1998.
(2) Short-term investments include FHLB overnight deposits, securities
purchased under agreements to resell, federal funds sold and
certificates of deposit.
15
<PAGE>
YIELDS EARNED AND RATES PAID
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
1999 1998
----------------------------------- ---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST YIELD/RATE
------- -------- ---------- ------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 2,988,147 $ 142,585 6.36% $ 2,417,931 $ 125,944 6.94%
Mortgage-backed securities
and collateralized mortgage
obligations (1) 333,185 12,572 5.03 252,385 12,560 6.64
Short-term investments (2) 174,210 6,670 5.05 85,972 3,696 5.67
Tax certificates 29,925 1,561 6.96 36,597 2,004 7.30
Long-term investments and
FHLB stock 83,447 4,580 7.33 78,722 4,175 7.08
------------ ----------- ------ ------------ ---------- ------
Total interest-earning assets $ 3,608,914 $ 167,968 6.19% $ 2,871,607 $ 148,379 6.88%
------------ ----------- ------ ------------ ---------- ------
Interest-bearing liabilities:
NOW/money market $ 272,519 $ 5,918 2.90% $ 119,827 $ 3,331 3.72%
Savings 351,464 11,733 4.46 179,657 6,361 4.73
Certificates of deposit 1,603,981 62,599 5.22 1,308,987 56,224 5.74
Trust preferred securities 218,500 15,865 9.68 158,051 11,664 9.84
FHLB advances and other
borrowings 1,065,019 44,318 5.50 975,987 41,921 5.67
------------ ----------- ------ ------------ ---------- ------
Total interest-bearing
liabilities $ 3,511,483 $ 140,433 5.32% $ 2,742,509 $ 119,501 5.80%
------------ ----------- ------ ------------ ---------- ------
Excess of interest-earning assets
over interest-bearing liabilities $ 97,431 $ 129,098
============ ============
Net interest income $ 27,535 $ 28,878
=========== ==========
Interest rate spread 0.87% 1.08%
====== ======
Net interest margin 1.02% 1.34%
====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 102.77% 104.71%
=============== ======
</TABLE>
- ----------------------
(1) The yields and rates along with the corresponding interest rate spread
and net interest margin for the nine months ended June 30, 1999 reflect
the accelerated amortization of purchase premiums on the One-Year CMT
loan portfolio and a related security in the first quarter of fiscal
1999 and the $14.8 million charge in the second quarter of fiscal 1999
related to the write-off of purchase premiums on the One-Year CMT loan
portfolio and the continuing acceleration of amortization of purchase
premiums on a related security.
The yields and rates along with the corresponding interest rate spread
and net interest margin for the nine months ended June 30, 1998 reflect
the accelerated amortization of purchase premiums on the one-year CMT
loan portfolio in the third quarter of fiscal 1998.
(2) Short-term investments include FHLB overnight deposits, securities
purchased under agreements to resell, federal funds sold and
certificates of deposit.
16
<PAGE>
RATE/VOLUME ANALYSIS
The following tables present, for the periods indicated, the changes in
interest income and the changes in interest expense attributable to the changes
in interest rates and the changes in the volume of interest-earning assets and
interest-bearing liabilities. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: (i) changes in volume (change in volume multiplied by prior year rate); (ii)
changes in rate (change in rate multiplied by prior year volume); (iii) changes
in rate/volume (change in rate multiplied by change in volume); and (iv) total
changes in rate and volume.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------
1999 VS. 1998
--------------------------------------------------------------
INCREASE (DECREASE) DUE TO
--------------------------------------------------------------
CHANGES CHANGES CHANGES TOTAL
IN IN IN INCREASE/
VOLUME RATE RATE/VOLUME (DECREASE)
------ ------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Interest income attributable to:
Loans $ 6,136 $ 1,785 $ 224 $ 8,145
Mortgage-backed securities and
collateralized mortgage obligations (1,608) 559 (136) (1,185)
Short-term investments (1) 1,575 (152) (139) 1,284
Tax certificates (142) 6 (2) (138)
Long-term investments and
FHLB stock (247) (9) 39 (217)
-------- --------- -------- --------
Total interest-earning assets 5,714 2,189 (14) 7,889
-------- --------- -------- --------
Interest expense attributable to:
NOW/money market 1,337 (395) (365) 577
Savings 2,147 (220) (210) 1,717
Certificates of deposit 401 (2,648) (48) (2,295)
Trust preferred securities - - - -
FHLB advances and other
borrowings 484 (341) 7 150
-------- --------- -------- --------
Total interest-bearing liabilities 4,369 (3,604) (616) 149
-------- --------- -------- --------
Increase in net interest income $ 1,345 $ 5,793 $ 602 $ 7,740
======== ========= ======== ========
</TABLE>
- ------------
(1) Short-term investments include FHLB overnight deposits, securities
purchased under agreements to resell, federal funds sold and
certificates of deposit.
17
<PAGE>
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30,
--------------------------------------------------------------
1999 VS. 1998
--------------------------------------------------------------
INCREASE (DECREASE) DUE TO
--------------------------------------------------------------
CHANGES CHANGES CHANGES TOTAL
IN IN IN INCREASE/
VOLUME RATE RATE/VOLUME (DECREASE)
------ ------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Interest income attributable to:
Loans $ 29,408 $ (10,370) $ (2,397) $ 16,641
Mortgage-backed securities and
collateralized mortgage obligations 4,021 (3,036) (973) 12
Short-term investments (1) 3,794 (405) (415) 2,974
Tax certificates (365) (94) 16 (443)
Long-term investments and
FHLB stock 293 51 61 405
-------- --------- -------- --------
Total interest-earning assets 37,151 (13,854) (3,708) 19,589
-------- --------- -------- --------
Interest expense attributable to:
NOW/money market 4,245 (729) (929) 2,587
Savings 6,083 (364) (347) 5,372
Certificates of deposit 12,670 (5,137) (1,158) 6,375
Trust preferred securities 4,461 (188) (72) 4,201
FHLB advances and other
borrowings 3,820 (1,533) 110 2,397
-------- --------- -------- --------
Total interest-bearing liabilities 31,279 (7,951) (2,396) 20,932
-------- --------- -------- --------
Increase (decrease) in net interest income $ 5,872 $ (5,903) $ (1,312) $ (1,343)
======== ========= ======== =========
</TABLE>
- ------------
(1) Short-term investments include FHLB overnight deposits, securities
purchased under agreements to resell, federal funds sold and
certificates of deposit.
18
<PAGE>
ASSET QUALITY
Non-performing assets as of June 30, 1999 were $30.7 million, which
represents an increase of $8.1 million or 35.8% from $22.6 million as of
September 30, 1998. The increase in non-performing assets primarily resulted
from increases in non-accrual loans and non-accrual tax certificates of $7.6
million and $0.6 million, respectively. Non-accrual loans increased primarily
due to a $3.3 million increase in one-to-four family residential loan
delinquencies and a $3.6 million increase in commercial mortgage loan
delinquencies. Included in the increase of $3.6 million in commercial mortgage
loans is one loan in the amount of $2.5 million. The increase in non-accrual tax
certificates resulted from a change in BankUnited's policy regarding
classification of tax certificates relating to bankruptcy proceedings initiated
by the debtor. The policy was changed in the first quarter of fiscal 1999 to
require classification of the tax certificates as non-accrual upon filing of
bankruptcy by the debtor instead of upon finalization of the bankruptcy plan by
the courts. Non-performing assets as a percentage of total assets increased from
0.61% as of September 30, 1998 to 0.78% as of June 30, 1999 due to the increase
in non-performing assets for the reasons discussed above.
The following table sets forth information concerning the BankUnited's
non-performing assets at June 30, 1999 and September 30, 1998.
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
----------- -----------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans $ 23,606 $ 15,999
Restructured loans 993 1,137
Loans past due 90 days and still accruing (1) 952 2,313
----------- -----------
Total non-performing loans 25,551 19,449
Non-accrual tax certificates 1,833 1,225
Real estate owned 3,286 1,974
----------- -----------
Total non-performing assets $ 30,670 $ 22,648
=========== ===========
Allowance for losses on tax certificates $ 1,166 $ 469
Allowance for loan losses 12,068 6,128
----------- -----------
Total allowance $ 13,234 $ 6,597
=========== ===========
Non-performing assets as a percentage of
total assets 0.78% 0.61%
Non-performing loans as a percentage of
total loans 0.82% 0.64%
Allowance for loan losses as a percentage of
total loans 0.39% 0.20%
Allowance for loan losses as a percentage of
non-performing loans 47.23% 31.51%
Net charge offs as a percentage of average
total loans 0.06% 0.02%
</TABLE>
(1) Consists primarily of loans guaranteed by the Federal Housing
Authority ("FHA") acquired in the acquisition of Suncoast Savings and Loan
Association, FSA.
19
<PAGE>
BankUnited's allowance for loan losses is established and maintained
based upon management's evaluation of the risks inherent in BankUnited's loan
portfolio including the economic trends and other conditions in specific
geographic areas as they relate to the nature of BankUnited's portfolio. The
provision for loan losses for the three months ended June 30, 1999 was $0.5
million as compared to $0.3 million for the three months ended June 30, 1998. In
connection with management's rigorous review in the second quarter of fiscal
1999 of its loans, a provision of $6.3 million was made to increase the
allowance for loan losses. BankUnited's allowance for loan losses has increased
by a net amount of $6.0 million from $6.1 million as of September 30, 1998 to
$12.1 million as of June 30, 1999. See "Results of Operations-Provision for Loan
Losses."
The following table sets forth the change in BankUnited's allowance for
loan losses for the three and nine months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
(in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $ 12,342 $ 4,844 $ 6,128 $ 3,693
Provision........................................ 450 300 7,186 1,350
Allowance from Consumers acquisition............. - - - 362
Allowance from Central acquisition............... - 900 - 900
Loans charged off................................ (736) 112 (1,294) (156)
Recoveries....................................... 12 8 48 15
----------- ----------- ----------- ------------
Balance at end of period........................... $ 12,068 $ 6,164 $ 12,068 $ 6,164
=========== =========== =========== ============
</TABLE>
The following table sets forth BankUnited's allocation of the allowance
for loan losses by category as of June 30, 1999 and 1998.
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------------------
1999 1998
--------------- ---------------
(in thousands)
<S> <C> <C>
One-to-four family....................................... $ 4,667 $ 1,942
Multi-family............................................. 353 59
Commercial real estate................................... 3,202 1,065
Construction............................................. 50 32
Land..................................................... 1,174 130
Commercial business and consumer......................... 2,024 1,365
Unallocated.............................................. 598 1,571
------------- -------------
Total allowance........................................ $ 12,068 $ 6,164
============== ==============
</TABLE>
20
<PAGE>
The following table sets forth the composition of BankUnited's loan
portfolio, including loans held for sale, at June 30, 1999 and September 30,
1998.
<TABLE>
<CAPTION>
JUNE 30, 1999 SEPTEMBER 30, 1998
--------------------------- --------------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
-------------- ---------- ------------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One-to-four family................................ $ 2,874,843 92.2% $ 2,788,838 92.4%
Multi-family...................................... 29,326 0.9 24,392 0.8
Commercial real estate............................ 139,048 4.5 145,819 4.8
Construction...................................... 4,965 0.1 7,827 0.3
Land.............................................. 14,475 0.5 5,410 0.2
------------- ----------- ------------ -----------
Total mortgage loans............................ 3,062,657 98.2 2,972,286 98.5
------------- ----------- ------------ -----------
Other loans:
Commercial........................................ 24,512 0.8 15,550 0.5
Consumer.......................................... 30,547 1.0 30,401 1.0
------------- ----------- ------------- -----------
Total other loans............................... 55,059 1.8 45,951 1.5
------------- ----------- ------------ -----------
Total loans................................... 3,117,716 100.0% 3,018,237 100.0%
=========== ==========
Unearned discounts, premiums and
deferred loan fees, net......................... 15,010 29,905
Allowance for loan losses......................... (12,068) (6,128)
------------- ------------
Total loan portfolio................................. $ 3,120,658 $ 3,042,014
============= ============
</TABLE>
YEAR 2000
BankUnited utilizes extensive electronic data processing hardware and
software in its banking operations, among other things, to process and record
customer transactions, determine and collect revenue to be earned and expenses
to be paid in connection with customer transactions, maintain and report
customer transaction information, record and manage BankUnited's short-term and
long-term investments, and assist with accounting and financial management and
risk management. BankUnited also relies on certain vendors to provide critical
services to BankUnited's banking operations, including telecommunications, loan
servicing and correspondent banking. Failure of the electronic data processing
hardware or software of BankUnited, its third party service bureaus, or certain
vendors to properly recognize the Year 2000 could result in a significant
disruption of BankUnited's banking operations. Based on the measures already
taken by BankUnited, a significant disruption of its banking operations due to
such a failure is not currently expected because BankUnited is substantially
compliant as of June 30, 1999.
BankUnited's customer transactions are processed through a network of
electronic data processing workstations in its branch offices and loan servicing
department and are recorded on electronic data processing hardware and software,
a substantial portion of which are maintained by two third-party service
bureaus. BankUnited has conducted Year 2000 compliance tests with the two
third-party service bureaus that handle its data processing and has received
certification that they are Year 2000 compliant. BankUnited has replaced the
majority of its hardware and software used in its operations as necessary for
Year 2000
21
<PAGE>
compliance. BankUnited has also received Year 2000 compliance certifications
from its major telecommunications, loan servicing and correspondent banking
vendors. While a portion of BankUnited's financial assets and liabilities are
with commercial businesses and government-sponsored entities, BankUnited's loans
and deposits are primarily with individuals. As a result, BankUnited does not
expect any significant disruptions resulting from customers that may not be Year
2000 compliant.
BankUnited has designated a Year 2000 task force under the direction of
one of its senior officers, which has identified and coordinated BankUnited's
efforts to become Year 2000 compliant and has developed a Year 2000 contingency
plan. The contingency plan details alternate methods for meeting BankUnited's
data processing needs and cash and liquidity requirements, as well as covering
such matters as the weekend of the date change and monitoring system output
throughout the Year 2000. The contingency plan is expected to be completely
tested by September 30, 1999. BankUnited has also launched an aggressive
customer awareness program, which includes an e-mail address, a toll-free
hotline, a Year 2000 report card and Year 2000 awareness material for our retail
and small business customers.
Additionally, BankUnited is subject to regulation and supervision by
the Office of Thrift Supervision, the "OTS," which regularly conducts reviews of
the safety and soundness of BankUnited's operations, including BankUnited's
progress in becoming Year 2000 compliant. Failure by BankUnited to adequately
prepare for Year 2000 issues could negatively impact BankUnited's banking
operations resulting in restrictions on its banking operations by the OTS. No
such restrictions exist at this time, nor does BankUnited expect any such
restrictions resulting from failure to address Year 2000 issues.
BankUnited has estimated the costs associated with becoming Year 2000
compliant to be approximately $1.6 million, exclusive of internal costs, of
which approximately $1.5 million has been incurred through June 30, 1999. The
costs consist of approximately $0.5 million for the replacement of hardware and
software, $0.9 million for the write-off of non-compliant hardware and software
and $0.2 million of other incremental costs. BankUnited does not separately
track the internal costs incurred for the Year 2000 project and such costs are
principally the related payroll costs for its information systems department.
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM SEPTEMBER 30, 1998 TO JUNE 30,
1999 AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999
AND 1998.
FINANCIAL CONDITION
ASSETS
Total assets remained relatively constant from September 30, 1998 to
June 30, 1999, which is consistent with BankUnited's expectations that assets
will not grow significantly during the 1999 fiscal year.
BankUnited's short-term investments, primarily consisting of Federal
Home Loan Bank ("FHLB") overnight deposits and securities purchased under
agreements to resell, increased by $168.3 million, or 257.7% to $233.6 million
at June 30, 1999, from $65.3 million at September 30, 1998 due to the purchase
of securities under agreements to resell. These securities were purchased to
invest the unapplied proceeds of BankUnited's borrowings (primarily FHLB
advances and Senior Notes) to maximize earnings while
22
<PAGE>
maintaining liquidity until such time as loans and/or securities of a price and
quality in line with BankUnited's investment strategy become available.
BankUnited's investment in tax certificates decreased by $21.6 million,
or 54.0%, to $18.4 million at June 30, 1999 from $40.0 million at September 30,
1998, as a result of certificate redemptions and repayments and the decision to
discontinue investing in this line of business.
Mortgage-backed securities held-to-maturity decreased by $111.6
million, or 76.4% to $34.5 million at June 30, 1999 from $146.1 million at
September 30, 1998 due to repayments and amortization of premiums.
Mortgage-backed securities available-for-sale increased by $116.7
million or 58.5% to $316.3 million at June 30, 1999, from $199.6 million at
September 30, 1998, due primarily to purchases of $166.2 million, offset by
repayments and amortization of $42.7 million, and also due to a reduction of
$6.8 million in the market value of the underlying securities.
BankUnited's loans receivable, net (including loans held for sale)
remained relatively constant from September 30, 1998 to June 30, 1999. Mortgage
loan purchases of $683.8 million and loan originations of $479.2 million were
offset by repayments of $1.0 billion (net of accretion of discount and
amortization of premium) and loan sales of $23.3 million. For further discussion
of repayments of loans and mortgage-backed securities, see " Results of
Operations-Net Interest Income," and Item 3, "Quantitative and Qualitative
Disclosures About Market Risk."
Mortgage loans held for sale increased by $264.3 million, or 153.3%, to
$436.7 million at June 30, 1999 from $172.4 million at September 30, 1998,
principally due to the transfer of $288.3 million of loans from loans
receivable, net in the second quarter of fiscal 1999 and residential loan
originations of $140.4 million. This increase was partially offset by repayments
of $67.3 million, sales of $23.3 million and the transfer to loans receivable,
net in the first quarter of fiscal 1999, of $73.8 million of loans originated in
the prior fiscal year. The transfer of loans to loans receivable, net in the
first quarter resulted from the discontinuation of BankUnited's policy of
selling substantially all of its internally generated residential loans. The
transfer of loans from loans receivable, net in the second quarter resulted from
BankUnited's decision to classify its One-Year CMT purchased mortgage loan
portfolio as held for sale. In the second quarter of fiscal 1999, BankUnited
began to classify the majority of its originated residential loans as loans
receivable, net.
Other interest earning assets remained relatively constant from
September 30, 1998 to June 30, 1999. This category primarily represents stock in
the FHLB which BankUnited is required to purchase as FHLB advances increase.
Accrued interest receivable decreased by $7.8 million to $25.1 million
at June 30, 1999 from $32.9 million at September 30, 1998. Prepaid expenses and
other assets decreased by $13.3 million or 33.7% to $26.2 million at June 30,
1999, from $39.5 million at September 30, 1998.
23
<PAGE>
LIABILITIES
Deposits increased by $103.9 million from September 30, 1998 to June
30, 1999 due to an increase in savings and checking accounts of $126.4 million
and $38.7 million, respectively. This increase was partially offset by a $61.2
million decrease in certificates of deposit resulting from the elimination of
all brokered certificates of deposit. This change in the deposit mix resulted in
a favorable reduction in BankUnited's cost of interest-bearing liabilities to
5.32% for the nine months ended June 30, 1999 from 5.80% for the nine months
ended June 30, 1998.
Securities sold under agreements to repurchase decreased by $120.4
million, or 99.4%, to $0.7 million at June 30, 1999 from $121.1 million at
September 30, 1998. This decrease resulted from the maturity of the agreements
and the decision of BankUnited's management not to replace the agreements but to
seek longer-term sources of funds to more effectively control BankUnited's cost
of funds and to take advantage of the current low interest rate environment.
FHLB advances remained relatively constant from September 30, 1998 to
June 30, 1999.
Senior Notes increased $200.0 million as a result of the issuance and
sale of the Bank's Senior Notes during the second quarter of fiscal 1999. See
Note 6 - "Contingencies and Off-Balance Sheet Activities" of the Condensed Notes
to Consolidated Financial Statements.
CAPITAL
BankUnited's total stockholders' equity was $188.4 million at June 30,
1999, a decrease of $10.9 million, or 5.5%, from $199.3 million at September 30,
1998. The decrease is due primarily to a $4.7 million decrease in accumulated
other comprehensive income, and a current year net loss, offset, in part, by the
issuance of common stock from stock awards and the exercise of options. See Note
3 - "Comprehensive Income" of the Condensed Notes to Consolidated Financial
Statements.
In December 1998, the Board of Directors of BankUnited authorized the
purchase from time to time in open market transactions of up to 1,000,000 shares
of BankUnited's Class A Common Stock at such prices as the Executive Committee
deems advantageous. During July and August 1999, BankUnited purchased 100,000
shares of its Class A Common Stock on the open market.
In May 1999, the Board of Directors of BankUnited authorized the
purchase of shares of the 9% Preferred Stock on the open market, as deemed
appropriate, and, if the market is appropriate, the retirement of the 9%
Preferred Stock. As of the date of filing of this Quarterly Report on Form 10-Q,
BankUnited had not yet purchased any shares of its 9% Preferred Stock.
24
<PAGE>
RESULTS OF OPERATIONS
GENERAL
Net income after preferred stock dividends increased to $3.1 million
for the three months ended June 30, 1999, compared to $1.2 million for the three
months ended June 30, 1998. For the nine months ended June 30, 1999, net income
after preferred stock dividends decreased to a loss of $7.8 million from net
income after preferred stock dividends of $4.9 million for the nine months ended
June 30, 1998. Below is a more detailed discussion of each major category of
income and expenses. The increase in net income after preferred stock dividends
for the three months ended June 30, 1999 as compared to the prior year period
was attributable to an increase in the interest rate spread to 1.62% for the
three months ended June 30, 1999 from 0.75% for the prior year period. The
primary reasons for the decline in net income after preferred stock dividends
for the nine month period ended June 30, 1999 were (i) the accelerated
amortization of purchase premiums on the One-Year CMT loan portfolio and a
related security recorded in the first quarter of fiscal 1999 due to the high
level of prepayments; (ii) the write-off of purchase premiums on the One-Year
CMT loan portfolio, and the continuing acceleration of amortization of purchase
premiums on a related security in the second quarter of fiscal 1999; (iii) the
provision for loan losses in the second quarter resulting from the re-evaluation
of the loan portfolio; (iv) the provision for tax certificate losses in the
second quarter resulting from the increase in nonperforming tax certificates and
the decision to discontinue investing in this asset; and (v) other miscellaneous
charges in the second quarter including costs associated with becoming year 2000
compliant. See "Significant Developments for the Three and Nine Months Ended
June 30, 1999- Analysis of Net Interest Income," "-Second Quarter Restructuring
Charges" and "-Asset Quality."
NET INTEREST INCOME
Net interest income before provision for loan losses increased by $7.7
million, or 93.9%, to $15.9 million for the three months ended June 30, 1999
from $8.2 million for the same prior year period. For the nine months ended June
30, 1999, net interest income was $27.5 million compared to $28.9 million for
the same period in 1998, a decrease of $1.4 million, or 4.8%.
The increase in net interest income for the three months ended June 30,
1999 was primarily the result of the improved net interest margin to 1.76% from
1.00% for the same prior year period. For the three months ended June 30, 1999,
the increase in the net interest margin was due to an increase in the yield on
interest-earning assets to 6.82% from 6.57% for the same period in 1998,
primarily attributable to the higher yields on the loans originated by
BankUnited, and a 62 basis point decrease in the cost of interest-bearing
liabilities to 5.20% from 5.82% for the same period in 1998.
The decrease in net interest income for the nine months ended June 30,
1999 was primarily the result of the accelerated amortization of purchase
premiums on the One-Year CMT loan portfolio and a related security recorded in
the first quarter of fiscal 1999 and the $14.8 million charge in the second
quarter of fiscal 1999 related to the One-Year CMT loan portfolio and a related
security. See "Significant Developments for the Three and Nine Months Ended June
30, 1999-Second Quarter Restructuring Charges." This charge contributed to the
reduction of the net interest margin to 1.02% for the nine months ended June 30,
1999, compared to 1.34% for the same prior year period. For the nine months
ended June 30, 1999, the decrease in the net interest margin was due to a
decrease in the yield on interest-earning assets to 6.19% (6.95% prior to
accelerated amortization of purchase premiums in the first quarter of fiscal
1999 and the $14.8 million charge in the second quarter of fiscal 1999) from
6.88% for the same period in 1998, primarily
25
<PAGE>
attributable to the lower yields on the loans purchased, partially offset by a
basis 48 point decrease in the cost of interest-bearing liabilities to 5.32%
from 5.80% for the same period in 1998.
Interest income for the three months ended June 30, 1999 was $61.6
million, compared to $53.7 million for the same prior year period, an increase
of $7.9 million, or 14.7%. For the nine months ended June 30, 1999, interest
income was $168.0 million compared to $148.4 million for the same prior year
period in 1998, an increase of $19.6 million, or 13.2%.
The results of operations for the three months ended December 31, 1998
reflect the accelerated amortization of premiums on purchased loans and
mortgage-backed securities. The amortization of premiums, net of discounts and
deferred origination costs, increased from $1.0 million for the three months
ended December 31, 1997 to $6.1 million for the same period in fiscal 1999. The
increase in premium amortization was a result of the high level of loan
prepayments experienced in the first quarter of fiscal 1999. The results of
operations for the three months ended March 31, 1999 include the $14.8 million
charge and $0.2 million of other amortization for a total reduction to interest
income of $15.0 million. The results of operations for the three months ended
June 30, 1999 include $1.3 million of amortization compared to $2.7 million for
the same period in fiscal 1998. The decrease is the result of the reduction in
the level of prepayments and the charge in the second quarter of fiscal 1999 to
reduce the carrying value of the purchased One-Year CMT portfolio to the lower
of cost or market. The decrease in interest income due to these net reductions
was offset by an increase in the average balance of loans receivable, which
increased by $364.1 million or 14.1% and $570.2 million or 23.58%, for the three
and nine months periods ended June 30, 1999, as compared to the same prior year
period, which resulted primarily from purchases of residential loans in the
secondary mortgage market. See "Significant Developments for the Three and Nine
Months Ended June 30, 1999-Second Quarter Restructuring Charges" and "-Analysis
of Net Interest Income."
As a result of the $14.8 million charge, the yield on loans and the
yield on mortgage-backed securities declined from 6.94% and 6.64% for the nine
months ended June 30, 1998, to 6.36% and 5.03% for the nine months ended June
30, 1999. This 58 and 161 basis point drop in the yields earned on loans and
mortgage-backed securities was a significant factor in the decline of the yield
on interest earning assets. As of June 30, 1999, BankUnited had no premiums
remaining on the One-Year CMT loans, $7.5 million of premiums, net of discounts,
remaining on other purchased loans and $50,000 of premiums remaining on a
mortgage-backed security related to the securitization of a pool of BankUnited's
purchased loans. See "Quantitative and Qualitative Disclosures About Market
Risk."
Interest expense for the three months ended June 30, 1999 was $45.7
million compared to $45.5 million for the same prior year period, an increase of
$0.2 million, or 0.4%. Interest expense for the nine months ended June 30, 1999
was $140.4 million compared to $119.5 million for the same prior year period, an
increase of $20.9 million, or 17.5%. The increases reflect significant increases
in the average balance for interest-bearing deposits and trust preferred
securities during the period. There was an increase in average interest-bearing
deposits of $0.3 billion and $0.6 billion to $2.2 billion and $2.2 billion for
the three and nine months ended June 30, 1999, from $1.9 billion and $1.6
billion for the same prior year periods. Average trust preferred securities
remained unchanged at $218.5 million for the three months ended June 30, 1999 as
compared to the prior year period. For the nine months ended June 30, 1999,
average trust preferred securities increased to $218.5 million from $158.1
million for the same prior year period. Average FHLB advances and other
borrowings remained relatively constant at $1.1 billion and $1.1 billion for the
three and nine months ended June 30, 1999, compared to $1.0 billion and $1.0
billion for the same prior year periods. The increase in interest expense was
partially offset by a decline in the average cost of interest-bearing
26
<PAGE>
liabilities, due to decline in market interest rates over the recent year . For
the three months ended June 30, 1999, the average rate paid on interest-bearing
liabilities decreased 62 basis points to 5.20% from 5.82% for the same prior
year period. For the nine months ended June 30, 1999, the average rate paid on
interest-bearing liabilities decreased 48 basis points to 5.32% from 5.80% for
the nine months ended June 30, 1998. See "Significant Developments for the Three
and Nine Months Ended June 30, 1999-Analysis of Net Interest Income."
PROVISION FOR LOAN LOSSES
The provision for loan losses increased to $0.5 million and $7.2
million for the three and nine months ended June 30, 1999, compared to $0.3
million and $1.4 million for the same prior year periods. Included in the $7.2
million provision is a $6.3 million provision recorded in the second quarter of
fiscal 1999 as a result of management's review of interest earning assets. The
provision recorded in the second quarter of fiscal 1999 relates to one-to-four
family residential mortgage loans ($2.1 million), commercial mortgage loans
($2.7 million) and other loans ($1.5 million). In connection with the review of
interest-earning assets, management conducted a rigorous review of the loan
portfolio, which included a systematic and detailed evaluation of the estimated
loss exposure in BankUnited's loan portfolio in light of the economic trends and
other conditions in specific geographic areas as they relate to the nature of
BankUnited's portfolio. Management utilized historical loan loss experience
(including a detailed state-by-state analysis) and current trends in
delinquencies and charge-offs in order to determine the adequacy of the
allowance for loan losses; as a result of this review, some of the loss
presumptions in determining the adequacy of the allowance for loan losses were
revised in the second quarter of fiscal 1999. Additionally, the decision was
made to discontinue indirect consumer lending. See "Significant Developments for
the Three and Nine Months Ended June 30, 1999-Asset Quality."
Also, during the second quarter of fiscal 1999, management performed a
detailed re-evaluation of the non-performing commercial loans. For these loans,
an estimated value of the property or collateral securing the loan is determined
through an appraisal, where possible. In instances where BankUnited has not
taken possession of the property or does not otherwise have access to the
premises and therefore cannot obtain an appraisal, a real estate broker's
opinion as to the value of the property is obtained based primarily on a
drive-by inspection. If the unpaid balance of the loan is greater than the
estimated fair value of the property, reduced by estimated costs to dispose of
the property, a reserve is established for the difference between the carrying
value and the estimated fair value.
Other non-performing loans such as non-mortgage commercial loans are
evaluated individually as well. For these loans, a determination is made of the
value of the collateral, if any, through examination of current financial
information. If the unpaid balance of the loan is greater than estimated fair
value of the property, reduced by estimated costs to dispose of the property, a
reserve is established for the difference between the carrying value and the
estimated fair value.
General valuation allowances are also established on all classes of the
performing portfolio and represent loss allowances that have been established to
recognize the unspecified losses inherent in the loan portfolio.
The above-described method of establishing an adequate provision for
the allowance for loan losses inherently lacks precision. Because of the many
factors that can affect recoverability, the estimated loss on an individual loan
or pool of loans may not be the same as the ultimate loss, if any, actually
sustained.
27
<PAGE>
BankUnited's goal, therefore, is to determine a provision (and an allowance for
losses) that in the aggregate is reasonable in the context of BankUnited's loan
portfolio and financial condition taken as a whole.
NON-INTEREST INCOME
Non-interest income decreased to $1.2 million and $3.7 million for the
three and nine months ended June 30, 1999, compared to $2.5 million and $5.2
million for the same prior year periods. The results reflect an increase in net
service fee income and other non-interest income, offset by a decrease in income
related to a reduction in the sales of loans and mortgage-backed securities.
NON-INTEREST EXPENSES
Non-interest expenses increased to $11.1 million and $35.3 million for
the three and nine months ended June 30, 1999, compared to $8.1 million and
$23.2 million for the same prior year periods. Included in the increase in
non-interest expenses is the expenses incurred in the second quarter of fiscal
1999 for the additional provision for tax certificate losses of $1.1 million,
$1.0 million of expenses related to Year 2000 compliance and $1.0 million of
miscellaneous other charges. See "Significant Developments for the Three and
Nine Months Ended June 30, 1999-Second Quarter Restructuring Charges." The
remaining increase in expenses is attributable to the growth BankUnited has
experienced, including the additional costs relating to the acquisitions of
Consumers Bancorp, Inc. and Central Bank during the second and third quarters,
respectively, of the 1998 fiscal year and the opening of two additional branches
this fiscal year. Total non-interest expenses, as a percentage of average
assets, increased from 0.95% and 1.04% for the three and nine months ended June
30, 1998, to 1.19% and 1.25% for the same periods in 1999 as a result of the
additional charges.
INCOME TAXES
The income tax provision increased to $2.2 million for the three months
ended June 30, 1999 from $0.9 million for the prior year period due to the
higher pre-tax earnings during the three months ended June 30, 1999 as compared
to the prior year period. The income tax provision decreased to a net benefit of
$4.1 million for the nine months ended June 30, 1999, compared to a net expense
of $3.8 million for the same prior year period. This decrease was due to
BankUnited's lower pre-tax earnings during the nine months ended June 30, 1999,
compared to the same prior year period, partially offset by the increase in the
effective income tax rate due to the effect of non-deductible goodwill.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends remained relatively constant at $0.2 million
for the three months ended June 30, 1999 and 1998. Preferred stock dividends
decreased to $0.6 million for the nine months ended June 30, 1999, as compared
to $0.7 million for the same prior year period. The decrease was the result of
the retirement in January 1998 of the Noncumulative Convertible Preferred Stock,
Series 1993, partially offset by the issuance of shares of Noncumulative
Convertible Preferred Stock, Series B in October 1997 and April 1998.
28
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The discussion contained in BankUnited's Annual Report on Form 10-K for
the year ended September 30, 1998, under Item 7a, "Quantitative and Qualitative
Disclosures about Market Risk," provides detailed quantitative and qualitative
disclosures about market risk and should be referenced for information thereon.
In addition, the following discussion addresses the sources and effects of
developments during the nine months ended June 30, 1999 which related to
refinancing risks and risks associated with investments and mortgage-backed
securities.
REFINANCING RISKS. A significant portion of BankUnited's loans
receivable are single-family residential mortgages that generally have an
imbedded option that allows the borrower to prepay the loan at any time without
penalty. A substantial portion of these loans have been purchased by BankUnited
in the secondary mortgage market at a premium.
In the current interest rate environment, when long-term interest rates
are generally low on a historical basis and the spread between short-term rates
and long-term rates is relatively narrow, prepayments of adjustable rate
mortgage ("ARM") loans and higher fixed-rate mortgages tend to accelerate.
BankUnited's results of operations for the first quarter of fiscal 1999 reflect
the accelerated amortization of premiums on purchased loans and mortgage-backed
securities. The amortization of premiums, net of discounts and deferred
origination costs, increased from $1.0 million for the three months ended
December 31, 1997 to $6.1 million for the three months ended December 31, 1998
as a result of such prepayments. BankUnited continued to experience high levels
of prepayments in the second quarter of fiscal 1999, the effects of which are
included in the $14.8 million charge to write-off the remaining purchase
premiums on the One-Year CMT loan portfolio and to record the continuing
accelerated amortization of purchase premiums on a related security. See
"Significant Developments for the Three and Nine Months Ended June 30,
1999-Second Quarter Restructuring Charges." During the third quarter of fiscal
1999, long-term interest rates rose slightly resulting in a significant decrease
in the level of loan prepayments. As a result of the decline in prepayments and
the reduction in the balance of premiums to amortize due to the charge in the
second quarter of fiscal 1999, the amortization of premiums, net of discounts
and deferred originations costs decreased from $2.7 million for the three months
ended June 30, 1998 to $1.3 million for the three months ended June 30, 1999. As
a result of the premium amortization, the yield on loans and mortgage-backed
securities declined from 6.94% and 6.64%, respectively, for the nine months
ended June 30, 1998 to 6.36% and 5.03%, respectively, for the nine months ended
June 30, 1999. This 58 and 161 basis point drop in the yields earned on loans
and mortgage-backed securities was a significant factor in the decline of the
yield on interest earning assets.
In addition, at June 30, 1999, $358.1 million of BankUnited's ARMs had
teaser rates, which will be subject to interest rate adjustments within the next
twelve months. Teaser rate loans may tend to be prepaid near the end of the
teaser period creating higher levels of prepayments on loans overall which
BankUnited may not be able to reinvest quickly enough and at sufficient interest
rates to mitigate the effect on its net interest margin.
Premiums, net of discounts and deferred origination costs, which at
June 30, 1999 were $15.0 million, including $7.6 million of premiums on
purchased loans and a mortgage-backed security related to the securitization of
a pool of BankUnited's purchased loans, are recognized as a reduction 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. As prepayments accelerate, BankUnited's historical prepayment
experience changes, resulting in a shortening of the estimated life of the loan
portfolio, and an increase in the rate at which premiums are expensed, resulting
in a greater reduction in interest income. Accelerated prepayments could,
therefore, have a material adverse effect on BankUnited's results of
29
<PAGE>
operations. BankUnited's exposure to increased amortization of premiums from
continued prepayments has been significantly reduced due to the write-off of
purchase premiums on the One-Year CMT loan portfolio and a related security and
the recent rise in long-term interest rates.
BankUnited has reviewed its practice of purchasing mortgage loans in
the secondary market, particularly ARM loans, and has turned its focus to
originating its own loans. This change is expected to mitigate the effect of the
accelerated amortization of premiums which continued throughout the first two
quarters of fiscal 1999 and has declined in the third quarter of fiscal 1999.
BankUnited continues to purchase fixed and adjustable-rate loans, except
One-Year CMT loans. The purchase of fixed-rate loans due to their longer terms
could increase BankUnited's sensitivity to increases in market rates of interest
and, therefore, could have an adverse effect on BankUnited's net interest
margin.
RISKS ASSOCIATED WITH INVESTMENTS AND MORTGAGE-BACKED SECURITIES.
BankUnited purchases fixed and adjustable rate mortgage-backed securities and
other securities for liquidity, yield and risk management purposes. Changes in
market interest rates associated with BankUnited's investments and
mortgage-backed securities could have a material adverse effect on BankUnited's
carrying value of its securities. Such changes in the carrying value would be
reflected as a component of stockholder's equity. See Note 5 "Comprehensive
Income."
30
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company did not file any current reports on Form
8-K during the quarter for which this report is
filed.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
BANKUNITED FINANCIAL CORPORATION
By: /s/ DIANE DELELLA
--------------------------------------------
Diane DeLella
Senior Vice President, Chief Financial
Officer and Controller
Date: August 16, 1999
<PAGE>
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
Form 10-Q for the Quarter Ended June 30, 1999
INDEX TO EXHIBITS
EXHIBIT NO.
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BANK UNITED, FSB FOR THE NINE MONTHS ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 21,617
<INT-BEARING-DEPOSITS> 98,575
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 336,453
<INVESTMENTS-CARRYING> 192,955
<INVESTMENTS-MARKET> 192,882
<LOANS> 3,132,726
<ALLOWANCE> 12,068
<TOTAL-ASSETS> 3,932,725
<DEPOSITS> 2,228,745
<SHORT-TERM> 200,722
<LIABILITIES-OTHER> 54,935
<LONG-TERM> 1,259,947
0
10
<COMMON> 184
<OTHER-SE> 188,182
<TOTAL-LIABILITIES-AND-EQUITY> 3,932,725
<INTEREST-LOAN> 142,585
<INTEREST-INVEST> 25,383
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 167,968
<INTEREST-DEPOSIT> 80,250
<INTEREST-EXPENSE> 140,433
<INTEREST-INCOME-NET> 27,535
<LOAN-LOSSES> 7,186
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 35,293
<INCOME-PRETAX> (11,253)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,253)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
<YIELD-ACTUAL> 1.02
<LOANS-NON> 23,606
<LOANS-PAST> 952
<LOANS-TROUBLED> 993
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,128
<CHARGE-OFFS> 1,294
<RECOVERIES> 48
<ALLOWANCE-CLOSE> 12,068
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
