SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 1998.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File Number:
0000906420
BANK UNITED CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3528556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 SOUTHWEST FREEWAY, SUITE 1600
HOUSTON, TEXAS 77027
------------------------------------------ --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 543-6500
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
Number of shares outstanding of the registrant's $0.01 par value common
stock as of August 12, 1998 were as follows:
TITLE OF EACH CLASS NUMBER OF SHARES
------------------- ----------------
Class A 28,355,776
Class B 3,241,320
BANK UNITED CORP.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements................................1
Consolidated Statements of Financial Condition -
June 30, 1998 and September 30, 1997..........................1
Consolidated Statements of Operations -
For the Three and Nine Months Ended June 30, 1998 and 1997....2
Consolidated Statements of Stockholders' Equity -
For the Nine Months Ended June 30, 1998 and 1997..............3
Consolidated Statements of Cash Flows -
For the Nine Months Ended June 30, 1998 and 1997..............4
Notes to Consolidated Financial Statements....................5
Independent Accountants' Report...............................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................18
Item 2. Changes in Securities and Use of Proceeds....................19
Item 3. Defaults Upon Senior Securities..............................19
Item 4. Submission of Matters to a Vote of Security Holders..........19
Item 5. Other Information............................................19
Item 6. Exhibits and Reports on Form 8-K.............................19
Signatures .............................................................20
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
JUNE 30, SEPTEMBER 30,
1998 1997
----------- -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents ............................................... $ 172,369 $ 121,000
Securities purchased under agreements to resell and federal funds sold .. 840,505 349,209
Securities .............................................................. 137,414 77,809
Mortgage-backed securities
Held to maturity, at amortized cost (fair value of $467.3 million in
1998 and $528.9 million in 1997) ................................. 471,711 543,361
Available for sale, at fair value .................................. 578,390 1,026,344
Loans
Held for investment (net of allowances for credit losses of
$44.9 million in 1998 and $39.2 million in 1997) ................. 7,527,890 8,221,626
Held for sale ...................................................... 2,183,899 773,603
Federal Home Loan Bank stock ............................................ 210,017 205,011
Premises and equipment .................................................. 54,220 46,921
Mortgage servicing rights ............................................... 410,650 272,214
Real estate owned (net of allowances for losses of $0.6 million in
1998 and $1.2 million in 1997) ..................................... 18,401 19,833
Deferred tax asset ...................................................... 121,645 120,936
Other assets ............................................................ 368,836 189,205
----------- -----------
TOTAL ASSETS ............................................................ $13,095,947 $11,967,072
=========== ===========
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS'
EQUITY
LIABILITIES
Deposits ............................................................ $ 6,419,242 $ 5,247,668
Federal Home Loan Bank advances ..................................... 4,078,294 3,992,344
Securities sold under agreements to repurchase and federal
funds purchased ................................................. 891,724 1,308,600
Notes payable ....................................................... 219,715 220,199
Advances from borrowers for taxes and insurance .................... 192,879 173,294
Other liabilities ................................................... 439,182 240,988
----------- -----------
Total liabilities ......................................... 12,241,036 11,183,093
----------- -----------
MINORITY INTEREST
Preferred stock issued by consolidated subsidiary ................... 185,500 185,500
----------- -----------
STOCKHOLDERS' EQUITY
Common stock ........................................................ 316 316
Paid-in capital ..................................................... 129,286 129,286
Retained earnings ................................................... 538,030 462,551
Accumulated other comprehensive income - unrealized gains (losses) on
securities available for sale, net of tax ...................... 1,779 6,326
----------- -----------
Total stockholders' equity ................................ 669,411 598,479
----------- -----------
TOTAL LIABILITIES, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY ............................................. $13,095,947 $11,967,072
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
-------- -------- ------- ------
(UNAUDITED)
INTEREST INCOME
Short-term interest-earning assets ..................... $ 10,164 $ 9,195 $ 22,013 $ 26,732
Securities ............................................. 1,693 1,521 5,972 3,752
Mortgage-backed securities ............................. 19,962 25,610 66,942 78,946
Loans .................................................. 193,439 163,677 566,574 482,077
Federal Home Loan Bank stock ........................... 3,102 2,900 9,440 8,427
-------- -------- -------- --------
Total interest income ......................... 228,360 202,903 670,941 599,934
-------- -------- -------- --------
INTEREST EXPENSE
Deposits ............................................... 79,448 65,733 221,453 195,107
Federal Home Loan Bank advances ........................ 58,242 52,399 176,999 157,701
Securities sold under agreements to repurchase and
federal funds purchased ...................... 10,591 14,263 43,216 39,703
Notes payable .......................................... 4,892 3,888 14,684 8,514
-------- -------- -------- --------
Total interest expense ........................ 153,173 136,283 456,352 401,025
-------- -------- -------- --------
Net interest income ........................... 75,187 66,620 214,589 198,909
PROVISION FOR CREDIT LOSSES ............................ 1,814 3,425 16,777 14,644
-------- -------- -------- --------
Net interest income after provision for credit
losses ...................................... 73,373 63,195 197,812 184,265
-------- -------- -------- --------
NON-INTEREST INCOME
Net gains (losses)
Sales of single family servicing rights and single
family loans ................................. 2,923 3,544 5,464 20,475
Securities and mortgage-backed securities .......... 224 684 2,025 2,277
Other loans ........................................ 297 56 673 992
Sale of mortgage offices ........................... -- -- -- 3,998
Loan servicing, net of related amortization ............ 10,630 7,809 24,089 23,635
Other .................................................. 8,579 5,221 21,859 14,925
-------- -------- -------- --------
Total non-interest income .................... 22,653 17,314 54,110 66,302
-------- -------- -------- --------
NON-INTEREST EXPENSE
Compensation and benefits .............................. 22,683 17,901 62,308 57,201
Occupancy .............................................. 4,376 3,501 12,125 11,372
Data processing ........................................ 4,202 2,998 11,952 10,217
Advertising and marketing .............................. 1,685 1,829 6,230 5,979
Amortization of intangibles ............................ 1,761 838 4,114 3,350
SAIF deposit insurance premiums ........................ 1,173 823 3,100 3,985
Furniture and equipment ................................ 1,038 953 2,778 3,201
Other .................................................. 13,618 12,414 36,176 37,105
-------- -------- -------- --------
Total non-interest expense ................... 50,536 41,257 138,783 132,410
-------- -------- -------- --------
Income before income taxes, minority interest,
and extraordinary loss .................. 45,490 39,252 113,139 118,157
INCOME TAX EXPENSE ..................................... 17,014 15,086 8,805 45,499
-------- -------- -------- --------
Income before minority interest .............. 28,476 24,166 104,334 72,658
MINORITY INTEREST
Subsidiary preferred stock dividends ................... 4,563 4,563 13,689 13,689
-------- -------- -------- --------
Income before extraordinary loss ............. 23,913 19,603 90,645 58,969
EXTRAORDINARY LOSS ..................................... -- 2,323 -- 2,323
-------- -------- -------- --------
NET INCOME .......................... $ 23,913 $ 17,280 $ 90,645 $ 56,646
======== ======== ======== ========
EARNINGS PER COMMON SHARE
BASIC
Net income before extraordinary loss .......... $ 0.76 $ 0.62 $ 2.87 $ 1.86
Extraordinary loss ............................ -- 0.07 -- 0.07
-------- -------- -------- --------
Net income .................................... $ 0.76 $ 0.55 $ 2.87 $ 1.79
======== ======== ======== ========
DILUTED
Net income before extraordinary loss .......... $ 0.74 $ 0.61 $ 2.80 $ 1.84
Extraordinary loss ............................ -- 0.07 -- 0.07
-------- -------- -------- --------
Net income .................................... $ 0.74 $ 0.54 $ 2.80 $ 1.77
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE
--------------------------------------- INCOME -
CLASS A CLASS B UNREALIZED TOTAL
------------------ ------------------ PAID-IN RETAINED GAINS STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS (LOSSES) EQUITY
---------- ------ --------- ------ --------- --------- -------- ----------
BALANCE AT SEPTEMBER 30, 1996............. 27,735,934 $ 277 3,859,662 $ 39 $ 129,286 $ 403,674 $ (2,233) $ 531,043
Net income .......................... -- -- -- -- -- 56,646 -- 56,646
Change in unrealized gains (losses) . -- -- -- -- -- -- 8,257 8,257
--------- -------- ---------
Total comprehensive income ....... -- -- -- -- -- 56,646 8,257 64,903
--------- -------- ---------
Dividends declared: common
stock ($0.42 per share) ........ -- -- -- -- -- (13,270) -- (13,270)
Conversion of common stock .......... 618,342 7 (618,342) (7) -- -- -- --
---------- ----- --------- ----- --------- --------- -------- ---------
BALANCE AT JUNE 30, 1997 ................. 28,354,276 $ 284 3,241,320 $ 32 $ 129,286 $ 447,050 $ 6,024 $ 582,676
========== ===== ========= ===== ========= ========= ======== =========
BALANCE AT SEPTEMBER 30, 1997............. 28,354,276 $ 284 3,241,320 $ 32 $ 129,286 $ 462,551 $ 6,326 $ 598,479
Net income .......................... -- -- -- -- -- 90,645 -- 90,645
Change in unrealized gains (losses) . -- -- -- -- -- -- (4,547) (4,547)
--------- -------- ---------
Total comprehensive income ....... -- -- -- -- -- 90,645 (4,547) 86,098
--------- -------- ---------
Dividends declared: common
stock ($0.48 per share) ........ -- -- -- -- -- (15,166) -- (15,166)
---------- ----- --------- ----- --------- --------- -------- ---------
BALANCE AT JUNE 30, 1998 ................. 28,354,276 $ 284 3,241,320 $ 32 $ 129,286 $ 538,030 $ 1,779 $ 669,411
========== ===== ========= ===== ========= ========= ======== =========
See accompanying Notes to Consolidated Financial Statements.
3
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED JUNE 30,
--------------------------------------
1998 1997
----------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash used by operating activities .................................... $ (881,016) $ (229,990)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase price of acquisitions ........................................... (51,850) --
Net change in securities purchased under agreements to resell and
federal funds sold .................................................. (491,296) 97,190
Fundings of loans held for investment .................................... (2,694,812) (1,688,051)
Proceeds from principal repayments and maturities of
Loans held for investment ........................................... 3,054,375 1,809,411
Securities available for sale ....................................... 198,922 54,146
Mortgage-backed securities held to maturity ......................... 70,898 60,931
Mortgage-backed securities available for sale ....................... 349,563 177,858
Proceeds from the sale of
Securities available for sale ....................................... 380,452 241,929
Mortgage-backed securities available for sale ....................... -- 6,965
Mortgage servicing rights ........................................... -- 7,112
Federal Home Loan Bank stock ........................................ 54,325 18,160
Real estate owned acquired through foreclosure ...................... 30,134 50,081
Purchases of
Loans held for investment ........................................... (189,929) (842,270)
Securities held to maturity ......................................... (2,213) --
Securities available for sale ....................................... (273,397) (34,944)
Mortgage-backed securities held to maturity ......................... -- (2,134)
Mortgage-backed securities available for sale ....................... (15,598) (171,918)
Mortgage servicing rights ........................................... (56,637) (144,116)
Federal Home Loan Bank stock ........................................ (49,891) (16,998)
Other changes in loans held for investment ................................. (189,065) (83,139)
Other changes in mortgage servicing rights ................................. (18,030) (14,052)
Net purchases of premises and equipment .................................... (18,133) (9,655)
----------- -----------
Net cash provided (used) by investing activities .................... 87,818 (483,494)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits ................................................... (338,114) 102,130
Proceeds from deposits purchased ......................................... 1,509,688 --
Proceeds from Federal Home Loan Bank advances ............................ 2,425,583 2,750,202
Repayment of Federal Home Loan Bank advances ............................. (2,339,633) (2,610,528)
Net change in securities sold under agreements to repurchase
and federal funds purchased.......................................... (416,876) 349,096
Net change in advances from borrowers for taxes and insurance ............ 19,585 17,408
Payment of dividends ..................................................... (15,166) (13,270)
Proceeds from issuance of subordinated debt .............................. -- 216,234
Repayment of senior notes ................................................ (500) (114,500)
----------- -----------
Net cash provided by financing activities ........................... 844,567 696,772
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... 51,369 (16,712)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............................. 121,000 119,523
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 172,369 $ 102,811
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest ................................................... $ 460,408 $ 394,231
Cash paid for income taxes ............................................... 6,398 1,106
NONCASH INVESTING ACTIVITIES
Real estate owned acquired through foreclosure ........................... 28,573 51,657
Sales of real estate owned financed by the Bank .......................... 553 17,451
Securitization of loans .................................................. 364,887 246,617
Net transfer of loans from held for investment ........................... 670,461 --
Transfer of mortgage-backed securities from held to maturity to
available for sale .................................................. -- 6,843
Change in unrealized gains (losses) on securities available for sale ..... (4,547) 8,257
See accompanying Notes to Consolidated Financial Statements.
4
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF CONSOLIDATION
The accompanying unaudited Consolidated Financial Statements include the
accounts of Bank United Corp. (the "Parent Company"), Bank United, a federal
savings bank (the "Bank"), and subsidiaries of both the Parent Company and the
Bank (collectively known as the "Company"). All significant intercompany
accounts have been eliminated in consolidation. A majority of the Company's
assets and operations are derived from the Bank.
2. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements were prepared
in accordance with the instructions for Form 10-Q and, therefore, do not include
all disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows in conformity with generally accepted
accounting principles. All adjustments (consisting of only normal recurring
adjustments) that are necessary, in the opinion of management, for a fair
presentation of the interim financial statements have been included. The results
of operations for the nine months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the entire fiscal year or any
interim period. The interim financial information should be read in conjunction
with the Consolidated Financial Statements and Notes included in the Company's
1997 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Certain amounts within the accompanying Consolidated Financial Statements
and the related Notes have been reclassified for comparative purposes to conform
to the current presentation. Such reclassifications had no effect on previously
presented net income or retained earnings.
3. EARNINGS PER COMMON SHARE
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per Share," which establishes
standards for computing and presenting earnings per share ("EPS"). It requires
dual presentation of basic and diluted EPS on the face of the income statement
for entities with complex capital structures and requires a reconciliation of
the basic EPS computation to the diluted EPS computation. All prior period EPS
data were restated to comply with SFAS No. 128, but are not materially
different. The table below presents the computation of EPS pursuant to SFAS No.
128 (in thousands, except per share data).
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1998 1997 1998 1997
------- ---------- ------- ----------
INCOME
Net income before extraordinary loss.................... $ 23,913 $ 19,603 $90,645 $ 58,969
Extraordinary loss ..................................... -- 2,323 -- 2,323
------- ---------- ------- ----------
Net income applicable to common shares.................. $ 23,913 $ 17,280 $90,645 $ 56,646
======= ========== ======= ==========
SHARES
Average common shares outstanding ...................... 31,596 31,596 31,596 31,596
Potential dilutive common shares from options .......... 846 485 765 362
------- ---------- ------- ----------
Average common shares and equivalents outstanding ...... 32,442 32,081 32,361 31,958
======= ========== ======= ==========
BASIC EPS
Before extraordinary loss .............................. $ 0.76 $ 0.62 $ 2.87 $ 1.86
Extraordinary loss ..................................... -- 0.07 -- 0.07
------- ---------- ------- ----------
Basic EPS .............................................. $ 0.76 $ 0.55 $ 2.87 $ 1.79
======= ========== ------- ==========
DILUTED EPS
Before extraordinary loss .............................. $ 0.74 $ 0.61 $ 2.80 $ 1.84
Extraordinary loss ..................................... -- 0.07 -- 0.07
------- ---------- ------- ----------
Diluted EPS ............................................ $ 0.74 $ 0.54 $ 2.80 $ 1.77
======= ========== ======= ==========
5
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EMPLOYEE BENEFITS
SUMMARY OF STOCK-BASED COMPENSATION
The Company has granted stock options to certain employees and members of
its Board of Directors under incentive and compensation plans. See the Company's
1997 Annual Report on Form 10-K for additional disclosures regarding these
options.
At June 30,
-------------------------------------------------------
1998 1997
--------------------------- ------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- ------- --------------
Outstanding at end of period ...... 1,647,220 $ 24.73 1,322,020 $21.02
Exercisable at end of period ...... 34,000 32.46 -- --
Vested at end of period ........... 828,096 20.67 33,718 20.13
PERFORMANCE UNITS
Effective October 1, 1997, the Company's Board of Directors awarded
performance units to executive officers and other key officers and employees
under its 1996 Stock Incentive Plan. These units, which equate to shares of the
Company's common stock on a one-for-one basis, will be earned based on the
achievement of certain corporate performance goals over a performance period
beginning October 1, 1997 and ending September 30, 2000. Upon completion of the
performance period, the Company's Compensation Committee will determine the
number of performance units that have been earned based on the Company's
performance. Cash will be distributed to the participants equal to the number of
performance units earned multiplied by the fair market value of the Company's
common stock as of September 30, 2000. Additional units were awarded under this
plan on March 30, 1998, bringing the maximum number of performance units to
201,000 in the aggregate. Compensation expense totalling $591,000 was recorded
for the nine months ended June 30, 1998 relating to these units.
5. COMPREHENSIVE INCOME
As of October 1, 1997, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires that all components of comprehensive
income and total comprehensive income be reported on one of the following: the
statement of operations, the statement of stockholders' equity, or a separate
statement of comprehensive income. The Company is disclosing this information on
its statement of stockholders' equity. The components of comprehensive income
are net income and all changes to stockholders' equity, except those due to
investments by owners (changes in paid-in capital) and distributions to owners
(dividends). This statement did not change the current accounting treatment for
components of comprehensive income (i.e. changes in unrealized gains or losses
on securities and mortgage-backed securities ("MBS") available for sale).
6. RECENT ACCOUNTING STANDARDS
SFAS No. 127, "Deferral of Certain Provisions of FASB Statement No. 125,"
was implemented January 1, 1998. This statement deferred certain provisions of
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," related to secured borrowings and collateral for
all transactions and transfers of financial assets for securities purchased
under agreements to resell ("Repurchase Agreements"), dollar rolls, securities
lending, and similar transactions. Implementation of the deferred portion of
SFAS No. 125 had no material effect on the Company's Consolidated Financial
Statements.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," requires public companies to report certain information about
their operating segments in their annual financial statements and quarterly
reports issued to stockholders, for years beginning after implementation. It
also requires public companies to report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. This statement is effective for fiscal years beginning after
December 15, 1997. The Company anticipates implementing SFAS No. 131 for its
fiscal 1998 Annual Report on Form 10-K. Implementation of SFAS No. 131 should
have no material effect on the Company's Consolidated Financial Statements.
6
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities," was issued. This statement requires companies to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 requires that
changes in fair value of a derivative be recognized currently in earnings unless
specific hedge accounting criteria are met. This statement is effective for
fiscal years beginning after June 15, 1999. The Company is evaluating the
impact, if any, this statement may have on its future consolidated financial
statements.
7
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Bank United Corp.:
We have reviewed the accompanying condensed consolidated statement of financial
condition of Bank United Corp. and its subsidiaries (collectively known as the
"Company") as of June 30, 1998, and the related condensed consolidated
statements of operations for the three-month and nine-month periods ended June
30, 1998 and 1997 and the related condensed consolidated statements of
stockholders' equity and cash flows for the nine-month periods ended June 30,
1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Bank United
Corp. and its subsidiaries as of September 30, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated October 24,
1997, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial condition as of September 30, 1997
is fairly stated, in all material respects, in relation to the consolidated
statement of financial condition from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Houston, Texas
July 28, 1998
8
BANK UNITED CORP.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCUSSION OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND
1997
GENERAL
Net income was $90.6 million or $2.80 per diluted share for the nine months
ended June 30, 1998, and $56.6 million or $1.77 per diluted share for the nine
months ended June 30, 1997. The increase in net income was primarily
attributable to two positive tax adjustments that were recorded in the second
quarter of fiscal 1998, increased net interest income and increased loan
servicing, community banking and commercial banking related fees. These
increases were partially offset by lower gains on sales of single family loans
and higher non-interest expenses.
NET INTEREST INCOME
Net interest income was $214.6 million for the nine months ended June 30,
1998, compared to $198.9 million for the nine months ended June 30, 1997, a
$15.7 million, or 8%, increase. This increase was attributable to a $1.4
billion, or 13%, increase in average interest-earning assets and a change in the
composition of assets and deposits, partially offset by a 14 basis point
decrease in the net yield on interest-earning assets ("net yield").
AVERAGE BALANCE SHEET, INTEREST INCOME/EXPENSE, AND AVERAGE YIELD/RATE
FOR THE NINE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------
1998 1997
--------------------------------------- -----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE (1) BALANCE INTEREST RATE (1)
----------- ----------- ----- ----------- ----------- -----
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Short-term interest-earning assets ......... $ 383,201 $ 22,013 7.58% $ 589,249 $ 26,732 5.98%
Securities ................................. 118,082 5,972 6.76 74,407 3,752 6.75
Mortgage-backed securities ................. 1,331,274 66,942 6.70 1,552,690 78,946 6.78
Loans ...................................... 9,699,719 566,574 7.78 7,938,565 482,077 8.10
FHLB stock ................................. 210,429 9,440 6.00 191,650 8,427 5.88
----------- ----------- ---- ----------- ----------- ----
Total interest-earning assets .......... 11,742,705 670,941 7.61 10,346,561 599,934 7.73
Non-interest-earning assets ................. 854,910 600,225
----------- ----------- ---- ----------- ----------- ----
TOTAL ASSETS ........................... $12,597,615 $10,946,786
=========== ===========
INTEREST-BEARING LIABILITIES
Deposits ................................. $ 5,936,938 221,453 4.99 $ 5,086,292 195,107 5.13
FHLB advances ............................ 4,082,665 176,999 5.72 3,696,314 157,701 5.63
Securities sold under agreements
to repurchase and federal funds
purchased ............................... 996,419 43,216 5.72 934,166 39,703 5.60
Notes payable ............................... 220,121 14,684 8.89 136,616 8,514 8.31
----------- ----------- ---- ----------- ----------- ----
Total interest-bearing liabilities ... 11,236,143 456,352 5.40 9,853,388 401,025 5.41
Non-interest-bearing liabilities,
minority interest,
and stockholders' equity ................ 1,361,472 1,093,398
----------- ----------- ---- ----------- ----------- ----
TOTAL LIABILITIES, MINORITY
INTEREST, AND
STOCKHOLDERS' EQUITY ............... $12,597,615 $10,946,786
=========== ===========
Net interest income/interest rate spread .... $ 214,589 2.21% $ 198,909 2.32%
=========== ==== =========== ====
Net yield on interest-earning assets ........ 2.44% 2.58%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities ..... 1.05 1.05
==== ====
(1) Annualized.
9
BANK UNITED CORP.
The increase in average interest-earning assets came from growth in
commercial loan originations and purchases. Average commercial loans increased
$1.4 billion, or 106%, to $2.7 billion for the nine months ended June 30, 1998.
Average deposits increased $850.6 million, or 17%, during the current period.
Transaction accounts and certificates of deposit increased as a result of recent
branch acquisitions. See "Discussion of Changes in Financial Condition from
September 30, 1997 to June 30, 1998."
The net yield was 2.44% for the nine months ended June 30, 1998, compared
to 2.58% for the nine months ended June 30, 1997. Despite the significant
increase in higher yielding commercial loans outstanding during the period, the
gross yield on total loans decreased. This decrease was due principally to the
decline in long-term market interest rates and the resulting prepayments of
higher yielding single family loans. Deposit rates also declined during the
period, which principally resulted from recent branch acquisitions and
maturities of higher rate brokered deposits.
PROVISION FOR CREDIT LOSSES
The provision for credit losses increased $2.1 million to $16.8 million for
the nine months ended June 30, 1998. This increase principally resulted from an
increase in the allowance established for the commercial loan portfolio, which
was partially offset by a reduction in the allowance maintained for the single
family loans held for investment portfolio. The commercial loan portfolio
increased $1.5 billion, or 89%, from June 30, 1997 to June 30, 1998. Due to this
growth, the Company increased this portfolio's allowance during the nine months
ended June 30, 1998, bringing the commercial loan allowance ratio to
approximately one percent. The single family loans held for investment portfolio
decreased $2.0 billion, or 33%, from June 30, 1997 to June 30, 1998. The Company
determined that its allowance for single family loans held for investment could
be reduced, based on the portfolio's historical losses as well as the reduction
in the outstanding portfolio balance. Accordingly, the allowance for single
family loans held for investment was reduced, bringing the allowance ratio to
approximately 30 basis points. The consumer loan provision decreased from the
year ago period due to the sale of the consumer line of credit portfolio,
totalling $37.6 million, in January 1998. Charge-offs of $4.9 million related to
this sale were recorded during the first quarter of fiscal 1998.
ALLOWANCE FOR CREDIT LOSSES
SINGLE
FAMILY COMMERCIAL CONSUMER TOTAL
------ ---------- -------- -----
(IN THOUSANDS)
Balance at September 30, 1996 ...... $28,672 $ 5,769 $ 5,219 $39,660
Provision ....................... 7,663 2,596 4,385 14,644
Net charge-offs.................. (10,787) (533) (4,426) (15,746)
------- ------- ------- -------
Balance at June 30, 1997 ........... $25,548 $ 7,832 $ 5,178 $38,558
======= ======= ======= =======
Balance at September 30, 1997 ...... $24,538 $ 8,766 $ 5,870 $39,174
Provision ....................... (9,041) 21,877 3,941 16,777
Net charge-offs ................. (2,912) (463) (7,641) (11,016)
------- ------- ------- -------
Balance at June 30, 1998 ........... $12,585 $30,180 $ 2,170 $44,935
======= ======= ======= =======
10
BANK UNITED CORP.
NONPERFORMING ASSETS
June 30, September 30, June 30,
1998 1997 1997
-------- -------- ---------
(in thousands)
Nonaccrual loans
Single family..............................$ 60,190 $ 51,742 $ 51,186
Commercial................................. 5,667 1,995 2,638
Consumer................................... 576 974 855
-------- -------- ---------
66,433 54,711 54,679
Premium (discounts).......................... 87 (759) (818)
-------- -------- ---------
Net nonaccrual loans .................... 66,520 53,952 53,861
REO, primarily single family properties...... 19,028 21,038 22,297
-------- -------- ---------
Total nonperforming assets..............$ 85,548 $ 74,990 $ 76,158
======== ======== =========
Selected Asset Quality Ratios
At or For the At or For At or For the
Nine Months Ended the Year Ended Nine Months Ended
June 30, 1998 September 30, 1997 June 30, 1997
------------- ------------------ -------------
Allowance for credit losses to net nonaccrual loans
Single family .................................. 20.87% 47.37% 49.89%
Total........................................... 67.55 72.61 71.59
Allowance for credit losses to total loans ....... 0.46 0.43 0.46
Nonperforming assets to total assets ............. 0.65 0.63 0.67
Net nonaccrual loans to total loans .............. 0.68 0.60 0.65
Nonperforming assets to total loans and REO ...... 0.88 0.83 0.91
Net loan charge-offs to average loans - annualized
Single family .................................. 0.06 0.18(1) 0.23(1)
Total .......................................... 0.15(2) 0.23(1) 0.26(1)
(1) Excluding charge-offs totalling $5.0 million related to the nonperforming
loan sale in April 1997, the single family charge-off ratio for fiscal 1997
and the nine months ended June 30, 1997, would have been 0.11% and 0.12%,
and the total charge-off ratio would have been 0.17% and 0.18%,
respectively.
(2) Excluding charge-offs in December 1997 totalling $4.9 million related to the
January 1998 sale of the consumer line of credit portfolio, the total
charge-off ratio would have been 0.08%.
NON-INTEREST INCOME
Non-interest income decreased $12.2 million, or 18%, during the nine months
ended June 30, 1998, compared to the nine months ended June 30, 1997. This
decrease was largely the result of lower gains on sales of single family loans,
partially offset by increased loan servicing, community banking and commercial
banking related fees. The prior period's results include a $4.0 million gain
related to the sale of certain retail mortgage origination offices.
Despite an increase in the volume of single family loans sold ($1.3 billion
for the nine months ended June 30, 1998, compared to $1.1 billion for the nine
months ended June 30, 1997), gains on sales of such loans declined $15.0
million, or 73%. Loans sold during the current period were originated through
the Company's wholesale network. Loans sold in the prior period were principally
originated through the Company's retail network, which was sold during the
second quarter of fiscal 1997. While loans originated through a wholesale
network typically have a higher cost basis and therefore reduced gains upon
sale, non-interest expenses associated with such loans are generally lower.
Changes in the mix of products sold and, to a lesser extent, competitive market
pressures also contributed to lower gains during the current period.
11
BANK UNITED CORP.
Loan servicing income, which consists of loan servicing fee revenue, net of
the amortization of mortgage servicing rights ("MSRs"), increased $454,000
during the nine months ended June 30, 1998, compared to the same period a year
ago. Loan servicing income for the current period was reduced by a valuation
allowance of $4.8 million before tax, or $0.09 per diluted share, for
prepayments on the servicing portfolio's underlying loans. Excluding this
valuation allowance, loan servicing income increased $5.0 million, or 21%,
during the current period. Gross servicing fee revenue increased $22.9 million
and the related amortization of MSRs increased $17.9 million. These increases
resulted from a larger portfolio of single family loans serviced for others,
which averaged $18.2 billion for the nine months ended June 30, 1998, compared
to $11.0 billion for the nine months ended June 30, 1997. Other non-interest
income increased $6.9 million, or 46%, during the nine months ended June 30,
1998, resulting from higher community banking and commercial banking related
fees.
NON-INTEREST EXPENSE
Non-interest expense was $138.8 million for the nine months ended June 30,
1998, up 5% from $132.4 million for the nine months ended June 30, 1997. Despite
the increase in expenses, the ratio of non-interest expense to average total
assets decreased from 1.62% for the nine months ended June 30, 1997 to 1.47% for
the current nine month period, while the efficiency ratio remained unchanged at
approximately 50 percent for both periods. The expense increase was principally
the result of growth in the Company's servicing portfolio, higher levels of loan
activity and recent branch acquisitions. Start-up costs incurred in conjunction
with the Company's program of offering home equity loans in Texas also caused an
increase in non-interest expenses. Prior period's non-interest expense included
costs associated with the retail mortgage origination network, which was sold in
the second quarter of fiscal 1997, and higher Savings Association Insurance Fund
("SAIF") premiums.
INCOME TAX EXPENSE
During the quarter ended March 31, 1998, the Company successfully resolved
an outstanding tax benefit lawsuit with the Federal Deposit Insurance
Corporation as manager of the Federal Savings and Loan Insurance Corporation
Resolution Fund, which resulted in a positive income tax adjustment of
approximately $6.0 million, or $0.18 per diluted share. Additionally, the
Company recognized a positive income tax adjustment of $27.5 million, or $0.85
per diluted share, resulting from the anticipated use of additional net
operating losses against future taxable income.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1997 TO JUNE 30,
1998
GENERAL
Total assets increased during the nine months ended June 30, 1998 by $1.1
billion, or 9%, to $13.1 billion. This increase primarily occurred in the loan
portfolio. During this period, the Company acquired 21 branches with deposits
totalling $1.5 billion. The cash acquired in these transactions, along with
principal repayments on loans and MBS, were used to fund the growth in the
Company's loan portfolio and reduce borrowings.
Repurchase Agreements and federal funds sold increased $491.3 million
during the nine months ended June 30, 1998 to $840.5 million. This increase
primarily resulted from the Company's ability to borrow funds and invest those
funds at a positive spread on a short-term basis.
Securities increased $59.6 million, or 77%, during the nine months ended
June 30, 1998. During this period, $275.7 million of securities were purchased
and $198.6 million matured. Additionally, $364.9 million of securities were
created through the securitization of Small Business Administration ("SBA")
loans and $378.2 million of these securities were sold. The interest-only strips
related to these securitizations approximating $34.1 million were retained by
the Company.
MBS declined $519.6 million during the nine months ended June 30, 1998 due
to principal repayments and sales. Principal repayments increased 66%, totalling
$396.3 million during the nine months ended June 30, 1998, compared to $238.8
million for the year ago period, as a result of increased refinancing activity.
Sales of MBS totalled $103.4 million during the nine months ended June 30, 1998,
compared to $6.9 million during the year ago period. The net unrealized gain on
securities available for sale decreased $4.5 million consistent with the decline
in the MBS portfolio balance.
12
BANK UNITED CORP.
Total loans increased $716.6 million, or 8%, during the nine months ended
June 30, 1998, to $9.7 billion. Additionally, the composition of the loan
portfolio changed as the Company continued to expand its commercial and consumer
lending lines of business. At June 30, 1998, commercial and consumer loans
totalled 37% of the Company's total loan portfolio, compared to 28% at September
30, 1997.
ORIGINATION, PURCHASE, AND SALE OF LOANS
FOR THE NINE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
----------- -----------
(IN THOUSANDS)
Beginning balance, September 30 ................... $ 8,995,229 $ 7,519,488
Fundings
Single family .............................. 2,791,581 1,603,305
Commercial ................................. 1,942,142 1,045,748
Consumer ................................... 308,592 109,056
Purchases
Single family .............................. 113,100 715,134
Commercial ................................. 579,843 347,169
Consumer ................................... 172 88,424
Net change in mortgage banker finance line of
credit ..................................... 178,217 169,260
Repayments ..................................... (3,443,696) (1,824,037)
Securitized loans sold or transferred .......... (1,031,320) (1,175,579)
Sales .......................................... (687,696) (289,117)
Other .......................................... (34,375) (36,947)
----------- -----------
Ending balance, June 30 ........................... $ 9,711,789 $ 8,271,904
=========== ===========
LOAN PORTFOLIO
JUNE 30, SEPTEMBER 30, JUNE 30,
1998 1997 1997
---------- ---------- ----------
(IN THOUSANDS)
Single family
Held for investment ......... $4,069,641 $5,795,179 $6,086,495
Held for sale ............... 2,048,921 697,410 243,808
Commercial ..................... 3,122,336 2,201,880 1,655,536
Consumer ....................... 470,891 300,760 286,065
---------- ---------- ----------
$9,711,789 $8,995,229 $8,271,904
========== ========== ==========
The commercial loan portfolio increased $920.5 million, or 42%, since
September 1997, due to originations and purchases. Commercial loan originations,
primarily related to residential construction loans, totalled $1.9 billion
during the nine months ended June 30, 1998, an increase of $896.4 million, or
86%, over the year ago period. During the nine months ended June 30, 1998, the
Company purchased commercial real estate loans with principal balances totalling
$157.8 million. These loans are secured by apartment buildings, office
buildings, and retail centers. Additionally, $422.0 million of SBA loans were
purchased during the nine months ended June 30, 1998, $364.9 million of which
were securitized. In summary, during the nine month period ended June 30, 1998,
the commercial loan portfolio increased as follows: single family construction
($252.2 million or 65%), multi-family ($125.2 million or 16%), commercial real
estate ($189.6 million or 50%), healthcare ($118.4 million or 125%), mortgage
banker finance line of credit ($178.2 million or 38%), and SBA ($56.9 million or
49%).
13
BANK UNITED CORP.
Consumer loans increased $170.1 million, or 57%, to $470.9 million at June
30, 1998. This increase can be attributed to an increase in the home improvement
loan portfolio of 45% and the implementation of the Company's home equity
lending program in Texas. Since the program began in January 1998, following an
amendment to the Texas constitution permitting such lending in the state, the
Company has funded $175.5 million of such loans.
Total single family loans decreased $374.0 million, or 6%, during the nine
months ended June 30, 1998. Single family loans held for investment decreased
$1.7 billion, which was partially offset by a $1.4 billion increase in single
family loans held for sale.
Single family loans held for sale increased as a result of higher
originations. Despite the sale of certain mortgage origination offices during
fiscal 1997, single family loan originations increased to $2.8 billion during
the nine months ended June 30, 1998, compared to $1.6 billion during the nine
months ended June 30, 1997. The increase in originations is due to increased
refinancing activity resulting from lower long-term market interest rates.
Refinancings approximated $2.0 billion and $603.3 million, or 72% and 37% of
total single family loan originations during these periods. Sales of single
family loans were $1.3 billion for the nine months ended June 30, 1998, compared
to $1.1 billion for the year ago period.
The decrease in single family loans held for investment is due primarily to
principal repayments. The outstanding balance of these loans has decreased as
the Company continues to build its commercial and consumer loan portfolios and
designate a greater portion of its single family originations as held for sale.
During the nine months ended June 30, 1998, the Company purchased servicing
rights associated with $7.5 billion in loans for a premium of $158.2 million.
While loans totalling $6.6 billion included in these purchases will not be
transferred to the Company until the fourth quarter of fiscal 1998, the risks
and rewards of ownership of the related servicing rights were transferred to the
Company at the time of purchase.
Deposits increased $1.2 billion during the nine months ended June 30, 1998.
During this period, the Company purchased 21 branches with deposits totalling
$1.5 billion and associated goodwill of $51.7 million. The Company has
consolidated 12 of the 21 branches purchased into existing branches.
Increases in other assets and other liabilities were primarily due to
increased goodwill as a result of recent branch acquisitions and due to growth
in the Company's servicing portfolio.
LIQUIDITY
The Bank is required by Office of Thrift Supervision ("OTS") regulations to
maintain a certain level of liquidity. The Bank's average daily liquidity ratio
for the quarter ended June 30, 1998 was 6.23%, compared to the requirement of
4.0%.
The primary sources of funds are deposits, Federal Home Loan Bank ("FHLB")
advances, reverse repurchase agreements, and principal repayments on loans and
MBS. These funds are principally used to meet ongoing commitments related to
deposit withdrawals, repayment of borrowings, funding of existing and continuing
loan commitments, and to maintain liquidity. Management believes that the Bank
has adequate resources to fund all of its commitments.
The Company's ability to pay dividends on its common stock and to meet its
other cash obligations is dependent upon the receipt of dividends from the Bank.
The declaration of dividends by the Bank on all classes of its capital stock is
subject to the discretion of the Board of Directors of the Bank, the terms of
the Bank preferred stock, and applicable regulatory requirements. At June 30,
1998, the Bank had $214.3 million of available capacity for the payment of
dividends under OTS regulations. See "Management's Discussion and Analysis -
Capital Resources and Liquidity" in the Company's 1997 Annual Report on Form
10-K.
14
BANK UNITED CORP.
REGULATORY MATTERS
The Bank's capital levels at June 30, 1998 and September 30, 1997 qualified
it as "well-capitalized", the highest of five tiers under applicable regulatory
definitions. The Bank's capital ratios at June 30, 1998 and September 30, 1997,
and the regulatory capital requirements were as follows:
JUNE 30, SEPTEMBER 30, CAPITAL ADEQUACY WELL-CAPITALIZED
1998 1997 REQUIREMENT REQUIREMENT
---------- ------------ ---------------- ----------------
Tangible capital ............. 7.03% 7.72% 1.50% --
Core/leverage capital ........ 7.06 7.77 3.00 5.00%
Tier 1 capital ............... 10.42 12.65 -- 6.00
Total risk-based capital ..... 10.93 13.18 8.00 10.00
DISCUSSION OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
1997
GENERAL
Net income was $23.9 million or $0.74 per diluted share for the three months
ended June 30, 1998, and $17.3 million or $0.54 per diluted share for the three
months ended June 30, 1997. The increase in net income was due to an increase in
net interest income and increased loan servicing, community banking and
commercial banking related fees, partially offset by lower gains on sales of
single family loans and higher non-interest expenses.
NET INTEREST INCOME
Net interest income was $75.2 million for the three months ended June 30,
1998, compared to $66.6 million for the three months ended June 30, 1997, for an
$8.6 million, or 13%, increase. This increase was attributable to a $1.6
billion, or 16%, increase in average interest-earning assets and a change in the
composition of assets and deposits, partially offset by a 7 basis point decrease
in the net yield.
AVERAGE BALANCE SHEET, INTEREST INCOME/EXPENSE, AND AVERAGE YIELD/RATE
FOR THE THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
1998 1997
------------------------------------ --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE (1) BALANCE INTEREST RATE (1)
----------- ----------- --------- ----------- --------- -----
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Short-term interest-earning assets ................ $ 552,931 $ 10,164 7.27% $ 572,720 $ 9,195 6.35%
Securities ........................................ 112,553 1,693 6.03 67,725 1,521 9.00
Mortgage-backed securities ........................ 1,202,004 19,962 6.64 1,504,305 25,610 6.81
Loans ............................................. 10,008,019 193,439 7.73 8,119,958 163,677 8.06
FHLB stock ........................................ 207,389 3,102 6.00 193,411 2,900 6.01
----------- ----------- ---- ---------- --------- ----
Total interest-earning assets ................. 12,082,896 228,360 7.55 10,458,119 202,903 7.75
Non-interest-earning assets ........................ 955,112 665,391
----------- ----------- ---- ---------- --------- ----
TOTAL ASSETS .................................. $13,038,008 $11,123,510
=========== ===========
INTEREST-BEARING LIABILITIES
Deposits ........................................ $ 6,462,527 79,448 4.93 $ 5,156,202 65,733 5.11
FHLB advances ................................... 4,079,943 58,242 5.65 3,645,949 52,399 5.68
Securities sold under agreements to repurchase
and federal funds purchased .................... 740,955 10,591 5.65 990,724 14,263 5.70
Notes payable .................................. 219,954 4,892 8.90 179,846 3,888 8.65
----------- ----------- ---- ---------- --------- ----
Total interest-bearing liabilities .......... 11,503,379 153,173 5.31 9,972,721 136,283 5.44
Non-interest-bearing liabilities, minority interest,
and stockholders' equity ....................... 1,534,629 1,150,789
----------- ----------- ---- ---------- --------- ----
TOTAL LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY ...................... $13,038,008 $11,123,510
=========== ===========
Net interest income/interest rate spread ........... $ 75,187 2.24 % $ 66,620 2.31%
=========== ==== ======== ====
Net yield on interest-earning assets ............... 2.49 % 2.56%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities............. 1.05 1.05
==== ====
(1) Annualized
15
BANK UNITED CORP.
The increase in average interest-earning assets came from growth in
commercial loan originations and purchases. Average commercial loans increased
$1.5 billion, or 98%, to $3.0 billion for the three months ended June 30, 1998.
Average deposits increased $1.3 billion, or 25%, during the current quarter.
Transaction accounts and certificates of deposit increased as a result of recent
branch acquisitions. See "Discussion of Changes in Financial Condition from
September 30, 1997 to June 30, 1998."
The net yield was 2.49% for the three months ended June 30, 1998, compared
to 2.56% for the three months ended June 30, 1997. This decrease was due
principally to a decline in long-term market interest rates, partially offset by
a decline in deposit rates resulting from recent branch acquisitions and
maturities of higher rate brokered deposits.
PROVISION FOR CREDIT LOSSES
The provision for credit losses decreased $1.6 million from the year ago
quarter, primarily due to lower provisions for single family and consumer loans.
The provision for single family loans decreased $1.8 million from the year ago
quarter, primarily as a result of a decrease in the single family loans held for
investment portfolio and due to that portfolio's low historical loss experience.
The provision for consumer loans decreased $1.1 million from the year ago
quarter, primarily as a result of the January 1998 sale of the consumer line of
credit portfolio totalling $37.6 million. These decreases were partially offset
by a $1.3 million increase in the provision for commercial loans, resulting from
growth in this portfolio.
ALLOWANCE FOR CREDIT LOSSES
Single
Family Commercial Consumer Total
------ ---------- -------- -----
(in thousands)
Balance at March 31, 1997 ....... $ 31,362 $ 7,372 $ 5,014 $ 43,748
Provision ..................... 894 775 1,756 3,425
Net charge-offs ............... (6,708) (315) (1,592) (8,615)
-------- -------- ------- --------
Balance at June 30, 1997 ........ $ 25,548 $ 7,832 $ 5,178 $ 38,558
======== ======== ======= ========
Balance at March 31, 1998 ....... $ 14,111 $ 28,427 $ 1,877 $ 44,415
Provision ..................... (920) 2,035 699 1,814
Net charge-offs .............. (606) (282) (406) (1,294)
-------- -------- ------- --------
Balance at June 30, 1998 ........ $ 12,585 $ 30,180 $ 2,170 $ 44,935
======== ======== ======= ========
NON-INTEREST INCOME
Non-interest income increased $5.3 million, or 31%, during the three months
ended June 30, 1998, compared to the three months ended June 30, 1997. Loan
servicing income increased $2.8 million, or 36%, during the current quarter.
Gross servicing fee revenue increased $9.8 million and was partially offset by a
$7.6 million increase in the amortization of MSRs. These increases resulted from
a larger portfolio of single family loans serviced for others which averaged
$18.6 billion for the three months ended June 30, 1998, compared to $13.1
billion for the three months ended June 30, 1997. Other non-interest income
increased $3.4 million, or 64%, during the current quarter resulting from higher
community banking and commercial banking related fees.
NON-INTEREST EXPENSE
Non-interest expense was $50.5 million for the three months ended June 30,
1998, up 23% from $41.3 million for the three months ended June 30, 1997. This
increase was principally due to the growth in the Company's servicing portfolio,
higher levels of loan activity and recent branch acquisitions. Start-up costs
incurred in conjunction with the Company's program of offering home equity loans
in Texas also caused an increase in non-interest expenses.
YEAR 2000
See "Management Discussion and Analysis - Contingencies and Uncertainties -
Year 2000" in the Company's 1997 Annual Report on Form 10-K.
16
FORWARD-LOOKING INFORMATION
Statements and financial discussion and analysis contained in this report
that are not historical facts are forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward- looking statements involve a number of risks and uncertainties.
The important factors that could cause actual results to differ materially from
the forward-looking statements include, without limitation, changes in interest
rates and economic conditions; the shift in the Company's emphasis from
residential mortgage lending to community and commercial banking activities;
increased competition for deposits and loans adversely affecting rates and
terms; changes in the availability of funds increasing costs or reducing
liquidity; changes in local economic and business conditions adversely affecting
the Bank's customers or impacting the value of the Bank's collateral; changes in
availability of loans originated by other financial institutions or the
Company's ability to purchase such loans on favorable terms; changes in
availability of single family servicing rights in the marketplace and the
Company's ability to purchase such assets on favorable terms; changes in the
levels of loan prepayments and the resulting effects on the value of the loan
and servicing portfolios and the related hedging instruments; the Company's
ability to make acquisitions of other depository institutions, their assets or
their liabilities on favorable terms to the Bank and the Company's successful
integration of any such acquisitions; changes in the ability of the Bank to pay
dividends on its common stock; changes in applicable statutes and government
regulations or their interpretations; the loss of senior management or operating
personnel; claims with respect to representations and warranties made by the
Company to purchasers and insurers of mortgage loans and to purchasers of MSRs;
claims of noncompliance by the Company with statutory and regulatory
requirements; and changes in the status of litigation to which the Company is a
party. See "Risk Factors" in the Company's registration statement filed with
respect to an offering of its common stock (Registration No. 333-19237).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal market risk exposure is to changes in market
interest rates. The Company's asset and liability management process is utilized
to manage the Company's interest rate risk through structuring the balance sheet
and off-balance-sheet portfolios to maximize net interest income while
maintaining an acceptable level of risk to changes in market interest rates. The
achievement of this goal requires a balance between profitability, liquidity,
and interest rate risk. See discussion in "Business - Asset and Liability
Management" in the Company's 1997 Annual Report on Form 10- K.
The following table represents an analysis of the sensitivity inherent in
the Company's net interest income and market value of portfolio equity ("MVE").
MVE is the market value of assets, less the market value of liabilities,
adjusted for the market value of MSRs and off-balance-sheet instruments. The
interest rate scenarios presented in the table include interest rates at June
30, 1998 projected forward for the twelve months ended June 30, 1999 and
adjusted by instantaneous parallel rate changes upward and downward of up to 200
basis points. Each rate scenario reflects unique prepayment and repricing
assumptions.
Since there are limitations inherent in any methodology used to estimate
the exposure to changes in market interest rates, this analysis is not intended
to be a forecast of the actual effect of a change in market interest rates on
the Company. The MVE is significantly impacted by the estimated effect of
prepayments on the value of single family loans, MBS and servicing as rates
decline. Further, this analysis is based on the Company's assets, liabilities,
MSRs and off- balance-sheet instruments at June 30, 1998 and does not
contemplate any actions the Company might undertake in response to changes in
market interest rates. This action could minimize the decrease in MVE in the
downward rate scenarios.
CHANGE IN NET INTEREST
INTEREST RATES INCOME MVE
-------------- ----------- ----
+200 (7.53)% (9.88)%
+100 (2.09) (2.33)
0 0.00 0.00
-100 0.01 (5.45)
-200 (0.20) (0.30)
17
BANK UNITED CORP.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 25, 1995, the Bank, the Parent Company (including its
predecessors), and Hyperion Partners L.P. (collectively, "Plaintiffs") filed
suit against the United States of America in the United States Court of Federal
Claims for breach of contract and other claims. The action arose because the
passage of Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") and the regulations adopted by the OTS pursuant to FIRREA deprived
Plaintiffs of their contractual rights.
In December 1988, the United States, through its agencies, entered into
certain agreements with the Plaintiffs that resulted in contractual obligations
owed to Plaintiffs. Plaintiffs contend that the obligations were undertaken to
induce, and did induce, the Company's acquisition of substantially all of the
assets and the secured deposit, and certain tax liabilities of United Savings
Association of Texas ("Old USAT"), an insolvent savings and loan association,
thereby relieving the Federal Savings and Loan Insurance Corporation ("FSLIC"),
an agency of the United States government ("Government"), of the immense costs
and burdens of taking over and managing or liquidating the institution.
The lawsuit alleges breaches of the United States' contractual obligations
(1) to abide by a capital forbearance, which would have allowed the Bank to
operate for ten years under negotiated capital levels lower than the levels
required by the then existing regulations or successor regulations, (2) to abide
by its commitment to allow the Bank to count $110 million of subordinated debt
as regulatory capital for all purposes, and (3) to abide by an accounting
forbearance, which would have allowed the Bank to count as capital for
regulatory purposes, and to amortize over a period of twenty-five years, the
$30.7 million difference between certain FSLIC payment obligations to the Bank
and the discounted present value of those future FSLIC payments. The lawsuit
seeks monetary relief for the breaches by the United States of its contractual
obligations to Plaintiffs and other relief.
The lawsuit was stayed from the outset by a judge of the Court of Federal
Claims pending the Supreme Court's decision in UNITED STATES V. WINSTAR CORP.,
an action by three other thrifts raising similar issues (the "WINSTAR cases").
Since the Supreme Court ruling, the Chief Judge of the Court of Federal Claims
has established a case management protocol for the more than 100 lawsuits on the
Court of Federal Claims docket, that, like Plaintiffs' case, involve issues
similar to those raised in the WINSTAR cases. Chief Judge Loren Smith of the
United States Court of Federal Claims transferred all WINSTAR-related cases to
his own docket and entered an Omnibus Case Management Order governing
proceedings in such cases, including the Company's case. Under the Omnibus Case
Management Order, Chief Judge Smith serves as the "Managing Judge" for all
WINSTAR-related cases and may assign other judges of the United States Court of
Federal Claims to resolve pre-trial discovery disputes and common legal issues
and to conduct trials. The damage trial of one of the three WINSTAR cases has
been completed, and the other two cases have been settled. Trials in the
remaining cases subject to the Omnibus Case Management Plan are scheduled to
begin in December, 1998. The Company's case is one of thirteen cases that "shall
be accorded priority in the scheduling" of the damages trials under the Omnibus
Case Management Order. On January 3, 1997, the court issued a scheduling order
scheduling the trial of the Company's case in the third month after the trials
of the "priority" cases begin.
In December 1996, Chief Judge Smith decided the motion IN LIMINE on damage
theories of Glendale Federal, one of four WINSTAR plaintiffs, and allowed
Glendale Federal to assert several other alternative damage theories against the
Government. While the Company expects Plaintiffs' claims for damages to exceed
$200 million, and that they could range as high as $1 billion or more, the
Company is unable to predict the outcome of Plaintiffs' suit against the United
States and the amount of judgment for damages, if any, that may be awarded.
Plaintiffs expect that the government may argue that no breach by the government
has occurred and that damages to the Plaintiffs, in any event, would approach
zero. The Company, on November 27, 1996, moved for partial summary judgment on
liability, and the Government has opposed the motion. The Company is pursuing an
early trial on damages. Uncertainties remain concerning the administration of
the Omnibus Case Management Order and the future
18
BANK UNITED CORP.
course of the Company's lawsuit pursuant to the Omnibus Case Management Order.
Accordingly, the Company cannot predict the timing of any resolution of its
claims, and now expects the trial of its case to commence during the second
quarter of fiscal 1999. The Company is unable to predict the outcome of its suit
against the United States and the amount of judgment for damages, if any, that
may be awarded. Consequently, no assurances can be given as to the results of
this suit.
The Company has agreed to participate in a non-binding alternative dispute
resolution process with the Government. The Company has not changed its
assessment of the merits of its claims and has agreed to participate in the
settlement process solely in an effort to resolve its claims on favorable terms
without the expense and uncertainty of a trial. There can be no assurance that a
settlement will be reached, and, if there is no settlement, the Company will
proceed to trial on the original trial schedule.
The Company and the Bank have entered into an agreement with Hyperion
Partners L.P. acknowledging the relative value, as among the parties, of their
claims in the pending litigation. The agreement confirms that the Company and
the Bank are entitled to receive 85% of the amount, if any, recovered as a
result of the settlement of or a judgment on such claims, and that Hyperion
Partners L.P. is entitled to receive 15% of such amount. The agreement was
approved by the disinterested directors of the Company. Plaintiffs will continue
to cooperate in good faith and will use their best efforts to maximize the total
amount, if any, that they may recover.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6A. EXHIBITS
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
*15.1 - Letter in Lieu of Consent of Deloitte & Touche
LLP, independent accountants
*27.1 - Financial Data Schedule, Quarter Ended June 30,
1998
* Filed herewith.
ITEM 6B. REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K during the nine months ended
June 30, 1998.
19
BANK UNITED CORP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANK UNITED CORP.
(Registrant)
Date AUGUST 12, 1998 /s/ BARRY C. BURKHOLDER
------------------------------------- ------------------------
Barry C. Burkholder
President
Chief Executive Officer
(Duly Authorized Officer)
Date AUGUST 12, 1998 /s/ ANTHONY J. NOCELLA
------------------------------------ ------------------------
Anthony J. Nocella
Vice Chairman
Chief Financial Officer
20