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 March 31, 1999.
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:
0-21017
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 2600
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 May 12, 1999 were as follows:
TITLE OF EACH CLASS NUMBER OF SHARES
---------------------- --------------------
Class A 28,462,326
Class B 3,241,320
BANK UNITED CORP.
INDEX
PAGE
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements................................. 1
Consolidated Statements of Financial Condition -
March 31, 1999 and September 30, 1998.......................... 1
Consolidated Statements of Operations -
For the Three and Six Months Ended March 31, 1999 and 1998..... 2
Consolidated Statements of Stockholders' Equity -
For the Six Months Ended March 31, 1999 and 1998............... 3
Consolidated Statements of Cash Flows -
For the Six Months Ended March 31, 1999 and 1998............... 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..... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 20
Item 2. Changes in Securities and Use of Proceeds...................... 20
Item 3. Defaults Upon Senior Securities................................ 20
Item 4. Submission of Matters to a Vote of Security Holders............ 20
Item 5. Other Information.............................................. 20
Item 6. Exhibits and Reports on Form 8-K............................... 21
Signatures............................................................. 22
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
MARCH 31, SEPTEMBER 30,
1999 1998
------------- -------------
(UNAUDITED)
ASSETS
Cash and cash equivalents .................................................... $ 237,251 $ 228,674
Securities purchased under agreements to resell and federal funds sold ....... 411,529 474,483
Securities and other investments
Held to maturity, at amortized cost (fair value of $14.3 million in
1999 and $2.4 million in 1998) ........................................ 14,375 2,412
Available for sale, at fair value ....................................... 109,998 88,938
Mortgage-backed securities
Held to maturity, at amortized cost (fair value of $367.8 million in
1999 and $438.7 million in 1998) ...................................... 372,614 443,886
Available for sale, at fair value ....................................... 796,344 488,172
Loans
Held for investment (net of allowances for credit losses of
$58.8 million in 1999 and $47.0 million in 1998) ...................... 9,892,786 8,566,712
Held for sale ........................................................... 1,714,822 2,237,032
Federal Home Loan Bank stock ................................................. 291,948 242,883
Mortgage servicing rights .................................................... 431,746 410,868
Deferred tax asset ........................................................... 96,948 113,581
Premises and equipment ....................................................... 76,180 59,889
Intangible assets ............................................................ 87,035 59,591
Real estate owned ............................................................ 29,069 18,790
Other assets ................................................................. 312,121 229,081
------------ ------------
TOTAL ASSETS ................................................................. $ 14,874,766 $ 13,664,992
============ ============
LIABILITIES, MINORITY INTEREST, AND STOCKHOLDERS'
EQUITY
LIABILITIES
Deposits ..................................................................... $ 6,605,548 $ 6,320,476
Federal Home Loan Bank advances .............................................. 5,744,594 4,783,294
Securities sold under agreements to repurchase and federal
funds purchased .......................................................... 576,007 811,742
Notes payable ................................................................ 368,715 219,720
Mortgage loan principal and interest due investors ........................... 248,636 207,626
Advances from borrowers for taxes and insurance ............................. 215,907 270,135
Other liabilities ............................................................ 206,883 182,087
------------ ------------
Total liabilities .................................................. 13,966,290 12,795,080
------------ ------------
MINORITY INTEREST
Preferred stock issued by consolidated subsidiary............................. 185,500 185,500
------------ ------------
STOCKHOLDERS' EQUITY
Common stock ................................................................. 316 316
Paid-in capital .............................................................. 129,343 129,343
Retained earnings ............................................................ 599,088 556,708
Accumulated other comprehensive income - unrealized gains (losses)
on securities available for sale, net of tax ............................. (4,708) (1,454)
Treasury stock, at cost ...................................................... (1,063) (501)
------------ ------------
722,976 684,412
------------ ------------
TOTAL LIABILITIES, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY ...................................................... $ 14,874,766 $ 13,664,992
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------------ -----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(UNAUDITED)
INTEREST INCOME
Short-term interest-earning assets ................................ $ 7,517 $ 6,293 $ 12,467 $ 11,849
Securities and other investments .................................. 1,791 2,140 3,418 4,279
Mortgage-backed securities ........................................ 17,694 22,595 35,661 46,980
Loans ............................................................. 209,585 189,007 419,350 373,135
Federal Home Loan Bank stock ...................................... 4,056 3,181 7,879 6,338
--------- --------- --------- ---------
Total interest income ................................... 240,643 223,216 478,775 442,581
--------- --------- --------- ---------
INTEREST EXPENSE
Deposits .......................................................... 70,694 74,367 145,070 142,005
Federal Home Loan Bank advances ................................... 74,945 58,553 145,475 118,757
Securities sold under agreements to repurchase and
federal funds purchased ........................................ 8,530 14,019 18,652 32,625
Notes payable ..................................................... 5,088 4,896 9,975 9,792
--------- --------- --------- ---------
Total interest expense .................................. 159,257 151,835 319,172 303,179
--------- --------- --------- ---------
Net interest income ..................................... 81,386 71,381 159,603 139,402
PROVISION FOR CREDIT LOSSES ....................................... 5,898 11,524 12,384 14,963
--------- --------- --------- ---------
Net interest income after provision for credit losses .... 75,488 59,857 147,219 124,439
--------- --------- --------- ---------
NON-INTEREST INCOME
Loan servicing, net of related amortization ....................... 12,875 4,121 27,598 13,459
Net gains (losses)
Sales of single family loans ................................. 4,662 2,715 13,175 2,541
Securities and mortgage-backed securities .................... 605 886 785 1,801
Other loans .................................................. (38) 376 1,027 376
Other ............................................................. 10,029 6,760 18,711 13,280
--------- --------- --------- ---------
Total non-interest income ............................... 28,133 14,858 61,296 31,457
--------- --------- --------- ---------
NON-INTEREST EXPENSE
Compensation and benefits ......................................... 24,892 20,915 47,125 39,625
Occupancy ......................................................... 5,219 4,071 9,947 7,749
Data processing ................................................... 4,626 3,927 8,977 7,750
Court of claims litigation ........................................ 1,316 450 4,077 900
Advertising and marketing ......................................... 1,363 1,671 3,553 4,545
Other ............................................................. 18,251 16,023 35,859 27,678
--------- --------- --------- ---------
Total non-interest expense ............................... 55,667 47,057 109,538 88,247
--------- --------- --------- ---------
Income before income taxes and minority interest ........ 47,954 27,658 98,977 67,649
INCOME TAX EXPENSE (BENEFIT) ...................................... 18,281 (23,207) 37,365 (8,209)
--------- --------- --------- ---------
Income before minority interest ......................... 29,673 50,865 61,612 75,858
MINORITY INTEREST
Subsidiary preferred stock dividends .............................. 4,563 4,563 9,126 9,126
--------- --------- --------- ---------
NET INCOME ............................... $ 25,110 $ 46,302 $ 52,486 $ 66,732
========= ========= ========= =========
EARNINGS PER COMMON SHARE
Basic .......................................................... $ 0.80 $ 1.47 $ 1.66 $ 2.11
Diluted ........................................................ 0.78 1.43 1.63 2.06
See accompanying Notes to Consolidated Financial Statements.
2
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
COMMON STOCK
-------------------------------------------------
CLASS A CLASS B
----------------------- ----------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT
SEPTEMBER 30, 1997 .................. 28,354,276 $ 284 3,241,320 $ 32 $ 129,286 $ 462,551
Net income ........................ -- -- -- -- -- 66,732
Change in unrealized gains (losses) -- -- -- -- -- --
----------
Total comprehensive income ..... -- -- -- -- -- 66,732
----------
Dividends declared: common
stock ($0.32 per share) ...... -- -- -- -- -- (10,111)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT
MARCH 31, 1998 ...................... 28,354,276 $ 284 3,241,320 $ 32 $ 129,286 $ 519,172
========== ========== ========== ========== ========== ==========
BALANCE AT
SEPTEMBER 30, 1998 .................. 28,355,776 $ 284 3,241,320 $ 32 $ 129,343 $ 556,708
Net income ........................ -- -- -- -- -- 52,486
Change in unrealized gains (losses) -- -- -- -- -- --
----------
Total comprehensive income ........ -- -- -- -- -- 52,486
Dividends declared: common
stock ($0.32 per share) ...... -- -- -- -- -- (10,106)
Stock repurchased ................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT
MARCH 31, 1999 ...................... 28,355,776 $ 284 3,241,320 $ 32 $ 129,343 $ 599,088
========== ========== ========== ========== ========== ==========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME -
UNREALIZED TREASURY STOCK TOTAL
GAINS ------------------------ STOCKHOLDERS'
(LOSSES) SHARES AMOUNT EQUITY
---------- ---------- ---------- -------------
BALANCE AT
SEPTEMBER 30, 1997 .................. $ 6,326 -- $ -- $ 598,479
Net income ........................ -- -- -- 66,732
Change in unrealized gains (losses) (2,079) -- -- (2,079)
---------- ----------
Total comprehensive income ..... (2,079) -- -- 64,653
---------- ----------
Dividends declared: common
stock ($0.32 per share) ...... -- -- -- (10,111)
---------- ---------- ---------- ----------
BALANCE AT
MARCH 31, 1998 ...................... $ 4,247 -- $ -- $ 653,021
========== ========== ========== ==========
BALANCE AT
SEPTEMBER 30, 1998 .................. $ (1,454) (14,200) $ (501) $ 684,412
Net income ........................ -- -- -- 52,486
Change in unrealized gains (losses) (3,254) -- -- (3,254)
---------- ----------
Total comprehensive income ........ (3,254) -- -- 49,232
---------- ----------
Dividends declared: common
stock ($0.32 per share) ...... -- -- -- (10,106)
Stock repurchased ................. -- (20,000) (562) (562)
---------- ---------- ---------- ----------
BALANCE AT
MARCH 31, 1999 ...................... $ (4,708) (34,200) $ (1,063) $ 722,976
========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
3
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE SIX MONTHS ENDED MARCH 31,
----------------------------------
1999 1998
----------- ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided (used) by operating activities ..................... $ 67,084 $ (682,212)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase price of acquisitions........................................ (45,000) (51,662)
Assets purchased in acquisitions...................................... (184,968) --
Net change in securities purchased under agreements to resell and
federal funds sold .............................................. 73,228 (260,294)
Fundings of loans held for investment ................................ (2,391,024) (1,736,554)
Proceeds from principal repayments and maturities of
Loans held for investment ....................................... 2,578,357 1,902,991
Securities held to maturity ..................................... 5,544 --
Securities available for sale ................................... 88,375 198,636
Mortgage-backed securities held to maturity ..................... 76,977 40,947
Mortgage-backed securities available for sale ................... 117,170 219,389
Proceeds from the sale of
Securities available for sale ................................... 198,043 257,698
Federal Home Loan Bank stock .................................... 11,000 43,395
Real estate owned acquired through foreclosure .................. 14,718 19,653
Purchases of
Loans held for investment ....................................... (1,021,884) (183,509)
Securities held to maturity ..................................... (4,226) --
Securities available for sale ................................... (84,814) (208,333)
Mortgage-backed securities held to maturity ..................... (1,613) --
Mortgage-backed securities available for sale ................... (427,690) (15,598)
Mortgage servicing rights ....................................... (32,093) (27,734)
Federal Home Loan Bank stock .................................... (52,187) (49,891)
Other changes in loans held for investment ............................. (28,380) (213,897)
Other changes in mortgage servicing rights ............................. (20,280) (11,254)
Net purchases of premises and equipment ................................ (20,521) (12,385)
----------- -----------
Net cash used by investing activities ........................... (1,151,268) (88,402)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits ................................................. 52,268 (250,989)
Proceeds from deposits purchased ....................................... 232,804 1,509,688
Proceeds from Federal Home Loan Bank advances .......................... 3,027,000 2,079,237
Repayment of Federal Home Loan Bank advances ........................... (2,065,700) (1,843,287)
Net change in securities sold under agreements to
repurchase and federal funds purchased ............................... (235,735) (640,170)
Net change in advances from borrowers for taxes and insurance .......... (54,228) 2,453
Payment of common stock dividends ...................................... (10,106) (10,111)
Stock repurchased ...................................................... (562) --
Net proceeds from issuance of subordinated debt ........................ 147,020 --
----------- -----------
Net cash provided by financing activities ....................... 1,092,761 846,821
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................. 8,577 76,207
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 228,674 121,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 237,251 $ 197,207
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest ............................................... $ 313,452 $ 304,391
NONCASH INVESTING ACTIVITIES
Real estate owned acquired through foreclosure ....................... 22,350 19,798
Securitization of loans .............................................. 202,219 232,190
Net transfer of loans (to) from held for investment .................. (360,198) 664,496
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 six months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the entire fiscal year or any
other interim period. The interim financial information should be read in
conjunction with the Consolidated Financial Statements and Notes included in the
Company's 1998 Annual Report on Form 10-K filed with the Securities and Exchange
Commission ("SEC").
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. NOTES PAYABLE
In January 1999, the Bank filed a registration statement with the Office of
Thrift Supervision ("OTS") to establish a $500 million medium-term note program.
The program provides for the issuance of notes on a continuous basis by the
Bank. In March 1999, in connection with this program the Bank issued $150
million of subordinated medium-term notes due in full in March 2009 with a
stated rate of 8% and an effective rate of 8.1%. Net proceeds from the issuance
of these notes will be used for general business purposes. The medium-term notes
are unsecured general obligations of the Bank. In a liquidation, holders of the
medium-term notes could receive, if anything, significantly less than holders of
deposit liabilities of the Bank.
4. EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing net income
available to common stockholders by the weighted-average number of common shares
outstanding during the period. Diluted EPS is computed by dividing net income
available to common stockholders by the weighted-average number of common shares
and potential dilutive common shares outstanding during the period. Potential
dilutive common shares are computed using the treasury stock method.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME
Net income applicable to common shares .............. $25,110 $46,302 $52,486 $66,732
======= ======= ======= =======
SHARES
Weighted-average common shares outstanding .......... 31,563 31,596 31,565 31,596
Potential dilutive common shares from options ....... 641 721 607 720
------- ------- ------- -------
Weighted-average common shares and potential dilutive
common shares .................................. 32,204 32,317 32,172 32,316
======= ======= ======= =======
BASIC EPS ........................................... $ 0.80 $ 1.47 $ 1.66 $ 2.11
DILUTED EPS ......................................... 0.78 1.43 1.63 2.06
5
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options to purchase 544,200 and 21,500 shares of common stock at
weighted-average prices of $44.76 and $52.55 outstanding at March 31, 1999 and
1998, respectively, were excluded from the computation of diluted EPS for the
three months ended March 31, 1999 and 1998 because the options' exercise price
was greater than the average market price of the common shares.
Options to purchase 700,271 and 21,500 shares of common stock at
weighted-average prices of $43.24 and $52.55 outstanding at March 31, 1999 and
1998, respectively, were excluded from the computation of diluted EPS for the
six months ended March 31, 1999 and 1998 because the options' exercise price was
greater than the average market price of the common shares.
5. 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
1998 Annual Report on Form 10-K for additional disclosures regarding these
options.
AT MARCH 31,
--------------------------------------------------------------------
1999 1998
-------------------------------- ---------------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- ------------------ ----------- ------------------
Outstanding at end of period ....... 2,159,470 $ 29.42 1,658,220 $ 24.77
Vested at end of period ............ 826,596 20.64 438,819 20.85
Exercisable at end of period ....... 32,500 32.16 26,500 30.87
6. ACQUISITIONS
In February 1999, the Company completed its acquisition of Midland American
Bank, a commercial bank operating five branches in Midland, Texas, with assets
of $282.5 million and deposits of $232.8 million. The accounts and results of
operations of Midland were included in the Consolidated Financial Statements
beginning February 12, 1999 as this acquisition was accounted for as a purchase.
The goodwill related to this acquisition of $28.4 million is being amortized on
a straight-line basis over 15 years.
In March 1999, the Company signed an agreement to purchase Texas Central
Bank, a commercial bank operating three branches in the Dallas area, with assets
of $116 million and deposits of $96 million. The acquisition is expected to
close in September, pending regulatory approval, and is expected to be accounted
for as a pooling of interests.
7. RECENT ACCOUNTING STANDARDS
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which requires public companies to report
certain information about their operating segments in their annual financial
statements and quarterly reports issued to stockholders. 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. Disclosures
under SFAS No. 131 are not required for interim financial statements in the
initial year of application.
As of October 1, 1998, the Company adopted SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, " which requires that any
mortgage-backed security ("MBS") retained after securitization of a mortgage
loan held for sale be classified based on the Company's intentions. Any retained
MBS that are committed to be sold before or during the securitization process
must be classified as trading.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," 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. Upon implementation of SFAS No. 133, hedging relationships may be
redesignated and securities
6
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
held to maturity may be transferred to available for sale or trading. This
statement is effective for fiscal years beginning after June 15, 1999. The
Company will adopt SFAS No. 133 on October 1, 1999 and is evaluating the impact,
if any, this statement may have on its future Consolidated Financial Statements.
8. SUBSEQUENT EVENTS
In April 1999, the Company filed a registration statement with the SEC to
establish a universal shelf for the issuance of up to $680 million in various
securities. The registration provides for the continuous issuance of preferred
stock, class A common stock, depository shares, and junior subordinated debt
securities of Bank United Corp., and trust preferred securities of a statutory
business-trust formed under Delaware law. The specific terms of any issue of the
securities will be determined and set forth in all applicable supplements in the
event the securities under the prospectus are offered for sale.
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 March 31, 1999, and the related condensed consolidated
statements of operations for the three-month and six-month periods ended March
31, 1999 and 1998 and the related condensed consolidated statements of
stockholders' equity and cash flows for the six-month periods ended March 31,
1999 and 1998. 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, 1998, 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 21,
1998, 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, 1998
is fairly stated, in all material respects, in relation to the consolidated
statement of financial condition from which it has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
April 27, 1999
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 SIX MONTHS ENDED MARCH 31, 1999
AND 1998
GENERAL
Net income was $52.5 million ($1.63 per diluted share) for the six months
ended March 31, 1999, compared to $66.7 million ($2.06 per diluted share) for
the six months ended March 31, 1998. The decrease is principally a result of two
positive income tax adjustments recorded during the six months ended March 31,
1998, along with an increase in non-interest expenses during the current period.
The effects of these items were partially offset by increases in net interest
income, loan servicing and other fees and net gains on mortgage banking sales of
single family loans.
NET INTEREST INCOME
Net interest income was $159.6 million for the six months ended March 31,
1999, compared to $139.4 million for the six months ended March 31, 1998,
resulting in a $20.2 million, or 14%, increase. This increase was due to a $1.7
billion, or 15%, increase in average interest-earning assets, as well as a
change in the composition of the assets and deposits.
AVERAGE BALANCE SHEET, INTEREST INCOME/EXPENSE, AND AVERAGE YIELD/RATE
FOR THE SIX MONTHS ENDED MARCH 31,
------------------------------------------------------------------------------------
1999 1998
----------------------------------------- ---------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE(1) BALANCE INTEREST RATE(1)
----------- ----------- --------- ----------- ----------- ---------
(dollars in thousands)
Interest-earning assets
Short-term interest-earning assets ...... $ 392,206 $ 12,467 6.29% $ 298,337 $ 11,849 7.86%
Securities and other investments ........ 130,949 3,418 5.23 120,846 4,279 7.10
Mortgage-backed securities .............. 1,118,765 35,661 6.38 1,395,908 46,980 6.73
Loans:
Single family .................... 6,864,405 240,212 7.00 6,716,003 250,833 7.47
Commercial ....................... 3,994,846 158,556 7.92 2,524,642 107,972 8.54
Consumer ......................... 521,944 20,582 7.91 304,925 14,330 9.42
----------- ----------- ------- ----------- ----------- -------
Total loans ................... 11,381,195 419,350 7.36 9,545,570 373,135 7.82
FHLB stock .................................. 281,789 7,879 5.61 211,949 6,338 6.00
----------- ----------- ------- ----------- ----------- -------
Total interest-earning assets .... 13,304,904 478,775 7.19 11,572,610 442,581 7.64
Non-interest-earning assets ................. 1,099,813 804,808
----------- -----------
Total assets ..................... $14,404,717 $12,377,418
=========== ===========
Interest-bearing liabilities
Deposits ................................ $ 6,356,479 145,070 4.58 $ 5,674,144 142,005 5.02
FHLB advances ........................... 5,537,986 145,475 5.20 4,084,028 118,757 5.75
Securities sold under agreements to
repurchase and federal funds purchased . 713,902 18,652 5.17 1,124,151 32,625 5.74
Notes payable ........................... 225,457 9,975 8.85 220,204 9,792 8.89
----------- ----------- ------- ----------- ----------- -------
Total interest-bearing
liabilities .................... 12,833,824 319,172 4.96 11,102,527 303,179 5.44
Non-interest-bearing liabilities,
minority interest, and stockholders'
equity ................................. 1,570,893 1,274,891
----------- -----------
Total liabilities, minority
interest, and stockholders'
equity ......................... $14,404,717 $12,377,418
=========== ===========
Net interest income/interest rate spread .... $ 159,603 2.23% $ 139,402 2.20%
=========== ======= =========== =======
Net yield on interest-earning assets ........ 2.41% 2.42%
======= =======
Ratio of average interest-earning assets to
average interest-bearing liabilities .... 1.04 1.04
======= =======
(1) Annualized.
9
BANK UNITED CORP.
The increase in average interest-earning assets came from growth in the
Company's higher yielding commercial and consumer loan portfolios. Average
commercial and consumer loans increased $1.7 billion, or 60%, during the six
months ended March 31, 1999, as compared to the six months ended March 31, 1998,
due to purchases and fundings. Average deposits increased $682.3 million, or
12%, during the six months ended March 31, 1999, as compared to the year ago
period. This increase was due to acquisitions during fiscal 1998 and the second
quarter of fiscal 1999, and due to an increase in the number of transaction
accounts. The increase in average deposits and Federal Home Loan Bank ("FHLB")
advances funded the growth in assets.
The net yield on interest-earning assets ("net yield") was 2.41% for the
six months ended March 31, 1999, compared to 2.42% for the six months ended
March 31, 1998. Declining asset yields resulting from continued prepayments of
higher yielding single family mortgage loans, as well as downward interest rate
resets in the commercial loan portfolio, were mitigated by lower funding costs,
resulting in a relatively stable net yield during the six months ended March 31,
1999, compared to the year ago period. The interest rate spread for the six
months ended March 31, 1999 of 2.23% increased slightly from 2.20% for the six
months ended March 31, 1998, due to the effects of commercial loan growth
outpacing the high level of mortgage loan prepayments during the six months
ended March 31, 1999.
PROVISION FOR CREDIT LOSSES
Bank management periodically evaluates each loan portfolio based on a
variety of factors in an effort to determine that the period end allowance for
credit loss levels are adequate to cover probable losses. The allowance for
credit losses totalled $58.8 million or .50% of total loans at March 31, 1999,
compared to $47.0 million or .44% at September 30, 1998, and $44.4 million or
.44% at March 31, 1998. The provision for credit losses totalled $12.4 million
for the six months ended March 31, 1999, down $2.6 million from $15.0 million
for the six months ended March 31, 1998.
ALLOWANCE FOR CREDIT LOSSES
SINGLE
FAMILY COMMERCIAL CONSUMER TOTAL
-------- ---------- ---------- ----------
(IN THOUSANDS)
Balance at September 30, 1997 ...... $ 24,538 $ 8,766 $ 5,870 $ 39,174
Provision ....................... (8,121) 19,842 3,242 14,963
Net charge-offs ................. (2,306) (181) (7,235) (9,722)
-------- -------- -------- --------
Balance at March 31, 1998 .......... $ 14,111 $ 28,427 $ 1,877 $ 44,415
======== ======== ======== ========
Balance at September 30, 1998 ...... $ 12,503 $ 32,269 $ 2,255 $ 47,027
Provision ....................... 1,989 10,060 335 12,384
Midland acquisition ............. -- 2,594 -- 2,594
Net charge-offs ................. (1,651) (974) (613) (3,238)
-------- -------- -------- --------
Balance at March 31, 1999 .......... $ 12,841 $ 43,949 $ 1,977 $ 58,767
======== ======== ======== ========
During the six months ended March 31, 1998, the Company determined that the
allowance for single family loans held for investment could be reduced based on
the portfolio's historical losses as well as a decrease in the outstanding
portfolio balance. Accordingly, $9.1 million of the single family allowance was
reversed through a negative provision, bringing the single family held for
investment allowance ratio to 31 basis points at March 31, 1998. In March 1999,
the Company determined that the allowance for single family loans held for
investment could be further reduced based on the portfolio's historical losses.
Accordingly, the single family held for investment allowance ratio was reduced
to 26 basis points at March 31, 1999. Excluding the negative provisions in both
periods, the increase in the single family provision during the current period
related to the increase in the related loan portfolio. The single family held
for investment loan portfolio increased from $4.6 billion at March 31, 1998, to
$5.0 billion at March 31, 1999.
10
BANK UNITED CORP.
During the six months ended March 31, 1998, the Company increased the
allowance for credit losses on its commercial loan portfolio due to growth in
that portfolio and the increased risks associated with this type of asset. At
March 31, 1998, the commercial loan portfolio totalled $2.9 billion or 29% of
the total loan portfolio, compared to $2.2 billion or 24% at September 30, 1997.
The commercial loan portfolio is comprised of residential and
nonresidential commercial loans. The nonresidential commercial loan portfolio
includes commercial real estate, healthcare, and small business loans. Default
rates and loss severity on nonresidential commercial loans are generally greater
than residential commercial loans. Accordingly, the Company increased the
commercial loss reserve associated with the nonresidential commercial loans.
This factor coupled with the increased balance in the total commercial loan
portfolio (both in absolute dollars as well as percentage composition of total
portfolio), resulted in an increase in the commercial loan allowance to
approximately one percent of total commercial loans or $28.4 million at March
31, 1998. The related provision for the six months ended March 31, 1998 was
$19.8 million.
At March 31, 1999, the commercial loan allowance totalled $44.0 million or
one percent of total commercial loans, with the related provision totalling
$10.0 million for the six months ended March 31, 1999. The provision for the six
months ended March 31, 1999, was a result of the continued growth in the
commercial loan portfolio. The total commercial loan portfolio increased to $4.5
billion at March 31, 1999, up $1 billion or 29% from $3.5 billion at September
30, 1998.
The consumer loan provision was higher during the six months ended March
31, 1998, primarily due to provisions recorded during that period related to the
consumer line of credit portfolio. The consumer line of credit portfolio
totalled $37.6 million and was sold during the second quarter of fiscal 1998.
Charge-offs of $4.9 million related to this sale were recorded in the six months
ended March 31, 1998.
NONPERFORMING ASSETS
MARCH 31, SEPTEMBER 30, MARCH 31,
1999 1998 1998
----------- --------------- ------------
(IN THOUSANDS)
Nonaccrual loans
Single family ......................... $ 56,025 $ 55,800 $ 59,534
Commercial ............................ 5,729 5,344 1,916
Consumer .............................. 1,354 688 730
-------- -------- --------
63,108 61,832 62,180
Premium (discounts) ...................... (148) 116 (13)
-------- -------- --------
Net nonaccrual loans .................. 62,960 61,948 62,167
REO, primarily single family properties .. 29,594 19,357 20,504
-------- -------- --------
Total nonperforming assets ......... $ 92,554 $ 81,305 $ 82,671
======== ======== ========
The increase in nonperforming assets from September 30, 1998 to March 31,
1999 was due to an increase in real estate owned ("REO"). REO increased due
primarily to the foreclosure of a purchased multi-family loan and the
foreclosure of a single family construction loan. The Company believes it will
recover its current investment in these properties at the time of sale.
11
BANK UNITED CORP.
SELECTED ASSET QUALITY RATIOS
AT OR FOR THE AT OR FOR AT OR FOR THE
SIX MONTHS ENDED THE YEAR ENDED SIX MONTHS ENDED
MARCH 31, 1999 SEPTEMBER 30, 1998 MARCH 31, 1998
------------------ -------------------- ------------------
Allowance for credit losses to net nonaccrual loans
Single family ............................................. 22.96% 22.36% 23.70%
Total ..................................................... 93.34 75.91 71.44
Allowance for credit losses to total loans ................... 0.50 0.44 0.44
Nonperforming assets to total assets ......................... 0.62 0.59 0.63
Net nonaccrual loans to total loans .......................... 0.54 0.57 0.62
Nonperforming assets to total loans and REO .................. 0.79 0.75 0.82
Net loan charge-offs to average loans - annualized
Single family ............................................. 0.05 0.06 0.07
Total ..................................................... 0.06 0.13 (1) 0.20 (1)
(1) 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 0.10% for the six months ended March 31,
1998 and 0.08% for fiscal 1998.
Impaired loans as defined in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," totalled $3.8 million at March 31, 1999, compared to $3.6
million at September 30, 1998. The increase in impaired loans was due to the
addition of one loan approximating $238,000. An allowance for credit losses of
$200,000 has been established for this loan. The remaining balance of $3.6
million at March 31, 1999, was comprised of two loans which were also impaired
at September 30, 1998. Both of these loans were purchased, modified by the
Company as troubled debt restructurings during fiscal 1995, and have been
performing according to their modified terms subsequent to restructuring. Both
of these loans will mature in fiscal 2000. No allowance for credit losses
determined in accordance with SFAS No. 114 was required on these two loans
because the values of the loans exceeded the recorded investments in the loans.
The change in the net recorded investment of these loans from September 30, 1998
to March 31, 1999 was de minimis.
NON-INTEREST INCOME
Non-interest income, which is comprised of loan servicing, community
banking, and commercial banking related fees, and net gains totalled $61.3
million for the six months ended March 31, 1999, compared to $31.5 million for
the six months ended March 31, 1998, for an increase of $29.8 million, or 95%.
Loan servicing fees increased $14.1 million, over 100%, during the six
months ended March 31, 1999, compared to the six months ended March 31, 1998.
This increase was due to a larger servicing portfolio and higher servicing fees
received per loan. On average, the portfolio of single family loans serviced for
others was $23.3 billion for the six months ended March 31, 1999, compared to
$18.9 billion for the six months ended March 31, 1998, for an increase of $4.4
billion, or 23%. The portfolio's growth came from purchases of servicing rights
and single family loan originations, partially offset by payoffs and
amortization. Loan servicing rights purchased during the first quarter of 1999
included a significant amount of adjustable rate government loans that yield a
higher servicing fee per loan, thereby contributing to the increased servicing
fees earned. The average annualized service fee per loan was 41.2 basis points
during the six months ended March 31, 1999, compared to 36.2 basis points for
the year ago period. During the six months ended March 31, 1998, the Company
recorded a $4.8 million valuation allowance. This allowance recognized the risks
associated with increased prepayments on the servicing portfolio's underlying
loans. No additional valuation allowance was required during the current period.
The Company services loans for its own portfolio ($4.5 billion at March 31,
1999) as well as others ($22.8 billion at March 31, 1999), bringing the total
servicing portfolio to $27.3 billion at March 31, 1999.
Mortgage banking sales of single family loans increased during the six
months ended March 31, 1999, compared to the year ago period, with volumes sold
during the current period totalling $2.1 billion, compared to $703.9 million
12
BANK UNITED CORP.
for the year ago period. Increased volumes sold, changes in the mix of product
sold and favorable market conditions contributed to higher gains during the
current period. Mortgage banking gains totalled $13.2 million for the six months
ended March 31, 1999, compared to $2.5 million for the year ago period, for an
increase of $10.7 million.
Other non-interest income, primarily community banking and commercial
banking fees, increased $5.4 million, or 41%, during the six months ended March
31, 1999, compared to the year ago period. This increase includes higher
checking account and other deposit related fees due to growth in the number of
checking accounts from 173,700 at March 31, 1998, to 188,000 at March 31, 1999.
Commissions earned on sales of annuities also contributed to this increase as a
result of a 19% increase in sales volume during the six months ended March 31,
1999.
NON-INTEREST EXPENSE
Non-interest expense was $109.5 million and $88.2 million for the six
months ended March 31, 1999 and 1998. Included in these amounts are litigation
expenses of $4.1 million and $900,000, respectively, related to the Company's
Court of Claims case against the federal government. See "Legal Proceedings".
Excluding these litigation expenses, non-interest expense for the six months
ended March 31, 1999 and 1998, was $105.5 million and $87.3 million, for an
increase of 21%. The expense increase during the current period was principally
the result of higher levels of loan activity and branch acquisitions. The number
of corporate branches (including wholesale loan origination, commercial banking
and community banking branches) increased 21%, while the number of employees
increased 32%, during the six months ended March 31, 1999, compared to the year
ago period. Despite the increase in non-interest expenses during the current
period, the efficiency ratio improved from 50.39% for the six months ended March
31, 1998, to 48.36% for the six months ended March 31, 1999.
Subsequent to March 31, 1999, the Company opened 48 new community banking
branches in Kroger Stores in the Dallas/Fort Worth and Houston markets.
Beginning in the third quarter of fiscal 1999, the Company's results of
operations will include the effect of this growth in the community banking
branch network.
INCOME TAX EXPENSE
Income tax expense increased during the six months ended March 31, 1999,
primarily due to two positive income tax adjustments totalling $33.5 million
recorded during the year ago period. During the six months 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, during the year ago period resulting from
the anticipated use of additional net operating losses against future taxable
income.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION FROM SEPTEMBER 30, 1998 TO
MARCH 31, 1999
GENERAL
Total assets increased during the six months ended March 31, 1999 by $1.2
billion, or 9%, to $14.9 billion. This increase occurred primarily in the loan
portfolio. FHLB advances were the principal source of funds used to finance this
growth as well as pay down reverse repurchase agreements and federal funds
purchased. During the second quarter of fiscal 1999, the Company completed its
acquisition of Midland American Bank. Five branches in Midland, Texas were
acquired in this transaction with assets totalling $282.5 million and deposits
totalling $232.8 million.
Securities and other investments increased $33.0 million during the six
months ended March 31, 1999. During this period, the Company purchased $131.0
million of securities, of which $41.9 million were acquired in the Midland
transaction, and $91.2 million matured. Additionally, $202.2 million of Small
Business Administration ("SBA") loans were securitized, of which $197.7 million
were sold.
MBS increased $236.9 million, or 25%, during the six months ended March 31,
1999. During this period, $435.3 million of MBSs were purchased, a large portion
of which were AAA and AA rated commercial MBSs. Principal repayments were $194.1
million for the six months ended March 31, 1999, compared to $236.1 million for
the six months ended March 31, 1998. The decrease in repayments is due to a
decline in the average size of the MBS portfolio during the current period.
13
BANK UNITED CORP.
ORIGINATION, PURCHASE, AND SALE OF LOANS
FOR THE SIX MONTHS ENDED MARCH 31,
----------------------------------
1999 1998
------------ ------------
(IN THOUSANDS)
Beginning balance, September 30 ....................... $ 10,803,744 $ 8,995,229
Fundings
Single family .................................. 2,399,057 1,959,019
Commercial ..................................... 2,040,570 1,219,141
Consumer ....................................... 142,620 180,030
Purchases
Single family .................................. 908,151 79,523
Commercial ..................................... 580,491 391,866
Consumer ....................................... 25,472 172
Net change in mortgage banker finance line of credit 80,091 204,750
Repayments
Single family .................................. (1,441,142) (1,118,326)
Commercial ..................................... (1,372,905) (874,817)
Consumer ....................................... (85,535) (59,800)
Securitized loans sold or transferred .............. (592,327) (520,162)
Sales .............................................. (1,813,393) (463,452)
Other .............................................. (67,286) (26,108)
------------ ------------
Ending balance, March 31 .............................. $ 11,607,608 $ 9,967,065
============ ============
LOAN PORTFOLIO
MARCH 31, SEPTEMBER 30, MARCH 31,
1999 1998 1998
----------- -------------- -----------
(IN THOUSANDS)
Single family
Held for investment ...... $ 4,978,688 $ 4,686,600 $ 4,556,130
Held for sale ............ 1,571,433 2,149,009 2,146,018
Commercial .................. 4,480,710 3,472,579 2,880,053
Consumer .................... 576,777 495,556 384,864
----------- ----------- -----------
$11,607,608 $10,803,744 $ 9,967,065
=========== =========== ===========
The commercial loan portfolio increased $1.0 billion, or 29%, since
September 1998. Commercial loan originations, which primarily related to single
family construction loans, totalled $2.0 billion for the six months ended March
31, 1999, compared to $1.2 billion for the year ago period. Purchases of
commercial loans were $580.5 million during the six months ended March 31, 1999,
of which $117.6 million were acquired in the Midland transaction. SBA loans
totalling $316.6 million were also purchased during the current period, a
portion of which were pooled into securities and sold. Higher principal
repayments during the six months ended March 31, 1999 compared to the year ago
period were due to the larger size of the portfolio during the current period.
All commercial loan categories increased during the six months ended March 31,
1999: single family construction ($284.2 million, or 37%), multi-family ($41.2
million, or 5%), commercial real estate ($248.9 million, or 37%), healthcare
($179.9 million, or 68%), mortgage banker finance line of credit ($80.0 million,
or 10%), small business and SBA ($141.1 million, or 118%), and energy and
agriculture ($32.8 million, or 100%).
Single family loan originations totalled $2.4 billion for the six months
ended March 31, 1999, compared to $2.0 billion for the year ago period. The
increase in originations, as well as higher levels of principal repayments, was
due to increased refinancing activity resulting from lower long-term market
interest rates during the current period. Refinancings approximated $1.9 billion
and $1.4 billion, or 79% and 72%, of total single family loan originations
during the six months ended March 31, 1999 and 1998. A large portion of these
originations were designated as held for sale, thereby contributing to the
increased sales volume during the six months ended March 31, 1999. Single family
loan purchases totalled $908.2 million for the six months ended March 31, 1999,
compared to $79.5 million for the six months ended March 31, 1998. The
volatility in the secondary mortgage market enabled the Company to obtain these
loans at favorable spreads.
14
BANK UNITED CORP.
MSRs increased $20.9 million during the six months ended March 31, 1999.
During this period, the Company purchased servicing rights associated with $1.3
billion in loans at a cost of $32.1 million. Additionally, $33.0 million of MSRs
were created during the current period through sales of originated single family
loans. In an effort to mitigate the risk that increased prepayments would cause
a decline in value on the MSR portfolio, the Company enters into interest rate
floor agreements. During the six months ended March 31, 1999, the Company reset
its hedge position by selling certain interest rate floor agreements and then
purchasing new agreements with different terms and maturities. The sale resulted
in a deferred gain of $24.2 million. At March 31, 1999, the Company was party to
$3.1 billion in interest rate floor agreements. See "Discussion of Results of
Operations for the Six Months Ended March 31, 1999 and 1998 - Non-Interest
Income."
The increase in intangible assets includes $28.4 million in goodwill
related to the Midland acquisition. Other assets increased primarily due to the
continued growth in the Company's servicing portfolio.
Total deposits increased $285.1 million during the six months ended March
31, 1999, due principally to $232.8 million of deposits acquired in the Midland
transaction and $147.5 million in brokered deposits purchased.
During the six months ended March 31, 1999, the Bank issued $150 million,
of 8%, subordinated medium-term notes. Proceeds were used for general business
purposes, which may include lending and investment activities, extensions of
credit and repayment of borrowings or other obligations.
LIQUIDITY
The Bank is required by OTS regulations to maintain a certain level of
liquidity. The Bank's average daily liquidity ratio for the quarter ended March
31, 1999 was 5.74%, compared to the requirement of 4.0%.
The primary sources of funds are deposits, FHLB advances, securities sold
under agreements to repurchase and federal funds purchased, principal repayments
on loans and MBS, and proceeds from the issuance of debt and stock. 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 March 31,
1999, the Bank had $139.5 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 1998 Annual Report on Form
10-K.
REGULATORY MATTERS
The Bank's capital levels at March 31, 1999 and September 30, 1998
qualified it as "well-capitalized", the highest of five tiers under applicable
regulatory definitions. The Bank's capital ratios at March 31, 1999 and
September 30, 1998, and the regulatory capital requirements were as follows:
MARCH 31, SEPTEMBER 30, CAPITAL ADEQUACY WELL-CAPITALIZED
1999 1998 REQUIREMENT REQUIREMENT
------------- --------------- ------------------- -----------------
Tangible capital.............. 6.73% 6.75% 1.50% -
Core/leverage capital......... 6.75 6.77 3.00 5.00%
Tier 1 capital................ 9.86 9.97 - 6.00
Total risk-based capital...... 11.92 10.48 8.00 10.00
YEAR 2000
The Company has completed repairing and testing all in-house developed
software. All planned vendor software upgrades are installed and are
substantially tested. Testing with third party service providers is
substantially complete. The previously estimated costs to complete the Year 2000
effort have increased by approximately $475,000, to $2.8
15
BANK UNITED CORP.
million, primarily due to unanticipated expenses associated with testing
third-party service providers. The Company continues to assess the risks from
other environmental factors, such as electrical power supply, and voice and data
transmission. Contingency plans are in process and are on schedule to be
completed by June 30, 1999. See "Management Discussion and Analysis -
Contingencies and Uncertainties - Year 2000" in the Company's 1998 Annual Report
on Form 10-K.
DISCUSSION OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND 1998
GENERAL
Net income was $25.1 million ($0.78 per diluted share) for the three months
ended March 31, 1999, compared to $46.3 million ($1.43 per diluted share) for
the three months ended March 31, 1998. The decrease is principally a result of
two positive income tax adjustments recorded during the three months ended March
31, 1998, along with an increase in non-interest expenses during the current
period. The effects of these items were partially offset by increases in net
interest income, loan servicing and other fees and net gains on mortgage banking
sales of single family loans, as well as a lower provision for credit losses.
NET INTEREST INCOME
Net interest income was $81.4 million for the three months ended March 31,
1999, compared to $71.4 million for the three months ended March 31, 1998,
resulting in a $10.0 million, or 14% increase. This increase was due to a $1.8
billion, or 15% increase in average interest-earning assets, as well as a change
in the composition of the assets and deposits.
AVERAGE BALANCE SHEET, INTEREST INCOME/EXPENSE, AND AVERAGE YIELD/RATE
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------
1999
-------------------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE (1)
----------- ----------- -----------
(dollars in thousands)
Interest-earning assets
Short-term interest-earning assets ............. $ 431,607 $ 7,517 6.97%
Securities and other investments ............... 144,507 1,791 5.03
Mortgage-backed securities ..................... 1,122,278 17,694 6.31
Loans:
Single family ........................... 6,838,812 116,543 6.82
Commercial .............................. 4,229,580 82,457 7.83
Consumer ................................ 541,273 10,585 7.93
----------- ----------- -------
Total loans .......................... 11,609,665 209,585 7.24
FHLB stock ......................................... 299,268 4,056 5.50
----------- ----------- -------
Total interest-earning assets ........... 13,607,325 240,643 7.10
Non-interest-earning assets ........................ 1,143,797
-----------
Total assets ............................ $14,751,122
===========
Interest-bearing liabilities
Deposits ....................................... $ 6,443,932 70,694 4.45
FHLB advances .................................. 5,872,116 74,945 5.11
Securities sold under agreements to repurchase
and federal funds purchased ................... 681,371 8,530 5.01
Notes payable .................................. 231,318 5,088 8.80
----------- ----------- -------
Total interest-bearing liabilities ...... 13,228,737 159,257 4.85
Non-interest-bearing liabilities, minority interest,
and stockholders' equity ...................... 1,522,385
-----------
Total liabilities, minority interest, and
stockholders' equity .................. $14,751,122
===========
Net interest income/interest rate spread ........... $ 81,386 2.25%
=========== =======
Net yield on interest-earning assets ............... 2.38%
=======
Ratio of average interest-earning assets to
average interest-bearing liabilities ........... 1.03
=======
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------
1998
---------------------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE (1)
------------ ------------- ------------
(dollars in thousands)
Interest-earning assets
Short-term interest-earning assets ............. $ 298,741 $ 6,293 8.43%
Securities and other investments ............... 122,614 2,140 7.08
Mortgage-backed securities ..................... 1,336,361 22,595 6.76
Loans:
Single family ........................... 6,791,490 123,978 7.30
Commercial .............................. 2,735,125 58,019 8.51
Consumer ................................ 305,076 7,010 9.32
----------- ----------- -------
Total loans .......................... 9,831,691 189,007 7.70
FHLB stock ......................................... 214,899 3,181 6.00
----------- ----------- -------
Total interest-earning assets ........... 11,804,306 223,216 7.57
Non-interest-earning assets ........................ 904,027
-----------
Total assets ............................ $12,708,333
===========
Interest-bearing liabilities
Deposits ....................................... $ 6,110,899 74,367 4.94
FHLB advances .................................. 4,068,040 58,553 5.76
Securities sold under agreements to repurchase
and federal funds purchased ................... 989,259 14,019 5.67
Notes payable .................................. 220,207 4,896 8.89
----------- ----------- -------
Total interest-bearing liabilities ...... 11,388,405 151,835 5.37
Non-interest-bearing liabilities, minority interest,
and stockholders' equity ...................... 1,319,928
-----------
Total liabilities, minority interest, and
stockholders' equity ..................... $12,708,333
===========
Net interest income/interest rate spread ........... $ 71,381 2.20%
=========== =======
Net yield on interest-earning assets ............... 2.39%
=======
Ratio of average interest-earning assets to
average interest-bearing liabilities ........... 1.04
=======
(1) Annualized.
16
BANK UNITED CORP.
The increase in average interest-earning assets came from growth in the
Company's higher yielding commercial and consumer loan portfolios. Average
commercial and consumer loans increased $1.7 billion, or 57%, during the three
months ended March 31, 1999, compared to the three months ended March 31, 1998,
due to purchases and fundings. This growth was funded primarily with FHLB
advances.
The net yield was 2.38% for the three months ended March 31, 1999, compared
to 2.39% for the three months ended March 31, 1998. Declining asset yields
resulting from continued prepayments of higher yielding single family mortgage
loans, as well as downward interest rate resets in the commercial loan
portfolio, were mitigated by lower funding costs, resulting in a relatively
stable net yield during the three months ended March 31, 1999, compared to the
year ago period. The interest rate spread for the three months ended March 31,
1999 of 2.25% increased from 2.20% for the three months ended March 31, 1998,
due to the effects of commercial loan growth outpacing the high level of
mortgage loan prepayments during the three months ended March 31, 1999.
PROVISION FOR CREDIT LOSSES
The provision for credit losses totalled $5.9 million for the three months
ended March 31, 1999, down $5.6 million from $11.5 million for the three months
ended March 31, 1998. The decrease in the commercial loan provision and increase
in the single family loan provision was primarily due to a reassessment of these
allowances during the quarter ended March 31, 1998. The consumer provision was
higher during the quarter ended March 31, 1998, primarily due to provisions
recorded during that period related to the consumer line of credit portfolio.
See "Discussion of Results of Operations for the Six Months Ended March 31, 1999
and 1998 - Provision for Credit Losses".
ALLOWANCE FOR CREDIT LOSSES
SINGLE
FAMILY COMMERCIAL CONSUMER TOTAL
-------- ------------ ------------ ----------
(in thousands)
Balance at December 31, 1997 ........ $ 23,321 $ 10,123 $ 1,765 $ 35,209
Provision ........................ (8,005) 18,485 1,044 11,524
Net charge-offs .................. (1,205) (181) (932) (2,318)
-------- -------- -------- --------
Balance at March 31, 1998 ........... $ 14,111 $ 28,427 $ 1,877 $ 44,415
======== ======== ======== ========
Balance at December 31, 1998 ........ $ 13,186 $ 37,067 $ 1,964 $ 52,217
Provision ........................ 671 4,963 264 5,898
Midland acquisition .............. -- 2,594 -- 2,594
Net charge-offs .................. (1,016) (675) (251) (1,942)
-------- -------- -------- --------
Balance at March 31, 1999 ........... $ 12,841 $ 43,949 $ 1,977 $ 58,767
======== ======== ======== ========
NON-INTEREST INCOME
Non-interest income increased $13.3 million, or 89%, during the three
months ended March 31, 1999, compared to the three months ended March 31, 1998.
Loan servicing fees increased $8.8 million due to a larger portfolio of
single family loans serviced for others, which averaged $23.0 billion for the
three months ended March 31, 1999, compared to $19.7 billion for the three
months ended March 31, 1998, for an increase of $3.3 billion, or 17%. The
average service fee per loan also increased to 42.2 basis points for the three
months ended March 31, 1999, compared to 34.6 basis points for the year ago
period. Increased loan servicing fees in the current period were also the result
of a $4.8 million valuation allowance recorded during the three months ended
March 31, 1998. See "Discussion of Results of Operations for the Six Months
Ended March 31, 1999 and 1998 - Non-Interest Income".
Mortgage banking gains on sales of single family loans increased $1.9
million during the current period primarily due to an increase in volume sold
($804.2 million for the three months ended March 31, 1999, compared to $575.0
million for the three months ended March 31, 1998).
17
BANK UNITED CORP.
Other non-interest income, primarily community banking and commercial
banking fees, increased $3.3 million, or 48%, during the three months ended
March 31, 1999, compared to the three months ended March 31, 1998. This increase
includes higher checking account and other deposit related fees due to growth in
the number of checking accounts and increased commissions earned on sales of
annuities due to a 28% increase in sales volume.
NON-INTEREST EXPENSE
Non-interest expense was $55.7 million and $47.1 million for the three
months ended March 31, 1999 and 1998. Excluding Court of Claims litigation
expenses of $1.3 million and $450,000 for the same periods, non-interest expense
increased 17%. This increase primarily relates to the Company's expanding
operations in terms of offices and growth in staff. See "Discussion of Results
of Operations for the Six Months Ended March 31, 1999 and 1998 - Non-Interest
Expense".
INCOME TAX EXPENSE
See "Discussion of Results of Operations for the Six Months Ended March 31,
1999 and 1998 - Income Tax Expense".
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:
INTEREST RATES AND ECONOMY
o changes in interest rates and economic conditions;
o 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;
o changes in local economic and business conditions adversely affecting the
Company's borrowers and their ability to repay their loans according to
their terms or impacting the value of the related collateral;
o changes in local economic and business conditions adversely affecting the
Company's customers other than borrowers and their ability to transact
profitable business with the Company;
COMPETITION AND PRODUCT AVAILABILITY
o increased competition for deposits and loans adversely affecting rates and
terms;
o changes in availability of loans originated by other financial institutions
or the Company's ability to purchase such loans on favorable terms;
o changes in availability of single family servicing rights in the marketplace
and the Company's ability to purchase such assets on favorable terms;
o the Company's ability to make acquisitions of other depository institutions,
their assets or their liabilities on terms favorable to the Company, and the
Company's successful integration of any such acquisitions;
CHANGE IN COMPANY'S ASSET MIX
o increased credit risk in the Company's assets and increased operating risk
caused by an increase in commercial and consumer loans and a decrease in
single family mortgage loans as a percentage of the total loan portfolio;
LIQUIDITY AND CAPITAL
o changes in availability of funds increasing costs or reducing liquidity;
o changes in the ability of the Company to pay dividends on its common stock;
o increased asset levels and changes in the composition of assets and the
resulting impact on the Bank's capital levels and regulatory capital ratios;
SYSTEMS
o the Company's ability to acquire, operate, and maintain cost effective and
efficient systems;
o the Company's ability to complete its project to assess and resolve any Year
2000 problems on time;
18
BANK UNITED CORP.
PERSONNEL
o the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation levels;
REGULATORY, COMPLIANCE, AND LEGAL
o changes in applicable statutes and government regulations or their
interpretations;
o claims of noncompliance by the Company with statutory and regulatory
requirements;
o claims with respect to representations and warranties made by the Company to
purchasers and insurers of mortgage loans and to purchasers of MSRs;
o changes in the status of litigation to which the Company is a party.
For further information regarding these factors, see "Risk Factors" in the
prospectus dated April 8, 1999, relating to the universal shelf for the issuance
of up to $680 million in various securities filed with the SEC (File No. 333-
75937).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's principal market risk exposure is to changes in
interest rates. The Company is most affected by changes in U. S. Treasury rates
and London InterBank Offered Rates ("LIBOR") because many of the Company's
financial instruments reprice based on these indices. Interest rate risk arises
primarily from differences in the duration or repricing of the Company's assets,
liabilities, and financial instruments with off-balance-sheet risk. The
Company's management actively monitors and manages its interest rate risk
through structuring the balance sheet and off-balance-sheet portfolios by
seeking 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 - Market Risk Analysis" in the Company's 1998 Annual
Report on Form 10-K.
The following table represents an analysis of the sensitivity inherent in
the Company's net interest income over a 12 month period and market value of
portfolio equity arising from hypothetical changes in market interest rates
("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 March 31, 1999 and September 30, 1998 and adjusted by instantaneous
parallel rate changes upward and downward of up to 200 basis points. Each rate
scenario has unique prepayment, repricing, and reinvestment assumptions.
Prepayments are assumed to increase as rates decrease and to slow as rates
increase.
MARCH 31, 1999 SEPTEMBER 30, 1998
----------------------------- --------------------------
CHANGE IN NET INTEREST NET INTEREST
INTEREST RATES INCOME MVE INCOME MVE
---------------- -------------- ---------- -------------- --------
+200 0.86% (8.96)% (2.92)% (4.63)%
+100 1.15 (2.04) (0.48) (2.63)
0 0.00 0.00 0.00 0.00
-100 (2.53) 0.56 1.13 (3.86)
-200 (4.65) 6.09 2.39 1.68
19
BANK UNITED CORP.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 1995, the Bank, the Parent Company, and Hyperion Partners L.P.
(collectively, the "Plaintiffs") filed suit (the "Forbearance Lawsuit") 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 March 1999, United States Court of Federal Claims granted the Company's
motion for summary judgment on the issue of liability and held that the United
States was liable for claims in the case filed by the plaintiffs relating to the
government's breach of promises made when the Bank acquired a failed savings and
loan association in late 1988. The Company's case will now proceed to trial on
the amount of damages. The trial is scheduled to begin on September 13, 1999.
The Company continues to conduct discovery and to prepare for trial. See "Legal
Proceedings" in the Company's Annual Report on Form 10-K.
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
The annual meeting of stockholders of the Parent Company was held on March
18, 1999, for the purpose of voting on the election of directors. Proxies for
the meeting were solicited pursuant to Section 14(a) of the Securities Exchange
Act of 1934, and there was no solicitation in opposition to management's
solicitation.
All of the nominees for director listed in the proxy statement were elected
with the following vote:
NOMINEE SHARES FOR SHARES WITHHELD
Paul M. Horvitz 24,616,316 399,646
Scott A. Shay 24,162,016 453,946
Patricia A. Sloan 24,572,348 234,046
Michael S. Stevens 24,216,765 399,197
The names of the directors whose terms of office continued after the
meeting are as follows:
Lewis S. Ranieri, Chairman
Barry C. Burkholder
Lawrence Chimerine
David M. Golush
Alan E. Master
Anthony J. Nocella
Salvatore A. Ranieri
Kendrick R. Wilson III
ITEM 5. OTHER INFORMATION
Not applicable.
20
BANK UNITED CORP.
ITEM 6A. EXHIBITS
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
- ----------- -------------------------------
*10.29a - Amendment to the Employment Agreement between the Company and
Anthony J. Nocella
*15.1 - Letter in Lieu of Consent of Deloitte & Touche LLP, independent
accountants
*27.1 - Financial Data Schedule, Quarter Ended March 31, 1999
* Filed herewith.
ITEM 6B. REPORTS ON FORM 8-K
On March 24, 1999, the Company filed a report on Form 8-K, including a
press release under Item 7 of Form 8-K. This press release announced that the
Court of Federal Claims had granted the Company's motion for summary judgment on
liability in the Forbearance Lawsuit. (See "Legal Proceedings").
On April 2, 1999, the Company filed a report on Form 8-K, reporting under
Item 5 of Form 8-K, which disclosed that the trial date in the Forbearance
Lawsuit (see "Legal Proceedings") had been set for September 13, 1999.
21
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 MAY 12, 1999 /s/ BARRY C. BURKHOLDER
Barry C. Burkholder
President
Chief Executive Officer
(Duly Authorized Officer)
Date MAY 12, 1999 /s/ ANTHONY J. NOCELLA
Anthony J. Nocella
Vice Chairman
Chief Financial Officer
22