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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 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 (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 543-6500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
PREMIUM INCOME EQUITY SECURITIES
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting common equity held by
nonaffiliates of the registrant, as of December 20, 1999, was $829,794,098.
The number of shares outstanding as of the registrant's $0.01 par value
common stock, as of December 20, 1999, was 32,460,926.
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K is
incorporated by reference to portions of the Registrant's definitive Proxy
Statement to be filed in January 2000.
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BANK UNITED CORP.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.................................................... 1
General................................................ 1
Commercial Banking..................................... 1
Community Banking...................................... 2
Mortgage Servicing..................................... 4
Mortgage Banking....................................... 5
Investment Portfolio................................... 6
Competition............................................ 7
Subsidiaries........................................... 7
Personnel.............................................. 8
Regulation............................................. 8
Taxation............................................... 18
ITEM 2. PROPERTIES.................................................. 20
ITEM 3. LEGAL PROCEEDINGS........................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 22
ITEM 6. SELECTED FINANCIAL DATA..................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 27
Discussion of Results of Operations.................... 27
Discussion of Changes in Financial Condition........... 33
Asset Quality.......................................... 39
Capital Resources and Liquidity........................ 44
Contingencies and Uncertainties........................ 45
Recent Accounting Standards............................ 46
Forward-Looking Information............................ 46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 51
(i)
PAGE
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 51
ITEM 11. EXECUTIVE COMPENSATION...................................... 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 52
SIGNATURES 56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 58
(ii)
PART I
ITEM 1. BUSINESS
GENERAL
Bank United Corp. (the "Parent Company") is the holding company of Bank
United (the "Bank"), a federally chartered savings bank. The Bank's deposits
are insured by the Federal Deposit Insurance Corporation ("FDIC"). The
Consolidated Financial Statements included herein include the accounts of the
Parent Company, the Bank, and subsidiaries of both the Parent Company and the
Bank (collectively known as the "Company").
Bank United Corp. is the largest publicly traded depository institution
headquartered in Texas, with $16.2 billion in assets, $7.5 billion in deposits,
and $753.4 million in stockholders' equity at September 30, 1999. The Company
provides consumers and businesses in Texas and selected markets throughout the
United States with a broad array of financial services. The Company serves over
300,000 Texas consumers and small businesses through a 150-branch network, has
23 Small Business Association ("SBA") lending offices in 16 states, is a
national middle market commercial bank with 20 regional offices in 16 states,
originates wholesale mortgage loans through 10 offices in nine states, and
operates a national mortgage servicing business serving 325,000 customers and an
investment portfolio business. The Company's address is 3200 Southwest Freeway,
Houston, Texas 77027, and its telephone number is (713) 543-6500. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Discussion of Results of Operations -- Segments" and Note 20 to
the Consolidated Financial Statements for summarized financial information by
business segment.
Historically, the Company's operating strategy emphasized traditional
single family mortgage lending and deposit gathering activities. Since the
Company's August 1996 initial public offering, management has pursued a strategy
designed to transform its loan portfolio from a high concentration of single
family mortgages to a more balanced portfolio of commercial, consumer and single
family mortgage loans, increase its non-interest revenues, and lower its cost of
funds. To facilitate the transformation, the Company sold certain of its single
family mortgage origination offices in 1997, expanded its commercial and
consumer lending lines, grew its mortgage servicing portfolio, and focused on
obtaining lower cost transaction deposit accounts.
COMMERCIAL BANKING
Commercial Banking provides credit and a variety of cash management and
other services primarily to mortgage bankers, builders, developers, and
healthcare operators. Other products and industry specialties of Commercial
Banking include commercial syndications, SBA securitizations, and other
commercial and industrial loan products. Business is solicited in Texas and in
targeted markets throughout the United States. At September 30, 1999, the
Commercial Banking network consisted of 20 regional banking offices in 16
states. During fiscal 1999, the commercial loan portfolio increased by $1.9
billion or 54% ending the year with $5.4 billion in outstanding loans. A
majority of the commercial loans outstanding at September 30, 1999, was managed
and serviced by Commercial Banking. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Discussion of Changes in
Financial Condition -- Loan Portfolio."
RESIDENTIAL CONSTRUCTION LENDING
Commercial Banking provides financing to builders for the construction of
single family properties, including loans for the acquisition and development of
improved residential lots. These loans are made on a commitment term that
generally is for a period of one to three years. At September 30, 1999, this
business line had $1.2 billion of loans outstanding and $853.5 million in
unfunded commitments.
MORTGAGE BANKER FINANCE
Commercial Banking provides small- and medium-sized mortgage companies with
credit facilities, including secured warehouse lines of credit, securities
purchased under agreements to resell ("repurchase agreements") and working
capital credit lines. At September 30, 1999, this business line had $944.2
million of loans outstanding, $130.3 million of repurchase agreements
outstanding, and $808.6 million in unfunded commitments. At September 30, 1999,
this business line's outstanding loans included $17.8 million of term loans
secured by mortgage servicing rights ("MSRs"). Commercial Banking also offers
commercial banking services, including
1
cash management, document custody, and deposit services to its mortgage banking
customers. Deposits related to mortgage banker finance activities totalled $1.1
billion at September 30, 1999, and had an average cost of funds to the Company
of 4.81% for fiscal 1999.
COMMERCIAL REAL ESTATE LENDING
Commercial Banking is engaged in commercial real estate lending for
specific products, emphasizing permanent mortgages and construction loans on
income producing properties, such as retail shopping centers. At September 30,
1999, this business line had $976.3 million of loans outstanding ($860.6 million
in permanent loans and $115.6 million in construction loans) and $190.1 million
of unfunded commitments.
MULTI-FAMILY LENDING
Commercial Banking provides financing for operating multi-family
properties, real estate investment trusts, and selected construction,
acquisition, and rehabilitation projects. These loans are solicited directly in
Texas and in targeted markets throughout the United States through regional
offices and preapproved multi-family mortgage banking correspondents and
brokers. At September 30, 1999, this business line had $1.1 billion of loans
outstanding ($822.3 million in permanent loans and $228.0 million in
construction loans) and $240.1 million of unfunded commitments.
HEALTHCARE LENDING
In fiscal 1996, Commercial Banking began funding construction and permanent
loans to experienced operators of senior housing and long-term care facilities.
In addition, Commercial Banking makes construction and permanent loans for
medical offices. At September 30, 1999, this business line had $607.8 million of
loans outstanding ($328.5 million in permanent loans and $279.2 million in
construction loans) and $260.2 million in unfunded commitments. At September 30,
1999, $12.2 million of healthcare loans were underwritten with the Medicare
prospective pay system as their primary source of debt service.
COMMUNITY BANKING
Community Banking's principal activities include deposit gathering,
consumer lending, small business and SBA banking, and investment product sales.
Community Banking operates a 150-branch network, a 24-hour telephone banking
center, a 152-unit ATM network, and 23 SBA lending offices in 16 states, which
together serve as the platform for the Company's consumer and small business
banking activities. The Community Banking branch network includes 62 branches in
the greater Houston area, 79 branches in the Dallas / Ft. Worth metropolitan
area, five branches in Midland, and two branches each in Austin and San Antonio.
The Community Banking branch network includes 68 7-Day Banking Centers located
in Kroger supermarkets. Through this branch network, the Company attracts a
majority of its deposits and at September 30, 1999 maintained approximately
469,000 deposit accounts, including certificates of deposit ("CDs") for over
300,000 households and businesses. The Company also has online banking and
online bill payment services available through its website. Over the past few
years, the Company's management has pursued a strategy designed to increase the
level of lower cost transaction and commercial deposit accounts. The number of
consumer and commercial checking accounts increased to approximately 233,000 at
September 30, 1999, up by 30% from 179,000 at September 30, 1998.
DEPOSIT GATHERING
Community Banking offers a variety of traditional deposit products and
services, including checking and savings accounts, money market accounts, CDs,
and deposit products and services tailored specifically to consumer and small
business needs. Community Banking's strategy is to become the primary financial
services provider to its customers by emphasizing high levels of customer
service and innovative products. At September 30, 1999, Community Banking
maintained nearly 469,000 deposit accounts with $5.6 billion in deposits.
Currently, the principal methods used by Community Banking to attract and
retain deposit accounts include offering competitive interest rates, having
branch locations in major Texas markets, and offering a variety of services for
the Company's customers. The Company uses traditional marketing methods to
attract new customers and savings deposits, including newspaper, radio, and
television advertising. Deposit products are
2
tailored to meet the needs of the Company's consumer and small business banking
customers. The following table illustrates the levels of deposits held by the
Company's Community Banking network by region at September 30, 1999.
AVERAGE
DEPOSITS
NUMBER OF DEPOSITS PER
LOCATION BRANCHES OUTSTANDING BRANCH
- ------------------------------------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
Houston area......................... 62 $ 2,953,168 $ 47,632
Dallas/Ft. Worth Metroplex........... 79 2,228,964 28,215
Other................................ 9 427,215 47,468
--- ------------ ---------
Total........................... 150 $ 5,609,347 $ 37,396
=== ============ =========
The Company expanded from 83 branches at September 30, 1998 to the current
level of 150 branches primarily by opening 48 branches located in Kroger
supermarket stores in the Houston and Dallas/Ft. Worth markets in mid-April.
These 7-Day Banking Centers, along with others added in newly opened Kroger
stores in the same markets, brought the total number of 7-Day Banking Centers to
68 at September 30, 1999.
The Company also obtains deposits through acquisitions. In August 1999, the
Company acquired Texas Central Bancshares, Inc. ("Texas Central"), a
commercial bank in Dallas, Texas. Texas Central had assets of $113.1 million,
deposits of $92.9 million at acquisition, and operated three branches located in
Dallas, Park Cities, and Plano. In February 1999, the Company acquired Midland
American Bank ("Midland"), a commercial bank operating five branches in
Midland, Texas, with assets of $282.5 million and deposits of $232.8 million at
acquisition. In January 1998, the Company purchased 18 branches and related
deposits from Guardian Savings and Loan Association. The branches, six in the
Houston area and 12 in the Dallas/Ft. Worth Metroplex, had combined deposits of
$1.44 billion at acquisition. In December 1997, the Company purchased three
branches in the Dallas area, having $66 million in deposits at acquisition, from
California Federal Savings Bank, FSB. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Discussion of Changes in
Financial Condition -- Deposits."
SMALL BUSINESS BANKING
During fiscal 1999, Community Banking expanded its SBA offices to 23
locations in 16 states, from two offices in one state at September 30, 1998, and
became the number one SBA lender in Texas and the number four SBA lender in the
nation. From time to time Community Banking may take advantage of market
conditions and sell a portion or all of its SBA loan portfolio.
Community Banking's small business strategy is focused on offering loan
products and services tailored to most small business needs, with highly
responsive credit decision-making. It provides a broad range of credit services
to its small business customers, including lines of credit, working capital
loans, equipment loans, owner-occupied real estate loans, SBA loans and cash and
treasury management services. These loans are offered with both fixed and
adjustable-rates on a term basis and adjustable-rates on a revolving basis with
maturities of up to 10 years for term loans and one year for revolving loans. At
September 30, 1999, Community Banking had 1,667 small business loans outstanding
totalling $160.7 million, $37.9 million in unfunded commitments, and $211
million in pending applications.
CONSUMER LENDING
Community Banking offers a variety of consumer loan products, including
home equity loans, home improvement loans, purchase-money second lien loans, and
automobile loans. Community Banking also provides a specialty lending program in
which a preferred rate and faster service is offered to home improvement loan
prospects referred to the Company by contractors. At September 30, 1999,
consumer loans outstanding totalled $663.3 million, up by $158.9 million with
$42.0 million in unfunded commitments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Discussion of
Changes in Financial Condition -- Loan Portfolio."
3
RETAIL MORTGAGE ORIGINATIONS
In fiscal 1997, the Company began offering mortgages through its Community
Banking branch network. The types of loans offered through the community banking
branch network are primarily limited to 15-and 30-year fixed-rate mortgage
loans. Community Banking has developed an abbreviated initial application, a
promised response within two days of application, and provides a discount on the
rate if the customer has the payment automatically withdrawn from a Bank United
checking account.
INVESTMENT PRODUCT SALES
Bank United Securities Corp., a subsidiary of the Bank, markets investment
products to the Company's consumer customer base. A broad range of investment
products, including stocks, bonds, mutual funds, annuities, securities, and
certain other insurance policies is offered by commissioned Series 7 and Group I
licensed, registered representatives. As of September 30, 1999, there were 44
such representatives operating out of certain offices located in the Community
Banking branches. Each representative will typically be responsible for
investment product sales at two to three Community Banking branches.
MORTGAGE SERVICING
The Company operates one of the 25 largest residential mortgage loan
servicing businesses in the United States. This business generates substantial
fee income for the Company. The servicing portfolio includes a large amount of
Government National Mortgage Association ("GNMA") adjustable-rate mortgage
loans and private-label securities which usually generate higher service fee
rates than traditional Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") fixed-rate mortgage loan
servicing.
Mortgage servicing activities include collecting and applying loan payments
from borrowers, remitting payments to investors, collecting funds for and paying
mortgage-related expenses, inspecting the collateral as required, collecting
from and, if necessary, foreclosing on delinquent borrowers, disposing of
properties received in foreclosures, and generally administering the loans.
Mortgage servicing operations are technology and process management intensive.
The Company views itself as competitively positioned to service loans in an
efficient and cost effective manner relative to its peers.
At September 30, 1999, the Company's single family mortgage servicing
portfolio totalled $30.9 billion or 325,000 loans, including $4.8 billion of
loans serviced for the Company's own account. Escrow funds held on behalf of
investors totalled $115.2 million at September 30, 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Discussion of Changes in Financial Condition -- Mortgage Servicing
Rights," and Note 7 to the Consolidated Financial Statements. The following
tables show the composition of the servicing portfolio by type and by owner.
AT SEPTEMBER 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
BY TYPE
Conventional..................... $ 17,697,787 $ 18,125,325 $ 19,034,564
Government....................... 13,195,206 9,809,975 5,483,832
------------ ------------ ------------
$ 30,892,993 $ 27,935,300 $ 24,518,396
============ ============ ============
BY OWNER
Others........................... $ 26,058,482 $ 23,491,960 $ 20,521,294
Company.......................... 4,834,511 4,443,340 3,997,102
------------ ------------ ------------
$ 30,892,993 $ 27,935,300 $ 24,518,396
============ ============ ============
The weighted average interest rate in the servicing portfolio has decreased
from 7.78% at September 30, 1998 to 7.50% at September 30, 1999, principally as
a result of the origination of mortgage loans with increasingly lower rates
during fiscal 1999, the prepayment and refinancing of higher rate mortgages, and
purchases of MSRs on loans originated by others at lower rates. At September 30,
1999, the weighted-average contractual maturity (remaining years to maturity) of
the loans in the servicing portfolio was approximately 24 years.
4
At September 30, 1999, the largest concentrations of the servicing
portfolio were in California (26.5%) and Texas (9.8%). At September 30, 1999,
5.15% of the loans serviced by Mortgage Servicing were delinquent and an
additional 0.91% were in foreclosure. The following table presents the servicing
portfolio at September 30, 1999, by interest rate category:
LESS
THAN 7.00- 8.01- 9.01- 10.01- 11.01- 12.01%
7.00% 8.00% 9.00% 10.00% 11.00% 12.00% & ABOVE
--------- --------- --------- ------ ------ ------ -------
Government........................... 15.10% 22.68% 3.59% 1.01% 0.23% 0.07% 0.03%
Conventional......................... 15.30 29.69 9.26 1.96 0.67 0.23 0.18
--------- --------- --------- ------ ------ ------ -------
Total........................... 30.40% 52.37% 12.85% 2.97% 0.90% 0.30% 0.21%
========= ========= ========= ====== ====== ====== =======
The Company enters into agreements to service loans for loan investors, in
exchange for servicing fees, primarily through the purchase of servicing rights
and secondarily through the sale of loans it has originated while retaining the
right to service the loans. Mortgage Servicing services loans for GNMA, FNMA,
FHLMC, private mortgage investors, and the Company.
Servicing fees are withheld from the monthly payments made to investors,
are usually based on the principal balance of the loan being serviced, and
generally range from 0.25% to 0.55% annually of the outstanding principal amount
of the loan. Minimum servicing fees for substantially all loans serviced that
have been securitized into mortgage-backed securities ("MBS") are set from
time to time by the sponsoring agencies. As a servicer of loans securitized by
GNMA, FNMA, and FHLMC, the Company may be obligated to make timely payment of
principal and interest to security holders, whether or not such payments have
been made by borrowers on the underlying mortgage loans. With respect to
mortgage loans securitized under GNMA programs, the Company is insured by the
Federal Housing Administration ("FHA") against foreclosure loss on FHA loans
and by the Department of Veteran's Affairs ("VA") through guarantees on VA
loans. Although GNMA, FNMA, and FHLMC are obligated to reimburse the Company for
principal and interest payments advanced by the Company as a servicer, the
funding of delinquent payments or the exercise of foreclosure rights involves
costs to the Company that may not be fully reimbursed or recovered.
Loan administration contracts with FNMA, and typically with private
investors, provide for continuation of servicing over the term of the loan, but
permit termination for cause or termination without cause upon payment of a
cancellation fee. Loan administration contracts with GNMA and FHLMC can only be
terminated for cause. Management believes that the Company is currently in
substantial compliance with all material rules, regulations, and contractual
obligations related to mortgage loan servicing.
Mortgage servicing portfolio levels are influenced by market interest
rates. As interest rates rise, prepayments generally decrease, resulting in an
increase in the value of the servicing portfolio. Lower market interest rates
prompt an increase in prepayments as consumers refinance their mortgages at
lower rates of interest. As prepayments increase, the life of the servicing
portfolio is reduced, decreasing the servicing fee revenue that will be earned
over the life of that portfolio and the price third-party purchasers are willing
to pay. Increased prepayment activity also impacts earnings through higher
amortization of MSRs and potential MSR impairment, which are deducted from
servicing fee revenue. The Company actively seeks to mitigate the negative
effect of prepayments on the servicing portfolio by entering into interest rate
floor agreements ("floors"). The Company pays a one-time premium to enter into
the floor agreement and if rates fall below an agreed rate, the Company will
receive payments equal to the difference between the market rate and the agreed
rate multiplied by the notional amount. The Company is not exposed to loss with
a floor agreement beyond the initial premium paid. See Note 12 to the
Consolidated Financial Statements.
MORTGAGE BANKING
Mortgage Banking originates both fixed- and adjustable-rate single family
mortgage loans through 10 wholesale production offices in nine states. The types
of loans originated include: (1) loans that meet the standard underwriting
policies and purchase limits established by FNMA and FHLMC guidelines
("conforming conventional loans"); (2) loans in amounts in excess of the FNMA
and FHLMC purchase limits ("jumbo loans"); (3) loans insured or guaranteed
under FHA or VA programs; (4) loans exclusively for sale to specific investors
5
that conform to the requirements of such investors; and (5) loans with loan to
value ratios greater than 80% at origination that are covered by mortgage
insurance.
Loans originated by the wholesale offices are retained for the Company's
portfolio or are sold into the secondary market. Loans sold into the secondary
market are typically fixed-rate loans, but may from time to time include
adjustable-rate loans. Conforming conventional loans sold into the secondary
market are typically pooled and exchanged for securities issued by FNMA or
FHLMC, which are sold to investment banking firms. Mortgage Banking may also
sell conforming conventional loans as whole loans directly to FNMA or FHLMC or
to private investors. Jumbo loans produced for sale in the secondary market are
sold to private investors. FHA-insured and VA-guaranteed loans produced for sale
in the secondary market are pooled to form GNMA MBS, which are sold to
investment banking firms.
Mortgage Banking originates loans through approximately 2,800 approved
mortgage brokers. A formal approval and monitoring process is in place to select
all brokers, assess their performance, and evaluate the credit quality of the
loans they originate. Mortgage brokers demonstrating unacceptable performance or
insufficient loan activity are removed from the Company's program.
Mortgage Banking originated $3.7 billion and $3.6 billion of single family
loans in fiscal 1999 and 1998. During fiscal 1999 and 1998, $2.8 billion and
$1.9 billion of single family mortgage loans were sold in the secondary market.
At September 30, 1999, this business segment had $2.2 billion of single family
loans held for investment and $166.6 million in unfunded commitments.
Prior to February 1997, the Company's Mortgage Banking segment originated
retail and wholesale mortgages and serviced mortgage loans. In February 1997,
the Company sold certain of its mortgage origination offices and the remaining
offices were restructured or closed. The Company retained its mortgage servicing
business, retail mortgage origination capability in Texas through the Community
Banking branches and its wholesale and other mortgage origination capabilities,
which became the current Mortgage Banking segment. See "-- Mortgage Servicing"
and "-- Community Banking -- Retail Mortgage Originations."
INVESTMENT PORTFOLIO
The Company, pursuant to established policies and guidelines, invests in
single family loans, short-term interest earning assets, securities and other
investments, and MBS. These investments are held by the Investment Portfolio
segment.
Investment Portfolio acquires single family loans through traditional
secondary market sources (mortgage companies, financial institutions, and
investment banks). In fiscal 1999, 1998, and 1997, the Company purchased
approximately $1.8 billion, $1.2 billion, and $795.8 million of single family
loans. While the Company intends to continue to pursue this strategy on a
selective basis, there can be no assurance of the continued availability of
portfolio acquisition opportunities or the Company's ability to obtain such
portfolios on favorable terms. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Discussion of Changes in
Financial Condition -- Loan Portfolio."
Investment Portfolio holds the following assets at September 30, 1999: $4.1
billion of single family loans held for investment, repurchase agreements and
federal funds sold of $390.3 million, securities and other investments of $143.5
million (including SBA interest-only strips of $88.2 million), and MBS of $1
billion (including U.S. government and agency securities of $292.9 million). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Discussion of Changes in Financial Condition -- Investment
Portfolio."
MBS are acquired as a means of investing in housing-related mortgage
instruments while incurring less credit risk than holding a portfolio of
non-securitized loans. Additionally, MBS include securities created through the
securitization of the Company's single family loans. The MBS in the investment
portfolio have various credit quality guarantees and structures and include
FNMA, FHLMC, and GNMA certificates ("agency securities"), privately issued and
credit enhanced MBS ("non-agency securities"), and certain types of
collateralized mortgage obligations ("CMOs"). Agency pass-through securities
guarantee the timely payment of principal and interest, whether collected or
not, and pay-off if the mortgagor defaults. GNMA is an agency of the federal
6
government that guarantees GNMA MBS. GNMA MBS are backed by the full faith and
credit of the United States. FNMA and FHLMC are government-sponsored
enterprises, and their MBS only carry the guarantee of the issuing agency.
However, these agencies have lines of credit with the United States Treasury,
which provide a large measure of security and certainty.
The Company also invests in MBS sponsored by private issuers with no
explicit or implicit government guarantee. There are a variety of structuring
techniques used to protect investors against default risk and delays in payment
of principal and interest. The forms of credit enhancements include insurance,
letters of credit, and subordination within the MBS structure. As of September
30, 1999, all of the non-agency MBS had a credit rating of AA/Aa or higher as
defined by Standard & Poor's Corporation or Moody's Investor Services, Inc.
The Company holds SBA interest-only strips in its securities and other
investments portfolio. These SBA interest-only strips were created in connection
with the Company's securitization of SBA loans. These investments represent the
contractual right to receive a portion of the interest due on the underlying SBA
loans. If actual prepayment speeds are higher than anticipated, the value of the
recorded investment may be impaired. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Discussion of Changes in
Financial Condition -- Investment Portfolio," "Quantitative and Qualitative
Disclosures About Market Risk," and Notes 3, 4, and 5 to the Consolidated
Financial Statements.
COMPETITION
The Company competes primarily with certain commercial banks and thrift
institutions, some of which have a substantial presence in the same markets as
the Company. Competitors for deposits include commercial banks, community banks,
thrift institutions, credit unions, full service and discount broker-dealers,
and other investment alternatives, such as mutual funds, money market funds,
savings bonds, and other government securities. The Company and its peers
compete primarily on the price at which products are offered and on customer
service.
The Company competes for loan originations with mortgage companies, banks,
thrift institutions, and insurance companies. Primary competitive factors
include service quality, relationships with builders and real estate brokers,
and rates and fees. Many of the Company's competitors are, or are affiliated
with, organizations with substantially larger asset and capital bases (including
regional and multi-national banks and bank holding companies) and lower funding
costs.
SUBSIDIARIES
The Bank is permitted to invest in the capital stock, obligations, and
other securities of its service corporations in an aggregate amount not to
exceed 2% of the Bank's assets, plus an additional 1% of assets if such
investment is used for community development or inner city development purposes.
In addition, if the Bank meets minimum regulatory capital requirements, it may
make certain conforming loans in an amount not exceeding 50% of the Bank's
regulatory capital to service corporations and lower tier entities in total. At
September 30, 1999, the Bank was authorized to have a maximum investment of
approximately $484.8 million in its service corporation subsidiaries. Only one
of the Bank's subsidiaries, Bank United Securities Corp. ("BUS"), is
significant.
BANK UNITED SECURITIES CORP.
The Bank is the sole shareholder of BUS, a Texas corporation, which acts as
a full-service broker-dealer. BUS, through its institutional division, sells
various securities products and whole loans and engages in the deposit referral
business with institutional and sophisticated retail customers. Through its
retail division, BUS markets annuities and securities, including mutual funds,
stocks, and bonds, to the Bank's community banking customers. BUS is a
broker-dealer registered with the Securities and Exchange Commission and is a
member of the National Association of Securities Dealers, Inc.
7
PERSONNEL
At September 30, 1999, the Company employed 2,377 full-time employees and
226 part-time employees. The employees are not represented by a collective
bargaining agreement, and the Company believes that it has good relations with
its employees. See Note 13 to the Consolidated Financial Statements.
REGULATION
GENERAL
The Parent Company is a savings and loan holding company that is regulated
and subject to examination by the Office of Thrift Supervision ("OTS"). The
Bank is a federally chartered savings bank and is subject to the regulations,
examinations, and reporting requirements of the OTS. The Bank's deposits are
insured by the FDIC through the Savings Association Insurance Fund ("SAIF").
As the administrator of the SAIF, the FDIC has certain regulatory and full
examination authority over OTS regulated savings associations. The FDIC may
terminate deposit insurance under certain circumstances involving violations of
law or unsafe or unsound practices.
The Bank is a member of the Federal Home Loan Bank ("FHLB") Dallas, which
is one of 12 regional FHLBs, each subject to supervision and regulation by the
Federal Housing Finance Board. The FHLBs provide a central credit facility
primarily for member thrift institutions as well as for qualified commercial
banks and other entities involved in home mortgage finance. The Bank, as a
member of the FHLB Dallas, is required to purchase and hold shares of the
capital stock in that FHLB in an amount at least equal to the greater of: (1) 1%
of the aggregate principal amount of its unpaid mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year; or (2) 5% (or
greater fraction as established by the FHLB) of its advances (I.E., borrowings)
from the FHLB. The regional FHLBs have authority to periodically conduct
community support reviews of member institutions.
The descriptions of the statutes and regulations applicable to savings and
loan holding companies and savings associations set forth below is not a
complete description of the statutes and regulations or all such statutes and
regulations and their effects on the Parent Company and the Bank.
HOLDING COMPANY ACQUISITIONS
The Parent Company is a savings and loan holding company within the meaning
of the Home Owner's Loan Act, as amended (the "HOLA"). The HOLA and OTS
regulations generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring, directly or indirectly, the ownership or control
of any other savings association or savings and loan holding company, or all, or
substantially all, of the assets or more than 5% of the voting shares thereof.
These provisions also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control of
any savings association that is not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES
The Parent Company currently operates as a unitary savings and loan holding
company. Generally, there are few restrictions on the activities of a unitary
savings and loan holding company and its non-savings association subsidiaries
provided that the savings association subsidiary is a qualified thrift lender.
See "-- Investment Authority -- QTL Test." If the Company ceases to be a
unitary savings and loan holding company, the activities of the Company and its
non-savings association subsidiaries would thereafter be subject to substantial
restrictions.
The HOLA requires that every savings association subsidiary of a savings
and loan holding company give the OTS at least 30 days advance notice of any
proposed dividends to be made on its guaranty, permanent, or other
non-withdrawable stock or such dividend will be invalid. See "-- Capital
Distributions."
8
TRANSACTIONS WITH AFFILIATES
Pursuant to Section 11 of the HOLA, transactions between a savings
association and its affiliates ("Covered Transactions") are subject to
quantitative and qualitative restrictions substantially similar to those imposed
upon member banks under Sections 23A and 23B of the Federal Reserve Act
("FRA"). Savings associations are also prohibited from extending credit to any
affiliate engaged in an activity not permissible for a bank holding company.
The term "affiliate" includes any company that controls or is controlled
by a company that controls the Bank or a bank or savings association subsidiary
of the Bank. The term "affiliate" also includes any company controlled by
controlling stockholders of the Bank or the Parent Company and any company
sponsored and advised on a contractual basis by the Bank or any subsidiary or
affiliate of the Bank. The OTS regulation generally excludes all non-bank and
non-savings association subsidiaries of savings associations from treatment as
affiliates, except to the extent that the director of the OTS decides to treat
such subsidiaries as affiliates. The Parent Company is an affiliate of the Bank.
Section 23A of the FRA limits Covered Transactions with any one affiliate
to 10% of an association's capital stock and surplus (as defined therein) and
limits aggregate affiliate transactions to 20% of the Bank's capital stock and
surplus. A Covered Transaction is defined generally as a loan to an affiliate,
the purchase of securities issued by an affiliate, the purchase of assets from
an affiliate, the acceptance of securities issued by an affiliate as collateral
for a loan, or the issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate. In addition, the Bank generally may not purchase
securities issued or underwritten by an affiliate, or low quality assets from an
affiliate. Sections 23A and 23B of the FRA provide that a loan transaction with
an affiliate generally must be collateralized (but may not be collateralized by
a low quality asset or securities issued by an affiliate) and that all Covered
Transactions, as well as the sale of assets, the payment of money, or the
provision of services by the Bank to an affiliate, must be on terms and
conditions that are substantially the same, or at least as favorable to the
Bank, as those prevailing for comparable nonaffiliate transactions.
The OTS generally requires savings associations, such as the Bank, to
attribute to an affiliate the amounts of all transactions conducted with
subsidiaries of that affiliate, requires savings associations to make and retain
records that show affiliate transactions in reasonable detail, and provides that
certain classes of savings associations may be required to give the OTS prior
notice of affiliate transactions.
INSURANCE ASSESSMENTS
The FDIC establishes premium assessment rates for SAIF deposit insurance.
There is no statutory limit on the maximum assessment and the percent of
increase in the assessment that the FDIC may impose in any one year, provided,
however, that the FDIC may not collect more than is necessary to reach or
maintain the SAIF's designated reserve ratio and must rebate any excess
collected. Under the FDIC's risk-based insurance system, SAIF-assessable
deposits are now subject to premiums of between 0 to 27 cents per $100 of
deposits, depending upon the institution's capital position and other
supervisory factors.
To arrive at a risk-based assessment for each bank and thrift, the FDIC
places it in one of nine risk categories using a two-step process based first on
capital ratios and then on relevant supervisory information. Each institution is
assigned to one of three groups (well-capitalized, adequately capitalized, or
undercapitalized) based on its capital ratios. A "well-capitalized"
institution is one that has at least a 10% "total risk-based capital" ratio
(the ratio of total capital to risk-weighted assets), a 6% "tier 1 risk-based
capital" ratio (the ratio of tier 1 risk-based capital to risk-weighted
assets), and a 5% "leverage capital" ratio (the ratio of core capital to
adjusted total assets). An "adequately capitalized" institution has at least
an 8% total risk-based capital ratio, a 4% tier 1 risk-based capital ratio, and
a 4% leverage capital ratio. An "undercapitalized" institution is one that
does not meet either the definition of well-capitalized or adequately
capitalized.
9
The FDIC also assigns each institution to one of three supervisory
subgroups based on an evaluation of the risk posed by the institution. These
supervisory evaluations modify premium rates within each of the three capital
groups. The nine risk categories and the corresponding SAIF assessment rates are
as follows:
SUPERVISORY SUBGROUP
-------------------------------
A B C
-- -- --
Meets numerical standards for:
Well-capitalized................ 0 3 17
Adequately capitalized.......... 3 10 24
Undercapitalized................ 10 24 27
For purposes of assessments of FDIC insurance premiums, the Company
believes that the Bank is a well-capitalized institution as of September 30,
1999. FDIC regulations prohibit disclosure of the supervisory subgroup to which
an insured institution is assigned. The Bank's insurance assessments for fiscal
1999 and 1998 were $4.0 million and $4.2 million.
The Economic Growth and Paperwork Reduction Act of 1996 (the "1996 Act")
required the FDIC to impose a one-time assessment on institutions holding SAIF
deposits in an amount sufficient to increase the SAIF's net worth to 1.25% of
SAIF-insured deposits. The special assessment was 65.7 basis points times the
amount of deposits held by an institution as of March 31, 1995. The Bank's
special assessment was $33.7 million, or $20.7 million net of tax.
ASSESSMENTS TO PAY FICO BONDS. The 1996 Act also obligates banks, for the
first time, to pay assessments to be used to service the bonds issued by the
Financing Corporation ("FICO") to resolve the thrift failures during the late
1980s and early 1990s. Under the 1996 Act, during the period beginning January
1, 1997 through December 31, 1999, SAIF-insured institutions must pay 6.48 basis
points toward FICO bonds and Bank Insurance Fund ("BIF") insured institutions
must pay 1.296 basis points. Starting in the year 2000, BIF and SAIF
institutions will begin sharing the FICO burden on a pro rata basis until
termination of the FICO obligation in 2017 at an estimated rate of approximately
2.4 basis points.
AUDIT REQUIREMENTS. In May 1993, the FDIC adopted rules implementing
statutory annual independent audit and financial reporting requirements for all
depository institutions with assets of more than $500 million, and for their
management, and their independent auditors. The rules also establish
requirements for the composition, duties, and authority of such institutions'
audit committees and boards of directors. Among other things, all depository
institutions with assets in excess of $500 million are required to prepare and
make available to the public, annual reports on their financial condition and
management, including statements of management's responsibility for preparing
the institution's financial statements, for establishing and maintaining an
internal control structure and procedures for financial reporting, and for
complying with specified laws and regulations relating to safety and soundness,
and an assessment of the effectiveness of such internal controls and procedures
and the institution's compliance with laws and regulations designated by the
FDIC. The institution's independent auditors are required to attest to these
management assertions, except the procedures employed by management to detect
and report violations of designated laws. Each such institution also is required
to have an audit committee composed of directors who are independent of
management of the institution. Audit committees of large institutions
(institutions with assets exceeding $3.0 billion) must (1) include members with
banking or related financial management expertise; (2) have the ability to
engage their own independent legal counsel; and (3) must not include any
individuals designated as "large customers" of the institution.
RESERVE REQUIREMENTS. The Federal Reserve Board ("FRB") requires all
depository institutions (including savings associations) to maintain reserves
against their deposit accounts (primarily transaction accounts and nonpersonal
time deposits) and Eurocurrency liabilities. Reserves of 3% are required to be
maintained against net transaction accounts of $46.5 million or less. In
addition, if net transaction accounts exceed $46.5 million, institutions are
required to maintain reserves equal to 10% of the excess. The reserve
requirement for nonpersonal time deposits and Eurocurrency liabilities is 0%.
Reserve requirements are subject to adjustment by the FRB, and must be adjusted
at least annually. The balances maintained to meet the reserve requirements
imposed by the
10
FRB may be used to satisfy liquidity requirements imposed by the OTS. See
" -- Investment Authority -- Liquidity."
CAPITAL REQUIREMENTS
REQUIREMENTS AND STANDARDS. The OTS capital regulations have three
components: a leverage limit, a tangible capital requirement, and a risk-based
capital requirement. See Note 18 to the Consolidated Financial Statements for
compliance with the regulatory capital requirements. The OTS has broad
discretion to impose capital requirements in excess of minimum applicable
ratios. See " -- Enforcement."
LEVERAGE LIMIT. The leverage limit requires that a savings association
maintain "core capital" of at least 4% of its adjusted total assets (or a
leverage ratio of 3% if the institution is rated composite 1 in its most recent
report of examination). For purposes of this requirement, total assets are
adjusted to exclude intangible assets and investments in certain subsidiaries,
and to include the assets of certain other subsidiaries, certain intangibles
arising from prior period supervisory transactions, and permissible MSRs. "Core
capital" includes common stockholders' equity and noncumulative perpetual
preferred stock minus intangibles, plus certain MSRs and certain goodwill
arising from prior regulatory accounting practices. At September 30, 1999, the
Bank's core capital ratio was 7.15%.
Certain MSRs are not deducted in computing core and tangible capital. Prior
to August 10, 1998, generally, the lower of 90% of the fair market value of
readily marketable MSRs or the current unamortized book value as determined
under GAAP could be included in the core and tangible capital calculations up to
a maximum of 50% of core capital computed before the deduction of any disallowed
qualifying intangible assets. Effective August 10, 1998, the OTS increased the
maximum amount of MSRs that are includable in regulatory capital calculations
from 50% to 100% of core capital. At September 30, 1999, $495.5 million of MSRs
were included in the Bank's core capital calculation.
In determining core capital, all investments in and loans to subsidiaries
engaged in activities not permissible for national banks, which are generally
more limited than activities permissible for savings associations and their
subsidiaries, must be deducted. Certain exceptions are provided, including
exceptions for mortgage banking subsidiaries and subsidiaries engaged in agency
activities for customers (unless determined otherwise by the FDIC on safety and
soundness grounds). Generally, all subsidiaries engaged in activities
permissible for national banks are required to be consolidated for purposes of
calculating capital compliance by the parent savings association.
TANGIBLE CAPITAL REQUIREMENT. The tangible capital requirement mandates
that a savings association maintain tangible capital of at least 1.5% of
adjusted total assets. For purposes of this requirement, adjusted total assets
are calculated on the same basis as for the leverage limit. "Tangible capital"
is defined in the same manner as core capital, except that all intangible assets
must be deducted. At September 30, 1999, the Bank's tangible capital ratio was
7.14%.
RISK-BASED CAPITAL REQUIREMENT. The risk-based requirement promulgated by
the OTS is required by the HOLA to track the standard applicable to national
banks, except that the OTS may determine to reflect interest rate and other
risks not specifically included in the national bank standard. However, such
deviations from the national bank standard may not result in a materially lower
risk-based requirement for savings associations than for national banks. The
risk-based standard adopted by the OTS is similar to the Office of the
Comptroller of the Currency standard for national banks.
The risk-based standards of the OTS require maintenance of total capital
equal to at least 8% of risk-weighted assets. "Total capital" includes core
capital plus supplementary capital (to the extent it does not exceed core
capital). Supplementary capital includes cumulative perpetual preferred stock;
mutual capital certificates, income capital certificates and net worth
certificates; nonwithdrawable accounts and pledged deposits to the extent not
included in core capital; perpetual and mandatory convertible subordinated debt
and maturing capital instruments meeting specified requirements; and general
loan and lease loss allowances, up to a maximum of 1.25% of risk-weighted
assets. At September 30, 1999, the Bank's total risk-based capital ratio was
11.71%.
11
In determining the amount of risk-weighted assets, savings associations
must assign balance sheet assets to one of four risk-weight categories,
reflecting the relative credit risk inherent in the asset. Off-balance-sheet
items are assigned to one of the four risk-weight categories after a "credit
conversion factor" is applied.
INTEREST RATE RISK ("IRR") COMPONENT. OTS regulations add an IRR
component to the 8% risk-based capital requirement discussed above. Only savings
associations with more than a "normal" level of IRR are subject to IRR
requirements. Specifically, savings associations with IRR exposure in excess of
2% (measured in accordance with an OTS Model and Guidelines) must deduct an IRR
component from total capital prior to calculating their risk-based capital
ratios. The IRR component is calculated as one-half of the difference between
the institution's measured IRR and 2%, multiplied by the market value of the
institution's assets. This deduction will have the effect of requiring savings
associations with IRR exposures of more than 2% to hold more capital than those
with IRR exposure of 2% or less. On August 21, 1995, the OTS adopted and
approved an appeal process, but delayed the IRR capital deduction indefinitely.
CAPITAL DISTRIBUTIONS
Limitations are imposed upon all "capital distributions" by savings
associations, including cash dividends, payments by an institution in a cash-out
merger, and other distributions of cash or property to shareholders on account
of their ownership interest.
Under the prompt corrective action provisions discussed below, no insured
depository institution may make a capital distribution if it would be
undercapitalized after such distribution. See " -- Enforcement -- Prompt
Corrective Action."
Under OTS Regulations, most associations may make capital distributions
during a calendar year up to 100% of net income to date during the calendar
year, plus retained net income for the preceding two years. An association, such
as the Bank, that is a subsidiary of a savings and loan holding company must
give 30 days' written notice to the OTS before making any capital distribution.
The OTS may disapprove a capital distribution if (1) following the distribution,
the association would be undercapitalized; (2) the OTS determines that the
proposed capital distribution raises safety or soundness concerns; or (3) the
distribution violates a provision contained in any statute, regulation, or
agreement between the savings association and the OTS or the FDIC, or condition
imposed on the association in an OTS-approved application or notice.
INVESTMENT AUTHORITY
PERMISSIBLE LOANS AND INVESTMENTS. Federally chartered savings banks, such
as the Bank, are authorized to originate, invest in, sell, purchase, service,
participate, and otherwise deal in: (1) loans made on the security of
residential and nonresidential real estate, (2) commercial loans (up to 20% of
assets, the last 10% of which must be small business loans), (3) consumer loans
(subject to certain percentage of asset limitations), and (4) credit card loans.
The lending authority of federally chartered associations is subject to various
OTS requirements, including, as applicable, requirements governing loan-to-value
ratio, percentage-of-assets limits, and loans to one borrower limits. In
September 1996, the OTS substantially revised its investment and lending
regulations eliminating many of their specific requirements in favor of a more
general standard of safety and soundness.
Federally chartered savings associations may invest, without limitation, in
the following assets: (1) obligations of the United States government or certain
agencies thereof; (2) stock issued or loans made by the FHLBs or the FNMA; (3)
obligations issued or guaranteed by the FNMA, the Student Loan Marketing
Association, the GNMA, or any agency of the United States government; (4)
certain mortgages, obligations, or other securities that have been sold by the
FHLMC; (5) stock issued by a national housing partnership corporation; (6)
demand, time, or savings deposits, shares, or accounts of any insured depository
institution; (7) certain "liquidity" investments approved by the OTS to meet
liquidity requirements; (8) shares of registered investment companies the
portfolios of which are limited to investments that a federal association is
otherwise authorized to make; (9) certain MBS; (10) general obligations of any
state of the United States or any political subdivision or municipality thereof,
PROVIDED that not more than 10% of a savings association's capital may be
invested in the general obligations of any one issuer; (11) loans secured by
residential real property; (12) credit card loans; and (13) education loans.
Federally chartered savings associations may invest in secured or unsecured
loans for commercial, corporate, business, or agricultural purposes, up to 20%
of assets, provided that the last 10% is
12
invested in small business loans. The HOLA also limits a federal savings
association's aggregate nonresidential real property loans to 400% of the
savings association's capital as determined pursuant to the OTS's capital
requirements. See "-- Capital Requirements." The OTS may allow a savings
association to exceed the aggregate limitation, if the OTS determines that
exceeding the limitation would pose no significant risk to the safe and sound
operations of the association and would be consistent with prudent operating
practices. Federally chartered savings associations are also authorized by the
HOLA to make investments in consumer loans, business development credit
corporations, certain commercial paper and corporate debt securities, service
corporations, and small business investment companies, all of which investments
are subject to percentage-of-assets and various other limitations.
LENDING LIMITS. Generally, savings associations, such as the Bank, are
subject to the same loans to one borrower limits that apply to national banks.
Generally, a savings association may lend to a single borrower or group of
related borrowers, on an unsecured basis, in an amount not greater than 15% of
its unimpaired capital and unimpaired surplus. An additional amount, not greater
than 10% of the savings association's unimpaired capital and unimpaired surplus,
may be loaned if the loan is secured by readily marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. Notwithstanding the general lending limits, a savings
association may make loans to one borrower for any purpose of up to $500,000; or
to develop domestic residential housing units, up to the lesser of $30 million
or 30% of the savings association's unimpaired capital and unimpaired surplus,
if certain conditions are satisfied. The OTS may also impose more stringent
limits on an association's loans to one borrower, if it determines that such
limits are necessary to protect the safety and soundness of the association.
SERVICE CORPORATIONS. The HOLA authorizes federally chartered savings
associations, such as the Bank, to invest in the capital stock, obligations, or
other securities of service corporations. The HOLA authorizes a savings
association to invest up to a total of 3% of its assets in service corporations.
The last 1% of the 3% statutory investment limit applicable to service
corporations must be primarily invested in community development investments
drawn from a broad list of permissible investments that include, among other
things: government guaranteed loans; loans for investment in small businesses;
investments in revitalization and rehabilitation projects; and investments in
low- and moderate-income housing developments.
Service corporations are authorized to engage in a variety of preapproved
activities, some of which (E.G., securities brokerage and real estate
development) are ineligible activities for the parent savings association. The
OTS regulations implementing the service corporation authority contained in the
HOLA also provide that activities reasonably related to the activities of a
federally chartered savings association may be approved on a case-by-case basis
by the Director of the OTS.
OPERATING SUBSIDIARIES. All federal savings associations are authorized to
establish or acquire one or more operating subsidiaries. Operating subsidiaries
are subject to examination and supervision by the OTS to the same extent as the
parent thrift. An "operating subsidiary" is a corporation that meets all of
the following requirements: (1) it engages only in activities that a federal
savings association is permitted to engage in directly; (2) the parent savings
association owns, directly or indirectly, more than 50% of the subsidiary's
voting stock; and (3) no person or entity other than the parent thrift may
exercise effective operating control over the subsidiary. While a savings
association's investment in its service corporations is generally limited to an
amount that does not exceed 3% of the parent savings association's total assets,
OTS regulations do not limit the amount that a parent savings association may
invest in its operating subsidiaries. Operating subsidiaries may be incorporated
and operated in any geographical location where its parent may operate. An
operating subsidiary that is a depository institution may accept deposits in any
location, provided that the subsidiary has federal deposit insurance.
QUALIFIED THRIFT LENDER ("QTL") TEST. All savings associations are
required to meet a QTL test for, among other things, future eligibility for FHLB
advances. A savings association that fails to satisfy the QTL test is subject to
substantial restrictions on its activities and to other significant penalties. A
savings association is a QTL if it either meets the test for being a domestic
building and loan association, as that term is defined in Section 7701(a)(19) of
the Internal Revenue Code of 1986, as amended, or has invested at least 65% of
its
13
portfolio assets in qualified thrift investments and maintains this level of
qualified thrift investments on a monthly average basis in nine of every 12
months.
The term "portfolio assets" is defined as total assets less intangibles,
properties used to conduct business and liquid assets (up to 20% of total
assets). The following assets may be included as qualified thrift investments
without limit: domestic residential housing or manufactured housing loans; home
equity loans and MBS backed by residential housing or manufactured housing
loans; FHLB stock; certain obligations of the FDIC and certain other related
entities; and education, small business, and credit card loans. Other qualifying
assets, which may be included up to an aggregate of 20% of portfolio assets,
are: (1) 50% of originated residential mortgage loans sold within 90 days of
origination; (2) investments in debt or equity of service corporations that
derive 80% of their gross revenues from housing-related activities; (3) 200% of
certain loans to, and investments in, low cost one-to four-family housing; (4)
200% of loans for residential real property, churches, nursing homes, schools,
and small businesses in areas where the credit needs of low- and moderate-income
families are not met; (5) other loans for churches, schools, nursing homes, and
hospitals; and (6) personal, family, or household loans (other than education,
small business, or credit card loans).
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies. A savings association may
requalify the next time it meets the requirement in nine of the preceding 12
months, but it may requalify only one time. If an institution that fails the QTL
test has not yet requalified and has not converted to a national bank, its new
investments and activities are limited to those permissible for a national bank,
it is immediately ineligible to receive any new FHLB advances, is subject to
national bank limits for payment of dividends, and it may not establish a branch
office at any location at which a national bank located in the savings
association's home state could not establish a branch.
LIQUIDITY. The Bank is required to maintain an average daily balance of
"liquid assets" (cash, certain time deposits, bankers' acceptances, highly
rated corporate debt securities and commercial paper, securities of certain
mutual funds, reserves maintained pursuant to FRB requirements, and specified
government, state, or federal agency obligations) equal to a certain percentage
of net withdrawable deposit accounts and borrowings payable in one year or less.
The liquidity requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. OTS regulations require a savings association, such as the Bank,
to maintain liquid assets equal to not less than 4% of its net withdrawable
deposit accounts and borrowings payable in one year or less.
MERGERS AND ACQUISITIONS
Insured depository institutions are authorized to merge or engage in
purchase and assumption transactions with other insured depository institutions
with the prior approval of the federal banking regulator of the resulting
entity. The Change in Bank Control Act and the savings and loan holding company
provisions of the HOLA, together with the regulations of the OTS under such
Acts, require that the consent of the OTS be obtained prior to any person or
company acquiring control of a savings association or a savings and loan holding
company. Under OTS regulations, "control" is conclusively presumed to exist if
an individual or company acquires more than 25% of any class of voting stock of
a savings association or holding company. There is a rebuttable presumption of
control if a person or company acquires more than 10% of any class of voting
stock (or more than 25% of any class of non-voting stock) and is subject to any
of several "control factors". The control factors relate, among other matters,
to the relative ownership position of a person or company, the percentage of
debt and/or equity of the association or holding company controlled by the
person or company, agreements giving the person or company influence over a
material aspect of the operations of the association or holding company, and the
number of seats on the board of directors thereof held by the person or company,
or his designees. The regulations provide a procedure for challenge of the
rebuttable control presumption. Certain restrictions applicable to the
operations of savings and loan holding companies and certain conditions imposed
by the OTS in connection with its approval of companies to become savings and
loan holding companies may deter companies from seeking to obtain control of the
Bank.
BRANCHING. Subject to certain statutory restrictions in the HOLA and the
Federal Deposit Insurance Act (the "FDIA"), the Bank is authorized to branch
on a nationwide basis. Branching by savings associations is also
14
subject to other regulatory requirements, including compliance with the
Community Reinvestment Act (the "CRA") and its implementing regulations.
OFFICERS, DIRECTORS, AND CONTROLLING SHAREHOLDERS
INSIDER LOANS. Loans to an executive officer or director of a savings
association, or to any person who directly or indirectly, or acting through or
in concert with one or more persons, owns, controls, or has the power to vote
more than 10% of any class of voting securities of such institution ("Principal
Shareholder"); to any related interests of such persons (I.E., any company
controlled by such executive officer, director, or Principal Shareholder); or to
any political or campaign committee, the funds or services of which will benefit
such executive officer, director, or Principal Shareholder, or which is
controlled by such executive officer, director or Principal Shareholder, are
subject to Sections 22(g) and 22(h) of the FRA and the regulations promulgated
thereunder. Among other things, such loans must be made on terms substantially
the same as those prevailing on comparable transactions made to unaffiliated
individuals, and may not involve more than the normal risk of repayment or
present other unfavorable features. Certain extensions of credit to such persons
must first be approved in advance by a disinterested majority of a savings
association's entire board of directors. Section 22(h) of the FRA prohibits
loans to any such individuals where the aggregate amount exceeds an amount equal
to 15% of an insured institution's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus (as defined) in the case of
loans that are fully secured by readily marketable collateral, or when the
aggregate amount on all such extensions of credit outstanding to all such
persons would exceed the Bank's unimpaired capital and unimpaired surplus.
Section 22(g) establishes additional limitations on loans to executive officers.
CHANGES IN DIRECTORS AND SENIOR EXECUTIVE OFFICERS. Section 32 of the
FDIA, as amended by the 1996 Act, requires a depository institution or holding
company thereof to give 30 days prior written notice to its primary federal
regulator of any proposed appointment of a director or senior executive officer
if the institution is not in compliance with the minimum capital requirements or
otherwise is in a troubled condition. The regulator then has the opportunity to
disapprove any such appointment.
ENFORCEMENT
PROMPT CORRECTIVE ACTION. The OTS is required by statute to take certain
actions against savings associations that fail to meet certain capital-based
requirements. Each of the federal banking agencies, including the OTS, is
required to establish five levels of insured depository institutions based on
leverage limit and risk-based capital requirements established for institutions
subject to their jurisdiction plus, in each agency's discretion, individual
additional capital requirements for such institutions.
Under the rules that have been adopted by each of the federal banking
agencies, an institution will be designated well-capitalized if the institution
has a total risk-based capital ratio of 10% or greater, a tier 1 risk-based
capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and the
institution is not subject to an order, written agreement, capital directive, or
prompt corrective action directive to meet and maintain a specific capital level
for any capital measure.
An institution will be designated adequately capitalized if the institution
has a total risk-based capital ratio of 8% or greater, a tier 1 risk-based
capital ratio of 4% or greater, and a leverage ratio of 4% or greater (or a
leverage ratio of 3% or greater if the institution is rated a composite 1 in its
most recent report of examination). An institution will be designated
undercapitalized if the institution has a total risk-based capital ratio of less
than 8%, a tier 1 risk-based capital ratio of less than 4%, or a leverage ratio
of less than 4% (or a leverage ratio of less than 3% if the institution is rated
composite 1 in its most recent report of examination). An institution will be
designated significantly undercapitalized if the institution has a total
risk-based capital ratio of less than 6%, a tier 1 risk-based capital ratio of
less than 3%, or a leverage ratio of less than 3%. An institution will be
designated critically undercapitalized if the institution has a ratio of
tangible equity to total assets equal to or less than 2%.
Undercapitalized institutions are required to submit capital restoration
plans to the appropriate federal banking agency and are subject to certain
operational restrictions. Moreover, companies controlling an undercapitalized
institution are required to guarantee the subsidiary institution's compliance
with the capital restoration
15
plan subject to an aggregate limitation of the lesser of 5% of the institution's
assets or the amount of the capital deficiency when the institution first failed
to meet the plan.
Significantly or critically undercapitalized institutions and
undercapitalized institutions that have not submitted or complied with
acceptable capital restoration plans are subject to regulatory sanctions. A
forced sale of shares or merger, restrictions on affiliate transactions, and
restrictions on rates paid on deposits are required to be imposed unless the
supervisory agency has determined that such restrictions would not further
capital improvement. The agency may impose other specified regulatory sanctions
at its option. Generally, the appropriate federal banking agency is required to
authorize the appointment of a conservator or receiver within 90 days after an
institution becomes critically undercapitalized.
The federal banking agencies have adopted uniform procedures for the
issuance of directives by the appropriate federal banking agency. Under these
procedures, an institution will generally be provided advance notice when the
appropriate federal banking agency proposes to impose one or more of the
sanctions set forth above. These procedures provide an opportunity for the
institution to respond to the proposed agency action or, where circumstances
warrant immediate agency action, an opportunity for administrative review of the
agency's action.
ADMINISTRATIVE ENFORCEMENT AUTHORITY. The OTS exercises extensive
enforcement authority over all savings associations and their
"institution-affiliated parties" (I.E., officers, directors, controlling
shareholders, employees, as well as attorneys, appraisers, or accountants if
such consultants or contractors knowingly or recklessly participate in a
wrongful action likely to have adverse effect on an insured institution). This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal and prohibition orders,
and to initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. The OTS may use written agreements to correct compliance deficiencies
with respect to applicable laws and regulations and to ensure safe and sound
practices. Except under certain narrow circumstances, public disclosure of final
enforcement actions by the federal banking agencies, including the OTS, is
required.
The OTS has the authority, when statutorily prescribed grounds exist, to
appoint a conservator or receiver for a savings association. Grounds for such
appointment include: insolvency; substantial dissipation of assets or earnings;
existence of an unsafe or unsound condition to transact business; likelihood
that the association will be unable to pay its obligations in the normal course
of business; undercapitalization where the association (1) has no reasonable
prospect of becoming adequately capitalized, (2) fails to become adequately
capitalized when required to do so, (3) fails to timely submit an acceptable
capital restoration plan, or (4) materially fails to implement a capital
restoration plan; or where the association is "critically undercapitalized" or
otherwise has "substantially insufficient capital".
CONSUMER PROTECTION REGULATIONS
The Bank is subject to many federal consumer protection statutes and
regulations including, but not limited to, the following:
THE TRUTH IN LENDING ACT ("TILA"). The TILA, enacted into law in 1968,
is designed to ensure that credit terms are disclosed in a meaningful way so
that consumers may compare credit terms more readily and knowledgeably. As a
result of the TILA, all creditors must use the same credit terminology and
expressions of rates, the annual percentage rate, the finance charge, the amount
financed, the total of payments, and the payment schedule.
THE FAIR HOUSING ACT ("FH ACT"). The FH Act, enacted into law in 1968,
regulates many practices, including making it unlawful for any lender to
discriminate in its housing-related lending activities against any person
because of race, color, religion, national origin, sex, handicap, or familial
status.
THE EQUAL CREDIT OPPORTUNITY ACT ("ECOA"). The ECOA, enacted into law in
1974, prohibits discrimination in any credit transaction, whether for consumer
or business purposes, on the basis of race, color, religion, national origin,
sex, marital status, age (except in limited circumstances), receipt of income
from public assistance programs, or good faith exercise of any rights under the
Consumer Credit Protection Act.
16
THE REAL ESTATE SETTLEMENT PROCEDURES ACT ("RESPA"). The RESPA, enacted
into law in 1974, requires lenders to provide borrowers with disclosures
regarding the nature and cost of real estate settlements. RESPA is applicable to
all federally related mortgage loans. A "federally related mortgage loan"
includes any loan secured by a first or subordinate lien on residential real
property designed for occupancy by one to four families, including a refinancing
of an existing loan secured by the same property, if: (1) the loan is made by
any lender, the deposits of which are federally insured or any lender that is
regulated by a federal agency, (2) the loan is insured, guaranteed or
supplemented by a federal agency, (3) the loan is intended to be sold to the
FNMA, the GNMA, or the FHLMC, or (4) the loan is made by any creditor who makes
or invests in residential real estate loans aggregating more than $1 million per
year.
THE HOME MORTGAGE DISCLOSURE ACT ("HMDA"). The HMDA, enacted into law in
1975, is intended to provide public information that can be used to help
determine whether financial institutions are serving the housing credit needs of
the neighborhoods and communities in which they are located and to assist in
identifying possible discriminatory lending patterns.
THE COMMUNITY REINVESTMENT ACT ("CRA"). The CRA, enacted into law in
1977, is intended to encourage insured depository institutions, while operating
safely and soundly, to help meet the credit needs of their communities. The CRA
specifically directs the federal regulatory agencies, in examining insured
depository institutions, to assess the institution's record of helping to meet
the credit needs of their entire community, including low-and moderate-income
neighborhoods, and consistent with safe and sound banking practices. The CRA
further requires the agencies to take a financial institution's record of
meeting its community credit needs into account when evaluating applications
for, among other things, domestic branches, consummating mergers or
acquisitions, or holding company formations. To evaluate most large retail
institutions, such as the Bank, the agencies apply three tests, the lending,
investment, and service tests, to determine an overall CRA rating for the
financial institution. The ratings range from a high of "outstanding" to a low
of "substantial noncompliance".
The Bank's last public evaluation dated December 10, 1999, issued by its
primary regulator, the OTS, rated the Bank "outstanding". The Bank's previous
CRA assessment rating, as of December 2, 1996, was also "outstanding".
THE BANK SECRECY ACT ("BSA") AND MONEY LAUNDERING LAWS. The BSA, enacted
into law in 1970, requires every financial institution within the United States
to file a Currency Transaction Report with the Internal Revenue Service for each
transaction in currency of more than $10,000 not exempted by the Treasury
Department.
The Money Laundering Prosecution Improvements Act requires financial
institutions, typically banks, to verify and record the identity of the
purchaser upon the issuance or sale of bank checks or drafts, cashier's checks,
traveler's checks, or money orders involving $3,000 or more in cash.
Institutions must also verify and record the identity of the originator and
beneficiary of certain funds transfers.
ELECTRONIC FUND TRANSFER ACT ("EFTA"). The EFTA, enacted into law in
1978, provides a basic framework establishing the rights, liabilities, and
responsibilities of participants in "electronic fund transfer systems",
defined to include automated teller machine transfers, telephone bill-payment
services, point-of-sale terminal transfers, and preauthorized transfers from or
to a consumer's account (E.G., direct deposit of Social Security payments). Its
primary objective is to protect the rights of individuals using these systems.
The EFTA limits a consumer's liability for certain unauthorized electronic fund
transfers and requires certain error resolution procedures.
THE EXPEDITED FUNDS AVAILABILITY ACT ("EXPEDITED FUNDS ACT"). The
Expedited Funds Act, enacted into law in 1987, seeks to insure prompt
availability of funds deposited into a customer's account and to expedite the
return of checks.
THE TRUTH IN SAVINGS ACT ("TISA"). The TISA, enacted into law in 1991,
is principally a disclosure law, the purpose of which is to encourage
comparative shopping for deposit products. The common denominator used by the
TISA to facilitate comparison shopping of interest payable on deposit accounts
is the Annual Percentage Yield.
17
THE AMERICANS WITH DISABILITIES ACT ("ADA"). The ADA, enacted into law
in 1990, prohibits private employers, state and local governments, employment
agencies, and labor unions from discriminating against qualified individuals
with disabilities in connection with job application procedures, hiring, firing,
advancement, compensation, job training, and other terms, conditions, and
privileges of employment. Section 302 of Title 3 of the ADA, which covers banks,
thrifts, credit unions, and finance companies, provides that "no individual
shall be discriminated against on the basis of disability in the full and equal
enjoyment of the goods, services, or facilities, privileges, advantages, or
accommodations of any place of public accommodation". An individual with a
disability is a person who: (1) has a physical or mental impairment that
substantially limits one or more major life activities, (2) has a record of such
an impairment, or (3) is regarded as having such an impairment.
The Bank attempts in good faith to assure compliance with the requirements
of the consumer protection statutes to which it is subject, as well as the
regulations that implement the statutory provisions. The requirements are
complex, however, and even inadvertent non-compliance could result in civil and,
in some cases, criminal liability. During the past several years, numerous
individual claims and purported consumer class action claims have been commenced
against financial institutions, their subsidiaries, and other lending
institutions alleging violations of one or more of the consumer protection
statutes and seeking civil damages, court costs, and attorney's fees. Based on
the Bank's history of claims under the consumer protection statutes and
regulations to which it is subject, management does not believe that claims are
likely to be asserted that will have a material adverse effect on the Bank's or
the Company's financial condition, results of operations, or liquidity.
LEGISLATION
Federal legislation and regulation have significantly affected the
operations of federally insured savings associations, such as the Bank, and
other federally regulated financial institutions in the past several years and
have increased competition among savings associations, commercial banks, and
other financial institutions.
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999 (the "1999 Act") into law. The
primary purpose of the 1999 Act is to eliminate barriers between investment
banking and commercial banking, permitting, with certain limitations, the
affiliation of banks, securities firms, insurance companies, and other financial
service providers. The 1999 Act prohibits the formation of any new unitary
savings and loan company, unless an application was pending with the OTS as of
May 4, 1999. Existing unitary savings and loan holding companies, such as the
Company, may continue to operate under current law as long as the company
continues to meet the definition of a unitary savings and loan holding company.
The 1999 Act also imposes new restrictions on the sharing of customer
information, repeals the SAIF special reserve, and revises the Federal Home Loan
Bank Act. The 1999 Act requires the promulgation of numerous new regulations.
The Company is evaluating the legislation and will evaluate any related
regulations to determine what effect, if any, the legislation and regulations
may have on its operations.
TAXATION
FEDERAL TAXATION
The Parent Company and the Bank are subject to the Internal Revenue Code of
1986, as amended (the "Code"), in the same manner, with certain exceptions, as
other corporations. The Parent Company and its subsidiaries participate in the
filing of a consolidated federal income tax return with their "affiliated
group", as defined by the Code. For financial reporting purposes, however, each
entity computes its tax on a separate-company basis. In addition to federal
income taxes, the Bank is required to make payments in lieu of federal income
taxes as discussed below. See Note 15 to the Consolidated Financial Statements.
NET OPERATING LOSS LIMITATIONS
The Bank succeeded to substantial net operating losses ("NOLs") as a
result of the original acquisition in 1988. The Company's total NOLs at
September 30, 1999 were $334 million. Section 382 of the Internal Revenue Code
imposes an annual limitation on the amount of taxable income a corporation may
offset with NOLs and certain recognized built-in losses. The limitation imposed
by Section 382 is determined by multiplying the value of the Company's stock
(both common stock and preferred stock) at the time of an Ownership Change (as
defined by Section 382) by the applicable long-term tax exempt rate. Any unused
annual limitation may be
18
carried over to later years, and the limitation may under certain circumstances
be increased by the built-in gains in assets held by the Company at the time of
the change.
In August 1999, the Company issued its Corporate Premium Income Equity
Securities ("Corporate PIES") and redeemable preferred stock ("Redeemable
Preferred Stock Series A"). See Note 16 to the Consolidated Financial
Statements. As a result, the Company underwent an Ownership Change because the
stockholders who own or have owned (directly or indirectly) 5% or more of the
common stock of the Company or are otherwise treated as 5% stockholders or a
"higher tier entity" under Section 382 of the Code increased their aggregate
percentage ownership by more than 50% over the lowest percentage owned at any
time during the Testing Period (generally the preceding three years). The
Company's annual NOL utilization is limited to approximately $59.5 million,
based on the closing market price at August 11, 1999, the date of the Ownership
Change.
STATE TAXATION
The Parent Company and the Bank file unitary and combined state returns
with certain subsidiaries as well as separate state returns. The location of
branches and offices, loan solicitations, or real property securing loans
creates jurisdiction for taxation in certain states, which results in the filing
of state income tax returns. Amounts for state tax liabilities are included in
the Statements of Operations for fiscal 1999, 1998, and 1997.
PAYMENTS IN LIEU OF FEDERAL INCOME TAXES
In connection with the original acquisition of the Bank by the Parent
Company in 1988, the Federal Home Loan Bank Board ("FHLBB") approved the Tax
Benefits Agreement. The Tax Benefits Agreement, as amended in December 1993,
requires the Bank to pay to the Federal Savings and Loan Insurance Corporation
("FSLIC") Resolution Fund an amount equal to one-third of the sum of federal
and state net tax benefits as defined in the original acquisition agreements
("Net Tax Benefits"). Net Tax Benefits are equal to the excess of any of the
federal income tax liability, which would have been incurred if the tax benefit
item had not been deducted or excluded from income, over the federal income tax
liability actually incurred. Net Tax Benefits items are tax savings resulting
mainly from the utilization of any amount of NOLs. The obligation to share tax
benefit utilization will continue through September 30, 2003. The estimated tax
savings, by year, were as follows (in millions):
FOR THE YEAR ENDED
SEPTEMBER 30, SAVINGS
- ------------------------------------- -------
1997............................ $26.7
1998............................ 38.1
1999............................ 40.5
The Ownership Change, caused by the issuance of the Corporate PIES and
Redeemable Preferred Stock Series A, deferred the utilization of the Company's
NOLs, with the result that the Company will no longer be required to share the
tax benefits of these losses beyond fiscal 2003.
19
ITEM 2. PROPERTIES
The leases for the Company's headquarters and support facilities in effect
at September 30, 1999 had terms from three to eight years, with annual rental
payments of $7.4 million. A majority of leases outstanding at September 30, 1999
relate to Community Banking branches and expire within five years or less. The
following table sets forth the number and location of the community banking, SBA
lending, commercial banking, and wholesale mortgage origination offices of the
Company as of September 30, 1999.
NUMBER OF OFFICES
------------------------------------------------------------------------------
COMMUNITY
BANKING WHOLESALE
BRANCHES COMMERCIAL MORTGAGE
--------------- SBA LENDING BANKING ORIGINATION
LOCATION OWNED LEASED OFFICES LEASED OFFICES LEASED OFFICES LEASED TOTAL
- ------------------------------------- ----- ------ -------------- -------------- -------------- -----
Dallas/Ft. Worth Area................ 17 62 1 1 - 81
Houston Area......................... 14 48 1 1 1 65
Other Texas.......................... 5 4 1 - - 10
California........................... - - 3 3 2 8
Other U.S............................ - - 17 15 7 39
-- -- --
----- ------ -----
Total........................... 36 114 23 20 10 203
===== ====== == == == =====
Net investment in premises and equipment totalled $88.7 million at
September 30, 1999.
ITEM 3. LEGAL PROCEEDINGS
COURT OF CLAIMS LITIGATION
In connection with the original acquisition of the Bank by the Parent
Company in 1988, the FHLBB approved the Forbearance Agreement. Under the terms
of the Forbearance Agreement, the FSLIC agreed to waive or forbear from the
enforcement of certain regulatory provisions with respect to regulatory capital
requirements, liquidity requirements, accounting requirements, and other
matters. After the enactment of the Financial Institutions Reform Recovery and
Enforcement Act of 1989 ("FIRREA"), the OTS took the position that the capital
standards set forth in FIRREA applied to all savings institutions, including
those institutions that had been operating under previously granted capital and
accounting forbearances, and that FIRREA eliminated those forbearances. While
the Bank has not had to rely on such forbearances or waivers in order to remain
in compliance with existing capital requirements as interpreted by the OTS, the
position of the OTS adversely affected the Bank by curtailing the growth and
reducing the leverage contemplated by the terms of the Forbearance Agreement.
The Bank has been and continues to be in compliance with regulatory capital
provisions and, accordingly, has not had to rely on the waivers or forbearances
provided in connection with the original acquisition.
On July 25, 1995 the Bank, the Parent Company, and Hyperion Partners LP
(collectively the "Plaintiffs") filed suit against the United States of
America in the United States Court of Federal Claims for alleged failures of the
United States (1) to abide by a capital forbearance that 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 that 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.
In March 1999, the 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. On
August 5, 1999, the Court denied a motion for summary judgment filed by the
United States of America on the issue of lost profits damages. The Company's
case proceeded to trial on the amount of damages on September 13, 1999, and the
taking of evidence by the Court was concluded on October 21, 1999. The parties
will now submit post-trial briefs followed by oral argument. A decision by the
Court is not expected until
20
sometime in the first half of calendar year 2000. The Plaintiffs' seek and
offered evidence in support of damages in excess of $560 million. The government
argued that damages to Plaintiffs as a result of the breach, if any, approached
zero. 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. No assurances can be given on the outcome of this case.
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 any 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.
The Company is involved in other legal proceedings occurring in the
ordinary course of business that management believes, after consultation with
legal counsel, are not, in the aggregate, material to the financial condition,
results of operations, or liquidity of the Bank or the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed on the NASDAQ National Market System
under the symbol "BNKU". At December 15, 1999, there were approximately 117
shareholders of record for the Company's common stock. A majority of the
Company's common stock is held in "street name" by nominees for the beneficial
owners. The Company estimates the actual number of shareholders to be 5,878. The
last reported sales price of common stock on December 15, 1999, was $30.125 per
share.
The high and low common stock prices by quarter for the year ended
September 30 were as follows:
HIGH LOW
--------- ---------
1998
First quarter...................... $ 49.875 $ 38.500
Second quarter..................... 50.000 37.250
Third quarter...................... 56.500 44.500
Fourth quarter..................... 49.750 30.000
1999
First quarter...................... $ 45.500 $ 23.625
Second quarter..................... 43.313 38.250
Third quarter...................... 44.000 38.250
Fourth quarter..................... 40.188 29.250
The cash dividends paid by quarter were as follows:
1998
First quarter...................... $ 0.157
Second quarter..................... 0.163
Third quarter...................... 0.161
Fourth quarter..................... 0.162
1999
First quarter...................... $ 0.157
Second quarter..................... 0.157
Third quarter...................... 0.193
Fourth quarter..................... 0.185
The Parent Company intends, subject to its financial results, contractual,
legal, and regulatory restrictions, and other factors that its Board of
Directors may deem relevant, to declare and pay a quarterly cash dividend on the
Parent Company's common stock. The principal source of the funds to pay any
dividends on the Parent Company's common stock would be a dividend from the
Bank. OTS regulations impose restrictions on the payment of dividends by savings
institutions. See "Business -- Regulation -- Capital Distributions" for a
discussion of these restrictions.
22
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presented below under the captions
"Summary of Financial Condition" and "Summary of Operations" are derived
from the Company's Consolidated Financial Statements, which have been audited by
KPMG LLP and Deloitte & Touche LLP, independent certified public accountants.
The information set forth below should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations". The
Consolidated Financial Statements as of September 30, 1999 and 1998 and for each
of the years in the three-year period ended September 30, 1999 and the auditors'
reports thereon are included elsewhere in this document. Prior period amounts
have been restated to include the accounts of an entity that was acquired using
the pooling of interest method of accounting.
AT SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
SUMMARY OF FINANCIAL CONDITION
ASSETS
Cash and cash equivalents............ $ 183,260 $ 236,588 $ 128,379 $ 124,987 $ 117,122
Securities purchased under agreements
to resell and federal funds sold... 390,326 495,282 366,249 689,194 482,637
Securities and other investments..... 143,538 104,522 83,551 72,852 123,240
Mortgage-backed securities, net...... 1,004,002 938,528 1,570,399 1,658,967 2,399,019
Loans
Single family -- held for
investment..................... 6,451,606 4,696,201 5,802,722 6,120,191 7,005,814
Single family -- held for sale... 592,583 2,149,009 697,410 256,656 406,563
Commercial....................... 5,408,675 3,518,280 2,239,898 1,014,176 759,555
Consumer......................... 663,338 504,407 306,370 172,844 121,433
Mortgage servicing rights............ 534,694 410,868 272,214 123,392 75,097
Other assets......................... 872,657 727,370 587,176 556,593 552,332
------------ ------------ ------------ ------------ ------------
Total assets................ $ 16,244,679 $ 13,781,055 $ 12,054,368 $ 10,789,852 $ 12,042,812
============ ============ ============ ============ ============
LIABILITIES, MINORITY INTEREST,
REDEEMABLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY
Deposits............................. $ 7,508,502 $ 6,894,227 $ 5,571,402 $ 5,404,385 $ 5,475,976
Federal Home Loan Bank advances...... 6,443,470 4,783,498 3,992,581 3,490,654 4,384,193
Securities sold under agreements to
repurchase
and federal funds purchased........ 516,900 824,043 1,312,301 834,286 1,172,533
Notes payable........................ 368,762 219,720 220,199 115,000 115,000
Other liabilities.................... 308,131 182,673 167,923 223,640 208,874
------------ ------------ ------------ ------------ ------------
Total liabilities........... 15,145,765 12,904,161 11,264,406 10,067,965 11,356,576
------------ ------------ ------------ ------------ ------------
Minority interest -- Bank preferred
stock.............................. 185,500 185,500 185,500 185,500 185,500
Redeemable preferred stock........... 160,000 -- -- -- --
Stockholders' equity................. 753,414 691,394 604,462 536,387 500,736
------------ ------------ ------------ ------------ ------------
Total liabilities, minority
interest, redeemable
preferred stock, and
stockholders' equity...... $ 16,244,679 $ 13,781,055 $ 12,054,368 $ 10,789,852 $ 12,042,812
============ ============ ============ ============ ============
23
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
----------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS
Interest income...................... $ 1,007,986 $ 905,800 $ 816,483 $ 816,900 $ 750,861
Interest expense..................... 658,365 615,047 547,914 586,210 554,045
----------- --------- --------- --------- ---------
Net interest income.............. 349,621 290,753 268,569 230,690 196,816
Provision for credit losses.......... 38,368 20,123 18,107 16,489 24,791
----------- --------- --------- --------- ---------
Net interest income after
provision for credit losses.... 311,253 270,630 250,462 214,201 172,025
Non-interest income
Loan servicing fees, net......... 54,408 35,975 32,381 30,383 32,677
Net gains (losses)
Sales of single family
servicing rights and
loans..................... 18,909 11,124 21,182 43,074 60,495
Securities and
mortgage-backed
securities................ 1,290 2,761 2,718 4,001 26
Other loans................. 3,299 651 1,128 3,189 (1,210)
Sale of mortgage
offices(1)................ -- -- 4,748 -- --
----------- --------- --------- --------- ---------
Net gains................... 23,498 14,536 29,776 50,264 59,311
Deposit fees and charges......... 23,176 17,888 13,419 9,820 7,693
Other............................ 18,879 13,254 8,428 6,330 5,037
----------- --------- --------- --------- ---------
Total non-interest income........ 119,961 81,653 84,004 96,797 104,718
----------- --------- --------- --------- ---------
Non-interest expense
Compensation and benefits........ 109,944 88,890 76,836 89,205 84,784
SAIF deposit insurance
premiums....................... 3,974 4,167 4,797 45,690 11,428
Court of claims litigation....... 7,575 1,800 -- -- --
Merger related and restructuring
costs(1)....................... 2,394 -- -- 10,681 --
Other............................ 125,758 97,621 93,755 96,573 89,893
----------- --------- --------- --------- ---------
Total non-interest expense....... 249,645 192,478 175,388 242,149 186,105
----------- --------- --------- --------- ---------
Income before income taxes,
minority interest, and
extraordinary loss............. 181,569 159,805 159,078 68,849 90,638
Income tax expense (benefit)......... 53,659 25,862 60,986 (75,487) 37,545
----------- --------- --------- --------- ---------
Income before minority interest
and extraordinary loss......... 127,910 133,943 98,092 144,336 53,093
Minority interest
Bank preferred stock dividends... 18,253 18,253 18,253 18,253 10,600
Payments in lieu of
dividends(2)................... -- -- -- 6,413 377
----------- --------- --------- --------- ---------
Income before extraordinary
loss........................... 109,657 115,690 79,839 119,670 42,116
Extraordinary loss -- early
extinguishment of debt(3).......... -- -- 2,323 -- --
----------- --------- --------- --------- ---------
Net income....................... $ 109,657 $ 115,690 $ 77,516 $ 119,670 $ 42,116
=========== ========= ========= ========= =========
Net income available to common
stockholders................... $ 107,955 $ 115,690 $ 77,516 $ 119,670 $ 42,116
=========== ========= ========= ========= =========
Earnings per common share
Basic............................ $ 3.34 $ 3.59 $ 2.41 $ 4.01 $ 1.43
Diluted.......................... 3.28 3.51 2.38 3.81 1.33
CERTAIN RATIOS AND OTHER DATA
Book value per common share.......... $ 23.22 $ 21.47 $ 18.77 $ 17.96 $ 16.99
Dividends declared per common
share................................ 0.69 0.64 0.55 3.35 --
Average common shares outstanding.... 32,299 32,200 32,210 29,872 29,475
Average common shares and potential
dilutive common shares
outstanding........................ 32,941 32,976 32,536 29,927 29,481
Regulatory capital ratios of the Bank
Tangible capital................. 7.14% 6.74% 7.71% 6.57% 6.21%
Core capital..................... 7.15 6.76 7.76 6.64 6.30
Total risk-based capital......... 11.71 10.48 13.17 13.09 13.45
Return on average assets(4).......... 0.85 1.04 0.86 1.28 0.51
Return on average common equity...... 14.81 17.81 13.53 22.98 8.80
Efficiency ratio(5).................. 51.86 50.22 49.24 71.93 58.06
Stockholders' equity to assets....... 4.64 5.02 5.01 4.97 4.16
Tangible stockholders' equity to
tangible assets.................... 4.14 4.60 4.91 4.82 3.95
Net yield on interest-earning
assets............................. 2.53 2.45 2.55 2.12 1.94
Interest rate spread................. 2.54 2.42 2.41 1.91 1.75
24
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CERTAIN RATIOS AND OTHER DATA --
CONTINUED
Average interest-earning assets to
average interest-bearing
liabilities........................ 1.00 1.01 1.03 1.04 1.03
Single family servicing portfolio.... $ 30,892,993 $ 27,935,300 $ 24,518,396 $ 13,246,848 $ 12,532,472
Fundings
Single family.................... 3,680,202 3,791,447 2,188,943 3,603,371 3,226,324
Commercial....................... 4,479,385 2,883,938 1,497,779 900,977 548,637
Consumer......................... 318,409 370,338 153,944 125,992 99,249
------------ ------------ ------------ ------------ ------------
Total fundings....................... $ 8,477,996 $ 7,045,723 $ 3,840,666 $ 4,630,340 $ 3,874,210
============ ============ ============ ============ ============
Loans purchased for held for
investment portfolio............... $ 2,151,626 $ 1,158,270 $ 1,086,249 $ 148,510 $ 2,658,093
Nonperforming assets to total
assets............................. 0.67% 0.59% 0.62% 1.12% 0.84%
Allowance for credit losses to
nonperforming loans................ 92.25 76.62 73.40 44.85 49.05
Allowance for credit losses to total
loans.............................. 0.63 0.44 0.44 0.53 0.45
Net charge-offs to average loans..... 0.05 0.13 0.23 0.17 0.17
Full-time equivalent employees....... 2,578 1,968 1,577 2,340 2,691
Number of Community Banking
branches........................... 150 83 71 70 65
Number of SBA lending offices........ 23 2 -- -- --
Number of Commercial Banking
offices............................ 20 19 11 9 9
Number of mortgage origination
offices(1)......................... 10 8 6 85 122
CERTAIN RATIOS AND OTHER DATA --
EXCLUDING ADJUSTING ITEMS(6)
Adjusted net income.................. $ 110,830 $ 91,256 $ 76,915 $ 57,127 $ 42,116
Adjusted net income available to
common stockholders................ 109,128 91,256 76,915 57,127 42,116
Earnings per diluted share........... 3.31 2.77 2.36 1.81 1.33
Return on average assets............. 0.86% 0.85% 0.85% 0.67% 0.51%
Return on average common equity...... 14.94 14.60 13.43 11.50 8.80
Efficiency ratio..................... 49.70 49.33 49.24 55.44 58.06
- ------------
(1) During fiscal 1997, the Company sold certain of its mortgage origination
offices. During 1996 and in connection with this sale, the remaining offices
were restructured or closed. The mortgage origination branches shown at
September 30, 1999, 1998, and 1997 are wholesale mortgage origination
offices. The merger related and restructuring costs recorded in fiscal 1999
related to the Company's acquisition of Texas Central. See Note 2 to the
Consolidated Financial Statements.
(2) In connection with its original acquisition of the Bank in 1988, the Bank
issued to the FDIC-FSLIC Resolution Fund a warrant to acquire 158,823 shares
of common stock of the Bank. Payments in lieu of dividends related to the
warrant, which was redeemed in August 1996.
(3) The fiscal 1997 extraordinary loss represents costs and charges associated
with the repurchase and retirement of a majority of the Company's senior
notes.
(4) Return on average assets is net income without deduction of minority
interest, divided by average total assets.
(5) Efficiency ratio is non-interest expenses (excluding goodwill amortization),
divided by net interest income plus non-interest income, excluding the gain
on the sale of mortgage offices.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
25
(6) Adjusting items are comprised of the following for fiscal 1999, 1998, 1997,
and 1996:
-- 1999 (adjusting items decreased actual earnings per share ("EPS")
$0.03) -- (1) a positive income tax adjustment totalling $13.5 million,
(2) court of claims litigation expenses of $7.6 million ($4.7 million net
of tax), (3) an additional $13 million provision for credit losses
associated with the increased growth of certain types of single family
and commercial loans ($8.1 million net of tax), and (4) $2.9 million of
costs related to the Texas Central acquisition ($1.8 million net of tax);
-- 1998 (adjusting items increased actual EPS $0.74) -- (1) two positive
income tax adjustments totalling $33.5 million, (2) an increase in the
commercial loan provision for credit losses of $7.8 million ($4.9
million net of tax), and (3) provisions for the impact of higher
prepayments on the single family loan and servicing portfolios
totalling $6.7 million ($4.2 million net of tax);
-- 1997 (adjusting items increased actual EPS $0.02) -- (1) the gain
on the sale of mortgage offices of $4.7 million ($2.9 million net
of tax) and (2) an extraordinary loss on extinguishment of debt of
$3.6 million ($2.3 million net of tax);
-- 1996 (adjusting items increased actual EPS $2.00) -- (1) a
one-time SAIF assessment charge of $33.7 million ($20.7 million
net of tax), (2) compensation expense of $7.8 million ($4.8
million net of tax), (3) charges totalling $12.5 million ($7.7
million net of tax) related to the restructuring of and items
associated with the mortgage origination business, (4) a
contractual payment to previous minority interests of $5.9
million, and (5) an income tax benefit of $101.7 million.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Prior period amounts have been restated to include the accounts of an
entity that was acquired using the pooling of interest method of accounting.
DISCUSSION OF RESULTS OF OPERATIONS
OVERVIEW
1999 COMPARED TO 1998. Net income was $109.7 million or $3.28 per diluted
share for fiscal 1999, compared to $115.7 million or $3.51 per diluted share for
fiscal 1998. The decrease in net income is primarily due to two positive income
tax adjustments recorded during fiscal 1998 totalling $33.5 million, partially
offset by a $13.5 million tax adjustment in fiscal 1999. Net interest income
increased due to higher levels of interest-earning assets, particularly in the
commercial lending businesses. Non-interest income increased due to higher net
servicing fee revenue and increased gains on sales of single family loans. The
increase in the provision for credit losses relates to the growth in the single
family and commercial loan portfolios, as well as changes in the mix of those
portfolios. Non-interest expenses are up due to growth in the Community Banking
and Commercial Banking businesses.
1998 COMPARED TO 1997. Net income was $115.7 million or $3.51 per diluted
share for fiscal 1998, compared to $77.5 million or $2.38 per diluted share for
fiscal 1997. The increase in net income was primarily caused by two positive
income tax adjustments that were recorded in 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.
SEGMENTS
The Company's business segments include Commercial Banking (which is
comprised of Residential Construction Lending, Mortgage Banker Finance,
Commercial Real Estate Lending, Multi-Family Lending, and Healthcare Lending),
Community Banking, Mortgage Servicing, Mortgage Banking, and Investment
Portfolio. Financial information by segment is reported on a basis consistent
with how such information is presented to management for purposes of making
operating decisions and assessing performance. See Note 20 to the Consolidated
Financial Statements. Summarized financial information by business segment for
fiscal 1999 was as follows:
AT OR FOR THE YEAR ENDED
SEPTEMBER 30, 1999
------------------------------------
GROSS
INCOME REVENUES ASSETS
-------- ---------- -------------
(IN THOUSANDS)
Commercial Banking
Residential Construction
Lending......................... $ 24,181 $ 34,348 $ 1,169,138
Mortgage Banker Finance......... 22,300 30,047 1,088,144
Commercial Real Estate
Lending......................... 15,786 21,896 865,339
Multi-Family Lending............ 15,665 21,310 1,061,347
Healthcare Lending.............. 8,550 12,483 615,794
Other........................... 6,016 9,953 477,894
-------- ---------- -------------
Total Commercial Banking... 92,498 130,037 5,277,656
Community Banking.................... 21,489 148,789 1,179,002
Mortgage Servicing................... 22,319 64,454 788,941
Mortgage Banking..................... 21,880 49,626 2,754,640
Investment Portfolio................. 39,555 68,641 5,412,149
-------- ---------- -------------
Reportable Segments............. 197,741 461,547 15,412,388
Other................................ (16,172) 8,035 832,291
-------- ---------- -------------
Total........................... $181,569 $ 469,582 $ 16,244,679
======== ========== =============
27
NET INTEREST INCOME
Net interest income is based on the levels of interest-earning assets and
interest-bearing liabilities and the spread between the yields earned on assets
and rates paid on liabilities. The net interest-rate spread is affected by
changes in general market interest rates, including changes in the relationship
between short- and long-term interest rates, the effects of periodic caps on the
Company's adjustable-rate loan and MBS portfolios, and the interest rate
sensitivity position or gap. See "Quantitative and Qualitative Disclosures
About Market Risk," and Note 12 to the Consolidated Financial Statements.
The Company's average balances, interest, and average yields were as
follows:
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ---------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
---------- --------- ------ ---------- --------- ------ ---------- ---------
(DOLLARS IN THOUSANDS)
Interest-earning assets
Short-term interest-earning
assets............................ $ 390,737 $ 20,692 5.37% $ 528,013 $ 38,641 7.32% $ 575,801 $ 36,729
Securities and other investments.... 169,295 7,414 4.57 145,906 9,711 6.66 88,812 5,841
Mortgage-backed securities.......... 1,098,249 69,665 6.36 1,235,486 82,276 6.66 1,549,198 104,955
Loans:
Single family - held for
investment.................... 5,272,188 386,721 7.34 4,844,430 371,286 7.66 6,115,456 478,030
Single family - held for sale... 1,534,219 96,453 6.29 1,667,629 111,143 6.66 325,237 24,782
Commercial...................... 4,557,010 365,022 8.04 2,860,296 246,427 8.62 1,451,516 130,287
Consumer........................ 580,656 45,843 7.94 393,671 33,638 8.54 248,262 24,440
---------- --------- ------ ---------- --------- ------ ---------- ---------
Total loans................... 11,944,073 894,039 7.50 9,766,026 762,494 7.81 8,140,471 657,539
FHLB stock.......................... 295,206 16,176 5.48 211,544 12,678 5.99 193,106 11,419
---------- --------- ------ ---------- --------- ------ ---------- ---------
Total interest-earning assets... 13,897,560 1,007,986 7.27 11,886,975 905,800 7.62 10,547,388 816,483
Non-interest-earning assets......... 1,152,046 966,708 630,116
---------- ---------- ----------
Total assets.................... $15,049,606 $12,853,683 $11,177,504
========== ========== ==========
Interest-bearing liabilities
Interest-bearing deposits
Checking accounts............... $ 233,222 2,391 1.03 $ 215,976 3,109 1.44 $ 212,781 2,587
Money market accounts........... 2,202,400 109,393 4.97 1,973,170 107,209 5.43 1,569,461 83,883
Savings accounts................ 133,074 2,430 1.83 127,373 3,041 2.39 128,448 3,165
Certificates of deposit......... 3,469,732 182,416 5.27 3,395,515 189,566 5.58 2,955,230 174,811
Non-interest bearing deposits....... 1,130,031 -- -- 820,838 -- -- 538,354 --
---------- --------- ------ ---------- --------- ------ ---------- ---------
Total deposits.................. 7,168,459 296,630 4.15 6,532,872 302,925 4.63 5,404,274 264,446
FHLB advances....................... 5,820,296 303,014 5.21 4,090,581 236,265 5.78 3,705,326 212,573
Reverse repurchase agreements and
federal funds purchased........... 644,911 32,929 5.13 975,779 56,286 5.77 1,005,299 57,485
Notes payable....................... 297,585 25,792 8.67 220,019 19,571 8.90 157,565 13,410
---------- --------- ------ ---------- --------- ------ ---------- ---------
Total interest-bearing
liabilities................... 13,931,251 658,365 4.73 11,819,251 615,047 5.20 10,272,464 547,914
Non-interest-bearing liabilities,
minority interest, redeemable
preferred stock, and stockholders'
equity............................ 1,118,355 1,034,432 905,040
---------- --------- ------ ---------- --------- ------ ---------- ---------
Total liabilities, minority
interest, redeemable preferred
stock, and stockholders'
equity........................ $15,049,606 $12,853,683 $11,177,504
========== ========== ==========
Net interest income/interest rate
spread................................ $ 349,621 2.54% $ 290,753 2.42% $ 268,569
========= ====== ========= ====== =========
Net yield on interest-earning assets.... 2.53% 2.45%
====== ======
Ratio of average interest-earning assets
to average interest-bearing
liabilities........................... 1.00 1.01
====== ======
YIELD/
RATE
------
Interest-earning assets
Short-term interest-earning
assets............................ 6.38%
Securities and other investments.... 6.58
Mortgage-backed securities.......... 6.77
Loans:
Single family - held for
investment.................... 7.82
Single family - held for sale... 7.62
Commercial...................... 8.98
Consumer........................ 9.84
------
Total loans................... 8.08
FHLB stock.......................... 5.91
------
Total interest-earning assets... 7.74
Non-interest-earning assets.........
Total assets....................
Interest-bearing liabilities
Interest-bearing deposits
Checking accounts............... 1.22
Money market accounts........... 5.34
Savings accounts................ 2.46
Certificates of deposit......... 5.92
Non-interest bearing deposits....... --
------
Total deposits.................. 4.89
FHLB advances....................... 5.74
Reverse repurchase agreements and
federal funds purchased........... 5.72
Notes payable....................... 8.51
------
Total interest-bearing
liabilities................... 5.33
Non-interest-bearing liabilities,
minority interest, redeemable
preferred stock, and stockholders'
equity............................
------
Total liabilities, minority
interest, redeemable preferred
stock, and stockholders'
equity........................
Net interest income/interest rate
spread................................ 2.41%
======
Net yield on interest-earning assets.... 2.55%
======
Ratio of average interest-earning assets
to average interest-bearing
liabilities........................... 1.03
======
28
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in yields and rates. The table shows the extent to which changes in the interest
income and interest expense are due to changes in volume (changes in volume
multiplied by prior year rate) and changes in rate (changes in rate multiplied
by prior year volume).
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
---------------------------------- ----------------------------------
VOLUME RATE NET VOLUME RATE NET
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
INTEREST INCOME
Short-term interest-earning
assets.......................... $ (8,875) $ (9,074) $ (17,949) $ (3,212) $ 5,124 $ 1,912
Securities and other investments... 1,284 (3,581) (2,297) 3,798 72 3,870
Mortgage-backed securities......... (8,973) (3,638) (12,611) (20,996) (1,683) (22,679)
Loans.............................. 172,394 (40,849) 131,545 127,025 (22,070) 104,955
FHLB stock......................... 4,655 (1,157) 3,498 1,103 156 1,259
---------- ---------- ---------- ---------- ---------- ----------
Total...................... 160,485 (58,299) 102,186 107,718 (18,401) 89,317
---------- ---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits........................... 16,192 (22,487) (6,295) 44,943 (6,464) 38,479
FHLB advances...................... 91,948 (25,199) 66,749 22,204 1,488 23,692
Reverse repurchase agreements and
federal funds purchased......... (17,607) (5,750) (23,357) (1,699) 500 (1,199)
Notes payable...................... 6,739 (518) 6,221 5,522 639 6,161
---------- ---------- ---------- ---------- ---------- ----------
Total...................... 97,272 (53,954) 43,318 70,970 (3,837) 67,133
---------- ---------- ---------- ---------- ---------- ----------
Net change in net interest
income................... $ 63,213 $ (4,345) $ 58,868 $ 36,748 $ (14,564) $ 22,184
========== ========== ========== ========== ========== ==========
1999 COMPARED TO 1998. Net interest income increased $58.9 million or 20%
during fiscal 1999. This increase was due to a $2.0 billion or 17% increase in
average interest-earning assets, as well as a change in the composition of
assets and deposits. The net yield on interest-earning assets ("net yield")
increased 8 basis points to 2.53%.
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 totalled $5.1 billion or 37% of average
interest-earning assets for fiscal 1999 as compared to $3.3 billion or 27% of
average interest-earning assets for fiscal 1998. Average deposits increased
$635.6 million or 10% during the current year. This growth was principally due
to an increase in the number of transaction accounts resulting from the Midland
acquisition and the 7-Day Banking Centers opened in Kroger Stores during fiscal
1999. Transaction accounts averaged $3.6 billion or 51% of average total
deposits, up from $3.1 billion or 47% in the prior year. The growth in assets
was funded primarily with FHLB advances and the growth in deposits. See
"-- Discussion of Changes in Financial Condition."
The net yield increased 8 basis points during fiscal 1999, as a result of
increased levels of higher yielding commercial and consumer loans and lower
costing transaction deposit accounts. On average, market interest rates were
lower during fiscal 1999, as compared to fiscal 1998. The favorable effect of
the decline on the cost of funds exceeded the decline in asset yields.
1998 COMPARED TO 1997. Net interest income increased $22.2 million or 8%
during fiscal 1998. This increase was due to a $1.3 billion or 13% increase in
average interest-earning assets and a change in the composition of assets and
deposits, partially offset by a 10 basis point decrease in the net yield.
The increase in average interest-earning assets came from growth in the
commercial and consumer loan portfolios through fundings and purchases. As a
result of this growth, the composition of the Company's assets changed during
fiscal 1998. For fiscal 1998, commercial and consumer loans comprised 27% of
average interest-earning assets and single family loans comprised 55%. During
fiscal 1997, commercial and consumer loans comprised 16% of average
interest-earning assets and single family loans comprised 61%. Average deposits
29
increased $1.1 billion or 21% during fiscal 1998. This increase is primarily due
to an increase in lower costing transaction accounts and CDs.
The net yield was 2.45% for fiscal 1998, compared to 2.55% for fiscal 1997.
The net yield decreased due to a decline in long-term market interest rates, and
the resulting prepayments of higher yielding single family loans. As new loans
are originated at the lower current market interest rates, they were generally
included in the Company's held for sale portfolio. Excluding the single family
held for sale portfolio, the net yield would have been 2.70% for the year ended
September 30, 1998, compared to 2.57% for the year ended September 30, 1997. The
resulting 13 basis point increase demonstrated increased levels of higher
yielding commercial loans and lower deposit rates. The decline in deposit rates
resulted from deposits acquired in branch acquisitions in fiscal 1998 and
maturities of higher rate brokered deposits.
PROVISION FOR CREDIT LOSSES
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
level is adequate to cover probable losses. The allowance for credit losses
totalled $82.7 million or 0.63% of total loans at September 30, 1999, $47.5
million or 0.44% at September 30, 1998, and $39.7 million or 0.44% at September
30, 1997. The provision for credit losses totalled $38.4 million in fiscal 1999,
$20.1 million in fiscal 1998, and $18.1 million in fiscal 1997. See "-- Asset
Quality" and Note 6 to the Consolidated Financial Statements.
ALLOWANCE FOR CREDIT LOSSES
SINGLE
FAMILY COMMERCIAL CONSUMER TOTAL
------- ---------- -------- ---------
(IN THOUSANDS)
Balance at September 30, 1997........ $24,538 $ 9,315 $ 5,870 $ 39,723
Provision....................... (8,343) 24,105 4,361 20,123
Net charge-offs................. (3,692) (675) (7,976 ) (12,343)
------- ---------- -------- ---------
Balance at September 30, 1998........ 12,503 32,745 2,255 47,503
Provision....................... 9,644 27,288 1,436 38,368
Acquisition..................... -- 2,594 -- 2,594
Net charge-offs................. (3,117) (1,356) (1,287 ) (5,760)
------- ---------- -------- ---------
Balance at September 30, 1999........ $19,030 $ 61,271 $ 2,404 $ 82,705
======= ========== ======== =========
1999 COMPARED TO 1998. The increase in the provision for credit losses and
the related allowance during fiscal 1999 is a result of the significant growth
in the single family and commercial loan portfolios. An additional provision for
credit losses of $13.0 million was recorded in the fourth quarter of fiscal
1999. This provision related to the growth in certain types of single family and
commercial loans, which have historically experienced higher levels of default
and loss severity.
The single family loan provision totalled $9.6 million for fiscal 1999,
compared to a negative $8.3 million for fiscal 1998, for an increase of $18.0
million. The increase in the provision during fiscal 1999 exhibits an increase
in the single family loans held for investment portfolio, a change in the mix of
that portfolio during the year, and the effects of a loss ratio reassessment
performed in 1998. During fiscal 1998, $9.1 million of the single family
allowance was reversed through a negative provision as a result of the
historically low levels of losses experienced in that portfolio. The single
family loans held for investment portfolio increased $1.8 billion during fiscal
1999, from $4.7 billion at September 30, 1998 to $6.5 billion at September 30,
1999. The single family loans held for investment allowance ratio increased
slightly from 0.27% at September 30, 1998 to 0.29% at September 30, 1999.
The commercial loan provision totalled $27.3 million for fiscal 1999,
compared to $24.1 million for fiscal 1998, for an increase of $3.2 million. The
provision for fiscal 1999 resulted from an increase in the commercial loan
portfolio during the year, as well as, a change in the mix of that portfolio
during the year. The commercial loan portfolio increased $1.9 billion during
fiscal 1999, from $3.5 billion at September 30, 1998 to $5.4 billion at
30
September 30, 1999. The commercial loan allowance ratio increased from 0.95% at
September 30, 1998 to 1.14% at September 30, 1999.
The consumer loan provision decreased to $1.4 million during fiscal 1999,
compared to $4.4 million during fiscal 1998, primarily due to provisions
recorded during fiscal 1998 related to the consumer line of credit portfolio
which was sold during that year.
1998 COMPARED TO 1997. The provision for credit losses increased $2.0
million, to $20.1 million in fiscal 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 for the single family
loans held for investment portfolio. The commercial loan portfolio increased
$1.3 billion or 57% during fiscal 1998. Due to this growth, and the increased
risks associated with this type of portfolio, most particularly the
non-residential commercial loans, the Company increased this portfolio's
allowance levels to approximately one percent. The single family loans held for
investment portfolio decreased $1.1 billion or 19% during fiscal 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, a negative
provision was recorded and the allowance for single family loans held for
investment was reduced to approximately 27 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 fiscal 1998. Charge-offs of
$4.9 million related to this sale were recorded during fiscal 1998.
NON-INTEREST INCOME
1999 COMPARED TO 1998. The primary components of non-interest income are
net loan servicing fees, net gains from sales of single family and SBA loans,
Community Banking deposit related fees and charges, commissions from annuity and
security sales to consumers, and Commercial Banking fees. Non-interest income
increased $38.3 million or 47% during fiscal 1999.
The largest component of non-interest income is loan servicing fees, which
totalled $54.4 million for an increase of $18.4 million or 51% during fiscal
1999. This increase was due to higher average servicing fees received per loan
and due to a larger average servicing portfolio. The total average servicing fee
rate, including ancillary revenues, rose to 42.4 basis points during the current
year, compared to 37.3 basis points during the prior year. Loan servicing rights
purchased during the current year included a significant amount of government
guaranteed loans that yield a higher servicing fee per loan, contributing to the
increased servicing fees earned. At September 30, 1999, government-backed loans
comprised 50% of the serviced for others portfolio, compared to 40% at September
30, 1998. The portfolio of single family loans serviced for others averaged
$23.5 billion during fiscal 1999, compared to $21.7 billion during fiscal 1998.
The growth in the Company's servicing portfolio came from purchases of servicing
rights and sales of originated single family loans with servicing retained,
partially offset by payoffs. See "-- Discussion of Changes in Financial
Condition -- Mortgage Servicing Rights." During fiscal 1998, the Company
recorded a $4.8 million valuation allowance to recognize the risks associated
with expected increased prepayments on the servicing portfolio's underlying
loans. No additional valuation allowance was required during the current year.
Net gains from sales of single family loans, SBA loans, and securities made
in the ordinary course of business comprised the majority of the $23.5 million
of gains during fiscal 1999, up $9.0 million or 62% over the prior year.
Increased volumes sold ($2.8 billion during the current year versus $1.9 billion
during the prior year) and changes in the mix of products sold resulted in a
$7.8 million or 70% increase in net gains on sales of single family loans during
the current year. Increased SBA banking sales resulted in a $2.3 million or 100%
increase in related net gains, which totalled $4.7 million during the current
year compared to $2.4 million during the prior year.
Deposit fees and charges increased $5.3 million or 30% primarily due to an
increase in the number of checking accounts. Growth in the number of checking
accounts from 179,000 at September 30, 1998 to 233,000 at September 30, 1999 is
primarily due to the Midland and Texas Central acquisitions, as well as the
7-Day Banking Centers opened in Kroger stores during fiscal 1999. See
"-- Discussion of Changes in Financial Condition -- Deposits."
31
Other non-interest income increased $5.6 million or 42% primarily due to
increased income earned on sales of annuities due to higher sales volumes during
fiscal 1999 and due to higher fee revenue related to the mortgage banker finance
business.
1998 COMPARED TO 1997. Non-interest income decreased $2.4 million or 3%
during fiscal 1998, compared to fiscal 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. Fiscal 1997 results include a $4.7 million gain related to the sale of
certain mortgage origination offices.
Despite an increase in the volume of single family loans sold ($1.9 billion
for fiscal 1998, compared to $1.2 billion for fiscal 1997), gains on sales of
such loans declined $10.1 million or 47%. Loans sold during fiscal 1998 were
originated through the Company's wholesale network. Loans sold in fiscal 1997
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.
Net loan servicing fees increased $3.6 million during fiscal 1998. Loan
servicing fees for fiscal 1998 were reduced by a valuation allowance of $4.8
million, which was established due to the effect of a decline in long-term
market interest rates. Excluding this valuation allowance, loan servicing fees
increased $8.4 million or 26% during fiscal 1998. Gross servicing fee revenue
increased $31.6 million, and the related amortization of MSRs increased $23.2
million. These increases resulted from a larger portfolio of single family loans
serviced for others, which averaged $21.7 billion for fiscal 1998, compared to
$14.5 billion for fiscal 1997.
Deposit fees and charges increased $4.5 million or 33%, during fiscal 1998
due to higher volumes of activity in several areas. Checking account fee revenue
grew by $3.2 million, stemming from growth in the number of checking accounts
from 166,000 at September 30, 1997 to 179,000 at September 30, 1998, as well as
a higher volume of insufficient funds charges. Fees on debit cards, introduced
in March 1997, increased $1.1 million over the prior year.
Other non-interest income increased $4.8 million or 57% during fiscal 1998
due to an increase in broker and annuity fees resulting from an increase in
sales volume. Commercial Banking related fees increased $1.3 million due
primarily to growth in the mortgage banker line of credit portfolio, which
almost doubled from $464.0 million at September 30, 1997 to $787.3 million at
September 30, 1998.
MORTGAGE BANKING RESTRUCTURING AND SALE OF OFFICES
In fiscal 1997, the Company sold certain of its mortgage origination
offices. In connection with this sale, the remaining offices were restructured
or closed. The net gain on the sale of these offices, reduced by restructuring
costs, was $4.7 million before tax, $2.9 million after tax, or $0.09 per share.
NON-INTEREST EXPENSE
1999 COMPARED TO 1998. Non-interest expense was $249.6 million and $192.5
million for fiscal 1999 and 1998. Included in these amounts are litigation
expenses of $7.6 million and $1.8 million related to the Company's Court of
Claims case against the federal government in fiscal 1999 and 1998. Fiscal 1999
expense also includes $2.4 million of merger related and restructuring costs
associated with the August 1999 Texas Central acquisition. See "Legal
Proceedings" and Notes 2 and 18 to the Consolidated Financial Statements.
Excluding the litigation expenses and the merger related and restructuring
costs, non-interest expense was $239.6 million and $190.7 million, for an
increase of $48.9 million or 26% year over year. This increase exhibits the
continued growth in all businesses of the Company, most particularly the
Community Bank and the Commercial Bank. During fiscal 1999, the Community Bank's
retail network expanded from 83 branch locations to 150, while the number of
checking accounts grew from 179,000 to 233,000. The Company's investment in
7-Day Banking Centers, which resulted in the opening of 59 new Kroger store
locations during 1999, and the expansion into Midland, Texas in February 1999,
contributed to this increase. Additionally, the SBA initiative within the
Community Bank grew from two lending offices at September 30, 1998 to 23 offices
at September 30, 1999. Record loan volumes in the Commercial Bank contributed to
additional expenses in that business. Technology initiatives, including the Year
32
2000 and e-commerce efforts, real estate expenses and a larger government-backed
loan servicing portfolio also caused non-interest expenses to increase year over
year. On a year to date basis, the adjusted efficiency ratio was 49.70% for the
current year, compared to 49.33% in the prior year.
1998 COMPARED TO 1997. Non-interest expense was $192.5 million for fiscal
1998, up 10% from $175.4 million for fiscal 1997. Despite the increase in
expenses, the efficiency ratio remained at approximately 50% for both periods.
The expense increase was principally the result of growth in the servicing
portfolio, higher levels of loan activity, and branch acquisitions in fiscal
1998. 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. Non-interest expenses for fiscal 1998 included $1.8 million of costs
associated with the Company's Court of Claims case. See "Legal Proceedings."
Non-interest expense for fiscal 1997 included costs associated with the retail
mortgage origination network, which was sold in the second quarter of fiscal
1997.
INCOME TAXES
The provision for income taxes was $53.7 million for fiscal 1999, $25.9
million for fiscal 1998, and $61.0 million for fiscal 1997. The August 1999
issuance of the Corporate PIES and the Redeemable Preferred Stock Series A
caused an ownership change under Section 382 of the Internal Revenue Code. This
ownership change deferred the future utilization of the Company's NOLs with the
result that the Company will no longer be required to share certain tax benefits
of these losses with a third party pursuant to a contractual agreement entered
into in connection with the original acquisition of the Bank. This deferral
resulted in the recognition of $13.5 million tax benefit during fiscal 1999.
During fiscal 1998, the Company successfully resolved an outstanding tax
benefit lawsuit with the FDIC as manager of the FSLIC Resolution Fund, which
resulted in a positive income tax adjustment of approximately $6.0 million.
Additionally, the Company recognized a positive income tax adjustment of $27.5
million resulting from the anticipated use of additional NOLs against future
taxable income.
MINORITY INTEREST
Dividends paid on the Bank's preferred stock were $18.3 million for fiscal
1999, 1998, and 1997. These shares are not owned by the Company and,
accordingly, are shown as minority interest in the Consolidated Financial
Statements. See Note 16 to the Consolidated Financial Statements.
EXTRAORDINARY LOSS
In May 1997, the Company issued $220 million of subordinated notes and used
a portion of the net proceeds to retire $114.5 million of the Company's senior
notes. The costs associated with retiring the senior notes are shown as an
extraordinary loss of $3.6 million, $2.3 million after tax, or $0.07 per share.
See Note 11 to the Consolidated Financial Statements.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION
GENERAL
1999 ACTIVITY. Total assets increased $2.4 billion or 17% to $16.2 billion
at September 30, 1999 from $13.8 billion at September 30, 1998. This increase
was primarily the result of commercial loan additions, particularly in the
single family construction, commercial real estate, and healthcare loan
portfolios. These additions were funded primarily with FHLB advances and
deposits.
1998 ACTIVITY. Total assets increased during fiscal 1998 by $1.7 billion
or 14% to $13.8 billion. This increase primarily occurred in the commercial loan
portfolio. During the year, the Company acquired 21 Community Banking branches
having 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.
33
INVESTMENT PORTFOLIO
The following table sets forth the composition of the Company's investment
portfolio.
AT SEPTEMBER 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
Securities purchased under agreements
to resell and federal funds sold... $ 390,326 $ 495,282 $ 366,249
Securities and other investments
SBA interest-only strips........ 88,199 71,561 37,511
U.S. government and agency...... 47,468 31,127 34,827
State and local government
agency........................ 5,958 -- --
Other........................... 1,913 1,834 11,213
Mortgage-backed securities
U.S. government and agency...... 292,926 284,445 651,986
Other........................... 711,076 654,083 918,413
------------ ------------ ------------
Total...................... $ 1,537,866 $ 1,538,332 $ 2,020,199
============ ============ ============
1999 ACTIVITY. The Company's portfolio of repurchase agreements and
federal funds sold is maintained for liquidity and short-term investment
purposes. The decrease during fiscal 1999 represents the Company's ability to
reinvest these funds in higher yielding assets.
In connection with the Commercial Bank's SBA business, $474.4 million of
SBA loans were securitized, of which $451.5 million were sold. SBA interest-only
strips totalling $37.4 million were retained by the Company. During fiscal 1999,
$722.4 million of securities, primarily commercial paper, were purchased, of
which $692.6 million matured. Sales of securities other than SBA totalled $29.6
million during fiscal 1999. Securities acquired in the Midland transaction
totalled $41.9 million.
During fiscal 1999, $469.9 million of MBS were purchased, a large portion
of which were AAA and AA rated commercial MBS. Principal repayments totalling
$368.3 million for fiscal 1999 were lower than the fiscal 1998 repayments of
$539.7 million due to a lower average portfolio balance outstanding as well as a
decline in payoffs during fiscal 1999. The increased net unrealized loss on
securities available for sale primarily related to the commercial MBS purchased
during this year, reflecting an increase in market interest rates and a widening
of spreads since the time of purchase.
1998 ACTIVITY. Repurchase agreements and federal funds sold increased
during fiscal 1998 primarily resulting from the Company's ability to borrow
funds and invest those funds at a positive spread on a short-term basis.
During fiscal 1998, $506.1 million of SBA loans were securitized, of which
$494.8 million were sold. SBA interest-only strips totalling $45.8 million were
retained by the Company. Additionally, during fiscal 1998, $364.9 million of
securities, primarily commercial paper, were purchased of which $344.5 million
matured.
MBS declined due to principal repayments and sales. Principal repayments
increased 61%, totalling $539.7 million during fiscal 1998, compared to $335.4
million for fiscal 1997, as a result of increased refinancing activity. Sales of
MBS totalled $99.5 million during fiscal 1998, compared to $6.9 million during
fiscal 1997.
34
LOAN PORTFOLIO
The following table shows the composition of the loan portfolio.
AT SEPTEMBER 30,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------ ------------ ------------
(IN THOUSANDS)
SINGLE FAMILY
Held for investment................ $ 6,470,636 $ 4,708,704 $ 5,827,260 $ 6,148,863 $ 7,035,446
Allowance for credit losses........ (19,030) (12,503) (24,538) (28,672) (29,632)
------------- ------------- ------------ ------------ ------------
Net single family held for
investment............... 6,451,606 4,696,201 5,802,722 6,120,191 7,005,814
Held for sale...................... 592,583 2,149,009 697,410 256,656 406,563
------------- ------------- ------------ ------------ ------------
Net single family loans.... 7,044,189 6,845,210 6,500,132 6,376,847 7,412,377
------------- ------------- ------------ ------------ ------------
COMMERCIAL
Single family construction......... 1,254,796 781,729 392,956 243,249 116,702
Mortgage banker finance line of
credit.......................... 944,155 787,343 464,037 139,761 109,278
Commercial real estate
construction.................... 115,633 91,204 28,890 21,473 3,613
Commercial real estate............. 860,644 431,858 287,161 22,564 31,094
Multi-family construction.......... 228,043 171,670 106,579 30,840 34,873
Multi-family....................... 822,280 701,914 667,209 476,797 444,538
Healthcare construction............ 279,216 144,361 29,630 -- --
Healthcare......................... 328,541 121,348 65,545 8,750 --
Commercial syndication............. 305,945 173,998 72,380 -- --
SBA................................ 156,799 77,529 73,680 37,009 998
Small business..................... 135,884 68,071 61,146 40,046 22,750
Energy............................. 30,712 -- -- -- --
Agricultural....................... 7,298 -- -- -- --
------------- ------------- ------------ ------------ ------------
Total commercial........... 5,469,946 3,551,025 2,249,213 1,020,489 763,846
Allowance for credit losses........ (61,271) (32,745) (9,315) (6,313) (4,291)
------------- ------------- ------------ ------------ ------------
Net commercial loans....... 5,408,675 3,518,280 2,239,898 1,014,176 759,555
------------- ------------- ------------ ------------ ------------
CONSUMER
Real estate........................ 579,295 434,370 204,630 80,456 31,373
Installment........................ 80,253 64,491 57,121 41,059 32,108
Revolving.......................... 6,194 7,801 50,489 56,548 61,199
------------- ------------- ------------ ------------ ------------
Total consumer............. 665,742 506,662 312,240 178,063 124,680
Allowance for credit losses........ (2,404) (2,255) (5,870) (5,219) (3,247)
------------- ------------- ------------ ------------ ------------
Net consumer loans......... 663,338 504,407 306,370 172,844 121,433
------------- ------------- ------------ ------------ ------------
Total loans, net................... $ 13,116,202 $ 10,867,897 $ 9,046,400 $ 7,563,867 $ 8,293,365
============= ============= ============ ============ ============
The Company's loan portfolio is concentrated in certain geographical
regions, particularly California and Texas. The performance of such loans may be
affected by changes in local economic and business conditions. Unfavorable or
worsened economic conditions throughout California or Texas could have a
materially adverse effect on the Company's financial condition, results of
operations, or liquidity. See Note 6 to the Consolidated Financial Statements
for a geographic distribution of the loan portfolio and see " -- Asset
Quality."
In recent years, the Company has focused on originating commercial and
consumer loans. However, single family mortgage loan activity continues to have
a significant impact on the loan portfolio. The table below shows the activity
in the loan portfolio. Fundings include originations of new loans and increases
in existing loans, such as lines of credit.
35
The following table shows activity in the loan portfolio:
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(IN THOUSANDS)
Beginning balance.................... $ 10,867,897 $ 9,046,400 $ 7,563,867
Fundings
Single family................... 3,680,202 3,791,447 2,188,943
Commercial...................... 4,479,385 2,883,938 1,497,779
Consumer........................ 318,409 370,338 153,944
Purchases
Single family................... 1,794,457 1,195,255 795,827
Commercial...................... 1,057,228 653,170 639,852
Consumer........................ 25,472 172 95,613
Net change in mortgage banker
finance line of credit.......... 156,812 323,306 324,276
Repayments
Single family................... (2,354,372) (2,662,080) (1,581,897)
Commercial...................... (3,093,643) (2,036,509) (864,745)
Consumer........................ (178,567) (134,550) (109,256)
Securitized loans sold or
transferred
Single family................... (728,428) (933,028) (943,819)
Commercial...................... (476,025) (506,110) (346,401)
Sales
Single family................... (2,090,128) (1,021,052) (270,426)
Commercial...................... (216,308) (57,206) (49,281)
Foreclosures....................... (41,123) (34,738) (61,889)
Net change in allowance for credit
losses.......................... (35,202) (7,780) 481
Other.............................. (49,864) (3,076) 13,532
-------------- -------------- --------------
Ending balance....................... $ 13,116,202 $ 10,867,897 $ 9,046,400
============== ============== ==============
1999 ACTIVITY. During fiscal 1999, the Company continued to expand its
commercial and consumer lending lines of business. At September 30, 1999,
commercial and consumer loans totalled 46% of the total loan portfolio, compared
to 37% at September 30, 1998.
The growth in the commercial loan portfolio was due to fundings and
purchases. A significant portion of commercial loan fundings during fiscal 1999
related to single family construction loans. Single family construction loan
fundings totalled $2.7 billion for fiscal 1999, compared to $1.7 billion for
fiscal 1998. Commercial loan purchases during fiscal 1999 included SBA loans of
$576.8 million, loans collateralized by commercial real estate of $344.2
million, and loans obtained in the Midland acquisition of $117.6 million. Higher
principal repayments during fiscal 1999, compared to fiscal 1998, were due to a
larger portfolio balance outstanding during the current period. All commercial
loan categories increased during fiscal 1999: single family construction ($473.1
million or 61%), mortgage banker finance line of credit ($156.8 million or 20%),
commercial real estate ($453.2 million or 87%), multi-family ($176.7 million or
20%), healthcare ($342.1 million or 129%), commercial syndications ($131.9
million or 76%), small business and SBA ($147.1 million or 101%), and energy and
agriculture ($38.0 million, up from zero).
Total single family loans increased $205.5 million during fiscal 1999.
Single family loans held for investment increased $1.8 billion, while single
family loans held for sale decreased $1.6 billion. The increase in single family
loans held for investment portfolio is due to transfers of loans from the
available for sale portfolio as well as purchases during fiscal 1999. Volatility
in the secondary market during fiscal 1999 enabled the Company to obtain these
loans at favorable spreads. Sales increased $883.4 million or 46% during fiscal
1999, also contributing to the decline in the held for sale portfolio. The
decline in fundings, as well as the decline in repayments, is due to the
industry wide reduction in refinance activity resulting from the increase in
market interest rates during the latter part of fiscal 1999.
The increase in the consumer loan portfolio primarily related to fundings
of home improvement and home equity loans.
36
1998 ACTIVITY. Total loans increased $1.8 billion or 20% during fiscal
1998. During fiscal 1998, the Company expanded its commercial and consumer
lending lines of business. At September 30, 1998, commercial and consumer loans
totalled 37% of the Company's total loan portfolio, compared to 28% at September
30, 1997.
The commercial loan portfolio increased $1.3 billion or 58% since September
1997, as a result of fundings and purchases. Commercial loan fundings, primarily
related to single family construction and multi-family loans, increased $1.4
billion or 93% over fiscal 1997. During fiscal 1998, the Company purchased
commercial real estate loans with principal balances totalling $157.8 million.
These loans were primarily secured by apartment buildings, office buildings, and
retail centers. Additionally, $495.4 million of SBA loans were purchased during
fiscal 1998, of which $506.1 million were securitized. During fiscal 1998, the
commercial loan portfolio increased as follows: single family construction
($388.8 million or 99%), mortgage banker finance line of credit ($323.3 million
or 70%), commercial real estate ($207.0 million or 65%), multi-family ($99.8 or
13%), healthcare ($170.5 million or 179%), commercial syndications ($101.6
million or 140%), and small business and SBA ($10.8 million or 8%).
Total single family loans increased $333.0 million or 5% during fiscal
1998. Single family loans held for sale increased $1.4 billion, which was
partially offset by a $1.1 billion decrease in single family loans held for
investment.
Single family loans held for sale increased as a result of higher fundings
despite the sale of certain mortgage origination offices during fiscal 1997. The
Company continues to originate loans through its wholesale origination network.
Single family loan fundings increased to $3.8 billion during fiscal 1998,
compared to $2.2 billion during fiscal 1997. The increase in fundings is due to
increased refinancing activity resulting from lower long-term market interest
rates. Refinancings approximated $2.5 billion and $941.0 million or 67% and 43%
of total single family loan originations during fiscal 1998 and 1997. Sales of
single family loans were $1.9 billion for fiscal 1998, compared to $1.2 billion
for the prior year.
During September 1998, the Company purchased $867.8 million of
adjustable-rate single family loans for the held for investment portfolio.
Despite this purchase, the single family loan held for investment portfolio
declined, primarily due to principal repayments. The outstanding balance of this
portfolio decreased as the Company continued to build its commercial and
consumer loan portfolios and designate a greater portion of its single family
fundings as held for sale.
Consumer loans increased $194.4 million or 62% during fiscal 1998 primarily
due to a 60% increase in the home improvement loan portfolio and the
implementation of the Company's home equity lending program in Texas. From the
beginning of the program in January 1998, following an amendment to the Texas
constitution permitting such lending in the state, the Company funded $201.0
million of such loans during the year.
MORTGAGE SERVICING RIGHTS
The following table shows activity in the single family loan servicing
portfolio.
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
(IN THOUSANDS)
Beginning balance.................... $ 27,935,300 $ 24,518,396 $ 13,246,848
Purchases....................... 4,427,735 7,395,384 4,928,408
Servicing on originated loans... 3,634,949 3,899,903 2,219,294
Prepayments..................... (7,338,789) (7,447,519) (1,870,400)
Sales........................... -- (154,709) (929,687)
Amortization.................... (773,316) (850,081) (436,541)
Foreclosures.................... (276,128) (81,489) (95,662)
------------- ------------- -------------
Total Serviced....................... 27,609,751 27,279,885 17,062,260
Acquired, not transferred....... 3,283,242 655,415 7,456,136
------------- ------------- -------------
Ending balance....................... $ 30,892,993 $ 27,935,300 $ 24,518,396
============= ============= =============
1999 ACTIVITY. During fiscal 1999, the Company purchased servicing rights
associated with $7.7 billion in loans at a cost of $151.9 million. At September
30, 1999, $3.3 billion of these loans had not yet been transferred
37
to the Company, and a resulting liability of $69.7 million was included in other
liabilities, representing the amount withheld until the loans transfer. These
servicing rights, which are currently being subserviced by the seller for a fee,
are expected to be transferred during the first quarter of fiscal 2000.
Additionally, $49.5 million of MSRs were created during fiscal 1999 through
sales of $3.6 billion of originated single family loans.
In an effort to mitigate the risk that increased prepayments would cause
the MSR portfolio to decline in value, the Company enters into interest rate
floor agreements. During fiscal 1999, the Company reset a portion of 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 September 30, 1999, the Company was party to
$3.2 billion in interest rate floor agreements. The Company has entered into
other financial instruments for the purposes of reducing interest rate risk in
addition to these interest rate floor agreements. See Notes 7 and 12 to the
Consolidated Financial Statements.
During fiscal 1998, an MSR valuation allowance totalling $4.8 million was
established due to the effect of a decline in long-term market interest rates
and the resulting increase in prepayments. Prepayments increased almost 300%
during fiscal 1998, as compared to fiscal 1997, but remained relatively stable
between fiscal 1998 and 1999. No additional valuation allowance was required
during fiscal 1999. The increase in foreclosures primarily relates to the
increase in servicing acquired on government guaranteed loans.
1998 ACTIVITY. MSRs increased $138.7 million to $410.9 million at
September 30, 1998. During fiscal 1998, the Company purchased servicing rights
associated with $8.1 billion in loans increasing the servicing portfolio to
$27.9 billion at September 30, 1998, compared to $24.5 billion at September 30,
1997. In an effort to mitigate the effect of a decline in the value of the
servicing portfolio that may result from a decline in market interest rates and
increased prepayments, the Company enters into interest rate floor agreements.
At September 30, 1998, the Company was party to $3.2 billion in interest rate
floor agreements related to MSRs. During fiscal 1998 a $4.8 million valuation
allowance related to this portfolio was established due to the effect of a
decline in long-term market interest rates.
DEPOSITS
The composition of the Company's deposits by business unit, type of
customer, and type of account was as follows:
AT SEPTEMBER 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
BUSINESS UNIT
Community Banking.................... $ 5,609,347 $ 5,284,513 $ 4,278,554
Commercial Banking................... 1,076,409 1,100,313 973,123
Mortgage Servicing(1)................ 391,472 477,761 247,078
Investment Portfolio................. 431,274 31,640 72,647
------------ ------------ ------------
$ 7,508,502 $ 6,894,227 $ 5,571,402
============ ============ ============
TYPE OF CUSTOMER
Consumer............................. $ 5,689,617 $ 5,539,104 $ 4,352,739
Commercial(2)........................ 1,387,611 1,323,483 1,146,016
Wholesale............................ 431,274 31,640 72,647
------------ ------------ ------------
$ 7,508,502 $ 6,894,227 $ 5,571,402
============ ============ ============
TYPE OF ACCOUNT
Time (CDs)........................... $ 3,860,553 $ 3,412,842 $ 2,901,075
Transaction.......................... 3,647,949 3,481,385 2,670,327
------------ ------------ ------------
$ 7,508,502 $ 6,894,227 $ 5,571,402
============ ============ ============
- ------------
(1) Comprised of advances from borrowers for taxes and insurance and principal
and interest due investors.
(2) Includes $246.6 million, $223.1 million, and $130.8 million of Community
Banking deposits
38
1999 ACTIVITY. Over the past few years, management has pursued a strategy
designed to increase the level of lower cost transaction accounts. Transaction
accounts, which include checking, savings, money market, and escrow accounts
increased $166.6 million or 5% during fiscal 1999. This growth was primarily due
to deposits obtained in the Midland acquisition and as a result of 48 new 7-Day
Banking Centers opened in Kroger stores in mid April 1999. Transaction accounts
sourced through these Kroger stores totalled $46.2 million during fiscal 1999.
Brokered deposits increased to $421.7 million at September 30, 1999. While the
Company does not generally solicit brokered deposits, it may from time to time
accept these types of deposits when permitted by regulation and if available at
favorable rates.
1998 ACTIVITY. Deposits increased $1.3 billion or 24% to $6.9 billion at
September 30, 1998. Transaction accounts increased $811.1 million or 30% as a
result of successful marketing efforts. Commercial deposits increased during the
year by $177.5 million or 15%. During fiscal 1998, the Company purchased 21
branches with deposits, primarily CDs, totalling $1.5 billion and associated
goodwill of $51.7 million. The Company closed 13 of the 21 branches and
continues to operate the remaining eight locations. Cash from higher deposit
levels provided a majority of the funds for asset purchases and originations
during fiscal 1998.
NOTES PAYABLE
During fiscal 1999, the Bank issued $150 million of 8% subordinated
medium-term notes, with an effective rate of 8.1%. Proceeds were used for
general business purposes. See Note 11 to the Consolidated Financial Statements.
REDEEMABLE PREFERRED STOCK
In August 1999, the Company issued 2,000,000 shares of 8% Corporate PIES
for a price of $50 per share or $100 million in aggregate. Each of the Corporate
PIES consists of (a) a purchase contract for shares of Company common stock and
(b) a share of Company redeemable preferred stock ("Redeemable Preferred Stock
Series B"). Proceeds were contributed to the Bank for general business
purposes. Also in August 1999, the Company issued 1,200,000 shares of 7.55%
Redeemable Preferred Stock Series A for a price of $50 per share or $60 million
in aggregate. Proceeds from this offering were used for general corporate
purposes. See Note 16 to the Consolidated Financial Statements.
OTHER
1999 ACTIVITY. The increase in premises and equipment primarily relates to
the physical relocation of the servicing and loan production groups and the
opening of the 7-Day Banking Centers in Kroger stores. The increase in
intangible assets includes $28.6 million of goodwill related to the Midland
acquisition.
1998 ACTIVITY. Increases in other assets and other liabilities were
primarily a result of the growth in the Company's servicing portfolio.
ASSET QUALITY
The Company is exposed to certain credit risks related to the value of
collateral that secures loans held in its portfolio and the ability of borrowers
to repay their loans according to the terms thereof. In an effort to manage
these risks, the Company has implemented an overall credit review and risk
management process.
The Credit Committee, which is comprised of senior executives appointed by
the Board of Directors, establishes credit policies, approves all commercial
loans, approves all other loan fundings or loan packages exceeding certain
dollar amounts, and reports to the Board of Directors at regularly scheduled
meetings. The Company also has an Asset Review Department with the
responsibility of providing an independent ongoing review and evaluation of
asset quality to the Board of Directors.
Loan officers are responsible for recommending credit grades to individual
loans and classification of assets for regulatory reporting. The Credit
Department and the Credit Committee approve the credit grades. Product directors
are required to monitor the credit quality of their portfolios, identify problem
loans, correct deficiencies and recommend loan loss allowances. They are also
required to report loan problems to the chief financial officer, the chief
credit officer, and the Asset Review Department. Additionally, changes in grades
must be approved by the Asset Review Department.
39
The Risk Management Committee, which is comprised of senior executives
appointed by the Board of Directors, provides an oversight function for the
credit review and risk management process. This committee has been charged with:
the review of asset classifications, the review of individual portfolio risks
(including loan type concentrations, loan sizes, geographic concentrations, and
demographic and economic conditions), the approval of changes to the credit
policies, and the approval of the methodology and level of the allowance for
credit losses. Selected asset quality ratios were as follows:
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Allowance for credit losses to
nonperforming loans
Single family................... 25.71% 22.36% 47.37% 32.49% 39.79%
Commercial...................... 436.59 607.29 669.18 1,357.63 452.16
Consumer........................ 151.77 329.20 635.97 554.03 904.46
Total........................... 92.25 76.62 73.40 44.85 49.05
Allowance for credit losses to total
loans
Single family................... 0.29 0.27 0.42 0.47 0.42
Commercial...................... 1.14 0.95 0.43 0.64 0.64
Consumer........................ 0.36 0.45 1.88 2.93 2.60
Total........................... 0.63 0.44 0.44 0.53 0.45
Nonperforming assets to total
assets............................. 0.67 0.59 0.62 1.12 0.84
Net loan charge-offs to average loans
Single family................... 0.06 0.08 0.19(2) 0.12 0.09
Commercial...................... 0.03 0.02 0.04 (0.02) 0.61
Consumer........................ 0.22 2.00(1) 2.50 4.09 2.38
Total........................... 0.05 0.13(1) 0.23(2) 0.17 0.17
- ------------
(1) Excluding charge-offs in fiscal 1998 totalling $4.9 million related to the
sale of the consumer line of credit portfolio, the consumer charge-off ratio
would have been 0.77% and the total charge-off ratio would have been 0.08%.
(2) Excluding charge-offs totalling $5.0 million related to a nonperforming loan
sale in fiscal 1997, the single family charge-off ratio would have been
0.11% and the total charge-off ratio would have been 0.17%.
IMPAIRED LOANS
The following table summarizes the recorded investments in impaired loans,
related allowances and income recognition:
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
Impaired loans with allowance........ $ 44,406 $ 3,053 $ 3,168
Impaired loans with no allowance..... -- 590 608
--------- --------- ---------
Total impaired loans................. $ 44,406 $ 3,643 $ 3,776
========= ========= =========
Average impaired loans............... $ 13,630 $ 3,707 $ 3,699
Allowance for impaired loans......... 6,626 507 557
At September 30, 1999, impaired loans included a $41.5 million secured loan
to a mortgage banking company. Subsequent to September 30, 1999, a principal
payment of $34.5 million was received on this loan, resulting in an outstanding
loan balance of $7 million. The borrower is currently in Chapter 7 bankruptcy
proceedings. The Company believes it is adequately secured and reserved. The
impaired loans outstanding at September 30, 1998, were paid in full during
fiscal 1999. Interest income of $2.9 million, $320,000, and $324,000 was
recognized on impaired loans during fiscal 1999, 1998, and 1997, of which $2.9
million, $317,000, and $280,000 was collected in cash.
40
NONPERFORMING ASSETS
A loan is generally placed on nonaccrual status when the loan is past due
90 days or more or the ability of a borrower to repay principal and interest is
in doubt. Nonperforming loans outstanding at September 30, 1999 were primarily
concentrated in California (22.19%) and Texas (19.57%), which is generally
consistent with the geographic makeup of the Company's loan portfolio.
AT SEPTEMBER 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- ---------- ---------- ----------
(IN THOUSANDS)
Nonperforming loans
Single family................... $ 73,575 $ 55,800 $ 51,742 $ 92,187 $ 83,954
Commercial...................... 14,170 5,398 2,159 494 991
Consumer........................ 1,617 688 974 1,039 563
---------- --------- ---------- ---------- ----------
89,362 61,886 54,875 93,720 85,508
Premiums (discounts)................. 287 116 (759) (4,077) (9,727)
---------- --------- ---------- ---------- ----------
Nonperforming loans........ 89,649 62,002 54,116 89,643 75,781
REO
Single family................... 17,231 19,357 20,552 30,015 24,008
Commercial...................... 1,387 -- 486 751 973
---------- --------- ---------- ---------- ----------
18,618 19,357 21,038 30,766 24,981
---------- --------- ---------- ---------- ----------
Total nonperforming
assets................... $ 108,267 $ 81,359 $ 75,154 $ 120,409 $ 100,762
========== ========= ========== ========== ==========
Nonperforming assets increased $26.9 million to $108.3 million during
fiscal 1999, and the nonperforming assets to total assets ratio also increased
from 0.59% at September 30, 1998 to 0.67% at September 30, 1999. The increase in
nonperforming assets during the year is a result of the growth in the single
family and commercial loan portfolios, as well as the inclusion of a $7 million
secured loan to a mortgage banking company. See Note 6 to the Consolidated
Financial Statements.
Nonperforming assets increased 8% or $6.2 million during fiscal 1998. This
increase was primarily the result of purchases of commercial loans during fiscal
1998 and a higher rate of single family loans 90 days or more delinquent.
Although the balance of delinquencies rose during the year, nonperforming assets
as a percentage of the total assets decreased from 0.62% at September 30, 1997
to 0.59% at September 30, 1998.
The Company's nonperforming assets decreased 38% during fiscal 1997. This
decrease was primarily caused by the sale of $31.3 million of nonperforming
single family loans in fiscal 1997 and a higher sales volume of real estate
owned ("REO") properties in fiscal 1997.
Nonperforming assets were at their highest level in fiscal 1996, resulting
from significant loan purchases in fiscal 1995, that subsequently produced an
increased level of delinquent loans and foreclosures.
41
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established based on management's
periodic evaluation of the loan portfolio and considers such factors as
historical loss experience, delinquency status, identification of adverse
situations that may affect the ability of borrowers to repay, known and inherent
risks in the portfolio, assessment of economic conditions, regulatory policies,
and the estimated value of the underlying collateral, if any. Although the
Company has historically had a very low loss experience, there can be no
assurance that such results will continue in the future. The activity in, and
the allocation of the allowance for, credit losses was as follows:
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
ACTIVITY
Beginning balance....................... $ 47,503 $ 39,723 $ 40,204 $ 37,170 $ 23,756
Provision.......................... 38,368 20,123 18,107 16,489 24,791
Acquisitions....................... 2,594 -- -- -- --
Charge-offs........................ (6,733) (13,044) (19,049) (13,860) (11,520)
Recoveries......................... 973 701 461 405 143
--------- --------- --------- --------- ---------
Ending balance.......................... $ 82,705 $ 47,503 $ 39,723 $ 40,204 $ 37,170
========= ========= ========= ========= =========
ALLOCATION
Single family........................... $ 19,030 $ 12,503 $ 24,538 $ 28,672 $ 29,632
Commercial(1)........................... 61,271 32,745 9,315 6,313 4,291
Consumer................................ 2,404 2,255 5,870 5,219 3,247
--------- --------- --------- --------- ---------
Total.............................. $ 82,705 $ 47,503 $ 39,723 $ 40,204 $ 37,170
========= ========= ========= ========= =========
(1) Includes $6.6 million, $5.0 million, $2.2 million, $925,000 and
$560,000 related to construction loans as of September 30, 1999, 1998,
1997, 1996, and 1995.
The allowance for credit losses increased $35.2 million or 74%, to $82.7
million during fiscal 1999. Additionally, the ratio of the allowance to
nonperforming loans as well as the ratio of the allowance to total loans
increased to 92.25% and 0.63% at September 30, 1999, up from 76.62% and 0.44% at
September 30, 1998. These increases are a result of the significant growth in
the single family and commercial loan portfolios. An additional provision for
credit losses of $13.0 million was recorded during the fourth quarter of fiscal
1999. This provision is related to the growth in certain types of single family
and commercial loans, which have historically experienced higher levels of
default and loss severity. See "-- Discussion of Results of
Operations -- Provision for Credit Losses," and Note 6 to the Consolidated
Financial Statements. The single family loans held for investment portfolio
increased $1.8 billion or 37% during the year and the single family loans held
for investment allowance ratio increased slightly from 0.27% at September 30,
1998 to 0.29% at September 30, 1999. Similarly, the commercial loan portfolio
increased $1.9 billion or 54% during the year and the commercial loan allowance
ratio increased from 0.95% at September 30, 1998 to 1.14% at September 30, 1999.
The allowance for credit losses increased $7.8 million during fiscal 1998.
This change resulted from an increase in the allowance established for the
commercial loan portfolio, which was partially offset by a reduction in the
allowance for the single family loans held for investment portfolio. The
commercial loan portfolio increased $1.3 billion or 57% during fiscal 1998. Due
to this growth and the increased risks associated with this type of portfolio,
most particularly the nonresidential commercial loans, the Company increased
this portfolio's allowance levels to approximately one percent. The single
family loans held for investment portfolio decreased $1.1 billion or 19% during
fiscal 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 to approximately 27 basis points. The consumer loan allowance decreased
from the year ago period due to the sale of the consumer line of credit
portfolio, totalling $37.6 million, in fiscal 1998.
The allowance for credit losses remained relatively unchanged during fiscal
1997, however, the composition of the allowance changed. The single family loan
allowance decreased $4.1 million during fiscal 1997, due to the
42
sale of $31.3 million of nonperforming single family loans with related
charge-offs of $5.0 million. This decrease was offset by increased reserves in
the commercial and consumer loan portfolios, which were necessitated by growth
in those portfolios.
The allowance for credit losses increased to $40.2 million at September 30,
1996 from $37.2 million at September 30, 1995. The single family loan allowance
decreased during fiscal 1996 due to reduced levels of single family loans
outstanding as repayments exceeded originations. The consumer allowance for
credit losses increased during fiscal 1996 due to increased losses related to
the unsecured line of credit portfolio. The commercial allowance for credit
losses increased during fiscal 1996 primarily from growth in the commercial loan
portfolio.
CHARGE-OFFS
The Company charges off loans, other than consumer loans, when all attempts
have been exhausted to resolve any outstanding loan or legal issues. Consumer
loans are charged off when the loan becomes contractually 120 days delinquent.
Loan charge-offs and recoveries have been as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
CHARGE-OFFS
Single family................... $ (3,365) $ (3,933) $ (11,886) $ (7,751) $ (4,842)
Commercial...................... (1,776) (829) (583) (114) (3,831)
Consumer........................ (1,592) (8,282) (6,580) (5,995) (2,847)
---------- ---------- ---------- ---------- ----------
Total charge-offs.......... (6,733) (13,044) (19,049) (13,860) (11,520)
---------- ---------- ---------- ---------- ----------
RECOVERIES
Single family................... 248 241 63 31 36
Commercial...................... 420 154 21 230 13
Consumer........................ 305 306 377 144 94
---------- ---------- ---------- ---------- ----------
Total recoveries........... 973 701 461 405 143
---------- ---------- ---------- ---------- ----------
Total net charge-offs...... $ (5,760) $ (12,343) $ (18,588) $ (13,455) $ (11,377)
========== ========== ========== ========== ==========
Net loan charge-offs to
average loans............ 0.05% 0.13% 0.23% 0.17% 0.17%
Net loan charge-offs for fiscal 1999 decreased $6.6 million. The decrease
is primarily the result of $4.9 million of consumer charge-offs which were
included in fiscal 1998 activity. These charge-offs were recognized upon the
sale of the consumer line of credit portfolio during fiscal 1998. Excluding the
sale of the consumer line of credit portfolio, the ratio of net charge-offs to
average loans for fiscal 1998 was 0.08%. The net charge-off to average loan
ratio improved to 0.05% in fiscal 1999.
Net loan charge-offs decreased $6.2 million during fiscal 1998, due
primarily to lower single family charge-offs during fiscal 1998. During fiscal
1997, $5.0 million in charge-offs were recorded in connection with the sale of
$31.3 million of nonperforming loans. Net charge-offs for the consumer loan
portfolio increased during fiscal 1998, primarily due to the fiscal 1998 sale of
the consumer line of credit portfolio. This portfolio totalled $37.6 million and
charge-offs of $4.9 million were recognized at the time of the sale. The Company
had historically experienced high rates of charge-offs related to this product,
which are included in prior period numbers. The ratio of net loan charge-offs to
average total loans decreased from 0.23% for fiscal 1997 to 0.13% for fiscal
1998, due to lower charge-offs combined with a higher average loan balance.
Adjusting for the loan sales in fiscal 1998 and 1997 discussed above, the ratio
of net loan charge-offs to average total loans would have been 0.08% for fiscal
1998 and 0.17% for fiscal 1997.
Net loan charge-offs increased $5.1 million during fiscal 1997. This
increase was the result of the fiscal 1997 sale of $31.3 nonperforming single
family loans with related charge-offs of $5.0 million. The ratio for net
charge-offs as a percentage of average single family loans includes the
increased charge-offs and was 0.19% for
43
fiscal 1997 versus 0.12% for fiscal 1996. Adjusting for the loan sale mentioned
above, the single family loan charge-off ratio would have been 0.11% and the
total charge-off ratio would have been 0.17% for fiscal 1997.
Net loan charge-offs increased to $13.5 million for fiscal 1996 from $11.4
million for fiscal 1995. Net charge-offs on the single family portfolio
increased to $7.7 million for fiscal 1996, from $4.8 million for fiscal 1995.
This resulted in net charge-offs as a percentage of single family loans on
average of 0.12% and 0.09% for fiscal 1996 and 1995. Net single family REO gains
of $17.6 million exceeded net single family charge-offs of $16.4 million for the
four years ended September 30, 1996. REO gains historically have been
significant because of discounts attributable to the original loan purchases.
Net charge-offs on the consumer loan portfolio increased to $5.9 million for
fiscal 1996 from $2.8 million for fiscal 1995, because of the unsecured consumer
line of credit portfolio.
CAPITAL RESOURCES AND LIQUIDITY
LIQUIDITY
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank complies with regulatory liquidity requirements.
The Company's primary sources of liquidity are deposits, FHLB advances,
securities sold under agreements to repurchase ("reverse repurchase
agreements"), principal and interest payments on loans and MBS, proceeds from
the sale of loans and proceeds from the issuance of debt and stock. While
maturities and scheduled payments of loans and MBS are predictable sources of
funds, deposit outflows, loan sales and access to the capital markets for
issuance of securities are greatly influenced by economic conditions and general
interest rates.
Deposits have provided the Bank with a stable source of funding. Average
deposits funded 48%, 51%, and 48% of average assets for fiscal 1999, 1998, and
1997. The Bank also utilizes the FHLB Dallas for a source of funds. Average FHLB
advances funded 39%, 32%, and 33% of average assets for fiscal 1999, 1998, and
1997. These advances are available to the Bank under a security and pledge
agreement. At September 30, 1999, the Bank had available $390 million under this
agreement. The Bank has also utilized borrowings under reverse repurchase
agreements as a source of funding. Borrowings under reverse repurchase
agreements are limited to the market value of the Bank's collateral. At
September 30, 1999, the Bank had $952.7 million in total collateral that could
be used for reverse repurchase borrowings, $299.6 million of which was pledged.
Under OTS regulations, the Bank must maintain, for each calendar quarter,
an average daily balance of liquid assets equal to at least 4.0% of either (1)
its net withdrawable accounts plus short-term borrowings, (liquidity base) at
the end of the preceding calendar quarter or (2) the average daily balance of
its liquidity base during the preceding quarter. For the fourth quarter of
fiscal 1999, the Bank's liquidity ratio was 4.31%.
The primary source of funds for the Parent Company, excluding funds raised
through the capital markets, to meet its cash obligations and to make dividend
payments on its cumulative redeemable preferred stock, common stock, and
Corporate PIES, has been from dividends from the Bank, whose ability to pay
dividends is subject to regulations of the OTS and the terms of the preferred
stock of the Bank. At September 30, 1999, the Bank had $226.6 million of capital
available for payment of dividends without prior approval of the OTS.
At September 30, 1999, the Bank had 7,420,000 shares of preferred stock
outstanding or $185.5 million. The annual dividend requirement is $18.3 million,
and must be paid for the four most recent quarters and in full before dividends
can be paid on the Bank common stock.
At September 30, 1999, the Company had 3,200,000 shares of cumulative
redeemable preferred stock outstanding, or $160.0 million. The fiscal 2000
dividend requirement on the cumulative redeemable preferred stock is expected to
be $9.7 million. The Company may not pay dividends on its common stock, other
than dividends paid in common stock, unless full dividends on the cumulative
redeemable preferred stock have been paid, or declared and funds set aside for
payment.
At September 30, 1999, the Bank had $150.0 million of subordinated
medium-term notes due in full in March 2009. The annual interest payments on the
subordinated debt total $12.0 million.
44
At September 30, 1999, the Company had $220.0 million of 8.875%
subordinated debt outstanding, due in 2007. The annual interest payments on the
subordinated debt total $19.5 million. The subordinated debt indenture restricts
the Company, and any subsidiary, from paying dividends on any common stock if
the Company or any subsidiary is not in compliance with, or if the dividend
payment would cause the Company or any subsidiary to not meet its minimum
capital requirement as established by the FRB or another banking regulator.
COMMITMENTS
At September 30, 1999, the Company had $2.9 billion of outstanding
commitments to extend credit, $1.5 billion of which is scheduled to mature
during the 12 months following September 30, 1999. Because such commitments may
expire without being drawn upon, the commitments do not necessarily represent
future cash requirements. Scheduled maturities of CDs and borrowings (including
advances from the FHLB and reverse repurchase agreements) during the 12 months
following September 30, 1999, total $2.7 billion and $5.0 billion. At September
30, 1999, the Company had $59.6 million in outstanding commitments to purchase
loans. Management believes that the Company has adequate resources to fund all
of its commitments. See Note 12 to the Consolidated Financial Statements.
REGULATORY MATTERS
The Bank is subject to regulatory capital requirements as defined in the
OTS capital regulations. The Bank's capital level at September 30, 1999, 1998,
and 1997 qualified it as "well-capitalized", the highest of five tiers under
applicable regulatory definitions.
AT SEPTEMBER 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
Tangible capital..................... 7.14% 6.74% 7.71%
Core capital......................... 7.15 6.76 7.76
Tier 1 risk-based capital............ 9.73 9.97 12.63
Total risk-based capital............. 11.71 10.48 13.17
The Bank's capital ratios declined during fiscal 1998 due to increased
asset levels, a higher proportion of commercial loans, deposit acquisitions, and
the devaluation of the MSR portfolio for regulatory purposes. See
"Business -- Regulation -- Capital Requirements," and Note 18 to the
Consolidated Financial Statements.
CONTINGENCIES AND UNCERTAINTIES
YEAR 2000
GENERAL. This section contains forward-looking statements that have been
prepared on the basis of the Company's best judgments and currently available
information and constitutes a Year 2000 Readiness Disclosure within the meaning
of the Year 2000 Readiness Disclosure Act of 1998. These forward-looking
statements are inherently subject to significant business, third-party, and
regulatory uncertainties and other contingencies, many of which are beyond the
control of the Company. Accordingly, there can be no assurance that the
Company's results of operations will not be adversely affected by difficulties
or delays in the Company's or third parties' Year 2000 readiness efforts. See
"-- Risks of Third Party Year 2000 Issues" below for a discussion of factors
that may cause such forward-looking statements to differ from actual results.
The Year 2000 problem involves the risk that computer programs and computer
systems may not be able to perform without interruption into the Year 2000. If
computer systems do not correctly recognize the date change from 1999 to 2000,
computer applications that rely on the date field could fail or create erroneous
results. Such erroneous results could affect interest payments or due dates and
could cause the temporary inability to process transactions and to engage in
ordinary business activities. The failure of the Company, its suppliers, and its
borrowers to address the Year 2000 problem could have a material adverse effect
on the Company's financial condition, results of operations, or liquidity.
STATE OF READINESS. Bank United Corp. implemented a company-wide program
to renovate, test, and document the readiness of its electronic systems,
programs, processes and facilities to properly recognize dates to and through
the Year 2000. The Company has successfully tested 100% of all critical computer
systems and programs for Year 2000 readiness. It has completed repairing and
testing all in-house developed software. All
45
planned vendor software upgrades are installed and tested. Testing with third
party service providers is complete. Contingency plans have been written, tested
and approved by the Company's senior management and Board of Directors.
Processes and procedures have been implemented to ensure that non-compliant
components are not introduced into a compliant environment. Cash and liquidity
plans have been written. A customer awareness program has been implemented. Year
2000 Event planning is underway. The Company continues to monitor
hardware/software vendors and third party service providers for changes to their
compliance statement.
COSTS TO ADDRESS YEAR 2000 ISSUES. The process of making the Company's
computer systems Year 2000 ready has not had an adverse material impact on its
operations or liquidity. The Company's total Year 2000 project costs includes
estimated costs and time associating with managing the project and the costs of
direct internal and external professional labor. Direct Year 2000 costs have
been funded through operating cash flows and were expensed as incurred. The
Company has spent $5.5 million on its Year 2000 project since 1996 and currently
expects to spend an additional $500,000 to complete the project. The Company did
not materially increase the number of its employees, or incur material
professional fees or costs associated with its computer systems to implement its
Year 2000 project. Instead, certain of the Company's personnel resources were
redeployed from other developmental projects. Upon completion of the Company's
Year 2000 project, these personnel resources will resume working on other
developmental projects. For this reason, a substantial portion of the costs
identified as related to the Company's Year 2000 project will continue.
RISKS OF THIRD PARTY YEAR 2000 ISSUES. The Company continues to assess its
risk from other environmental factors over which it has little direct control,
such as electrical power supply, and voice and data transmission. Based on its
current assessments which are based in part on certain representations of
third-party servicers, the Company does not expect that it will experience a
significant disruption of its operations as a result of the change to the new
millennium. Although the Company has no reason to conclude that a failure will
occur, the most reasonably likely worst-case Year 2000 scenario would entail a
disruption or failure of the Company's power suppliers' or voice and data
transmission suppliers' capability to provide power or data transmission
services to a computer system, a third-party servicer, or a facility. If such a
failure were to occur, the Company would implement its business resumption
contingency plan. While it is impossible to quantify the impact of such a
scenario, the most reasonably likely worst-case scenario would entail a
diminishment of service levels and some customer inconvenience.
CONTINGENCY PLANS. Business resumption contingency plans for critical
systems have been written, tested and approved by the Company's senior
management and Board of Directors. These plans conform to guidance from the
Federal Financial Institution Examination Council ("FFIEC") on business
contingency planning for Year 2000 readiness. The plans include, among other
actions, manual workarounds and identification of resource requirements and
alternative solutions for resuming critical business processes in the event of a
Year 2000 related failure. While the Company has business resumption contingency
plans in place to address a temporary disruption in these services, there can be
no assurance that any disruption or failure will be only temporary, that the
Company's contingency plans will function as anticipated, or that the results of
operations, financial condition, or liquidity of the Company will not be
adversely affected in the event of a prolonged disruption or failure.
Additionally, there can be no assurance that the FFIEC or other federal
regulators will not issue new regulatory requirements that require additional
work by the Company and, if issued, that new regulatory requirements will not
increase the cost of the Company's Year 2000 project.
RECENT ACCOUNTING STANDARDS
A discussion of recently issued accounting pronouncements and their impact
on the Consolidated Financial Statements is provided in Note 1 to the
Consolidated Financial Statements.
FORWARD-LOOKING INFORMATION
Statements and financial discussion and analysis by management contained
throughout this Annual Report on Form 10-K 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
46
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 preferred
and 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 effectiveness of the Company's Year 2000 project;
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 August 4, 1999, relating to the universal shelf for the
issuance of up to $830 million in various securities filed with the Securities
and Exchange Commission (File No. 333-75937 and File No. 333-83797).
47
ITEM 7A. 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. Interest rate risk arises primarily from timing differences in
the duration or repricing of the Company's assets, liabilities, and
off-balance-sheet financial instruments. 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.
Substantial changes in these indices may adversely impact the Company's
earnings. To that end, management actively monitors and manages its interest
rate risk exposure. This effort is accomplished 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.
ASSET AND LIABILITY MANAGEMENT
Interest rate risk is managed by the Asset and Liability Committee
("ALCO"), which is composed of senior officers of the Company, in accordance
with policies approved by the Company's Board of Directors. The ALCO formulates
strategies based on appropriate levels of interest rate risk. In determining the
appropriate level of interest rate risk, the ALCO considers the impact on
earnings and capital of the current outlook on interest rates, potential changes
in interest rates, regional economies, liquidity, business strategies, and other
factors. The ALCO meets regularly to review, among other things, the sensitivity
of assets and liabilities to interest rate changes, the book and fair values of
assets and liabilities, unrealized gains and losses, purchase and sale activity,
loans held for sale and commitments to originate loans, and the maturities of
investments, borrowings and time deposits. Additionally, the ALCO reviews
liquidity, cash flow flexibility, and consumer and commercial deposit activity.
To effectively measure and manage interest rate risk, the Company uses
sensitivity analysis to determine the impact on net interest income of various
interest rate scenarios, balance sheet trends, and strategies. From these
simulations, interest rate risk is quantified and appropriate strategies are
developed and implemented. Additionally, duration and market value sensitivity
measures are utilized when they provide added value to the overall interest rate
risk management process. The overall interest rate risk position and strategies
are reviewed by executive management and the Company's Board of Directors on an
ongoing basis. The Company has traditionally managed its business to reduce its
overall exposure to changes in interest rates. However, management has latitude
to increase the Company's interest rate sensitivity position within certain
limits if, in management's judgment, it will enhance profitability.
The Company manages its exposure to interest rates by entering into certain
financial instruments with on and off-balance-sheet risk in the ordinary course
of business. The Company does not enter into instruments such as leveraged
derivatives or structured notes for the purposes of reducing interest rate risk.
The financial instruments used to manage interest rate risk may include interest
rate swaps, caps, floors, locks, short sales, financial options, financial
futures contracts, and forward delivery contracts. A hedge is an attempt to
reduce risk by creating a relationship whereby any gains or losses on the hedged
asset or liability are expected to be offset in whole or in part by gains or
losses on the hedging financial instrument. Thus, market risk resulting from a
particular instrument is normally offset by other on or off-balance-sheet
transactions. See Note 12 to the Consolidated Financial Statements.
48
SENSITIVITY ANALYSIS
The following table presents an analysis of the changes 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 off-balance-sheet instruments. The
interest rate scenarios presented in the table include interest rates at
September 30, 1999 and 1998 and as adjusted by instantaneous parallel rate
changes upward and downward of up to 200 basis points. The fiscal 1999 and 1998
scenarios are not comparable due to differences in the interest rate
environments, including the absolute level of rates and the shape of the yield
curve.
1999 1998
--------------------------------- ---------------------------------
CHANGE IN NET INTEREST MARKET VALUE OF NET INTEREST MARKET VALUE OF
INTEREST RATES INCOME PORTFOLIO EQUITY INCOME PORTFOLIO EQUITY
-------------- ------------ ---------------- ------------ ----------------
+200 (5.45)% (33.28)% (2.78)% (4.89)%
+100 (1.79) (13.82) (0.42) (2.76)
0 0.00 0.00 0.00 0.00
-100 0.54 11.63 1.07 (3.66)
-200 0.62 26.34 2.26 2.02
The positive effect of a decline in market interest rates is reduced by the
estimated effect of prepayments on the value of single family loans, MBS, and
MSRs. Further, this analysis is based on the Company's interest rate exposure at
September 30, 1999 and 1998 and does not contemplate any actions the Company
might undertake in response to changes in market interest rates, which could
impact MVE.
Each rate scenario shows unique prepayment, repricing, and reinvestment
assumptions. Management derived these assumptions considering published market
prepayment expectations, the repricing characteristics of individual instruments
or groups of similar instruments, the Company's historical experience, and the
Company's asset and liability management strategy. Further, this analysis
assumes that certain of the Company's instruments would not be affected by the
changes in interest rates or would be partially affected due to the
characteristics of the instruments.
There are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates. It is not possible to fully model
the market risk in instruments with leverage, option, or prepayment risks. Also,
the Company is affected by basis risk, which is the difference in repricing
characteristics of similar term rate indices. As such, this analysis is not
intended to be a forecast of the effect of a change in market interest rates on
the Company.
GAP ANALYSIS
The interest rate sensitivity gap ("gap") is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. During a period of rising interest rates,
a positive gap (where the amount of maturing and repricing assets exceeds
liabilities) would tend to have a positive impact on net interest income, while
a negative gap (where the amount of maturing and repricing liabilities exceeds
assets) would tend to have a detrimental impact. During a period of declining
interest rates, a negative gap would tend to have a positive impact on net
interest income, while a positive gap would tend to have a detrimental impact.
The Company's one-year cumulative gap position at September 30, 1999 was
negative $2.1 billion or 12.66% of assets. This is a one-day position that
changes frequently and is not indicative of the Company's position at any other
time. While the gap position is a useful tool in measuring interest rate risk
and contributes toward effective asset and liability management, it is difficult
to predict the effect of changing interest rates solely on that measure without
accounting for alterations in the maturity or repricing characteristics of the
balance sheet that occur during changes in market interest rates. For example,
the gap position shows only the prepayment assumptions pertaining to the current
rate environment. Assets tend to prepay more rapidly during periods of declining
interest rates than during periods of rising interest rates. Because of this and
other risk factors not contemplated by the gap position, an institution could
have a matched gap position in the current rate environment and still have its
net interest income exposed to interest rate risk.
49
The following table sets forth the expected maturity and repricing
characteristics of the Company's consolidated assets, liabilities, and
off-balance-sheet contracts at September 30, 1999:
AMOUNTS MATURING OR REPRICING IN
--------------------------------------------------------------------
AFTER
THREE AFTER AFTER
LESS THAN MONTHS SIX MONTHS ONE YEAR
THREE BUT WITHIN BUT WITHIN BUT WITHIN AFTER NON-
MONTHS SIX MONTHS ONE YEAR FIVE YEARS FIVE YEARS REPRICING
---------- ----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS(1)
Cash and investment
securities(2).................... $ 867,849 $ -- $ -- $ -- $ -- $ 175,058
Adjustable-rate loans.............. 5,494,912 867,489 632,195 1,338,564 303,856 --
Fixed-rate loans................... 207,682 80,637 177,682 1,564,953 2,463,522 --
Adjustable-rate mortgage-backed
securities....................... 396,004 109,168 21,737 -- -- --
Fixed-rate mortgage-backed
securities....................... 9,110 9,312 24,988 140,651 278,779 --
Other assets....................... -- -- -- -- -- 1,080,531
---------- ----------- ----------- ---------- ---------- ----------
Total assets................... $6,975,557 $1,066,606 $ 856,602 $3,044,168 $3,046,157 $1,255,589
========== =========== =========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Certificates of deposit............ $ 626,841 $ 532,601 $1,504,023 $1,196,552 $ 536 $ --
Transaction deposits(3)............ 1,349,742 684,089 171,022 1,051,624 -- 391,472
---------- ----------- ----------- ---------- ---------- ----------
Total deposits................. 1,976,583 1,216,690 1,675,045 2,248,176 536 391,472
FHLB advances...................... 4,302,924 1,081,046 407,000 652,500 -- --
Reverse repos...................... 516,900 -- -- -- -- --
Notes payable...................... -- -- -- -- 370,000 --
Other liabilities.................. -- -- -- -- -- 306,893
Minority interest and redeemable
preferred stock.................. -- -- -- -- -- 345,500
Stockholders' equity............... -- -- -- -- -- 753,414
---------- ----------- ----------- ---------- ---------- ----------
Total liabilities, minority
interest, redeemable
preferred stock, and
stockholders' equity......... $6,796,407 $2,297,736 $2,082,045 $2,900,676 $ 370,536 $1,797,279
========== =========== =========== ========== ========== ==========
Gap before off-balance-sheet
financial instruments.............. $ 179,150 $(1,231,130) $(1,225,443) $ 143,492 $2,675,621 $ (541,690)
OFF-BALANCE-SHEET(4)
Interest rate swap
agreements -- pay fixed.......... 424,000 (37,500) (165,000) (221,500) -- --
---------- ----------- ----------- ---------- ---------- ----------
Gap.................................. $ 603,150 $(1,268,630) $(1,390,443) $ (78,008) $2,675,621 $ (541,690)
========== =========== =========== ========== ========== ==========
Cumulative gap....................... $ 603,150 $ (665,480) $(2,055,923)
========== =========== ===========
Cumulative gap as a percentage of
total assets....................... 3.71% (4.10)% (12.66)%
========== =========== ===========
TOTAL
----------
ASSETS(1)
Cash and investment
securities(2).................... $1,042,907
Adjustable-rate loans.............. 8,637,016
Fixed-rate loans................... 4,494,476
Adjustable-rate mortgage-backed
securities....................... 526,909
Fixed-rate mortgage-backed
securities....................... 462,840
Other assets....................... 1,080,531
----------
Total assets................... $16,244,679
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Certificates of deposit............ $3,860,553
Transaction deposits(3)............ 3,647,949
----------
Total deposits................. 7,508,502
FHLB advances...................... 6,443,470
Reverse repos...................... 516,900
Notes payable...................... 370,000
Other liabilities.................. 306,893
Minority interest and redeemable
preferred stock.................. 345,500
Stockholders' equity............... 753,414
----------
Total liabilities, minority
interest, redeemable
preferred stock, and
stockholders' equity......... $16,244,679
==========
Gap before off-balance-sheet
financial instruments..............
OFF-BALANCE-SHEET(4)
Interest rate swap
agreements -- pay fixed..........
Gap..................................
Cumulative gap.......................
Cumulative gap as a percentage of
total assets.......................
- ------------
(1) Fixed-rate loans and MBS are distributed based on contractual maturity
adjusted for anticipated prepayments. Adjustable-rate loans and MBS are
distributed based on the interest rate reset date and contractual maturity
adjusted for anticipated prepayments. Single family loans and MBS runoff and
repricing assume a constant prepayment rate based on coupon rate and
maturity. The weighted-average annual projected prepayment rate was 18.56%.
(2) Investment securities include repurchase agreements, federal funds sold,
securities, and FHLB stock.
(3) Transaction deposits are presented over their expected repricing periods
because these types of accounts tend to reprice over time due to changes in
general market interest rates.
(4) The above table includes only those off-balance-sheet financial instruments
that impact the gap in all interest rate environments. The Company also has
certain off-balance-sheet financial instruments that hedge specific interest
rate risks.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included on page 58 and the Consolidated Financial Statements
which begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information on the change in accountant of the Company in Form 8-K/A filed
June 23, 1999, is incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on directors and executive officers of the Company contained
under the caption "Election of Directors" in the Company's definitive Proxy
Statement relating to the 1999 Annual Meeting of Shareholders, to be filed not
later than 120 days after the close of the Company's fiscal year, is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation contained under the caption
"Executive Compensation" in the Company's definitive Proxy Statement relating
to the 1999 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of the Company's voting securities by
each director and all officers and directors as a group, and by any person known
to beneficially own more than 5% of voting security of the Company contained
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement relating to the 1999
Annual Meeting of Shareholders, to be filed not later than 120 days after the
close of the Company's fiscal year, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions contained
under the caption "Certain Relationships and Related Transactions" of the
Company's definitive Proxy Statement relating to the 1999 Annual Meeting of
Shareholders, to be filed not later than 120 days after the close of the
Company's fiscal year, is incorporated herein by reference.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
EXHIBITS
Exhibits followed by a parenthetical reference are incorporated by
reference herein from the document described in such parenthetical
reference.
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
2.1 -- Form of Letter Agreement, by and among the general and limited partners of Hyperion
Partners, L.P., dated as of June 17, 1996, relating to certain transactions consumated
prior to the Offering. (Incorporated by reference to Exhibit 2.1 to Form S-1, Registration
No. 333-06229)
2.2 -- Merger Agreement, dated as of June 17, 1996, by and between the Company and Hyperion
Holdings related to the Merger. (Incorporated by reference to Exhibit 2.2 to Form S-1,
Registration No. 333-06229)
3.1 -- Form of Restated Certificate of Incorporation of the Registrant, as amended. (Incorporat-
ed by reference to Exhibit 3.1 to Form S-1, Registration No. 333-06229)
3.2 -- Form of By-Laws of the Registrant. (Incorporated by reference to Exhibit 3.2 to Form S-1,
Registration No. 333-06229)
4.5 -- Form of Class A common stock Certificate. (Incorporated by reference to Exhibit 4.5 to
Form S-1, Registration No. 333-06229)
4.6 -- Indenture, dated as of May 7, 1997, between the Registrant and The Bank of New York, as
Trustee, relating to the Registrant's 8.875% Subordinated Notes due May 1, 2007
(Incorporated by reference to Exhibit 4.2 to Form S-1, Registration No. 333-19861)
4.7 -- Form of 8.875% Subordinated Notes due May 1, 2007 (included in the Indenture filed as
Exhibit 4.6 hereto) (Incorporated by reference to Exhibit 4.3 to Form S-1, Registration
No. 333-19861)
10.1 -- Assistance Agreement, dated December 30, 1988, among the Bank, the Registrant, Hyperion
Holdings, Hyperion Partners, and the FSLIC. (Incorporated by reference to Exhibit 10.1 to
Form S-1, Registration No. 333-06229)
10.1a -- Settlement and Termination Agreement, dated as of December 23, 1993, among the Bank, the
Registrant, Hyperion Holdings, Hyperion Partners and the FDIC. (Incorporated by reference
to Exhibit 10.1a to Form S-1, Registration No. 333-06229)
10.1b -- Tax Benefits Agreement, dated December 28, 1993, among the Bank, the Registrant, Hyperion
Holdings, Hyperion Partners and the FDIC. (Incorporated by reference to Exhibit 10.1b to
Form S-1, Registration No. 333-06229)
10.2 -- Acquisition Agreement, dated December 30, 1988, between the Bank and the FSLIC.
(Incorporated by reference to Exhibit 10.2 to Form S-1, Registration No. 333-06229)
10.3 -- Warrant Agreement, dated December 30, 1988, between the Bank and the FSLIC. (Incorporated
by reference to Exhibit 10.3 to Form S-1, Registration No. 333-06229)
10.3a -- Amended and Restated Warrant Agreement dated December 28, 1993, between the Bank and the
FDIC. (Incorporated by reference to Exhibit 10.3a to Form S-1, Registration No. 333-06229)
10.4 -- Regulatory Capital Maintenance Agreement, dated December 30, 1988, among the Bank, the
Registrant, Hyperion Holdings, Hyperion Partners, and the FSLIC (terminated). (Exhibit
10.4 to Form S-1 filed on June 18, 1996)
10.5 -- Federal Stock Charter of the Bank and First Amendment to charter approved on August 26,
1992. (Incorporated by reference to Exhibit 10.5 to Form S-1, Registration No. 333-06229)
10.6 -- Amended and Restated Federal Stock Charter of the Bank and Second Amendment approved on
October 30, 1992. (Incorporated by reference to Exhibit 10.6 to Form S-1, Registration No.
333-06229)
10.6a -- Third Amendment to the Federal Stock Charter of the Bank approved on April 23, 1996.
(Incorporated by reference to Exhibit 10.6a to Form S-1, Registration No. 333-06229)
52
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
10.6b -- Amended and Restated Bylaws of the Bank. (Incorporated by reference to Exhibit 10.6b to
Form S-1, Registration No. 333-06229)
10.7 -- Specimen Preferred Stock, Series A, certificate, $25.00 per share stated value of the
Bank. (Incorporated by reference to Exhibit 10.7 to Form S-1, Registration No. 333-06229)
10.7a -- Certificate of Designation of Noncumulative Preferred Stock, Series A, of the Bank.
(Incorporated by reference to Exhibit 10.7a to Form S-1, Registration No. 333-06229)
10.7b -- Specimen Preferred Stock, Series B, certificate, $25.00 per share stated value, of the
Bank. (Incorporated by reference to Exhibit 10.7b to Form S-1, Registration No. 333-06229)
10.7c -- Certificate of Designation of Noncumulative Preferred Stock, Series B, of the Bank.
(Incorporated by reference to Exhibit 10.7c to Form S-1, Registration No. 333-06229)
10.7d -- Certificate of Designation of Redeemable Preferred Stock Series A of the Company.
(Incorporated by reference to Exhibit 4.1 to Form 8-K filed August 10, 1999)
10.7e -- Certificate of Designation of Redeemable Preferred Stock Series B of the Company.
(Incorporated by reference to Exhibit 4.2 to Form 8-K filed August 10, 1999)
10.8 -- Data Processing Agreement, dated January 1, 1992, between the Bank and Systematics
Financial Services, Inc., and First Amendment (dated October 28, 1992) and Second
Amendment (dated September 1, 1992). (Incorporated by reference to Exhibit 10.8 to Form
S-1, Registration No. 333-06229)
10.8a -- Third Amendment, dated December 17, 1993, to the Data Processing Agreement, dated January
1, 1992, between the Bank and Systematics Financial Services, Inc. (Incorporated by
reference to Exhibit 10.8a to Form S-1, Registration No. 333-06229)
10.8b -- Fourth Amendment, dated March 28, 1994, to the Data Processing Agreement, dated January 1,
1992, between the Bank and Systematics Financial Services, Inc. (Incorporated by reference
to Exhibit 10.8b to Form S-1, Registration No. 333-06229)
10.8c -- Fifth Amendment, dated April 1, 1994, to the Data Processing Agreement, dated January 1,
1992, between the Bank and Systematics Financial Services, Inc. (Incorporated by reference
to Exhibit 10.8c to Form S-1, Registration No. 333-06229)
10.8d -- Sixth Amendment, dated February 26, 1996, to the Data Processing Agreement, dated January
1, 1992, between the Bank and Systematics Financial Services, Inc. (Incorporated by
reference to Exhibit 10.8d to Form S-1, Registration No. 333-06229)
10.9 -- Management and Consulting Services Agreement, dated January 1, 1992, between the Bank and
Systematics Financial Services, Inc., and First Amendment (dated March 18, 1992) and
Second Amendment (dated September 1, 1992). (Incorporated by reference to Exhibit 10.9 to
Form S-1, Registration No. 333-06229)
10.10 -- Lease Agreement, dated April 1, 1989, between the Bank and Homart Development Co. (Leased
premises at 3200 Southwest Freeway) and First Amendment thereto dated January 31, 1990.
(Incorporated by reference to Exhibit 10.10 to Form S-1, Registration No. 333-06229)
10.10a -- Second Amendment, dated November 14, 1994, to Lease Agreement dated April 1, 1989, between
the Bank and Homart Development Co. (assigned to HD Delaware Properties, Inc.).
(Incorporated by reference to Exhibit 10.10a to Form S-1, Registration No. 333-06229)
10.10b -- Third Amendment, dated January 8, 1996, to Lease Agreement dated April 1, 1989, between
the Bank and Homart Development Co. (predecessor in interest of HMS Office, L.P.).
(Incorporated by reference to Exhibit 10.10b to Form S-1, Registration No. 333-06229)
10.11 -- Lease Agreement, dated November 20, 1990, between the Bank and Greenway Plaza, LTD.
(Leased premises at 3800 Buffalo Speedway). (Incorporated by reference to Exhibit 10.11 to
Form S-1, Registration No. 333-06229)
10.12 -- Employment Agreement, dated March 18, 1991, between the Bank and Barry C. Burkholder.
(Incorporated by reference to Exhibit 10.12 to Form S-1, Registration No. 333-06229)
53
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
10.12a -- Amendment, dated April 10, 1996, to the Employment Agreement between the Bank and Barry C.
Burkholder. (Incorporated by reference to Exhibit 10.12a to Form S-1, Registration No.
333-06229)
10.13 -- Letter Agreement Related to Employment, dated April 4, 1990, between the Bank and Anthony
J. Nocella. (Incorporated by reference to Exhibit 10.13 to Form S-1, Registration No.
333-06229)
10.15 -- Letter Agreement Related to Employment, dated April 6, 1990, between the Bank and Jonathon
K. Heffron. (Incorporated by reference to Exhibit 10.15 to Form S-1, Registration No.
333-06229)
10.17 -- Management Incentive Plan, dated April 20, 1992. (Incorporated by reference to Exhibit
10.17 to Form S-1, Registration No. 333-06229)
10.18 -- Letter Agreement, dated January 5, 1990, between Hyperion Partners and certain
shareholders of the Registrant with respect to the provision of managerial assistance to
the Registrant. (Incorporated by reference to Exhibit 10.18 to Form S-1, Registration No.
333-06229)
10.22 -- Supplemental Executive Savings Plan of the Bank. (Incorporated by reference to Exhibit
10.22 to Form S-1, Registration No. 333-06229)
10.23 -- Directors Supplemental Savings Plan of the Bank. (Incorporated by reference to Exhibit
10.23 to Form S-1, Registration No. 333-06229)
10.24 -- Warrant Purchase and Exchange Agreement, dated July 23, 1996, by and among the Company,
the Bank and the FDIC. (Exhibit 10.24 to Form S-1 filed on July 25, 1996)
10.25 -- Tax Sharing Agreement, dated as of May 1, 1996, by and between the Company and the Bank.
(Incorporated by reference to Exhibit 10.25 to Form 10-K for the fiscal year ended
September 30, 1996)
10.26 -- Form of the Company's 1996 Stock Incentive Plan. (Incorporated by reference to Exhibit
10.26 to Form S-1, Registration No. 333-06229)
10.27 -- Form of the Company's Director Stock Plan. (Incorporated by reference to Exhibit 10.27 to
Form S-1, Registration No. 333-06229)
10.28 -- Employment Agreement, dated August 1, 1996, between the Company and Barry C. Burkholder.
(Incorporated by reference to Exhibit 10.28 to Form 10-K for the fiscal year ended
September 30, 1996)
10.29 -- Employment Agreement, dated August 1, 1996, between the Company and Anthony J. Nocella.
(Incorporated by reference to Exhibit 10.29 to Form 10-K for the fiscal year ended
September 30, 1996)
10.29a -- Amendment to Employment Agreement, dated February 18, 1999, between the Company and
Anthony J. Nocella (Incorporated by reference to Exhibit 10.29a to Form 10-Q for the
quarter ended March 31, 1999)
10.30 -- Employment Agreement, dated August 1, 1996, between the Company and Jonathon K. Heffron.
(Incorporated by reference to Exhibit 10.30 to Form 10-K for the fiscal year ended
September 30, 1996)
*10.30a -- Amendment to Employment Agreement dated November 18, 1999, between the Company and
Jonathon K. Heffron.
10.31 -- Employment Agreement, dated August 1, 1996, between the Company and Ronald D. Coben.
(Incorporated by reference to Exhibit 10.31 to Form 10-K for the fiscal year ended
September 30, 1996)
10.32 -- Form of Nontransferable Stock Agreement. (Incorporated by reference to Exhibit 10.32 to
Form S-1, Registration No. 333-06229)
10.33 -- Form of Stock Option Agreement. (Incorporated by reference to Exhibit 10.33 to Form S-1,
Registration No. 333-06229)
10.34 -- Consulting Agreement. (Incorporated by reference to Exhibit 10.23 to Form 10-K for the
fiscal year ended September 30, 1996)
10.35 -- Recovery Agreement. (Incorporated by reference to Exhibit 10.24 to Form 10-K for the
fiscal year ended September 30, 1996)
54
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
10.36 -- Stock Purchase Agreement, dated January 15, 1993, between Hyperion Partners and Hyperion
Holdings. (Incorporated by reference to Exhibit 10.36 to Form S-1, Registration No.
333-06229)
10.37 -- Asset Purchase and Sale Agreement, dated January 17, 1997, between the Bank and National
City Mortgage Co. (Incorporated by reference to Exhibit 10.38 to Form 10-Q for the quarter
ended December 31, 1996)
10.38 -- Lease Agreement, dated November 21, 1997, between the Bank and Utah State Retirement Fund.
(Leased premises at 3200 Southwest Freeway). (Incorporated by reference to Exhibit 10.38
to Form 10-K for the fiscal year ended September 30, 1997)
10.39 -- First Amendment, dated June 30, 1998, to Lease Agreement dated November 21, 1997, between
the Bank and Utah State Retirement Fund. (Leased premises at 3200 Southwest Freeway.)
*21 -- Subsidiaries of the Registrant.
*23.1a -- Consent of Deloitte & Touche LLP, former independent auditors.
*23.1b -- Consent of KPMG LLP, independent auditors.
*23.1c -- Consent of Payne Falkner Smith & Jones, P.C.
*24 -- Power of Attorney.
*27.1 -- Financial Data Schedule for the years ended September 30, 1999, September 30, 1998, and
September 30, 1997.
*27.2 -- Financial Data Schedule for the quarters ended September 30, 1999, June 30, 1999, March
31, 1999, and December 31, 1998.
*27.3 -- Financial Data Schedule for the quarters ended September 30, 1998, June 30, 1998, March
31, 1998, and December 31, 1997.
*99.1 -- Form 8-K/A filed by the Company June 23, 1999.
- ------------
* Filed herewith.
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
See Index to the Consolidated Financial Statements on page 58. All
supplemental schedules are omitted as inapplicable or because the required
information is included in the Consolidated Financial Statements or Notes
thereto.
REPORTS ON FORM 8-K
On August 11, 1999, the Company filed a report in Form 8-K, reporting under
Item 5 of Form 8-K, to file the exhibits for its Corporate PIES and Preferred
Stock Series A.
55
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECTION 13, OR 15(D) OF THE SECURITIES
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN HOUSTON, STATE OF
TEXAS, ON DECEMBER 20, 1999.
BANK UNITED CORP.
By: /s/ BARRY C. BURKHOLDER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED BELOW.
SIGNATURES TITLE DATE
- ------------------------------------------------------ --------------------------------- -------------------
(1) Principal Executive Officer:
/s/BARRY C. BURKHOLDER President and December 20, 1999
BARRY C. BURKHOLDER Chief Executive Officer
(2) Principal Financial and Accounting Officer:
/s/ANTHONY J. NOCELLA Vice Chairman and December 20, 1999
ANTHONY J. NOCELLA Chief Financial Officer
(3) Directors:
* Chairman and Director December 20, 1999
LEWIS S. RANIERI
/s/BARRY C. BURKHOLDER Director December 20, 1999
BARRY C. BURKHOLDER
* Director December 20, 1999
LAWRENCE CHIMERINE, PH.D.
* Director December 20, 1999
DAVID M. GOLUSH
* Director December 20, 1999
PAUL M. HORVITZ, PH.D.
* Director December 20, 1999
ALAN E. MASTER
/s/ANTHONY J. NOCELLA Director December 20, 1999
ANTHONY J. NOCELLA
56
SIGNATURES TITLE DATE
- ------------------------------------------------------ --------------------------------- -------------------
* Director December 20, 1999
SALVATORE A. RANIERI
* Director December 20, 1999
SCOTT A. SHAY
* Director December 20, 1999
PATRICIA A. SLOAN
* Director December 20, 1999
MICHAEL S. STEVENS
* Director December 20, 1999
KENDRICK R. WILSON III
/s/JONATHON K. HEFFRON
JONATHON K. HEFFRON
ATTORNEY-IN-FACT
- ------------
* Signed through Power of Attorney
granted to Jonathon K. Heffron,
Attorney-in-Fact.
57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Reports............................................. F-1
Consolidated Statements of Financial Condition as of September 30, 1999 and
1998.................................................................... F-4
Consolidated Statements of Operations for the Year Ended September 30, 1999,
1998, and 1997.......................................................... F-5
Consolidated Statements of Stockholders' Equity for the Year Ended September
30, 1999, 1998, and 1997................................................ F-6
Consolidated Statements of Cash Flows for the Year Ended September 30, 1999,
1998, and 1997.......................................................... F-7
Notes to Consolidated Financial Statements................................ F-9
58
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Bank United Corp.:
We have audited the accompanying consolidated statement of financial
condition of Bank United Corp. and subsidiaries as of September 30, 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Bank
United Corp. and subsidiaries as of September 30, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The consolidated financial statements of Bank United Corp. and subsidiaries
as of September 30, 1998 and 1997, prior to their restatement for the 1999
pooling-of-interests transaction described in Note 2 to the consolidated
financial statements, were audited by other auditors whose report is presented
separately herein. The contribution of Bank United Corp. and subsidiaries to
consolidated interest income and net income represented 98% and 99%, and 99% and
99% of the restated totals for 1998 and 1997, respectively. Separate financial
statements of Texas Central Bancshares, Inc. and subsidiaries also included in
the 1998 and 1997 restated consolidated financial statements were audited by
other auditors whose report is presented separately herein. We also audited the
combination of the accompanying consolidated financial statements for the years
ended September 1998 and 1997, after restatement for the 1999 pooling of
interests; in our opinion, such consolidated statements have been properly
combined on the basis described in Note 1 of the notes to the consolidated
financial statements.
KPMG LLP
Houston, Texas
October 26, 1999
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Bank United Corp.:
We have audited the consolidated statement of financial condition of Bank
United Corp. and its subsidiaries (collectively known as the "Company") as of
September 30, 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
ended September 30, 1998 (none of which are presented herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
September 30, 1998, and the results of its operations and its cash flows for
each of the two years in the period ended September 30, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
October 21, 1998
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Texas Central Bancshares, Inc. and Subsidiaries
We have audited the consolidated balance sheet of Texas Central Bancshares,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended not presented herein. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Central Bancshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
PAYNE FALKNER SMITH & JONES, P.C.
Dallas, Texas
February 9, 1999
F-3
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
AT SEPTEMBER 30,
----------------------------
NOTES 1999 1998
----------- ------------- -------------
(RESTATED)
ASSETS
Cash and cash equivalents............ 1 $ 183,260 $ 236,588
Securities purchased under agreements
to resell and federal funds sold... 3 390,326 495,282
Securities and other investments 4
Held to maturity, at amortized
cost (fair value of $11.7
million in 1999 and $15.3
million in 1998)............... 12,106 15,114
Available for sale, at fair
value.......................... 131,432 89,408
Mortgage-backed securities........... 5, 10
Held to maturity, at amortized
cost (fair value of $308.8
million in 1999 and $445.1
million in 1998)............... 315,288 450,356
Available for sale, at fair
value.......................... 688,714 488,172
Loans 6, 9, 12
Held for investment (net of the
allowance for credit losses of
$82.7 million in 1999 and $47.5
million in 1998)............... 12,422,238 8,630,865
Held for sale................... 693,964 2,237,032
Federal Home Loan Bank stock......... 328,886 243,191
Mortgage servicing rights............ 7, 12 534,694 410,868
Servicing receivables................ 116,397 118,333
Deferred tax asset................... 15 110,512 113,581
Premises and equipment............... 88,684 62,007
Intangible assets.................... 83,778 59,591
Real estate owned.................... 17,278 18,790
Other assets......................... 127,122 111,877
------------- -------------
TOTAL ASSETS......................... $ 16,244,679 $ 13,781,055
============= =============
LIABILITIES
Deposits............................. 8 $ 7,508,502 $ 6,894,227
Federal Home Loan Bank advances...... 6, 9, 12 6,443,470 4,783,498
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 5, 10, 12 516,900 824,043
Notes payable........................ 11 368,762 219,720
Other liabilities.................... 308,131 182,673
------------- -------------
Total liabilities.......... 15,145,765 12,904,161
------------- -------------
MINORITY INTEREST AND REDEEMABLE
PREFERRED STOCK 16
Preferred stock issued by
consolidated subsidiary............ 185,500 185,500
Redeemable preferred stock........... 160,000 --
------------- -------------
345,500 185,500
------------- -------------
STOCKHOLDERS' EQUITY 17, 18
Common stock......................... 325 322
Paid-in capital...................... 132,153 132,066
Retained earnings.................... 646,549 560,961
Unearned stock compensation.......... 13 (4,686) --
Accumulated other comprehensive
income -- net unrealized losses on
securities available for sale, net
of tax............................. (20,058) (1,454)
Treasury stock, at cost.............. (869) (501)
------------- -------------
Total stockholders'
equity................... 753,414 691,394
------------- -------------
TOTAL LIABILITIES, MINORITY INTEREST,
REDEEMABLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY............... $ 16,244,679 $ 13,781,055
============= =============
See accompanying Notes to Consolidated Financial Statements.
F-4
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------
NOTES 1999 1998 1997
------- ------------ ----------- -----------
(RESTATED) (RESTATED)
INTEREST INCOME
Short-term interest-earning assets... $ 20,692 $ 38,641 $ 36,729
Securities and other investments..... 7,414 9,711 5,841
Mortgage-backed securities........... 69,665 82,276 104,955
Loans................................ 894,039 762,494 657,539
Federal Home Loan Bank stock......... 16,176 12,678 11,419
------------ ----------- -----------
Total interest income...... 1,007,986 905,800 816,483
------------ ----------- -----------
INTEREST EXPENSE
Deposits............................. 296,630 302,925 264,446
Federal Home Loan Bank advances...... 303,014 236,265 212,573
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 32,929 56,286 57,485
Notes payable........................ 25,792 19,571 13,410
------------ ----------- -----------
Total interest expense..... 658,365 615,047 547,914
------------ ----------- -----------
Net interest income........ 349,621 290,753 268,569
PROVISION FOR CREDIT LOSSES.......... 6 38,368 20,123 18,107
------------ ----------- -----------
Net interest income after
provision for credit
losses................... 311,253 270,630 250,462
------------ ----------- -----------
NON-INTEREST INCOME
Loan servicing fees, net............. 54,408 35,975 32,381
Net gains
Sales of single family loans.... 18,909 11,124 21,182
Securities and mortgage-backed
securities.................... 1,290 2,761 2,718
Other loans..................... 3,299 651 1,128
Sale of mortgage offices........ 20 -- -- 4,748
------------ ----------- -----------
Net gains.................. 23,498 14,536 29,776
Deposit fees and charges............. 23,176 17,888 13,419
Other................................ 18,879 13,254 8,428
------------ ----------- -----------
Total non-interest
income................... 119,961 81,653 84,004
------------ ----------- -----------
NON-INTEREST EXPENSE
Compensation and benefits............ 13 109,944 88,890 76,836
Occupancy............................ 22,841 15,945 15,241
Data processing...................... 20,574 16,804 13,902
Court of claims litigation........... 18 7,575 1,800 --
Amortization of intangibles.......... 6,647 5,864 4,118
Merger related and restructuring
costs.............................. 2 2,394 -- --
Other................................ 79,670 63,175 65,291
------------ ----------- -----------
Total non-interest
expense.................. 249,645 192,478 175,388
------------ ----------- -----------
Income before income taxes,
minority interest,
and extraordinary loss... 181,569 159,805 159,078
INCOME TAX EXPENSE................... 15 53,659 25,862 60,986
------------ ----------- -----------
Income before minority
interest and
extraordinary loss....... 127,910 133,943 98,092
MINORITY INTEREST -- subsidiary
preferred stock dividends.......... 16 18,253 18,253 18,253
------------ ----------- -----------
Income before extraordinary
loss..................... 109,657 115,690 79,839
EXTRAORDINARY LOSS -- early
extinguishment of debt............. 11 -- -- 2,323
------------ ----------- -----------
NET INCOME................. $ 109,657 $ 115,690 $ 77,516
============ =========== ===========
NET INCOME AVAILABLE TO
COMMON STOCKHOLDERS...... $ 107,955 $ 115,690 $ 77,516
============ =========== ===========
EARNINGS PER COMMON SHARE 17
Basic........................... $ 3.34 $ 3.59 $ 2.41
Diluted......................... 3.28 3.51 2.38
See accompanying Notes to Consolidated Financial Statements.
F-5
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
-------------------------------------
CLASS A CLASS B UNEARNED
----------------- ----------------- PAID-IN RETAINED STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS COMPENSATION
--------- ------ --------- ------ --------- -------- -------------
BALANCE AT SEPTEMBER 30, 1996,
RESTATED............................... 28,348,981 $283 3,859,662 $ 39 $ 132,299 $406,142 $ --
Net income........................... -- -- -- -- -- 77,516 --
Net change in unrealized gains
(losses), net of tax expense of
$5.2 million....................... -- -- -- -- -- -- --
--------- ------ --------- ------ --------- -------- -------------
Total comprehensive income....... -- -- -- -- -- 77,516 --
--------- ------ --------- ------ --------- -------- -------------
Dividends declared: common stock
($0.55 per share).................. -- -- -- -- -- (17,694) --
Conversion of common stock........... 618,342 7 (618,342) (7) -- -- --
Stock options exercised.............. 8,835 -- -- -- 43 -- --
Purchase and retirement of common
stock.. (39,924) -- -- -- (492) -- --
--------- ------ --------- ------ --------- -------- -------------
BALANCE AT SEPTEMBER 30, 1997,
RESTATED............................... 28,936,234 290 3,241,320 32 131,850 465,964 --
Net income........................... -- -- -- -- -- 115,690 --
Net change in unrealized gains
(losses), net of tax benefit of
$4.7 million....................... -- -- -- -- -- -- --
--------- ------ --------- ------ --------- -------- -------------
Total comprehensive income......... -- -- -- -- -- 115,690 --
--------- ------ --------- ------ --------- -------- -------------
Dividends declared: common stock
($0.64 per share).................. -- -- -- -- -- (20,693) --
Stock options exercised.............. 33,358 -- -- -- 216 -- --
Stock repurchased.................... -- -- -- -- -- -- --
--------- ------ --------- ------ --------- -------- -------------
BALANCE AT SEPTEMBER 30, 1998,
RESTATED............................... 28,969,592 290 3,241,320 32 132,066 560,961 --
Net income........................... -- -- -- -- -- 109,657 --
Net change in unrealized gains
(losses), net of tax benefit of
$11.1 million...................... -- -- -- -- -- -- --
--------- ------ --------- ------ --------- -------- -------------
Total comprehensive income....... -- -- -- -- -- 109,657 --
--------- ------ --------- ------ --------- -------- -------------
Dividend declared:
Common stock ($0.69 per share)... -- -- -- -- -- (22,367) --
Redeemable preferred stock ($0.53
per share)..................... -- -- -- -- -- (1,702) --
Issuance costs -- redeemable
preferred stock.................... -- -- -- -- (6,479) -- --
Conversion of shares................. 3,241,320 32 (3,241,320) (32) -- -- --
Restricted stock issuance, net of
amortization....................... 140,750 1 -- -- 5,550 -- (4,686)
Stock options exercised.............. 126,164 2 -- -- 1,016 -- --
Stock repurchased.................... -- -- -- -- -- -- --
--------- ------ --------- ------ --------- -------- -------------
BALANCE AT SEPTEMBER 30, 1999............ 32,477,826 $325 -- $-- $ 132,153 $646,549 $ (4,686)
========= ====== ========= ====== ========= ======== =============
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME --
UNREALIZED TREASURY STOCK TOTAL
GAINS ----------------- STOCKHOLDERS'
(LOSSES) SHARES AMOUNT EQUITY
------------- -------- ------ -------------
BALANCE AT SEPTEMBER 30, 1996,
RESTATED............................... $ (2,376) -- $-- $ 536,387
Net income........................... -- -- -- 77,516
Net change in unrealized gains
(losses), net of tax expense of
$5.2 million....................... 8,702 -- -- 8,702
------------- -------- ------ -------------
Total comprehensive income....... 8,702 -- -- 86,218
------------- -------- ------ -------------
Dividends declared: common stock
($0.55 per share).................. -- -- -- (17,694)
Conversion of common stock........... -- -- -- --
Stock options exercised.............. -- -- -- 43
Purchase and retirement of common
stock.. -- -- -- (492)
------------- -------- ------ -------------
BALANCE AT SEPTEMBER 30, 1997,
RESTATED............................... 6,326 -- -- 604,462
Net income........................... -- -- -- 115,690
Net change in unrealized gains
(losses), net of tax benefit of
$4.7 million....................... (7,780) -- -- (7,780)
------------- -------- ------ -------------
Total comprehensive income......... (7,780) -- -- 107,910
------------- -------- ------ -------------
Dividends declared: common stock
($0.64 per share).................. -- -- -- (20,693)
Stock options exercised.............. -- -- -- 216
Stock repurchased.................... -- (14,200) (501 ) (501)
------------- -------- ------ -------------
BALANCE AT SEPTEMBER 30, 1998,
RESTATED............................... (1,454) (14,200) (501 ) 691,394
Net income........................... -- -- -- 109,657
Net change in unrealized gains
(losses), net of tax benefit of
$11.1 million...................... (18,604) -- -- (18,604)
------------- -------- ------ -------------
Total comprehensive income....... (18,604) -- -- 91,053
------------- -------- ------ -------------
Dividend declared:
Common stock ($0.69 per share)... -- -- -- (22,367)
Redeemable preferred stock ($0.53
per share)..................... -- -- -- (1,702)
Issuance costs -- redeemable
preferred stock.................... -- -- -- (6,479)
Conversion of shares................. -- -- -- --
Restricted stock issuance, net of
amortization....................... -- -- -- 865
Stock options exercised.............. -- 7,000 246 1,264
Stock repurchased.................... -- (21,700) (614) (614)
------------- -------- ------ -------------
BALANCE AT SEPTEMBER 30, 1999............ $ (20,058) (28,900) $(869) $ 753,414
============= ======== ====== =============
See accompanying Notes to Consolidated Financial Statements.
F-6
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
(RESTATED) (RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 109,657 $ 115,690 $ 77,516
Adjustments to reconcile net income to
net cash used by operating activities:
Provision for credit losses........ 38,368 20,123 18,107
Provision for mortgage servicing
rights impairment allowance...... -- 4,767 --
Deferred tax expense............... 15,192 12,149 42,287
Net gains on sales of assets....... (26,197) (19,753) (30,500)
Depreciation and amortization...... 118,563 85,011 41,400
Federal Home Loan Bank stock
dividends........................ (16,176) (12,678) (11,419)
Fundings and purchases of loans
held for sale.................... (4,128,607) (3,768,039) (1,995,816)
Proceeds from the sale of loans
held for sale.................... 2,994,954 1,903,991 1,198,295
Change in loans held for sale...... 546,876 670,197 32,638
Change in interest receivable...... (18,862) (4,748) (9,052)
Change in other assets............. 7,361 (140,952) (64,686)
Change in other liabilities........ 69,372 14,612 (69,858)
Management restricted stock
award............................ 865 -- --
------------- ------------- -------------
Net cash used by operating
activities.................. (288,634) (1,119,630) (771,088)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase price of acquisitions..... (45,000) (51,850) --
Assets purchased in acquisitions... (184,968) -- --
Net change in securities purchased
under agreements to resell and
federal funds sold............... 115,230 (129,033) 322,945
Fundings of loans held for
investment....................... (5,074,920) (3,867,558) (2,289,888)
Proceeds from principal repayments
and maturities of
Loans held for investment..... 5,117,746 4,162,942 2,517,782
Securities held to maturity... 11,749 96 2,596
Securities available for
sale........................ 685,039 345,215 134,165
Mortgage-backed securities
held to maturity............ 142,589 98,701 81,022
Mortgage-backed securities
available for sale.......... 225,730 465,195 263,659
Proceeds from the sale of
Securities available for
sale........................ 482,006 498,459 338,735
Mortgage-backed securities
available for sale.......... 6,459 93,131 6,965
Mortgage servicing rights..... -- -- 8,034
Federal Home Loan Bank
stock....................... 14,852 64,325 18,160
Real estate owned acquired
through foreclosure......... 46,290 37,031 59,038
Purchases of
Loans held for investment..... (2,008,466) (1,158,270) (1,086,249)
Securities held to maturity... (12,487) (9,747) (1,969)
Securities available for
sale........................ (709,897) (355,113) (131,488)
Mortgage-backed securities
held to maturity............ (10,512) (5,989) (2,134)
Mortgage-backed securities
available for sale.......... (453,489) (21,084) (246,363)
Mortgage servicing rights..... (104,533) (161,570) (144,258)
Federal Home Loan Bank
stock....................... (84,371) (88,112) (32,231)
Other changes in loans held for
investment....................... (97,446) (234,899) (237,312)
Other changes in mortgage servicing
rights........................... (39,267) (31,597) (21,870)
Net purchases of premises and
equipment........................ (34,824) (26,440) (14,854)
------------- ------------- -------------
Net cash used by investing
activities.................. (2,012,490) (376,167) (455,515)
------------- ------------- -------------
(CONTINUED ON FOLLOWING PAGE)
F-7
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(RESTATED) (RESTATED)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits.......... $ 381,471 $ (186,863) $ 167,017
Proceeds from deposits
purchased..................... 232,804 1,509,688 --
Proceeds from Federal Home Loan
Bank advances................. 4,815,600 3,130,583 3,296,067
Repayment of Federal Home Loan
Bank advances................. (3,155,628) (2,339,666) (2,794,140)
Net change in securities sold
under agreements to repurchase
and federal funds purchased... (307,143) (488,258) 478,015
Proceeds from issuance of
redeemable preferred stock.... 160,000 -- --
Payment of issuance costs of
redeemable preferred stock.... (4,423) -- --
Payment of common stock
dividends..................... (22,367) (20,693) (17,694)
Stock repurchased............... (614) (501) (492)
Stock options exercised......... 1,264 216 43
Repayment of notes payable...... -- (500) (114,740)
Proceeds from issuance of notes
payable....................... 148,984 -- 219,931
Payment of issuance costs of
notes payable................. (2,152) -- (4,012)
----------- ----------- -----------
Net cash provided by
financing activities..... 2,247,796 1,604,006 1,229,995
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................... (53,328) 108,209 3,392
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 236,588 128,379 124,987
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 183,260 $ 236,588 $ 128,379
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest.......... $ 642,408 $ 614,657 $ 539,014
Cash paid for income taxes...... 34,754 20,151 9,907
NONCASH INVESTING ACTIVITIES
Real estate owned acquired
through foreclosure........... 41,123 34,738 61,889
Securitization of loans......... 476,025 506,110 346,401
Net transfer of loans (to) from
held for investment (from) to
held for sale................. (1,671,006) 671,704 43,412
Transfer of acquisition related
securities from held to
maturity to available for
sale.......................... 17,082 -- --
Transfer of mortgage-backed
securities from held to
maturity to available for
sale.......................... 6,827 -- 6,843
See accompanying Notes to Consolidated Financial Statements.
F-8
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Bank United Corp. (the "Parent Company") became the holding company for
Bank United, a federal savings bank (the "Bank"), upon the Bank's formation in
December 1988. In December 1996, the Parent Company formed a wholly owned
Delaware subsidiary, BNKU Holdings, Inc. ("Holdings"), which is now the parent
company of the Bank.
The accompanying Consolidated Financial Statements include the accounts of
the Parent Company, Holdings, the Bank, and subsidiaries of both the Parent
Company and the Bank (collectively known as the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
The majority of the Company's assets and operations are derived from the Bank.
Bank United Corp. is the largest publicly traded depository institution
headquartered in Texas, with $16.2 billion in assets, $7.5 billion in deposits
and $753.4 million in stockholders' equity at September 30, 1999. The Company
provides consumers and businesses in Texas and selected markets throughout the
United States with a broad array of financial services. The Company serves over
300,000 Texas consumers and small businesses through a 150-branch network, has
23 Small Business Association ("SBA") lending offices in 16 states, is a
national middle market commercial bank with 20 regional offices in 16 states,
originates wholesale mortgage loans through 10 offices in nine states, and
operates a national mortgage servicing business serving 325,000 customers and an
investment portfolio business.
Certain amounts within the accompanying Consolidated Financial Statements
and the related Notes have been reclassified for comparative purposes to conform
to the current presentation.
ACQUISITIONS
Prior period Consolidated Financial Statements have been restated to
include the accounts of an entity that was acquired using the pooling of
interests method of accounting. Entities acquired that were accounted for as
purchases are included in the Consolidated Financial Statements beginning on
their date of acquisition. Assets and liabilities of institutions accounted for
as purchases are adjusted to their fair values as of their dates of acquisition.
USE OF ESTIMATES
The preparation of the Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the disclosure of contingent assets and liabilities. Actual results could differ
from these estimates and assumptions.
SHORT-TERM INTEREST-EARNING ASSETS
Short-term interest-earning assets are comprised of cash, cash equivalents,
securities purchased under agreements to resell ("repurchase agreements"), and
federal funds sold. Cash and cash equivalents consist of interest-earning and
non-interest-earning deposits in other banks.
The regulations of the Federal Reserve Board require average cash reserve
balances based on deposit liabilities to be maintained by the Bank at the
Federal Reserve Bank. The required reserve balance totalled $110.9 million for
the period including September 30, 1999. The Bank was in compliance with these
requirements.
SECURITIES
Debt and equity securities, including mortgage-backed securities ("MBS"),
are classified into one of three categories: held to maturity, available for
sale, or trading. Securities that the Company has the positive intent and
F-9
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ability to hold to maturity are classified as held to maturity and carried at
amortized cost, adjusted for the amortization of premiums and the accretion of
discounts. Under certain circumstances (including the deterioration of the
issuer's creditworthiness or a change in tax law, statutory requirements, or
regulatory requirements), securities held to maturity may be sold or transferred
to another portfolio. Securities that the Company intends to hold for indefinite
periods of time are classified as available for sale and are recorded at fair
value and any unrealized gains or losses are excluded from earnings and reported
net of tax as other comprehensive income in stockholders' equity until realized.
Trading account assets are carried at fair value with any realized or unrealized
gains and losses recognized in current operations. Trading account assets are
generally comprised of assets that are actively and frequently bought and sold
with the objective of generating income on short-term changes in price. The
Company held no trading account assets at September 30, 1999 or 1998.
The overall return or yield earned on MBS depends on the amount of interest
collected over the life of the security and the amortization of any purchase
premiums or discounts. Premiums and discounts are recognized in income using the
level-yield method over the assets' remaining lives (adjusted for anticipated
prepayments). The actual yields and maturities of MBS depend on the timing of
the payment of the underlying mortgage principal and interest. Accordingly,
changes in interest rates and prepayments can have a significant impact on the
yields of MBS.
If the fair value of a security declines for reasons other than temporary
market conditions, the carrying value will be written down to current fair value
by a charge to operations.
Net gains or losses on sales of securities are computed on the specific
identification method.
INTEREST-ONLY STRIPS
SBA interest-only strips are created in connection with the Company's
securitization of SBA loans and represent the contractual right to receive a
portion of the interest on the underlying SBA loans. The interest-only strips
are carried at fair value, which is the net present value of the future interest
to be collected, using assumptions of prepayments, defaults, and discount rates
that the Company believes market participants would use for similar securities.
Interest-only strips are amortized using the level-yield method and are
classified as securities and other investments available for sale.
LOANS
Loans that the Company has the intent and ability to hold for the
foreseeable future are classified as held for investment and are carried at
unpaid principal balance, adjusted for unamortized purchase premiums or
discounts, the allowance for credit losses, and any deferred loan origination
fees or costs ("Book Value"). Loans held for sale are carried at the lower of
Book Value or fair value. Fair value is determined based on quoted market prices
and considers the fair value of the related financial instruments utilized as
hedges. Any net unrealized losses on loans held for sale are charged to current
operations and a valuation allowance established.
Interest income on loans is recognized principally using the level-yield
method. Based on management's periodic evaluation or at the time a loan is 90
days past due, the related accrued interest is generally reversed by a charge to
operations and the loan is simultaneously placed on nonaccrual. Once a loan
becomes current and the borrower demonstrates the ability to repay the loan, the
loan is returned to accrual status.
Premiums, discounts, and loan fees (net of certain direct loan origination
costs) on loans held for sale are recognized in income when the related loans
are sold or repaid. Premiums, discounts, and loan fees (net of certain direct
loan origination costs) associated with loans held for investment, for which
collection is probable and estimable, are recognized in income over the loans'
estimated remaining lives using the level-yield method (adjusted for anticipated
prepayments) or when such loans are sold.
F-10
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRED LOANS
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." The adoption of
these statements did not have a material impact on the overall allowance for
credit losses. These pronouncements state that a loan is considered "impaired"
when it is probable that the creditor will be unable to collect all principal
and interest amounts due according to the contractual terms of the loan
agreement. Smaller balance homogeneous loans, including single family
residential and consumer loans, are excluded from the scope of SFAS No. 114.
These loans, however, are considered when determining the adequacy of the
allowance for credit losses.
Impaired loans are identified and measured in conjunction with management's
review of non-performing loans, classified assets, and the allowance for credit
losses. Impairment of large non-homogeneous loans is measured one of three ways:
discounting estimated future cash flows, or the loan's market price, or the fair
value of the collateral, if the loan is collateral dependent. If the measurement
of the loan is less than the Book Value of the loan, excluding any allowance for
credit losses and including accrued interest, then the impairment is recognized
by a charge to operations or an allocation of the allowance for credit losses.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at levels management deems
adequate to cover probable losses on loans. This allowance covers all loans,
including loans deemed to be impaired, loans not impaired, and loans excluded
from the impairment test. The adequacy of the allowance is based on management's
periodic evaluation of the loan portfolio, which considers such factors as
historical loss experience, delinquency status, identification of adverse
situations that may affect the ability of obligors to repay, known and inherent
risks in the portfolio, assessment of economic conditions, regulatory policies,
and the estimated value of the underlying collateral, if any. Losses are charged
to the allowance for credit losses when the loss actually occurs or when a
determination is made that a loss is probable to occur. Cash recoveries are
credited to the allowance for credit losses.
SALES OF SINGLE FAMILY LOANS
Gains or losses on loan sales are recognized at the time of sale and are
determined using the specific identification method. Certain loans are sold with
general representations and warranties included in the sales agreement.
Repurchases of these assets may be required when a loan fails to meet certain
conditions specified in the sales agreement that are covered by the general
representations and warranties. An accrual is maintained for the probable future
costs of such obligations at a level management believes adequate. This accrual
is included in other liabilities in the Consolidated Statements of Financial
Condition, and the related expense is included in non-interest expense in the
Consolidated Statements of Operations.
MORTGAGE SERVICING RIGHTS ("MSRS")
MSRs are periodically evaluated for impairment based on the fair value of
these rights. The fair value of MSRs is determined by discounting the estimated
future cash flows using a discount rate commensurate with the risks involved and
considers the fair value of the related financial instruments utilized as
hedges. This method of valuation incorporates assumptions that market
participants would use in estimating future servicing income and expense,
including assumptions about prepayment, default, and interest rates. For
purposes of measuring impairment, the loans underlying the MSRs are stratified
on the basis of interest rate and type (conventional or government). Impairment
is measured by the amount the book value of the MSRs exceeds the fair value of
the MSRs. Impairment, if any, is recognized through a valuation allowance and a
charge to current operations.
MSRs, net of valuation allowances, are amortized in proportion to, and over
the period of, the estimated net servicing revenue of the underlying mortgages,
which are secured by single family properties. Servicing fee revenue represents
fees earned for servicing single family loans for investors and related
ancillary income,
F-11
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
including late charges. Servicing fee revenue is recognized as earned, unless
collection is doubtful. The amortization expense is deducted from the related
servicing fee revenue in the Consolidated Statements of Operations. The
amortization of MSRs is periodically evaluated and adjusted, if necessary, to
reflect changes in prepayment rates or other related factors.
SERVICING RECEIVABLES
The Company services single family loans for its own portfolio and for
other investors. Mortgage servicing activities include collecting and accounting
for loan payments from borrowers, remitting those payments to investors,
collecting funds for and paying mortgage-related expenses, collecting payments
from delinquent borrowers, filing claims and collecting proceeds on government
guaranteed or insured loans, and generally administering the loans. Servicing
receivables relating to these activities include amounts due from governmental
agencies and investors. A valuation allowance is maintained at levels deemed
adequate by management to cover probable losses on these receivables. Various
factors, including the frequency, volume, and amount of claims filed with
governmental agencies, as well as historical loss experience, are used to
determine the amount and adequacy of the valuation allowance.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation,
and include certain branch facilities and the related furniture, fixtures, and
equipment. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets ranging from three to 40 years.
INTANGIBLE ASSETS
Intangible assets consist of the excess cost over fair value of net assets
acquired and debt issuance costs. The excess of cost over fair value of net
assets acquired is comprised of core deposit premiums paid and goodwill. The
core deposit premiums are amortized on an accelerated basis over the estimated
lives of the deposit relationships acquired. Goodwill is amortized on a
straight-line basis over a period up to 15 years. Debt issuance costs are
amortized over the life of the debt on a straight-line basis. These assets are
evaluated periodically to determine whether events and circumstances have
developed that warrant revision of the estimated lives of the related assets or
their write-off.
REAL ESTATE OWNED ("REO")
At the time of foreclosure, REO is recorded at fair value reduced by
estimated costs to sell. The resulting loss, if any, is charged to the allowance
for credit losses. Declines in a property's fair value subsequent to foreclosure
are charged to current operations. Revenues, expenses, gains or losses on sales,
and increases or decreases in the allowance for REO losses are charged to
operations as incurred and included in non-interest expense in the Consolidated
Statements of Operations. The Company's REO is primarily comprised of single
family properties held by the Investment Portfolio Segment. The Company's
historical average holding period for REO is seven months.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company enters into traditional off-balance-sheet financial instruments
such as interest rate exchange agreements ("swaps"), interest rate caps,
locks, and floors, financial options, and forward delivery contracts in the
normal course of business in an effort to reduce its exposure to changes in
interest rates. The Company does not utilize instruments such as leveraged
derivatives or structured notes. The off-balance-sheet financial instruments
utilized by the Company are typically classified as hedges of existing assets,
liabilities, or anticipated transactions. To qualify for hedge accounting, the
hedged asset or liability must be interest rate sensitive and the
off-balance-sheet financial instrument must be designated and be effective as a
hedge of the asset, liability, or anticipated transaction. In addition, for
hedges of anticipated transactions, significant characteristics and terms of
F-12
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the transaction must be identified, and it must be probable the transaction will
occur. The effectiveness of a hedge is evaluated at inception and throughout the
hedge period using statistical calculations of correlation.
Gains or losses on early termination of financial contracts, if any, are
amortized over the remaining terms of the hedged items. Generally, the Company
terminates the off-balance-sheet financial instrument when the hedged asset or
liability is sold or if the anticipated transaction is not likely to occur. In
these instances, the gain or loss on the financial contract is recognized in
income.
Off-balance-sheet financial instruments that do not satisfy the criteria
for classification as hedges above, including those used for trading activities,
are carried at market value. Changes in market value are recognized in
non-interest income.
INTEREST RATE SWAPS, CAPS, FLOORS, FORWARD DELIVERY CONTRACTS, FINANCIAL
OPTIONS, AND INTEREST RATE LOCKS. The market value of off-balance-sheet
instruments that are hedging assets carried at lower of cost or market are
included in the overall valuation analysis of the hedged asset to determine if a
loss allowance is necessary. Payments made and received on off-balance-sheet
instruments entered into in an effort to alter the interest rate characteristics
of the hedged item are offset against the related interest income or expense.
Fees paid to enter caps and floor contracts are capitalized and amortized over
the lives of the contracts. Fees and expenses related to financial option and
interest rate lock contracts are capitalized and offset against the related gain
or loss upon the sale of the hedged items. Fees paid to cancel commitments to
deliver loans are charged against the gain or loss on single family loans.
OTHER OFF-BALANCE-SHEET INSTRUMENTS. The Company has entered into other
off-balance-sheet financial instruments consisting of commitments to extend
credit or to purchase loans. Such financial instruments are recorded in the
financial statements when they are funded or purchased.
FEDERAL INCOME TAXES
The Parent Company and its subsidiaries file a consolidated tax return.
Each entity within the consolidated group computes its tax on a separate-company
basis, and the results are combined for purposes of preparing the Consolidated
Financial Statements. Deferred tax assets and liabilities are recognized for the
estimated tax consequences due to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
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 potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares are computed using the treasury stock method.
RECENT ACCOUNTING STANDARDS
As of October 1, 1998, the Company adopted 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.
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 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.
F-13
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 held to maturity may be transferred to available
for sale or trading. SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133," deferred the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company will adopt SFAS No. 133 on October 1, 2000 and
is evaluating the impact, if any, this statement may have on its future
Consolidated Financial Statements.
2. ACQUISITIONS
In August 1999, the Company acquired and merged with Texas Central
Bancshares, Inc. ("Texas Central"), a commercial bank operating three branches
in the Dallas area with assets of $113.1 million and deposits of $92.9 million
at acquisition. The acquisition was accounted for as a pooling of interests.
Accordingly, financial information for all periods reported prior to the date of
acquisition have been restated to present the combined financial information as
if the acquisition had been in effect for all such periods. Under the terms of
the merger agreement, holders of Texas Central common stock received 2.0266
shares of the Company's common stock for each share of Texas Central common
stock. The Company issued 709,980 shares of common stock to complete the Texas
Central acquisition.
The results of operations previously reported by the separate entities and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below. Gross revenues are comprised of net interest
income before the provision for credit losses and non-interest income.
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
GROSS REVENUES
The Company..................... $ 465,389 $ 367,018 $ 348,076
Texas Central................... 4,193 5,388 4,497
---------- ---------- ----------
Combined........................ $ 469,582 $ 372,406 $ 352,573
========== ========== ==========
NET INCOME
The Company..................... $ 111,112 $ 114,378 $ 76,571
Texas Central................... (1,455) 1,312 945
---------- ---------- ----------
Combined........................ $ 109,657 $ 115,690 $ 77,516
========== ========== ==========
Prior to the merger, Texas Central's fiscal year ended on December 31.
Texas Central's financial results for 1999 have been conformed to the fiscal
year end of the Company. All prior year consolidated financial results combine
the Company with Texas Central utilizing their respective "pre-merger" fiscal
year ends.
In connection with the Texas Central acquisition, the Company recorded
merger related and restructuring costs of $2.4 million. These costs included
$1.0 million of asset write-downs, $795,000 of transaction fees, $485,000 of
lease termination costs and other costs associated with branch consolidation,
and estimated costs for severance and retention bonuses of $82,000. Additionally
$150,000 of loan loss reserves were recorded and $349,000 of losses on
securities sales were realized bringing the total costs related to the Texas
Central acquisition to $2.9 million. Securities and MBS acquired from Texas
Central of $23.9 million that were not sold were transferred from held to
maturity to available for sale at September 30, 1999. An unrealized loss of
$770,000 before tax, or $481,000 after tax related to this transfer, was
recorded in stockholders' equity. At September 30, 1999, the unpaid liability
relating to the Texas Central merger and restructuring costs was $320,000 and is
expected to be paid in full by September 30, 2000.
F-14
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1999, the Company acquired Midland American Bank, a commercial
bank operating five branches in Midland, Texas, with assets of $282.5 million
and deposits of $232.8 million at acquisition. The acquisition was accounted for
as a purchase. The goodwill of $28.6 million related to this acquisition is
being amortized on a straight-line basis over 15 years.
In January 1998, the Company acquired 18 branches with combined deposits of
$1.44 billion at acquisition from Guardian Savings and Loan Association. The
acquisition was accounted for as a purchase. The goodwill of $48.9 million
related to this acquisition is being amortized on a straight-line basis over 15
years.
In December 1997, the Company acquired three branches with combined
deposits of $66 million at acquisition from California Federal Savings Bank,
FSB. The acquisition was accounted for as a purchase. The goodwill of $2.8
million related to this acquisition is being amortized on a straight-line basis
over 15 years.
3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND
FEDERAL FUNDS SOLD
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
REPURCHASE AGREEMENTS
Balance outstanding at
period-end.................... $ 305,312 $ 414,483 $ 301,209
Fair value of collateral at
period-end.................... 307,772 423,772 310,066
Maximum outstanding at any
month-end..................... 418,868 819,604 582,336
Daily average balance........... 286,695 446,913 512,957
Average interest rate for the
period........................ 6.04% 6.14% 5.92%
FEDERAL FUNDS SOLD
Balance outstanding at
period-end.................... $ 85,014 $ 80,799 $ 65,040
Maximum outstanding at any
month-end..................... 148,979 212,165 85,000
Daily average balance........... 90,177 65,889 53,398
Average interest rate for the
period........................ 4.87% 5.46% 5.37%
The repurchase agreements outstanding at September 30, 1999, were secured
by single family, multi-family, and commercial real estate loans, and MBS,
pledged by others. These loans and MBS were held by the counterparty in
safekeeping for the account of the Company or by a third-party custodian for the
benefit of the Company. The repurchase agreements and federal funds sold
outstanding at September 30, 1999, matured during October 1999. The repurchase
agreements provide for the same loans and MBS to be resold at maturity. At
September 30, 1999, $125 million in repurchase agreements were held by
Donaldson, Lufkin & Jenrette Securities Corp. as counterparty.
F-15
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SECURITIES AND OTHER INVESTMENTS
AT SEPTEMBER 30,
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- ---------- --------
(IN THOUSANDS)
1999
HELD TO MATURITY
U.S. government and agency...... $ 6,148 $-- $ 111 $ 6,037
State and local government
agency........................ 5,958 -- 259 5,699
--------- ---------- ---------- ----------
12,106 $-- $ 370 11,736 $ 12,106
========== ========== ========
--------- ----------
AVAILABLE FOR SALE
SBA interest-only strips........ 93,665 $-- $5,466 88,199
U.S. government and agency...... 42,347 64 1,091 41,320
Corporate securities............ 1,949 -- 36 1,913
--------- ---------- ---------- ----------
137,961 $ 64 $6,593 131,432 $131,432
========== ========== ========
----------
---------
Total...................... $ 150,067 $ 143,168
========= ==========
1998
HELD TO MATURITY
U.S. government and agency...... $ 15,114 $ 234 $ 12 $ 15,336 $ 15,114
========== ========== ========
----------
AVAILABLE FOR SALE
SBA interest-only strips........ 73,802 $-- $2,241 71,561
U.S. government and agency...... 15,930 83 -- 16,013
Corporate securities............ 1,835 -- 1 1,834
--------- ---------- ---------- ----------
91,567 $ 83 $2,242 89,408 $ 89,408
========== ========== ========
--------- ----------
Total...................... $ 106,681 $ 104,744
========= ==========
Securities outstanding at September 30, 1999, were scheduled to mature as
follows:
HELD TO MATURITY AVAILABLE FOR SALE
----------------------------------- ------------------------------------
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
---------- --------- -------- ---------- ---------- --------
(IN THOUSANDS)
Due in one year or
less............. $ 2,350 $ 2,347 4.71% $ 1,441 $ 1,412 5.08%
Due in one to five
years............ 9,756 9,389 5.97 2,492 2,520 6.13
Due after five
years through ten
years............ -- -- -- 30,441 29,349 6.28
Due after ten
years............ -- -- -- 103,587 98,151 10.69
---------- --------- -------- ---------- ---------- --------
$ 12,106 $ 11,736 5.73% $137,961 $ 131,432 9.58%
========== ========= ======== ========== ========== ========
F-16
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. MORTGAGE-BACKED SECURITIES
The MBS portfolio includes securities issued by U.S. government
corporations and agencies ("agency securities"), privately issued and
credit-enhanced MBS ("non-agency securities"), and collateralized mortgage
obligations ("CMOs").
AT SEPTEMBER 30,
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
------------ ---------- ---------- ---------- ----------
(IN THOUSANDS)
1999
HELD TO MATURITY
Agency
Fixed-rate.................... $ 13,387 $-- $ 38 $ 13,349
Adjustable-rate............... 2,159 -- 45 2,114
Non-agency
Adjustable-rate............... 248,497 1,010 7,313 242,194
CMOs -- fixed-rate............ 51,245 -- 141 51,104
------------ ---------- ---------- ----------
Held to maturity........... 315,288 $1,010 $ 7,537 308,761 $ 315,288
========== ========== ==========
------------ ----------
AVAILABLE FOR SALE
Agency
Fixed-rate.................... 67,259 $ 106 $ 1,994 65,371
Adjustable-rate............... 28,230 420 25 28,625
CMOs -- fixed-rate............ 19,534 3 421 19,116
CMOs -- adjustable-rate....... 163,239 1,255 226 164,268
Non-agency
Fixed-rate.................... 284,878 -- 17,631 267,247
Adjustable-rate............... 53,331 35 556 52,810
CMOs -- fixed-rate............ 59,629 2,082 3,657 58,054
CMOs -- adjustable-rate....... 34,647 -- 1,669 32,978
Other........................... 245 -- -- 245
------------ ---------- ---------- ----------
Available for sale......... 710,992 $3,901 $ 26,179 688,714 $ 688,714
========== ========== ==========
------------ ----------
Total mortgage-backed
securities............... $ 1,026,280 $ 997,475
============ ==========
1998
HELD TO MATURITY
Agency
Fixed-rate.................... $ 8,576 $-- $ 35 $ 8,541
Non-agency
Adjustable-rate............... 351,237 1,970 6,410 346,797
CMOs -- fixed-rate............ 87,639 235 1,051 86,823
Other........................... 2,904 50 -- 2,954
------------ ---------- ---------- ----------
Held to maturity........... 450,356 $2,255 $ 7,496 445,115 $ 450,356
========== ========== ==========
------------ ----------
AVAILABLE FOR SALE
Agency
Fixed-rate.................... 19,417 $ 150 $ -- 19,567
Adjustable-rate............... 42,924 365 -- 43,289
CMOs -- fixed-rate............ 14,323 34 55 14,302
CMOs -- adjustable-rate....... 197,455 1,277 21 198,711
Non-agency
Fixed-rate.................... 19,703 591 -- 20,294
Adjustable-rate............... 146,274 189 1,123 145,340
CMOs -- fixed-rate............ 8,348 3,145 334 11,159
CMOs -- adjustable-rate....... 34,837 412 145 35,104
Other........................... 406 -- -- 406
------------ ---------- ---------- ----------
Available for sale......... 483,687 $6,163 $ 1,678 488,172 $ 488,172
========== ========== ==========
------------ ----------
Total mortgage-backed
securities............... $ 934,043 $ 933,287
============ ==========
F-17
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1999, MBS with carrying values totalling $308.7 million
and fair values totalling $299.6 million were used to secure securities sold
under agreements to repurchase ("reverse repurchase agreements").
6. LOANS
Loans are presented net of deferred loan fees, premiums, and discounts. At
September 30, 1999 and 1998, these amounts net to a premium of $6.9 million and
$25.2 million.
AT SEPTEMBER 30,
----------------------------
1999 1998
------------- -------------
(IN THOUSANDS)
HELD FOR INVESTMENT
Single family................... $ 6,470,636 $ 4,708,704
Commercial...................... 5,368,565 3,463,002
Consumer........................ 665,742 506,662
------------- -------------
12,504,943 8,678,368
Allowance for credit losses..... (82,705) (47,503)
------------- -------------
12,422,238 8,630,865
------------- -------------
HELD FOR SALE
Single family................... 592,583 2,149,009
Commercial...................... 101,381 88,023
------------- -------------
693,964 2,237,032
------------- -------------
Total loans................ $ 13,116,202 $ 10,867,897
============= =============
The following table sets forth the geographic distribution of loans by
state at September 30, 1999.
TOTAL NON-REAL
SINGLE REAL ESTATE ESTATE % OF
STATE FAMILY COMMERCIAL CONSUMER LOANS LOANS TOTAL TOTAL
- ------------------------------------- --------- ------------ -------- ----------- -------- ---------- ---------
(DOLLARS IN THOUSANDS)
California........................... $3,000,293 $ 728,415 $ 9,690 $3,738,398 $14,809 $3,753,207 28.45%
Texas................................ 807,229 1,241,720 494,368 2,543,317 270,339 2,813,656 21.33
Arizona.............................. 376,755 262,241 35,736 674,732 1,620 676,352 5.13
Florida.............................. 307,153 261,501 4,352 573,006 13,448 586,454 4.45
Other................................ 2,547,194 2,516,083 31,430 5,094,707 267,740 5,362,447 40.64
--------- ------------ -------- ----------- -------- ---------- ---------
Total.............................. $7,038,624 $5,009,960 $575,576 $12,624,160 $567,956 $13,192,116 100.00%
========= ============ ======== =========== ======== ========== =========
Loans held for investment at September 30, 1999, mature in the years ended
September 30 as follows:
2000 2001-2004 THEREAFTER TOTAL
------------ ------------ ------------ -------------
(IN THOUSANDS)
TYPE OF LOAN
Single family........................ $ 244,860 $ 602,910 $ 5,622,866 $ 6,470,636
Commercial........................... 3,178,848 1,121,488 1,068,229 5,368,565
Consumer............................. 55,479 170,891 439,372 665,742
------------ ------------ ------------ -------------
Total........................... $ 3,479,187 $ 1,895,289 $ 7,130,467 $ 12,504,943
============ ============ ============ =============
TYPE OF INTEREST
Adjustable........................... $ 3,352,201 $ 1,187,326 $ 3,886,881 $ 8,426,408
Fixed................................ 126,986 707,963 3,243,586 4,078,535
------------ ------------ ------------ -------------
Total........................... $ 3,479,187 $ 1,895,289 $ 7,130,467 $ 12,504,943
============ ============ ============ =============
F-18
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1999, the performing single family and multi-family loans
were pledged, under a blanket lien, as collateral securing advances from the
Federal Home Loan Bank ("FHLB").
The activity in the allowance for credit losses was as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------
1999 1998 1997
--------- ---------- ------------
(IN THOUSANDS)
Beginning balance.................... $ 47,503 $ 39,723 $ 40,204
Provision....................... 38,368 20,123 18,107
Acquisitions.................... 2,594 -- --
Charge-offs..................... (6,733) (13,044) (19,049)
Recoveries...................... 973 701 461
--------- ---------- ------------
Ending balance....................... $ 82,705 $ 47,503 $ 39,723
========= ========== ============
Nonaccrual loans, net of related premiums and discounts, totalled $89.6
million and $62.0 million at September 30, 1999 and 1998. If the nonaccrual
loans as of September 30, 1999, had been performing in accordance with their
original terms throughout fiscal 1999, interest income recognized would have
been $9.2 million. The actual interest income recognized on these loans for
fiscal 1999, was $4.3 million. No commitments exist to lend additional funds to
borrowers whose loans were on nonaccrual status at September 30, 1999.
The following table summarizes the recorded investments in impaired loans,
related allowances and income recognition information as required by SFAS No.
114:
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
Impaired loans with allowance........ $ 44,406 $ 3,053 $ 3,168
Impaired loans with no allowance..... -- 590 608
--------- --------- ---------
Total impaired loans................. $ 44,406 $ 3,643 $ 3,776
========= ========= =========
Average impaired loans............... $ 13,630 $ 3,707 $ 3,699
Allowance for impaired loans......... 6,626 507 557
At September 30, 1999, impaired loans included a $41.5 million secured loan
to a mortgage banking company. Subsequent to September 30, 1999, a principal
payment of $34.5 million was received on this loan, resulting in an outstanding
loan balance of $7 million. The borrower is currently in Chapter 7 bankruptcy
proceedings. The Company believes it is adequately secured and reserved. The
impaired loans outstanding at September 30, 1998, were paid in full during
fiscal 1999. Interest income of $2.9 million, $320,000, and $324,000 was
recognized on impaired loans during fiscal 1999, 1998, and 1997, of which $2.9
million, $317,000, and $280,000 was collected in cash.
F-19
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. MORTGAGE SERVICING RIGHTS
The activity in the Company's MSRs was as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
(IN THOUSANDS)
Balance at beginning of period....... $ 410,868 $ 272,214 $ 123,392
Additions....................... 201,442 199,513 173,618
Amortization.................... (67,342) (54,679) (31,462)
Sales........................... -- -- (52)
Deferred hedging gains.......... (28,169) (8,828) (1,351)
Cost of hedges.................. 17,895 7,415 8,069
Provision for impairment........ -- (4,767) --
------------- ------------- -------------
Balance at end of period............. $ 534,694 $ 410,868 $ 272,214
============= ============= =============
Loan servicing portfolio............. $ 30,892,993 $ 27,935,300 $ 24,518,396
Loans serviced for others............ 26,058,482 23,491,960 20,521,294
Advances from borrowers for taxes and
insurance.......................... 276,247 270,135 173,294
Principal and interest due
investors.......................... 115,225 207,626 73,784
At September 30, 1999, $3.3 billion of servicing rights purchased had not
yet been transferred to the Company. These servicing rights are currently being
subserviced and are expected to be transferred to the Company during the first
quarter of fiscal 2000.
8. DEPOSITS
AT SEPTEMBER 30,
---------------------------------------------------
1999 1998
------------------------ ------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------------ --------- ------------ ---------
(DOLLARS IN THOUSANDS)
NON-INTEREST BEARING DEPOSITS........ $ 1,072,936 -- % $ 981,764 -- %
------------ --------- ------------ ---------
INTEREST-BEARING DEPOSITS
Checking accounts............... 240,125 0.80 209,206 0.75
Money market accounts........... 2,199,350 4.78 2,165,623 5.03
Savings accounts................ 135,538 1.69 124,792 2.07
Certificates of deposit......... 3,860,553 5.24 3,412,842 5.57
------------ --------- ------------ ---------
Total interest-bearing
deposits................. 6,435,566 4.84 5,912,463 5.13
------------ --------- ------------ ---------
Total deposits............. $ 7,508,502 4.15% $ 6,894,227 4.40%
============ ========= ============ =========
Scheduled maturities of certificates of deposit ("CDs") outstanding at
September 30, 1999, were as follows:
YEARS ENDING SEPTEMBER 30,
- -------------------------------------
(IN THOUSANDS)
---------------
2000............................ $2,681,965
2001............................ 906,729
2002............................ 144,464
2003............................ 52,972
2004 and thereafter............. 74,423
---------------
$3,860,553
===============
F-20
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of CDs $100,000 or more outstanding at September 30,
1999, were as follows:
NUMBER OF DEPOSIT
ACCOUNTS AMOUNT
--------- --------
(DOLLARS IN THOUSANDS)
Three months or less................. 1,103 $123,130
Over three to six months............. 855 95,320
Over six to twelve months............ 2,320 256,779
Over twelve months................... 2,185 234,311
--------- --------
Total...................... 6,463 $709,540
========= ========
9. FEDERAL HOME LOAN BANK ADVANCES
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Balance outstanding at period-end.... $ 6,443,470 $ 4,783,498 $ 3,992,581
Average interest rate at
period-end......................... 5.36% 5.54% 5.69%
Maximum outstanding at any
month-end.......................... $ 6,468,830 $ 4,783,498 $ 3,992,581
Daily average balance................ 5,820,296 4,090,581 3,705,326
Average interest rate for the
period............................. 5.21% 5.78% 5.74%
Scheduled maturities for FHLB advances outstanding at September 30, 1999,
were as follows:
WEIGHTED-
AVERAGE
AMOUNT RATE
------------ ---------
(DOLLARS IN THOUSANDS)
2000................................. $ 4,479,393 5.40%
2001................................. 1,427,900 5.25
2002................................. 470,500 5.31
2003................................. -- --
2004 and thereafter.................. 65,677 5.31
------------ ---------
Total...................... $ 6,443,470 5.36%
============ =========
F-21
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS PURCHASED
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
---------- ------------ ------------
(DOLLARS IN THOUSANDS)
REVERSE REPURCHASE AGREEMENTS
Balance outstanding at
period-end.................... $ 291,900 $ 599,043 $ 1,312,301
Average interest rate at
period-end.................... 5.50% 5.62% 5.70%
Maximum outstanding at any
month-end..................... $ 578,406 $ 1,225,624 $ 1,312,301
Daily average balance........... 416,333 890,998 1,005,042
Average interest rate for the
period........................ 5.05% 5.78% 5.72%
FEDERAL FUNDS PURCHASED
Balance outstanding at
period-end.................... $ 225,000 $ 225,000 $ --
Average interest rate at
period-end.................... 5.51% 5.44% -- %
Maximum outstanding at any
month-end..................... $ 320,000 $ 225,000 $ 1,770
Daily average balance........... 228,578 84,781 1,182
Average interest rate for the
period........................ 5.27% 5.66% 5.67%
Reverse repurchase agreements and federal funds purchased outstanding at
September 30, 1999, matured during October 1999 and December 1999, respectively.
The counterparties to all reverse repurchase agreements at September 30, 1999,
have agreed to resell the same securities upon maturity of such agreements. The
securities securing the reverse repurchase agreements have been delivered to the
counterparty or its agent. At September 30, 1999, $128 million and $122 million
of reverse repurchase agreements were held by Goldman, Sachs, & Co. and Morgan
Stanley & Co. Incorporated as counterparties.
11. 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, the Bank issued $150 million, par value, 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
were used for general business purposes. At September 30, 1999, the outstanding
balance of the medium-term notes, net of related discounts, was $149.0 million.
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.
In May 1997, the Company issued $220 million of fixed-rate subordinated
notes due in full in May 2007, with a stated rate of 8.875% and an effective
rate of 8.896%. At September 30, 1999, the outstanding balance of the
subordinated notes, net of related discounts, was $219.7 million. Net proceeds
from the issuance of the subordinated notes were used to repurchase and retire
$114.5 million of the Company's 8.05% senior notes due May 15, 1998, pay the
related costs and expenses, and provide additional capital to the Bank. The
costs associated with retiring the senior notes are shown as an extraordinary
loss of $3.6 million, or $2.3 million after tax, in fiscal 1997. The
subordinated notes are subordinate to all liabilities of the Company's
subsidiaries, including preferred stock and deposit liabilities. The remaining
$500,000 of senior notes matured and were repaid in May 1998.
F-22
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. The fair
value estimates presented are based on relevant information available to
management as of September 30, 1999 and 1998. Management is not aware of any
factors that would significantly affect these estimated fair value amounts.
Since the reporting requirements exclude certain financial instruments and all
non-financial instruments, the aggregate fair value amounts presented do not
represent management's estimate of the underlying value of the Company. The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument for which it is practicable to estimate:
SHORT-TERM INTEREST-EARNING ASSETS. The carrying amount approximates fair
value due to the short-term nature of such assets.
SECURITIES, OTHER INVESTMENTS, AND MORTGAGE-BACKED SECURITIES. The fair
values of securities, other investments, and MBS are estimated based on
published bid prices or bid quotations received from securities dealers.
LOANS. Fair values are estimated for portfolios of loans with similar
characteristics and include the value of related servicing rights, if
appropriate. Loans are segregated by type, by rate, and by performing and
nonperforming categories. The fair values of loans held for sale are based on
quoted market prices. The fair values of loans held for investment are based on
contractual cash flows discounted at secondary market rates, adjusted for
prepayments. No prepayments were assumed for commercial loans due to prepayment
penalties associated with these loans. For adjustable-rate commercial and
consumer loans held for investment that reprice frequently, fair values are
based on carrying values. The fair value of nonperforming loans is estimated
using the Book Value, which is net of any related allowance for credit losses.
FHLB STOCK. The carrying amount approximates fair value because it is
redeemable at its par value.
MORTGAGE SERVICING RIGHTS. See Note 1 for a description of the method used
to value the single family servicing portfolio.
DEPOSITS. The estimated fair value of deposits with no stated maturity,
which includes demand deposits, money market, and other savings accounts, is
equal to the amount payable on demand or the carrying value. Although market
premiums paid for depository institutions include an additional value for these
deposits, SFAS No. 107 prohibits adjusting fair value for any value expected to
be derived from retaining those deposits for a future period of time or from the
benefit that results from the ability to fund interest-earning assets with these
deposit liabilities. The SFAS No. 107 fair value of fixed-maturity deposits is
estimated using a discounted cash flow model with rates currently offered by the
Company for deposits of similar remaining maturities.
FHLB ADVANCES, REVERSE REPURCHASE AGREEMENTS, FEDERAL FUNDS PURCHASED, AND
NOTES PAYABLE. Fair values are estimated based on the discounted value of
contractual cash flows using rates currently available to the Company for
borrowings with similar terms and remaining maturities.
OTHER ASSETS AND LIABILITIES. The carrying amount of financial instruments
in these classifications is considered a reasonable estimate of their fair value
due to the short-term nature of the instruments.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK. The fair values of
financial instruments with off-balance-sheet risk are based on current market
prices. Negative fair values of these instruments represent the net unrealized
loss on these instruments at period end.
F-23
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS NO. 107 FAIR VALUES
AT SEPTEMBER 30,
-------------------------------------------------------
1999 1998
--------------------------- -------------------------
CARRYING SFAS NO. CARRYING SFAS NO.
VALUE 107 VALUE VALUE 107 VALUE
------------- ----------- ------------- ---------
(IN THOUSANDS)
FINANCIAL ASSETS
Short-term interest-earning
assets........................ $ 573,586 $ 573,586 $ 731,870 $ 731,870
Securities and other
investments................... 143,538 143,168 104,522 104,744
Mortgage-backed securities...... 1,004,002 997,475 938,528 933,287
Loans........................... 13,116,202 13,160,017 10,867,897 11,061,714
FHLB stock...................... 328,886 328,886 243,191 243,191
Other assets.................... 235,765 235,765 224,980 224,980
NON-FINANCIAL ASSETS
Mortgage servicing rights....... 534,694 592,923 410,868 367,487
Other........................... 308,006 N/A 259,199 N/A
=========== =========
------------- -------------
Total assets............... $ 16,244,679 $ 13,781,055
============= =============
FINANCIAL LIABILITIES
Deposits........................ $ 7,508,502 $ 7,503,864 $ 6,894,227 $6,919,776
FHLB advances................... 6,443,470 6,429,694 4,783,498 4,790,212
Reverse repurchase agreements
and federal funds purchased... 516,900 516,973 824,043 824,211
Notes payable................... 368,762 373,261 219,720 248,478
Other liabilities............... 301,138 301,138 143,086 143,086
NON-FINANCIAL LIABILITIES AND
STOCKHOLDERS' EQUITY............ 1,105,907 N/A 916,481 N/A
=========== =========
------------- -------------
Total liabilities and
stockholders' equity..... $ 16,244,679 $ 13,781,055
============= =============
OTHER FINANCIAL INSTRUMENTS FAIR
VALUES
Interest rate swaps........... $ 4,189 $ (5,998)
Interest rate caps............ -- 1
Interest rate floors.......... 6,154 54,287
Interest rate locks........... -- (2,126)
Financial options............. 75 --
Forward delivery contracts.... (1,624) (2,133)
Commitments to extend
credit..................... 1,097 7,787
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company manages its exposure to changes in interest rates by entering
into certain financial instruments with on- and off-balance-sheet risk in the
ordinary course of business. A hedge is an attempt to reduce risk by creating a
relationship whereby any gains or losses on the hedged asset or liability are
expected to be offset by gains or losses on the hedging financial instrument.
Thus, market risk resulting from a particular off-balance-sheet instrument is
normally offset by other on- or off-balance-sheet transactions thereby reducing
volatility in net income due to changes in market conditions.
F-24
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is exposed to a limited amount of credit related losses in the
event of non-performance of the counterparties to the agreements. The Company
seeks to manage credit risk by limiting the total amount of arrangements
outstanding, both by counterparty and in the aggregate, by monitoring the size
and maturity structure of the financial instruments, by assessing the
creditworthiness of the counterparty, and by applying uniform credit standards
for all activities with credit risk.
Notional principal amounts indicated in the following table do not
represent the Company's exposure to credit loss. Notional amounts represent the
extent of the Company's involvement in particular classes of financial
instruments and generally exceed the expected future cash requirements relating
to the instruments. Financial instruments with off-balance-sheet risk
outstanding at September 30, 1999, were scheduled to mature as follows:
MATURING IN THE YEAR ENDING SEPTEMBER 30, AT SEPTEMBER 30,
---------------------------------------------------- --------------------------
2000 2001 2002 THEREAFTER 1999 1998
------------ ---------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
Interest rate swaps.................. $ 440,500 $ 186,000 $ -- $ 35,500 $ 662,000 $ 477,000
Interest rate caps................... 243,000 -- -- -- 243,000 301,000
Interest rate floors................. 230,000 214,706 898,960 1,818,370 3,162,036 3,299,000
Interest rate locks.................. -- -- -- -- -- 24,450
Financial options.................... 20,000 -- -- -- 20,000 --
Forward delivery contracts........... 361,243 -- -- -- 361,243 611,412
Commitments to extend credit......... 1,511,995 456,459 341,627 540,880 2,850,961 2,401,222
Commitments to purchase loans........ 59,605 -- -- -- 59,605 16,004
------------ ---------- ------------ ------------ ------------ ------------
Total...................... $ 2,866,343 $ 857,165 $ 1,240,587 $ 2,394,750 $ 7,358,845 $ 7,130,088
============ ========== ============ ============ ============ ============
INTEREST RATE SWAPS. The Company entered into interest rate swaps in an
effort to match the repricing of its liabilities with its assets. During fiscal
1999, $351 million of swaps were entered into and $166 million matured.
AVERAGE AVERAGE
NOTIONAL FIXED FLOATING HEDGED
AMOUNT RATE RATE(1) ITEM
---------- ------- --------- ----------------------------------------
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 1999
Receive Floating/Pay Fixed........... $ 476,000 5.43% 5.35% FHLB advances
186,000 4.61 5.38 Reverse repurchase agreements
AT SEPTEMBER 30, 1998
Receive Floating/Pay Fixed........... $ 477,000 5.98% 5.63% FHLB advances
(1) Based on one or three month London InterBank Offered Rate ("LIBOR").
INTEREST RATE CAPS AND FLOORS. Amortizing interest rate caps and floors,
together known as a "collar", were entered into in an effort to hedge certain
adjustable-rate single family loans that are subject to certain limitations
related to the amount that their interest rate can change at each reset date.
AVERAGE
NOTIONAL INDEX CONTRACTED
AMOUNT RATE(1) RATE
-------- ------- ----------
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 1999................ floor $243,000 5.60% 7.86%
cap 243,000 5.60 8.57
AT SEPTEMBER 30, 1998................ floor 301,000 5.75 7.86
cap 301,000 5.75 8.57
(1) Based on six month LIBOR.
F-25
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE FLOORS. Floor contracts were entered into in an effort to
hedge MSRs against declines in value, which are a result of increased
prepayments due to changes in market interest rates. Certain floors outstanding
at September 30, 1998, were entered into to hedge fixed-rate commercial loans
available for sale against declines in value due to changes in market interest
rates.
AVERAGE AVERAGE
NOTIONAL INDEX FLOOR
AMOUNT RATE(1) RATE HEDGED ITEM
--------- --------- ------- -------------------
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 1999................ $3,162,036 6.51% 5.39% MSRs
AT SEPTEMBER 30, 1998................ $3,189,000 4.82% 5.50% MSRs
110,000 5.03 4.75 Commercial loans
held for sale
(1) Based on five or ten year Constant Maturity Treasury index.
Costs to enter floor agreements, gains on sales of floor agreements, and
interest received on floor agreements are included as components of the assets
being hedged and are amortized into income over the lives of the floor
agreements. During fiscal 1999, the Company reset a portion of its hedge
position by selling $2.3 billion of its 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. During fiscal 1998, $1.8 billion of floors
were purchased and $858 million were sold for a deferred gain of $3.2 million.
Maturities totalled $270 million and $250 million during fiscal 1999 and 1998.
Interest received on interest rate floor agreements was $4.0 million and $5.5
million during fiscal 1999 and 1998. The unamortized deferred gain, including
interest received, was $45.4 million at September 30, 1999, and $17.2 million at
September 30, 1998. The unamortized costs to enter the floor agreements were
$21.1 million and $10.7 million at September 30, 1999 and 1998.
During fiscal 1999, commercial loans available for sale were sold and the
related floors were transferred to hedge the MSRs.
INTEREST RATE LOCKS. During fiscal 1998, $35.2 million of interest rate
lock contracts were entered into in an effort to manage the risk that a change
in interest rates would decrease the value of certain commercial loans available
for sale prior to their sale. During fiscal 1998, $10.7 million of rate locks
were closed as the loans being hedged were transferred to the held to maturity
portfolio, and the resulting loss of $653,000 was included in the commercial
loan basis. During fiscal 1999, the remaining interest rate lock contracts were
closed out as the loans being hedged were sold. The loss on the sale of the
loans totalling $876,000 was offset by the $682,000 income on the hedge.
FINANCIAL OPTIONS. During fiscal 1999, Treasury put options with notional
principal amounts totalling $340 million were entered into in an effort to
manage the risk that a change in interest rates would decrease the value of
single family loans held for sale or commitments to originate mortgage loans.
During fiscal 1999, $320 million of these options were closed when the loans
being hedged were sold. A loss of $171,000 on the options offset gains on sales
of single family loans in current operations. A $220,000 premium related to the
$20 million of open option contracts is included in other assets in the
Statements of Financial Condition at September 30, 1999, and will be recognized
in operations upon the sale of the loans being hedged. There were no financial
options outstanding at September 30, 1998.
F-26
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FORWARD DELIVERY CONTRACTS. Forward delivery contracts were entered into
to sell single family loans and to manage the risk that a change in interest
rates would decrease the value of single family loans or commitments to
originate mortgage loans ("mortgage pipeline").
AT SEPTEMBER 30,
------------------------
1999 1998
---------- ------------
(IN THOUSANDS)
FIXED-RATE FORWARD DELIVERY
CONTRACTS.......................... $ 361,243 $ 611,412
========== ============
LOANS AVAILABLE TO FILL COMMITMENTS
Single family........................ $ 574,675 $ 2,024,535
Mortgage pipeline (estimated)........ 166,599 477,106
---------- ------------
Total...................... $ 741,274 $ 2,501,641
========== ============
Net gains related to forward delivery contracts totalling $8.3 million
during fiscal 1999 and a net loss of $2.3 million during fiscal 1998 were
included in gains on sales of single family loans.
SHORT SALES. During fiscal 1998, the Company sold $139.6 million of
Federal National Mortgage Association notes short in an effort to manage the
risk that a change in market interest rates would decrease the value of certain
single family loans prior to their sale. These loans were later sold for a gain
of $1.4 million, which was recognized in current operations. Upon sale of the
loans, the short positions were closed out at a loss of $701,000, which was
recorded as a realized loss on trading account assets. No short sales were
entered into during fiscal 1999.
COMMITMENTS TO EXTEND CREDIT. The Company's exposure to credit loss for
commitments to extend credit is represented by the contractual amount of these
agreements. The Company uses the same credit policies in making funding
commitments as it does for on-balance-sheet instruments. These commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee to the Company. Because commitments may expire
without being drawn upon, the total contract amounts do not necessarily
represent future cash requirements. Commitments to extend credit outstanding at
September 30, 1999 and 1998 were $2.9 billion and $2.4 billion. Included in
these commitments are $1.5 billion and $908.2 million representing the
undisbursed portion of loans in process and letters of credit totalling $68.4
million and $55.3 million as of September 30, 1999 and 1998.
COMMITMENTS TO PURCHASE LOANS. The Company's outstanding commitments to
purchase loans at September 30, 1999 and 1998, were $59.6 million and $16.0
million.
RECOURSE OBLIGATIONS. Over time, the Company sells loans for which certain
recourse obligations apply. At September 30, 1999 and 1998, the amount subject
to these recourse provisions totalled $64.2 million and $66.6 million.
Management believes that it has adequately provided reserves for its recourse
obligations related to these loan sales.
13. EMPLOYEE BENEFITS
SAVINGS PLANS
The Company has an employee tax-deferred savings plan available to all
eligible employees, which qualifies as a 401(k) plan. The Company contributes
fifty cents for every dollar contributed up to 2% of the participant's earnings
and dollar for dollar for contributions between 2% and 4% of the participant's
earnings. Effective January 1, 2000, the Company will match contributions 100%
up to 4% of the participant's earnings. The maximum employee contribution
percentage is 15% of an employee's earnings, subject to Internal Revenue Service
maximum contributions limitations. The Company's contributions to the plan were
approximately $1.3 million, $1.1 million, and $1.1 million for fiscal 1999,
1998, and 1997.
F-27
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Midland American Bank and Texas Central, which the Company acquired during
fiscal 1999, both had tax-deferred employee savings plans that qualified as
401(k) plans. These plans will be terminated by the Company.
1999 STOCK INCENTIVE PLAN
During fiscal 1999, the Company established the 1999 Stock Incentive Plan.
The Company granted 818,750 options to purchase shares of its common stock under
this plan. Compensation expense was not recognized for the stock options because
the options had an exercise price equal to the fair value of the Company's
common stock at the date of grant. At September 30, 1999, there were 814,750
options outstanding and 19,000 shares were available for future grant under this
plan. These options vest over four years and expire if not exercised within ten
years from the date of grant.
In April 1999, the Company issued 140,750 shares of restricted stock from
the 1996 and 1999 Stock Incentive Plans. These shares will fully vest by April
2003 (20% vests April 2001, 30% vests April 2002 and 50% vests April 2003). The
market value of the restricted stock at the time of grant, which totalled $5.6
million, was recorded as unearned stock compensation and is shown as a separate
component of stockholders' equity. The unearned stock compensation is being
amortized to compensation expense over the vesting period. Compensation expense
totalling $865,000 was recorded in fiscal 1999 for this restricted stock.
1996 STOCK INCENTIVE PLAN
In fiscal 1999 and 1998, the Company granted 245,900 and 539,700 options to
purchase shares of its common stock to certain employees of the Bank under the
1996 Stock Incentive Plan. Compensation expense was not recognized for the stock
options because the options had an exercise price equal to the fair value of the
Company's common stock at the date of grant. At September 30, 1999, there were
1,197,800 options outstanding and 326,200 shares were available for future grant
under this plan. These options vest over three to five years and will expire if
not exercised within five to ten years of the date of grant.
In fiscal 1998, the Company's Board of Directors granted performance units
to executive officers and other key officers and employees under the 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 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 multiplied by the fair
value of the Company's common stock as of September 30, 2000. The maximum number
of performance units that can be earned is 201,000 in the aggregate.
Compensation expense totalling $1.9 million and $731,000 was recorded in fiscal
1999 and 1998 for these units.
MANAGEMENT COMPENSATION PROGRAM
In connection with the Company's initial public offering in August 1996,
the Bank's and the Company's Boards of Directors approved a management
compensation program for the Bank's executive officers, other key officers and
employees, and certain directors. The program provided for the issuance of
1,154,520 options to purchase shares of Company common stock. These options
became fully vested and exercisable during fiscal 1999. The options will expire
if not exercised within ten years of the date of the grant. No further grants or
compensation awards may be made or awarded under this program. At September 30,
1999, there were 1,117,520 options outstanding under this plan.
DIRECTOR STOCK COMPENSATION PLAN
The Company has a director stock compensation plan for each member of the
Company's Board who is not an employee. Each eligible director is granted stock
options to purchase 1,000 shares of the Company's common stock when first
elected to the Company's Board of Directors and following each annual
stockholders' meeting thereafter. The exercise price of the options is 115% of
the fair value of the Company's common stock at the date
F-28
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of grant. The Company granted 10,000 options each year under the director stock
plan during fiscal 1999, 1998, and 1997. These options vest and become
exercisable if and when the fair value of the Company's common stock equals or
exceeds the exercise price of the option on any day during the 30-day period
commencing on the first anniversary of the date of the grant. If these stock
options do not vest during the this 30-day period, they will be cancelled. The
options issued to directors in fiscal 1997 became fully vested and exercisable
during 1998. The options issued to directors in fiscal 1998 did not vest and
were cancelled. Vested options will expire if not exercised within ten years of
the date of grant. At September 30, 1999, there were 30,000 options outstanding
and 220,000 shares were available for future grant under this plan.
SUMMARY OF STOCK-BASED COMPENSATION
Stock option activity was as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
NUMBER WEIGHTED- NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE OF AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
Outstanding at beginning of year........ 2,161,720 $29.41 1,653,020 $24.49 1,164,520 $20.15
Granted............................. 1,074,650 38.98 549,700 44.67 500,250 34.72
Exercised........................... (37,000) 20.13 (1,500) 38.06 -- --
Forfeited........................... (39,300) 45.53 (39,500) 35.28 (11,750) 30.92
--------- -------------- --------- -------------- --------- --------------
Outstanding at end of year.............. 3,160,070 $32.57 2,161,720 $29.41 1,653,020 $24.49
========= ============== ========= ============== ========= ==============
Exercisable at end of year.............. 1,268,720 $22.11 32,500 $32.16 10,500 $24.26
========= ============== ========= ============== ========= ==============
Stock options outstanding and exercisable, by range of exercise price, were
as follows:
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
----------------------------------------------- --------------------------
NUMBER WEIGHTED- WEIGHTED-AVERAGE NUMBER WEIGHTED-
RANGE OF OF AVERAGE REMAINING OF AVERAGE
EXERCISE PRICES OPTIONS EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE
--------------- ---------- -------------- ------------------ -------- ---------------
$20.00-$25.00........................... 1,126,520 $20.15 6.85 year 1,126,520 $ 20.15
$25.01-$30.00........................... 128,500 26.85 7.18 3,500 27.02
$35.01-$40.00........................... 1,372,350 38.67 7.87 138,700 37.94
$40.01-$45.00........................... 508,450 44.33 3.86 -- --
$45.01-$50.00........................... 24,250 48.73 5.97 -- --
---------- -------------- ----- -------- ---------------
3,160,070 $32.57 6.82 1,268,720 $ 22.11
========== ============== ===== ======== ===============
The Company accounts for its stock-based employee compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Under this method, no compensation expense is
recognized for stock options when the exercise price equals fair value at the
date of grant. If compensation expense had been recorded in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's net income
would have been $102.4 million, $112.9 million, and $74.4 million and diluted
EPS would have been $3.11, $3.42, and $2.29 for fiscal 1999, 1998, and 1997.
The weighted-average grant date fair value of stock options granted during
fiscal 1999, 1998, and 1997, was $19.16, $14.86, and $11.31. The fair value of
each stock option was estimated using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in fiscal 1999,
1998, and 1997: estimated volatility of 42.37%, 35.80%, and 27.78%; risk-free
interest rate of 5.11%, 5.50%, and 6.75%; dividend yield of 1.60%, 1.40%, and
1.68%; and an expected life of 9.97 years for the options issued in fiscal 1999,
5.1 years for the options issued in fiscal 1998, and 6.6 years for the options
issued in fiscal 1997.
F-29
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The option information included in this footnote has not been restated to
reflect stock option activity of Texas Central. Options exercised by Texas
Central employees totalled 96,164, 31,858, and 8,835 during fiscal 1999, 1998,
and 1997. All of Texas Central's stock options were exercised prior to the
Company's August 1999 acquisition of Texas Central.
14. RELATED PARTIES
In August 1999, the Parent Company entered into five loan participation
agreements with the Bank totalling $60 million with an average initial interest
rate of 8.12%. These participation agreements provide the Parent Company with a
direct ownership interest in five revolving single family construction loans
made by the Bank to various borrowers in August 1998. The participation
agreements remain in effect until such time as the revolving single family
construction loans are paid in full by the borrowers or the termination of the
loan participation agreements. The Bank has the option to terminate the loan
participation agreements beginning six months from the consummation date of the
participation agreements.
In the ordinary course of business, the Company has granted loans to
principal officers and directors and their affiliates amounting to $4.0 million
at September 30, 1999 and $3.5 million at September 30, 1998. Such loans were at
market rates and on market terms and conditions.
15. INCOME TAXES
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997
---------- --------- -----------
(IN THOUSANDS)
CURRENT TAX EXPENSE
Federal and state............... $ 22,158 $ 7,230 $ 6,355
Payments due in lieu of taxes... 16,309 6,483 12,344
DEFERRED TAX EXPENSE (BENEFIT)
Federal and state............... 28,692 39,649 42,287
Change in valuation
allowance -- utilization and
reduction of NOLs............. -- (27,500) --
Change in value of net operating
losses........................ (13,500) -- --
---------- --------- -----------
Total income tax expense
before extraordinary
loss..................... $ 53,659 $ 25,862 $ 60,986
========== ========= ===========
The Company's issuance of its Corporate Premium Income Equity Securities
("Corporate PIES") and cumulative redeemable preferred stock ("Redeemable
Preferred Stock Series A") in August 1999 caused an Ownership Change under
Internal Revenue Code 382 (see Note 16). This Ownership Change will defer the
utilization of the Company's net operating losses ("NOLs"), with the result
that the Company will no longer be required to share certain of the tax benefits
associated with these losses with a third party pursuant to a contractual
agreement entered into in connection with the acquisition of the Bank. This
deferral resulted in the recognition of $13.5 million tax benefit during fiscal
1999.
During fiscal 1998, the Company successfully resolved an outstanding tax
benefit lawsuit with the Federal Deposit Insurance Corporation ("FDIC"), as
manager of the Federal Savings and Loan Insurance Corporation ("FSLIC")
Resolution Fund, which resulted in a positive income tax adjustment of
approximately $6.0 million.
F-30
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the Company recognized a positive income tax adjustment of $27.5
million resulting from the anticipated use of additional NOLs against future
taxable income.
Tax NOLs outstanding at September 30, 1999, were as follows:
ALTERNATIVE EXPIRATION
YEAR GENERATED REGULAR TAX MINIMUM TAX DATE
- ------------------------------------- ----------- ----------- ----------
(IN MILLIONS)
September 30, 1990................... $ 175 $-- 2005
September 30, 1991................... 119 -- 2006
September 30, 1992................... 33 -- 2007
September 30, 1994................... 7 -- 2009
The Parent Company and its subsidiaries are subject to regular income tax
and alternative minimum tax ("AMT"). For fiscal 1999, 1998, and 1997, the
current federal tax expense was the result of AMT.
Income tax and related payments differ from the amount computed by applying
the federal income tax statutory rate on income as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
---------- ---------- ---------
(IN THOUSANDS)
TAXES, CALCULATED BEFORE
EXTRAORDINARY LOSS................. $ 63,549 $ 55,932 $ 55,677
INCREASE (DECREASE) FROM
Reduction in valuation allowance
for the utilization and
reduction of NOLs............. -- (27,500) --
Change in value of net operating
losses........................ (13,500) -- --
State income tax -- current..... 4,063 3,949 3,791
Tax benefit lawsuit
resolution.................... -- (6,020) --
Other........................... (453) (499) 1,518
---------- ---------- ---------
Income tax expense......... $ 53,659 $ 25,862 $ 60,986
========== ========== =========
F-31
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax assets and liabilities outstanding at September 30, 1999
and 1998, were as follows:
AT SEPTEMBER 30,
----------------------
1999 1998
---------- ----------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Net operating losses............ $ 89,203 $ 122,453
Tax mark to market.............. 15,435 12,658
AMT credit...................... 15,915 10,033
Bad debt........................ 13,906 --
Purchase accounting............. 2,778 3,393
Net unrealized losses on
securities available for
sale........................... 12,017 872
Depreciation -- premises and
equipment...................... 5,214 3,327
Real estate mortgage investment
conduits....................... 4,006 2,696
Hedges.......................... 15,862 5,546
Other........................... 13,357 15,475
---------- ----------
Total deferred tax
assets................... 187,693 176,453
---------- ----------
DEFERRED TAX LIABILITIES
Originated mortgage servicing
rights......................... 42,556 31,121
FHLB stock...................... 24,349 19,935
Bad debt reserve................ -- 3,694
Other........................... 10,276 8,122
---------- ----------
Total deferred tax
liabilities.............. 77,181 62,872
---------- ----------
Net deferred tax asset before
valuation allowance............ 110,512 113,581
Valuation allowance............. -- --
---------- ----------
Net deferred tax assets.... $ 110,512 $ 113,581
========== ==========
As of September 30, 1999, future taxable income of $473 million would fully
utilize the net deferred tax assets.
The Bank is permitted to deduct an annual addition to a reserve for bad
debts in determining taxable income, subject to certain limitations. In prior
years, this addition differs from the provision for credit losses for financial
reporting purposes. Due to legislation enacted in fiscal 1996, the Bank's
post-1987 tax bad debt reserve is being recaptured over a six-taxable-year
period. At September 30, 1999, the Bank had approximately $45 million of
post-1987 tax bad debt reserves remaining. There will be no financial statement
impact from this recapture because a deferred tax liability has already been
provided on the Bank's post-1987 tax bad debt reserves. The current tax
liability resulting from recapture of these reserves will be reduced by NOLs
available to offset this income.
No deferred taxes have been provided on approximately $52 million of
pre-1988 tax bad debt reserves. This tax reserve for bad debts is included in
taxable income in later years if certain circumstances occur, such as, a
distribution in redemption of stock of the Bank (with certain exceptions for
preferred stock); partial or complete liquidation of the Bank following a merger
or liquidation; or a dividend distribution in excess of certain earnings and
profits. However, if a thrift with a pre-1988 reserve is merged, liquidated on a
tax-free basis, or acquired by another depository institution, the remaining
institution will inherit the thrift's pre-1988 reserve and post-1951 earnings
and profits. Because management believes the circumstances requiring recapture
of the reserve are not likely to occur, deferred income taxes of approximately
$18 million have not been provided.
Concurrent with the Bank's incorporation in December 1988, the Parent
Company, the Bank, and certain related entities entered into an agreement with
the FSLIC providing financial assistance to the Bank, among other
F-32
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
things. In December 1993, this agreement was terminated. As part of the
termination, the Bank agreed to pay the FSLIC Resolution Fund one-third of
certain tax benefits that are utilized by the Bank through September 30, 2003.
Amounts reflected as payments due in lieu of taxes are based on estimated tax
benefits utilized by the Bank and may vary from amounts paid due to the actual
utilization of tax benefits reported in the federal income tax return.
16. MINORITY INTEREST AND REDEEMABLE PREFERRED STOCK
MINORITY INTEREST
The Bank is authorized to issue a total of 10,000,000 shares of preferred
stock. At September 30, 1999 the Bank had 4,000,000 shares, $25 liquidation
preference per share, of 9.60% noncumulative preferred stock (par value $0.01)
(the "Bank Preferred Stock Series B") outstanding ($100 million in aggregate)
and 3,420,000 shares, $25 liquidation preference per share, of 10.12%
noncumulative preferred stock (par value $0.01) (the "Bank Preferred Stock
Series A") outstanding ($85.5 million in aggregate). These shares are not owned
by the Parent Company.
The shares of Bank Preferred Stock Series A and Series B are redeemable at
the option of the Bank, in whole or in part, at any time on or after December
31, 1997 or September 30, 2000, at the redemption prices set forth in the table
below:
SERIES A SERIES B DOLLAR EQUIVALENT
BEGINNING DECEMBER 31, BEGINNING SEPTEMBER 30, REDEMPTION PRICE PER SHARE
- ----------------------- ------------------------ ---------------- -----------------
1997 2000 105% $ 26.25
1998 2001 104 26.00
1999 2002 103 25.75
2000 2003 102 25.50
2001 2004 101 25.25
2002 and thereafter 2005 and thereafter 100 25.00
REDEEMABLE PREFERRED STOCK
In August 1999, the Company issued 2,000,000 shares of 8% Corporate PIES
for a price of $50 per Corporate PIES or $100 million in aggregate. Each of the
Corporate PIES consists of (a) a purchase contract for shares of Company common
stock and (b) a share of Company redeemable preferred stock ("Redeemable
Preferred Stock Series B").
The purchase contract obligates the holder of the Corporate PIES to
purchase shares of Company common stock in August 2002. Upon purchase of the
common stock, the holder of the Corporate PIES must remit $50 per Corporate PIES
owned in exchange for shares of the Company's common stock. The number of shares
of common stock ultimately issued to the holder will depend on the average
closing price of the common stock over a 20-day trading period preceding the
time of purchase. The maximum number of shares to be issued under the purchase
contract is 2,671,120 and the minimum number is 2,225,940. The Company will
remit quarterly contract payments under the purchase contract equal to 0.75% per
annum of the $50 stated amount of the purchase contract.
The cumulative Redeemable Preferred Stock Series B, which has a liquidation
preference of $50 per share and certain voting rights, may be redeemed at the
option of the Company on or after October 16, 2002 at 100% of its liquidation
preference and is subject to mandatory redemption in full in August 2004. The
Redeemable Preferred Stock Series B will be pledged to the Company to secure the
holders' obligation to purchase the common stock under the purchase contract.
The Company will make quarterly dividend payments equal to 7.25% per annum of
the $50 liquidation preference.
Proceeds from the Corporate PIES offering were contributed to the Bank for
general business purposes.
F-33
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also in August 1999, the Company issued 1,200,000 shares of 7.55%
Redeemable Preferred Stock Series A for a price of $50 per share or $60 million
in aggregate. Redeemable Preferred Stock Series A, which has a $50 per share
liquidation preference, and certain voting rights, may be redeemed at the option
of the Company on or after February 2000 at 100% of its liquidation preference
and is subject to mandatory redemption in full in August 2004. The dividend rate
will be increased to 8.55% in February 2000. Proceeds from this offering were
used for general business purposes.
17. STOCKHOLDERS' EQUITY
CAPITAL STOCK
The authorized stock of the Company consists of the following (par value
$0.01): Class A common stock (voting) -- 40,000,000 shares, Class B common stock
(nonvoting) -- 40,000,000 shares, and preferred stock -- 10,000,000 shares.
Class B common stock may be converted to Class A common stock subject to certain
restrictions.
In June 1999, the Company released certain transfer restrictions on
7,887,436 shares of its outstanding common stock. These restrictions, which
would otherwise have expired in August 1999, were agreed to by shareholders who
owned five percent or more of the Company's common stock at the time of its
initial public offering. As a result of the lifting of these restrictions, the
Company's Class B common stock was converted to Class A common stock. In July
1999, the restrictions on the remaining 318,342 shares of common stock that were
restricted at the time of the initial public offering were also released.
In June 1999, prior to the Texas Central acquisition, the Company increased
the quarterly common stock dividend to $0.185 per share from $0.16 per share.
TREASURY STOCK
In August 1998, the Company's Board of Directors authorized the repurchase
of up to $50 million of the Company's common stock. The Company repurchased
34,200 shares under this program prior to its rescission in August 1999. In
September 1999, the Company's Board of Directors authorized the repurchase of up
to 36,000 shares of the Company's common stock. During fiscal 1999, the Company
issued 7,000 shares from the treasury for the exercise of stock options. As of
September 30, 1999, the Company had repurchased 1,700 shares under this new
program and had a total of 28,900 shares in treasury.
F-34
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER COMMON SHARE
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
INCOME
Income before extraordinary loss..... $ 109,657 $ 115,690 $ 79,839
Less: redeemable preferred stock
dividends.......................... 1,702 -- --
---------- ---------- ----------
Income available to common
stockholders before extraordinary
loss............................... 107,955 115,690 79,839
Extraordinary loss................... -- -- 2,323
---------- ---------- ----------
Net income available to common
stockholders....................... $ 107,955 $ 115,690 $ 77,516
========== ========== ==========
SHARES
Average common shares outstanding.... 32,299 32,201 32,210
Potentially dilutive common shares
from options....................... 642 775 326
---------- ---------- ----------
Average common shares and potentially
dilutive common shares
outstanding........................ 32,941 32,976 32,536
========== ========== ==========
BASIC
Income before extraordinary loss..... $ 3.34 $ 3.59 $ 2.48
Extraordinary loss................... -- -- (0.07)
---------- ---------- ----------
Net income........................... $ 3.34 $ 3.59 $ 2.41
========== ========== ==========
DILUTED
Income before extraordinary loss..... $ 3.28 $ 3.51 $ 2.45
Extraordinary loss................... -- -- (0.07)
---------- ---------- ----------
Net income........................... $ 3.28 $ 3.51 $ 2.38
========== ========== ==========
Options to purchase 961,722, 193,393, and 55,832 shares of common stock at
weighted-average exercise prices of $41.97, $45.20, and $28.01 were excluded
from the computation of diluted EPS for fiscal 1999, 1998, and 1997, because the
options' exercise price was greater than the average market price of the common
stock. The purchase contract portion of the Corporate PIES were not potentially
dilutive and therefore were not included in the computation of diluted EPS for
fiscal 1999.
F-35
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. REGULATORY MATTERS
The Bank is subject to the regulatory capital requirements of the OTS. Any
savings association that fails to meet these capital requirements is subject to
enforcement actions by the OTS, which could have a material effect on its
financial statements. To meet the capital adequacy requirements, the Bank must
maintain minimum amounts and ratios of tangible capital, core capital, and total
risk-based capital. As of September 30, 1999 and 1998, the Bank met all capital
adequacy requirements.
As of September 30, 1999 and 1998, the most recent notification from the
OTS categorized the Bank as well-capitalized, the highest of five tiers under
the prompt corrective action provisions. To be categorized as well-capitalized,
the Bank must maintain minimum amounts and ratios of core capital, tier 1
risk-based capital, and total risk-based capital. There have been no conditions
or events since September 30, 1999, that management believes would change the
institution's category.
The following tables show the Bank's compliance with the regulatory capital
requirements:
AT SEPTEMBER 30,
-----------------------------------------------------------------
CAPITAL ADEQUACY WELL-CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
---------------------- ----------------- --------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- ----------- ----- --------- --------- ---------
(DOLLARS IN THOUSANDS)
1999
Stockholders' equity of the Bank.................. $ 1,224,957
Add: Net unrealized losses................... 20,058
Less: Intangible assets of the Bank........... (78,712)
Non-qualifying deferred tax assets...... --
Non-qualifying MSRs..................... (18,060)
-----------
TANGIBLE CAPITAL.................................. 7.14% 1,148,243 1.50 % $ 241,273 -- --
Add: Core deposit intangibles................ 2,536
-----------
CORE CAPITAL...................................... 7.15% 1,150,779 3.00 % 482,622 5.00% $ 804,371
Less: Low level recourse deduction............ (7,752)
-----------
TIER 1 RISK-BASED CAPITAL......................... 9.73% 1,143,027 -- -- 6.00% 704,707
Add: Allowance for loan and MBS credit
losses.................................. 82,747
Qualifying subordinated debt............ 149,019
-----------
TOTAL RISK-BASED CAPITAL.......................... 11.71% $ 1,374,793 8.00 % 939,609 10.00% 1,174,512
===========
1998
Stockholders' equity of the Bank.................. $ 1,066,223
Add: Net unrealized losses................... 1,454
Less: Intangible assets of the Bank........... (56,144)
Non-qualifying deferred tax assets...... (18,387)
Non-qualifying MSRs..................... (76,594)
-----------
TANGIBLE CAPITAL.................................. 6.74% 916,552 1.50 % $ 204,008 -- --
Add: Core deposit intangibles................ 3,498
-----------
CORE CAPITAL...................................... 6.76% $ 920,050 3.00 % 408,121 5.00% $ 680,202
===========
TIER 1 RISK-BASED CAPITAL......................... 9.97% $ 920,050 -- -- 6.00% 553,878
Add: Allowance for loan and MBS credit
losses.................................. 47,552
-----------
TOTAL RISK-BASED CAPITAL.......................... 10.48% $ 967,602 8.00 % 738,503 10.00% 923,129
===========
OTS regulations generally allow dividends to be paid without prior OTS
approval provided that the level of regulatory capital, following the payment of
such dividends, meets the capital adequacy requirements. At
F-36
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1999, there was $226.6 million of capital available for the
payment of dividends under these requirements.
The Bank's net income and stockholders' equity figures, as presented in the
Consolidated Statements of Financial Condition and Operations in the Bank's
Annual Report on Form 10-K, agree with the information included in the Bank's
Thrift Financial Report filed with the OTS as of September 30, 1999.
COURT OF CLAIMS LITIGATION
Notwithstanding the above capital requirements, the Bank's capital
requirements were established pursuant to the forbearance letter (a
"Forbearance Agreement") issued simultaneously with the original acquisition
of the Bank by the Parent Company in 1988. The OTS took the position that the
capital forbearances were no longer available because of the enactment of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"). On July 25, 1995 the Bank, the Parent Company, and Hyperion
Partners LP (collectively the "Plaintiffs") filed suit against the United
States of America in the United States Court of Federal Claims for alleged
failures of the United States (1) to abide by a capital forbearance that 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 that 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.
In March 1999, the 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. On
August 5, 1999, the Court denied a motion for summary judgment filed by the
United States of America on the issue of lost profits damages. The Company's
case proceeded to trial on the amount of damages on September 13, 1999, and the
taking of evidence by the Court was concluded on October 21, 1999. The parties
will now submit post-trial briefs followed by oral argument. A decision by the
Court is not expected until sometime in the first half of calendar year 2000.
The Plaintiffs' seek and offered evidence in support of damages in excess of
$560 million. The government argued that damages to Plaintiffs as a result of
the breach, if any, approached zero. The Company is unable to predict the
outcome of the Plaintiffs' suit against the United States and the amount of
judgment for damages, if any, that may be awarded. No assurances can be given on
the outcome of this case.
19. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Bank is involved in legal proceedings occurring in the ordinary course
of business that management believes, after consultation with legal counsel, are
not, in the aggregate, material to the financial condition, results of
operations, or liquidity of the Bank or the Company.
F-37
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FACILITIES OPERATIONS
The Company leases various branch offices, office facilities, and equipment
under operating leases and contracts with a service bureau for data processing.
Total rental and data processing expense for fiscal 1999, 1998, and 1997, after
consideration of certain credits and rental income, was $20.9 million, $16.7
million, and $21.1 million. Future minimum commitments on data processing
agreements and significant operating leases in effect at September 30, 1999,
were as follows:
YEARS ENDING
SEPTEMBER 30, AMOUNT
---------------------------------- --------------
(IN THOUSANDS)
2000.............................. $ 20,815
2001.............................. 13,402
2002.............................. 12,710
2003.............................. 11,572
2004.............................. 8,187
Thereafter........................ 32,054
20. SEGMENTS
The Company's business segments include Commercial Banking, (which is
comprised of Residential Construction Lending, Mortgage Banker Finance,
Commercial Real Estate Lending, Multi-Family Lending, and Healthcare Lending),
Community Banking, Mortgage Servicing, Mortgage Banking, and Investment
Portfolio. Commercial Banking provides credit and a variety of cash management
and other services primarily to mortgage bankers, builders, developers, and
healthcare operators. Other products and industry specialties include SBA
securitizations, and other commercial and industrial loan products. Community
Banking activities include deposit gathering, consumer lending, small business
banking, and investment product sales. Mortgage Servicing activities include
collecting and applying payments from borrowers, remitting payments to
investors, collecting funds for and paying mortgage-related expenses, and, in
general, the overall administration of an investor's loan. Mortgage Banking
originates wholesale single family mortgage loans for the Company's portfolio
and for sale in the secondary market. Investment Portfolio invests in single
family loans, short-term interest-earning assets, securities and other
investments, and MBS. Summarized financial information by business segment for
the periods indicated, was as follows:
F-38
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------------------
GROSS
INCOME REVENUES ASSETS
---------- -------- -------------
(IN THOUSANDS)
1999
Commercial Banking
Residential Construction
Lending....................... $ 24,181 $ 34,348 $ 1,169,138
Mortgage Banker Finance......... 22,300 30,047 1,088,144
Commercial Real Estate
Lending....................... 15,786 21,896 865,339
Multi-Family Lending............ 15,665 21,310 1,061,347
Healthcare Lending.............. 8,550 12,483 615,794
Other........................... 6,016 9,953 477,894
---------- -------- -------------
Total Commercial Banking... 92,498 130,037 5,277,656
Community Banking.................... 21,489 148,789 1,179,002
Mortgage Servicing................... 22,319 64,454 788,941
Mortgage Banking..................... 21,880 49,626 2,754,640
Investment Portfolio................. 39,555 68,641 5,412,149
---------- -------- -------------
Reportable Segments............. 197,741 461,547 15,412,388
Other................................ (16,172) 8,035 832,291
---------- -------- -------------
Total........................... $ 181,569 $469,582 $ 16,244,679
========== ======== =============
1998
Commercial Banking
Residential Construction
Lending....................... $ 13,347 $ 21,998 $ 762,639
Mortgage Banker Finance......... 15,403 21,114 924,514
Commercial Real Estate
Lending....................... 7,662 12,244 496,595
Multi-Family Lending............ 16,979 23,313 866,449
Healthcare Lending.............. 3,352 6,110 266,064
Other........................... 6,295 9,080 328,826
---------- -------- -------------
Total Commercial Banking... 63,038 93,859 3,645,087
Community Banking.................... 19,023 121,189 760,887
Mortgage Servicing................... 16,070 50,886 635,964
Mortgage Banking..................... 4,087 30,618 2,197,176
Investment Portfolio................. 68,160 78,930 5,823,756
---------- -------- -------------
Reportable Segments............. 170,378 375,482 13,062,870
Other................................ (10,573) (3,076) 718,185
---------- -------- -------------
Total........................... $ 159,805 $372,406 $ 13,781,055
========== ======== =============
1997
Commercial Banking
Residential Construction
Lending....................... $ 7,905 $ 12,860 $ 380,359
Mortgage Banker Finance......... 7,516 10,446 581,232
Commercial Real Estate
Lending....................... 1,456 3,087 209,448
Multi-Family Lending............ 13,484 18,468 754,656
Healthcare Lending.............. 527 1,151 95,336
Other........................... 3,814 6,446 311,732
---------- -------- -------------
Total Commercial Banking... 34,702 52,458 2,332,763
Community Banking.................... 16,315 102,981 543,686
Mortgage Servicing................... 16,463 41,590 354,764
Mortgage Banking..................... -- -- --
Investment Portfolio................. 78,038 113,193 8,373,792
---------- -------- -------------
Reportable Segments............. 145,518 310,222 11,605,005
Other................................ 13,560 42,351 449,363
---------- -------- -------------
Total........................... $ 159,078 $352,573 $ 12,054,368
========== ======== =============
F-39
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information by segment is reported on a basis consistent with how
such information is presented to management for purposes of making operating
decisions and assessing performance. Income for segment reporting purposes is
defined as income before income taxes, minority interest, and extraordinary loss
as these items are not allocated to the segments. Gross revenues are comprised
of net interest income before the provision for credit losses and non-interest
income.
Non-interest income and expenses directly attributable to a segment are
assigned to that segment. The budgeted non-interest expenses of support areas
are allocated to each segment. Such allocation contemplates income, assets, and
headcount for a particular segment. Non-interest expenses incurred by the
support areas which differ from budgeted amounts are not allocated to the
segments, but are included in the other caption shown above. Certain provisions
for loan losses are not allocated to the segments and are included in the other
caption shown above.
Transfer pricing is used in calculating each segment's income and gross
revenues and measures the cost of funds used and provided by a segment. Through
this process, funds are "purchased" from liability-generating businesses, such
as Community Banking, and are "sold" to asset-generating businesses, such as
Commercial Banking. The price at which funds are bought and sold is based on the
Bank's wholesale cost of funds. Transfer pricing results in a difference between
interest income or expense as shown in the Consolidated Financial Statements and
the amount allocated to the segments. This difference is reported as a component
of the other caption shown above. Financing costs incurred by the Parent Company
are also included in the other caption shown above as these costs are not
allocated to the segments.
Segment income and gross revenues include certain inter-segment
transactions that the Company views as appropriate for purposes of reflecting
the performance of the segments. The Mortgage Servicing segment receives a fee
for servicing loans held by the Mortgage Banking and Investment Portfolio
segments. The Community Banking segment is allocated actual costs incurred by
the Mortgage Servicing segment in servicing consumer loans. The Community
Banking segment receives a fee for originating single family loans in its
branches for the Investment Portfolio segment. The Investment Portfolio segment
is allocated actual costs incurred by the Community Banking segment for time
spent on telemarketing related to refinancing loans in the single family loan
portfolio. Deposit operations is considered part of the Community Banking
segment and a portion of the related costs is allocated to the Commercial
Banking segment based on time spent servicing that segment's deposits.
MORTGAGE BANKING RESTRUCTURING AND SALE OF OFFICES
In fiscal 1997, the Company sold certain of its retail mortgage origination
offices. In connection with this sale, the remaining offices were restructured
or closed. The net gain on the sale of these offices, reduced by restructuring
costs, was $4.7 million before tax, $2.9 million after tax, or $0.09 per share.
The Company maintained its mortgage servicing business, its retail mortgage
origination capability in Texas through its community banking branches, and its
wholesale and other mortgage origination capabilities.
Activity associated with the Company's mortgage origination business for
fiscal 1997 and the costs associated with restructuring or closing of the
remaining offices have been excluded from the Reportable Segments.
F-40
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents summarized data for each of the quarters in
fiscal 1999 and 1998. Amounts have been restated to reflect an entity acquired
in fiscal 1999 using the pooling of interests method of accounting.
1999 1998
------------------------------------------ ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Interest income...................... $ 276,088 $ 251,161 $ 242,605 $ 238,132 $ 229,766 $ 230,206 $ 224,902 $ 220,926
Interest expense..................... 176,789 161,667 159,994 159,915 156,997 153,805 152,381 151,864
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income.................. 99,299 89,494 82,611 78,217 72,769 76,401 72,521 69,062
Provision for credit losses.......... 20,283 5,617 5,982 6,486 3,346 1,814 11,524 3,439
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for credit losses.................. 79,016 83,877 76,629 71,731 69,423 74,587 60,997 65,623
Non-interest income.................. 31,008 27,464 28,326 33,163 27,024 22,832 15,037 16,760
Non-interest expense................. 75,399 63,742 56,633 53,871 50,638 51,597 48,142 42,101
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
minority interest.................. 34,625 47,599 48,322 51,023 45,809 45,822 27,892 40,282
Income tax (benefit) expense......... (1,356) 17,639 18,292 19,084 16,931 17,014 (23,207) 15,124
--------- --------- --------- --------- --------- --------- --------- ---------
Income before minority interest...... 35,981 29,960 30,030 31,939 28,878 28,808 51,099 25,158
Minority interest -- subsidiary
preferred stock dividends.......... 4,564 4,563 4,563 4,563 4,564 4,563 4,563 4,563
--------- --------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 31,417 $ 25,397 $ 25,467 $ 27,376 $ 24,314 $ 24,245 $ 46,536 $ 20,595
========= ========= ========= ========= ========= ========= ========= =========
Net income available to common
stockholders....................... $ 29,715 $ 25,397 $ 25,467 $ 27,376 $ 24,314 $ 24,245 $ 46,536 $ 20,595
========= ========= ========= ========= ========= ========= ========= =========
Earnings per common share
Basic............................ $ 0.92 $ 0.78 $ 0.79 $ 0.85 $ 0.75 $ 0.75 $ 1.45 $ 0.64
Diluted.......................... 0.90 0.77 0.77 0.83 0.74 0.73 1.41 0.63
Average common shares outstanding.... 32,424 32,401 32,190 32,181 32,209 32,210 32,204 32,180
Average common shares and potential
dilutive common shares
outstanding........................ 32,694 33,082 32,913 32,803 32,915 33,091 32,957 32,945
The fourth quarter of fiscal 1999 included a $13.5 million tax benefit (see
Note 15), $2.9 million of costs related to the Texas Central acquisition (see
Note 2), and an additional $13 million provision for credit losses associated
with the increased growth of certain types of single family and commercial
loans.
F-41
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. FINANCIAL STATEMENTS OF PARENT COMPANY
PARENT COMPANY
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
AT SEPTEMBER 30,
------------------------
1999 1998
------------ ----------
ASSETS
Cash and cash equivalents............ $ 5,837 $ 3,155
Loans held for investment............ 60,000 --
Investment in subsidiaries........... 1,043,145 884,293
Deferred tax asset................... 18,415 26,755
Tax receivable from subsidiary....... 14,691 2,174
Intangible assets.................... 3,045 3,447
Other assets......................... 874 235
------------ ----------
TOTAL ASSETS......................... $ 1,146,007 $ 920,059
============ ==========
LIABILITIES
Notes payable........................ $ 219,743 $ 219,720
Other liabilities.................... 12,850 8,945
------------ ----------
Total liabilities.......... 232,593 228,665
------------ ----------
REDEEMABLE PREFERRED STOCK........... 160,000 --
STOCKHOLDERS' EQUITY
Common stock......................... 325 322
Paid-in capital...................... 132,153 132,066
Retained earnings.................... 646,549 560,961
Unearned stock compensation.......... (4,686) --
Accumulated other comprehensive
income -- net unrealized losses on
subsidiary's securities available
for sale, net of tax............... (20,058) (1,454)
Treasury stock, at cost.............. (869) (501)
------------ ----------
Total stockholders'
equity................... 753,414 691,394
------------ ----------
TOTAL LIABILITIES, REDEEMABLE
PREFERRED STOCK, AND STOCKHOLDERS'
EQUITY............................. $ 1,146,007 $ 920,059
============ ==========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-42
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
INCOME
Dividends from subsidiary............ $ 37,204 $ 41,697 $ 18,545
Interest income -- loans............. 700 -- --
---------- ---------- ----------
Total income............... 37,904 41,697 18,545
---------- ---------- ----------
EXPENSE
Interest expense -- notes payable.... 19,556 19,546 9,731
Amortization of intangibles.......... 401 401 426
Other................................ 1,192 1,181 1,896
---------- ---------- ----------
Total expense.............. 21,149 21,128 12,053
---------- ---------- ----------
INCOME BEFORE UNDISTRIBUTED INCOME OF
SUBSIDIARIES AND INCOME TAXES...... 16,755 20,569 6,492
Equity in undistributed income of
subsidiaries....................... 85,291 87,238 66,352
---------- ---------- ----------
INCOME BEFORE INCOME TAXES........... 102,046 107,807 72,844
Income tax benefit................... (7,611) (7,883) (4,672)
---------- ---------- ----------
NET INCOME........................... $ 109,657 $ 115,690 $ 77,516
========== ========== ==========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-43
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------
1999 1998 1997
---------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 109,657 $ 115,690 $ 77,516
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income
of subsidiaries............... (85,291) (87,238) (66,352)
Deferred tax expense
(benefit)..................... 8,340 (4,166) (3,062)
Amortization.................... 432 422 434
Change in other assets.......... (13,156) (2,304) 5,171
Change in other liabilities..... 140 369 (4,961)
---------- ---------- -----------
Net cash provided by
operating activities..... 20,122 22,773 8,746
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contributions to
subsidiary.................... (91,300) (750) (108,462)
Purchase of loans held for
investment.................... (60,000) -- --
---------- ---------- -----------
Net cash used by investing
activities............... (151,300) (750) (108,462)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of
redeemable preferred stock.... 160,000 -- --
Payment of issuance costs of
redeemable preferred stock.... (4,423) -- --
Repayment of notes payable...... -- -- (114,740)
Proceeds from issuance of notes
payable....................... -- -- 219,931
Payment of issuance costs of
notes payable................. -- -- (4,012)
Payment of common stock
dividends..................... (22,367) (20,693) (17,694)
Stock repurchased............... (614) (501) (492)
Stock options exercised......... 1,264 216 43
---------- ---------- -----------
Net cash provided (used) by
financing activities..... 133,860 (20,978) 83,036
---------- ---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 2,682 1,045 (16,680)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 3,155 2,110 18,790
---------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 5,837 $ 3,155 $ 2,110
========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest............. $ 19,556 $ 19,200 $ 9,436
NONCASH INVESTING ACTIVITIES
Net transfer of investment in Bank
and Senior Notes to Holdings.... -- -- 525,751
Capital contributed to Holdings.... -- -- 121,186
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-44