Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Quarterly Report under Section 13 or 15 (d)
Of The Securities Exchange Act of 1934
For the Quarter Commission File
Ended: September 30, 1998 Number: 000-23745
BNP U.S. FUNDING L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 13-3972207
-------- ----------
State or other jurisdiction of I.R.S. Employer
Incorporation or organization Identification
No.
499 Park Avenue, New York, New York 10022
----------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code (212) 449-9600.
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 [ ]
Common Stock, $10,000 Par Value 53,011
------------------------------- ------
Number of shares outstanding of each of the issuer's
classes of common stock on September 30, 1998
1
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Form 10-Q Index
Part I Page
Item 1. Financial Statements - BNP U.S. FUNDING L.L.C.:
Balance Sheet at September 30, 1998 and
December 31, 1997 3
Statement of Income for the quarter ended
September 30, 1998 and nine-months ended
September 30, 1998 4
Statement of Comprehensive Income for the
quarter ended September 30, 1998
and nine-months ended September 30, 1998 5
Statement of Changes in Securityholders'
Equity for the nine-months ended
September 30, 1998 6
Statement of Cash Flows for the nine-
months ended September 30, 1998 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 18
Part II
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of the
Proceeds 20
Item 3 Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Current Reports on Form 8-K 20
2
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Part I
Item 1.
BNP U.S. FUNDING L.L.C.
BALANCE SHEET
(in thousands, except per share data)
September December
30, 31,
1998 1997
---------- ----------
(unaudited) (audited)
ASSETS:
Cash and cash equivalent $ 67,687 $ 33,762
Investment securities (Notes 3 and 4)
Available-for-sale, at fair value 990,684 997,748
Receivable arising from payment for securities,
pursuant to the application of SFAS 125 (Note 3) 610,710 996,260
Accounts Receivable 200 --
Accrued interest receivable 7,709 5,144
---------- ----------
TOTAL ASSETS $1,676,990 $2,032,914
========== ==========
LIABILITIES:
Obligation arising from the receipt of securities,
pursuant to the application of SFAS 125 (Note 3) $ 625,793 $ 998,610
Due to affiliates -- 12
Accrued expenses 18 34
---------- ----------
TOTAL LIABILITIES 725,811 998,656
---------- ----------
Redeemable common securities, par value and
redeemable value $10,000 per security; 150,000
securities authorized,
53,011 securities issued and outstanding (Note 5) 530,110 530,110
Preferred securities, liquidation preference
$10,000 per security; 150,000 securities authorized,
50,000 securities issued and outstanding 500,000 500,000
Additional paid in capital 6 6
Accumulated other comprehensive income 1,990 --
Retained earnings 19,073 4,142
---------- ----------
TOTAL REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND
SECURITYHOLDERS' EQUITY 1,051,179 1,034,258
---------- ----------
TOTAL LIABILITIES AND TOTAL REDEEMABLE
COMMON SECURITIES, PREFERRED SECURITIES
AND SECURITYHOLDERS' EQUITY $1,676,990 $2,032,914
========== ==========
The accompanying Notes to Financial Statements are an integral
part of these Statements.
3
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BNP U.S. FUNDING L.L.C.
STATEMENT OF INCOME
(in thousands, except per share data)
Nine-month Three-Month
period ended period ended
September 30, September 30,
1998 1998
(unaudited) (unaudited)
INTEREST INCOME:
Collateralized Mortgage Obligations:
Floating-rate REMICs $11,721 $ 4,096
Fixed-rate REMIC 2,439 922
Mortgage Backed Securities:
Agency ARMs 7,837 2,839
Agency Hybrid ARMs 9,989 3,713
Treasury Notes 6,321 2,181
Interest on Deposits 1,489 676
------- -------
Total 39,796 14,427
------- -------
NONINTEREST EXPENSE:
Fees and expenses 173 56
------- -------
NET INCOME APPLICABLE TO PREFERRED
AND REDEEMABLE COMMON SECURITIES
$39,623 $14,371
NET INCOME PER REDEEMABLE COMMON
SECURITY $747.45 $271.10
======= =======
The accompanying Notes to Financial Statements are an integral
part of these Statements.
4
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BNP U.S. FUNDING L.L.C.
STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
Nine-month Three-month
period ended period ended
September 30, September 30,
1998 1998
(unaudited) (unaudited)
------------- -------------
NET INCOME $ 39,623 $ 14,371
OTHER COMPREHENSIVE INCOME:
Net change in unrealized gain (loss)
in fair value of securities available-
for-sale treated as collateral (Note 3) 12,732 11,336
Net change in unrealized loss in fair
value of obligation arising from the
receipt of securities pursuant to the
application of SFAS 125 (Note 3) (12,732) (11,336)
Net change in unrealized gain (loss) in
fair value of securities available-for-
sale not treated as collateral (Note 3) 1,990 2,662
-------- --------
OTHER COMPREHENSIVE INCOME 1,990 2,662
-------- --------
COMPREHENSIVE INCOME $ 41,613 $ 17,033
======== ========
The accompanying Notes to Financial Statements are an
integral part of these Statements.
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
BNP U.S. FUNDING L.L.C.
STATEMENT OF CHANGES IN REDEEMABLE COMMON SECURITIES, PREFERRED SECURITIES
AND SECURITYHOLDERS' EQUITY
(in thousands)
TOTAL
REDEEMABLE
COMMON
SECURITIES
ACCUMU- PREFERRED
LATED SECURITIES
OTHER AND
REDEEMABLE ADDITIONAL COMPRE- SECURITY-
COMMON PREFERRED PAID IN HENSIVE RETAINED HOLDERS'
SECURITIES SECURITIES CAPITAL INCOME EARNINGS EQUITY
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997
(audited) $ 530,110 $ 500,000 $ 6 $ -- $ 4,142 $1,034,258
Net income -- -- -- -- 39,623 39,623
Other comprehensive income -- -- -- 1,990 -- 1,990
Dividends Paid - Preferred
Securities -- -- -- -- (19,345) (19,345)
Dividends Paid - Common
Securities -- -- -- -- (5,347) (5,347)
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 1998 $ 530,110 $ 500,000 $ 6 $ 1,990 $ 19,073 $1,051,179
========== ========== ========== ========== ========== ==========
(unaudited)
The accompanying Notes to Financial Statements are an integral
part of these Statements.
</TABLE>
6
<PAGE>
BNP U.S. FUNDING L.L.C.
STATEMENT OF CASH FLOWS
(in thousands)
Nine-month period
ended September 30,
1998
(unaudited)
OPERATING ACTIVITIES:
Net income $ 39,623
Adjustments to reconcile net income to
cash provided from operating activities:
Premium amortization 8,117
Net change in interest receivable (806)
Net change in accrued expenses (16)
Net change in accounts receivable (200)
Net change in due to affiliates (12)
--------
Net cash provided from operating activities 46,706
--------
INVESTING ACTIVITIES:
Purchase of investment securities:
Floating-rate REMICs (124,838)
Fixed Rate REMIC (78,641)
Agency ARMs (40,874)
Agency Hybrid ARMs (169,716)
Premium paid (2,869)
Interest receivable (1,759)
Decrease in receivable arising from payment
for securities, pursuant to the application
of SFAS #125 (Note 3) 385,550
Proceeds from principal payments of securities
available-for-sale, not treated as collateral 55,536
Proceeds from principal payments of securities
available-for-sale, treated as collateral 375,072
--------
Net cash provided (used) by investing activities 397,461
--------
FINANCING ACTIVITIES:
Cash dividends - Preferred Securities (19,345)
Cash Dividends - Common Securities (5,347)
Decrease in obligation arising from receipt
of securities, pursuant to the application of
SFAS #125 (Note 3) (385,550)
--------
Net cash provided (used) by financing
activities (410,242)
--------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
33,925
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,762
--------
CASH AND CASH EQUIVALENTS, END OF PERIOD 67,687
--------
The accompanying Notes to Financial Statements are an integral
part of these Statements.
7
<PAGE>
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
BNP U.S. Funding L.L.C. (the "Company") is a Delaware limited
liability company formed on October 14, 1997 for the purpose of
acquiring and holding Eligible Securities (as defined in Item 1,
herein) that will generate net income for distribution to the
holders of its Series A Preferred Securities and its redeemable
Common Securities. The Company is a wholly owned subsidiary of
the New York Branch (the "Branch") of Banque Nationale de Paris
(the "Bank" or "BNP"). BNP is a French corporation that conducts
retail banking activities in France and corporate and private
banking and other financial activities both in France and
throughout the world.
The Company was initially capitalized on October 14, 1997 with
the issuance to the Branch of one share of the Company's
redeemable common securities, $10,000 par value (the "Common
Securities"). On December 5, 1997 (inception), the Company
commenced operations concurrent with the issuance of 50,000
noncumulative preferred securities, Series A, liquidation
preference $10,000 per security, (the "Series A Preferred
Securities") to qualified institutional buyers, and the issuance
of 53,010 Common Securities to the Branch. These issuances raised
in the aggregate $1,030,115,873 of net capital (including $5,873
of additional paid in capital). This entire amount was used to
acquire from the Branch a portfolio of debt securities (including
accrued interest) at their fair values (the "Initial Portfolio").
The accounting and financial reporting policies of the Company
conform to U.S. generally accepted accounting principles and
current industry practices. The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and
revenues during the reporting periods. Actual results could
differ from those estimates.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT SECURITIES:
Investments in debt securities, both collateral (Note 3) and
noncollateral, are classified as available for sale and are
carried at fair value. Unrealized gains and losses on these
securities are reported as a component of other comprehensive
income.
Interest on securities is included in interest income and is
recognized using the interest method. Premiums and discounts are
amortized using the effective interest method and are recognized
in interest income.
COMPREHENSIVE INCOME:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires the Company to report items of
other comprehensive income by their nature in a financial
statement and display the accumulated balance of other
comprehensive income separately in Total Redeemable Common
Securities, Preferred Securities and Securityholders' Equity.
Comprehensive income includes net income, as reported, as well as
the change in unrealized gains and losses on available-for-sale
securities and in the obligation arising from the receipt of
securities, pursuant to the application of SFAS 125.
8
<PAGE>
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash and short-term deposits
with original maturities of three months or less.
DIVIDENDS:
Dividends on the Series A Preferred Securities, when, and if
declared by the Company's Board of Directors, are payable, out of
the Company's net income, determined without regard to capital
gains or losses, semi-annually in arrears on a non-cumulative
basis on the fifth day of June and December of each year,
commencing June 5, 1998, at a rate per annum of 7.738% of the
liquidation preference through and including December 5, 2007.
Thereafter, dividends, when, and if declared by the Company's
Board of Directors, will be payable quarterly in arrears on the
third Wednesday of March, June, September, and December of each
year and will be calculated on a weekly basis in each quarter at
a rate per annum of the liquidation preference equal to 2.8% per
annum above one-week LIBOR for the week concerned as determined
on the related LIBOR Determination Date.
Holders of Common Securities are entitled to receive dividends
when, as and if declared by the Company's Board of Directors out
of the Company's net income not required to be applied to fund
dividends with respect to the Series A Preferred Securities.
To date, the Company has declared and paid dividends as follows:
Security Amount Date Paid
- -------- ------ ---------
Series A Preferred Securities $19,345,000 June 5, 1998
Common Securities $ 5,347,365 June 22, 1998
If the Bank's financial condition were to deteriorate with the
consequence that a Shift Event (as defined below) were to occur,
substantially all of the Common Securities would be redeemed
automatically without prior redemption of the Series A Preferred
Securities and dividends payable on each Series A Preferred
Security could be substantially reduced or completely eliminated.
In addition, if the Bank's Tier 1 risk-based capital ratio were
to decline below the minimum percentage required by French
banking regulations (currently 4%), the Company would pay a
special dividend consisting of all of the Company's net assets
(other than assets having a total market value of approximately
$40 million) to the Bank as holder of the Common Securities.
A "Shift Event" would be deemed to have occurred if (i) the
Bank's total risk-based capital ratio or Tier 1 risk-based
capital ratio were to decline below the minimum percentages
required by French banking regulations, (ii) the Bank were to
become subject to certain specified receivership proceedings or
(iii) the French Banking Commission (Commission bancaire), in its
sole discretion, were to notify the Bank and the Company that it
has determined that the Bank's financial condition was
deteriorating such that either of the foregoing clauses (i) or
(ii) would apply in the near term. French banking regulations
currently require French banks to maintain a minimum total
risk-based capital ratio of at least 8.0% and a minimum Tier 1
risk-based capital ratio of at least 4.0%.
The Company may not pay dividends or make other distributions on
the Common Securities or the Series A Preferred Securities if,
after giving effect to the distributions, the Company's
liabilities would exceed the fair value of its assets.
Additionally, as long as any Series A Preferred Securities are
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<PAGE>
outstanding, except during a Shift Period (i.e., following the
occurrence of a Shift Event causing a shift in dividend
preference and before the termination thereof), the amount of
dividends on the Common Securities in any fiscal year may not
exceed the amount by which the net income of the Company for such
fiscal year exceeds the stated dividends on the Series A
Preferred Securities scheduled to be paid during such fiscal year
irrespective of whether dividends on the Series A Preferred
Securities are in fact declared and paid. Additionally, other
than during a Shift Period, no dividends may be declared, paid or
set apart for payment on the Common Securities (a) with respect
to any period of time included in any Dividend Period unless full
dividends have been or contemporaneously are declared and paid,
or declared and a sum sufficient for the payment thereof is set
apart for such payment on the Series A Preferred Securities for
the then-current Dividend Period and (b) the Company may not
declare, pay or set apart funds for any dividends or other
distributions with respect to any Common Securities unless and
until (x) full dividends on the Series A Preferred Securities for
the two most recent preceding Dividend Periods are declared and
paid, or declared and a sum sufficient for payment has been paid
over to the dividend disbursing agent for payment of such
dividends and (y) the Company has declared a cash dividend on the
Series A Preferred Securities at the annual dividend rate for the
then-current Dividend Period, and sufficient funds have been paid
over to the dividend disbursing agent for payment of such cash
dividends for such then-current Dividend Period.
NET INCOME PER REDEEMABLE COMMON SECURITY:
Net income per redeemable common security is calculated by
dividing net income after preferred dividends by the weighted
average number of Common Securities outstanding.
INCOME TAXES:
The Company expects to be treated as a partnership for U.S.
Federal income tax purposes. As such, a partnership is not a
taxable entity, the Company will not be subject to U.S. federal,
state and local income tax on its income. Instead, each
securityholder is required to take into account its allocable
share of items of income, gain, loss and deduction of the
partnership in computing its U.S. Federal tax liability.
Accordingly, the Company has made no provision for income taxes
in the accompanying statement of income.
NOTE 3--RECEIVABLE ARISING FROM PAYMENT FOR SECURITIES, PURSUANT
TO THE APPLICATION OF SFAS 125, AND OBLIGATION ARISING FROM THE
RECEIPT OF SECURITIES, PURSUANT TO THE APPLICATION OF SFAS 125
Statement of Financial Accounting Standards No. 125 "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125") governs the
accounting for the transfer of financial assets. Under SFAS 125,
transfers of financial assets that do not meet certain sale
accounting requirements must be accounted for as a secured
borrowing transaction with a pledge of collateral.
Due to the potential consequences of a Shift Event (as described
above), the Company's purchase of the Initial Portfolio from the
Branch did not meet certain SFAS 125 sale accounting
requirements. Therefore, the purchase of the Initial Portfolio
has been accounted for as a secured borrowing transaction with a
pledge of collateral. In accounting for this transaction as a
secured borrowing transaction in accordance with SFAS 125, the
Company has recorded a receivable in an amount equal to the
remaining amount paid to the Branch to acquire the Initial
Portfolio. In this case, however, having delivered the securities
in the Initial Portfolio to the Company, neither the Branch nor
BNP has
10
<PAGE>
any further obligation to the Company to repay any part of the
purchase price for the Initial Portfolio or otherwise to
repurchase or redeem any securities in the Initial Portfolio.
Other provisions of SFAS 125 govern the accounting for financial
assets treated as collateral that an entity has the right to sell
or repledge. In accordance with such provisions, the Company has
recognized the securities in the Initial Portfolio and recorded a
related obligation. In this case, the Company has in fact no
obligation to return any such securities to the Branch or to BNP,
except to the extent that the consequences of a Shift Event (as
described above) might affect securities still held by the
Company at the time.
As securities within the Initial Portfolio mature or prepay, the
Company will recognize the cash proceeds as a reduction in a
receivable arising from payment for securities. Concurrent with
the receipt of such cash proceeds, the Company will derecognize
such securities and reduce the obligation. In accounting for this
transaction as a secured borrowing transaction in accordance with
SFAS 125, the Company has recorded a receivable of $610,710,283
at September 30, 1998, which is equal to the remaining amount
paid by Branch to acquire the Initial Portfolio.
The obligation arising from the receipt of securities is stated
at the fair value of the related securities. Changes in the value
of the obligation due to corresponding changes in the fair value
of the related securities are reported as an element of other
comprehensive income.
NOTE 4--INVESTMENT SECURITIES:
The amortized cost and estimated fair value of available-for-sale
securities were as follows ($ in 000's) based on management's
prepayment assumptions:
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 1998 Cost Gains Losses Value
- ------------------ --------- ---------- ---------- --------
Collateralized Mortgage
Obligations:
Floating-rate REMICs $250,951 $ 136 $ 484 $250,603
Fixed-rate REMICs 119,820 902 217 120,505
Mortgage Backed Securities:
Agency ARMs 215,118 1,213 787 215,544
Agency Hybrid ARMs 241,694 2,220 6 243,908
U.S. Treasury Notes 146,029 14,095 -- 160,124
-------- -------- -------- --------
Total $973,612 $ 18,566 $ 1,494 $990,684
======== ======== ======== ========
11
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Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ----------------- --------- ---------- ---------- --------
Collateralized Mortgage
Obligations:
Floating-rate REMICs $263,209 $ 118 $ 585 $262,742
Fixed-rate REMIC 46,837 -- 607 46,230
Mortgage Backed Securities:
Agency ARMs 360,343 1,283 909 360,717
Agency Hybrid ARMs 178,405 2,271 -- 180,676
U.S. Treasury Notes 146,604 779 -- 147,383
-------- -------- -------- --------
Total $995,398 $ 4,451 $ 2,101 $997,748
======== ======== ======== ========
The breakdown of the Company's available-for-sale securities by
category and expected maturity distribution (stated in terms of
amortized cost) is summarized below ($ in 000's) based on
management's prepayment assumptions:
Due in Due after Due after
1 year 1 through 5 through Due after
September 30, 1998 or less 5 years 10 years 10 years Total
- ------------------ ------- --------- --------- --------- --------
Collateralized Mortgage
Obligations:
Floating-rate REMICs $ -- $140,128 $ 94,782 $ 16,041 $250,951
Fixed-rate REMICs -- 72,981 -- 46,839 119,820
Mortgage Backed
Securities:
Agency ARMs 55,634 133,611 25,873 -- 215,118
Agency Hybrid ARMs -- 200,114 31,172 10,408 241,694
U.S. Treasury Notes -- -- 146,029 -- 146,029
-------- -------- -------- --------
Total $ 55,634 $546,834 $297,856 $ 73,288 $973,612
======== ======== ======== ======== ========
Due in Due after Due after
1 year 1 through 5 through Due after
December 31, 1997 or less 5 years 10 years 10 years Total
- ----------------- ------- --------- --------- --------- --------
Collateralized Mortgage
Obligations:
Floating-rate REMICs $ 1,470 $261,739 $ -- $ -- $263,209
Fixed-rate REMIC -- -- -- 46,837 46,837
Mortgage Backed
Securities:
Agency ARMs -- -- 360,343 -- 360,343
Agency Hybrid ARMs -- -- 178,405 -- 178,405
U.S. Treasury Notes -- -- 146,604 -- 146,604
-------- -------- -------- --------
Total $ 1,470 $261,739 $685,352 $ 46,837 $995,398
======== ======== ======== ======== ========
Actual maturities may differ from maturities shown above due to
prepayments.
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<PAGE>
The breakdown of the Company's available-for-sale securities by
category and yield is summarized below:
Due in Due after Due after
1 year 1 through 5 through Due after
September 30, 1998 or less 5 years 10 years 10 years Total
------- --------- --------- --------- -------
Collateralized Mortgage
Obligations:
Floating-rate REMICs --% 5.71% 6.70% 5.96% 5.89%
Fixed-rate REMICs -- 6.04 -- 6.49 5.66
Mortgage Backed
Securities:
Agency ARMs 2.11 5.14 6.43 -- 3.69
Agency Hybrid ARMs -- 5.65 5.11 5.34 5.68
U.S. Treasury Notes -- -- 5.76 -- 5.76
------- ------ ------ ------ ------
Total 2.11% 5.54% 6.12% 6.29% 5.17%
======= ====== ====== ====== ======
Due in Due after Due after
1 year 1 through 5 through Due after
December 31, 1997 or less 5 years 10 years 10 years Total
- ----------------- ------- --------- --------- --------- -------
Collateralized Mortgage
Obligations:
Floating-rate REMICs 6.22% 6.34% --% --% 6.34%
Fixed-rate REMIC -- -- -- 6.92 6.92
Mortgage Backed
Securities:
Agency ARMs -- -- 5.62 -- 5.62
Agency Hybrid ARMs -- -- 5.66 -- 5.66
U.S. Treasury Notes -- -- 5.86 -- 5.86
------ ------ ------ ------ ------
Total 6.22% 6.34% 5.68% 6.92% 5.92%
====== ====== ====== ====== ======
There were no sales of available-for-sale securities from
December 5, 1997 (inception) to September 30, 1998.
NOTE 5--REDEEMABLE COMMON SECURITIES:
General
The Company is authorized to issue up to 150,000 Common
Securities; as of September 30, 1998 and December 31, 1997, the
Company had outstanding 53,011 Common Securities, all of which
were held by the Branch. The Bank has agreed with the Company in
the Contingent Support Agreement that, so long as any Series A
Preferred Securities are outstanding, it will maintain direct or
indirect ownership of 100% of the outstanding Common Securities.
Dividends
Holders of Common Securities are entitled to receive dividends
when, as and if declared by the Company's Board of Directors out
of the Company's net income not required to be applied to fund
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dividends with respect to the Series A Preferred Securities;
provided that so long as any Series A Preferred Securities are
outstanding, no dividends or other distributions (including
redemptions and purchases) may be made with respect to the Common
Securities unless full dividends on all Series A Preferred
Securities have been paid for the current and the two immediately
preceding Dividend Periods (except during a Shift Period if the
Bank does not distribute dividends on its common stock).
Redemption Requirements
If the Bank's financial condition were to deteriorate with the
consequence that a Shift Event were to occur, substantially all
the Common Securities would be redeemed automatically without
prior redemption of any Series A Preferred Securities.
Voting Rights
Subject to the rights, if any, of the holders of Series A
Preferred Securities (in particular the right to remove and
replace any Independent Director and to elect an additional
director, in certain circumstances), all voting rights are vested
in the Common Securities. The Holders of Common Securities are
entitled to one vote per security.
Rights Upon Liquidation
In the event of the dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, after there shall have
been paid or set aside for the holders of all Series A Preferred
Securities the full preferential amounts to which such holders
are entitled, the holders of Common Securities will be entitled
to share equally and ratably in any assets remaining after the
payment of all debts and liabilities. Upon a liquidation of the
Company during a Shift Period, the Common Securities will have a
preference over the Series A Preferred Securities to the extent,
if any, that the liabilities of the Bank (including any debt
instruments, such as titres participatifs and prets
participatifs) have not been paid in full.
NOTE 6--RELATED PARTY TRANSACTIONS:
The Company entered into a Services Agreement with the Branch on
December 5, 1997 pursuant to which the Branch manages the
securities portfolio of the Company and performs other
administrative functions for a fee of $50,000 per annum. Expenses
incurred under such Agreement were $37,500 as of September 30,
1998. While the amount of the fee payable under the Agreement is
somewhat less than the fee which would be payable in an arm's
length transaction with a third party, Management does not
believe that the difference is material.
French American Banking Corporation (FABC), an affiliate of BNP,
serves as the dividend paying agent, registrar, and transfer
agent with respect to the Series A Preferred Securities. The
Company paid FABC an upfront fee of $4,000 and will pay a fee of
$4,000 per annum for these services.
The Company maintains a credit balance account with the Branch
for clearing certain transactions.
All of the Company's officers and employees and all but one of
the members of the Company's Board of Directors are officers and
employees of the Branch or BNP.
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<PAGE>
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair values of securities at September 30,1998 and December
31, 1997 were obtained from independent market sources and are
summarized in Note 4. The carrying value of cash and cash
equivalents, accounts receivable, accrued interest receivable,
accrued expenses, and due to affiliates approximates fair value.
The carrying values of investment securities, as shown in Note 4,
and the obligation arising from the receipt of securities,
pursuant to the application of SFAS 125, approximates their fair
value. The fair value of the receivable arising from payment for
securities, pursuant to the application of SFAS 125, approximates
the aggregate carrying value of the investment securities treated
as collateral including accrued interest, which at September 30,
1998 and December 31, 1997 was $625,793,016 and $998,609,635
respectively.
15
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion pertains to the nine-month period
ended September 30, 1998 (the "nine-month period") and the three
month period ended September 30, 1998 (the "three-month period").
General
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The Company was formed on October 14, 1997 and commenced
operations on December 5, 1997 by a sale to qualified
institutional buyers offering of 50,000 noncumulative preferred
securities, Series A, liquidation preference $10,000 per
security, (the "Series A Preferred Securities") and the sale to
New York Branch of Banque National de Paris (the Branch) of
53,011 Common Securities, $10,000 par value per share (the common
securities ). Together, such sale raised net capital of
$1,030,115,873, which the Company used to purchase a portfolio of
securities (the portfolio) from the Branch.
The Company's sole business is to acquire, hold and manage
debt instruments largely consisting of mortgage obligations,
which generate net income for distribution to stockholders. The
Company's sole source of income is interest generated by the
securities in the Portfolio.
Results of Operations
During the nine-month period ended September 30, 1998
and for the three month-period ended September 30, 1998, the
Company had revenues of $39,795,265 and $14,426,958,
respectively. This amount consisted entirely of interest income.
Interest on the securities in the Portfolio for the nine and
three month period amounted to $38,306,498 and $13,750,966,
respectively. This represents an aggregate average yield for the
nine and three month period of 5.17% and 5.61%, respectively.
Interest earned and average yield with respect to each category
of security in the Portfolio was as follows:
NINE MONTH PERIOD THREE MONTH PERIOD
----------------- ------------------
Floating-rate
REMICs $11,720,747, 5.89% $4,095,636, 6.05%
Fixed-rate REMIC $2,439,024, 5.66% $921,743, 5.71%
Agency ARMs $7,836,601, 3.69% $2,839,408, 4.57%
Agency Hybrid ARMs $9,989,452, 5.68% $3,712,949, 6.21%
Treasuries $6,320,672, 5.76% $2,181,228, 5.79%
The average book value of the Portfolio during the nine and three
month period was $987,105,704 and 975,028,840, respectively. This
reflects the following prepayments and reinvestments:
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PREPAYMENTS NINE MONTH PERIOD THREE MONTH PERIOD
----------------- ------------------
Floating-Rate
REMICs $133,416,478 $48,962,901
Agency ARMs $224,888,947 $78,389,000
Agency Hybrid ARMs $72,302,718 $29,471,639
REINVESTMENTS NINE MONTH PERIOD THREE MONTH PERIOD
----------------- ------------------
Floating-rate
REMICs $124,837,899 $6,248,217
Fixed Rate REMICS $78,641,348 $73,220,891
Agency ARMs $40,874,409 $0
Agency Hybrid ARMs $169,717,612 $41,205,021
The Company also recorded interest income from the short-term
investment for the nine and three month period of $1,488,767 and
$675,991, respectively. This amount is attributable to (i)
interest payments on securities in the Portfolio and (ii) such
prepayments of principal pending their reinvestment.
The decrease in the aggregate yield on the securities in
the Portfolio to 5.17% for the nine-month period ended September
30, 1998 from 5.92% for the period from December 31, 1997 was due
primarily to prevailing market conditions resulting in a lower
interest rate environment in the United States.
During the period January 1, 1998 to September 30,
1998, approximately 85% of the Portfolio consisted of
collateralized mortgage obligations (Floating-rate REMICs and
Fixed-rate REMIC) and mortgage backed securities (Agency ARMs and
Agency Hybrid ARMs) and approximately 15% consisted of Treasuries
Notes. Floating rate securities accounted for approximately
72.69% of the portfolio of collateralized mortgage obligations
and mortgage backed securities. The decline in market interest
rates caused an acceleration of prepayments of principal of
collateralized mortgage obligations and mortgage backed
securities as mortgage holders refinanced to lower rate
obligations.
The aggregate market value of the securities in the
Portfolio as of September 30, 1998 was higher than the book value
by approximately 1.75%, due to a net decrease in interest rates.
Because management intends to hold such securities until
maturity, the unrealized net gain of approximately $17,074,597
was not recognized in reporting income.
Operating expenses for the nine month and three month
period totaled $ 172,451 and $55,636, respectively. Operating
expenses consisted of accrued audit fees and an accrued portion
of the fees of Citibank as Trustee and of the Branch under the
Services Agreement.
The Company's net income during the nine month and
three-month period was $39,622,814 and $14,371,322, respectively.
As of September 30, 1998, the Company has declared and paid
dividends as follows:
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Security Amount Date Paid
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Series A Preferred Securities $19,345,000 June 5, 1998
Common Securities $ 5,347,365 June 22, 1998
These amounts were paid from the Company's retained earnings
generated from the period December 5, 1997 to May 31, 1998.
Interest Rate Risk
The Company's income consists primarily of interest
payments on collateralized mortgage obligations, mortgage backed
securities and Treasuries Notes. Currently, the Company does not
use any derivative products to manage its interest rate risk. If
there is a decline in market interest rates, as occurred in the
first nine months of 1998, the Company may experience a reduction
in interest income on its collateralized mortgage obligations and
its mortgage backed securities and a corresponding decrease in
funds available to be distributed to its securityholders. The
reduction in interest income may result from downward adjustments
of the indices upon which the interest rates on ARM mortgage
loans are based and from prepayment of mortgage loans with fixed
interest rates, resulting in reinvestment of the proceeds in
lower yielding securities. There can be no assurance that an
interest rate environment in which there is a significant decline
in interest rates over an extended period of time would not
adversely affect the Company's ability to pay dividends on the
Series A Preferred Shares.
SFAS Receivable and Obligation
- ------------------------------
Under SFAS 125, transfers of financial assets that do not
meet certain sale accounting requirements must be accounted for
as a secured borrowing transaction with a pledge of collateral.
Due to the potential consequences of a Shift Event, the Company's
purchase of the Initial Portfolio from the Branch did not meet
certain SFAS 125 sale accounting requirements. Accordingly, the
Company recorded at December 5, 1997 a receivable for the
consideration paid to the Branch for the Initial Portfolio
treated as collateral. Since the Company has the right to sell
and pledge the securities in the Initial Portfolio treated as
collateral, in application of SFAS 125 the Company recognized the
securities in the Initial Portfolio as assets and recorded at
December 5, 1997 a related obligation to return them to the
Branch. As a legal and economic matter, however, there is no such
receivable or obligation since (a) neither the Bank nor the
Branch has any obligation to repay any part of the purchase price
for the Initial Portfolio or to repurchase or redeem any of the
securities included therein, and (b) the Company has no
obligation to return any of such securities to the Bank or the
Branch (except in the limited circumstances and to the extent
that the occurrence of a Shift Event under the Charter would
require the transfer of any assets held by the Company at the
time). As the securities in the Initial Portfolio are paid, the
receivable will be deemed to be realized and the obligation will
be reduced, each by an amount corresponding to the amount of the
payments. At September 30, 1998 and December 31, 1998,
respectively, the receivable arising from payment for securities
amounted to $610,710,283 and $996,259,635 and the obligation
arising from the receipt of securities amounted to $625,793,016
and $998,609,635. (The difference between the amounts of the
receivable and the obligation result from a requirement to mark
the obligation to market in parallel with the related
securities). The decrease in the amount of such receivable and
such obligation between two dates reflects the prepayment of
securities in the Initial Portfolio and the purchase by the
Company of securities from third parties with the proceeds
therefrom. The Company recognized the proceeds from such proceeds
of such prepayments as a reduction in the receivable and
concurrently reduced the associated obligation. Such decreases in
the receivable and the obligation did
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affect the Company's results of operations or cash flow. Such
transactions are accounted for as a purchase under SFAS 125.
Liquidity and Capital Resources
The objective of liquidity management is to ensure the
availability of sufficient cash flows to meet all of the
Company's financial commitments. The Company's sole liquidity
needs are to acquire reinvestment securities as original
securities repay or prepay and to pay dividends on the Series A
Preferred Securities. The acquisition of reinvestment securities
is funded with the proceeds of principal repayments or
prepayments on original securities, and the payments of dividends
on the Series A Preferred Securities will be funded by revenues
from the securities in the Portfolio. Given the limited scope of
its purpose (acquiring and holding Eligible Securities to fund
the payment of dividends on the Series A Preferred Securities and
the Common Securities), the Company does not anticipate that it
will have any other material expenditures requiring liquidity.
Furthermore, the Company is prohibited from incurring
indebtedness. Accordingly, the Company believes that its
liquidity and capital resources will be sufficient to meet its
liquidity requirements in the short and long term.
Item 3
Quantitative and Qualitative Disclosure about Market Risk
Not Applicable
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Part II
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Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of the Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Current Reports on Form 8-K
A) Exhibits:
11) Computation of net income per share
12) (a) Computation of ratio of earnings to
fixed charges
(b) Computation of ratio of earnings to
fixed charges and preferred security
dividend requirements
B) Reports on Form 8-K: NONE
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Signature
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereto duly authorized.
BNP U.S. FUNDING L.L.C.
-----------------------
Registrant
Date: November 13, 1998 By /s/ Eric Deudon
-----------
Eric Deudon
President and Director
Date: November 13, 1998 By /s/ Lisa Hermann
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Lisa Hermann
Treasurer
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Exhibit 11
BNP U.S. FUNDING L.L.C.
-----------------------
Computation of net income per share
(in thousands, except per share data)
Nine-month period ended
September 30, 1998
Net Income $ 39,623
Less: Preferred Securities Dividend
Requirement 19,345
Net Income Applicable to Common Securities $ 20,278
========
Securities:
Weighted Average Number of Common
Securities Outstanding 53,011
Net Income per Common Security $382.52
========
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Exhibit 12 (a)
BNP U.S. FUNDING L.L.C.
-----------------------
Computation of ratio of earnings to fixed charges
(in thousands, except ratios)
Nine-month period ended
September 30,1998
-----------------------
Net income $39,623
Fixed Charges
Audit Fees 37
Administrative Fees 37
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Total Fixed Charges 74
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Earnings before fixed charges 39,549
Fixed charges, as above 74
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Ratio of earnings to fixed charges 746.05
=======
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Exhibit 12 (b)
BNP U.S. FUNDING L.L.C.
-----------------------
Computation of ratio of earnings to
fixed charges and preferred securities
dividend requirements (in thousands,
except ratios)
Nine-month period ended
September 30,1998
-----------------------
Net income $39,623
Fixed Charges
Audit Fees 37
Administrative Fees 37
Total Fixed Charges 74
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Earnings before fixed charges 39,549
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Fixed charges, as above 74
Preferred securities dividend
requirements 19,345
Fixed charges including preferred
securities dividends 19,419
=======
Ratio of earnings to fixed
charges and preferred securities
dividend requirement 2.03
=======
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