AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1997
REGISTRATION NO. 333- AND 22-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BANK UNITED CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6711
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
13-3528556
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
3200 SOUTHWEST FREEWAY
SUITE 1600
HOUSTON, TX 77027
(713) 543-6500
(ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
JONATHON K. HEFFRON, ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
3200 SOUTHWEST FREEWAY, SUITE 1600
HOUSTON, TX 77027
(713) 543-6958
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JOHN R. BRANTLEY, ESQ. PETER H. DARROW, ESQ.
BRACEWELL & PATTERSON, L.L.P. CLEARY, GOTTLIEB, STEEN & HAMILTON
2900 SOUTH TOWER PENNZOIL PLACE ONE LIBERTY PLAZA
HOUSTON, TEXAS 77002-2781 NEW YORK, NEW YORK 10006
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]__________________
If this Form is a post-effective amendment filed pursuant to Rule 462(e)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]__________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE
- --------------------------------------------------------------------------------
% Subordinated Notes due 2004 $100,000,000 $30,304
- --------------------------------------------------------------------------------
% Subordinated Notes due 2007 $120,000,000 $36,364
- --------------------------------------------------------------------------------
Total $220,000,000 $66,668
================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED JANUARY 15, 1997
PROSPECTUS
$220,000,000
BANK
UNITED CORP.
$100,000,000 % Subordinated Notes Due 2004
$120,000,000 % Subordinated Notes Due 2007
The % Subordinated Notes due 2004 (the "2004 Notes") and the %
Subordinated Notes due 2007 (the "2007 Notes" and, together with the 2004
Notes, the "Notes") are being offered (the "Offering") by Bank United Corp.
(the "Company"). Interest on the Notes will be paid semi-annually on
and of each year and on the maturity dates of the Notes.
The Notes will be unsecured and will be subordinate in right of payment to all
Senior Indebtedness and, in the event of bankruptcy, Other Financial Obligations
of the Company as described herein under "Description of
Notes -- Subordination".
The Notes may not be redeemed prior to their maturity. Payment of the
principal of the Notes may be accelerated only in the case of certain events
involving the bankruptcy, insolvency, reorganization, receivership or similar
proceedings of the Company or its subsidiary, Bank United, a federally chartered
savings bank (the "Bank"). There is no right of acceleration upon a default in
the payment of principal or interest on the Notes or in the event of a breach in
the performance of any covenant of the Company. The Notes will be effectively
subordinated to all existing and future liabilities of the Bank and the
Company's other subsidiaries and to any preferred stock of the Bank (the "Bank
Preferred Stock"). As of September 30, 1996, $185.5 million of Bank Preferred
Stock was outstanding. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of Notes". As of September 30, 1996, there was, in the aggregate,
$ million of total indebtedness of the Company and its consolidated
subsidiaries outstanding, of which $ million was Senior Indebtedness.
A portion of the net proceeds of the Offering will be used to repurchase
and retire the $115 million outstanding principal amount of the Company's 8.05%
Senior Notes due May 15, 1998 (the "Senior Notes"), and to pay related costs
and expenses, pursuant to the tender offer described herein (the "Tender
Offer"). See "The Tender Offer". Net proceeds of the Offering in excess of
amounts necessary to repurchase the Senior Notes tendered and to pay related
costs and expenses will be contributed to the Bank to enhance the capital of the
Bank. The Bank will use the proceeds of such investment for general corporate
purposes, which may include the acquisition of the stock or assets of financial
institutions and the funding of internal growth. See "Use of Proceeds".
As of September 30, 1996, after giving pro forma effect to the Offering and
the Tender Offer as set forth under "Capitalization", the Company would have
had approximately $ million of Senior Indebtedness and Other Financial
Obligations outstanding.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE
NOTES OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION"), THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), THE OFFICE OF THRIFT SUPERVISION (THE "OTS")
OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION, THE FDIC,
THE OTS OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE NOTES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION, AND ARE NOT INSURED BY THE
FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
- --------------------------------------------------------------------------------
Per 2004 Note % % %
- --------------------------------------------------------------------------------
Total $ $ $
- --------------------------------------------------------------------------------
Per 2007 Note % % %
- --------------------------------------------------------------------------------
Total $ $ $
================================================================================
(1) Plus accrued interest on the Notes, if any, from date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(3) Before deducting expenses payable by the Company, estimated at $ .
The Notes are being offered subject to prior sale, when, as and if
delivered to and accepted by the Underwriters. It is expected that delivery of
Notes will be made in book-entry form through the facilities of The Depository
Trust Company on or about , 1997.
Smith Barney Inc.
Lehman Brothers
Merrill Lynch & Co.
<PAGE>
[MAP SHOWING LOCATIONS
OF THE COMPANY'S OPERATIONS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE NOTES OFFERED
HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, DEFINITIONS AND FINANCIAL STATEMENTS APPEARING ELSEWHERE HEREIN.
INVESTORS SHOULD CAREFULLY REVIEW THE ENTIRE PROSPECTUS. THE FISCAL YEAR FOR
BANK UNITED CORP. AND ITS SUBSIDIARY, BANK UNITED, A FEDERALLY CHARTERED SAVINGS
BANK (THE "BANK"), ENDS SEPTEMBER 30, AND, UNLESS OTHERWISE INDICATED,
REFERENCES TO PARTICULAR YEARS ARE TO FISCAL YEARS ENDING SEPTEMBER 30 OF THE
YEAR INDICATED. AS USED HEREIN, THE TERM "COMPANY" REFERS TO BANK UNITED CORP.
AND ITS PREDECESSORS, AND ITS CONSOLIDATED SUBSIDIARIES, UNLESS OTHERWISE
INDICATED OR THE CONTEXT OTHERWISE REQUIRES.
THE COMPANY
The Company is a broad-based financial services provider to consumers and
businesses in Texas and other selected regional markets throughout the United
States. Through the Bank, the Company currently operates 70 Texas-based
community banking branches serving nearly 200,000 households and businesses,
nine commercial banking offices and a nationwide network of mortgage offices. At
September 30, 1996, the Company had assets of $10.7 billion, deposits of $5.1
billion and stockholders' equity of $531.0 million. The Company was the largest
publicly traded depository institution headquartered in Texas, in terms of both
assets and deposits, at September 30, 1996.
The Company operates in two business segments.
BANKING SEGMENT
-- COMMUNITY BANKING GROUP. The Community Banking Group's principal
activities include deposit gathering, consumer lending, small-business
banking and investment product sales. The Community Banking Group,
which has marketed itself under the name "Bank United" since 1993,
currently operates a 70-branch community banking network, a 24-hour
telephone banking center and a 66-unit ATM network, which together
serve as the platform for the Company's consumer and small business
banking activities. The community banking branch network includes 37
branches in the greater Houston area, 29 branches in the Dallas/Ft.
Worth metropolitan area, and two branches each in Austin and San
Antonio. Through its branch network, the Company maintains more than
440,000 accounts with an estimated 200,000 households and businesses.
See "Business -- Community Banking Group".
-- COMMERCIAL BANKING GROUP. The Commercial Banking Group provides credit
and a variety of cash management and other services to real estate and
related businesses. Business is solicited in Texas and in targeted
regional markets throughout the United States. The Commercial Banking
Group is expanding its products and industry specialties to include
health care lending, asset-based lending and other commercial and
industrial loan products. See "Business -- Commercial Banking Group".
-- FINANCIAL MARKETS GROUP. The Financial Markets Group manages the
Company's asset portfolio activities, including loan acquisition and
management and the securitization of loans. Additionally, under the
supervision of the Asset and Liability Committee (the "ALCO"), the
Financial Markets Group is responsible for the Company's investment
portfolio, for interest rate risk hedging strategies, and for securing
funding sources other than consumer and commercial deposits. See
"Business -- Financial Markets Group".
MORTGAGE BANKING SEGMENT
-- MORTGAGE BANKING GROUP. The Mortgage Banking Group principally engages
in three activities: retail mortgage originations, wholesale mortgage
originations and mortgage servicing. The Mortgage Banking Group
operates under the names "Bank United Mortgage" in Texas and Virginia
and "Commonwealth United Mortgage" elsewhere in the United States.
The Mortgage Banking Group originates and services first mortgage loans
for single family residences for both the Company's portfolio and for
investors. The Company's servicing portfolio at September 30, 1996 was
$13.2 billion. See "Business -- Mortgage Banking Group".
3
<PAGE>
BUSINESS STRATEGY
After initially obtaining assets and deposits through the acquisition of
failed thrifts and from the Resolution Trust Corporation (the "RTC"), the
Company's operating strategy historically emphasized traditional single
family mortgage lending and deposit gathering activities, with a focus on
minimizing interest rate and credit risk while maximizing the net value of the
Company's assets and liabilities. Over the past few years, however, the
Company's management has pursued a strategy designed to reduce its reliance on
its traditional thrift and mortgage banking lines of business by developing
higher margin consumer and commercial lending lines of business. During this
time, the Company has engaged in more aggressive marketing campaigns and
increased its portfolio of multi-family, residential construction, consumer and
commercial loans and the level of lower cost transaction and commercial deposit
accounts. While the pursuit of this strategy entails risks different than those
present in traditional single family lending lines of business, the Company
believes it has taken appropriate measures to manage these risks adequately. To
manage potential credit risk, the Company has developed comprehensive credit
approval and underwriting policies and procedures for these lines of business.
To offset operational and competitive risk, the Company has hired experienced
commercial bank professionals, trained other personnel to manage and staff these
businesses, and closely monitors the conduct and performance of the business. In
addition to its efforts to increase originations of commercial and consumer
loans, the Company has been increasing the retention of higher yielding single
family and multi-family mortgage loans that, in the past, may have been sold or
securitized. The Company intends to continue to pursue additional expansion
opportunities, including acquisitions, while maintaining adequate
capitalization. See "Risk Factors -- Evolution of Business" and " -- Reduced
Profitability of Mortgage Banking Business" and "Business -- Community Banking
Group" and " -- Commercial Banking Group".
BACKGROUND OF THE COMPANY
HISTORY
The Company was incorporated in Delaware in December 1988 as USAT Holdings
Inc. and became the holding company for the Bank upon the Bank's formation on
December 30, 1988. The Bank is a federally chartered savings bank, the deposits
of which are insured by the Savings Association Insurance Fund (the "SAIF"),
which is administered by the FDIC. In December 1996, the Company formed a new,
wholly owned, Delaware subsidiary, BNKU Holdings, Inc. ("Holdings"), which
owns directly all of the outstanding common stock of the Bank. The Company's
address is 3200 Southwest Freeway, Houston, TX 77027, and its phone number is
(713) 543-6500.
Through June 17, 1996 the Company was operated as a subsidiary of Hyperion
Holdings Inc., a Delaware corporation ("Hyperion Holdings"). During that
period, all of the outstanding shares of Hyperion Holdings were owned by
Hyperion Partners L.P., a Delaware Limited Partnership ("Hyperion Partners").
The general partner of Hyperion Partners is indirectly controlled by three
individuals, including Lewis S. Ranieri, who from the Company's organization in
1988 has served as Chairman of the Board of the Company and, until July 15,
1996, also as President and Chief Executive Officer ("CEO") of the Company and
Chairman of the Board of the Bank.
During June 1996, the Company was restructured (the "Restructuring") to
simplify the ownership structure of the Company in order to facilitate financial
and tax reporting, marketing of the Class A Common Stock and management of the
Company's operations. In August 1996, the Company completed the offering of
12,075,000 shares of Class A Common Stock (the "August Offering"). Of the
12,075,000 shares sold, 910,694 were sold by the Company, with the balance sold
by certain selling stockholders. Since the August Offering, the Class A Common
Stock has been listed on the The Nasdaq Stock Market's National Market (the
"NASDAQ") under the symbol "BNKU". In January 1997, the Company filed a
registration statement covering the sale of 10,208,610 shares of Class A Common
Stock which may be sold by certain of the Company's stockholders from time to
time following the expiration of lock-up agreements to which the shares are
subject, the first of which expires on February 10, 1997 (the "Common Stock
Offering").
4
<PAGE>
MANAGEMENT
Day-to-day operations of the Bank are directed by Barry C. Burkholder,
Chairman of the Board of the Bank and President and CEO of the Bank and the
Company, who brings over 20 years of commercial banking experience to the Bank,
with specific experience in consumer banking, mortgage banking and related
areas. The executive management group of the Bank consists of eight individuals
who have more than 20 years of related industry experience, the majority of
which comes from commercial banking. See "Management". Lewis S. Ranieri, who has
over 20 years of investment experience with particular expertise in the field of
mortgage-backed securities ("MBS"), serves as Chairman of the Board of the
Company and as a director of the Bank and provides strategic and managerial
advice to the Company. See "Risk Factors -- Dependence on Key Personnel" and
"Management -- Certain Relationships and Related Transactions".
FUTURE TAX BENEFITS
In connection with the acquisition from the Federal Savings and Loan
Insurance Corporation ("FSLIC") of certain of the assets and the assumption of
all the deposits and certain other liabilities of United Savings Association of
Texas ("Old USAT"), an insolvent thrift (the "Acquisition"), and the related
Assistance Agreement (as defined herein), the Company succeeded to and recorded
substantial net operating loss carryforwards ("NOLs"), which have resulted in
certain tax benefits. As of September 30, 1996, the Company had NOLs of $817
million available to reduce taxable income in future years. The Company's
ability to utilize these NOLs may be limited in certain circumstances. See
"Risk Factors -- Limitations on Use of Tax Losses", "Capitalization" and
Note 14 to the Consolidated Financial Statements. Pursuant to the Tax Benefits
Agreement (as defined herein), the Bank is required to pay to the FSLIC
Resolution Trust Fund (the "FRF") a specified portion of net tax benefits
obtained through the taxable year ending nearest to September 30, 2003. See
"Regulation -- Taxation -- FSLIC Assistance".
CLAIMS RELATED TO FORBEARANCE AGREEMENT
In connection with the Acquisition, the Federal Home Loan Bank Board (the
"FHLBB") approved a forbearance letter, issued on February 15, 1989 (the
"Forbearance Agreement") pursuant to which 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. Although the Bank has not had to rely on these forbearances
or waivers, the OTS has taken the position that the capital standards
subsequently prescribed in the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") apply to all savings institutions,
including those institutions that had been operating under previously granted
capital and accounting forbearances, and that FIRREA eliminated these
forbearances. The position of the OTS has adversely affected the Bank by
curtailing the growth and reducing the leverage contemplated by the terms of the
Forbearance Agreement.
In 1995, the Bank, the Company, and Hyperion Partners (collectively,
"Plaintiffs") filed suit against the United States in the Court of Federal
Claims for alleged failures of the United States to abide by the terms of the
Forbearance Agreement. The Company currently expects the trial of its case to
commence during the first quarter of fiscal 1998. While the Company expects
Plaintiffs' claims for damages to exceed $200 million, the Company is unable to
predict the outcome of the suit and the amount of judgment for damages, if any,
that may be awarded. The Company and the Bank have entered into an agreement
with Hyperion Partners acknowledging that the Company and the Bank are entitled
to receive 85% of the amount, if any, recovered as a result of the settlement of
or a judgment on such claims, and that Hyperion Partners is entitled to receive
15% of such amount. The agreement was approved by the disinterested directors of
the Company. The Company is also unable to predict the timing of the resolution
of its claims. Consequently, no assurances can be given as to the results of
this suit. See "Legal Proceedings".
5
<PAGE>
THE TENDER OFFER
A portion of the net proceeds of the Offering will be used by the Company
to finance an offer to purchase any and all of the outstanding Senior Notes
pursuant to the Tender Offer and, in connection therewith, to seek consents from
holders of the Senior Notes to amend the indenture pursuant to which the Senior
Notes were issued to delete substantially all of the restrictive covenants
contained therein. The Tender Offer will be conditioned upon there having been
validly tendered (and not withdrawn), prior to , 1997, not
less than a majority in aggregate principal amount of the Senior Notes
outstanding, receipt of consents of holders of the Senior Notes necessary to
approve the amendments described above, completion of the sale of the Notes
pursuant to the Offering, and certain other customary conditions. See "The
Tender Offer" and "Use of Proceeds".
6
<PAGE>
THE OFFERING
Issuer................................. The issuer of the Notes is Bank
United Corp., a Delaware corporation
and the ultimate parent company of
Bank United, a federally chartered
savings bank.
Securities Offered..................... $100,000,000 aggregate principal
amount of % Subordinated Notes due
2004 (the "2004 Notes") and
$120,000,000 aggregate principal
amount of % Subordinated Notes due
2007 (the "2007 Notes" and,
together with the 2004 Notes, the
"Notes") to be issued under an
indenture dated ,
1997, between the Company and
, as trustee (the
"Indenture").
Maturity Dates......................... The 2004 Notes mature on
, 2004 and the 2007
Notes mature on ,
2007.
Interest Payment Dates................. and of each year,
commencing
, 1997.
Redemption............................. The Notes may not be redeemed prior
to their maturity and no sinking fund
is provided for the Notes.
Ranking and Holding Company
Structure............................ The Notes will be unsecured
obligations of the Company and
subordinate in right of payment to
Senior Indebtedness and, in the event
of bankruptcy, Other Financial
Obligations of the Company, in the
manner and to the extent described
herein. The Notes will be effectively
subordinated to all existing and
future liabilities of the Company's
subsidiaries, including the Bank
Preferred Stock and the Bank's
obligations to its depositors and its
obligations to its trade and other
general and secured creditors. The
terms of the Notes will not limit
incurrence by the Company or its
subsidiaries of additional
liabilities or indebtedness,
including Senior Indebtedness and
Other Financial Obligations. At
September 30, 1996, after giving pro
forma effect to the Offering and the
Tender Offer as set forth under
"Capitalization", the Company and
its consolidated subsidiaries,
including the Bank, would have had
outstanding approximately $
million of total indebtedness, of
which $ million would have been
Senior Indebtedness. See "De-
scription of Notes".
Events of Default/Limited Right of
Acceleration......................... Upon the occurrence of certain events
involving the bankruptcy, insol-
vency, reorganization, receivership
or similar proceedings of the Com-
pany or the Bank, either the Trustee
or the holders of not less than 25%
in aggregate principal amount of the
outstanding Notes may declare the
principal of the Notes, together with
any accrued and unpaid interest, to
be immediately due and payable. The
Notes do not otherwise provide for
any right of acceleration of the
payment of principal thereof. See
"Description of Notes -- Events of
Default and Waiver Thereof" and
" -- Limited Right of
Acceleration".
Certain Covenants...................... The Indenture contains certain
covenants with respect to, among
other things, (i) maintenance of
status of subsidiaries as insured
depository institutions; (ii)
restrictions on dividends in excess
of applicable regulatory minimum
capital requirements; and (iii)
consolidation, merger or sale of
assets. However, there is no right of
acceleration in the case of a breach
in the performance of any covenant of
the Company. See "Description of
Notes".
Risk Factors........................... Holding Company Structure;
Restrictions on Ability of
Subsidiaries to Pay Dividends;
General Business Risks; Evolution of
Business; Reduced Profitability of
the Mortgage Banking Group; Interest
Rate Risk; Competition; Funding and
Liquidity; Concentration of Loan
Portfolio; Active Purchaser of Loan
Portfolios; Limitations on Use of Tax
Losses; Regulation; Federal Programs;
Dependence on Key Personnel;
Liability Under Representations and
Warranties and Other Credit Risks;
Litigation; and Absence of a Public
Market for the Notes.
Use of Proceeds........................ Up to $ to purchase and
retire the Senior Notes and to pay
related costs and expenses; and up to
$ to enhance the equity
capital of the Bank. The Bank will
use the proceeds of such investment
for general corporate purposes, which
may include the acquisition of the
stock or assets of financial
institutions and the funding of
internal growth. See "The Tender
Offer" and "Use of Proceeds".
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary selected historical consolidated
financial data of the Company. The information set forth below should be read in
conjunction with the consolidated financial statements of the Company and the
Notes thereto set forth elsewhere herein (the "Consolidated Financial
Statements") and "Management's Discussion and Analysis of Financial Condition
and Results of Operations". The statement of operations data set forth below
for each of the three years ended September 30, 1996 and the statement of
financial condition data at September 30, 1996 and 1995 are derived from, and
are qualified by reference to, the audited Consolidated Financial Statements.
The statement of operations data set forth below for the years ended September
30, 1993 and 1992 and the statement of financial condition data at September 30,
1994, 1993 and 1992 are derived from the Company's audited consolidated
financial statements.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA
Total assets......................... $ 10,712,377 $ 11,983,534 $ 8,910,161 $ 8,440,556 $ 6,255,283
Loans................................ 7,519,488 8,260,240 5,046,174 4,862,379 4,101,716
Mortgage-backed securities........... 1,657,908 2,398,263 2,828,903 2,175,925 833,425
Deposits............................. 5,147,945 5,182,220 4,764,204 4,839,388 4,910,760
Federal Home Loan Bank advances(1)... 3,490,386 4,383,895 2,620,329 2,185,445 632,345
Securities sold under agreements to
repurchase and federal funds
sold............................... 832,286 1,172,533 553,000 310,000 --
Long-term debt(1).................... 115,000 115,000 115,000 115,000 106,090
Minority interest -- Bank Preferred
Stock(2)........................... 185,500 185,500 85,500 85,500 --
Total stockholders' equity........... 531,043 496,103 451,362 389,203 232,373
STATEMENT OF OPERATIONS DATA
Interest income...................... $ 812,312 $ 746,759 $ 494,706 $ 482,490 $ 502,854
Interest expense..................... 584,778 552,760 320,924 300,831 348,291
------------- ------------- ------------ ------------ ------------
Net interest income............. 227,534 193,999 173,782 181,659 154,563
Provision for credit losses.......... 16,469 24,293 6,997 4,083 21,133
------------- ------------- ------------ ------------ ------------
Net interest income after
provision for credit losses... 211,065 169,706 166,785 177,576 133,430
Non-interest income.................. 110,036 114,981 118,889 146,691 103,790
Non-interest expense................. 253,265 194,576 199,593 201,964 180,415
------------- ------------- ------------ ------------ ------------
Income before income taxes,
minority interest and
extraordinary loss............ 67,836 90,111 86,081 122,303 56,805
Income tax expense (benefit)......... (75,765) 37,415 (31,899) (26,153) 200
Less minority interest and payments
in lieu of dividends(2)(3)......... 24,666 10,977 9,010 6,537 --
Extraordinary loss(4)................ -- -- -- 14,549 --
------------- ------------- ------------ ------------ ------------
Net income...................... $ 118,935 $ 41,719 $ 108,970 $ 127,370 $ 56,605
============= ============= ============ ============ ============
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CERTAIN RATIOS AND OTHER DATA(5)
Operating earnings(6)................ $ 114,659 $ 91,295 $ 75,514 $ 77,105 $ 50,024
Return on average assets(7).......... 1.28% 0.50% 1.42% 1.83% 0.89%
Return on average common equity...... 23.06 8.80 26.32 44.87 28.18
Stockholders' equity to assets....... 4.96 4.14 5.07 4.61 3.71
Tangible stockholders' equity to
tangible assets.................... 4.81 3.93 4.68 4.14 2.58
Net yield on interest-earning
assets(8).......................... 2.10 1.92 2.20 2.61 2.60
Non-interest expense to average total
assets............................. 2.26 1.86 2.41 2.76 2.85
Efficiency ratio(9).................. 74.97 59.50 66.38 65.11 63.98
Allowance for credit losses to net
nonaccrual loans................... 44.24 48.74 30.73 71.71 74.04
Allowance for credit losses to total
loans.............................. 0.52 0.44 0.46 0.61 0.68
Net loan charge-offs to average
loans.............................. 0.17 0.16 0.30 0.05 0.07
Nonperforming assets to total
assets............................. 1.12 0.84 1.09 0.72 0.89
Regulatory capital ratios of the
Bank(10)
Tangible capital................ 6.57 6.20 6.01 6.17 4.24
Core capital.................... 6.64 6.29 6.17 6.43 5.04
Total risk-based capital........ 13.09 13.45 14.02 14.87 12.19
Number of community banking
branches........................... 70 65 62 62 65
Number of commercial banking
origination offices................ 9 9 5 3 2
Number of mortgage banking
origination offices................ 85 122 145 109 93
Single family servicing portfolio.... $ 13,246,848 $ 12,532,472 $ 8,920,760 $ 8,073,226 $ 7,187,000
Single family originations(11)....... $ 3,762,198 $ 3,447,250 $ 5,484,111 $ 6,737,762 $ 6,118,363
Net income available for Bank's
common stock....................... $ 115,943 $ 52,108 $ 116,108 $ 157,134 $ 74,505
Ratio of earnings to fixed
charges(12)........................ 1.11x 1.16x 1.26x 1.40x 1.16x
Ratio of earnings to combined fixed
charges and Bank Preferred Stock
Dividends(12)...................... 1.06 1.13 1.21 1.35 1.16
</TABLE>
- ------------
(1) Long-term debt is comprised of Senior Notes and other long-term debt.
Long-term borrowings exclude Federal Home Loan Bank ("FHLB") advances
with maturities greater than one year. FHLB advances with maturities
greater than one year were $926,291, $1,992,010, $782,129, $708,945, and
$55,445 at September 30, 1996, 1995, 1994, 1993, and 1992, respectively.
See Note 9 to the Consolidated Financial Statements.
(2) During fiscal 1993, the Bank issued its 10.12% Noncumulative Preferred
Stock, Series A, and, during fiscal 1995, the Bank issued its 9.60%
Noncumulative Preferred Stock, Series B (the Preferred Stock, Series A and
Series B, is collectively referred to as the "Bank Preferred Stock").
None of the shares of Bank Preferred Stock are owned by the Company. All of
the outstanding shares of common stock of the Bank are owned by Holdings, a
wholly owned subsidiary of the Company.
(3) In connection with the Acquisition, the Bank issued to the FDIC, as manager
of the FRF (the "FDIC-FRF"), a warrant to acquire 158,823 shares of
common stock of the Bank at an exercise price of $0.01 per share (the
"Warrant"). Payments in lieu of dividends were related to the Warrant. In
August 1996, the FDIC-FRF surrendered a portion of the Warrant for a cash
payment of $6.1 million, exercised the remainder of the Warrant and
immediately exchanged the shares of common stock of the Bank it received
for 1,503,560 shares of Common Stock of the Company. The FDIC-FRF sold all
of these shares in the August Offering. See "Business -- The Assistance
Agreement -- Warrant Agreement".
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
9
<PAGE>
(4) Reflects costs and charges associated with the repayment of the note
payable to a related party and the 15.75% Notes (as defined, see
"Management's Discussion and Analysis -- Capital Resources and
Liquidity -- Notes Payable") and the issuance of the Senior Notes.
(5) Ratio, yield, and rate information are based on weighted average daily
balances for fiscal 1996, 1995, 1994, and 1993 and average monthly balances
for prior periods, with the exception of return on average common equity,
which is based on average monthly balances for all periods presented.
(6) Operating earnings represents income, including net gains (losses) on the
sales of single family servicing rights and single family warehouse loans,
before taxes, minority interest, and extraordinary loss and excludes net
gains (losses) on securities, MBS, and other loans, and excludes certain
non-recurring items in fiscal 1996. See "Management's Discussion and
Analysis -- Discussion of Results of Operations" and
"Business -- General".
(7) Return on average assets represents income before minority interest and
extraordinary loss, divided by average total assets.
(8) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(9) Efficiency ratio represents non-interest expenses (excluding goodwill
amortization), divided by net interest income plus non-interest income,
excluding net gains (losses) on securities, MBS, and other loans.
(10) Regulatory capital ratios presented are those of the Bank. No regulatory
capital ratios are presented for the Company because there are no such
applicable requirements for savings and loan holding companies such as the
Company. For a discussion of the regulatory capital requirements applicable
to the Bank, see "Regulation -- Safety and Soundness
Regulations -- Capital Requirements".
(11) Includes $129.0 million, $135.3 million, $100.3 million, $116.5 million,
and $127.0 million of brokered and purchased loans for fiscal 1996, 1995,
1994, 1993, and 1992, respectively.
(12) For purposes of computing the ratio of earnings to fixed charges, and the
ratio of earnings to combined fixed charges and Bank Preferred Stock
dividends, "earnings" represent the pre-tax income from continuing
operations plus fixed charges, net of interest capitalized and dividends
paid on the Bank's Preferred Stock. "Fixed charges" represent interest
(whether expensed or capitalized), the amortization of total debt and that
portion of rentals considered to be representative of the interest factor
(deemed to be one-third of rentals).
10
<PAGE>
RISK FACTORS
Investment in the Notes involves certain risks. Prospective purchasers
should carefully consider the following risk factors, in addition to the other
information included in this Prospectus, when evaluating the Company and its
business in making an investment decision.
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON ABILITY OF SUBSIDIARIES TO PAY
DIVIDENDS
The Company, through Holdings, owns all the outstanding common stock of the
Bank. As a holding company without significant assets other than its indirect
ownership of all of the common stock of the Bank, the Company's ability to meet
its cash obligations, including debt service on the Notes, is dependent upon the
payment of dividends by the Bank on its common stock. The declaration of
dividends by the Bank is subject to the discretion of the Board of Directors of
the Bank, the terms of the Bank Preferred Stock, and applicable regulatory
requirements. While it is the present intention of the Board of Directors of the
Bank to declare dividends in an amount sufficient to provide the Company
(through Holdings) with the cash flow necessary to meet its debt service
obligations in respect of the Notes, no assurance can be given that
circumstances which would limit or preclude the declaration of such dividends
will not exist in the future.
The Notes will be subordinated obligations of the Company and will rank
junior to all Senior Indebtedness (as defined) of the Company. The Notes also
will rank junior to all Other Financial Obligations (as defined) in the
circumstances described in the Indenture and will be effectively subordinated to
all indebtedness and other liabilities and commitments (including deposits,
trade payables, lease obligations and obligations to holders of preferred stock)
of the Company's subsidiaries, including the Bank. Any right of the Company to
receive assets of any of its subsidiaries upon their liquidation or
reorganization (and the consequent right of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors.
The Bank currently has outstanding 7,420,000 shares of the Bank Preferred
Stock, with an aggregate liquidation preference of $185.5 million. The annual
dividend obligations on the Bank Preferred Stock is approximately $18.25
million. While the Bank Preferred Stock is noncumulative, dividends may not be
paid on the Bank Common Stock if full dividends on the Bank Preferred Stock have
not been paid for the four most recent quarterly dividend periods. The Bank is
currently in compliance with this requirement. The ability of the Company to
make payments on the Notes is contingent on the Bank having sufficient dividend
capacity under applicable regulatory guidelines to pay both the amount of such
dividends to the Company (through Holdings), plus full dividends on the Bank
Preferred Stock. If for any reason the Bank failed to declare and pay full
dividends on the Bank Preferred Stock, the Company would not receive any cash
dividends from Holdings, from which the Company could pay debt service on the
Notes, until four full quarterly dividends on the Bank Preferred Stock had been
paid. Unless an alternative source of funding for the Company were secured, as
to which there can be no assurance and for which no arrangements have been made,
this would likely result in a default by the Company in payment on the Notes.
See "Description of Notes -- Events of Default".
As of September 30, 1996, the Bank would have been permitted to pay $152.7
million of dividends on its capital stock without prior approval of the OTS. See
"Regulation -- Safety and Soundness Regulations -- Capital
Requirements -- Capital Distributions", "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Capital Resources and
Liquidity" and Notes 11, 15 and 16 to the Consolidated Financial Statements. If
the Company were to undergo an Ownership Change (as defined herein), this amount
would be significantly reduced. See "-- Limitations on Use of Tax Losses".
GENERAL BUSINESS RISKS
The Company's business is subject to various material business risks. For
example, changes in prevailing interest rates can have significant effects on
the Company's business. Some of the risks to which the Company's business are
subject may become more acute in periods of economic slowdown or recession.
During such periods, payment delinquencies and foreclosures generally increase
and could result in an increased incidence of claims and legal actions against
the Company. In addition, such conditions could lead to a potential decline in
demand for the Company's products and services.
11
<PAGE>
EVOLUTION OF BUSINESS
The Company's strategy in recent years has been to emphasize and grow its
Community Banking Group and Commercial Banking Group and to reduce the
significance over time of its residential mortgage lending business. See
"Prospectus Summary -- Business Strategy". The Community Banking Group and the
Commercial Banking Group are expected to continue to represent a growing portion
of the Company's business. This strategic shift has occurred at a time of
increasing competitive pressures in the mortgage banking business. Community and
commercial banking activities, while potentially more profitable, generally
entail a greater degree of credit risk than does single family lending, the
historical focus of the Company. Specifically, the performance of commercial,
construction and small business loans is more sensitive to regional and local
economic conditions. Collateral valuation requires more detailed analysis and is
more variable than residential mortgage lending. Loan balances for these types
of loans are typically larger than those for residential mortgage loans and,
thus, when there are defaults and losses, they can be greater on a per loan
basis than those for residential mortgages. Similarly, loss levels are more
difficult to predict. Commercial and community banking typically includes a
greater amount of unsecured lending, which presents different risks than secured
residential mortgage lending. The sources of repayment are not related to
collateral and can be more difficult to understand and pursue. Similarly, loan
default prevention and collection for commercial and community banking also can
be more complex and difficult than that for residential mortgage lending. For
example, business loans are not typically made with standardized loan documents.
Thus, the opportunity for mistakes and documentation risks are increased.
Moreover, a liquid secondary market for most types of commercial and business
loans does not exist. The operational, interest rate, and competitive risks
associated with commercial and community banking are different than those for
residential mortgage lending and require skills and experience of management and
staff different than that for residential mortgage lending. When evaluating such
credits, more factors need to be considered. Management must be more
knowledgeable of a wider variety of business enterprises and industries that
borrow money. Intensive, ongoing customer contact is required, as well as
complex analysis of financial statements at the time of loan approval and on an
ongoing basis. Servicing these customers requires closer monitoring and more
individualized analysis than does residential mortgage lending. Commercial and
community banking pricing is very competitive and more subjective than that for
residential mortgage lending.
REDUCED PROFITABILITY OF THE MORTGAGE BANKING GROUP
The Company has been in the process of evaluating its strategic
alternatives with respect to its mortgage banking business in order to mitigate
the negative effect on profitability resulting from increased competition in the
loan origination business. Increased competition has resulted in the Company
receiving lower fees and lower rates on originated loans. Additionally,
profitability is impacted by fluctuations in the volume of originations due to
changes in market interest rates. In June 1996, the Company initiated a
profitability improvement program in an effort to reduce the amount of fixed
charges necessary to operate its loan origination business in response to lower
levels of fee revenue and to reduce the volume of staff necessary to process
loan applications and to complete the loan origination process. The plan
included the closure and consolidation of 24 mortgage origination branches, the
closure of 6 regional operation centers, and a workforce reduction of
approximately 265 employees. As a result of this plan, through December 31,
1996, 39 mortgage origination branches and 6 regional operation centers had been
closed and the workforce was reduced by 243. At December 31, 1996, 80 mortgage
origination branches remained open. The plan also included a process and
operational restructuring, as well as changes in management structure and
compensation, all designed to create operational efficiencies and promote
profitability. As a result of the office closures, workforce reductions, and
related actions, the Company recorded a $10.7 million restructuring charge and
recorded $1.8 million of other expenses related to the mortgage origination
business in June 1996. The restructuring charge includes estimated costs for
severance and other benefits of $800,000, asset write-downs of $5.3 million,
lease termination costs of $3.4 million, and other costs of $1.2 million. The
non-cash write-off of $5.3 million reflects $3.5 million of goodwill and $1.8
million of fixed assets and leasehold improvements written off in connection
with the closed production offices. Implementation of the profitability
improvement plan has resulted in a decrease in the fixed charges necessary to
operate the loan origination business. However, the overall improvements in
profitability projected by the plan have not yet been achieved, and it is too
early to determine if they will ultimately be achieved. Therefore no assurance
can be given regarding the efficacy of the profitability improvement plan or the
timing or impact of any further restructuring (including a possible future sale
or liquidation of the Company's residential mortgage lending business). See
12
<PAGE>
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Discussion of Results of Operations -- Mortgage Banking
Restructuring".
INTEREST RATE RISK
The Company's net interest income is the differential or "spread" between
the interest earned on loans and investments and the interest paid on deposits,
borrowings and notes payable. The Company has traditionally managed its business
to limit its overall exposure to changes in interest rates; however, under the
Company Board's current policies, management has more latitude to increase the
Company's interest rate sensitivity position within certain limits. See
"Prospectus Summary -- Business Strategy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations". As a result,
changes in market interest rates may have a greater impact on the Company's
financial performance in the future than they have had historically. See
"Business -- Asset and Liability Management".
An increase in the general level of interest rates may affect the Company's
net interest spread due to the periodic caps which limit the interest rate
change on the Company's MBS and loans that pay interest at adjustable rates.
Additionally, an increase in interest rates may, among other things, reduce the
demand for loans and the Company's ability to originate loans. A decrease in the
general level of interest rates may affect the Company through, among other
things, increased prepayments on its loan and servicing portfolios and increased
competition for deposits. Accordingly, changes in the level of market interest
rates affect the Company's net interest spread, loan origination volume, loan
and servicing portfolios, and the overall results of the Company.
COMPETITION
The Company experiences substantial competition both in attracting and
retaining deposits and in making loans. Its most direct competition for deposits
historically has come from other thrift institutions, commercial banks and
credit unions doing business in the Houston and Dallas/Ft. Worth metropolitan
areas. The Company competes primarily with seven commercial banks and five
thrift institutions, all of which have a substantial presence in the same
markets as the Company. In addition, as with all banking organizations, the
Company has experienced increasing competition from nonbanking sources. For
example, the Company also competes for funds with full service and discount
broker-dealers and with other investment alternatives, such as mutual funds and
corporate and governmental debt securities. The Company's competition for loans
comes principally from other thrift institutions, commercial banks, mortgage
banking companies, consumer finance companies, insurance companies and other
institutional lenders. The Company and its peers compete primarily on the basis
of the price at which products are offered and on customer service. A number of
institutions with which the Company competes for deposits and loans have
significantly greater assets and capital than the Company and some also may have
significantly lower deposit insurance costs. See "Business -- Competition".
FUNDING AND LIQUIDITY
In recent years, the Company has relied primarily on collateralized
borrowings, borrowings from FHLB of Dallas ("FHLB Dallas") and borrowings on
securities sold under agreements to repurchase ("reverse repurchase
agreements") to fund its asset growth. At September 30, 1996, such borrowings
funded 45% of the Company's assets. The Company's collateralized borrowings have
an average maturity of approximately six months.
The Company borrows funds from the FHLB Dallas under a security and pledge
agreement that restricts the amount of such borrowings to 65% of fully disbursed
single family loans, unless assets are physically pledged to the FHLB Dallas,
not to exceed 45% of total assets in any event. At September 30, 1996, the
amounts available under these restrictions were $4.3 billion and $4.8 billion,
respectively. The Company had $3.5 billion of outstanding advances at September
30, 1996.
The Company's ability to borrow on reverse repurchase agreements is limited
to the amount and market value of collateral that is available to collateralize
through reverse repurchase agreements. At September 30, 1996, the Company had
$1.2 billion in such collateral, $1.0 billion of which was collateralizing such
reverse repurchase agreements. See "-- Interest Rate Risk". There can be no
assurance that the Company will continue to be able to arrange collateralized
borrowings or other borrowing arrangements to fund continued growth in its
assets.
13
<PAGE>
CONCENTRATION OF LOAN PORTFOLIO
The Company's current single family mortgage loan portfolio is concentrated
in certain geographical regions, particularly California. The performance of
such loans may be affected by changes in local economic and business conditions.
The California economy since the early 1990s has experienced an economic
recession, although the economy has not shown signs of further deterioration.
Unfavorable or worsened economic conditions throughout California could have a
material adverse effect on the Company's financial condition and results of
operations. See "Business -- Loan Portfolio".
ACTIVE PURCHASER OF LOAN PORTFOLIOS
The Company has been an active purchaser and securitizer of residential
mortgage loans originated by other financial institutions. See
"Business -- Financial Markets Group". While the Company intends to continue
to pursue this strategy on a selective basis, no assurance can be given as to
the continued availability of portfolio acquisition opportunities or the
Company's ability to obtain such portfolios on favorable terms.
When purchased by the Company, loan portfolios generally do not contain
delinquent or defaulted loans and may contain loans that have been outstanding
for a relatively short period of time. Consequently, the delinquency and loss
experience of the Company's loan portfolios to date are not necessarily
indicative of future results.
LIMITATIONS ON USE OF TAX LOSSES
As of September 30, 1996, the Company had NOLs of $817 million available to
reduce taxable income in future years. Such tax deductions would be subject to
significant limitation under Section 382 of the Internal Revenue Code of 1986,
as amended (the "Code") if the Company undergoes an ownership change (as
defined herein, an "Ownership Change"). In the event of an Ownership Change,
Section 382 of the 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 of the Code for any post-change
year would be determined by multiplying the value of the Company's stock
(including both common stock and preferred stock) at the time of the Ownership
Change by the applicable long-term tax exempt rate (which was 5.8% for September
1996). Any unused annual limitation may be 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 that are recognized in the
five-year period after the change. Under current conditions, if an Ownership
Change were to occur, the Company's annual NOL utilization would be limited to
approximately $32 million. If the Company were to undergo an Ownership Change, a
significant portion of the $101.7 million tax benefit recognized in the fiscal
year ended September 30, 1996 would be required to be reversed, with a
corresponding charge to earnings. The amount of the charge to earnings would
decline as the Company utilizes its NOLs. See "Regulation -- Taxation -- Net
Operating Loss Limitations" for a description of the events that would
constitute an Ownership Change.
Although the Company has attempted to protect against a future Ownership
Change that is not initiated by the Company by imposing in the Company's
Restated Certificate of Incorporation (the "Certificate") and the Company's
By-Laws (the "By-Laws") limitations on disqualifying transfers at any time
during the three years following the August Offering, these restrictions are
incomplete since the Company cannot, consistent with NASDAQ requirements,
prevent the settlement of transactions through NASDAQ, and because the
prohibitions do not limit transactions in the securities of the holders of 5% of
the Common Stock that could give rise to ownership shifts within the meaning of
the applicable Section 382 rules. Moreover, the Board of Directors of the
Company retains the discretion to waive these limitations or to take certain
other actions that could trigger an Ownership Change, including through the
issuance of additional shares of Common Stock in subsequent public or private
offerings or through subsequent merger or acquisition transactions.
Because the Company has utilized a substantial portion of its available
ownership limitation in connection with the August Offering, the Company may not
be able to engage in significant transactions that would create a further shift
in ownership within the meaning of Section 382 of the Code within the three-year
period following the August Offering without triggering an Ownership Change.
There can be no assurance that future actions on the part of the Company's
stockholders or the Company itself will not result in the occurrence of an
Ownership Change. See "Regulation -- Taxation -- Net Operating Loss
Limitations".
14
<PAGE>
REGULATION
Both the Company, as a savings and loan holding company, and the Bank, as a
federal stock savings bank, are subject to significant regulation. Statutes and
regulations now affecting the Company and the Bank, respectively, may be changed
at any time, and the interpretation of these statutes and regulations by
examining authorities is also subject to change. There can be no assurance that
future changes in the regulations or in their interpretation will not adversely
affect the business of the Company. As a savings and loan holding company, the
Company is subject to regulation and examination by the OTS. As a federal
savings bank, the Bank is subject to examination from time to time by the OTS,
its primary regulator, and the FDIC, as administrator of the Bank Insurance Fund
(the "BIF") and the SAIF. There can be no assurance that the OTS or the FDIC
will not, as a result of such examinations or otherwise, impose various
requirements or regulatory sanctions upon the Bank or the Company, respectively.
See "Regulation". If the Company were to become subject to regulation as a
bank holding company by the Board of Governors of the Federal Reserve Systems
(the "Board of Governors"), whether as a result of the consolidation into the
Board of Governors of all regulatory powers over financial institutions or some
other occurrence, the Company would become subject to capital requirements and
limitations on the types of business activities in which it may engage that are
not currently applicable to it as a savings and loan holding company. If this
were to occur, the Company believes that it would be permitted to continue its
activities and operations substantially as currently conducted and that the
Notes would constitute Tier 2 Capital, as currently defined by the regulations
of the Board of Governors.
FEDERAL PROGRAMS
The continuation of programs administered by the Federal National Mortgage
Association (the "FNMA"), the Federal Home Loan Mortgage Corporation (the
"FHLMC") and the Government National Mortgage Association (the "GNMA"),
which facilitate the issuance of MBS, as well as the Company's continued
eligibility to participate in such programs, enhances the Company's ability to
generate funds by sales of mortgage loans or MBS. A portion of the Company's
business is also dependent upon the continuation of various programs
administered by the Federal Housing Administration (the "FHA"), which insures
mortgage loans, and the Department of Veterans' Affairs (the "VA"), which
partially guarantees mortgage loans.
Any discontinuation of, or significant reduction in, the operation of such
programs would have a material adverse effect on the Company's mortgage banking
operations. The Company expects to remain eligible to participate in such
programs; however, any significant impairment of its eligibility could have a
material adverse impact on its operations. See "Business -- Mortgage Banking
Group".
DEPENDENCE ON KEY PERSONNEL
The Company and the Bank are managed by a small number of senior management
and operating personnel, the loss of certain of whom could have a material
adverse effect on the Company. See "Management" for detailed information on
the Company's management and directors. The key employees of the Company are
Messrs. Burkholder, Nocella, Heffron, Bender and Coben. The Company does not
maintain key person insurance for any of these individuals. The primary
retention vehicles used by the Company are employment agreements or letters and
participation in the Executive Management Compensation Program and the 1996
Stock Incentive Plan.
Lewis S. Ranieri serves as non-executive Chairman of the Company Board and
a director of the Bank. At the time of the August Offering, the Company entered
into a three-year consulting agreement with Mr. Lewis Ranieri, under which Mr.
Ranieri provides strategic and managerial advice to the Company in addition to
his continuing role as non-executive Chairman of the Company and a director of
the Bank. While the Company has entered into a consulting agreement with Mr.
Ranieri, he may devote a substantial amount of time to other business ventures,
including activities which are competitive with the Company, through Hyperion
Partners II L.P., a Delaware limited partnership ("Hyperion Partners II") and
its affiliates and otherwise. While the Company does not believe that the loss
of Mr. Ranieri's services would have a material adverse effect on the day-to-day
operations of the Company, the loss of the perspective afforded by Mr. Ranieri's
market experience, contacts and insight would be difficult for the Company to
replace. In addition, three other directors of the Company, Ms. Sloan, Mr. Shay
and Mr. Golush, also have an economic interest in Hyperion Partners II. See
"Security Ownership of Certain Beneficial Owners and Management -- Certain
Relationships and Transactions".
15
<PAGE>
LIABILITY UNDER REPRESENTATIONS AND WARRANTIES AND OTHER CREDIT RISKS
In the ordinary course of business, the Company has liability under
representations and warranties made to purchasers and insurers of mortgage loans
and to purchasers of mortgage servicing rights ("MSRs"). In connection with
MSRs that the Company purchases, it may have liability as a successor to
third-party originators' representations and warranties. Under certain
circumstances, the Company may become liable for the unpaid principal and
interest on defaulted loans if there has been a breach of representations or
warranties. In the case of any mortgage loans found to be defective with respect
to representations or warranties made or succeeded to by the Company, the
Company may be required to repurchase such mortgage loans, with any subsequent
loss on resale or foreclosure being borne by the Company. The Company's losses
from breaches of representations and warranties have not been material to date.
LITIGATION
The operations of financial institutions, such as the Company, are subject
to substantial statutory and regulatory compliance obligations. These
requirements are complex, and even inadvertent noncompliance could result in
liability. During the past several years, numerous individual claims and
purported consumer class action claims were commenced against a number of
financial institutions, their subsidiaries, and other mortgage lending
institutions, alleging violations of various statutory and regulatory provisions
relating to mortgage lending and servicing, including the Truth in Lending Act
(the "TILA"), the Real Estate Settlement Procedures Act (the "RESPA"), the
Equal Credit Opportunity Act (the "ECOA"), the Fair Housing Act (the "FH
Act") and various state laws. The Bank has had asserted against it one putative
class action claim under the RESPA and three separate putative class action
claims involving the Bank's loan servicing practices. Management does not expect
these claims, in the aggregate, to have a material adverse impact on the
Company's financial condition, results of operation, or liquidity.
Maxxam, Inc. ("Maxxam") has filed a petition for review in the United
States Court of Appeals for the Fifth Circuit and a motion to intervene in the
U.S. District Court for the Southern District of Texas, each challenging the
December 30, 1988 order of the FSLIC approving the Acquisition. See "The
Company -- History". Maxxam contends that it should have been selected as the
winning bidder. In its brief to the Court of Appeals, Maxxam has asserted that
the court should order the OTS "to award Bank United to Maxxam" and that the
Company would bear no harm in that event because it is entitled to full
indemnification by the FDIC-FRF pursuant to the Assistance Agreement (as
defined). On December 10, 1996, the Fifth Circuit Court, in a PER CURIAM opinion
and order, affirmed the order approving the Acquisition in all respects. The
time for appeal to the Supreme Court of the United States has not yet expired,
and the Company does not know whether Maxxam will appeal the Fifth Circuit
decision. Management of the Company believes, after consultation with legal
counsel, that Maxxam's claims for relief are barred by applicable time limits,
have no basis under existing law, and will not have a material adverse effect on
the Bank's or the Company's financial condition, results of operations or
liquidity. See "Legal Proceedings -- Maxxam, Inc.".
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
There can be no assurance as to the liquidity of any market for the Notes
that may develop, the ability of holders of the Notes to sell their Notes, or
the prices at which holders of the Notes would be able to sell their Notes. If
such market were to exist, the Notes could trade at prices higher or lower than
their initial public offering price, depending on a variety of factors,
including prevailing interest rates, the Company's operating results and the
market for similar securities. The Underwriters have advised the Company that
they currently intend to make a market in the Notes. However, the Underwriters
are not obligated to do so, and any market making activity with respect to the
Notes may be suspended or discontinued at any time without notice. The Company
does not intend to apply for listing of the Notes on any securities exchange.
16
<PAGE>
THE COMPANY
GENERAL
The Company is a broad-based financial services provider to consumers and
businesses in Texas and other selected regional markets throughout the United
States. Through the Bank, the Company currently operates 70 Texas-based
community banking branches serving nearly 200,000 households and businesses,
nine commercial banking offices and a nationwide network of mortgage offices
that originated $3.8 billion of single family mortgage loans during fiscal 1996.
At September 30, 1996, the Company had assets of $10.7 billion, deposits of $5.1
billion and stockholders' equity of $531.0 million. The Company was the largest
publicly traded depository institution headquartered in Texas, in terms of both
assets and deposits, at September 30, 1996.
The Bank is a federally chartered savings bank, the deposits of which are
insured by the SAIF, which is administered by the FDIC. In December 1996, the
Company formed a new, wholly owned, Delaware subsidiary, Holdings. After
acquiring all the common stock of Holdings, the Company contributed all the
common stock of the Bank to Holdings, and Holdings assumed the obligations of
the Company's Senior Notes. As a result of these transactions, Holdings is the
sole direct subsidiary of the Company and the Bank is the sole direct subsidiary
of Holdings. In conjunction with the formation of Holdings, the Company's
corporate headquarters were relocated from Uniondale, New York to Houston,
Texas.
HISTORY
The Company was incorporated in Delaware on December 19, 1988 as USAT
Holdings Inc. and became the holding company for the Bank upon the Bank's
formation on December 30, 1988. In the Acquisition, the Company initially
acquired from the FSLIC certain of the assets and assumed all the deposits and
certain other liabilities of Old USAT, an insolvent thrift. In connection with
the Acquisition, the Company entered into an agreement which, among other
things, provided for federal financial assistance to the Bank (the "Assistance
Agreement"). On December 23, 1993, the Company and the FDIC entered into an
agreement providing for the termination of the Assistance Agreement. See
"Business -- The Assistance Agreement".
Immediately after the Acquisition, the Bank operated 19 banking branches,
primarily in the greater Houston metropolitan area, with no significant loan
origination capabilities. Through both acquisitions and internal growth, the
Bank has substantially expanded its Texas community banking branch network,
built a nationwide mortgage banking business, and established itself as a
provider of a broad array of financial products, including commercial banking
services and products. In 1990, 1991, and 1992, the Bank entered into various
agreements with the RTC, whereby the Bank purchased assets approximating $1.2
billion and assumed certain liabilities, primarily deposit liabilities
approximating $4.3 billion, of six thrift institutions in RTC receivership. In
connection with these acquisitions, the Bank received cash from the RTC. The
amount of cash received from the RTC was based on the amount by which the sum of
the liabilities assumed exceeded the sum of the market values of the assets
purchased, less a purchase premium. As a result of federal legislation, the RTC
no longer exists. In 1990, the Bank consummated its agreement to purchase
certain assets and assume certain liabilities relating to the loan origination
operations of Commonwealth Mortgage of America, L.P. Since July 1992, and
particularly in 1994, the Bank has entered into agreements to purchase several
mortgage origination networks. The Company intends to continue to pursue
additional community and commercial banking expansion opportunities, including
through acquisitions, while maintaining adequate capitalization.
Through June 17, 1996 the Company was operated as a subsidiary of Hyperion
Holdings. During that period, all of the outstanding shares of Hyperion Holdings
were owned by Hyperion Partners. The general partner of Hyperion Partners is
indirectly controlled by three individuals, including Lewis S. Ranieri, who,
from December 1988, has served as Chairman of the Company Board and, until July
15, 1996, also as President and CEO of the Company and Chairman of the Board of
the Bank. Subsequent to the completion of the Restructuring and the August
Offering, the Company's Class A Common Stock has been listed on the NASDAQ under
the symbol "BNKU".
17
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offering are estimated to be $ million. The
Company will use up to $ million of the net proceeds of the Offering to
purchase and retire all of the Senior Notes that are tendered to and accepted by
the Company pursuant to the Tender Offer and to pay related costs and expenses.
The Senior Notes bear interest at 8.05% per annum and mature on May 15, 1998. As
of the date hereof, $115 million aggregate principal amount of Senior Notes are
outstanding. The consideration offered for the Senior Notes tendered pursuant to
the Tender Offer will be $ per $1,000 principal amount, plus accrued
interest up to but not including the purchase date for the Tender Offer. If less
than all of the Senior Notes are tendered to and purchased by the Company, after
the Tender Offer the Company may acquire additional Senior Notes in the open
market or in privately negotiated transactions, and may use proceeds of the
Offering for such purposes. The Company will use the remainder of the net
proceeds of the Offering to enhance the equity capital of the Bank. The Bank
will use the proceeds of such investment for general corporate purposes, which
may include the acquisition of the stock or assets of financial institutions and
the funding of internal growth.
THE TENDER OFFER
The Company proposes to offer to purchase any and all the outstanding
Senior Notes (the "Tender Offer") pursuant to an Offer to Purchase dated
, 1997 (the "Offer to Purchase"). The purchase price to be paid for
each $1,000 principal amount of Senior Notes tendered will be based upon a fixed
spread of basis points over the yield on the % U.S. Treasury Note due
, plus accrued and unpaid interest up to, but not including,
the payment date for the Tender Offer. The Company also intends to seek consents
from holders of the Senior Notes to amend the Indenture pursuant to which the
Senior Notes were issued (the "Senior Notes Indenture") to delete
substantially all of the restrictive covenants contained therein (the "Proposed
Amendments"), which will be evidenced by a supplement to the Senior Notes
Indenture to be executed upon consummation of the Tender Offer (the
"Supplemental Indenture"). The Company is offering to pay each holder who
validly consents to the Proposed Amendments on or prior , 19 , a
consent payment in cash equal to $ per $1,000 principal amount of Senior Notes
for which consents have been validly delivered if, but only if, the Senior Notes
are accepted for payment pursuant to the terms of Tender Offer. The Tender Offer
will expire on , 1997, unless extended by the Company. The Tender
Offer is conditioned upon there having been validly tendered (and not withdrawn)
prior to , 1997, not less than a majority in aggregate principal
amount of the Senior Notes outstanding, receipt of consents of holders of the
Senior Notes necessary to approve the Proposed Amendments, completion of the
sale of the Notes pursuant to the Offering, and certain other customary
conditions. See "Capitalization" and "Use of Proceeds".
18
<PAGE>
CAPITALIZATION
The following table sets forth the historical consolidated capitalization
of the Company at September 30, 1996, and as adjusted to reflect the
consummation of the Offering and the application of the net proceeds thereof
(estimated to be approximately $ million), assuming the repurchase and
retirement of all the Senior Notes pursuant to the Tender Offer at a price of
$ per $1,000 principal amount, plus accrued interest up to, but not
including the purchase date for the Tender Offer. See "Use of Proceeds". In
addition to the long-term debt of the Company reflected below, at September 30,
1996, the Bank had long-term debt consisting of deposits, FHLB advances, and
certain other funding liabilities incurred in the ordinary course of business.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity" and Notes 8, 9, 10 and 11 to the
Consolidated Financial Statements.
AT SEPTEMBER 30, 1996
-----------------------------
HISTORICAL AS ADJUSTED
----------- ------------
(DOLLARS IN THOUSANDS)
Long-term debt(1):
Senior Notes.................... $ 115,000 $ -- (2)
2004 Notes...................... -- 100,000
2007 Notes...................... -- 120,000
----------- ------------
Total long-term debt................. 115,000 220,000
----------- ------------
Minority Interest -- Bank Preferred
Stock(3)........................... 185,500 185,500
Stockholders' equity:
Preferred stock(4).............. -- --
Common stock.................... 316 316
Paid-in capital................. 129,286 129,286
Retained earnings............... 403,674
Unrealized gains (losses) on
securities and mortgage-backed
securities available for sale,
net of tax.................... (2,233) (2,233)
----------- ------------
Total stockholders' equity...... 531,043
----------- ------------
Total consolidated
capitalization........... $ 831,543 $
=========== ============
Ratio of equity to assets............ 4.96% %
Ratio of tangible equity to tangible
assets............................. 4.81% %
Total shares of Class A and B common
stock outstanding.................. 31,595,596 31,595,596
Regulatory capital of the Bank(5)
Tangible capital
Amount..................... $ 695,821 $
Ratio...................... 6.57% %
Core capital
Amount..................... $ 703,908 $
Ratio...................... 6.64% %
Total risk-based capital
Amount..................... $ 743,623 $
Ratio...................... 13.09% %
- ------------
(1) Excludes FHLB advances with maturities greater than one year of $926,291 at
September 30, 1996 and as adjusted.
(2) The Tender Offer is conditioned upon there having been validly tendered and
not withdrawn a majority (approximately $58.7 million) of the outstanding
principal amount of Senior Notes. If only the minimum amount of the Senior
Notes is validly tendered, approximately $56.3 million principal amount of
Senior Notes would remain outstanding after completion of the Tender Offer
and the Offering.
(3) Minority interest consists of $185.5 million stated value of the Bank
Preferred Stock. See Note 16 to the Consolidated Financial Statements.
(4) The Company had 10,000,000 shares of Preferred Stock authorized, none of
which were issued as of September 30, 1996.
(5) As a savings and loan holding company, the Company is not subject to the
capital requirements applicable to bank holding companies and contained in
regulations promulgated by the Board of Governors under the Bank Holding
Company Act of 1956 ("BHCA"). If the Company had been a bank holding
company at September 30, 1996, however, after giving pro forma effect to the
issuance and sale of the Notes, (a) its Tier 1 and Total Capital ratios as
of that date would have approximated 10.61% or $603.6 million ( %, or
$ as adjusted) and 11.31% or $643.4 million ( %, or $ as
adjusted), respectively, and (b) its leverage ratio would have approximated
5.69% ( % as adjusted).
19
<PAGE>
RATIOS OF EARNINGS TO FIXED CHARGES
"Fixed charges" includes interest (whether expensed or capitalized), the
amortization of total debt and that portion (deemed to be one-third) of rental
expense considered to be representative of the interest factor. "Earnings",
for purposes of the ratios, includes consolidated pre-tax income, plus fixed
charges as described above, net of capitalized interest and dividends paid on
the Bank's Preferred Stock.
BANK UNITED CORP.
CONSOLIDATED RATIOS
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Ratio of earnings to fixed charges
Actual.......................... 1.11 1.16 1.26 1.40 1.16
Pro forma(1)....................
Ratio of earnings to combined fixed
charges and Bank Preferred Stock
dividends
Actual.......................... 1.06 1.13 1.21 1.35 1.16
Pro forma(1)....................
- ------------
(1) Adjusted for the issuance of the Notes offered hereby and the application of
a portion of the net proceeds thereof to the purchase of the existing Senior
Notes as of the first day of the period reflected.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial and other data as of and for
each of the years in the five-year period ended September 30, 1996 are derived
from the Company's audited Consolidated Financial Statements. 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 Statements of
Financial Condition as of September 30, 1996 and 1995, and the Consolidated
Statements of Operations for each of the years in the three year period ended
September 30, 1996, and the report thereon of Deloitte & Touche LLP are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND
RATIOS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION
ASSETS
Cash and cash equivalents............ $ 119,523 $ 112,931 $ 76,938 $ 65,388 $ 94,723
Securities purchased under agreements
to resell and federal
funds sold......................... 674,249 471,052 358,710 547,988 206,000
Trading account assets............... 1,149 1,081 1,011 1,006 94,691
Securities........................... 64,544 116,013 114,115 43,430 4,909
Mortgage-backed securities........... 1,657,908 2,398,263 2,828,903 2,175,925 833,425
Loans................................ 7,519,488 8,260,240 5,046,174 4,862,379 4,101,716
Covered Assets and related
assets(1)............................ -- -- -- 392,511 610,901
All other assets..................... 675,516 623,954 484,310 351,929 308,918
---------- ---------- --------- --------- ---------
Total assets................. $10,712,377 $11,983,534 $8,910,161 $8,440,556 $6,255,283
=========== =========== ========== ========== ==========
LIABILITIES, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY
Deposits............................. $5,147,945 $5,182,220 $4,764,204 $4,839,388 $4,910,760
Federal Home Loan Bank advances(2)... 3,490,386 4,383,895 2,620,329 2,185,445 632,345
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 832,286 1,172,533 553,000 310,000 --
Note payable to related party........ -- -- -- -- 4,090
Long-term debt ("15.75% Notes").... -- -- -- -- 102,000
Senior Notes......................... 115,000 115,000 115,000 115,000 --
All other liabilities................ 410,217 448,283 320,766 516,020 373,715
---------- ---------- --------- --------- ---------
Total liabilities............ 9,995,834 11,301,931 8,373,299 7,965,853 6,022,910
---------- ---------- --------- --------- ---------
Minority interest -- Bank Preferred
Stock(3)........................... 185,500 185,500 85,500 85,500 --
Total stockholders' equity... 531,043 496,103 451,362 389,203 232,373
---------- ---------- --------- --------- ---------
Total liabilities, minority
interest, and
stockholders'
equity(4)................ $10,712,377 $11,983,534 $8,910,161 $8,440,556 $6,255,283
=========== =========== ========== ========== ==========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income...................... $ 812,312 $ 746,759 $ 494,706 $ 482,490 $ 502,854
Interest expense..................... 584,778 552,760 320,924 300,831 348,291
---------- ---------- --------- --------- ---------
Net interest income.............. 227,534 193,999 173,782 181,659 154,563
Provision for credit losses.......... 16,469 24,293 6,997 4,083 21,133
---------- ---------- --------- --------- ---------
Net interest income after
provision for credit losses.... 211,065 169,706 166,785 177,576 133,430
Non-interest income
Net gains (losses)
Sales of single family
servicing rights and single
family warehouse loans..... 43,074 60,495 63,286 67,403 67,223
Securities and
mortgage-backed
securities................. 4,002 26 10,404 43,702 2,022
Other loans.................. 3,189 (1,210) 163 1,496 4,759
Loan servicing fees and
charges........................ 44,230 43,508 31,741 21,780 20,823
Other............................ 15,541 12,162 13,295 12,310 8,963
---------- ---------- --------- --------- ---------
Total non-interest income........ 110,036 114,981 118,889 146,691 103,790
---------- ---------- --------- --------- ---------
Non-interest expense
Compensation and benefits........ 87,640 83,520 86,504 81,472 69,476
SAIF deposit insurance
premiums....................... 45,690 11,428 11,329 10,162 11,101
Amortization of intangibles...... 20,432 21,856 18,247 24,469 22,832
Restructuring charges............ 10,681 -- -- -- --
Other............................ 88,822 77,772 83,513 85,861 77,006
---------- ---------- --------- --------- ---------
Total non-interest expense....... 253,265 194,576 199,593 201,964 180,415
---------- ---------- --------- --------- ---------
Income before income taxes,
minority interest, and
extraordinary loss............. 67,836 90,111 86,081 122,303 56,805
Income tax (benefit) expense......... (75,765) 37,415 (31,899) (26,153) 200
---------- ---------- --------- --------- ---------
Income before minority interest
and extraordinary loss......... 143,601 52,696 117,980 148,456 56,605
Less minority interest
Bank Preferred Stock
dividends(3)................... 18,253 10,600 8,653 6,537 --
Payments in lieu of
dividends(5)................... 6,413 377 357 -- --
---------- ---------- --------- --------- ---------
Income before extraordinary
loss........................... 118,935 41,719 108,970 141,919 56,605
Extraordinary loss(6)................ -- -- -- 14,549 --
---------- ---------- --------- --------- ---------
Net income(7).................... $ 118,935 $ 41,719 $ 108,970 $ 127,370 $ 56,605
========== ========== ========= ========= =========
Net income applicable to common
shares......................... $ 113,327 $ 38,824 $ 102,519 $ 118,640 $ 52,406
========== ========== ========= ========= =========
Earnings per common share(8)
Income before extraordinary
loss........................... $ 3.87 $ 1.35 $ 3.55 $ 4.61 $ 1.85
Extraordinary loss............... -- -- -- 0.50 --
---------- ---------- --------- --------- ---------
Net income....................... $ 3.87 $ 1.35 $ 3.55 $ 4.11 $ 1.85
========== ========== ========= ========= =========
Book value per common share(8)....... $ 16.81 $ 17.19 $ 15.64 $ 13.48 $ 8.19
Average number of common shares
outstanding(8)..................... 29,260 28,863 28,863 28,863 28,366
CERTAIN RATIOS AND OTHER DATA(9)
Operating earnings(10)............... $ 114,659 $ 91,295 $ 75,514 $ 77,105 $ 50,024
Regulatory capital ratios of the
Bank(11)
Tangible capital................. 6.57% 6.20% 6.01% 6.17% 4.24%
Core capital..................... 6.64 6.29 6.17 6.43 5.04
Total risk-based capital......... 13.09 13.45 14.02 14.87 12.19
Return on average assets(12)......... 1.28 0.50 1.42 1.83 0.89
Return on average common equity...... 23.06 8.80 26.32 44.87 28.18
Stockholders' equity to assets....... 4.96 4.14 5.07 4.61 3.71
Tangible stockholders' equity to
tangible assets.................... 4.81 3.93 4.68 4.14 2.58
Net yield on interest-earning
assets(13)......................... 2.10 1.92 2.20 2.61 2.60
Interest rate spread(13)............. 1.78 1.61 1.95 2.41 2.54
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CERTAIN RATIOS AND OTHER
DATA -- CONTINUED(9)
Average interest-earning assets to
average interest-bearing
liabilities........................ 1.06 1.06 1.06 1.04 1.01
Non-interest expense to average total
assets............................. 2.26% 1.86% 2.41% 2.76% 2.85%
Net operating expense ratio(14)...... 1.28 0.76 0.97 0.76 1.21
Efficiency ratio(15)................. 74.97 59.50 66.38 65.11 63.98
Nonperforming assets to total
assets............................. 1.12 0.84 1.09 0.72 0.89
Net nonaccrual loans to total
loans.............................. 1.19 0.91 1.51 0.85 0.92
Allowance for credit losses to net
nonaccrual loans................... 44.24 48.74 30.73 71.71 74.04
Allowance for credit losses to
nonperforming assets............... 32.95 36.65 24.18 49.28 50.54
Allowance for credit losses to total
loans.............................. 0.52 0.44 0.46 0.61 0.68
Net loan charge-offs to average
loans.............................. 0.17 0.16 0.30 0.05 0.07
Full-time equivalent employees....... 2,310 2,663 2,894 3,122 2,720
Number of community banking
branches........................... 70 65 62 62 65
Number of commercial banking
origination offices................ 9 9 5 3 2
Number of mortgage banking
origination offices................ 85 122 145 109 93
Single family servicing portfolio.... $13,246,848 $12,532,472 $8,920,760 $8,073,226 $7,187,000
Single family originations(16)....... 3,762,198 3,447,250 5,484,111 6,737,762 6,118,363
Net income available for Bank's
common stock....................... 115,943 52,108 116,108 157,134 74,505
Ratio of earnings to fixed
charges(17)........................ 1.11x 1.16x 1.26x 1.40x 1.16x
Ratio of earnings to combined fixed
charges and Bank Preferred Stock
dividends(17)...................... 1.06 1.13 1.21 1.35 1.16
</TABLE>
- ------------
(1) Reflects assets governed under the Assistance Agreement between the Bank
and the FRF. See "Business -- The Assistance Agreement".
(2) FHLB advances with maturities greater than one year were $926,291,
$1,992,010, $782,129, $708,945, and $55,445 at September 30, 1996, 1995,
1994, 1993, and 1992, respectively. See Note 9 to the Consolidated
Financial Statements.
(3) During fiscal 1993, the Bank issued Bank Preferred Stock, Series A, and
during fiscal 1995, the Bank issued Bank Preferred Stock, Series B. None of
the shares of Bank Preferred Stock are owned by the Company. All of the
outstanding shares of common stock of the Bank are owned by Holdings, a
wholly owned subsidiary of the Company.
(4) In August 1996, the Company filed a registration statement with the
Commission and 12,075,000 shares of Class A Common Stock were sold to the
public. The Company sold 910,694 shares and certain stockholders sold
11,164,306 shares. See "Management's Discussion and Analysis -- Capital
Resources and Liquidity -- Capital" and Note 16 to the Consolidated
Financial Statements.
(5) The Bank had issued to the FDIC-FRF the Warrant to acquire 158,823 shares
of Common Stock of the Bank at an exercise price of $0.01 per share.
Payments in lieu of dividends related to the Warrant. In August 1996, the
FDIC-FRF surrendered a portion of the Warrant for a cash payment of $6.1
million, exercised the remainder of the Warrant and immediately exchanged
the shares of Common Stock of the Bank it received for 1,503,560 shares of
Common Stock of the Company. The FDIC-FRF sold all of these shares in the
August Offering. See "Business -- The Assistance Agreement -- Warrant
Agreement".
(6) Reflects costs and charges associated with the repayment of the note
payable to related party and the 15.75% Notes (as defined, see
"Management's Discussion and Analysis -- Capital Resources and
Liquidity -- Notes Payable") and the issuance of the Senior Notes.
(7) Net income for fiscal 1994, 1993, and 1992 included $23.1 million, $9.3
million, and $32.1 million, respectively, of financial assistance payments
received from the FRF. No such payments were received during fiscal 1996 or
1995 as a result of the termination of the Assistance Agreement in December
1993. See "Business -- The Assistance Agreement".
(8) Earnings per common share represents net income (adjusted for earnings on
the common stock equivalents attributable to the Bank's Warrant) divided by
the weighted average number of common shares outstanding. Per share results
have been restated to reflect an 1,800 to one common stock conversion in
June 1996. See Notes 1 and 16 to the Consolidated Financial Statements.
(9) Ratio, yield, and rate information are based on weighted average daily
balances for fiscal 1996, 1995, 1994, and 1993 and average monthly balances
for prior periods, with the exception of return on average common equity,
which is based on average monthly balances for all periods presented.
(10) Operating earnings represents income, including net gains (losses) on the
sales of single family servicing rights and single family warehouse loans,
before taxes, minority interest, and extraordinary loss and excludes net
gains (losses) on securities, MBS, and other loans and excludes certain
non-recurring items in fiscal 1996. See "Business -- General."
(11) Regulatory capital ratios presented are those of the Bank. No regulatory
capital ratios are presented for the Company because there are no such
applicable requirements for savings and loan holding companies such as the
Company. For a discussion of the regulatory capital requirements applicable
to the Bank, see "Regulation -- Safety and Soundness
Regulations -- Capital Requirements".
(12) Return on average assets represents income before minority interest and
extraordinary loss, divided by average total assets.
(13) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets. Interest rate spread
represents the difference between the average yield on interest-earning
assets and the average rate on interest-bearing liabilities.
(14) Net operating expense ratio represents total non-interest expense less
total non-interest income as a percentage of average assets for each
period.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
23
<PAGE>
(15) Efficiency ratio represents non-interest expenses (excluding goodwill
amortization), divided by net interest income plus non-interest income,
excluding net gains (losses) on securities, MBS, and other loans.
(16) Includes $129.0 million, $135.3 million, $100.3 million, $116.5 million,
and $127.0 million of brokered and purchased loans for fiscal 1996, 1995,
1994, 1993, and 1992, respectively.
(17) For purposes of computing the ratio of earnings to fixed charges, and the
ratio of earnings to combined fixed charges and Bank Preferred Stock
dividends, "earnings" represent the pre-tax income from continuing
operations plus fixed charges, net of interest capitalized and dividends
paid on the Bank's Preferred Stock. "Fixed charges" represent interest
(whether expensed or capitalized), the amortization of total debt and that
portion of rentals considered to be representative of the interest factor
(deemed to be one-third of rentals).
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCUSSION OF RESULTS OF OPERATIONS
OVERVIEW.
1996 COMPARED TO 1995. Net income was $118.9 million ($3.87 per share) for
fiscal 1996, compared to $41.7 million ($1.35 per share) for fiscal 1995. The
increase was primarily due to the recognition of a $101.7 million ($3.33 per
share) tax benefit for the expected utilization of NOLs. No such benefits were
recorded during fiscal 1995. Net income for fiscal 1996, excluding the $101.7
million tax benefit and certain non-recurring charges discussed below, was $56.4
million ($1.82 per share) compared to $41.7 million ($1.35 per share) in the
prior year. Higher levels of interest-earning assets and an increase in the
yield on interest-earning assets contributed to the increase in net income,
partially offset by lower gains on sales of single family MSRs and single family
warehouse loans and increased expenses attributable to the minority interests.
The single family loan servicing portfolio increased to $13.2 billion at
September 30, 1996.
Results for fiscal 1996 included several non-recurring charges: (i) a
one-time SAIF assessment charge of $33.7 million ($20.7 million after tax or
$0.67 per share); (ii) charges totalling $12.5 million ($7.8 million after tax
or $0.25 per share) relating to the restructuring of and items associated with
the mortgage origination business; (iii) $7.8 million of compensation expense
($4.8 million after tax or $0.16 per share) relating to a management
compensation program adopted in connection with the August Offering; and (iv) a
$5.9 million contractual payment ($0.20 per share) to previous minority
interests.
Operating earnings, were $114.7 million for fiscal 1996, compared to $91.3
million for fiscal 1995, a 26% increase. Operating earnings represent income,
including net gains (losses) on the sales of single family servicing rights and
single family warehouse loans, before taxes and minority interest, and excludes
net gains (losses) on securities, MBS, and other loans. Operating earnings for
fiscal 1996 exclude a one-time SAIF assessment charge of $33.7 million,
compensation expense of $7.8 million related to the adoption of a management
compensation program, and charges totalling $12.5 million related to the
Mortgage Banking Group because these items are considered non-recurring. See
"-- Mortgage Banking Restructuring" and Notes 13, 15, and 18 to the
Consolidated Financial Statements. Management believes operating earnings
reflect the revenues and expenses of the Company's business segments and
facilitates trend analysis as it excludes transactions that are typically
considered opportunistic or non-recurring and not part of the routine core
business operations of the Company. Operating earnings are provided as other
data and should not be considered an alternative to net income as an indicator
of the Company's operating performance or to cash flow as a measure of
liquidity.
1995 COMPARED TO 1994. Net income was $41.7 million ($1.35 per share) for
fiscal 1995, compared to $109.0 million ($3.55 per share) for fiscal 1994. The
decrease primarily reflects the effect of a tax benefit of $58.2 million ($1.90
per share) recognized in fiscal 1994 for the expected utilization of NOLs under
Statement of Financial Accounting Standard ("SFAS") No. 109, a lower net
interest-rate spread, lower gains on sales of securities and MBS, and higher
provisions for credit losses in fiscal 1995. Net income for fiscal 1995 was
favorably impacted by the effect of higher levels of interest-earning assets
during fiscal 1995 compared to fiscal 1994 and an increase in the single family
servicing portfolio. The single family servicing portfolio increased to $12.5
billion at September 30, 1995 compared to $8.9 billion at September 30, 1994,
contributing to increased loan servicing fees and charges during fiscal 1995.
Operating earnings were $91.3 million for fiscal 1995, compared to $75.5
million for fiscal 1994. This increase primarily reflects the higher levels of
interest-earning assets and increased loan servicing fees and charges, partially
offset by higher provisions for credit losses.
25
<PAGE>
The following table sets forth a reconciliation of Bank and Company net
income.
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------
1996 1995 1994
----------- ---------- ----------
(IN THOUSANDS)
BANK
Net income........................... $ 134,196 $ 62,708 $ 124,761
Preferred stock dividends............ (18,253) (10,600) (8,653)
----------- ---------- ----------
Net income available for Bank's
common stock.................... 115,943 52,108 116,108
Dividends to Company(1).............. (109,011) (6,409) (11,435)
Payments in lieu of dividends(1)..... (6,413) (377) (357)
----------- ---------- ----------
Undistributed income of Bank....... 519 45,322 104,316
----------- ---------- ----------
COMPANY
Dividends from Bank.................. 109,011 6,409 11,435
Interest expense..................... (10,353) (10,407) (10,177)
Income tax benefit(2)................ 20,898 1,397 5,299
Other expense, net................... (1,140) (1,002) (1,903)
----------- ---------- ----------
Net income (loss) of Company
without including undistributed
income of Bank.................. 118,416 (3,603) 4,654
----------- ---------- ----------
Consolidated net income............ $ 118,935 $ 41,719 $ 108,970
=========== ========== ==========
- ------------
(1) In May 1996, the Bank paid a $100 million dividend on the common stock of
the Bank and paid $5.9 million in lieu of dividends to the FDIC-FRF. See
"Business -- Assistance Agreement -- Warrant Agreement".
(2) During fiscal 1996, the Company recognized a tax benefit for the expected
utilization of NOLs against future taxable income. See " -- Income Taxes".
MORTGAGE BANKING RESTRUCTURING
The Company has been in the process of evaluating its strategic
alternatives with respect to its mortgage banking business in order to mitigate
the negative effect on profitability resulting from increased competition in the
loan origination business. Increased competition has resulted in the Company
receiving lower fees and lower rates on originated loans. Additionally,
profitability is impacted by fluctuations in the volume of originations due to
changes in market interest rates. In June, 1996, the Company initiated a
profitability improvement program in an effort to reduce the amount of fixed
charges necessary to operate its loan origination business in response to lower
levels of fee revenue and to reduce the volume of staff necessary to process
loan applications and to complete the loan origination process. The plan
included the closure and consolidation of 24 mortgage origination branches, the
closure of 6 regional operation centers, and a workforce reduction of
approximately 265 employees. As a result of this plan, through December 31,
1996, 39 mortgage origination branches and 6 regional operation centers had been
closed and the workforce was reduced by 243. At December 31, 1996, 80 mortgage
origination branches remained open. The plan also included a process and
operational restructuring, as well as changes in management structure and
compensation, all designed to create operational efficiencies and promote
profitability. As a result of the office closures, workforce reductions, and
related actions, the Company recorded a $10.7 million restructuring charge and
recorded $1.8 million of other expenses related to the mortgage origination
business in June 1996. The restructuring charge includes estimated costs for
severance and other benefits of $800,000, asset write-downs of $5.3 million,
lease termination costs of $3.4 million, and other costs of $1.2 million. The
non-cash write-off of $5.3 million reflects $3.5 million of goodwill and $1.8
million of fixed assets and leasehold improvements written off in connection
with the closed production offices. Implementation of the profitability
improvement plan has resulted in a decrease in the fixed charges necessary to
operate the loan origination business. However, the overall improvements in
profitability projected by the plan have not yet been achieved, and it is too
early to determine if they will ultimately be achieved. Therefore no assurance
can be given regarding the efficacy of the profitability improvement plan or the
timing or impact of any further restructuring (including a possible future sale
or liquidation of the Company's residential mortgage lending business).
26
<PAGE>
NET INTEREST INCOME
Net interest income is based on the relative amounts 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 yield curve), the
effects of periodic caps on the Company's adjustable-rate mortgage and MBS
portfolios and the interest rate sensitivity position or "gap". The Company
has traditionally managed its business to limit its overall exposure to changes
in interest rates. However, under current policies of the Company's Board of
Directors, management has been given some latitude to increase the Company's
interest rate sensitivity position within certain limits if, in management's
judgment, that will enhance profitability. As a result, changes in market
interest rates may have a greater impact on the Company's financial performance
in the future than they have had historically. See "Business -- General" and
"Business -- Asset and Liability Management".
The Company enters into certain financial instruments with
off-balance-sheet risk in the ordinary course of business to reduce its exposure
to changes in interest rates. The Company does not enter into instruments such
as leveraged derivatives or structured notes. The financial instruments used for
hedging interest rate risk include interest rate swaps, caps, floors, financial
options, financial futures contracts, and forward delivery contracts. A hedge is
an attempt to reduce risk by creating a relationship whereby any losses on the
hedged asset or liability are expected to be offset in whole or in part by gains
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. See Note 12 to the Consolidated Financial
Statements.
27
<PAGE>
AVERAGE BALANCES AND AVERAGE YIELDS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ --------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
---------- --------- ------ ---------- --------- ------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term interest-earning
assets........................ $ 668,657 $ 39,302 5.88% $ 466,276 $ 29,675 6.36% $ 461,530 $ 19,019
Trading account assets.......... 1,154 67 5.81 1,079 62 5.75 1,026 (144)
Securities(1)................... 76,637 3,917 5.11 116,934 5,893 5.04 108,751 5,007
Mortgage-backed securities(1)... 1,968,230 128,143 6.51 2,618,990 173,155 6.61 2,595,163 151,972
Loans(2)........................ 7,889,828 627,940 7.96 6,707,868 526,528 7.85 4,524,158 308,804
FHLB stock...................... 213,242 12,943 6.07 180,416 11,446 6.34 132,277 5,558
Covered Assets and related
assets........................ -- -- -- -- -- -- 74,547 4,490
---------- --------- ------ ---------- --------- ------ --------- ---------
TOTAL INTEREST-EARNING
ASSETS...................... 10,817,748 812,312 7.51 10,091,563 746,759 7.40 7,897,452 494,706
Non-interest-earning assets....... 411,683 345,500 386,175
---------- ---------- ---------
Total assets.................. $11,229,431 $10,437,063 $8,283,627
========== ========== =========
INTEREST-BEARING LIABILITIES:
Deposits:
Transaction accounts.......... $ 218,859 2,593 1.18 $ 225,799 3,384 1.50 $ 237,537 3,753
Insured money fund accounts... 1,464,577 69,100 4.72 1,032,873 57,848 5.60 582,126 18,508
Savings accounts.............. 138,007 3,598 2.61 171,308 4,715 2.75 284,885 7,311
Certificates of deposit....... 3,244,291 196,929 6.07 3,560,420 198,419 5.57 3,662,043 179,462
---------- --------- ------ ---------- --------- ------ --------- ---------
Total deposits............ 5,065,734 272,220 5.37 4,990,400 264,366 5.30 4,766,591 209,034
---------- --------- ------ ---------- --------- ------ --------- ---------
FHLB advances................... 4,073,297 247,093 6.07 3,560,844 224,767 6.31 2,285,630 91,060
Reverse repurchase agreements
and federal funds purchased... 955,708 55,112 5.77 888,453 53,220 5.99 274,666 10,574
Senior Notes.................... 115,000 10,353 9.00 115,000 10,407 9.05 115,000 10,177
Other........................... -- -- -- -- -- -- 3,350 79
---------- --------- ------ ---------- --------- ------ --------- ---------
TOTAL INTEREST-BEARING
LIABILITIES................. 10,209,739 584,778 5.73 9,554,697 552,760 5.79 7,445,237 320,924
Non-interest-bearing liabilities
and stockholders' equity...... 1,019,692 882,366 838,390
---------- ---------- ---------
Total liabilities and
stockholders' equity........ $11,229,431 $10,437,063 $8,283,627
========== ========== =========
Net interest income/interest rate
spread.......................... $ 227,534 1.78% $ 193,999 1.61% $ 173,782
========= ====== ========= ====== =========
Net yield on interest-earning
assets.......................... 2.10% 1.92%
====== ======
Ratio of average interest-earning
assets to average
interest-bearing liabilities.... 1.06 1.06 1.06
========== ========== =========
</TABLE>
YIELD/
RATE
------
INTEREST-EARNING ASSETS:
Short-term interest-earning
assets........................ 4.12%
Trading account assets.......... (14.04)
Securities(1)................... 4.60
Mortgage-backed securities(1)... 5.86
Loans(2)........................ 6.83
FHLB stock...................... 4.20
Covered Assets and related
assets........................ 6.02
------
TOTAL INTEREST-EARNING
ASSETS...................... 6.26
Non-interest-earning assets.......
Total assets..................
INTEREST-BEARING LIABILITIES:
Deposits:
Transaction accounts.......... 1.58
Insured money fund accounts... 3.18
Savings accounts.............. 2.57
Certificates of deposit....... 4.90
------
Total deposits............ 4.39
------
FHLB advances................... 3.98
Reverse repurchase agreements
and federal funds purchased... 3.85
Senior Notes.................... 8.85
Other........................... 2.36
------
TOTAL INTEREST-BEARING
LIABILITIES................. 4.31
Non-interest-bearing liabilities
and stockholders' equity......
Total liabilities and
stockholders' equity........
Net interest income/interest rate
spread.......................... 1.95%
======
Net yield on interest-earning
assets.......................... 2.20%
======
Ratio of average interest-earning
assets to average
interest-bearing liabilities....
- ------------
(1) For purposes of computing yields, the effects of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities",
have been excluded from the average balances.
(2) Includes nonaccrual loans.
28
<PAGE>
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 reflects the extent to which changes in the
interest income and interest expense are attributable to changes in volume
(changes in volume multiplied by prior year rate) and changes in rate (changes
in rate multiplied by prior year volume). Changes attributable to the combined
impact of volume and rate have been allocated proportionately to changes due to
volume and changes due to rate.
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1996 VS. 1995 1995 VS. 1994
--------------------------------- ----------------------------------
VOLUME RATE NET VOLUME RATE NET
---------- --------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Short-term interest-earning
assets.......................... $ 12,015 $ (2,388) $ 9,627 $ 198 $ 10,458 $ 10,656
Trading account assets............. 4 1 5 (7) 213 206
Securities......................... (2,057) 81 (1,976) 390 496 886
Mortgage-backed securities......... (42,429) (2,583) (45,012) 1,418 19,765 21,183
Loans.............................. 93,941 7,471 101,412 166,278 51,446 217,724
FHLB stock......................... 2,002 (505) 1,497 2,453 3,435 5,888
Covered assets and related
assets.......................... -- -- -- (4,490) -- (4,490)
---------- --------- ---------- ---------- ---------- ----------
Total...................... 63,476 2,077 65,553 166,240 85,813 252,053
---------- --------- ---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits........................... 4,189 3,665 7,854 10,219 45,113 55,332
FHLB advances...................... 31,178 (8,852) 22,326 65,246 68,461 133,707
Reverse repurchase agreements and
federal funds purchased......... 3,906 (2,014) 1,892 34,151 8,495 42,646
Senior Notes....................... -- (54) (54) -- 230 230
Other.............................. -- -- -- (79) -- (79)
---------- --------- ---------- ---------- ---------- ----------
Total...................... 39,273 (7,255) 32,018 109,537 122,299 231,836
---------- --------- ---------- ---------- ---------- ----------
NET CHANGE IN NET INTEREST INCOME.... $ 24,203 $ 9,332 $ 33,535 $ 56,703 $ (36,486) $ 20,217
========== ========= ========== ========== ========== ==========
</TABLE>
1996 COMPARED TO 1995. Net interest income increased $33.5 million or 17%
to $227.5 million for fiscal 1996, compared to $194.0 million for fiscal 1995.
The increase in net interest income is primarily attributable to a $726.2
million, or 7%, increase in average interest-earning assets and a 18 basis point
increase in the net yield on interest-earning assets.
Interest-earning assets are primarily comprised of single family mortgage
loans and MBS. Interest-bearing liabilities primarily include deposits and FHLB
advances. The increase in average interest-earning assets during fiscal 1996 can
be principally attributed to two single family loan purchases during the second
half of fiscal 1995, approximating $1.9 billion. The increase in average
interest-earning assets was funded primarily with FHLB advances and reverse
repurchase agreements.
Approximately 78% of the Company's interest-earning assets at September 30,
1996 were adjustable-rate assets, a portion of which are tied to indices that
normally lag the changes in market interest rates. Substantially all of the
Company's adjustable-rate assets are subject to periodic and/or lifetime
interest rate caps. Periodic caps limit the amount by which the interest rate on
a particular mortgage loan may increase at its next interest rate reset date. In
a rising-rate environment, the interest rate spread may be negatively impacted
when the repricing of interest-earning assets is limited by caps on periodic
interest rate adjustments, compared to market interest rate movements.
29
<PAGE>
During fiscal 1995, the periodic caps on loans and MBS with adjustable
rates limited the increase in income relative to the cost of deposits and
borrowings, as average market interest rates increased during fiscal 1995. The
net interest rate spread for fiscal 1996 reflects an improvement over fiscal
1995 due to a lessening of the impact of caps. As of September 30, 1996,
substantially all of the mortgages subject to caps would have no limitation on
their next scheduled rate reset due to the level of market interest rates and
the related reset margin being less than the current coupon rate on the mortgage
loan plus the applicable periodic cap limitation. The net interest rate spread
was also positively impacted during fiscal 1996 due to higher yields earned on
loans purchased in the later part of fiscal 1995.
1995 COMPARED TO 1994. Net interest income increased $20.2 million, or
12%, to $194.0 million for fiscal 1995, compared to $173.8 million for fiscal
1994. Average interest-earning assets increased $2.2 billion, or 28%, during the
period, principally attributable to single family loan purchases during the
second half of fiscal 1995. The increase in average interest-earning assets was
funded primarily with FHLB advances and reverse repurchase agreements. Increased
net interest income resulting from higher volumes of interest-earning assets was
offset, to some extent, by unfavorable changes in the net spread between the
yield on interest-earning assets and the cost of funds. The net interest rate
spread decreased 34 basis points as a result of the rapid rise in market
interest rates during the early part of fiscal 1995. Increases in market
interest rates and the effect of lagging rate indices and caps on
adjustable-rate assets and the sale of higher yielding assets in fiscal 1994 all
contributed to the drop in the net yield on interest-earning assets.
PROVISION FOR CREDIT LOSSES
1996 COMPARED TO 1995. The provision for credit losses decreased to $16.5
million for fiscal 1996 down from $24.3 million for fiscal 1995. Decreased loan
purchases during fiscal 1996 resulted in lower single family provisions of $6.8
million for fiscal 1996 compared to $18.5 million for fiscal 1995. Consumer loan
provisions increased to $7.8 million for fiscal 1996, compared to $4.2 million
for fiscal 1995, reflecting increased losses and charge-offs on the unsecured
line of credit portfolio. See "-- Asset Quality" and Note 5 to the
Consolidated Financial Statements.
1995 COMPARED TO 1994. The provision for credit losses increased to $24.3
million for fiscal 1995 compared to $7.0 million for fiscal 1994. This increase
primarily resulted from provisions on single family loans, which totalled $18.5
million for fiscal 1995 compared to $2.4 million for fiscal 1994. The single
family loan portfolio increased to $7.1 billion at September 30, 1995 from $4.2
billion at September 30, 1994, which included loan purchases totalling $2.7
billion and originations retained for portfolio of $1.0 billion during fiscal
1995. The growth in the consumer lending business and loss experience on the
unsecured consumer line of credit portfolio also increased consumer provisions
to $4.2 million for fiscal 1995, from $2.8 million for fiscal 1994. Consumer
loans increased to $123.1 million at September 30, 1995, from $108.2 million at
September 30, 1994, while consumer charge-offs increased to $2.8 million for
fiscal 1995, from $1.3 million for fiscal 1994. See "-- Asset Quality" and
Note 5 to the Consolidated Financial Statements.
30
<PAGE>
NON-INTEREST INCOME
Non-interest income includes gains from sales of single family servicing
rights and single family warehouse loans, gains (losses) on securities and MBS,
gains (losses) on other loans, loan servicing fees and charges, and other fees
and charges.
NON-INTEREST INCOME
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
NON-INTEREST INCOME
Net gains (losses)
Sales of single family servicing
rights........................ $ 4,678 $ 34,080 $ 67,198
Single family warehouse loans... 38,396 26,415 (3,912)
------------ ------------ ------------
43,074 60,495 63,286
Securities and mortgage-backed
securities.................... 4,002 26 10,404
Other loans..................... 3,189 (1,210) 163
Loan servicing fees and charges.... 44,230 43,508 31,741
Other.............................. 15,541 12,162 13,295
------------ ------------ ------------
Total non-interest
income..................... $ 110,036 $ 114,981 $ 118,889
============ ============ ============
PRINCIPAL SOLD
MSRs............................... $ 1,488,885 $ 2,854,114 $ 4,521,491
Single family warehouse loans...... 2,984,211 2,100,662 4,786,413
1996 COMPARED TO 1995. Non-interest income was $110.0 million for fiscal
1996 compared to $115.0 million for fiscal 1995, a decrease of $5.0 million.
During fiscal 1996 and 1995, $1.5 billion and $2.9 billion, respectively, of
single family MSRs were sold. The decrease in single family MSR sales during
fiscal 1996 reflects management's decision to retain a greater portion of MSRs
in response to the implementation of SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an Amendment of Financial Accounting Standards Board Statement
No. 65". See "Business -- Loan Servicing Portfolio". Fiscal 1995 included
substantial gains on sales of servicing rights originated in prior years. Gains
on sales of single family warehouse loans were $38.4 million during fiscal 1996,
compared to $26.4 million during fiscal 1995, reflecting an increase in the
volume of single family warehouse loans sold. Excluding gains from sales of
single family MSRs and single family warehouse loans, non-interest income
increased $12.5 million in fiscal 1996 compared to fiscal 1995, primarily due to
increased gains on sales of securities and MBS and other loans.
Net gains on securities and MBS were $4.0 million and $26,000 for fiscal
1996 and 1995, respectively. During fiscal 1996, the net gains on MBS were from
the sale of $293.0 million of MBS. See " -- Discussion of Financial
Condition".
Net gains (losses) on other loans were $3.2 million and $(1.2) million for
fiscal 1996 and 1995, respectively. During fiscal 1996, the Company sold $98.1
million of single family loans held by the Financial Markets Group for a gain of
$608,000 and $178.4 million of multi-family loans for a gain of $2.7 million.
See " -- Discussion of Financial Condition".
During fiscal 1996, loan servicing fees and charges increased $722,000, or
2% from the prior year. This increase is due primarily to an increase in the
portfolio of single family servicing for others, $9.5 billion at September 30,
1996 compared to $8.5 billion at September 30, 1995. Offsetting this increase
was a decrease in the average service fee rate due to a change in the mix of the
portfolio.
Other non-interest income was $15.5 million in fiscal 1996 compared to
$12.2 million in fiscal 1995. The increase was primarily due to growth in mutual
fund and annuity sales. The growth in the sale of these products reflected the
low interest rate environment, more experienced salespeople, and increased
marketing of those products.
31
<PAGE>
1995 COMPARED TO 1994. Non-interest income was $115.0 million for fiscal
1995, a $3.9 million decrease from $118.9 million for fiscal 1994. This decrease
is attributable, in part, to a $2.8 million decrease in gains on sales of single
family MSRs and single family warehouse loans which were $60.5 million and $63.3
million, respectively, for fiscal 1995 and 1994.
In September 1995, the Company adopted SFAS No. 122, effective October 1,
1994. This statement requires that, among other things, the book value of
mortgage loans be allocated at the time of origination between the MSRs and the
related loans, provided there is a plan to sell or securitize such loans. With
the implementation of SFAS No. 122, the original cost basis of the loan is
allocated between the loan and the MSRs, thus increasing the gains on sales of
loans and reducing the gains on sales of MSRs.
The implementation of SFAS No. 122 resulted in the capitalization of $28.7
million of originated MSRs during fiscal 1995 and an increase to net income and
stockholders' equity of $9.8 million. This implementation also had the effect of
decreasing the gains on sales of single family MSRs by $17.7 million and
increasing the gains on single family warehouse loans by $34.6 million.
Excluding the effects of implementing SFAS No. 122, the gains on sales of single
family MSRs and the gains (losses) on single family warehouse loans would have
been $51.8 million and $(8.2) million, respectively. In accordance with the
requirements of SFAS No. 122, the prior year amounts were not restated.
Excluding the effects of SFAS No. 122 in fiscal 1995, the gains on single
family MSRs were $51.8 million, compared to $67.2 million for fiscal 1994.
During fiscal 1995, single family MSRs were sold at an average premium of 181
basis points, compared to 149 basis points during fiscal 1994. The average
premiums on MSRs sold in fiscal 1994 were lower compared to fiscal 1995,
reflecting the lower interest rate environment during the first half of fiscal
1994. The rise in market interest rates during the second half of fiscal 1994,
and continuing through the beginning of fiscal 1995 had a positive effect on the
average premiums on servicing rights sold, reflecting an increase in the value
of the servicing portfolio due to actual and anticipated declines in
prepayments. The increase in interest rates during the second half of fiscal
1994 and during fiscal 1995 also resulted in a decrease in originations. The
decrease in originations and the retention of a greater proportion of originated
loans for the Company's own portfolio decreased the volume of MSRs available for
sale during fiscal 1995.
Excluding the effects of SFAS No. 122 in fiscal 1995, the losses on single
family warehouse loans were $(8.2) million in fiscal 1995 and $(3.9) million in
1994. Increased losses in fiscal 1995 reflect the increasingly competitive
pricing in the market during that period.
Net gains on securities and MBS were $26,000 and $10.4 million for fiscal
1995 and 1994, respectively. The gains in fiscal 1994 primarily relate to the
sale of $213.0 million of MBS created when the Company securitized single family
loans from its own portfolio.
Loan servicing fees and charges increased $11.8 million, or 37%, during
fiscal 1995 compared to fiscal 1994. The increase was due primarily to an
increase in the portfolio of single family servicing for others and an increase
in the average fees collected on those loans due to a change in the composition
of that portfolio. The portfolio of single family servicing for others increased
to $8.5 billion at September 30, 1995, compared to $6.2 billion at September 30,
1994, primarily due to loan originations and purchases of MSRs. See " --
Discussion of Financial Condition". The increase in the single family loan
servicing portfolio during fiscal 1995 includes $3.4 billion of loans associated
with MSRs purchased in fiscal 1994 that were not transferred to the Company
until fiscal 1995 and were not included in the portfolio as of September 30,
1994. See Note 6 to the Consolidated Financial Statements.
32
<PAGE>
NON-INTEREST EXPENSE
Non-interest expense was comprised of the following significant items:
NON-INTEREST EXPENSE
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Compensation and benefits............ $ 87,640 $ 83,520 $ 86,504
Occupancy............................ 18,415 18,713 17,196
Data processing...................... 16,196 16,360 15,821
Advertising and marketing............ 8,025 9,262 10,796
Amortization of intangibles.......... 20,432 21,856 18,247
SAIF deposit insurance premiums...... 45,690 11,428 11,329
Furniture and equipment.............. 6,121 6,428 6,810
Restructuring charges................ 10,681 -- --
Other................................ 40,065 27,009 32,890
---------- ---------- ----------
Total non-interest expense...... $ 253,265 $ 194,576 $ 199,593
========== ========== ==========
1996 COMPARED TO 1995. Non-interest expense was $253.3 million for fiscal
1996 and $194.6 million for fiscal 1995, or 2.26% and 1.86%, respectively, of
average total assets for those same periods. Non-interest expense for fiscal
1996 included several non-recurring items including $7.8 million in compensation
expense, $33.7 million in SAIF deposit insurance premiums, and a $10.7 million
restructuring charge. Excluding these non-recurring items, non-interest expense
was $201.1 million for fiscal 1996 compared to $194.6 million for fiscal 1995,
or 1.79% and 1.86%, respectively, of average total assets for those same
periods. The $7.8 million compensation charge related to a management
compensation program adopted in June 1996 in connection with the August
Offering. This program provided, among other things, for a cash bonus and the
award of Company common stock to certain executives and officers of the Company.
See Note 13 to the Consolidated Financial Statements. Excluding the $7.8 million
charge, compensation and benefits decreased to $79.8 million in fiscal 1996
compared to $83.5 million in fiscal 1995. This decrease reflects a decrease in
the number of average full-time equivalent employees to 2,548 for fiscal 1996,
from 2,729 for fiscal 1995. The $33.7 million SAIF deposit insurance premium
charge reflects a one-time assessment on all SAIF-insured deposits aimed at
fully-capitalizing the SAIF. The United States Congress passed legislation that
was signed into law on September 30, 1996 that mandated this assessment, which
was set at 65.7 basis points of SAIF-assessable deposits at March 31, 1995. See
"Regulation -- Charter, Supervision, and Examination -- Insurance
Assessments". The $10.7 million restructuring charge is discussed above in
" -- Mortgage Banking Restructure". During fiscal 1996 and 1995, $878,000 and
$11.2 million, respectively, of gains on sales of Real Estate Owned ("REO")
properties were recognized and included in other non-interest expense.
1995 COMPARED TO 1994. Non-interest expense was $194.6 million for fiscal
1995 compared to $199.6 million for fiscal 1994, or 1.86% and 2.41%,
respectively, of average total assets for those periods. Compensation and
benefits were $83.5 million for fiscal 1995 and $86.5 million for fiscal 1994,
or 43% of total non-interest expense for both of these periods. Advertising
expenses were lower during fiscal 1995 reflecting the introduction of community
banking products in the prior year. During fiscal 1995 and 1994, $11.2 million
and $5.8 million, respectively, of gains on sales of REO properties were
recognized and included in other non-interest expense. Amortization of
intangibles increased in fiscal 1995, reflecting increased amortization of MSRs
due to servicing acquisitions.
INCOME TAXES
The provision for income taxes is comprised of current federal income
taxes, deferred federal income taxes, state income taxes, and payments due in
lieu of taxes. The provision for income taxes was a net benefit of $75.8 million
for fiscal 1996, an expense of $37.4 million for fiscal 1995, and a net benefit
of $31.9 million in fiscal 1994. In June 1996, the Certificate of Incorporation
and By-Laws were restated with the intent to preserve certain
33
<PAGE>
beneficial tax attributes limiting the disposition of certain common stock and
other interests in the Company by certain of its stockholders. The preservation
of certain tax attributes allowed the recognition of tax benefits in June 1996
for the expected utilization of NOLs. These tax benefits were not recognized in
prior periods due to limitations on the utilization of NOLs if an Ownership
Change had occurred. In June 1996, the Company and the Bank entered into a tax
sharing agreement. This agreement resulted in the recognition of a tax benefit
for the expected utilization of the Company's NOLs by the Bank. As a result of
the tax sharing agreement and the restatement of the Certificate of
Incorporation and By-laws, a total tax benefit of $101.7 million was recognized
in fiscal 1996 as a reduction of income tax expense and an increase in the net
deferred tax asset. No tax benefits were recorded in fiscal 1995 due to
limitations on NOLs if an Ownership Change had occurred. During fiscal 1994, tax
benefits of $58.2 million were recorded due to the expected utilization of NOLs
against future taxable income. See "Regulation -- Taxation" and Note 14 to the
Consolidated Financial Statements.
As of September 30, 1996, future taxable income of $721 million would fully
utilize the net deferred tax asset. The Company earned taxable income of $130
million in fiscal 1995 and estimates taxable income of $80 million for fiscal
1996.
MINORITY INTEREST
Dividends on Bank Preferred Stock paid by the Bank increased to $18.3
million for fiscal 1996 from $10.6 million for fiscal 1995, due to the Bank's
issuance of Bank Preferred Stock, Series B during the fourth quarter of fiscal
1995. These shares are not owned by the Company and, accordingly, are reflected
as minority interest in the Consolidated Financial Statements. Payments in lieu
of dividends increased during the year due to the contractual payment of $5.9
million made to the FDIC-FRF in connection with the declaration of a $100
million dividend on the common stock of the Bank. See "Business -- The
Assistance Agreement -- Warrant Agreement" and Note 16 to the Consolidated
Financial Statements.
DISCUSSION OF FINANCIAL CONDITION
OVERVIEW
The Company, through the Bank, is a broad-based financial services provider
to consumers and businesses in Texas and other selected regional markets
throughout the United States. Historically, the Company focused on traditional
single family mortgage lending and deposit gathering, as well as retail and
wholesale mortgage banking activities. Over the past few years, however, the
Company's management has pursued a strategy designed to reduce the Bank's
reliance on its thrift and mortgage banking lines of business by developing
potentially higher margin community banking and commercial banking lines of
business. During this time, the Company has engaged in more aggressive marketing
campaigns and has increased its originations and retention of commercial and
consumer loans and increased the level of lower cost transaction and commercial
deposit accounts. While the pursuit of this strategy entails risks different
from and in addition to those found in traditional thrift and mortgage banking
lines of business, the Company believes it has taken appropriate measures to
manage these risks adequately. To manage potential credit risk, the Company has
developed comprehensive credit approval and underwriting policies and procedures
for these lines of business. To offset operational and competitive risk, the
Company has hired experienced commercial bank professionals, trained other
personnel to manage and staff these businesses, and has closely monitored the
conduct and performance of the businesses. In addition to its efforts to
increase originations of commercial and consumer loans, the Company plans to
increase the retention of higher-yielding single family and multi-family
mortgage loans that, in the past, may have otherwise been sold or securitized.
The Company intends to continue to pursue additional expansion opportunities,
including through acquisitions, while maintaining adequate capital.
34
<PAGE>
The following table reflects activity in the MBS portfolio.
MORTGAGE-BACKED SECURITIES
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
HELD TO MATURITY
Beginning balance.................... $ 2,051,304 $ 2,394,978 $ 358,896
Loans securitized.................. -- -- 906,652
Purchases.......................... 3,841 38,515 83,854
Net change in unrealized gains
(losses) before tax............. 2,841 162 (10,202)
Sales.............................. -- -- (38,252)
Repayments......................... (178,926) (390,364) (162,328)
Transfers.......................... (1,244,945) -- 1,260,971
Other.............................. (4,067) 8,013 (4,613)
------------ ------------ ------------
Ending balance....................... $ 630,048 $ 2,051,304 $ 2,394,978
============ ============ ============
AVAILABLE FOR SALE
Beginning balance.................... $ 346,959 $ 433,925 $ 1,817,029
Loans securitized.................. -- -- 275,520
Purchases.......................... -- 230 583,444
Net change in unrealized gains
(losses) before tax............. 3,660 8,415 (61,613)
Sales.............................. (292,990) (77,610) (174,702)
Repayments......................... (272,059) (16,346) (760,111)
Transfers.......................... 1,244,945 -- (1,260,971)
Other.............................. (2,655) (1,655) 15,329
------------ ------------ ------------
Ending balance....................... $ 1,027,860 $ 346,959 $ 433,925
============ ============ ============
The unrealized gains on the MBS held to maturity portfolio were $2.2
million at September 30, 1996, $14.5 million at September 30, 1995, and $1.8
million at September 30, 1994. The unrealized losses on the MBS held to maturity
portfolio were $23.0 million at September 30, 1996, $34.6 million at September
30, 1995, and $56.0 million at September 30, 1994. The changes in the unrealized
gains and losses in the MBS held to maturity portfolio relate to changes in
market conditions relating to MBS. At September 30, 1996, the Company's MBS held
to maturity portfolio was comprised primarily of privately-issued and
credit-enhanced MBS, of which 99% were rated AA/Aa or higher by the Standard &
Poor's Corporation or Moody's Investor Services, Inc., respectively. These
ratings and the individual MBS are reviewed monthly to ensure that no credit
deterioration has occurred. At September 30, 1996, none of the MBS in the held
to maturity portfolio were on credit watch for possible downgrading by either of
the rating agencies. See "Business -- Investment Portfolio."
35
<PAGE>
The following table reflects activity in the loan portfolio.
LOANS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
HELD TO MATURITY
Beginning balance.................... $ 7,763,676 $ 4,780,328 $ 3,434,440
Originations
Single family................... 818,563 1,012,771 1,319,020
Single family residential
construction.................. 554,260 239,481 133,609
Consumer........................ 125,596 99,249 94,153
Multi-family, commercial real
estate, and business credit... 248,185 246,131 207,546
Purchases
Single family................... 140,583 2,640,755 1,312,827
Consumer........................ -- 68 24,982
Multi-family and commercial real
estate........................ 7,927 17,270 68,466
Net change in mortgage banker
finance line of credit.......... 30,481 (38,124) (238,223)
Repayments......................... (2,298,915) (1,188,489) (807,574)
Securitized loans sold or
transferred..................... -- -- (1,125,050)
Transfers (to) from held for
sale............................ (104,235) 805 398,645
Sales.............................. (4,420) (34,865) (26,930)
Other.............................. (54,548) (11,704) (15,583)
------------- ------------- -------------
Ending balance....................... $ 7,227,153 $ 7,763,676 $ 4,780,328
============= ============= =============
HELD FOR SALE
Beginning balance.................... $ 496,564 $ 265,846 $ 1,427,939
Originations
Single family................... 2,783,446 2,213,553 4,105,530
Multi-family, commercial real
estate, and business credit... 88,861 61,505 23,449
Purchases
Single family................... 85,715 65,103 60,900
Multi-family, commercial real
estate, and business
credit........................ 57,594 38,823 --
Repayments......................... (15,581) (3,667) (54,846)
Securitized loans sold or
transferred(1).................. (2,669,406) (1,864,313) (4,470,275)
Transfers from (to) held to
maturity........................ 104,235 (805) (398,645)
Sales.............................. (642,559) (273,747) (430,342)
Other.............................. 3,466 (5,734) 2,136
------------- ------------- -------------
Ending balance....................... $ 292,335 $ 496,564 $ 265,846
============= ============= =============
</TABLE>
- ------------
(1) Includes $2.6 billion, $1.9 billion, and $4.4 billion of loans securitized
by the Mortgage Banking Group and sold to third parties during fiscal 1996,
1995, and 1994, respectively.
1996 ACTIVITY. Total assets decreased by $1.3 billion, or 11%, to $10.7
billion at September 30, 1996 down from $12.0 billion at September 30, 1995.
This decrease primarily resulted from loan and MBS sales and repayments.
Securities purchased under agreements to resell ("repurchase agreements")
and federal funds sold increased to $674.2 million at September 30, 1996 from
$471.1 million at September 30, 1995. The increase primarily reflects the
Company's decision to borrow and invest funds at a positive spread on a
short-term basis.
Securities decreased $51.5 million, to $64.5 million at September 30, 1996
from $116.0 million at September 30, 1995 reflecting the purchase of $22.4
million and the sale of $96.5 million in securities. During
36
<PAGE>
fiscal 1996, $58.0 million of Small Business Administration ("SBA") loans were
purchased, a portion of which were pooled into securities totalling $30.5
million. At September 30, 1996, $6.5 million of the securities created remain in
the Company's portfolio.
MBS decreased $740.4 million during fiscal 1996, primarily due to sales and
repayments. During fiscal 1996, the Company sold $293.0 million in MBS for a
gain of $2.7 million, compared to $77.6 million in sales for a gain of $16,000
during fiscal 1995. The increase in repayments resulted from a decline in market
interest rates.
In November 1995, the Financial Accounting Standards Board ("FASB")
issued "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities". This implementation guide provided
the Company the opportunity to reassess the appropriateness of the
classification of its securities, and provided that reclassifications of
securities from the held to maturity category resulting from this one-time
reassessment would not call into question the intent to hold other securities to
maturity in the future. During the first quarter of fiscal 1996, the Company
reassessed its securities portfolios and reclassified $1.2 billion in MBS from
the held to maturity portfolio to the available for sale portfolio. An
unrealized gain of $4.2 million before tax, or $2.6 million after tax, was
recorded in stockholders' equity as a result of this transfer. At September 30,
1996 and 1995, the Company had unrealized losses on securities and MBS available
for sale, net of tax, of $2.2 million and $6.6 million, respectively. See Note 4
to the Consolidated Financial Statements.
The increase in single family loan originations during fiscal 1996 resulted
from a decline in market interest rates in comparison to a year ago. The decline
in market interest rates prompted borrowers to refinance their mortgages at
lower rates of interest, resulting in an increase in repayments as well as in
single family mortgage loan originations. Refinancings approximated $1.2 billion
and $600.6 million, or 31% and 17% of total single family mortgage loan
originations during fiscal 1996 and 1995, respectively. Multi-family, commercial
real estate, and business credit loan originations increased $29.4 million
during fiscal 1996 as compared to fiscal 1995. The increase in multi-family,
commercial real estate, and business credit loan originations, as well as the
increase in residential construction loan originations during fiscal 1996, as
compared to fiscal 1995, reflects the geographic expansion of the offering of
these products. Increased consumer loan originations during fiscal 1996 as
compared to fiscal 1995 are primarily due to increased home improvement loan
originations resulting from increased marketing efforts.
As a result of the decline in market interest rates during fiscal 1996, the
MBF (as defined herein) line of credit portfolio increased $30.5 million to
$139.9 million at September 30, 1996.
Single family loan purchases were $226.3 million during fiscal 1996,
compared to $2.7 billion during fiscal 1995. The decrease in purchases reflects
a decrease in products available at attractive yields.
During fiscal 1996, total loans decreased $740.8 million, primarily due to
sales and repayments. During this period, the Company sold $98.1 million of
single family portfolio loans for a gain of $608,000 and $178.4 million of
multi-family loans for a gain of $2.7 million.
MSRs increased $48.3 million to $123.4 million at September 30, 1996 from
$75.1 million at September 30, 1995. During fiscal 1996, the Company purchased
servicing rights associated with $1.2 billion of single family loans at a
premium of $23.5 million.
In the aggregate, FHLB advances, reverse repurchase agreements, and federal
funds purchased decreased $1.3 billion to $4.3 billion at September 30, 1996
from $5.6 billion at September 30, 1995, reflecting a reduction in the Company's
asset base.
The decrease in deposits is primarily due to maturities of consumer and
wholesale certificates of deposits ("CDs") that were not renewed. These
decreases were partially offset by increased consumer checking and insured money
fund deposits, reflecting the Company's emphasis on high levels of customer
service and innovative products.
1995 ACTIVITY. Total assets increased to $12.0 billion at September 30,
1995 from $8.9 billion at September 30, 1994, reflecting an increase of $3.1
billion. The majority of this increase occurred in the loan portfolio, primarily
as a result of single family adjustable-rate loan originations retained for the
Company's portfolio and purchases of single family loans.
37
<PAGE>
Repurchase agreements and federal funds sold increased to $471.1 million at
September 30, 1995 from $358.7 million at September 30, 1994. The increase
primarily reflected the Company's decision to borrow and invest funds on a
short-term basis.
MBS decreased $430.6 million during fiscal 1995, primarily due to
repayments of $406.7 million. The decrease in purchases to $38.7 million for
fiscal 1995 from $667.3 million for fiscal 1994 reflected lower yields available
in the marketplace on MBS during fiscal 1995. The decreased volume of MBS sales,
to $77.6 million for fiscal 1995 as compared to $213.0 million during fiscal
1994, primarily resulted from reduced sales of securitized assets. There were no
loans securitized during fiscal 1995, as compared to $1.2 billion securitized
during fiscal 1994. The $515.7 million decrease in repayments for fiscal 1995,
as compared to fiscal 1994, reflected rising interest rates beginning in the
second half of fiscal 1994.
At September 30, 1995 and 1994, unrealized losses on securities and MBS
available for sale, net of tax, were $6.6 million and $13.4 million,
respectively. The decrease resulted principally from a decline in market prices
due to increased interest rates in the second half of fiscal 1994 and
prepayments of certain high yielding securities. See Note 4 to the Consolidated
Financial Statements.
During fiscal 1995, loans increased $3.2 billion, primarily as a result of
the retention of single family adjustable-rate loan originations for the
Company's portfolio and purchases of single family loans.
While the total loan portfolio increased, single family loan originations
decreased $2.2 billion, or 41%, in fiscal 1995 compared to fiscal 1994 and $1.2
billion, or 18%, in fiscal 1994 compared to fiscal 1993. The decrease in single
family loan originations during fiscal 1995 and 1994 can be attributed to higher
interest rates during those periods leading to a decline in mortgage loan
refinance activity during fiscal 1995 and 1994. Refinancings approximated $600.6
million and $2.0 billion, or 17% and 37%, respectively, of total originations in
fiscal 1995 and 1994. Despite lower origination volumes, the Company retained a
greater percentage of originations for its portfolio due to an increase in the
proportion of adjustable-rate loans as compared to fixed-rate loans originated
by the Mortgage Banking Group. During fiscal 1995, 30% of single family loan
originations were retained for portfolio, as compared to 24% in fiscal 1994. The
higher market interest rates also resulted in a decline in the MBF line of
credit portfolio.
During fiscal 1994 and 1995, despite the decline in single family mortgage
loan originations, the Company's single family loan portfolio increased as a
result of purchases from third parties. While purchases of single family loans
increased during these periods, purchases of MBS decreased. During fiscal 1995,
yields on loan purchases were higher than yields on MBS purchased. During fiscal
1995, $2.7 billion of single family loans yielding 8.46% were purchased,
including a $1.3 billion purchase consisting of adjustable-rate loans, compared
to $38.7 million of MBS purchased at a yield of 5.93%.
Increased single family residential construction, multi-family, and
commercial real estate loan originations in fiscal 1995 reflect geographic
expansion of the offering of these products.
Total deposits increased $418.0 million, to $5.2 billion at September 30,
1995, from $4.8 billion at September 30, 1994. The majority of the increase is
due to an increase in commercial deposits from MBF customers, reflecting the
Company's effort to build its customer base for this type of deposit.
In the aggregate, FHLB advances, reverse repurchase agreements, and federal
funds purchased increased to $5.6 billion at September 30, 1995 from $3.2
billion at September 30, 1994, primarily to fund asset originations and
purchases. In connection with the increase in FHLB advances, FHLB stock was
purchased to maintain the required balance of such stock. The Bank was in
compliance with such stock requirements at September 30, 1995.
During fiscal 1995, the Bank issued the Bank Preferred Stock, Series B.
Costs incurred in connection with the stock issuance were recorded as a
reduction to paid-in capital. The Bank's total capital was increased by $96.2
million as a result of this offering.
ASSET QUALITY
The Company is exposed to certain credit risks related to the value of the
collateral that secures loans held in its portfolio and the ability of borrowers
to repay their loans during the term thereof. The Company has a Credit
38
<PAGE>
Committee comprised of senior officers, that continually monitors the loan and
REO portfolios for potential problems and reports to the Board of Directors at
regularly scheduled meetings. The Company also has established an Asset
Classification Committee comprised of senior management. This committee reviews
the classification of assets and reviews the allowance for credit losses. This
committee reviews all assets and periodically reports its findings directly to
the Board of Directors. The Company also has an Asset Review Department, the
function of which is to provide to the Board of Directors an independent ongoing
review and evaluation of the quality of assets.
Nonperforming assets consist of nonaccrual loans and REO. Loans are usually
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. At September
30, 1994 and 1993, nonaccrual loans included $5.7 million and $9.0 million,
respectively, of single family loans 90 days delinquent that were subject to
government guaranty and upon which interest continued to accrue. There were no
such loans at September 30, 1996, 1995, and 1992. At September 30, 1995, single
family nonaccrual loans included $10.2 million of loans which were contractually
current pursuant to the borrowers' court-approved bankruptcy plans. At September
30, 1996, $10.6 million of such loans were excluded from single family
nonaccrual loans.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS
Single family(1)................ $ 92,187 $ 83,954 $ 85,722 $ 61,451 $ 60,209
Single family residential
construction.................. -- 505 -- -- 672
Consumer........................ 1,039 563 506 427 --
Multi-family.................... 144 213 3,802 3,233 --
Commercial real estate and
business credit............... 350 -- 2,342 -- --
---------- ---------- ---------- ---------- ----------
93,720 85,235 92,372 65,111 60,881
---------- ---------- ---------- ---------- ----------
DISCOUNTS
Accretable(2)................... (286) (560) (669) (781) (1,524)
Non-accretable(3)............... (3,791) (9,167) (15,384) (22,684) (21,250)
---------- ---------- ---------- ---------- ----------
(4,077) (9,727) (16,053) (23,465) (22,774)
---------- ---------- ---------- ---------- ----------
Net nonaccrual loans....... 89,643 75,508 76,319 41,646 38,107
REO, primarily single family
properties......................... 30,730 24,904 20,684 18,954 17,722
---------- ---------- ---------- ---------- ----------
Total nonperforming
assets................... $ 120,373 $ 100,412 $ 97,003 $ 60,600 $ 55,829
========== ========== ========== ========== ==========
</TABLE>
- ------------
(1) Originated single family nonaccrual loans to total single family nonaccrual
loans were 28.82%, 20.64%, and 13.66% at September 30, 1996, 1995, and 1994,
respectively.
(2) Accretable discount arises principally from the purchase of performing
single family residential loans in the secondary market. The discount in
effect functions principally as an additional reserve by lowering the book
value of the outstanding loans. If the accretable discount is included with
the allowance for credit losses, the resulting ratio of the allowance for
credit losses to total loans would have been 0.73% at September 30, 1996.
(3) The loan principal amount related to the non-accretable discounts were $29.5
million, $33.7 million, $60.2 million, $41.4 million, and $43.1 million at
September 30, 1996, 1995, 1994, 1993, and 1992, respectively.
39
<PAGE>
SELECTED ASSET QUALITY RATIOS
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for credit losses to net
nonaccrual loans
Single family................... 32.46% 39.74% 22.70% 39.69% 41.61%
Total........................... 44.24 48.74 30.73 71.71 74.04
Allowance for credit losses to
nonperforming assets............... 32.95 36.65 24.18 49.28 50.54
Allowance for credit losses and
non-accretable discounts to net
nonaccrual loans................... 48.47 60.88 50.89 126.18 129.80
Allowance for credit losses to total
loans.............................. 0.52 0.44 0.46 0.61 0.68
Nonperforming assets to total
assets............................. 1.12 0.84 1.09 0.72 0.89
Net nonaccrual loans to total
loans.............................. 1.19 0.91 1.51 0.85 0.92
Nonperforming assets to total loans
and REO............................ 1.59 1.21 1.91 1.23 1.35
Net loan charge-offs to average loans
Single family................... 0.12 0.08 0.04 0.05 0.07
Total........................... 0.17 0.16 0.30 0.05 0.07
</TABLE>
PORTFOLIO OF GROSS NONACCRUAL LOANS BY STATE AND TYPE
AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
% OF
STATE SINGLE FAMILY OTHER TOTAL TOTAL
- ------------------------------------- ------------- ------ --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
California........................... $53,093 $ -- $ 53,093 56.65%
Florida.............................. 8,657 97 8,754 9.34
Texas................................ 4,359 905 5,264 5.62
Illinois............................. 4,500 -- 4,500 4.80
New Jersey........................... 3,251 -- 3,251 3.47
New York............................. 2,592 -- 2,592 2.77
Maryland............................. 1,642 -- 1,642 1.75
Pennsylvania......................... 1,588 22 1,610 1.72
Virginia............................. 1,162 -- 1,162 1.24
Oregon............................... 1,025 -- 1,025 1.09
Other................................ 10,318 509 10,827 11.55
------------- ------ --------- ------
Total........................... $92,187 $1,533 $ 93,720 100.00%
============= ====== ========= ======
% of Total...................... 98.36% 1.64% 100.00%
============= ====== =========
</TABLE>
The allowance for credit losses to net nonaccrual loans decreased from a
five year high of 74.04% at September 30, 1992 to 48.74% at September 30, 1995.
The decrease in the ratio resulted from the charge-off of $10.1 million in
fiscal 1994 and $3.4 million in fiscal 1995 related to a single large commercial
real estate loan which reduced the amount of the reserve. The ratio decreased to
44.24% at September 30, 1996 primarily due to loan originations and purchases in
the latter half of 1995.
The allowance for credit losses to net nonaccrual loans was 44.24% at
September 30, 1996 and 48.74% at September 30, 1995. This compares to ratios for
peer institutions (thrifts with assets over $5.0 billion) of 83.47% and 80.94%
at June 30, 1996 and 1995, respectively. The Company's charge-off ratios were
0.17% and 0.16% in fiscal 1996 and 1995, respectively, compared to 0.51% and
0.52% for the twelve months ended June 30, 1996 and 1995, respectively, for peer
institutions. Because 98% of the Company's nonaccrual loans are single family
mortgages, its allowance is lower than is typical of its peers. The Company
believes that because of its underwriting standards and substantial purchase
discounts, historical charge-offs on its single family loans have been lower in
the aggregate than the corresponding aggregate net gains from the sales of the
underlying collateral. The Company believes that its allowance levels
approximate the allowances for future potential losses.
40
<PAGE>
At September 30, 1995 and 1994 the Company's single family loan portfolio
represented 84.8% and 82.1%, respectively, of gross loans outstanding compared
to 72.2% and 65.8% for peer institutions.
Total nonperforming assets increased $20.0 million to $120.4 million at
September 30, 1996 from $100.4 million at September 30, 1995. The single family
nonaccrual loans increased $8.2 million, reflecting, in part, the effects of the
loan purchases which occurred in the second half of 1995.
The portion of the purchase discount attributable to potential credit risk
on certain acquired delinquent single family loans is treated as non-accretable
discount. The Company believes that these purchase discounts are sufficient to
cover losses from these portfolios and to provide a market rate of return. The
non-accretable discount on nonaccrual loans decreased $5.4 million to $3.8
million at September 30, 1996 from $9.2 million at September 30, 1995. This
decrease resulted primarily from loan sales and loans being foreclosed upon and
transferred to REO. At September 30, 1996, total non-accretable discount was
$7.1 million, of which $3.8 million related to nonaccrual loans. The
non-accretable discount will reduce future REO losses. REO increased $5.8
million to $30.7 million at September 30, 1996 from $24.9 million at September
30, 1995. This increase primarily resulted from higher levels of delinquencies
on a larger loan portfolio.
Total nonperforming assets increased $3.4 million to $100.4 million at
September 30, 1995 from $97.0 million at September 30, 1994. The multi-family
and commercial real estate nonaccrual loans decreased $5.9 million from
September 30, 1994. This decrease resulted primarily from loans being paid in
full, and improvement in performance and cash flows. The non-accretable discount
decreased $6.2 million to $9.2 million at September 30, 1995 from $15.4 million
at September 30, 1994. This decrease resulted primarily from loans being
foreclosed upon and transferred to REO. REO increased $4.2 million to $24.9
million at September 30, 1995 from $20.7 million at September 30, 1994. This
increase resulted primarily from increased volumes in the single family
portfolio.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan", and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures, an amendment of SFAS No. 114",
effective October 1, 1995. These statements address the accounting by creditors
for impairment of certain loans. They apply to all creditors and to all loans,
uncollateralized as well as collateralized, except for large groups of
small-balance homogeneous loans that are collectively evaluated for impairment,
loans that are measured at fair value or at lower of cost or fair value, leases
and debt securities. These statements apply to all loans that are restructured
in a troubled debt restructuring involving a modification of terms. Loans within
the scope of these statements are considered impaired when, based on current
information and events, it is probable that all principal and interest amounts
due will not be collected in accordance with the contractual terms of the loans.
At September 30, 1996, the recorded investment in impaired loans, pursuant to
SFAS No. 114, totalled $3.9 million. There was no allowance for credit losses
determined in accordance with SFAS No. 114 related to these impaired loans
because the measured values of the loans exceeded the recorded investments in
the loans.
41
<PAGE>
Criticized and classified assets are identified pursuant to management's
asset classification policy, which was established in accordance with regulatory
guidelines.
RECONCILIATION OF CRITICIZED AND CLASSIFIED ASSETS TO
NONPERFORMING ASSETS
AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NONPERFORMING PERFORMING TOTAL
------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Criticized assets
Special Mention
Multi-family....................... $ -- $ 10,288 $ 10,288
Commercial real and business
credit........................... -- 2,440 2,440
------------- ---------- ----------
Total criticized assets....... -- 12,728 12,728
------------- ---------- ----------
Classified
Substandard
Single family...................... 88,522 -- 88,522
Consumer........................... 942 -- 942
Multi-family....................... 115 17,781 17,896
Commercial real estate and business
credit........................... 234 2,652 2,886
Real estate owned.................. 30,730 -- 30,730
------------- ---------- ----------
120,543 20,433 140,976
Doubtful
Multi-family....................... -- 339 339
Commercial real estate and business
credit........................... 116 -- 116
------------- ---------- ----------
116 339 455
Loss.................................. -- -- --
Total classified assets....... 120,659 20,772 141,431
------------- ---------- ----------
Total criticized and
classified assets........... $ 120,659 $ 33,500 $ 154,159
============= ========== ==========
Total classified assets as a %
of total gross loans........ 1.87%
Total allowance for credit
losses as a % of total
classified assets........... 28.04%
</TABLE>
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 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. Although the
credit management systems have resulted in a very low loss experience, there can
be no assurance that such results will continue in the future. The allowance for
credit losses is based principally on delinquency status and historical loss
experience.
The following table presents the allowance for credit losses. See Note 5 to
the Consolidated Financial Statements for activity in the allowance for credit
losses by loan type.
ALLOWANCE FOR CREDIT LOSSES
FOR THE YEAR ENDED SEPTEMBER
30,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Beginning balance....................... $ 36,801 $ 23,454 $ 29,864
Provision.......................... 16,469 24,293 6,997
Charge-offs net of recoveries...... (13,610) (10,946) (13,407)
--------- --------- ---------
Ending balance.......................... $ 39,660 $ 36,801 $ 23,454
========= ========= =========
42
<PAGE>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
AT SEPTEMBER 30,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Single family........................ $ 28,645 $ 29,594 $ 15,905
Single family residential
construction....................... 693 361 399
Consumer............................. 5,219 3,247 1,822
Multi-family......................... 4,118 2,855 2,329
Multi-family construction............ 232 199 127
Commercial real estate and business
credit............................. 314 97 2,112
Mortgage banker finance line of
credit............................. 412 410 684
Single family mortgage warehouse..... 27 38 76
--------- --------- ---------
Total........................... $ 39,660 $ 36,801 $ 23,454
========= ========= =========
The allowance for credit losses increased to $39.7 million at September 30,
1996 from $36.8 million at September 30, 1995. The single family allowance for
credit losses decreased to $28.6 million at September 30, 1996 from $29.6
million at September 30, 1995. This decrease primarily resulted from a reduced
level of single family loans as repayments exceeded originations. The consumer
allowance for credit losses increased to $5.2 million at September 30, 1996 from
$3.2 million at September 30, 1995. This increase primarily resulted from
increased losses related to the unsecured line of credit portfolio. The
multi-family allowance for credit losses increased to $4.1 million at September
30, 1996 from $2.9 million at September 30, 1995. This increase primarily
resulted from an increase in the multi-family held to maturity portfolio.
The allowance for credit losses increased to $36.8 million at September 30,
1995 from $23.5 million at September 30, 1994. The single family allowance for
credit losses increased to $29.6 million at September 30, 1995 from $15.9
million at September 30, 1994. This increase primarily resulted from an increase
in the single family loan portfolio to $7.1 billion at September 30, 1995 from
$4.2 billion at September 30, 1994 due to purchases of $2.7 billion during
fiscal 1995 and additional originations retained for portfolio of $1.0 billion.
The consumer allowance for credit losses increased to $3.2 million at September
30, 1995 from $1.8 million at September 30, 1994, reflecting increased losses
related to the unsecured consumer line of credit portfolio.
The Company charges-off loans, other than consumer loans, when all attempts
have been exhausted to resolve any outstanding loan or legal issues. For
consumer loans, all loans are charged-off when they contractually become 120
days delinquent.
43
<PAGE>
The components of charge-offs and recoveries by property type for the
periods indicated are as follows:
NET LOAN CHARGE-OFFS
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
CHARGE-OFFS
Single family................... $ (7,751) $ (4,840) $ (1,722)
Consumer........................ (5,995) (2,847) (1,365)
Multi-family.................... -- -- (233)
Commercial real estate and
business credit............... (39) (3,389) (10,145)
Single family mortgage
warehouse..................... -- (2) --
---------- ---------- ----------
Total charge-offs.......... (13,785) (11,078) (13,465)
---------- ---------- ----------
RECOVERIES
Single family................... 31 36 20
Consumer........................ 144 94 38
Multi-family.................... -- 2 --
---------- ---------- ----------
Total recoveries........... 175 132 58
---------- ---------- ----------
Total net charge-offs...... $ (13,610) $ (10,946) $ (13,407)
========== ========== ==========
Net loan charge-offs to
average loans............ 0.17% 0.16% 0.30%
Net loan charge-offs for all loan types increased to $13.6 million for
fiscal 1996 from $10.9 million for fiscal 1995. The loan portfolio consists
primarily of single family mortgage loans. 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 0.08%, respectively, 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 have
historically 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. The increase
primarily relates to the unsecured consumer line of credit portfolio.
Net loan charge-offs for all loans decreased to $10.9 million for fiscal
1995 compared to $13.4 million for fiscal 1994. Net charge-offs on the
commercial real estate and business credit portfolio decreased to $3.4 million
for fiscal 1995 compared to $10.1 million for fiscal 1994. The charge-off in
fiscal 1994 resulted primarily from a $10.1 million charge-off related to a
single commercial real estate loan. The charge-off in fiscal 1995 included an
additional $3.4 million charge related to the sale of the single commercial real
estate loan. Excluding the commercial real estate loan charge-offs, net
charge-offs to average loans outstanding would have been $7.5 million and $3.3
million or 0.11% and 0.07%, respectively, for fiscal 1995 compared to fiscal
1994. Net charge-offs on the single family portfolio increased to $4.8 million
for fiscal 1995 compared to $1.7 million for fiscal 1994. This resulted in net
charge-offs as a percentage of single family loans on average of 0.08% and
0.04%, respectively, for fiscal 1995 compared to fiscal 1994. Net charge-offs on
the consumer loan portfolio increased to $2.8 million for fiscal 1995 compared
to $1.3 million for fiscal 1994. This increase primarily relates to the
unsecured consumer line of credit portfolio.
The only credit product that has had charge-offs higher than its original
formula reserves is the unsecured consumer line of credit, which was first
offered in fiscal 1993. This product has loans outstanding at September 30, 1996
of $51.2 million, for which allowances for credit losses were recently increased
from 4% to 6% of loans outstanding. Due to the initial growth and loss
experience in this portfolio, underwriting, approval and collection processes
were modified. Net of charge-offs, the portfolio has had positive net interest
income after loss provisions. The Company believes that its current formula
reserve policy is appropriate for this product.
44
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Liquidity refers to the ability or the financial flexibility to manage
future cash flows to meet the needs of depositors and borrowers and fund
operations on a timely and cost-effective basis. The Bank is required by the OTS
to maintain average daily balances of liquid assets and short-term liquid assets
in amounts equal to 5% and 1%, respectively, of net-withdrawable deposits plus
borrowings payable on demand or with remaining maturities of one year or less.
The average daily liquidity ratio for September 1996 was 5.95%, and the average
short-term liquidity ratio for September 1996 was 3.40%.
The primary sources of funds have consisted of deposits, advances from the
FHLB, reverse repurchase agreements, principal repayments on loans and MBS, and
proceeds from the issuance of Bank Preferred Stock and the Senior Notes.
Liquidity may also be provided from other sources including investments in
short-term high credit quality instruments. At September 30, 1996, these
instruments generally comprised repurchase agreements, federal funds sold,
trading account assets, and MBS and securities available for sale. These
instruments totalled $1.8 billion, $933.2 million, and $905.4 million at
September 30, 1996, 1995, and 1994, respectively. Funding resources are
principally used to meet ongoing commitments to fund deposit withdrawals, repay
borrowings, fund existing and continuing loan commitments, and maintain
liquidity. See Notes 8, 9, 10, and 12 to the Consolidated Financial Statements.
In December 1996, the Company contributed all of the outstanding stock of
its subsidiary, the Bank, to Holdings, and Holdings assumed the obligations of
the Senior Notes. The Company has no significant assets other than its equity in
Holdings and the Company's ability to pay dividends on its common stock and to
meet its other cash obligations is dependent upon the receipt of dividends from
Holdings. Holdings' ability to pay dividends to the Company is dependent on the
extent to which it receives common stock dividends from the Bank. The
declaration of dividends by the Bank on all classes of its capital stock is
subject to the discretion of the Board of Directors of the Bank, the terms of
the Bank Preferred Stock, applicable regulatory requirements, and compliance
with the covenants of the Senior Notes. The Bank currently has outstanding
7,420,000 shares of the Bank Preferred Stock, stated value $25 per share or
$185.5 million in the aggregate. Total aggregate annual dividend requirements on
the Bank Preferred Stock are $18.25 million. While the Bank Preferred Stock is
noncumulative, common stock dividends may not be paid by the Bank if full
dividends on the Bank Preferred Stock have not been paid for the four most
recent quarterly dividend periods. Thus, if for any reason the Bank failed to
declare and pay full quarterly dividends on the Bank Preferred Stock, Holdings
would not receive any cash dividends from the Bank until four full quarterly
dividends on the Bank Preferred Stock had been paid. While it is the present
intention of the Board of Directors of the Bank to declare dividends in an
amount sufficient to provide the cash flow necessary to meet debt service
obligations in respect of the Notes and any Senior Notes that remain outstanding
after the Tender Offer, and to pay dividends to the holders of the Company's
common stock, subject to applicable regulatory restrictions, no assurance can be
given that circumstances which would limit or preclude the declaration of such
dividends will not exist in the future. At September 30, 1996, the Bank would be
permitted to pay $152.7 million of dividends on its capital stock without prior
approval of the OTS, and the Company would be able to pay $76.8 million of
dividends on its common stock under the covenants of the Senior Notes. See
"Regulation -- Safety and Soundness Regulations -- Capital
Requirements -- Capital Distributions" and Notes 11, 15, and 16 to the
Consolidated Financial Statements.
DEPOSITS
Deposits have provided the Company with a source of relatively stable and
low cost funds. Average deposits funded 45% of average total assets for fiscal
1996, 48% for fiscal 1995, and 58% for fiscal 1994. The relationship of the
Company's deposits to its average assets has decreased over the past three
years, while overall deposit levels have remained constant. This change in the
relationship of deposit funding is due to the opportunities for leverage created
by increased capital raised through the issuance of the Bank Preferred Stock in
1993 and 1995 and earnings retained by the Company. Additionally, other
financial instrument opportunities available to consumers, who have
traditionally invested in bank deposit products, have become more widely used as
an alternative to deposit products.
45
<PAGE>
The following table reflects net activity in the Company's deposit
accounts:
DEPOSIT ACCOUNT ACTIVITY
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
Consumer accounts
Checking accounts (including
interest-bearing and
non-interest bearing)......... $ 43,541 $ 4,984 $ 5,467
Savings accounts................ (17,762) (83,089) (97,286)
Money market accounts........... 171,064 (24,028) (1,275)
Time deposits................... (231,656) 35,425 (389,465)
----------- ----------- -----------
Total consumer activity.... (34,813) (66,708) (482,559)
Commercial deposits.................. (45,682) 482,726 384,387
Wholesale deposits................... (125,859) (157,019) (108,196)
----------- ----------- -----------
Total activity before
interest credited........ (206,354) 258,999 (206,368)
Interest credited.................... 172,079 159,017 131,184
----------- ----------- -----------
Net change in deposits..... $ (34,275) $ 418,016 $ (75,184)
=========== =========== ===========
The Company has historically utilized CDs to compete for consumer deposits.
Beginning in 1995, the Company's strategy has been to increase checking and
money market deposit accounts which are the core relationships that provide a
stable source of funding for the Company. As a complement to this strategy, the
Company continues to offer traditional deposit products, such as savings
accounts and CDs. See Note 8 to the Consolidated Financial Statements.
The Company offers cash management services to its MBF customers. These
services are commercial deposit accounts comprised of (i) operating accounts of
MBF customers, (ii) escrow deposits, and (iii) principal and interest payments
on the loans serviced by the MBF customers. At September 30, 1996, 1995, and
1994, these deposits totalled $879.3 million, $911.8 million, and $402.5
million, respectively. The Company also raises wholesale deposits from
institutional customers through its Financial Markets Group. These deposits tend
to be interest rate sensitive and are subject to withdrawal if the rates paid on
these deposits are not competitive with other market rates. While the Company
does not generally solicit brokered deposits, the Company may accept brokered
deposits when permitted by regulation and available at favorable rates.
BORROWINGS
The Company relies upon borrowings, primarily collateralized borrowings
such as advances from the FHLB and reverse repurchase agreements, to fund its
assets. Borrowings were the primary source of funds for the recent asset growth
and accounted for 45% of the funding of average assets for fiscal 1996, 43% for
fiscal 1995, and 31% for fiscal 1994. Fixed and adjustable-rate advances are
obtained from the FHLB Dallas under a security and pledge agreement that
restricts the amount of borrowings to the greater of a percentage of (i) fully
disbursed single family loans, unless assets are physically pledged to the FHLB
Dallas, and (ii) total assets. At September 30, 1996, these limitations were 65%
and 45%, respectively. The Company's ability to borrow on reverse repurchase
agreements is limited to the amount and market value of collateral that is
available to collateralize those reverse repurchase agreements. At September 30,
1996, the Company had $1.2 billion in such collateral, $1.0 billion of which was
collateralizing such reverse repurchase agreements. See Notes 9 and 10 to the
Consolidated Financial Statements.
NOTES PAYABLE
In May 1993, the Company issued $115 million of Senior Notes at an initial
rate of 8.05% and repaid long-term debt (the "15.75% Notes") and a note
payable to a related party. The interest rate on the Senior Notes was subject to
increase in certain circumstances and the PER ANNUM interest rate was increased
to 8.55% in October 1993, and to 9.05% in February 1994. The Senior Notes mature
on May 15, 1998. An exchange offer ("Exchange Offer") was consummated in
August 1996, which satisfied the condition of the Senior Notes pursuant to which
the interest rate on the Senior Notes reverted from 9.05% to 8.05% PER ANNUM in
September 1996. See Note 11 to the Consolidated Financial Statements. The
Company intends to commence the Tender Offer for the Senior Notes. See "The
Tender Offer".
46
<PAGE>
COMMITMENTS
At September 30, 1996, the Company had mandatory forward delivery contracts
for single family loans of $322 million and had warehouse loans and commitments
to originate single family mortgage loans ("mortgage pipeline") of $261
million and $175 million, respectively, available to fill these contracts. At
September 30, 1996 the Company had $988 million of commitments to extend credit.
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 twelve months following September 30, 1996, total $2.0
billion and $3.4 billion, respectively. Management believes that the Company has
adequate resources to fund all of its commitments.
CAPITAL
On May 6, 1996, the Bank paid a $100 million dividend to the Company on the
common stock of the Bank and on the same day, the Company paid a dividend on its
common stock in the amount of $100 million.
Prior to June 1996, the Company was a subsidiary of Hyperion Holdings,
which in turn was a subsidiary of Hyperion Partners. In June 1996, the following
actions were taken: (i) Hyperion Holdings exhanged shares of a newly created
class of its nonvoting common stock for certain shares of its voting common
stock held by Hyperion Partners; (ii) Hyperion Partners then distributed the
Hyperion Holdings common stock owned by it to its limited and general partners
in accordance with the terms of the limited partnership agreement of Hyperion
Partners (the "Distribution") and (iii) following the Distribution, Hyperion
Holdings was merged with and into the Company (the "Merger"). As a result of
the Merger, the common stockholders of Hyperion Holdings (i.e. the limited and
general partners of Hyperion Partners) received shares of Class A voting and
Class B nonvoting common stock of the Company. As of the date of the Merger,
Hyperion Holdings had no significant assets, liabilities or business other than
its investment in the Company. The Merger was accounted for in a manner similar
to a pooling of interests. Due to the immaterial nature of the assets,
liabilities, and operations of Hyperion Holdings prior to the Merger, prior
period results were not restated.
Prior to June 1996, the Company had 13,238 shares of Class A and 2,797
shares of Class C Common Stock, $0.01 par value per share (the "Class C Common
Stock"), outstanding. The June 1996 Merger and Restructuring discussed above
included a 1,800 to one stock conversion and the conversion of all Class C and
certain Class A shares to Class B shares. The Class C shares were then
cancelled. Also in June 1996, 318,342 shares of Class B Common Stock, $0.01 par
value per share (the "Class B Common Stock"), with restrictions on its
transferability for a period of three years from its issuance ("Restricted
Stock") were awarded as part of the management compensation program. See Note
13 to the Consolidated Financial Statements.
In August 1996, the Company filed a registration statement with the
Commission and 12,075,000 shares of the Company Class A Common Stock were sold
to the public. The Company sold 910,694 shares and selling stockholders sold
11,164,306 shares. The net proceeds to the Company, proceeds to the general
partners and limited partners of Hyperion Partners, and three other entities
with which an affiliate of Hyperion has a fiduciary relationship (the "Selling
Stockholders"), and the underwriting discount were $14.0 million, $210.4
million, and $13.9 million, respectively. The net proceeds to the Company from
the August Offering was contributed to the capital of the Bank in the first
quarter of fiscal 1997 for general corporate purposes.
Concurrent with the execution of the Assistance Agreement, the Bank and the
FSLIC entered into the warrant agreement ("Warrant Agreement"), dated December
30, 1988, pursuant to which the FSLIC was granted the Warrant to purchase up to
158,823 shares of common stock of the Bank at an exercise price of $0.01 per
share. In August 1996, the FDIC surrendered a portion of the Warrant for a cash
payment of $6.1 million and exercised the remainder of the Warrant. The FDIC
immediately exchanged the shares of Common Stock of the Bank it received for
1,503,560 shares of Common Stock. The FDIC sold all of the 1,503,560 shares of
Common Stock of the Company in the August Offering.
At September 30, 1996, after the 1,800 to one stock conversion, the
issuance of Restricted Stock, the August Offering, and the Warrant conversion,
the Company had a total of 31,595,596 shares of Common Stock (par value $0.01)
outstanding as follows: Class A (voting) -- 27,735,934 shares and Class B
(nonvoting) -- 3,859,622 shares. The authorized stock of the Company consists of
the following: Class A Common Stock -- 40,000,000 shares, Class B Common
Stock -- 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. At
47
<PAGE>
December 16, 1996, the Company had 28,354,276 shares of Class A Common Stock and
3,541,320 shares of Class B Common Stock outstanding.
In December 1996, the Company contributed all of the outstanding common
stock of its subsidiary, the Bank, to Holdings, and Holdings assumed the
obligations of the Senior Notes.
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, 1996 and 1995
qualified it as "well-capitalized", the highest of five tiers under applicable
regulatory definitions. See "Regulation -- Safety and Soundness
Regulations -- Capital Requirements," and Note 15 to the Consolidated Financial
Statements.
The following table sets forth the regulatory capital ratios of the Bank as
of the dates indicated.
REGULATORY CAPITAL RATIOS
AT SEPTEMBER 30,
-------------------------------
1996 1995 1994
--------- --------- ---------
Tangible capital..................... 6.57% 6.20% 6.01%
Core capital......................... 6.64% 6.29% 6.17%
Total risk-based capital............. 13.09% 13.45% 14.02%
Tier I capital....................... 12.40% 12.82% 13.44%
During fiscal 1993, the Bank issued its Preferred Stock, Series A and
during fiscal 1995, the Bank issued its Preferred Stock, Series B. Shares
totalling $85.5 million were issued as a result of the Preferred Stock, Series A
offering and shares totalling $100 million were issued as a result of the
Preferred Stock, Series B offering. These shares are not owned by the Company.
Bank Preferred Stock, which is treated as core capital for regulatory purposes,
was issued to increase total capital to support further growth.
The United States Congress passed legislation that was signed into law on
September 30, 1996, which resulted in an assessment on all SAIF-insured deposits
in such amounts that will fully-capitalize the SAIF at a reserve ratio of 1.25%
of SAIF-insured deposits. This one-time assessment has been set at 65.7 basis
points of SAIF-assessable deposits at March 31, 1995. The Bank's assessment of
$33.7 million, $20.7 million net of tax, was recorded in the fourth quarter of
fiscal 1996 and will be paid in the first quarter of fiscal 1997.
As a result of this one-time assessment, the SAIF has met its designated
reserve ratio at October 1, 1996. For the first quarter of fiscal 1997, a
special interim rate of 18 to 27 basis points will apply to pay interest on the
Financing Corporation ("FICO") obligations. Effective January 1, 1997, well
capitalized SAIF institutions such as the Bank will pay a base assessment rate
of 0 basis points and FICO assessments of 6.44 basis points.
CONTINGENCIES AND UNCERTAINTIES
Maxxam has filed a petition for review in the United States Court of
Appeals for the Fifth Circuit seeking to modify, terminate, and set aside the
order approving the Acquisition, which involved substantially all the Bank's
initial assets and liabilities. In its brief to the Court of Appeals, Maxxam has
asserted that the Court of Appeals should order the OTS "to award Bank United
to Maxxam" and that the Company would bear no harm in that event because it is
entitled to full indemnification by the FDIC-FRF pursuant to Section 7(a)(2) of
the Assistance Agreement. The same petitioner has filed a Motion to Intervene
and a Complaint in Intervention in an action pending in the United States
District Court for the Southern District of Texas, also seeking to set aside the
order approving the Acquisition. Maxxam contends, in both cases, that it
submitted the most favorable bid to acquire the assets and liabilities of Old
USAT and that it should have been selected as the winning bidder.
The Company is not a party to either of these proceedings. The Bank has
intervened in the Fifth Circuit case and may file a Motion to Intervene in the
District Court case at a later date. On December 10, 1996, the Fifth Circuit
Court, in a PER CURIAM opinion and order, affirmed the order approving the
Acquisition in all respects. The time for appeal to the Supreme Court of the
United States has not yet expired, and the Company does not know whether Maxxam
will appeal the Fifth Circuit decision. Management believes, after consultation
with legal counsel, that the claims of the petitioner are barred by applicable
time limits, have no basis for assertion under existing law, and will not have a
material adverse effect on the Bank's or the Company's financial condition,
results of operations, or liquidity. See "Legal Proceedings".
The Bank, in its various operations, is subject to substantial statutory
and regulatory compliance obligations. See "Regulation". The Bank attempts in
good faith to comply with the requirements of the various statutes and
48
<PAGE>
regulations to which it is subject. These statutes and regulations are complex,
however, and even inadvertent noncompliance could result in civil and, in some
cases, criminal liability. In this regard, a substantial part of the Bank's
business has involved the origination, purchase, and sale of mortgage loans.
During the past several years, numerous individual claims and purported consumer
class action claims have been commenced against a number of financial
institutions, their subsidiaries, and other mortgage lending institutions,
alleging violations of various state and regulatory provisions relating to
mortgage lending and servicing, including the TILA and the RESPA.
In addition to the foregoing, mortgage lending institutions have been
subjected to an increasing number of other types of individual claims and
purported consumer class action claims that relate to various aspects of the
origination, pricing, closing, servicing and collection of mortgage loans, and
that allege inadequate disclosure, breach of fiduciary duty, breach of contract,
or violation of federal or state laws. Claims have involved, among other things,
interest rates and fees charged in connection with loans, interest rate
adjustments on adjustable-rate mortgage loans, timely release of liens upon loan
payoffs, the disclosure and imposition of various fees and charges, and the
placing of collateral protection insurance. The Bank has had asserted against it
one putative class action claim under the RESPA and three separate putative
class action claims involving the Bank's loan servicing practices. Management
does not expect these claims, in the aggregate, to have a material adverse
effect on the Bank's or the Company's financial condition, results of operations
or liquidity. See "Legal Proceedings".
As of September 30, 1996, the Company had NOLs of $817 million available to
reduce taxable income in future years. There can be no assurance that the tax
deductions associated with these NOLs will be allowed by the IRS. In addition,
such tax deductions would be subject to significant limitation under Section 382
of the Code if the Company undergoes an Ownership Change. In the event of an
Ownership Change, Section 382 of the Code imposes an annual limitation on the
amount of taxable income a corporation may offset with NOLs and certain
recognized built-in losses. See "Regulation -- Taxation -- Net Operating Loss
Limitations".
FEDERAL FINANCIAL ASSISTANCE
Pursuant to the Assistance Agreement and the Settlement Agreement (as
defined herein) the Bank received substantial payments from the FRF during
fiscal 1994 as follows:
(IN THOUSANDS)
Payments affecting the results of
operations......................... $ 23,143
Other Payments
Settlement payment.............. 195,300
Other........................... 468
--------------
Total FRF payments.... $218,911
==============
FRF Assistance on Covered Assets (as defined herein) was offset by the
interest expense to carry these assets and certain related operating expenses,
neither of which were reimbursed by the FRF.
Pursuant to the Settlement Agreement, all financial assistance and related
payments ceased to accrue as of December 28, 1993, and, as of that date, the
Bank no longer managed or owned any Covered Assets. There was no material
adverse effect on the Company or the Bank as a result of the Settlement
Agreement, the transfer of certain Covered Assets to the FDIC, and the retention
of the remainder of such Covered Assets without financial assistance. See
"Business -- The Assistance Agreement".
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" was issued. This statement
establishes accounting standards for recognizing and measuring impairment of
long-lived assets (and related goodwill) to be held and used and for such assets
held for disposal. The statement is effective for financial statements with
fiscal years beginning after December 15, 1995. Implementation of this
pronouncement should have no material effect on the Consolidated Financial
Statements.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. This statement defines a fair value based method of accounting for
an employee stock option or similar equity instrument and encourages adoption of
that method for all employee stock compensation plans. However, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value based method currently being followed and make pro forma
disclosures of net income and earnings per share under the fair value based
method of accounting. This statement is effective for financial statements with
fiscal years beginning after December 15, 1995. Management is currently
evaluating the proposed alternatives under this statement.
49
<PAGE>
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued. This statement
requires that, after a transfer of financial assets, an entity recognize the
financial and servicing assets it controls and the liabilities it has incurred,
derecognize financial assets when control has been surrendered, and derecognize
liabilities when extinguished. This statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. This statement is effective for transfers and servicing
of financial assets and extinguishment of liabilities occurring after December
31, 1996, except as amended by SFAS No. 127, "Deferral of Certain Provisions of
FASB Statement No. 125". SFAS No. 127 was issued in December 1996 and defers
the effective date of SFAS No. 125 for (i) secured borrowings and collateral for
all transactions and (ii) transfers of financial assets for repurchase
agreements, dollar rolls, securities lending, and similar transactions. SFAS No.
125, as amended, is to be applied prospectively and early or retroactive
application is not permitted. Implementation of these pronouncements should have
no material effect on the Consolidated Financial Statements.
FORWARD-LOOKING INFORMATION
Statements and financial discussion and analysis by management contained
herein that are not historical facts are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements involve a number of risks and
uncertainties. The important factors that could cause actual results to differ
materially from the forward-looking statements include, without limitation,
changes in interests rates and economic conditions; the shift in the Company's
emphasis from residential mortgage lending to community and commercial banking
activities; the restructuring or sale of the Company's Mortgage Banking
origination business; increased competition for deposits and loans; changes in
the availability of funds; changes in local economic and business conditions;
changes in availability of residential mortgage loans originated by other
financial institutions or the Company's ability to purchase such loans on
favorable terms; transactions in the Common Stock that might result in an
Ownership Change triggering an annual limitation on the use of the Company's
NOLs under Section 382 of the Code; changes in the ability of the Bank to pay
dividends on its common stock; changes in applicable statutes and government
regulations or their interpretation; the continuation of the significant
disparity in the deposit insurance premiums paid by thrift institutions and
commercial banks; changes in government programs that facilitate the issuance of
MBS or the Company's continued eligibility to participate in such programs; the
loss of senior management or operating personnel; claims with respect to
representations and warranties made by the Company to purchasers and insurers of
mortgage loans and to purchasers of MSRs; claims of noncompliance by the Company
with statutory and regulatory requirements; and changes in the status of
litigation to which the Company is a party. For further information regarding
these factors, see "Risk Factors".
50
<PAGE>
BUSINESS
GENERAL
The Company is a broad-based financial services provider to consumers and
businesses in Texas and other selected regional markets throughout the United
States. Through the Bank, the Company currently operates 70 Texas-based
community banking branches serving nearly 200,000 households and businesses,
nine commercial banking offices and a nationwide network of mortgage offices. At
September 30, 1996, the Company had assets of $10.7 billion, deposits of $5.1
billion and stockholders' equity of $531.0 million. The Company was the largest
publicly traded depository institution headquartered in Texas, in terms of both
assets and deposits, at September 30, 1996.
The Company's operating structure reflects its current business strategy,
with four business groups in two business segments.
--------------------
| Bank United Corp. |
| (the "Company") |
--------------------
|
---------------------
| BNKU Holdings, Inc. |
| ("Holdings") |
---------------------
|
---------------------
| Bank United |
| (the "Bank") |
---------------------
|
----------------- | --------------------------
| Banking Segment | ---------------| Mortgage Banking Segment |
----------------- --------------------------
| |
----------------+--------------------------- |
| | | |
--------------- --------------- ------------------ ----------
| Community | | Commercial | | Financial Markets| | Mortgage |
| Banking Group | | Banking Group | | Group | | Banking |
--------------- --------------- ------------------ | Group |
----------
Activities
o Deposit o Mortgage Banker o Loan Acquisitions o Retail
Gathering Finance Mortgage
Operations
o Consumer Lending o Multi-Family o Wholesale Fundings o Wholesale
Lending Mortgage
Operations
o Small Business o Residential o Investment o Mortgage
Banking Construction Portfolio Servicing
Lending Management Operations
o Investment Product o Commercial Real o Securitization of
Sales Estate Lending Loans
51
<PAGE>
The tables below present an overview of the operating results of the
Company and its business segments for fiscal 1996, 1995, and 1994. See
"Management's Discussion and Analysis -- Discussion of Results of Operations"
and Note 18 to the Consolidated Financial Statements.
EARNINGS (LOSS) BEFORE INCOME TAXES, AND MINORITY INTEREST,
BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
BANKING MORTGAGE BANKING BANK UNITED TOTAL
SEGMENT SEGMENT CORP.(1) ELIMINATIONS(2) EARNINGS
------- ---------------- ----------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Years ended September 30,
1996............................... $ 82.4 $ (3.1) $97.5 $(109.0) $ 67.8
1995............................... 82.1 19.4 (5.0) (6.4) 90.1
1994............................... 73.8 24.4 (0.7) (11.4) 86.1
</TABLE>
OPERATING EARNINGS (LOSS) BY BUSINESS SEGMENT
<TABLE>
<CAPTION>
BANKING MORTGAGE BANKING BANK UNITED TOTAL OPERATING
SEGMENT SEGMENT CORP.(1) ELIMINATIONS(2) EARNINGS
------- ---------------- ----------- --------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Years ended September 30,
1996............................... $114.4 $ 11.8 $97.5 $(109.0) $ 114.7
1995............................... 83.3 19.4 (5.0) (6.4) 91.3
1994............................... 63.2 24.4 (0.7) (11.4) 75.5
</TABLE>
- ------------
(1) Principally dividends received by the Company from the Bank, net of interest
expense on the Senior Notes. In May 1996, the Bank paid a $100 million
dividend on its common stock. See Notes 16 and 18 to the Consolidated
Financial Statements.
(2) Reflects the elimination of dividends received by the Company from the Bank.
Operating earnings represents income, including net gains (losses) on the
sales of single family servicing rights and single family warehouse loans,
before taxes and minority interest, and excludes net gains (losses) on
securities, MBS, and other loans. Operating earnings for fiscal 1996 excludes a
one-time SAIF assessment charge of $33.7 milion, compensation expense of $7.8
million related to the adoption of a management compensation program, and
charges totalling $12.5 million related to the Mortgage Banking Group because
these items are considered non-recurring. See "Management's Discussion and
Analysis -- Mortgage Banking Restructuring" and Notes 13, 15, and 18 to the
Consolidated Financial Statements. Management believes operating earnings
reflects the revenues and expenses of the Company's business segments and
facilitates trend analysis as it excludes transactions that are typically
considered opportunistic or non-recurring and not part of the routine core
business operations of the Company. Operating earnings is provided as other data
and should not be considered an alternative to net income as an indicator of the
Company's operating performance or to cash flow as a measure of liquidity.
COMMUNITY BANKING GROUP
The Community Banking Group's principal activities include deposit
gathering, consumer lending, small-business banking, and investment product
sales. The Community Banking Group, which has marketed itself under the name
"Bank United" since 1993, currently operates a 70-branch community banking
network, a 24-hour telephone banking center, and a 66-unit ATM network, which
together serve as the platform for the Company's consumer and small business
banking activities. The community banking branch network includes 37 branches in
the greater Houston area, 29 branches in the Dallas / Ft. Worth metropolitan
area, and two branches each in Austin and San Antonio. Through this branch
network, the Company maintains approximately 440,000 accounts with an estimated
200,000 households and businesses.
52
<PAGE>
DEPOSIT GATHERING
The Community Banking Group offers a variety of traditional deposit
products and services, including checking and savings accounts, money market
accounts, and CDs and offers deposit products and services tailored specifically
to small business needs. The Community Banking Group's strategy is to become its
customers' primary financial services provider by emphasizing high levels of
customer service and innovative products. The Company has a history of
introducing innovative products that have helped it increase its competitive
position within its primary banking markets. At September 30, 1996, the
Community Banking Group maintained over 338,000 deposit accounts with $4.1
billion in deposits.
CONSUMER LENDING
Since 1992, the Community Banking Group has engaged in consumer lending for
its own portfolio. At September 30, 1996, consumer loans outstanding totalled
$173.5 million. Through the Community Banking Group, the Company offers a
variety of consumer loan products, including home improvement loans, unsecured
lines of credit, and automobile loans. Home improvement loans are fixed-rate
loans and are offered for terms up to 15 years, unsecured loans are open ended
maturities with fixed and adjustable-rates, and automobile loans are offered for
terms up to six years on a fixed-rate basis. These loans are underwritten
utilizing credit scoring and collateral value, and are subject to collection,
collateral valuation, and fraud risks. In addition, while the Company has
offered its customers credit cards since 1990, the Company intends to begin
credit card lending for its own portfolio in fiscal 1997. The consumer lending
division of the Community Banking Group also offers home equity lines of credit
("HELOCs") outside of Texas. (Current laws prohibit HELOC lending in the state
of Texas; however, the Company has in place the systems and controls needed to
manage a Texas based HELOC operation in anticipation of possible Texas
legislative and constitutional changes that would authorize such lending.)
During fiscal 1997, the Company intends to begin offering mortgages through its
community banking branch network. The Community Banking Group has developed the
technology required for efficient loan processing and underwriting, including
credit scoring and such services as taking loan applications by telephone.
Unsecured line of credit loans and credit card loans have the additional risks
of no collateral, greater chance of fraud and complex consumer protection laws
and regulations. In addition, the ease of credit card availability to the
consumer increases risk. Automobile loans carry the risk of collateral
depreciation and mobility. Also, repossession laws make it difficult to take
possession of the collateral to enforce lien rights.
SMALL BUSINESS BANKING
The Community Banking Group 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, and SBA loans. These loans
are offered with both fixed and adjustable-rates on a term basis, and
adjustable-rate revolving basis with maturities up to 10 years for term loans
and one year for revolving loans. These loans are underwritten on the financial
strength of the guarantor, collateral utilized, and projected cashflow of the
business. Small business loan risks are similar to the risks associated with
unsecured commercial loans, but tend to be magnified due to business cycles and
the nature of the assets that small businesses tend to maintain. Additionally,
the Company requires borrowers to provide periodic financial information for
review and assessment. At September 30, 1996, the Community Banking Group had
approximately 480 business credit loans outstanding, totalling approximately
$26.8 million. At September 30, 1996, the Community Banking Group also had
approximately $16.2 million in unfunded commitments and another $1.3 million in
pending applications for business credit loans. The Community Banking Group's
small business strategy is focused on offering loan products and services
tailored specifically to most small business needs, with highly responsive
credit decision-making. The Company is aggressively seeking to increase its
small business lending volume. Specifically, the Company is offering a
comprehensive line of small business products and services. It has hired a
number of experienced officers, developed a formal customer calling program,
trained community banking branch managers to source small business loans from
and in proximity to branches, is utilizing modern loan application processing
and credit scoring technology, and offering a comprehensive line of cash and
treasury management services to small business customers. Small business lines
of credit and working capital loans may be made on an unsecured basis and
therefore may have no secondary source of repayment. When such loans are
secured, the value of the collateral may fluctuate with local economic
conditions. Small business equipment loans are typically made for
53
<PAGE>
longer terms and at higher loan-to-value ratios than other types of equipment
loans, and the collateral may have limited marketability or may become obsolete
during the term of the loan. Small business owner-occupied real estate loans may
be secured by single-use or limited-use real estate. The valuation of these
properties is based, in part, upon their ability to operate successfully as
going concerns. SBA loans are typically originated at higher loan-to-value
ratios and for longer terms than other commercial loans and are made to
borrowers that might not meet the Company's underwriting guidelines for other
commercial loans.
INVESTMENT PRODUCT SALES
Since 1993, a subsidiary of the Bank has been marketing investment products
to the Company's consumer customer base. At September 30, 1996, the investment
product sales force was comprised of 24 commissioned Series 7 and Group I
licensed registered representatives. A broad range of investment products,
including stocks, bonds, mutual funds, annuities, and securities are offered by
these registered representatives. Investment product sales increased to $157.2
million in fiscal 1996 from $81.0 million in fiscal 1995. Gross fee revenue from
such sales were $5.4 million and $3.6 million for fiscal 1996 and 1995,
respectively.
COMMERCIAL BANKING GROUP
The Commercial Banking Group provides credit and a variety of cash
management and other services to certain real estate and real estate related
businesses. The Commercial Banking Group conducts its activities through four
units: Mortgage Banker Finance ("MBF"), a financial service provider to small-
and medium-sized mortgage companies; Multi-Family Lending; Residential
Construction Lending; and Commercial Real Estate Lending. Business is solicited
in Texas and in targeted regional markets throughout the United States. The
Commercial Banking Group earns fees on committed lines and fees and interest on
loans outstanding. The Commercial Banking Group is expanding its products and
industry specialties to include health care lending, asset-based lending, and
other industrial and commercial loan products.
MORTGAGE BANKER FINANCE
The Commercial Banking Group's MBF unit provides third-party mortgage
companies with credit facilities, including warehouse lines of credit,
repurchase agreements, term loans secured by MSRs, and working capital credit
lines, as well as cash management services. The loans provided by the MBF are
generally collateralized by single family mortgages or related servicing rights.
The Company lends based on a percentage of the loan market value. The collateral
for these loans typically is available for the period of time from the
origination of the loan by the borrower until its subsequent sale in the
secondary market. At September 30, 1996, the MBF unit had $199.2 million in
unfunded commitments and $139.9 million of loans outstanding. Since 1994, the
MBF unit has also offered commercial banking services (I.E., cash management,
document custody and deposit services) to its mortgage banking customers.
Deposits related to MBF activities totalled $879.3 million at September 30,
1996. MBF loans and lines of credit are subject to the risk of collateral that
fluctuates in value with changing interest rates. The loans are also subject to
the risk that the collateral may be fraudulently or improperly documented. MBF
loans are also generally made to borrowing entities that are more thinly
capitalized than other commercial borrowers.
MULTI-FAMILY LENDING
Since 1990, the Commercial Banking Group has been providing multi-family
financing for established, operating multi-family properties, real estate
investment trusts, and selected construction, acquisition, and rehabilitation
projects. Permanent and construction multi-family loans are offered on a fixed
or adjustable-rate basis. Multi-family lending is subject to the risk that the
borrower may not complete the improvements to the real estate collateral in a
timely manner or may fraudulently misrepresent the progress or status of the
project. Additionally, the value of the completed collateral is subject to
market fluctuations and may be adversely affected by the presence of undetected,
environmentally sensitive substances. The Company utilizes certain lending
practices to reduce these risks. These include limiting the loan amount to an
amount less than its appraised value, verifying historical cash flows, assessing
the general economic conditions and the financial condition of the borrower. At
September 30, 1996, the Multi-Family Lending unit had $152.3 million in unfunded
multi-family commitments and $511.2 million in such loans outstanding ($479.8
million in permanent loans and $31.4 million
54
<PAGE>
in construction loans). Loans are solicited directly in Texas and in targeted
regional markets throughout the United States, through regional offices and
selected preapproved multi-family mortgage banking correspondents. From time to
time, the Commercial Banking Group also purchases servicing rights related to
multi-family loans. At September 30, 1996, the multi-family servicing portfolio
totalled $716.9 million, of which $433.5 million represented loans in the
Company's portfolio.
RESIDENTIAL CONSTRUCTION LENDING
Since 1989, the Commercial Banking Group has been active in making loans to
builders for the construction of single family residential properties and, on a
more limited basis, loans for acquisition and development of improved
residential lots. These loans are made on a commitment term that generally is
for a period of one to two years. Residential construction loans are subject to
the risk that a general downturn in the builder's local economy could prevent it
from marketing its product profitably. Such loans are also subject to the risk
that a builder might misrepresent the completion status of the homes against
which it has drawn loan funds. The Company seeks to limit these risks by
reviewing individual builders' experience and reputation, general financial
condition, and speculative inventory levels. Additionally, construction status
is reviewed by onsite inspections and the builders' ongoing financial position
is monitored. During fiscal 1995 and 1994, the Company expanded into several
other major markets outside of Texas, including Atlanta, Chicago, Denver,
Orlando, Phoenix, and Philadelphia. Current markets in Texas include Houston,
Dallas, Austin, and San Antonio. At September 30, 1996, the Company had $175.9
million in unfunded commitments for single family residential construction loans
and $242.5 million of such loans outstanding.
COMMERCIAL REAL ESTATE LENDING
The Commercial Banking Group is engaged in commercial real estate lending
for specific products, emphasizing permanent mortgages on income producing
properties, such as assisted living facilities and retail shopping centers. At
September 30, 1996, the Company had $40.8 million in permanent commercial real
estate loans outstanding. Commercial real estate loans are typically made to
single-purpose business entities with limited secondary sources of repayment
outside the specific project financed. The value of the collateral for such
loans may be adversely affected by local market conditions and by the presence
of environmentally sensitive substances. Competitive marketplace underwriting
guidelines are followed in evaluating each loan transaction.
FINANCIAL MARKETS GROUP
The Financial Markets Group manages the Company's asset portfolio
activities, including loan acquisition and management and the securitization of
loans. Additionally, under the supervision of the ALCO, the Financial Markets
Group is responsible for the Company's investment portfolio, for interest rate
risk hedging strategies, and for securing funding sources other than consumer
and commercial deposits. See " -- Asset and Liability Management".
LOAN ACQUISITIONS
The Financial Markets Group acquires residential loans, primarily single
family loans, through traditional secondary market sources (mortgage companies,
financial institutions, and investment banks), as well as from the Mortgage
Banking Group. Since September 1992, the Company has closed more than 60 loan
acquisition transactions representing more than $5.3 billion in loans. While the
Company intends to continue to pursue this strategy on a selective basis, no
assurance can be given as to the continued availability of portfolio acquisition
opportunities or the Company's ability to obtain such portfolios on favorable
terms. At September 30, 1996, a majority of the $7.3 billion of loans held to
maturity by the Company were managed by the Financial Markets Group.
WHOLESALE FUNDINGS
The Financial Markets Group arranges funding sources other than consumer
and commercial deposits for the Company. Wholesale funding sources include
advances from the FHLB Dallas, borrowings on securities sold under reverse
repurchase agreements, and brokered CDs. At September 30, 1996, wholesale
activities provided
55
<PAGE>
$4.5 billion in funding. See "Management's Discussion and Analysis -- Capital
Resources and Liquidity" and Notes 8, 9, and 10 to the Consolidated Financial
Statements.
INVESTMENT PORTFOLIO MANAGEMENT
The Financial Markets Group manages the Company's investment portfolio,
which totalled nearly $2.4 billion at September 30, 1996. The Financial Markets
Group seeks to maintain a portfolio of assets that provides for liquidity needs
and maintains an interest rate spread over matched funded liabilities, including
assets that may be pledged as collateral for secured borrowings, and that
maximize utilization of the Bank's risk-based capital. See " -- Investment
Portfolio", "-- Asset and Liability Management", and Notes 2, 3, and 4 to the
Consolidated Financial Statements.
SECURITIZATION OF LOANS
From time to time, the Financial Markets Group evaluates the Company's loan
portfolio for securitization opportunities and, when appropriate, creates
securities and retains the master servicing. During the past four years, the
Financial Markets Group has structured seven securitization transactions,
creating $1.8 billion in MBS. The Company has sold substantially all of the
non-investment grade MBS created, thus enhancing the Bank's risk-based capital
ratios and credit quality. During fiscal 1996, the Financial Markets Group
purchased $58 million in SBA loans, a portion of which was pooled into seven
securities totalling $30.5 million. These securitization activities are separate
from the secondary marketing activities of the Mortgage Banking Group.
MORTGAGE BANKING GROUP
The Mortgage Banking Group operates under the names "Bank United
Mortgage" in Texas and Virginia and "Commonwealth United Mortgage" elsewhere
in the United States. The Mortgage Banking Group originates and services first
mortgage loans for single family residences for both the Company's portfolio and
for investors. The Company's servicing portfolio at September 30, 1996 was $13.2
billion. To manage the risk on the mortgage pipeline, the Company estimates the
portion of the loans that will close and then enters into forward sales of such
loans in the secondary market. See Note 12 to the Consolidated Financial
Statements.
Consistent with the increasing emphasis on its community and commercial
banking business, the Company has been in the process of evaluating its
strategic alternatives with respect to its mortgage banking business. As a
result of this evaluation and in order to attempt to mitigate the negative
effect on profitability of increased competition in the loan origination
business of the Mortgage Banking Group, the Company initiated a profitability
improvement plan. The plan included the closure and consolidation of certain
mortgage origination branches, the closure and consolidation of several regional
operation centers, and related reductions in workforce. In addition, the plan
included process and operational restructuring, as well as changes in management
structure and compensation, all designed to create operational efficiencies and
promote profitability. In June 1996, the Company recorded a restructuring charge
of $10.7 million before tax, to recognize the costs of closing or consolidating
production offices and several regional operation centers and recorded $1.8
million of other expenses related to the mortgage origination business. As a
result of this plan, through December 31, 1996, 39 mortgage origination branches
and 6 regional operation centers have been closed and the workforce was reduced
by 243. At December 31, 1996, 80 mortgage origination branches remained open.
Implementation of the profitability improvement plan has resulted in a decrease
in the fixed charges necessary to operate the loan origination business.
However, the overall improvements in profitability projected by the plan have
not yet been achieved, and it is too early to determine if they will ultimately
be achieved. Therefore no assurance can be given regarding the efficacy of the
profitability improvement plan or the timing or impact of any further
restructuring (including a possible future sale or liquidation of the Company's
residential mortgage lending business).
56
<PAGE>
The Mortgage Banking Group principally engages in three activities: Retail
Mortgage Operations, Wholesale Mortgage Operations, and Mortgage Servicing
Operations.
RETAIL MORTGAGE OPERATIONS
The Mortgage Banking Group offers a variety of fixed and adjustable-rate
mortgage products for consumers through a nationwide network of retail mortgage
origination offices. For fiscal 1996, the Mortgage Banking Group originated $2.1
billion in retail mortgage loans. Loans are originated through direct contact
with individual borrowers by commissioned retail loan officers.
WHOLESALE MORTGAGE OPERATIONS
The Mortgage Banking Group provides qualified mortgage brokers nationwide
with a variety of fixed and adjustable-rate mortgage products through its
network of wholesale mortgage origination offices. For fiscal 1996, the Mortgage
Banking Group originated $1.7 billion in mortgage loans through its wholesale
operations. Loans are originated through contact with one of the Company's 3,086
mortgage brokers, serviced by the wholesale account executives. All loans
originated through wholesale mortgage operations are underwritten by the
Company's staff according to secondary market requirements and internal
guidelines. The loans are originated and closed in either the name of the
Company or, under certain circumstances, the mortgage broker's name with
immediate assignment to the Company.
MORTGAGE SERVICING OPERATIONS
The Mortgage Banking Group services residential mortgage loans owned by the
Company and by others, including the GNMA, the FNMA, the FHLMC, and private
mortgage investors. At September 30, 1996, the Mortgage Banking Group serviced
over $13.2 billion in mortgage loans, including $3.8 billion for the Company's
portfolio and $9.4 billion for others. Mortgage servicing operations are
technology and process management intensive. The Company views itself as being
competitively positioned to service loans in an efficient and cost effective
manner relative to its peers. See " -- Loan Servicing Portfolio".
LOAN PORTFOLIO
The Company has focused in recent years on originating and servicing
commercial banking assets. However, the loan portfolio still reflects the Bank's
origins as a thrift institution, with single family mortgage originations
constituting a majority of loans made. The following tables set out loan
origination levels, as well as the product and geographic distribution of the
loan portfolio. See the loan table in "Management's Discussion and
Analysis -- Discussion of Financial Condition" and see Note 5 to the
Consolidated Financial Statements.
LOAN ORIGINATIONS
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Single family........................ $ 3,602,009 $ 3,226,324 $ 5,424,550
Single family residential
construction....................... 554,260 239,481 133,609
Consumer............................. 125,596 99,249 94,153
Multi-family, commercial real estate,
and business credit................ 337,046 307,636 230,995
------------ ------------ ------------
Total...................... $ 4,618,911 $ 3,872,690 $ 5,883,307
============ ============ ============
57
<PAGE>
LOAN PORTFOLIO
AT SEPTEMBER 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Single family........................ $ 6,152,504 $ 7,061,088 $ 4,203,614
Single family residential
construction....................... 242,525 115,436 57,786
Consumer............................. 173,518 123,096 108,179
Multi-family......................... 479,833 444,368 268,897
Multi-family construction............ 31,355 35,430 20,437
Commercial real estate and business
credit............................. 96,427 38,326 61,919
Mortgage banker finance line of
credit............................. 139,872 109,339 147,754
Single family mortgage warehouse..... 260,745 411,287 252,153
------------ ------------ ------------
7,576,779 8,338,370 5,120,739
Allowance for credit losses.......... (39,660) (36,801) (23,454)
Accretable unearned discount......... (15,307) (38,460) (50,650)
Net deferred loan origination fees... (2,324) (1,727) (461)
Unrealized losses.................... -- (1,142) --
------------ ------------ ------------
Total loans................ $ 7,519,488 $ 8,260,240 $ 5,046,174
============ ============ ============
GEOGRAPHIC DISTRIBUTION OF REAL ESTATE LOAN PORTFOLIO
AT SEPTEMBER 30,
----------------------------------------
STATE 1996 1995 1994
- ------------------------------------- ------------ ------------ ------------
(IN THOUSANDS)
California........................... $ 3,404,731 $ 3,958,293 $ 1,764,531
Texas................................ 1,245,459 1,259,306 1,131,225
Florida.............................. 436,338 479,379 456,812
Illinois............................. 166,783 190,801 138,072
Arizona.............................. 139,264 115,260 30,142
Pennsylvania......................... 125,876 128,693 68,728
Georgia.............................. 120,881 94,413 56,442
New Jersey........................... 108,113 118,825 80,727
Virginia............................. 100,565 107,420 92,704
Washington........................... 98,243 81,005 32,899
Other states......................... 1,088,044 1,202,943 827,480
Other -- single family mortgage
warehouse.......................... 260,745 411,287 252,153
------------ ------------ ------------
Total real estate loans......... 7,295,042 8,147,625 4,931,915
Mortgage banker finance line of
credit............................. 139,872 109,339 147,754
Business credit...................... 55,588 7,320 --
Non-real estate consumer............. 93,352 89,509 72,987
------------ ------------ ------------
7,583,854 8,353,793 5,152,656
Non-accretable unearned discounts.... (7,075) (15,423) (31,917)
------------ ------------ ------------
Total........................... $ 7,576,779 $ 8,338,370 $ 5,120,739
============ ============ ============
58
<PAGE>
GEOGRAPHIC AND PRODUCT DISTRIBUTION OF LOAN PORTFOLIO
AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SINGLE SINGLE SINGLE
FAMILY FAMILY COMMERCIAL FAMILY TOTAL NON-REAL
AND RESIDENTIAL MULTI- REAL MORTGAGE REAL ESTATE ESTATE
STATE CONSUMER CONSTRUCTION FAMILY ESTATE WAREHOUSE LOANS LOANS
- ---------------------------------------- --------- ------------ -------- ---------- --------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
California.............................. $3,383,554 $ -- $ 21,177 $ -- $ -- $3,404,731 $ 66
Texas................................... 851,832 124,941 242,554 26,132 -- 1,245,459 119,999
Florida................................. 393,402 28,440 12,522 1,974 -- 436,338 89
Illinois................................ 155,920 10,863 -- -- -- 166,783 --
Arizona................................. 97,763 14,611 26,890 -- -- 139,264 --
Pennsylvania............................ 109,816 13,582 2,478 -- -- 125,876 1
Georgia................................. 56,022 33,820 31,039 -- -- 120,881 --
New Jersey.............................. 108,113 -- -- -- -- 108,113 --
Virginia................................ 98,568 -- 1,997 -- -- 100,565 3
Washington.............................. 56,517 -- 41,726 -- -- 98,243 --
Other................................... 925,289 16,268 132,211 14,276 260,745 1,348,789 168,654
--------- ------------ -------- ---------- --------- ----------- --------
Total............................... $6,236,796 $242,525 $512,594 $ 42,382 $260,745 $7,295,042 $288,812
========= ============ ======== ========== ========= =========== ========
% of Total.............................. 82.24% 3.20% 6.76% 0.55% 3.44 % 96.19% 3.81%
========= ============ ======== ========== ========= =========== ========
</TABLE>
% OF
STATE TOTAL TOTAL
- ---------------------------------------- --------- ------
California.............................. $3,404,797 44.90%
Texas................................... 1,365,458 18.00
Florida................................. 436,427 5.75
Illinois................................ 166,783 2.20
Arizona................................. 139,264 1.84
Pennsylvania............................ 125,877 1.66
Georgia................................. 120,881 1.59
New Jersey.............................. 108,113 1.42
Virginia................................ 100,568 1.33
Washington.............................. 98,243 1.30
Other................................... 1,517,443 20.01
--------- ------
Total............................... $7,583,854 100.00%
========= ======
% of Total.............................. 100.00%
=========
LOAN SERVICING PORTFOLIO
At September 30, 1996, the Mortgage Banking Group serviced $3.8 billion in
residential mortgage loans owned by the Company and $9.4 billion in mortgages
owned by others. Mortgage loan servicing consists of collecting and accounting
for principal and interest payments from borrowers, remitting principal and
interest payments to investors, making cash advances when required, collecting
funds for and paying mortgage-related expenses such as taxes and insurance,
inspecting mortgaged properties when required, collecting delinquent mortgages,
conducting foreclosures and property dispositions in the event of unremedied
defaults, and generally administering the loans. Since September 30, 1996, the
Mortgage Banking Group has acquired an additional $1.12 billion in mortgage loan
servicing rights and also has contracted to purchase an additional $3.96 billion
in such rights.
In return for performing the servicing functions listed above, the Mortgage
Banking Group receives servicing fees under loan administration contracts. These
fees are withheld from the monthly payments made to investors, are usually based
on the principal balance of the loan being serviced, generally range from 0.25%
to 0.50% annually of the outstanding principal amount of the loan, and are
collected only as payments are received. Minimum servicing fees for
substantially all loans serviced under MBS are set from time to time by the
sponsoring agencies. As a servicer of loans securitized by the GNMA, the FNMA,
and the 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 FHA against
foreclosure loss on FHA loans, and by the VA through guarantees on VA loans.
Although the GNMA, the FNMA, and the 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.
59
<PAGE>
The following table sets forth information on the Mortgage Banking Group's
single family servicing portfolio.
SINGLE FAMILY SERVICING PORTFOLIO
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------
1996 1995 1994
------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning servicing portfolio........ $ 12,532,472 $ 8,920,760 $ 8,073,226
------------- ------------- ------------
Add: Servicing acquisitions
transferred in(1).................. 1,189,387 3,730,401 567,010
Servicing on loans purchased by
the Company........................ 21,192 439,834 97,681
Servicing originated........... 3,689,994 3,338,628 5,406,548
Subservicing acquired.......... 22,538 254,959 --
------------- ------------- ------------
Total additions............ 4,923,111 7,763,822 6,071,239
------------- ------------- ------------
Less: Prepayments.................... 1,600,195 937,509 1,050,849
Foreclosures................... 104,572 79,790 40,764
Servicing
released/transferred(1)............ 2,130,004 2,840,244 3,913,243
Amortization................... 373,964 294,567 218,849
------------- ------------- ------------
Total reductions........... 4,208,735 4,152,110 5,223,705
------------- ------------- ------------
Ending servicing portfolio........... $ 13,246,848 $ 12,532,472 $ 8,920,760
============= ============= ============
COMPOSITION OF ENDING SERVICING
PORTFOLIO BY TYPE
Conventional.................... $ 9,663,715 $ 9,442,600 $ 6,143,604
Government...................... 3,583,133 3,089,872 2,777,156
------------- ------------- ------------
Total servicing portfolio............ $ 13,246,848 $ 12,532,472 $ 8,920,760
============= ============= ============
COMPOSITION OF ENDING SERVICING
PORTFOLIO BY OWNER
Company......................... $ 3,752,060 $ 4,010,700 $ 2,714,291
Others.......................... 9,494,788 8,521,772 6,206,469
------------- ------------- ------------
Total servicing portfolio............ $ 13,246,848 $ 12,532,472 $ 8,920,760
============= ============= ============
</TABLE>
- ------------
(1) Represents loans transferred into the servicing portfolio during the fiscal
year. The actual release or transfer of servicing does not necessarily take
place during the same period as the related sale or purchase of MSRs.
During fiscal 1996, 1995, and 1994, the Mortgage Banking Group purchased
MSRs associated with loan principal amounts of $1.2 billion, $594.7 million, and
$3.9 billion at premiums of $23.5 million, $12.5 million, and $50.9 million,
respectively. Certain MSR purchase transactions that occurred at or near
year-end in fiscal 1994 were not transferred in until fiscal 1995. See
"Management's Discussion and Analysis -- Discussion of Results of
Operations -- Non-Interest Income" and Note 6 to the Consolidated Financial
Statements.
Gains on the sale of MSRs are affected by changes in interest rates as well
as the amount of MSRs capitalized at the time of loan origination or MSR
acquisition. Purchasers of MSRs analyze a variety of factors, including
prepayment sensitivity, to assess the purchase price they are willing to pay.
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. The fair value of servicing is also
influenced by the supply and demand of servicing available for purchase at any
point in time. Conversely, as interest rates rise, prepayments generally
decrease, resulting in an increase in the value of the servicing portfolio as
well as the gains on sales of MSRs. As indicated in the table above, prepayments
increased in fiscal 1996 as compared to fiscal 1995 reflecting the lower market
interest rates experienced during fiscal 1996. In addition, the valuation of
MSRs incorporates market assumptions regarding expected prepayment speeds. There
was no MSR valuation allowance at September 30, 1996.
60
<PAGE>
In September 1995, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights, an amendment of FASB Statement No. 65," effective
October 1, 1994. This statement requires that, among other things, the book
value of mortgage loans be allocated at the time of origination between the MSRs
and the related loans, provided there is a plan to sell or securitize such
loans. With the implementation of SFAS No. 122, the original cost basis of the
loan is allocated between the loan and the MSRs, thus increasing the gains on
sales of loans and reducing the gains on sales of MSRs.
Prior to fiscal 1996, the Company sold substantially all of its originated
MSRs ("OMSRs") related to non-portfolio loans. After the implementation of
SFAS No. 122, the Company began evaluating which of its OMSRs to retain for
portfolio and which of its OMSRs to sell based on the returns available and the
corresponding risks associated with the different types of servicing rights. The
Company may also retain servicing in order to maintain the servicing portfolio
at an acceptable level, particularly during periods of unusually high levels of
prepayments or low levels of new originations. See "Management's Discussion and
Analysis -- Discussion of Results of Operations -- Non-Interest Income".
The following table presents the percentage of loans in the single family
servicing portfolio in each interest rate category.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-----------------------------------------------------------------------
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
--------- --------- --------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Government........................... 7.3% 10.0% 7.4% 1.9% 0.3% 0.2% -- %
Conventional......................... 7.1 29.2 27.5 6.6 1.6 0.5 0.4
--------- --------- --------- ------ ------ ------ -------
Total........................... 14.4% 39.2% 34.9% 8.5% 1.9% 0.7% 0.4%
========= ========= ========= ====== ====== ====== =======
</TABLE>
The weighted average interest rate in the single family servicing portfolio
has decreased from 9.57% at September 30, 1991 to 8.14% at September 30, 1996,
principally as a result of the origination of mortgage loans with increasingly
lower rates during fiscal 1991 to 1996, the prepayment and refinance of higher
rate mortgages, and purchases of MSRs on loans originated by others at lower
rates. At September 30, 1996, the weighted average contractual maturity
(remaining years to maturity) of the loans in the residential mortgage loan
servicing portfolio was 23.6 years.
At September 30, 1996, the single family servicing portfolio was secured by
properties located in the following states:
STATE PERCENT
- ------------------------------------- -------
California........................... 27.8%
Texas................................ 17.0
Florida.............................. 5.8
Illinois............................. 5.6
New Jersey........................... 4.9
Arizona.............................. 3.5
Other states, individually less than
3%................................. 35.4
-------
Total........................... 100.0%
=======
61
<PAGE>
Of the approximately 176,000 loans serviced by the Mortgage Banking Group,
at September 30, 1996, 4.43% were delinquent and an additional 0.61% were in
foreclosure. The following table presents certain information regarding the
number of the delinquent single family loans serviced by the Mortgage Banking
Group as of the dates indicated. Completed foreclosures and loans less than 30
days delinquent have been excluded from the table below.
AT SEPTEMBER 30,
----------------------
1996 1995 1994
---- ---- ----
30-59 Days Past Due.................. 3.3 % 2.7 % 2.3 %
60-89 Days Past Due.................. 0.6 0.6 0.5
90+ Days Past Due.................... 0.5 0.9 0.8
Loans in foreclosure................. 0.6 0.6 0.7
---- ---- ----
Total........................... 5.0 % 4.8 % 4.3 %
==== ==== ====
Loan administration contracts with the 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 the GNMA and the FHLMC are
terminable only for cause. Management believes that the Mortgage Banking Group
is currently in substantial compliance with all material rules, regulations, and
contractual obligations related to mortgage loan servicing.
INVESTMENT PORTFOLIO
The Company maintains an investment portfolio for investment and liquidity
purposes.
INVESTMENT PORTFOLIO
AT SEPTEMBER 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
Securities purchased under agreements
to resell and federal funds sold... $ 674,249 $ 471,052 $ 358,710
Trading account assets............... 1,149 1,081 1,011
Securities........................... 64,544 116,013 114,115
Mortgage-backed securities........... 1,657,908 2,398,263 2,828,903
------------ ------------ ------------
Total........................... $ 2,397,850 $ 2,986,409 $ 3,302,739
============ ============ ============
The investment portfolio consists primarily of MBS. MBS were acquired as a
means of investing in housing-related mortgage instruments while incurring less
credit risk than that which arises in 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
include FNMA, FHLMC, and GNMA certificates, privately issued and credit enhanced
MBS ("non-agency securities"), and certain types of collateralized mortgage
obligations ("CMOs").
62
<PAGE>
MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
--------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES FAIR VALUE VALUE
------------ ---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD TO MATURITY
Agency CMOs -- fixed-rate.......... $ 1,548 $ 5 $ -- $ 1,553
Non-agency
Fixed-rate...................... 7,042 1,753 126 8,669
Adjustable-rate................. 521,280 401 17,634 504,047
CMOs -- fixed-rate.............. 99,966 -- 5,277 94,689
Other.............................. 212 55 -- 267
------------ ---------- ---------- ------------
Held to maturity........... 630,048 $2,214 $ 23,037 609,225 $ 630,048
------------ ========== ========== ------------ ============
AVAILABLE FOR SALE
Agency
Adjustable-rate................. 326,338 $1,860 $ 13 328,185
CMOs -- fixed-rate.............. 1,818 -- 1 1,817
CMOs -- adjustable-rate......... 224,081 1,414 192 225,303
Non-agency
Fixed-rate...................... 61,893 2,253 -- 64,146
Adjustable-rate................. 373,876 1,119 1,702 373,293
CMOs -- adjustable-rate......... 34,017 -- 862 33,155
Other.............................. 1,961 -- -- 1,961
------------ ---------- ---------- ------------
Available for sale......... 1,023,984 $6,646 $ 2,770 1,027,860 $ 1,027,860
------------ ========== ========== ------------ ============
Total mortgage-backed
securities............... $ 1,654,032 $ 1,637,085
============ ============
</TABLE>
FNMA, FHLMC, and GNMA certificates are modified pass-through MBS that
represent undivided interests in underlying pools of fixed-rate or certain types
of adjustable-rate, single family loans issued by the GNMA, a governmental
agency, and by the FNMA and the FHLMC, government-sponsored enterprises. The
non-agency securities acquired by the Company have been pooled and sold by
private issuers and were generally underwritten by large investment banking
firms. These securities provide for the timely payments of principal and
interest either through insurance issued by a reputable insurer, or by
subordinating certain payments under other securities secured by the same
mortgage pool in a manner that is sufficient to have the senior MBS earn one of
the two highest credit ratings from one or more of the nationally recognized
statistical rating agencies. As of September 30, 1996, 99% of the non-agency MBS
had a credit rating of AA/Aa or higher as defined by the Standard & Poor's
Ratings Group or Moody's Investors Service Inc., respectively.
The securities purchased under repurchase agreements outstanding at
September 30, 1996 were collateralized by single family, multi-family, and
commercial real estate loans, and MBS. The loans and MBS underlying the
repurchase agreements are held by the counterparty in safekeeping for the
account of the Company or by a third-party custodian for the benefit of the
Company. All of the investments in repurchase agreements and federal funds sold
at September 30, 1996 matured on or before October 21, 1996. The repurchase
agreements provide for the same loans and MBS to be delivered to the repurchase
counterparty at maturity.
See Notes 1 through 4 to the Consolidated Financial Statements for
additional information related to the assets in the investment portfolio.
DEPOSITS AND BORROWINGS
DEPOSITS
The Company attracts deposits through the 70 community banking branches
located primarily in the Houston and Dallas/Ft. Worth areas including four
supermarket branches, three of which were opened in June of
63
<PAGE>
1996. Currently, the principal methods used by the Company to attract and retain
deposit accounts include offering generally competitive interest rates, having
branch locations in these 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. The Company offers a traditional line of
deposit products that currently includes checking, commercial checking, money
market, savings accounts, and CDs. These deposit products are specifically
tailored to meet the needs of the Company's consumer and small business banking
customers.
The following table illustrates the levels of deposits gathered by the
Company's community banking network at September 30, 1996.
COMMUNITY BANKING NETWORK
AVERAGE
DEPOSITS
NUMBER OF DEPOSITS PER
LOCATION BRANCHES OUTSTANDING BRANCH
- ------------------------------------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
Houston Area......................... 37 $ 2,449,487 $ 66,202
Dallas/Ft. Worth Area................ 29 1,371,803 47,304
Other................................ 4 229,765 57,441
--
------------
Total deposits.................. 70 $ 4,051,055 57,872
== ============ =========
The Company also offers cash management services to its MBF customers.
These services are commercial deposit accounts comprised of operating accounts
of MBF customers, escrow deposits, and principal and interest payments on the
loans serviced by MBF customers. At September 30, 1996, these deposits totalled
$879.3 million. While the Company does not generally solicit brokered deposits,
the Company from time to time accepts brokered deposits when permitted by
regulation and available at favorable rates. Wholesale deposits are raised from
time to time through the Company's money desk from institutional investors.
The following table sets forth, by account types, the aggregate amount and
weighted average rate of the Company's deposits.
DEPOSITS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NON-INTEREST BEARING DEPOSITS........ $ 284,304 -- % $ 181,196 -- % $ 76,498 -- %
INTEREST-BEARING DEPOSITS
Transaction accounts............... 211,976 1.00 219,307 1.50 233,666 1.49
Insured money fund accounts
Consumer......................... 588,585 4.36 397,473 3.73 407,029 3.12
Commercial....................... 810,743 5.29 857,669 5.82 416,571 4.84
--------- -------- --------- --- --------- ---
Subtotal....................... 1,399,328 4.90 1,255,142 5.16 823,600 3.99
--------- -------- --------- --- --------- ---
Savings accounts................... 130,137 2.48 144,301 2.73 222,769 2.60
Certificates of deposit
Consumer......................... 2,911,682 5.71 3,063,631 5.84 2,949,715 4.88
Commercial....................... 2,667 4.88 2,273 5.36 -- --
Wholesale........................ 207,851 10.28 316,370 9.06 457,956 7.92
--------- -------- --------- --- --------- ---
Subtotal....................... 3,122,200 6.01 3,382,274 6.14 3,407,671 5.29
--------- -------- --------- --- --------- ---
Total interest-bearing
deposits..................... 4,863,641 5.38 5,001,024 5.59 4,687,706 4.74
--------- -------- --------- --- --------- ---
Total deposits................. $5,147,945 5.08% $5,182,220 5.40% $4,764,204 4.67%
========= ======== ========= === ========= ===
Consumer............................. $3,939,631 $3,868,498 $3,834,239
Commercial........................... 1,000,463 997,352 472,009
Wholesale............................ 207,851 316,370 457,956
--------- --------- ---------
Total deposits................. $5,147,945 $5,182,220 $4,764,204
========= ========= =========
</TABLE>
64
<PAGE>
The following table sets forth, by various interest rate categories, the
dollar amounts and the periods to maturity of the Company's time deposits at
September 30, 1996.
DEPOSIT MATURITIES
<TABLE>
<CAPTION>
CERTIFICATES MATURING IN THE YEAR ENDING SEPTEMBER 30,
------------------------------------------------------------------
STATED RATE 1997 1998 1999 2000 2001 THEREAFTER TOTAL
----------------- --------- --------- --------- --------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
2.99% and below...................... $ 1,584 $ -- $ -- $ -- $ -- $ -- $ 1,584
3.00% to 3.99%....................... 21,867 740 8 -- -- 3 22,618
4.00% to 4.99%....................... 437,650 23,983 33,839 1,063 2,645 61 499,241
5.00% to 5.99%....................... 861,376 409,903 92,854 6,826 34,185 449 1,405,593
6.00% to 6.99%....................... 440,730 246,208 74,373 61,165 49,022 1,788 873,286
7.00% to 7.99%....................... 79,767 7,747 5,778 21,536 11,276 1,529 127,633
8.00% to 8.99%....................... 1,399 678 4,485 2,326 354 27 9,269
9.00% to 9.99%....................... 579 6,480 3,062 12 138 308 10,579
10.00% to 10.99%..................... 40,224 14,699 11,166 664 97 228 67,078
Over 10.99%.......................... 88,281 16,757 281 -- -- -- 105,319
--------- --------- --------- --------- --------- ---------- ---------
$1,973,457 $ 727,195 $ 225,846 $ 93,592 $ 97,717 $ 4,393 $3,122,200
========= ========= ========= ========= ========= ========== =========
</TABLE>
The following table sets forth the amount of the Company's CD's that are
$100,000 or greater by time remaining until maturity at September 30, 1996.
TIME DEPOSITS GREATER THAN $100,000
NUMBER OF DEPOSIT
ACCOUNTS AMOUNT
---------- --------
(DOLLARS IN THOUSANDS)
Three months or less.................... 1,234 $130,243
Over three through six months........... 551 57,661
Over six through twelve months.......... 957 101,299
Over twelve months...................... 1,813 190,973
---------- --------
4,555 $480,176
========== ========
BORROWINGS
The Company relies upon borrowings, primarily collateralized borrowings
such as advances from the FHLB and reverse repurchase agreements, to fund its
assets. Borrowings were the primary source of funds for the recent asset growth
and accounted for 45% of the funding of average assets for fiscal 1996, 43% for
fiscal 1995, and 31% for fiscal 1994. Fixed and adjustable-rate advances are
obtained from the FHLB Dallas under a security and pledge agreement that
restricts the amount of borrowings to the greater of a percentage of (i) fully
disbursed single family loans, unless assets are physically pledged to the FHLB
Dallas, and (ii) total assets. At September 30, 1996, these limitations were 65%
and 45%, respectively. The Company's ability to borrow on reverse repurchase
agreements is limited to the amount and market value of collateral that is
available to collateralize these reverse repurchase agreements. At September 30,
1996, the Company had $1.2 billion in such collateral, $1.0 billion of which was
collateralizing such reverse repurchase agreements. See Notes 9 and 10 to the
Consolidated Financial Statements.
65
<PAGE>
The following table sets forth certain information regarding the borrowings
of the Company as of or for the period indicated.
BORROWINGS
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB ADVANCES
Balance outstanding at period-end..... $ 3,490,386 $ 4,383,895 $ 2,620,329
Maximum outstanding at any
month-end.......................... 4,384,798 4,386,605 2,697,829
Daily average balance................. 4,073,297 3,560,844 2,285,630
Average interest rate................. 6.07% 6.31% 3.98%
REVERSE REPURCHASE AGREEMENTS
Balance outstanding at period-end..... $ 832,286 $ 1,172,533 $ 553,000
Fair value of collateral at
period-end......................... 1,020,405 1,239,527 673,000
Maximum outstanding at any
month-end.......................... 1,096,508 1,355,540 553,000
Daily average balance................. 955,681 887,932 273,899
Average interest rate................. 5.77% 5.99% 3.85%
FEDERAL FUNDS PURCHASED
Balance outstanding at period-end..... $ -- $ -- $ --
Maximum outstanding at any
month-end.......................... -- -- 15,000
Daily average balance................. 27 521 767
Average interest rate................. 6.02% 5.95% 3.73%
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The Company's asset and liability management process is utilized to manage
the Company's interest rate risk through structuring the balance sheet and
off-balance-sheet portfolios to maximize net interest income while maintaining
acceptable levels of risk to changes in market interest rates. The achievement
of this goal requires a balance between profitability, liquidity, and interest
rate risk.
Interest rate risk is managed by the 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 market values of assets and
liabilities, unrealized gains and losses, purchase and sale activity, the
mortgage pipeline, and the maturities of investments and borrowings.
Additionally, the ALCO reviews liquidity, cash flow flexibility, maturities of
deposits, consumer and commercial deposit activity, current market conditions,
and interest rates on both a local and national level.
The "interest rate sensitivity gap" is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. During a period of
rising interest rates, a negative gap would tend to affect net interest income
adversely, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap would
tend to result in an increase in net interest income, while a positive gap would
tend to affect net interest income adversely. Different types of assets and
liabilities with the same or similar maturities may react differently to changes
in overall market rates or conditions, thus changes in interest rates may affect
net interest income positively or negatively even if an institution were
perfectly matched in each maturity category. The Company's one year cumulative
interest rate gap position at September 30, 1996 was negative $483.5 million or
4.51% of total assets. This is a one-day position which is continually changing
and is not necessarily indicative of the Company's position at any other time.
Additionally, the gap analysis does not consider the many factors accompanying
interest rate movements. While the interest rate sensitivity gap is a useful
measurement and
66
<PAGE>
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. During periods
of rising interest rates the Company's assets tend to have prepayments that are
slower than those in an interest rate sensitivity gap and would increase the
negative gap position. Conversely, during a period of falling interest rates the
Company's assets would tend to prepay faster than expected thus decreasing the
negative gap.
To effectively measure and manage interest rate risk, the Company uses
simulation analysis to determine the impact on net interest income under 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, under current policies
of the Company's Board of Directors, management has been given some latitude to
increase the Company's interest rate sensitivity position within certain limits
if, in management's judgment, that will enhance profitability. As a result,
changes in market interest rates may have a greater impact on the Company's
financial performance in the future than they have had historically.
The Company enters into certain financial instruments with
off-balance-sheet risk in the ordinary course of business to reduce its exposure
to changes in interest rates. The Company does not enter into instruments such
as leveraged derivatives or structured notes. The financial instruments used for
hedging interest rate risk include interest rate swaps, caps, floors, financial
options, financial futures contracts, and forward delivery contracts. A hedge is
an attempt to reduce risk by creating a relationship whereby any losses on the
hedged asset or liability are expected to be offset in whole or in part by gains
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. See Note 12 to the Consolidated Financial
Statements.
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<PAGE>
The following table sets forth the expected repricing characteristics of
the Company's consolidated assets and liabilities at September 30, 1996,
utilizing assumptions noted below:
ASSET/LIABILITY REPRICING
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
ASSETS(1)(2)
Cash and investment
securities(3).................... $ 950,698 $ 52,600 $ -- $ -- $ 35,327 $ --
Adjustable-rate loans and
mortgage-backed securities....... 3,448,182 1,847,089 1,296,890 1,070,999 53,714 --
Fixed-rate loans and
mortgage-backed securities....... 51,630 51,204 101,226 641,860 312,254 --
Single family mortgage warehouse... 260,745 -- -- -- -- --
Other assets....................... 64,251 -- -- -- -- 473,708
---------- ----------- ----------- ---------- ---------- ---------
Total assets................... $4,775,506 $1,950,893 $1,398,116 $1,712,859 $401,295 $ 473,708
========== =========== =========== ========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Certificates of deposit............ $ 820,917 $ 455,130 $ 699,554 $1,142,401 $ 4,198 $ --
Checking and savings(4)............ 2,025,745 -- -- -- -- --
---------- ----------- ----------- ---------- ---------- ---------
Total deposits................. 2,846,662 455,130 699,554 1,142,401 4,198 --
Senior Notes....................... -- -- -- 115,000 -- --
FHLB advances and other
borrowings....................... 3,881,427 365,000 50,000 23,545 2,700 --
Other liabilities.................. 310,217 -- -- -- -- 100,000
Minority interest.................. -- -- -- -- -- 185,500
Stockholders' equity............... -- -- -- -- -- 531,043
---------- ----------- ----------- ---------- ---------- ---------
Total liabilities, minority
interest, and stockholders'
equity....................... $7,038,306 $ 820,130 $ 749,554 $1,280,946 $ 6,898 $ 816,543
========== =========== =========== ========== ========== =========
Gap before off-balance-sheet
financial instruments.............. $(2,262,800) $1,130,763 $ 648,562 $ 431,913 $394,397 $(342,835)
OFF-BALANCE-SHEET(5)
Interest rate swap
agreements -- pay floating....... (25,000) 25,000 -- -- -- --
---------- ----------- ----------- ---------- ---------- ---------
Gap.................................. $(2,287,800) $1,155,763 $ 648,562 $ 431,913 $394,397 $(342,835)
========== =========== =========== ========== ========== =========
Cumulative gap....................... $(2,287,800) $(1,132,037) $(483,475)
===========
Cumulative gap as a percentage of
total assets....................... (21.36)% (10.57 )% (4.51)%
</TABLE>
TOTAL
----------
ASSETS(1)(2)
Cash and investment
securities(3).................... $1,038,625
Adjustable-rate loans and
mortgage-backed securities....... 7,716,874
Fixed-rate loans and
mortgage-backed securities....... 1,158,174
Single family mortgage warehouse... 260,745
Other assets....................... 537,959
----------
Total assets................... $10,712,377
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Certificates of deposit............ $3,122,200
Checking and savings(4)............ 2,025,745
----------
Total deposits................. 5,147,945
Senior Notes....................... 115,000
FHLB advances and other
borrowings....................... 4,322,672
Other liabilities.................. 410,217
Minority interest.................. 185,500
Stockholders' equity............... 531,043
----------
Total liabilities, minority
interest, and stockholders'
equity....................... $10,712,377
==========
Gap before off-balance-sheet
financial instruments..............
OFF-BALANCE-SHEET(5)
Interest rate swap
agreements -- pay floating.......
Gap..................................
Cumulative gap.......................
Cumulative gap as a percentage of
total assets.......................
- ------------
(1) Fixed-rate loans and MBS are distributed based on their contractual maturity
adjusted for anticipated prepayments, and adjustable-rate loans and MBS are
distributed based on the interest rate reset date and contractual maturity
adjusted for anticipated prepayments. Loans and MBS runoff and repricing
assumes a constant prepayment rate based on coupon rate and maturity. The
weighted average annual projected prepayment rate was 19%.
(2) Assets repricing to lagging rate indices are adjusted to reflect the delay
in the repricing of the index to market interest rates. The lagging indices
are based on a blended cost of funds, primarily the FHLB 11th District Cost
of Funds Index. These indices are assumed to take 18 months to reprice fully
to a change in the general level of interest rates.
(3) Investment securities include repurchase agreements, federal funds sold,
trading account assets, securities, and FHLB stock.
(4) Checking and savings deposits are presented in the earliest repricing period
since amounts in these accounts are subject to withdrawal upon demand.
(5) The above table includes only those off-balance-sheet financial instruments
which impact the gap in all interest rate environments. The Company also has
certain off-balance-sheet financial instruments which hedge specific
interest rate risks.
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<PAGE>
COMPETITION
The Company competes primarily with seven commercial banks and five thrift
institutions, all of which have a substantial presence in the same markets as
the Company. Competitors for deposits include thrift institutions, commercial
banks, credit unions, full service and discount broker dealers, and other
investment alternatives, such as mutual funds, money market funds, and savings
bonds or other government securities. The Company and its peers compete
primarily on price at which products are offered and on customer service.
The Company competes for mortgage originations with thrift institutions,
banks, insurance companies, and mortgage companies, many of which operate
nationwide mortgage origination networks similar to that of the Company. 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 with lower funding costs.
SUBSIDIARIES
At September 30, 1996, the Company had no direct subsidiaries other than
Holdings, which has one direct subsidiary, the Bank. 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 innercity 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 of which the Bank owns more than 10% of the stock. At September 30,
1996, the Bank was authorized to have a maximum investment of approximately
$320.8 million in its subsidiaries.
BNKU HOLDINGS, INC.
In December 1996, the Company formed a new, wholly-owned, Delaware
subsidiary, Holdings. After acquiring all the common stock of Holdings, the
Company contributed all the common stock of the Bank to Holdings, and Holdings
assumed the obligations of the Company's Senior Notes. As a result of these
transactions, Holdings is the sole subsidiary of the Company and the Bank is the
sole subsidiary of Holdings.
COMMONWEALTH UNITED MORTGAGE COMPANY
The Bank is the sole shareholder of Commonwealth United Mortgage Company, a
Texas corporation formed in 1992 to function as a licensed mortgage banker in
the state of Vermont.
UNITED AGENCY CORPORATION
United Agency Corporation is a wholly-owned subsidiary of the Bank whose
primary purpose is holding the stock of Commonwealth General Services Agency,
Inc., an Arkansas corporation incorporated in 1951 ("CGSA"). CGSA is a
managing general insurance agency that contracts with insurance companies and
agencies that offer insurance products to the Bank's mortgage loan customers.
CGSA earns a commission on each insurance policy sold by the insurance companies
or agencies with which CGSA contracts.
UNITED CAPITAL MANAGEMENT CORPORATION
The Bank is the sole shareholder of United Capital Management Corporation,
a Texas corporation formed in 1985 to function in the deposit referral business
and is currently inactive.
UNITED FINANCIAL MARKETS, INC.
The Bank is the sole shareholder of United Financial Markets, Inc.
("UFM"), a Texas corporation, which acts as a full-service broker-dealer. UFM,
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, UFM markets
annuities and securities, including mutual funds, stocks and bonds, to the
Bank's retail customers. UFM is a broker-dealer registered with the Commission
and a member of the National Association of Securities Dealers, Inc. ("NASD").
This subsidiary commenced operations in late 1992, and its activities have been
expressly approved by the OTS.
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<PAGE>
UNITED GREENWAY SECURITIES SERVICES, INC.
The Bank is the sole shareholder of United Greenway Securities Services,
Inc., a Texas corporation formed in 1989 to make mutual funds and other
non-deposit products available to retail customers through referrals to a
registered broker-dealer. This subsidiary is currently inactive.
UNITED MORTGAGE SECURITIES CORPORATION
The Bank is the sole shareholder of United Mortgage Securities Corporation,
a Delaware corporation formed in 1993 to issue MBS securitized with mortgage
loans purchased from the Bank.
USAT MORTGAGE SECURITIES, INC.
The Bank is the sole shareholder of USAT Mortgage Securities, Inc., a Texas
corporation formed in 1985 to function as an issuer of three series of CMOs.
This subsidiary is currently inactive.
PERSONNEL
As of September 30, 1996, the Company employed 2,216 full-time employees
and 166 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.
THE ASSISTANCE AGREEMENT
In connection with the Acquisition, the Bank, the Company and certain of
their direct and indirect parent entities entered into an overall agreement with
the FSLIC and the FHLBB that was evidenced by several written agreements (the
"Agreements"). The principal contract relating to the Acquisition was the
Assistance Agreement, dated December 30, 1988, among the FSLIC, the Company, the
Bank, and certain of the Bank's other direct and indirect parent entities and
which set forth certain mutual, interdependent commitments of the parties with
respect to the Acquisition. The other written agreements comprising the overall
agreement were the Acquisition Agreement, dated December 30, 1988, between the
FSLIC and the Bank; the Warrant Agreement, dated December 30, 1988, between the
FSLIC and the Bank; the Regulatory Capital Maintenance Agreement, dated December
30, 1988, among the FSLIC, the Bank, the Company, Hyperion Holdings and Hyperion
Partners; and the Forbearance Agreement, dated February 15, 1989, among the
FHLBB, the Bank, the Company, Hyperion Holdings and Hyperion Partners. The
Acquisition Agreement set forth the terms of the Bank's acquisition of
substantially all of the assets of Old USAT and the assumption of Old USAT's
secured, deposit and certain tax liabilities. The Warrant Agreement granted the
FSLIC a Warrant to purchase up to 158,823 shares of Bank Common Stock at an
exercise price of $0.01 per share. The Regulatory Capital Maintenance Agreement
placed certain restrictions on the Bank's payment of dividends on the Bank
Common Stock. The Agreement for Operating Policies required the Bank to prepare
a three year business plan and certain specified written operating policies. The
Forbearance Agreement granted to the Bank, the Company, Hyperion Holdings and
Hyperion Partners forbearances from regulatory action relating to capital
requirements and accounting procedures. All of the Agreements have terminated
except one provision of the Assistance Agreement granting certain indemnities to
the Bank, the Company, Hyperion Holdings, Hyperion Partners, the Forbearance
Agreement and the Tax Benefits Agreement, dated December 28, 1993, among the
Bank, the Company, Hyperion Holdings and Hyperion Partners, which governs the
sharing of tax benefits with the FDIC-FRF.
The Company also succeeded to substantial NOLs as a result of the
Acquisition and has recorded substantial additional NOLs for tax purposes due to
the exclusion of assistance payments received from the FRF under the Assistance
Agreement from taxable income and the deduction of losses and writedowns on
certain assets (the "Covered Assets") for which tax-free assistance payments
were received. See "Regulation -- Taxation -- FSLIC Assistance".
The Assistance Agreement was terminated on December 23, 1993, when the
Company, the Bank, certain of their direct and indirect parent entities, and the
FDIC entered an agreement settling certain disputes with respect to various
matters relating to the Acquisition and the Assistance Agreement (the
"Settlement Agreement"). Pursuant to the Settlement Agreement, the Assistance
Agreement was terminated, the Bank no longer managed or owned the Covered Assets
(except for certain of the Covered Assets that were "uncovered" and retained),
and,
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<PAGE>
as of December 28, 1993, the Bank no longer received any significant financial
assistance from the FRF. The Settlement Agreement also provided for the
continuation of certain of the Company's and the Bank's claims against the
United States in the United States Court of Federal Claims. See
"-- Forbearance".
Pursuant to the Assistance Agreement and the Settlement Agreement, the Bank
received substantial payments from the FRF during fiscal 1994 as follows:
(IN THOUSANDS)
Payments affecting the results of
operations........................... $ 23,143
Other payments
Settlement payment................. 195,300
Other.............................. 468
--------------
Total FRF payments............ $218,911
==============
WARRANT AGREEMENT
Concurrent with the execution of the Assistance Agreement, the Bank and the
FSLIC entered into the Warrant Agreement, pursuant to which the FSLIC was
granted the Warrant to purchase up to 158,823 shares of Bank Common Stock at an
exercise price of $0.01 per share. Pursuant to the Settlement Agreement, the
Bank and the FDIC-FRF entered into the First Amendment to the Warrant Agreement
on December 28, 1993 (the "First Amendment to Warrant Agreement"). References
to the Warrant Agreement below are to the Warrant Agreement as amended by the
First Amendment to Warrant Agreement.
Pursuant to the Settlement Agreement, all disputes with respect to the
Warrant were resolved, and the parties agreed that the Bank was to make payments
to the holder of the Warrant in lieu of dividends upon any payment of dividends
on the Bank Common Stock (other than dividends for which anti-dilution
adjustments are made) beginning December 28, 1993 until December 30, 1998 or
such earlier date as the Warrant was no longer outstanding. In May 1996, the
Bank made a payment to the FDIC-FRF of $5.9 million in lieu of such dividends in
connection with the declaration of a $100 million dividend on the Bank Common
Stock.
In August 1996, the FDIC surrendered a portion of the Warrant for a cash
payment of $6.1 million, exercised the remainder of the Warrant for Bank Common
Stock, and immediately exchanged the shares of Bank Common Stock issued upon
exercise of the Warrant for 1,503,560 shares of Class B Common Stock. As part of
the August Offering, the FDIC-FRF sold all of such shares of Class B Common
Stock. Following the consummation of the August Offering, all rights and
obligations under the Warrant and the Warrant Agreement were terminated, and the
FDIC-FRF no longer owned any shares of Common Stock.
FORBEARANCE
In connection with the Acquisition, the FHLBB also 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 FIRREA, OTS took the
position that the capital standards set forth in FIRREA apply to all savings
institutions, including those institutions that had been operating under
previously granted capital and accounting forbearances, and that FIRREA
eliminated these 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 has adversely
affected the Bank by curtailing the growth and reducing the leverage
contemplated by the terms of the Forbearance Agreement. The Bank also has been
and continues to be in compliance with all of the other referenced regulatory
capital provisions and, accordingly, has not had to rely on the waivers or
forbearances provided in the Acquisition. Pursuant to the Settlement Agreement,
the Company, the Bank and certain of their then-direct and indirect parent
entities have retained all causes of action and claims relating to the
forbearances against the United States in the United States Court of Federal
Claims, and the FDIC and the other governmental parties to the lawsuit have
reserved any and all defenses to such causes of actions and claims. 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 has adversely affected the Bank by curtailing the growth and
reducing the leverage
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<PAGE>
contemplated by the terms of the Forbearance Agreement. The Bank also has been
and continues to be in compliance with all of the other referenced regulatory
capital provisions and, accordingly, has not had to rely on the waivers or
forbearances provided in the Acquisition.
On July 25, 1995, Plaintiffs filed suit against the United States in the
Court of Federal Claims for alleged failures of the United States (i) to abide
by a capital forbearance, which would have allowed the Bank to operate for ten
years under negotiated capital levels lower than the levels required by the then
existing regulations or successor regulations, (ii) to abide by its commitment
to allow the Bank to count $110 million of subordinated debt as regulatory
capital for all purposes, and (iii) to abide by an accounting forbearance, which
would have allowed the Bank to count as capital for regulatory purposes, and to
amortize over a period of twenty-five years, the $30.7 million difference
between certain FSLIC payment obligations to the Bank and the discounted present
value of those future FSLIC payments. The lawsuit is in a preliminary stage. The
lawsuit was stayed pending the United States Supreme Court's review in WINSTAR.
On July 1, 1996, the Supreme Court upheld lower court rulings that the United
States had breached the contracts involved in the WINSTAR cases and remanded the
case for further proceedings on the issue of damages. Since the Supreme Court
ruling, the Chief Judge of the Court of Federal Claims convened a number of
status conferences to establish a case management protocol for the more than 100
lawsuits on the Court of Federal Claims docket, that, like Plaintiffs case,
involve issues similar to those raised in the WINSTAR cases.
Following a number of status conferences Chief Judge Loren Smith of the
United States Court of Federal Claims has transferred all WINSTAR-related cases
to his own docket and entered an Omnibus Case Management Order governing
proceedings in such cases, including the Company's case. Under the Omnibus Case
Management Order, Chief Judge Smith serves as the "Managing Judge" for all
WINSTAR-related cases and may assign other judges of the United States Court of
Federal Claims to resolve pre-trial discovery disputes and common legal issues
and to conduct trials. The Government and Plaintiffs exchanged certain
significant documents as early as October 2, 1996 pursuant to a court order, and
the Company and the Bank are in the process of responding to the Government's
first discovery request. Trials on damages in two of the three WINSTAR cases
that were decided by the United States Supreme Court in July 1996 are scheduled
for early 1997. Damages trials in the remaining cases subject to the Omnibus
Case Management Plan are scheduled to begin four months after completion of the
first two damages trials. The Company's case is one of thirteen cases that
"shall be accorded priority in the scheduling" of the damages trials under the
Omnibus Case Management Order. In December 1996, Chief Judge Smith decided the
motion IN LIMINE on damage theories of Glendale Federal, one of the four WINSTAR
plaintiffs, and allowed Glendale Federal to assert several alternative damages
theories against the Government.
While the Company expects Plaintiffs' claims for damages to exceed $200
million, 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. The Company, on November 27, 1996, moved for partial summary
judgment on liability and is pursuing an early trial on damages. Uncertainties
remain concerning the administration of the Omnibus Case Management Order and
the future course of the Company's lawsuit pursuant to the Omnibus Case
Management Order. Accordingly, the Company cannot predict the timing of any
resolution of its claims. The Company expects the trial of its case to commence
during the first quarter of fiscal 1998. The Company is also unable to predict
the outcome of its suit against the United State and the amount of judgment for
damages, if any, that may be awarded. Consequently, no assurances can be given
as to the results of this suit. See "Legal Proceedings".
The Company and the Bank have entered into an agreement with Hyperion
Partners acknowledging the relative value, as among the parties, of their claims
in the pending litigation. The agreement confirms that the Company and the Bank
are entitled to receive 85% of the amount, if any, recovered as a result of the
settlement of or a judgment on such claims, and that Hyperion Partners 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.
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<PAGE>
REGULATION
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
The Company is a savings and loan holding company that is regulated and
subject to examination by the OTS. The activities of savings and loan holding
companies are governed by the provisions of the Home Owners' Loan Act, as
amended (the "HOLA"). Pursuant to the HOLA, a savings and loan holding company
may not (i) acquire control of a savings association or savings and loan holding
company without prior OTS approval; (ii) acquire, except with prior OTS
approval, by process of merger, consolidation, or purchase of assets of another
savings association or savings and loan holding company, all or substantially
all of the assets of any such association or holding company; or (iii) acquire,
by purchase or otherwise, more than 5% of the voting shares of a savings
association that is not a subsidiary, or of a savings and loan holding company
that is not a subsidiary. Other restrictions on activities of a savings and loan
holding company do not apply to the Company because its savings association
subsidiary is a qualified thrift lender. See " -- Safety and Soundness
Regulations -- Investment Authority -- QTL Test". Every subsidiary savings
association of a savings and loan holding company must give the OTS not less
than 30 days of advance notice of proposed dividend declarations.
SAFETY AND SOUNDNESS REGULATIONS
CHARTER, SUPERVISION, AND EXAMINATION
CHARTER. The Bank is chartered under the HOLA, which imposes certain
obligations and restrictions upon, and grants certain powers to, federally
chartered savings banks such as the Bank. The provisions of the HOLA are
implemented by regulations adopted and administered by the OTS.
OTS. Federally chartered savings banks, such as the Bank, are subject to
extensive regulation by the OTS and must regularly file financial and other
reports with that agency. The supervision and regulation to which the Bank is
subject is intended primarily for the protection of its depositors. The OTS
performs periodic examinations of the Bank to test compliance by the Bank with
various regulatory requirements. The OTS may revalue assets of an insured
institution based upon appraisals and require establishment of specific reserves
in amounts equal to the difference between such revaluation and the book value
of the assets, as well as require specific charge-offs relating to such assets.
The OTS prescribes regulations for the collection of fees in order to
recover the expenses of the agency, the cost of supervision of savings
associations, the examination of savings associations and their subsidiaries,
and the processing of applications, filings, notices, and certain other requests
of savings associations filed with the OTS. The OTS adopted a two-pronged
sliding scale approach in 1990 by which all institutions pay a general
assessment and troubled institutions pay an additional premium assessment. The
Bank has never been subject to a premium assessment. The Bank's general
assessments amounted to approximately $1.5 million and $1.2 million in the
aggregate during fiscal 1996 and 1995, respectively.
FDIC. The FDIC administers the SAIF, which insures the deposits of savings
associations such as the Bank. The Bank's deposits are insured by the SAIF to a
maximum of $100,000 for each insured depositor. In addition, the FDIC has
certain regulatory and full examination authority over OTS regulated savings
associations. The FDIC may also recommend enforcement actions against savings
associations to the OTS and, if the OTS fails to act on the FDIC's
recommendation, the FDIC may, under certain circumstances, compel the OTS to
take the requested enforcement action.
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. Effective January 1, 1993, the FDIC adopted risk-based assessment
regulations.
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
73
<PAGE>
tier 1 (core) 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 (core) 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.
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................ 23 26 29
Adequately capitalized.......... 26 29 30
Undercapitalized................ 29 30 31
For purposes of assessments of FDIC insurance premiums, as of September 30,
1996, the Company believes that the Bank is a "well-capitalized" institution.
FDIC regulations prohibit disclosure of the supervisory subgroup to which an
insured institution is assigned. The Bank's insurance assessments for fiscal
1996 and 1995 were $12.0 million and $11.4 million, respectively.
Both the SAIF and the BIF, the deposit insurance fund that covers most
commercial bank deposits, are statutorily required to achieve and maintain a
reserve ratio equal to 1.25% of estimated insured deposits. As a result of the
BIF reaching the 1.25% level, on August 16, 1995, the FDIC lowered the deposit
insurance premium assessment rate for BIF members to between .04% and .31% of
insured deposits, while retaining the assessment rate of .23% to .31% of insured
deposits for members of SAIF. On November 14, 1995, the FDIC further reduced
insurance premiums on BIF deposits by 0.04% of insured deposits, creating an
assessment range of 0% to .27% of insured deposits, subject to a statutory
requirement that all institutions pay at least $2,000 annually. Approximately
92% of BIF members qualify for the lowest assessment rate. As a result of the
significant disparity in the deposit insurance premiums paid by well-capitalized
SAIF members, such as the Bank, and well-capitalized BIF members, SAIF members
were at a competitive disadvantage to BIF members with respect to the pricing of
loans and deposits and the ability to achieve lower operating costs.
On September 30, 1996, President Clinton signed into law the Economic
Growth and Paperwork Reduction Act of 1996 (the "1996 Act"). 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, as of October 1, 1996. The special assessment, which was
collected on November 27, 1996, was 65.7 basis points times the amount of
deposits held by an institution as of March 31, 1995. The special assessment is
deductible in the tax year paid.
As a result of the special assessment, the SAIF is deemed to have met its
designated reserve ratio as of October 1, 1996. On October 8, 1996, the FDIC
proposed new risk-based assessments for SAIF-insured institutions. The SAIF base
assessment rates would effectively range from 0 to 27 basis points beginning
October 1, 1996. For the last calendar quarter of 1996, a special interim
schedule of rates ranging from 18 to 27 basis points would apply, reflecting the
assessments necessary to pay interest on the FICO bonds. Any excess assessments
collected under the prior assessment schedule will be refunded or credited, with
interest. Thus, except to the extent of FICO assessments, SAIF and BIF
institutions will have the same assessment schedule as of January 1, 1997.
Under the 1996 Act, during the period beginning January 1, 1997 through
December 31, 1999, SAIF-insured institutions will pay 6.44 basis points toward
FICO bonds and BIF-insured institutions will pay 1.29 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, thus
eliminating all assessment disparities.
TERMINATION OF INSURANCE. The FDIC may terminate the deposit insurance of
any insured depository institution if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound
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practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, or order, or any condition imposed by
an agreement with the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of insurance if the
institution has no tangible capital. If insurance of an institution's accounts
is terminated, the accounts at the institution at the time of such termination,
less subsequent withdrawals, would continue to be insured for a period of six
months to two years, as determined by the FDIC.
AUDIT REQUIREMENTS. In May 1993, the FDIC adopted rules establishing
annual independent audits 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 assessments. 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: (i) include members with banking or related
financial management expertise; (ii) have the ability to engage their own
independent legal counsel; and (iii) must not include any entities designated as
"large customers" of the institution. In some cases, the institution's
responsibilities under these rules may be fulfilled by its holding company.
The 1996 Act repealed the requirement that an independent auditor attest on
the procedures employed by financial institutions to detect and report
violations of designated laws. The 1996 Act also authorizes the appropriate
Federal banking agency to permit the independent audit committee to contain
inside as well as outside directors if the institution has encountered hardships
in recruiting and retaining outside directors to serve on the committee.
FEDERAL RESERVE BOARD. The Board of Governors requires all depository
institutions (including savings associations) to maintain reserves against their
transaction accounts (primarily NOW and Super NOW checking accounts) and
non-personal time deposits. Reserves of 3% must be maintained against total
transaction accounts of $52.0 million or less (subject to adjustment by the
Federal Reserve Board) and an initial reserve of $1,560,000 plus 10% (subject to
adjustment by the Federal Reserve Board to a level between 8% and 14%) must be
maintained when total transaction accounts exceed such amount. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements imposed by the OTS. See
" -- Investment Authority -- Liquidity".
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require savings
associations to exhaust other reasonable alternative sources of funds, including
FHLB advances, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANKS. The Bank is a member of the 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: (i) 1%
of the aggregate principal amount of its unpaid mortgage loans, home purchase
contracts and similar obligations at the beginning of each year; (ii) 0.3% of
its assets; or (iii) 5% (or such greater fraction as established by the FHLB) of
its advances (I.E., borrowings) from the FHLB.
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 15 to the Consolidated Financial
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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 3% of its adjusted total assets. 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
shareholders' equity and retained earnings, noncumulative perpetual preferred
stock and related surplus and minority interests in consolidated subsidiaries,
minus intangibles, plus certain MSRs and certain goodwill arising from prior
regulatory accounting practices.
Although accounted for under Generally Accepted Accounting Principles
("GAAP") as an intangible asset, certain MSRs need not be deducted in
computing core and tangible capital. Generally, the lower of 90% of the fair
market value of readily marketable MSRs, or the current unamortized book value
as determined under GAAP may be included in core and tangible capital up to a
maximum of 50% of core capital computed before the deduction of any disallowed
qualifying intangible assets. At September 30, 1996, the Bank's core capital
included $121.3 million of MSRs.
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 ("nonconforming 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
except qualifying MSRs must be deducted. At September 30, 1996, the Bank's
tangible capital ratio was 6.57%.
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 ("OCC") standard for national banks.
The risk-based standards of the OTS require maintenance of core capital
equal to at least 4% of risk-weighted assets and total capital equal to at least
8% of risk-weighted assets. "Total capital" includes core capital plus
supplementary capital (except that includable supplementary capital may 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, 1996, the Bank's core capital
and total capital ratios were 6.64% and 13.09%, respectively.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance-sheet assets, are multiplied by a risk factor ranging from
0% to 100%, as assigned by the OTS based on the risks it believes inherent in
the type of asset. Comparable weights are assigned to off-balance-sheet
activities.
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. 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.
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On October 13, 1994, the OTS waived the IRR capital deduction until
guidelines under which institutions may appeal such a deduction were published.
The OTS extended the waiver on March 20, 1995 until further notice. On August
21, 1995, the OTS adopted and approved an appeal process, but again delayed the
IRR capital deduction indefinitely.
FAILURE TO MEET REQUIREMENTS. Any savings association that fails to meet
its regulatory capital requirements is subject to enforcement actions by the OTS
or the FDIC. The OTS must limit the asset growth of any undercapitalized
association and issue a capital directive against the association. See
" -- Enforcement -- Prompt Corrective Action".
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 charged against
capital. The capital distribution regulation establishes a three-tiered system,
with the greatest flexibility afforded to well-capitalized institutions.
Under the capital distribution regulation, an association that immediately
prior to a proposed capital distribution, and on a pro forma basis after giving
effect to a proposed capital distribution, has capital that is equal to or
greater than the amount of its fully phased-in capital requirement is a "tier 1
association". To qualify, an association must maintain the following capital
ratios: (i) tangible capital to adjusted total assets ratio of 1.50%, (ii) core
capital to adjusted total assets ratio of 3.00%, and (iii) total risk-based
capital to risk-weighted assets ratio of 8.00%, of which at least 4.00% must be
core capital. An association that immediately prior to a proposed capital
distribution, and on a pro forma basis after giving effect to a proposed capital
distribution, has capital that is equal to or in excess of its minimum capital
requirements is a "tier 2 association". An association that immediately prior
to a proposed capital distribution, and on a pro forma basis after giving effect
to a proposed capital distribution, has capital that is less than its minimum
regulatory capital requirement is a "tier 3 association". The Bank currently
qualifies as a tier 1 association. See "Management's Discussion and
Analysis -- Capital Resources and Liquidity -- Regulatory Matters".
Upon 30 days' notice to the OTS, a tier 1 association may make capital
distributions during a calendar year up to the higher of 100% of its net income
to date during the calendar year, plus the amount that would reduce by one-half
its surplus capital ratio at the beginning of the calendar year or 75% of its
net income over the most recent four quarter period. A tier 1 association may
not make capital distributions in excess of the foregoing limitations except
upon notice to the OTS and an opportunity for the OTS to object to such capital
distribution. The OTS may prohibit an otherwise permissible capital distribution
upon a determination that making such a distribution would be an unsafe or
unsound practice. The OTS may notify an institution that qualifies as a tier 1
association that it is subject to more than normal supervision and thereafter,
treat it as a tier 2 or tier 3 association.
Under the prompt corrective action provisions discussed below, no insured
depository institution may make a capital distribution if after such
distribution it would be undercapitalized. See " -- Enforcement -- Prompt
Corrective Action". The OTS has proposed to amend its capital distribution
regulation to conform to the prompt corrective action system and to provide
additional flexibility. Under the proposal, savings associations that have a
composite CAMEL rating (examination rating) of "1" or "2" and that are not
holding company subsidiaries need not notify the OTS before making a capital
distribution. Savings associations that were adequately or well-capitalized
under prompt corrective action and that would remain at least adequately
capitalized after a capital distribution would be permitted to make a
distribution after providing notice to the OTS. "Troubled" and
undercapitalized institutions could make capital distributions only by filing an
application and receiving OTS approval, which would be granted only under
certain limited conditions. The proposal defines "troubled condition" as a
function of an institution's examination rating, its capital condition, or on
the basis of supervisory directives issued or designation made by the OTS.
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: (i) loans made on the security of
residential and nonresidential real estate, (ii) commercial loans, and (iii)
consumer loans, including credit card loans. The lending authority of federally
chartered associations is subject to numerous OTS requirements,
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including, as applicable, requirements governing amortization, term,
loan-to-value ratio, percentage-of-assets limits, and loans-to-one-borrower
limits. In September of 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".
A federally chartered savings association may invest, without limitation,
in the following assets: (i) obligations of the United States government or
certain agencies or instrumentalities thereof; (ii) stock issued or loans made
by the FHLBs or the FNMA; (iii) obligations issued or guaranteed by the FNMA,
the Student Loan Marketing Association, the GNMA, or any agency of the United
States government; (iv) certain mortgages, obligations, or other securities that
have been sold by the FHLMC; (v) stock issued by a national housing partnership
corporation; (vi) demand, time, or savings deposits, shares, or accounts of any
insured depository institution; (vii) certain "liquidity" investments approved
by the OTS to meet liquidity requirements; (viii) shares of registered
investment companies the portfolios of which are limited to investments that a
federal association is otherwise authorized to make; (ix) certain MBS; (x)
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; (xi) loans on the security of liens upon residential real property;
(xii) credit card loans; and (xiii) education loans. Federally chartered savings
associations are authorized by the HOLA to make investments in 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 or related group of
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 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.
In addition to limits on loans to one borrower, 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.
SUBSIDIARIES -- 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 others: 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: (i) it engages only in activities that a federal
savings association is permitted to engage in directly; (ii) the parent savings
association owns, directly or indirectly, more than 50% of the subsidiary's
voting stock;
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and (iii) 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.
FINANCE SUBSIDIARIES. In accordance with OTS regulations, federal savings
associations may establish one or more finance subsidiaries. The sole purpose of
a finance subsidiary is to issue securities that a federal savings association
may issue directly and to remit the net proceeds of the issuance to the parent
savings association.
In June 1996, the OTS proposed substantial revisions to its regulations
governing subsidiaries. If adopted as proposed, the revised regulations would,
among other things, expand the activities in which a service corporation may
engage, reclassify finance subsidiaries as operating subsidiaries, and permit
federal savings associations to invest in pass-through investments, including
limited partnerships and similar vehicles, whose activities are confined to
those the savings association could conduct directly.
QTL TEST. All savings associations are required to meet a qualified thrift
lender ("QTL") test for, among other things, future eligibility for FHLB
advances. An association must have invested at least 65% of its portfolio assets
in qualified thrift investments and must maintain this level of qualified thrift
investments on a monthly average basis in nine of every 12 months.
"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 as well as certain obligations of the FDIC and certain other
related entities. Other qualifying assets, which may be included up to an
aggregate of 20% of portfolio assets, are: (i) 50% of originated residential
mortgage loans sold within 90 days of origination; (ii) investments in debt or
equity of service corporations that derive 80% of their gross revenues from
housing-related activities; (iii) 200% of certain loans to, and investment in,
low cost one-to four-family housing; (iv) 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; (v) other
loans for churches, schools, nursing homes and hospitals; and (vi) personal,
family, household, or education loans (up to 10% of total portfolio assets).
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 a savings association converts to
a bank charter, it must remain SAIF-insured until the expiration of the
moratorium (the moratorium, enacted in 1989, effectively prohibits most
conversions from the SAIF to the BIF insurance fund), which will not occur until
the date on which the SAIF fund meets its designated reserve ratio. As a result
of the one-time assessment in SAIF deposits, the SAIF is deemed to have met its
designated reserve ratio as of October 1, 1996. 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 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.
The 1996 Act amended the QTL test to permit small business, credit card,
and student loans to be counted without limitation toward the 65% of assets
component of the QTL test. The terms "small business" and "credit card" will
be defined by the OTS. The Act also creates an alternative test by which a
thrift may demonstrate that it is a qualified thrift lender for branching. A
thrift may now qualify by meeting the Code test for being a domestic building
and loan association, as that term is defined in Section 7701(a)(19) of the
Code.
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
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mutual funds, reserves maintained pursuant to Federal Reserve Board
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. Currently, OTS regulations require a savings
association, such as the Bank, to maintain liquid assets equal to not less than
5% of its net withdrawable deposit accounts and borrowings payable in one year
or less and short-term liquid assets of not less than 1%. Penalties may be
imposed for failure to meet the liquidity requirements.
MERGERS AND ACQUISITIONS
RESTRICTIONS ON ACQUISITIONS. As previously described, the Bank is
controlled by the Company. The Company must obtain approval from the OTS before
acquiring control of any other savings association. Such acquisitions are
generally prohibited if they result in a savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in supervisory acquisitions of failing savings associations. The Company may
acquire up to 5%, in the aggregate, of the voting stock of any non-subsidiary
savings association or savings and loan holding company without being deemed to
acquire control of the association or holding company. In addition, a savings
and loan holding company may hold shares of a savings association or a savings
and loan holding company for certain purposes, including as a bona fide
fiduciary, as an underwriter, or in an account solely for trading purposes.
Under certain conditions, a savings and loan holding company may acquire up to
15% of the shares of a savings association or savings and loan holding company
in a "qualified stock issuance".
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. Control is rebuttably presumed to
exist if a person 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, the percentage of debt and/or equity of
the association or holding company controlled by the person, agreements giving
the person 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 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.
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.
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 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, director, 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") and their
related interests (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 Federal Reserve Act (the "FRA") and the regulations promulgated
thereunder. Among other things, such loans must be made on terms substantially
the same as those prevailing on transactions made to
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unaffiliated individuals, and 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) identifies limited circumstances in which the Bank is permitted to
extend credit 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.
TRANSACTIONS WITH AFFILIATES
Pursuant to Section 11 of the HOLA, savings associations are subject to
restrictions regarding transactions with affiliates ("Covered Transactions")
substantially similar to those imposed upon member banks under Sections 23A and
23B of the 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 Company and any company sponsored
and advised on a contractual basis by the Bank or any subsidiary or affiliate of
the Bank. The 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. 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 and grants the Director of the OTS the authority
to deem certain non-bank or non-thrift subsidiaries of a savings association as
affiliates.
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 final 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 core 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.
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An institution will be designated adequately capitalized if the institution
has a total risk-based capital ratio of 8% or greater, a core 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 core 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 core 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 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) who
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 (i) has no reasonable
prospect of becoming adequately capitalized, (ii) fails to become adequately
capitalized when required to do so, (iii) fails timely to submit an acceptable
capital restoration plan, or (iv) materially fails to implement a capital
restoration plan; or where the association is "critically undercapitalized" or
"otherwise has substantially insufficient capital".
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CONSUMER PROTECTION REGULATIONS
The Bank is subject to many federal consumer protection statutes and
regulations including, but not limited to, the following:
MORTGAGE AND CONSUMER LENDING
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 TILA is implemented by the Federal Reserve Board's Regulation Z.
Regulation Z contains disclosure and advertising rules, rules related to the
calculation of annual percentage rates, document retention rules, and error
resolution procedures. The appendices to the regulation set forth model forms
and clauses that creditors may use when providing open-end and closed-end
disclosures. The appendices also contain detailed rules for calculating the
annual percentage rate. Official staff interpretations of the regulation are
published in the Federal Reserve Board's Commentary. Good faith compliance with
the Commentary protects creditors from civil liability under the TILA.
Under certain circumstances involving extensions of credit secured by the
borrower's principal dwelling, the TILA and Regulation Z thereunder provide a
right of rescission. The period within which the consumer may exercise the right
to rescind runs for three business days from the last of three events: (i) the
occurrence that gives rise to the right of rescission; (ii) delivery of all
required material disclosures, I.E., the annual percentage rate, the finance
charge, the amount financed, the total of payments, and the payment schedule; or
(iii) delivery to the consumer of the required rescission notice. When a
creditor has failed to take the action necessary to start the three-day
rescission period running, the right to rescind automatically lapses on the
occurrence of the earliest of the following three events: (i) the expiration of
three years after the occurrence giving rise to the right of rescission; (ii)
transfer of all the consumer's interest in the property; or (iii) sale of the
consumer's interest in the property. After that time, depending on state law, a
consumer may assert a right of rescission as a defense in a foreclosure action
under certain circumstances. Under the TILA, the consumer cannot be required to
pay any amount in the form of money or property either to the creditor or to a
third party as a part of the transaction in which a consumer exercises the right
of rescission. Any amounts of this nature already paid by the consumer must be
refunded. "Any amount" includes finance charges already accrued, as well as
other charges such as application and commitment fees or fees for a title search
or appraisal. Once the creditor has fulfilled its rescission obligation under
the TILA, the consumer must tender to the creditor any property or money the
creditor has already delivered to the consumer.
The regulatory agencies are authorized to order creditors to make monetary
and other adjustments to the accounts of consumers in cases where an annual
percentage rate or finance charge is inaccurately disclosed. Generally, the
agencies order restitution when such disclosure errors resulted from a clear and
consistent pattern or practice of violation or gross negligence or a willful
violation that was intended to mislead the person to whom the credit was
extended. However, the agencies are not precluded from ordering restitution for
isolated disclosure errors. The TILA also provides for statutory damages of
twice the finance charge, with a minimum of $200 and a maximum of $2,000 for
closed end loans secured by real property or a dwelling. If successful, the
borrower is entitled to reasonable attorneys' fees and the costs of bringing the
action. The TILA also provides for class actions for actual damages and for
statutory damages of the lesser of $500,000 or 1% of the creditor's net worth,
plus court costs and attorneys' fees.
On September 30, 1995, President Clinton signed into law the Truth In
Lending Amendments of 1995 (the "1995 Amendments"). The 1995 Amendments
increase finance charge tolerances, limit the liability of assignees and loan
servicers, and provide protection from civil liability for claims based on
certain disclosure rules covered by the 1995 Amendments, including prohibiting
the maintenance of certain class action cases not certified as class actions
prior to January 1, 1995. The 1995 Amendments also clarify that third party fees
not required or
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retained by a lender, taxes levied on a security interest, and fees to prepare
all loan-related documents for real estate loans, as well as pest and flood
inspections, are excluded from the finance charge.
The Bank attempts in good faith to comply with the TILA and Regulation Z
thereunder. The requirements are complex, however, and even inadvertent
non-compliance could result in civil liability or the extension of the
rescission period for a mortgage loan for up to three years from the date the
loan was made. During the past several years, numerous individual claims and
purported consumer class action claims were commenced against a number of
financial institutions, their subsidiaries, and other mortgage lending
institutions, seeking civil statutory and actual damages and rescission under
the TILA, as well as remedies for alleged violations of various state unfair
trade practices acts and restitution or unjust enrichment in connection with
certain mortgage loan transactions.
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.
Section 805 of the FH Act, which applies to the financing of housing, makes
it unlawful for a bank to deny a loan or any other financial assistance for the
purpose of purchasing, constructing, improving, repairing, or maintaining a
dwelling because of the race, color, religion, national origin, sex, handicap,
or familial status of the loan applicant, any person associated with the loan
applicant, any present or prospective owner of the dwelling, any lessees, or any
tenants or occupants. It is also unlawful to discriminate in fixing the amount,
interest rates, duration, or other terms of the credit.
Section 813 of the FH Act provides that aggrieved persons may sue anyone
who they believe has discriminated against them. Section 814 of the FH Act
provides that the Attorney General of the United States may sue for an
injunction against any pattern or practice that denies civil rights granted by
the FH Act. Section 810 of the FH Act allows a person to file a discrimination
complaint with the Department of Housing and Urban Development ("HUD"). The
HUD will investigate the complaint and may attempt to resolve the grievance
through conciliation or persuasion. Penalties for violation of the FH Act
include actual damages suffered by the aggrieved person and injunctive or other
equitable relief. The court's order may also assess civil penalties.
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. Regulation B, which implements the ECOA, covers
all individuals and institutions that regularly participate in decisions to
extend credit. In addition to prohibiting outright discrimination on any of the
impermissible bases listed above, an effects test has been applied to the
analysis of discrimination under Regulation B. This means that if a creditor's
actions have had the effect of discriminating, the creditor may be held
liable -- even when there is no intent to discriminate.
In addition to actual damages, the ECOA provides for punitive damages of up
to $10,000 in individual lawsuits and up to the lesser of $500,000 or 1% of the
creditor's net worth in class action suits. Successful complainants may also be
entitled to an award of court costs and attorneys' fees.
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. Also, the RESPA
prohibits certain abusive practices, such as kickbacks, and places limitations
on the amount of money that a lender may require a borrower to place in an
escrow account. Regulation X, which implements RESPA, also establishes escrow
accounting procedures and mandates the use of aggregate accounting for
determining the maximum dollar amount that may be collected in connection with
escrow accounts.
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:
(i) the loan is made by any lender, the deposits of which are federally insured
or any lender that is regulated by a federal agency; or (ii) the
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loan is insured, guaranteed or supplemented by a federal agency; or (iii) the
loan is intended to be sold to the FNMA, the GNMA, or the FHLMC; or (iv) the
loan is made by any creditor who makes or invests in residential real estate
loans aggregating more than $1 million per year.
Section 8 of the RESPA prohibits any person from giving or receiving a fee
or a thing of value (payments, commissions, fees, gifts, or special privileges)
for a referral of settlement business. Such "kickbacks" include payments in
excess of the reasonable value of goods provided or services rendered.
Violations of Section 8 of the RESPA may result in imposition of the following
penalties: (i) civil liability equal to three times the amount of any charge
paid for the settlement services; (ii) the possibility that court costs and
attorneys' fees can be recovered; and (iii) a fine of not more than $10,000 or
imprisonment for not more than one year, or both.
The Bank attempts in good faith to comply with the requirements of the
RESPA and its implementing regulations. The requirements are complex, however,
and even inadvertent non-compliance could result in civil or criminal liability.
During the past several years, numerous individual claims and purported consumer
class action claims were commenced against a number of financial institutions,
their subsidiaries, and other mortgage lending institutions alleging violations
of the RESPA's escrow account rules and seeking civil damages, court costs, and
attorneys' fees.
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 HMDA requires institutions to report data regarding applications for
one-to four-family loans, home improvement loans, and multi-family loans, as
well as information concerning originations and purchases of such types of
loans. The HMDA also requires most lenders to report the race, sex, and income
of mortgage applicants and borrowers. Generally, insured institutions, like the
Bank, are also required to indicate the reasons for decisions not to grant
credit.
Compliance with the HMDA implementing regulations is enforced by the
appropriate federal banking agency, or, in some cases, by HUD. Administrative
sanctions, including civil money penalties, may be imposed by supervisory
agencies for violations.
THE COMMUNITY REINVESTMENT ACT. 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 their record of helping to meet the credit
needs of their entire community, including low-and moderate-income
neighborhoods, 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. Under the CRA, which is implemented by uniform
regulations adopted by each of the bank regulatory agencies, including the OTS,
financial institutions are required to describe their local community by
outlining the community on a map. If the financial institution has more than one
local community, it must describe each one. A financial institution's local
community consists of the areas surrounding each deposit-taking office or
cluster of offices, including any low- or moderate-income neighborhoods within
that area.
The regulations require the banking agencies to assess each financial
institution's record of performance in helping to meet the credit needs of its
community by reviewing 12 assessment factors. These assessment factors include:
(i) activities conducted by a financial institution to ascertain the credit
needs of its community; (ii) the extent of marketing and special credit related
programs to make members of the community aware of credit services; (iii) the
extent of participation of the financial institution's board of directors in
formulating policy and reviewing performance; (iv) the presence or absence of
practices intended to discourage applications for types of credit set forth in
the institution's CRA statement; (v) the geographic distribution for the
financial institution's credit extensions, credit applications, and denials;
(vi) the presence or absence of evidence of prohibited discriminatory or other
illegal credit practices; (vii) the financial institution's record of opening
and closing offices and providing services at offices; (viii) the financial
institution's participation, including investments, in
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local community development projects; (ix) the financial institution's
origination or purchase of residential mortgage loans, housing rehabilitation
loans, home improvement loans, and small business and farm loans within its
community; (x) the financial institution's participation in governmentally
insured, guaranteed, or subsidized loan programs for housing and small farms and
businesses; (xi) the financial institution's ability to meet various community
credit needs based on its financial condition, size, and other factors; and
(xii) any other factors, that in the agencies' judgment, reasonably bear on the
extent to which a financial institution has helped to meet the credit needs of
its community.
The agencies use the CRA assessment factors in order to provide a rating to
the financial institution. The ratings range from a high of "outstanding" to a
low of "substantial noncompliance".
On April 19, 1995, the agencies jointly adopted revised CRA regulations.
Under the new system, the 12 assessment factors used to evaluate the CRA
performance of most large retail institutions, such as the Bank, will be
replaced with three tests, the lending, investment, and service tests, with the
lending test carrying the primary importance. To receive a satisfactory or
better rating, an institution must achieve at least a satisfactory lending
performance.
The lending test evaluates an institution's record of helping to meet the
credit needs of its assessment area(s) through its lending activities by
considering, among other things, the number, amount, geographic distribution,
and certain borrower characteristics of the institution's home mortgage, small
business, small farm, and community development lending. The investment test
evaluates an institution's record of helping to meet the credit needs of its
assessment area or areas through "qualified investments" (lawful investments,
deposits, membership shares, or grants that have community development as their
primary purpose). The service test evaluates an institution's record of helping
to meet the credit needs of its assessment area or areas by analyzing the
availability and effectiveness of an institution's systems for delivering retail
banking services and an institution's community development services. An
institution may elect to be evaluated on the basis of a strategic plan approved
by its primary regulator rather than the three tests.
Although the regulations became effective on July 1, 1995, the primary
provisions are subject to a two-year phase-in period. Most large retail
institutions will become subject to the new examination criteria beginning July
1, 1997, although institutions may elect to be examined with the new tests
beginning January 1, 1996. Finally, new data collection requirements that became
effective on January 1, 1996 are included in the new regulations.
While the Bank is strongly committed to serving all of its CRA communities,
including its low- and moderate-income neighborhoods, the OTS might determine
the Bank's CRA-related programs to be insufficient. The Bank was last examined
for CRA compliance by its primary regulator, the OTS, on October 14, 1995 and
received a CRA assessment rating of "outstanding". The Bank's previous CRA
assessment rating, as of March 8, 1993, was also "outstanding".
SAVINGS AND CHECKING ACCOUNTS AND PUBLIC ACCOMMODATIONS
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
("IRS") for each transaction in currency of more than $10,000 not exempted by
the Treasury Department. The reports must be filed within 15 days of the
transaction. A "transaction in currency" is defined by the regulations to
include any transaction "involving the physical transfer of currency from one
person to another". The Treasury Department deems multiple transactions by the
same person on the same day exceeding $10,000 in the aggregate to be reportable.
Financial institutions are also required to file a Suspicious Activity Report
with respect to any known or suspected criminal conduct or suspicious
activities, including transactions valued at more than $5,000 that the
institution knows or suspects involve funds derived from illegal activities, are
designed to evade the requirements of the BSA, have no business or apparent
lawful purpose, or are not the sort in which the particular customer would
normally be expected to engage.
In 1988, Congress enacted the Money Laundering Prosecution Improvements Act
(the "1988 Act"). The 1988 Act expanded the BSA's definition of "financial
institution" and broadened the BSA's reporting requirements to require
financial institutions, typically banks, to verify and record the identity of
the purchaser
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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.
Under the FDIA, a receiver or conservator may be appointed for an insured
depository institution on the receipt of written notice from the Attorney
General that an insured depository institution has been found guilty of a
criminal money laundering offense or criminal offense under the BSA. The FDIC
may also take action to terminate the deposit insurance of an institution
convicted of criminal violations of the BSA and money laundering offenses. Any
person who willfully causes a violation of the BSA's record-keeping requirements
for insured institutions is subject to the imposition of up to a $50,000 civil
money penalty, in addition to any other applicable penalties.
The Bank has instituted a policy against money laundering that is
communicated by top management to the Bank's employees. The policy includes
safeguards to prevent money laundering, including, but not limited to, regular
education programs to teach employees the requirements of the federal money
laundering laws and to make them aware of the innovative and ever-changing
techniques employed by money launderers.
ELECTRONIC FUND TRANSFER ACT (THE "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.
Unless an error is resolved in accordance with the error-resolution
procedures specified in the EFTA, the institution may be liable for civil
damages. The statutory damages the institution would have to pay in a successful
individual action are actual damages and statutory damages between $100 and
$1,000, as determined by the court, plus court costs and attorneys' fees. In a
successful class action, the institution would have to pay actual damages and
statutory damages up to the lesser of $500,000 or 1% of the institution's net
worth, plus court costs and reasonable attorneys' fees. The EFTA also sets forth
provisions for criminal liability for certain EFTA violations. Penalties under
these provisions run from a $5,000 fine and one year's imprisonment for
knowingly and willfully failing to comply with the EFTA, to a $10,000 fine and
10 years' imprisonment for fraudulent use of a debit card.
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 Expedited Funds Act is implemented by the Federal Reserve
Board's Regulation CC. The Act and Regulation CC include specific detailed
provisions requiring a financial institution to: (i) make funds available to its
customers within specified time frames; (ii) ensure that interest accrues on
funds in interest-bearing transaction accounts not later than the day the
financial institution receives credit; and (iii) disclose the financial
institution's funds-availability policies to its customers.
In addition to administrative enforcement, there is civil liability for
violations of the Expedited Funds Act. Any depository institution that fails to
comply with any requirement of the Expedited Funds Act or regulation with
respect to any person other than another depository institution is liable to
such person in an amount equal to the sum of actual damages, such additional
amount as the court may allow (with a minimum of $100 and a maximum of $1,000 in
an individual action and, in a class action, a maximum of the lesser of $500,000
or 1% of the net worth of the depository institution), plus court costs and
attorneys' fees in the case of any successful action.
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 (the "APY"). TISA is implemented by Regulation
DD. The TISA and Regulation DD thereunder require depository institutions to pay
interest on the full amount of the principal in the account for each day, under
either
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the "daily balance method" or the "average daily balance method". No other
balance calculation methods are permitted by the TISA.
In addition to administrative enforcement, TISA violations carry civil
liability. Any depository institution that fails to comply with any requirement
of the TISA with respect to any person who is an account holder is liable to
such person in an amount equal to the sum of actual damages, such additional
amount as the court may allow (with a minimum of $100 and a maximum of $1,000 in
an individual action and, in a class action, a maximum of the lesser of $500,000
or 1% of the net worth of the depository institution), plus court costs and
attorneys' fees in the case of any successful action.
The 1996 Act repeals the civil liability provisions of the TISA effective
September 30, 2001.
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. An individual with a disability is a person who: (i)
has a physical or mental impairment that substantially limits one or more major
life activities; (ii) has a record of such an impairment; or (iii) is regarded
as having such an impairment.
Title 3 of the ADA covers banks, thrifts, credit unions, and finance
companies -- all of which are considered to be "public accommodations".
Section 302(a) of the ADA 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". Section 302(b) of the ADA sets forth specific
requirements and prohibitions for public accommodations; for example, a place of
public accommodation, such as a retail branch office of the Bank, may not impose
eligibility criteria that screen out persons with disabilities. Discrimination
also includes the failure to provide the auxiliary aids and services necessary
to enable individuals with disabilities to take advantage of a financial
institution's services, unless the financial institution can demonstrate that
providing the aids and services would "fundamentally" alter the nature of the
service or would result in an "undue burden". Another significant provision of
Section 302 of the ADA is the requirement to remove from public accommodations
all architectural barriers and communication barriers that are structural in
nature if the removal is "readily achievable". "Readily achievable" is
defined as "easily accomplishable and able to be carried out without much
difficulty or expense". In deciding whether a particular action is readily
achievable, the size of the institution and the nature and the cost of the
action will be considered. The last substantive provision of Title 3 of the ADA
that applies to financial institutions is Section 303, dealing with new
construction. It provides that any building opening to the public after January
26, 1993 must be "readily accessible to and useable by individuals with
disabilities" unless doing so is structurally impracticable.
Anyone who has been discriminated against on the basis of a disability in
relation to employment may file an action with the United States Equal
Employment Opportunity Commission and may be entitled to remedies that include
rehiring, promotion, reinstatement, back pay or remuneration, or reasonable
accommodation including reassignment. Such individuals may also be entitled to
damages intended to compensate for future pecuniary losses, mental anguish, and
inconvenience. The ADA authorizes the Attorney General to sue institutions that
are engaged in a pattern or practice of discrimination. At the Attorney
General's request, the court may impose civil penalties of $50,000 for a first
violation and $100,000 for any subsequent violation or certain other remedies.
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. 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
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have increased competition among savings associations, commercial banks, and
other financial institutions. The operations of regulated depository
institutions will continue to be subject to changes in applicable statutes and
regulations from time to time, which changes could adversely affect the Bank and
its affiliates.
On September 30, 1996, President Clinton signed into law the 1996 Act. The
1996 Act, among other things imposed a special assessment on SAIF deposits held
as of March 31, 1995, to capitalize the SAIF.
TAXATION
FEDERAL TAXATION
Bank United Corp. is a savings and loan holding company (the "Parent
Company") and the Bank is a federal savings bank. Both are subject to
provisions of the Code, in the same manner, with certain exceptions, as other
corporations. The Parent Company and the Bank 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, the Parent
Company and the Bank compute their tax on a separate company basis. The
accompanying Consolidated Financial Statements include provisions for income
taxes as a result of the Parent Company's and the Bank's taxable income for
fiscal 1996, 1995, and 1994. In addition to federal income taxes, the Bank is
required to make payments in lieu of federal income taxes pursuant to the
Assistance Agreement with the FSLIC. The tax benefit sharing provisions
contained in the Assistance Agreement were replaced by similar provisions
contained in the Tax Benefits Agreement entered into in connection with the
Settlement Agreement (the "Tax Benefits Agreement"); these provisions,
relating to the obligation to share tax benefit utilization, will continue
through the taxable year ending nearest to September 30, 2003. See " -- FSLIC
Assistance" and Note 14 to the Consolidated Financial Statements.
ENACTED LEGISLATION
The Small Business Job Protection Act of '96 (the "Small Business Act")
was signed into law on August 20, 1996. The legislation requires recapture of a
thrift's post-1987 tax bad debt reserve over a six taxable year period with the
opportunity to defer recapture by up to two years if certain residential loan
requirements are met. Under the Small Business Act, thrift institutions, which
are treated as banks for computing bad debt, with over $500 million in assets
("Large Banks"), will be required to use the specific charge-off method to
account for bad debts. The Small Business Act also repeals the ability of thrift
institutions to use NOLs to offset income from a residual interest in a Real
Estate Mortgage Investment Conduit ("REMIC") that meets a significant value
test.
The effective date of the enacted legislation for the Bank is fiscal 1997.
The amendment to a thrift's ability to utilize NOLs against residual income from
a REMIC with significant value does not apply to any residual interest held by
the taxpayer on November 1, 1995 and at all times thereafter. All residual
interests held by the Bank that meet a significant value test are grandfathered
under this clause. See " -- Residual Interest".
It is management's belief the Bank will not have the opportunity to defer
recapture of the bad debt reserve because it has been determined the residential
loan requirements will not be met. There will be no financial statement impact
on the Company from this recapture as a deferred tax liability has already been
provided for on the Bank's post-1987 tax bad debt reserves. At September 30,
1996, the Bank had approximately $90 million of post-1987 tax bad debt reserves.
The current tax liability resulting from recapture of this reserve will be
reduced by NOLs available to offset this income.
The pre-1988 reserve will be required to be recaptured into income under
certain circumstances, including any distribution in redemption of stock of the
Bank (with certain exceptions for preferred stock); partial or complete
liquidation of the Bank following the merger or liquidation; or a dividend
distribution in excess of certain earnings and profits. If a thrift with a
pre-1988 reserve is merged, liquidated tax free, or acquired by another
depository institution, the remaining institution will inherit the thrift's
pre-1988 reserve and post-1951 earning and profits. Because management believes
the circumstances requiring recapture of the pre-1988 reserve in the amount of
$52 million are not likely to occur, deferred taxes of $18 million have not been
provided.
Legislation was signed into law on September 30, 1996, which resulted in an
assessment on all SAIF-insured deposits in such amounts that will
fully-capitalize the SAIF at a reserve ratio of 1.25% of SAIF-insured deposits.
See " -- Charter, Supervision, and Examination -- Insurance Assessments" and
Note 15 to the
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Consolidated Financial Statements. This one-time assessment is not
tax-deductible until fiscal 1997, when it will be paid. The deduction associated
with the one-time assessment was deferred with the tax effect included as a
deferred tax asset.
RESIDUAL INTEREST
The Bank is a holder of residual interests in REMICs as defined by the
Code. The Code limits the amount of NOLs that may be used to offset the taxable
income derived by holders of residual interests in a REMIC. However, the Code
states that this limitation does not apply to certain financial institutions
that are holders of residual interests that meet a significant value test
prescribed by applicable Treasury regulations. The Bank incurs taxable income
from residual interests that meet such test and, therefore, may be offset by
NOLs without respect to this limitation. Also, the Bank incurs taxable income
from residual interests that do not meet such test and, therefore, may not be
offset by NOLs. This income caused the Bank to incur a regular tax liability for
fiscal 1994.
Enacted legislation repeals the ability of a thrift institution to use a
NOL to offset its income from a residual interest in a REMIC. This does not
apply to any residual interest in a REMIC held by a taxpayer on November 1,
1995, and at all times thereafter. See "-- Enacted Legislation".
DOMESTIC BUILDING AND LOAN ("DBL") TEST
Savings institutions such as the Bank that meet the definitional DBL test
prescribed by the Code may benefit from certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. The DBL test consists of a supervisory test, a business operations
test, and an asset test. If the Bank fails to meet these tests, the transition
from the reserve method to the direct charge-off method of tax accounting for
bad debts would result in a recapture of this reserve into taxable income. At
September 30, 1996, the Bank was in excess of the minimum thresholds. Enacted
legislation has repealed the reserve method of accounting for bad debts by large
thrifts for taxable years beginning after 1995; thereby eliminating the Bank's
requirement to meet the definitional DBL test. See "-- Enacted Legislation".
BAD DEBT DEDUCTION
For purposes of the bad debt reserve deduction, loans are separated into
"qualifying real property loans", which generally are loans secured by certain
interests in real property, and "non-qualifying loans", which are all other
loans. The deduction with respect to non-qualifying loans must be computed under
the experience method, which generally allows a deduction based on a savings
association's actual bad debt loss experience, consisting of the current year
and the prior five years. The bad debt reserve deduction with respect to
qualifying real property loans, however, may be the larger of the amounts
computed under (i) the experience method, or (ii) the percentage of taxable
income method. The percentage of taxable income method generally permits a
qualifying savings association to deduct 8% of its taxable income prior to such
deduction, as adjusted for certain items. Enacted legislation has repealed the
bad debt reserve deduction for Large Banks effective for taxable years beginning
after December 31, 1995.
Savings associations, such as the Bank, that file federal income tax
returns as part of a consolidated group are required by applicable Treasury
regulations to reduce their taxable income, for purposes of computing the
percentage of taxable income deduction, for losses attributable to activities of
the non-savings association members of the consolidated group that are
functionally related to the activities of the savings association member.
Currently, the Bank is computing its bad debt deduction pursuant to the
experience method. Due to enacted legislation, the Bank's post-1987 bad debt
reserve will be required to be recaptured into taxable income with the specific
charge-off method being used to account for bad debts for taxable years
beginning with fiscal 1997. See "-- Enacted Legislation".
ALTERNATIVE MINIMUM TAX ("AMT")
In addition to regular income taxes, corporations, including saving and
loan holding companies and savings associations, are subject to an AMT, which is
generally equal to 20% of alternative minimum taxable income ("AMTI") (taxable
income increased by tax preference items and adjusted for other items). The
preference item principally affecting the Bank relates to the adjusted current
earnings ("ACE") adjustment, which includes FRF assistance. See "-- The
Assistance Agreement". Although the amounts received by the Bank pursuant to
the
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Assistance Agreement are not taxable for federal income tax purposes, a portion
of such amounts are considered to be an ACE adjustment. For fiscal 1996 and
1995, AMTI was incurred that was offset by the utilization of AMT NOLs. However,
corporations may offset only 90% of their AMTI with the related NOLs. For fiscal
1994, an AMT liability was not incurred.
ENVIRONMENTAL TAX
The Code imposes an additional tax at the rate of .12% on the modified AMTI
of a corporation. Because the tax was enacted to provide funds for various
environmental programs, it is denominated as an environmental tax. Modified AMTI
is essentially AMTI without regard to any utilization of available AMT NOLs less
$2 million.
FSLIC ASSISTANCE
Pursuant to the Assistance Agreement, the FRF, as successor to the FSLIC,
was obligated to provide the Bank with financial assistance in connection with
various matters that arose under the Assistance Agreement. See "-- The
Assistance Agreement". The tax treatment of the assistance payments to savings
associations that acquire assets from institutions in receivership (such as the
predecessor to the Bank) has been amended several times in recent years.
Payments to the Bank pursuant to the Assistance Agreement were subject to the
applicable provisions of the Code that were in effect in 1988, the year of the
Acquisition. Payments from the FRF to the Bank pursuant to the Assistance
Agreement were not included in the Bank's taxable income, and the Bank was not
required to reduce its basis in the Covered Assets by the amount of such
financial assistance; however, certain writedowns and losses were limited as
discussed below. Accordingly, there was no requirement to pay federal income
taxes with respect to any amount of the assistance payments received pursuant to
the Assistance Agreement. The Bank also succeeded to substantial NOLs as a
result of the Acquisition.
The Assistance Agreement required the Bank to pay to the FRF an amount
equal to one-third of the sum of federal and state net tax benefits ("Net Tax
Benefits") (as defined by the Assistance Agreement). The Net Tax Benefits shall
be 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. The Net Tax
Benefits items are the tax savings resulting from (i) the utilization of the
deduction by the Bank of any amount of NOLs, capital loss carryforwards, and
certain other carryforwards on the books and records of Old USAT, (ii) the
exclusion from gross income of the amount of certain interest or assistance
payments made to the Bank by the FRF, and (iii) the deduction of certain costs,
expenses, or losses incurred by the Bank for which the FRF has made tax-free
assistance payments. These provisions were replaced by similar provisions in the
Tax Benefits Agreement entered into in connection with the termination of the
Assistance Agreement. Pursuant to the Tax Benefits Agreement, these provisions
relating to the obligation to share tax benefit utilization will continue
through the taxable year ending nearest to September 30, 2003.
Under the Assistance Agreement, the Bank received assistance payments from
the FRF for writedowns and losses from the sales of Covered Assets. For federal
income tax purposes, the Bank included the writedowns and losses from the sale
of Covered Assets in its calculation of the bad debt deduction, using the
experience method. However, the Revenue Reconciliation Act of 1993 denied the
inclusion of writedowns and losses from the sale of Covered Assets in the
calculation of bad debt deductions for assistance payments credited on or after
March 4, 1991. Amendment of federal tax returns for fiscal 1991 and 1992 did not
cause any additional federal tax liabilities to be incurred. However, the new
tax law reduced the Bank's federal NOLs by approximately $259 million.
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The aforementioned tax relief provided savings (costs) on the amount of
taxes required to be paid. The estimated tax savings (costs), by year, were as
follows (in millions):
FOR THE YEAR ENDED
SEPTEMBER 30, SAVINGS (COSTS)
- ------------------------------------- ---------------
1991............................ $(1.7)
1992............................ (2.8)
1993............................ 10.5
1994............................ 3.6
1995............................ 31.4
1996............................ 19.8
NET OPERATING LOSSES
The Company's total NOLs at September 30, 1996 were $817 million, of which
$754 million are attributable to tax relief discussed above. The remaining NOLs
of $63 million are a result of the Company's taxable losses from business
operations in years prior to fiscal 1993. Included in the $817 million is $33
million of Old USAT's NOLs that will expire in fiscal 2003 if not utilized.
Because Old USAT's NOLs are "separate return limitation year" losses within
the meaning of the consolidated return Treasury regulations, their utilization
is limited to future taxable income of the Bank. The remaining $784 million of
NOLs are attributable to operations for fiscal 1989 to 1994, and will begin
expiring in fiscal 2004 if not utilized. These NOLs may be utilized against the
taxable income of the other companies within the consolidated group of which the
Parent Company and the Bank are members. See Note 14 to the Consolidated
Financial Statements.
NET OPERATING LOSS LIMITATIONS
In the event of an Ownership Change, Section 382 of the 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 of the Code for any post-change year would be determined by multiplying the
value of the Company's stock (including both common stock and preferred stock)
at the time of the Ownership Change by the applicable long-term tax exempt rate
(which was 5.80% for September 1996). Any unused annual limitation may be
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 that are recognized in the five-year period after the change. Under
current conditions, if an Ownership Change were to occur, the Company's annual
NOL utilization would be limited to a maximum of approximately $32 million.
The Company would undergo an Ownership Change if, among other things, the
stockholders who own or have owned, directly or indirectly, 5% or more of the
Company's Common Stock or are otherwise treated as 5% Stockholders or a "higher
tier entity" under Section 382 of the Code ("5% Stockholders"), increase
their aggregate percentage ownership of such stock by more than 50 percentage
points over the lowest percentage of such stock owned by such stockholders at
any time during the Testing Period (generally the preceding three years). In
applying Section 382 of the Code, at least a portion of the stock sold pursuant
to the Common Stock Offering would be considered to be acquired by a new 5%
Stockholder even if no person acquiring the stock in fact owns as much as 5% of
the issuer's stock. While the application of Section 382 of the Code is highly
complex and uncertain in some respects, the August Offering, sales pursuant to
the Common Stock Offering, the conversion of the Warrant, and the issuance of
stock options during fiscal 1996 did not cause an Ownership Change. In addition,
events could occur in future periods that are beyond the control of the Company
which could result in an Ownership Change.
In an effort to protect against a future Ownership Change that is not
initiated by the Company, the Certificate and the By-Laws limit Transfers,
subject to certain exceptions, at any time during the three years following the
August Offering of shares of common stock that would either cause a person or
entity to become a 5% Stockholder or increase a 5% Stockholder's percentage
ownership interest. "Transfers" are defined to include any sale, transfer,
assignment, conveyance, pledge, short sale, hypothecation or other disposition
or the issuance of any option to sell, transfer, assign, convey, pledge or
otherwise dispose. While Transfers are deemed prohibited by the Certificate, and
the Company is authorized not to recognize any transferee of such a Transfer as
a stockholder to the extent of such Transfer, these restrictions are incomplete
since the Company cannot, consistent with NASDAQ requirements, prevent the
settlement of transactions through NASDAQ, and because the prohibition on
Transfers by 5% Stockholders does not limit transactions in the securities of
such 5%
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Stockholders that could give rise to ownership shifts within the meaning of the
applicable Section 382 rules. Moreover, the Company's Board of Directors retains
the discretion to waive these limitations or to take certain other actions that
could trigger an Ownership Change, including through the issuance of additional
shares of common stock in subsequent public or private offerings or through
subsequent merger or acquisition transactions.
Because the Company has utilized a substantial portion of its available
ownership limitation in connection with the August Offering, the Company may not
be able to engage in significant transactions that would create a further shift
in ownership within the meaning of Section 382 of the Code within the following
three-year period without triggering an Ownership Change. There can be no
assurance that future actions on the part of the Company's stockholders or the
Company itself will not result in the occurrence of an Ownership Change.
Preferred stock that meets the requirements of section 1504(a)(4) of the
Code is not considered stock when calculating an Ownership Change. Preferred
stock meets the definition under section 1504(a)(4) of the Code if such stock:
(i) is not entitled to vote; (ii) is limited and preferred as to dividends and
does not participate in corporate growth to any significant extent; (iii) has
redemption and liquidation rights which do not exceed the issue price of such
stock (except for a reasonable redemption or liquidation premium); and (iv) is
not convertible into another class of stock.
In fiscal 1995, the Bank publicly issued 4,000,000 shares, $25 liquidation
preference per share, of 9.60% Preferred Stock, Series B (par value $0.01). In
fiscal 1993, the Bank publicly issued 3,420,000 shares, $25 liquidation
preference per share, of 10.12% noncumulative Preferred Stock, Series A (par
value $0.01). Management believes that the Bank's issuance of the Bank Preferred
Stock met the requirements of Section 1504(a)(4) of the Code and, therefore, did
not result in an Ownership Change.
The tax laws in effect in 1988 that applied to the Acquisition provided
that generally applicable limitations on the ability of an acquiring corporation
to utilize the NOLs, and built-in losses, of acquired savings associations did
not apply in the case of the acquisition of assets from insolvent savings and
loan associations. Pursuant to this exception to the generally applicable law,
which existed in 1988, the Bank is allowed to use the NOLs and built-in losses
of Old USAT without limitation.
If an Ownership Change should occur, the Company's ability to utilize its
NOLs will be limited as described above, and the Company's ability to deduct its
built-in losses, if any, as they are realized will be subject to the same
limitation. Limitation of the utilization of these tax benefits could have a
material impact on the Company's financial condition.
CONSOLIDATED GROUP
The Company and the Bank were and are members of an "affiliated group" of
corporations, as defined in the Code and, accordingly, participate in the filing
of a consolidated tax return. One of the requirements of being a member of an
affiliated group is that 80% of the total voting power and 80% of the total
value of stock be owned, directly or indirectly, by other members of the
affiliated group. Stock for this purpose does not include preferred stock that
meets certain definitional requirements prescribed by the Code. Therefore, the
Bank did not cease to be a member of an affiliated group as a result of the
prior issuance of the Bank Preferred Stock. However, if subsequent events occur
that cause the Bank Preferred Stock to no longer meet these requirements (as
could occur if a default in dividends permitted the holders of such stock to
vote in the election of Bank directors), the Bank may cease to be a member of
the affiliated group. If the Bank ceases to be a member of the affiliated group,
other members of the affiliated group will lose their ability to utilize the
Bank's nonseparate return year limitation NOLs in the amount of $759 million.
See " -- Net Operating Losses".
TAX SHARING AGREEMENT
The Company and the Bank are parties to a tax sharing agreement pursuant to
which the Bank pays to the Company amounts equal to the taxes that the Bank
would be required to pay if it were to file a return separately from the
affiliated group of which the Company is the common parent. The tax sharing
agreement does not increase the amounts payable by the Bank over the amounts
that it would have to pay if it were not a member of the Company's affiliated
group.
ACCOUNTING FOR INCOME TAXES
Effective October 1, 1992, the Company adopted SFAS No. 109, "Accounting
for Income Taxes", which changed the method of computing income taxes for
financial statement purposes by adopting the liability method under which the
net deferred tax asset or liability is determined based on the tax effects of
tax benefits attributable to tax carryforwards such as NOLs, investment tax
credits and capital losses, and the differences
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between the book and tax bases of the various assets and liabilities. The
deferred tax asset must be reduced by a valuation allowance if, based on
available evidence, it is more likely than not that some portion of the tax
benefit will not be realized. Accounting guidance under Accounting Principles
Board No. 11, "Accounting for Income Taxes", did not require these amounts to
be recognized previously.
In June 1996, the Certificate and By-Laws were restated with the intent to
preserve certain beneficial tax attributes limiting the disposition of certain
common stock and other interests in the Company by certain of its stockholders.
The preservation of certain tax attributes allowed the recognition of tax
benefits of $85.2 million by the Bank in June 1996 for the expected utilization
of $365 million of NOLs against future taxable income. These tax benefits were
not recognized in prior periods due to limitations on the utilization of NOLs if
an Ownership Change had occurred. In June 1996, the Company and the Bank entered
into a tax sharing agreement. This agreement resulted in the recognition of a
tax benefit of $16.5 million by the Company for the expected utilization of $47
million of the Company's NOLs by the Bank. The total tax benefit of $101.7
million was recognized as a reduction of income tax expense and an increase in
the net deferred tax asset, in accordance with SFAS No. 109.
In fiscal 1995, no tax benefits were recorded by the Company or the Bank.
The Company recognized no benefit for its stand alone NOLs as it did not
generate taxable income to offset such losses and it was not party to a federal
tax sharing agreement with the Bank at that time. The Bank recognized no tax
benefits due to limitations on the utilization of its NOLs if an Ownership
Change had occurred.
In fiscal 1994, no tax benefits were recorded by the Company due to
circumstances similar to those described in the preceding paragraph. The Bank
recognized a $58.2 million tax benefit in fiscal 1994 for the expected
utilization of $249 million of its NOLs against future taxable income.
STATE TAXATION
The Company and the Bank file unitary and combined state returns with
certain subsidiaries and also file separate state returns. The location of
mortgage bank branches, 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 1996, 1995, and 1994. See Note 14 to the
Consolidated Financial Statements.
PROPERTIES
Effective December 1996, the headquarters of the Company were relocated to
leased premises in Houston, Texas in conjunction with the formation of Holdings.
The leases for the Company's headquarters have terms expiring from one to
four years, with annual rental expenses of $4.4 million, subject to increases
under certain circumstances. The following table sets forth the number and
location of the community banking, commercial banking, and mortgage banking
offices of the Company as of September 30, 1996:
<TABLE>
<CAPTION>
NUMBER OF OFFICES
--------------------------------------------------------------
COMMUNITY
BANKING
BRANCHES COMMERCIAL
--------------- BANKING MORTGAGE BANKING
LOCATION OWNED LEASED OFFICES LEASED OFFICES LEASED TOTAL
- ------------------------------------- ----- ------ -------------- ---------------- -----
<S> <C> <C> <C> <C> <C>
Houston Area......................... 14 23 1 3 41
Dallas/Ft. Worth Area................ 12 17 1 2 32
Other Texas.......................... -- 4 -- 2 6
California........................... -- -- 1 14 15
Florida.............................. -- -- 1 4 5
Other U.S............................ -- -- 5 60 65
----- ------ -- --- -----
Total............................ 26 44 9 85 164
===== ====== == === =====
</TABLE>
A majority of leases outstanding at September 30, 1996 expire within five
years or less. See Note 17 to the Consolidated Financial Statements.
Net investment in premises and equipment totalled $40.2 million at
September 30, 1996.
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LEGAL PROCEEDINGS
MAXXAM, INC.
On December 7, 1995, Maxxam filed a Petition for Review in the United
States Court of Appeals for the Fifth Circuit seeking to modify, terminate, and
set aside the order, dated December 30, 1988 (the "Order"), of the FSLIC
approving the Acquisition, which was consummated on December 31, 1988 and
involved substantially all the Bank's initial assets and liabilities. See
"Business -- Assistance Agreement". On December 8, 1995, Maxxam filed a Motion
to Intervene and a Complaint in Intervention in an action pending in the U.S.
District Court for the Southern District of Texas, entitled FEDERAL DEPOSIT
INSURANCE CORPORATION V. CHARLES E. HURWITZ, also seeking to set aside the
Order. Maxxam's Motion to Intervene was granted by the District Court Judge on
November 21, 1996. Maxxam contends, in both cases, that it submitted the most
favorable bid to acquire the assets and liabilities of Old USAT and that it
should have been selected as the winning bidder. In its brief to the Court of
Appeals, Maxxam has asserted that the Court should order the OTS "to award Bank
United to Maxxam" and that the Company would bear no harm in that event because
it is entitled to full indemnification by the FDIC-FRF, pursuant to Section
7(a)(2) of the Assistance Agreement.
The Company is not a party to either of these proceedings. The Bank
intervened in the Fifth Circuit case and may file a Motion to Intervene in the
District Court case at a later date. On December 10, 1996, the Fifth Circuit
Court, in a PER CURIAM opinion and order, affirmed the order approving the
Acquisition in all respects. The time for appeal to the Supreme Court of the
United States has not yet expired, and the Company does not know whether Maxxam
will appeal the Fifth Circuit decision. Management believes, after consultation
with legal counsel, that the claims of Maxxam are barred by applicable time
limits, have no basis for assertion under existing law, and will not have a
material adverse effect on the Bank's or the Company's financial condition,
results of operations, or liquidity.
REGULATORY ACTIONS
The Bank's operations are subject to various consumer protection statutes
and regulations, including, for example, the TILA, the FH Act, the CRA, the
ECOA, the HMDA, the RESPA, the EFTA, the Expedited Funds Act, the TISA, and the
ADA. See "Business -- Regulation -- Consumer Protection Regulations". During
the past several years, numerous individual claims and purported consumer class
action claims were commenced against a number of financial institutions, their
subsidiaries, and other mortgage lending institutions seeking civil statutory
and actual damages and rescission under the TILA, as well as remedies for
alleged violations of various state unfair trade practices laws and restitution
or unjust enrichment in connection with certain mortgage loan transactions.
Also, there have been numerous individual claims and purported consumer class
action claims commenced against a number of financial institutions, their
subsidiaries, and other mortgage lending institutions seeking declaratory relief
that certain of the lenders' escrow account servicing practices violate the
RESPA and breach the lenders' contracts with borrowers. Such claims also
generally seek actual damages and attorneys' fees.
In addition to the foregoing, mortgage lending institutions have been
subjected to an increasing number of other types of individual claims and
purported consumer class action claims that relate to various aspects of the
origination, pricing, closing, servicing, and collection of mortgage loans and
that allege inadequate disclosure, breach of contract, breach of fiduciary duty,
or violation of federal or state laws. Claims have involved, among other things,
interest rates and fees charged in connection with loans, interest rate
adjustments on adjustable-rate mortgage loans, timely release of liens upon loan
payoffs, the disclosure and imposition of various fees and charges, and the
placing of collateral protection insurance. The Bank has had asserted against it
one putative class action claim under the TILA, one putative class action claim
under the RESPA and three separate putative class action claims involving the
Bank's loan servicing practices. Management does not expect these claims, in the
aggregate, to have a material adverse impact on the Company's financial
condition, results of operation, or liquidity.
WINSTAR-BASED CLAIMS
On July 25, 1995, Plaintiffs filed suit against the United States of
America in the United States Court of Federal Claims for breach of contract and
taking of property without compensation in contravention of the Fifth
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Amendment of the United States Constitution. The action arose because the
passage of FIRREA and the regulations adopted by the OTS pursuant to FIRREA
deprived Plaintiffs of their contractual rights.
In December 1988, the United States, through its agencies, entered into
certain agreements with the Plaintiffs that resulted in contractual obligations
owed to Plaintiffs. Plaintiffs contend that the obligations were undertaken to
induce, and did induce, the Company's acquisition of substantially all of the
assets and the secured, deposit, and certain tax liabilities of Old USAT, an
insolvent savings and loan association, thereby relieving the FSLIC, an agency
of the United States government, of the immense costs and burdens of taking over
and managing or liquidating the institution. The FSLIC actively solicited buyers
for Old USAT, and in the weeks preceding the Acquisition the Company and the
FSLIC negotiated the terms of a complex transaction involving some six
contractual documents. To accomplish this transaction, the FSLIC and its
regulating agency, the FHLBB, which was also an agency of the United States
government, were required to undertake to pay certain other amounts of money
over time and to count for regulatory purposes certain monies and book entries
of the Bank in ways that allowed the Company greater leverage to increase the
size of the Bank prudently and profitably. The United States obtained the right
to share in this leveraged growth through warrants for stock and through
so-called "tax benefit payments" to the United States from the Company and the
Bank.
The lawsuit alleges breaches of the United States' contractual obligations
(i) to abide by a capital forbearance, which would have allowed the Bank to
operate for ten years under negotiated capital levels lower than the levels
required by the then existing regulations or successor regulations, (ii) to
abide by its commitment to allow the Bank to count $110 million of subordinated
debt as regulatory capital for all purposes and (iii) to abide by an accounting
forbearance, which would have allowed the Bank to count as capital for
regulatory purposes, and to amortize over a period of twenty-five years, the
$30.7 million difference between certain FSLIC payment obligations to the Bank
and the discounted present value of those future FSLIC payments. The lawsuit
seeks monetary relief for the breaches by the United States of its contractual
obligations to Plaintiffs and, in the alternative, seeks just compensation for a
taking of property and for a denial of due process under the Fifth Amendment to
the United States Constitution.
The lawsuit was stayed from the outset by a judge of the Court of Federal
Claims pending the Supreme Court's decision in the WINSTAR cases. Since the
Supreme Court ruling, the Chief Judge of the Court of Federal Claims convened a
number of status conferences to establish a case management protocol for the
more than 100 lawsuits on the Court of Federal Claims docket, that, like
Plaintiffs' case, involve issues similar to those raised in the WINSTAR cases.
Following a number of status conferences, Chief Judge Loren Smith of the
United States Court of Federal Claims transferred all WINSTAR-related cases to
his own docket and entered an Omnibus Case Management Order governing
proceedings in such cases, including the Company's case. Under the Omnibus Case
Management Order, Chief Judge Smith serves as the "Managing Judge" for all
WINSTAR-related cases and may assign other judges of the United States Court of
Federal Claims to resolve pre-trial discovery disputes and common legal issues
and to conduct trials. The Government and Plaintiffs exchanged certain
significant documents as early as October 2, 1996 pursuant to a court order, and
the Company and the Bank are in the process of responding to the Government's
first discovery request. Trials on damages in two of the three WINSTAR cases
that were decided by the United States Supreme Court in July 1996 are scheduled
for early 1997. Damages trials in the remaining cases subject to the Omnibus
Case Management Plan are scheduled to begin four months after completion of the
first two damages trials. The Company's case is one of thirteen cases that
"shall be accorded priority in the scheduling" of the damages trials under the
Omnibus Case Management Order.
In December, 1996, Chief Judge Smith decided the motion IN LIMINE on damage
theories of Glendale Federal, one of four WINSTAR Plaintiffs, and allowed
Glendale Federal to assert several other alternative damage theories against the
Government. While the Company expects Plaintiffs' claims for damages to exceed
$200 million, 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. The Company, on November 27, 1996, moved for partial summary
judgement on liability and is pursuing an early trial on damages. Uncertainties
remain concerning the administration of the Omnibus Case Management Order and
the future course of the Company's lawsuit pursuant to the Omnibus Case
Management Order. Accordingly, the Company cannot predict the timing of any
resolution
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of its claims. The Company expects the trial of its case to commence during the
first quarter of fiscal 1998. The Company is also unable to predict the outcome
of its suit against the United States and the amount of judgment for damages, if
any, that may be awarded. Consequently, no assurances can be given as to the
results of this suit.
The Company and the Bank have entered into an agreement with Hyperion
Partners 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 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 Bank 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.
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<PAGE>
MANAGEMENT
DIRECTORS
The Board of Directors of the Company consists of 12 members and is divided
into three classes. The members of each class are elected for a term of three
years with one class being elected annually. Each director of the Company is
also a director of the Bank. The following table sets forth certain information
with respect to the directors of the Company, including information regarding
their ages and when they became directors.
DIRECTOR OF DIRECTOR OF
THE COMPANY THE BANK TERM
NAME AGE SINCE SINCE EXPIRES
- ------------------------------- --- ----------- ------------ --------
Lewis S. Ranieri............... 50 1988 1988 1997
Salvatore A. Ranieri........... 48 1988 1988 1998
Barry C. Burkholder............ 56 1996 1991 1997
Lawrence Chimerine............. 56 1996 1990 1997
David M. Golush................ 52 1996 1988 1998
Paul M. Horvitz................ 61 1996 1990 1999
Alan E. Master................. 57 1996 1995 1997
Anthony J. Nocella............. 55 1996 1990 1998
Scott A. Shay.................. 39 1988 1988 1999
Patricia A. Sloan.............. 53 1996 1988 1999
Michael S. Stevens............. 46 1996 1996 1999
Kendrick R. Wilson III......... 50 1996 1988 1998
The principal occupation and position with the Company and the Bank of each
director is set forth below.
LEWIS S. RANIERI. Mr. Ranieri is the Chairman of the Company. He was also
the President and CEO of the Company and Chairman of the Bank from 1988 until
July 15, 1996. Mr. Ranieri is the Chairman and CEO of Ranieri & Co., positions
he has held since founding Ranieri & Co. in 1988. Mr. Ranieri is a founder of
Hyperion Partners and of Hyperion Partners II. He is also Chairman of Hyperion
Capital Management, Inc., a registered investment advisor ("Hyperion Capital")
and The Hyperion Total Return Fund, Inc. He is director of the Hyperion 1999
Term Trust, Inc., the Hyperion 1997 Term Trust, Inc., the Hyperion 2002 Term
Trust, Inc. and Hyperion 2005 Investment Grade Opportunity Trust, Inc. Mr.
Ranieri is also Chairman and President of various other indirect subsidiaries of
Hyperion Partners and Hyperion Partners II. Along with his brother, Salvatore A.
Ranieri, and Scott A. Shay, Mr. Ranieri controls the general partner of Hyperion
Partners. Along with Mr. Shay, Mr. Ranieri controls the general partner of
Hyperion Partners II, a recently formed investment partnership which plans to
make investments primarily in the financial and real estate sectors of the
economy. He is also Chairman of the Board and a director of American Marine
Holdings, Inc. ("American Marine"). Mr. Ranieri is also a director of Delphi
Financial Group, Inc.
Mr. Ranieri is a former Vice Chairman of Salomon Brothers Inc ("Salomon")
where he was employed from 1968 to 1987, and was one of the principal developers
of the secondary mortgage market. While at Salomon, Mr. Ranieri helped to
develop the capital markets as a source of funds for housing and commercial real
estate and to establish Salomon's then leading position in the MBS area. He is a
member of the National Association of Home Builders Mortgage Roundtable.
Mr. Ranieri is a Trustee for the Parish of Our Lady of the Rosary/Shrine of
St. Elizabeth Ann Seton and the Environmental Defense Fund. Mr. Ranieri is also
a director of the Peninsula Hospital Center in Queens, New York. Mr. Ranieri
received his Bachelor of Arts degree from St. John's University.
SALVATORE A. RANIERI. Mr. Ranieri is the General Counsel and a Managing
Director of Ranieri & Co. He was also the Vice President, Secretary and General
Counsel of the Company from 1988 until July 15, 1996. He is a director of
Hyperion Capital, as well as of various other direct and indirect subsidiaries
of Hyperion Partners. Along with his brother, Lewis S. Ranieri, and Scott A.
Shay, Mr. Ranieri controls the general partner of Hyperion Partners. He is also
a director of American Marine. Mr. Ranieri was one of the original founders of
Ranieri & Co. and of Hyperion Partners. Prior to joining Ranieri & Co., he had
been President of Livia
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Enterprises, Inc., a private venture capital and real estate investment company
that oversaw investments in the real estate, construction, and manufacturing
sectors. In addition to his business experience, Mr. Ranieri is also a lawyer.
During his career, his practice has included the areas of corporate, litigation,
real estate and regulatory matters. Until 1984, he had been a member of a law
firm in New York City. He is admitted to practice law in New York and various
federal courts. He received his Bachelor of Arts degree from New York University
and his Juris Doctor degree from Columbia University School of Law.
BARRY C. BURKHOLDER. Mr. Burkholder has been the President and CEO of the
Company since July 15, 1996, and has held similar positions with the Bank since
joining it on April 10, 1991. Since July 15, 1996, Mr. Burkholder has also been
Chairman of the Bank. In May 1994, Mr. Burkholder assumed the additional
responsibilities of managing the Bank's retail banking operations. Prior to
joining the Bank, Mr. Burkholder was employed at Citicorp/Citibank for 15 years.
Mr. Burkholder became associated with Citicorp through its then newly formed
Consumer Services Group in 1976, and then became a member of its International
Staff. Mr. Burkholder moved to Citibank Savings in London where he was named
Chairman and Managing Director in 1977. Mr. Burkholder returned to the United
States in 1981 to become President of Citicorp Person-to-Person, now part of
Citicorp Mortgage, Inc., a nationwide mortgage lending business with related
mortgage banking, servicing, and insurance activities. In 1984, he was named
Chairman and CEO of Citibank Illinois, and two years later became Central
Division Executive for the U.S. Consumer Bank. As Central Division Executive,
Mr. Burkholder was responsible for Citicorp's consumer banking activities in the
Midwest and Southeast. Mr. Burkholder began his career at Ford Motor Company in
the financial planning area and moved to Certain-teed Corporation where his last
position prior to joining Citicorp was as President of its real estate
development subsidiary. Mr. Burkholder received a B.S. and an M.B.A. from Drexel
University. Mr. Burkholder is a Member of the Thrift Institutions Advisory
Council of the Federal Reserve System. He is President of the Houston Symphony
and serves on the Board of Trustees of the Texas Gulf Coast United Way.
LAWRENCE CHIMERINE, PH.D. Dr. Chimerine has served as President of his own
economic consulting firm, Radnor Consulting Services, since 1990. He is
currently also the Managing Director and Chief Economist of the Economic
Strategy Institute in Washington, D.C. Dr. Chimerine served as Chairman and
Chief Executive Officer of the WEFA Group from 1987 to 1990 and of Chase
Econometrics from 1979 to 1987, both of which provide economic consulting. He
was manager of economic research for the IBM Corporation from 1965 to 1979. Dr.
Chimerine received a B.S. from Brooklyn College and a Ph.D. from Brown
University.
DAVID M. GOLUSH. Mr. Golush is a Managing Director of Ranieri & Co. with
which he has been associated since the firm's founding in 1988. He is a director
of Transworld Home Healthcare, Inc., as well as an officer of direct and
indirect subsidiaries of Hyperion Partners and Hyperion Partners II, and has an
economic interest in Hyperion Partners and Hyperion Partners II. Mr. Golush was
at Salomon from 1972 to 1987 and was a Vice President from 1975. From 1984 to
1987, he was Chief Administrative Officer of Salomon's Mortgage and Real Estate
Department. From 1966 to 1972, he held positions in public accounting and
private industry. He has been a certified public accountant in New York since
1972. Mr. Golush received a B.B.A. from the University of Cincinnati. He is
Treasurer of the New York Police & Fire Widows' and Children's Fund, Inc. and a
member of the board of the Jewish Federation of Central New Jersey.
PAUL M. HORVITZ, PH.D. Dr. Horvitz has been on the faculty of the
University of Houston since 1977, and holds the University's Judge James Elkins
Chair of Banking and Finance. From 1967 to 1977, Dr. Horvitz held positions as
Assistant Director of Research, Director of Research and Deputy to the Chairman
at the FDIC. Prior to joining the FDIC he was an economist at the Federal
Reserve Bank of Boston and the Office of Comptroller of the Currency. From 1983
to 1990, Dr. Horvitz was a member of the Board of Directors of the FHLB Dallas,
and in 1986 and 1987 he was a member of the Federal Savings and Loan Advisory
Council. He is currently a director of the Pulse EFT Association, and a member
of the Shadow Financial Regulatory Committee. Dr. Horvitz received a B.A. from
the University of Chicago, an M.B.A. from Boston University, and a Ph.D. from
MIT.
ALAN E. MASTER. Mr. Master began his career with Chemical Bank in 1961 as
a commercial lending officer, became a Branch Office Head, and worked on
start-ups or clean-ups of banks in Miami, Florida. In 1973, he joined Barnett
Banks of Florida ("Barnett") and led a unit of Barnett formed from the
reorganization and
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<PAGE>
merger of five subsidiaries of Barnett. In 1977, he became President, CEO, and
Chief Financial Officer, and in 1978 was elected Vice Chairman of United
Americas Bank of New York. Mr. Master joined The Merchants Bank of New York in
1979 as Executive Vice President and was elected a director in 1980. In 1983,
Mr. Master joined Ensign Bank FSB in New York City as President and CEO. In
1991, Mr. Master established a consulting practice specializing in the financial
services and banking sectors. Mr. Master has served on the Board of Trustees of
the Hyperion Government Mortgage Trust II, has participated in meetings of the
Advisory Board of Hyperion Partners and Hyperion Partners II, is a member of the
Advisory Board of the Johnson Graduate School of Management of Cornell
University and joined PaineWebber Incorporated in April 1996. Mr. Master
received a B.A. from Cornell University and has completed course work in finance
and accounting at the New York University Graduate School of Business
Administration.
ANTHONY J. NOCELLA. Mr. Nocella has been the Executive Vice President and
Chief Financial Officer of the Company since June 27, 1996, and has held those
same positions with the Bank since joining it in July 1990. He manages the
Financial Markets and Commercial Banking Groups of the Bank. From 1988 to 1990,
Mr. Nocella provided consulting services to the Bank as President of Nocella
Management Company, a firm that specialized in asset and liability management
consulting for financial institutions. From 1981 to 1987, Mr. Nocella served as
Executive Vice President and Chief Financial Officer of Meritor Financial Group,
as well as President of the Company's commercial banking/financial markets arm,
Meritor Financial Markets ("Meritor"). During his 13 years at Meritor
(1974-1987), he also served as President of PSFS Management Company, Inc., the
holding company of The Philadelphia Saving Fund Society, the nation's largest
savings institution at the time. Mr. Nocella's other positions have included
Controller and Director of Financial Services for American Medicorp (now
Humana), Managing Auditor and Consultant for Peat Marwick and adjunct professor
of finance at St. Joseph's University and Drexel University. Mr. Nocella, a
Certified Public Accountant, received an undergraduate degree in accounting from
LaSalle University, and an M.B.A. in computer science and finance from Temple
University. He also completed the graduate Bank Financial Management Program of
the Wharton School at the University of Pennsylvania. Mr. Nocella is the
President and a director of the Community Bankers Association of Southeast
Texas, a delegate and member of the Mortgage Finance and Accounting Committees
of the America's Community Bankers, a director of the Texas Community Bankers
Association, and delegate and past President of the Financial Executives
Institute.
SCOTT A. SHAY. Mr. Shay has been a Managing Director of Ranieri & Co.
since its formation in 1988. He was also a Vice President of the Company from
1988 until July 15, 1996. Mr. Shay is a founder of Hyperion Partners and
Hyperion Partners II. Mr. Shay is currently a director of Hyperion Capital and
Transworld Home Healthcare, Inc., as well as an officer or director of other
direct and indirect subsidiaries of Hyperion Partners and Hyperion Partners II.
Along with Lewis S. Ranieri and Salvatore A. Ranieri, Mr. Shay controls the
general partner of Hyperion Partners. Along with Mr. Lewis S. Ranieri, Mr. Shay
controls the general partner of Hyperion Partners II. Prior to joining Ranieri &
Co., Mr. Shay was a director at Salomon where he was employed from 1980 to 1988.
Mr. Shay was involved with Salomon's thrift mergers and acquisitions practice
and with mortgage banking financing and mergers and acquisitions. Mr. Shay also
worked on acquisitions of real estate investment trusts while at Salomon. Mr.
Shay graduated Phi Beta Kappa from Northwestern University with a B.A. degree in
economics and received a Master of Management degree with distinction from
Northwestern's Kellogg Graduate School of Management. Mr. Shay currently serves
as a member of the board and was President of Hillel of New York from 1990 until
June 30, 1992. He is also on the board of UJA-Federation of New York.
PATRICIA A. SLOAN. Ms. Sloan is a Managing Director of Ranieri & Co. and
has an economic interest in Hyperion Partners and Hyperion Partners II. She is
also a director of certain funds managed by Hyperion Capital Management,
including Hyperion 1999 Term Trust, Inc., Hyperion 1997 Term Trust, Inc.,
Hyperion 2002 Term Trust, Inc., Hyperion Investment Grade Opportunity Term
Trust, Inc., and the Hyperion Total Return Fund, Inc. Prior to joining Ranieri &
Co. in 1988, Ms. Sloan was employed at Salomon from 1972 to 1988, where she
served as director of Salomon's Financial Institutions Group. Prior to joining
Salomon, Ms. Sloan was employed at Bache & Co., Inc. from 1965 to 1972. Ms.
Sloan received a B.A. from Radcliffe College and an M.B.A. from Northwestern
University.
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<PAGE>
MICHAEL S. STEVENS. Mr. Stevens has been a Director of the Company since
August 1996, and a Director of the Bank since October 1996. Mr. Stevens is
Chairman of Michael Stevens Interests, Inc. In 1981, Mr. Stevens founded the
companies that now constitute this real estate investment and management
company. Since its inception, the firm has developed, acquired, or managed over
70 real estate projects valued at over $300 million and representing over 8.5
million square feet of building area and apartment units. From 1974 to 1981, Mr.
Stevens was an executive, board member, and significant shareholder of Insyte
Corporation, a diversified public holding company with extensive real estate
interests, and from 1973 to 1974, he was an Associate of John McClelland and
Associates, a financial consulting firm. Mr. Stevens currently serves as
Houston's first Assistant to the Mayor on Housing and Inner-City Revitalization,
as well as the President of the Housing Finance Corporation for the City. He
plays a major role in leading Houston's affordable housing program, HOMES FOR
HOUSTON. Mr. Stevens serves as Chair of the Houston International Sports
Committee, a non-profit organization working to bring the Olympic Games to
Houston, and he is a deacon at Second Baptist Church. He graduated from the
University of Houston in 1973 with a Bachelors of Business Administration.
KENDRICK R. WILSON III. Mr. Wilson currently is a Managing Director and
head of investment banking of Lazard Freres & Co. LLC ("Lazard Freres"), a New
York-based investment banking firm. Prior to his joining Lazard Freres in 1990,
Mr. Wilson served as President of Ranieri & Co. from March 1988 to December
1989, and Senior Executive Vice President for E.F. Hutton from April 1987 to
February 1988. Mr. Wilson was also employed at Salomon from June 1978 to April
1987 where he became a Managing Director. Mr. Wilson has an economic interest in
Hyperion Partners. He is a director of ITT Corporation, Black Rock Asset
Investors, American Marine Holdings, American Buildings Company, Inc., and
Meigher Communications, Inc. Mr. Wilson received a B.A. from Dartmouth College
and an M.B.A. from Harvard Business School.
Mr. Lewis Ranieri and Mr. Salvatore Ranieri are brothers. No other director
or executive officer is related to any other director or executive officer by
blood, marriage, or adoption. There are no existing arrangements or
understandings between a director and any other person pursuant to which such
person was elected a director.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company Board has established two committees: an Audit Committee and a
Compensation Committee.
The Audit Committee meets with management to consider the adequacy of the
internal controls and the objectivity of financial reporting. The Audit
Committee also meets with the independent auditors and with appropriate
financial personnel and internal auditors of the Company regarding these
matters. The Audit Committee recommends to the Board of Directors of the Company
the appointment of the independent auditors, subject to ratification by the
stockholders at the annual meeting. Both the internal auditors and the
independent auditors periodically meet alone with the Audit Committee and have
unrestricted access to the Audit Committee. The Audit Committee consists of
directors who are not employees of the Company: Dr. Chimerine, Dr. Horvitz and
Mr. Master, with Dr. Horvitz serving as Chair.
The Compensation Committee's functions include administering management
incentive compensation plans, including the 1996 Incentive Compensation Plan (as
defined herein), and making recommendations to the Board of Directors of the
Company with respect to the compensation of directors and officers of the
Company. The Compensation Committee also supervises the Company's employee
benefit plans. The Compensation Committee consists of all directors except Mr.
Burkholder and Mr. Nocella.
To the extent that any permitted action taken by the Board of Directors of
the Company conflicts with action taken by the Compensation Committee, the Board
of Directors of the Company action shall control. Mr. Burkholder and Mr. Nocella
have excused themselves from Board of Directors of the Company deliberations
regarding their compensation and it is anticipated that this practice will
continue.
COMPENSATION OF DIRECTORS
Each director, except Mr. Burkholder and Mr. Nocella, who are employees of
the Bank, receives a single annual retainer ("Annual Retainer") of $25,000 for
service on the boards of directors of Company and the Bank. All non-employee
directors also receive a fee of $1,000 for each in person meeting of the Board
of Directors of the Company that they attend and a fee of $500 for each
telephonic meeting of the Company Board and each
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meeting of any Committee of the Board of Directors of the Company that they
attend. The chair of the Audit Committee receives an additional annual retainer
of $2,000. Directors who are employees of the Company or any subsidiary do not
receive additional compensation for service as directors, including
participation in the Director Stock Plan. See also "The Director Stock
Compensation Plan" and "Certain Relationships and Related Transactions".
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information concerning executive officers of
the Company and executive officers of the Bank who do not serve on the Board of
Directors of the Company. All executive officers of the Company and the Bank are
elected by the Board of Directors of the Company and the Board of Directors of
the Bank, respectively, and serve until their successors are elected and
qualified. There are no arrangements or understandings between any director and
any other person pursuant to which such individual was elected an executive
officer.
PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
<TABLE>
<CAPTION>
NAME AGE POSITION AND OCCUPATION
- ------------------------------------- ---- ----------------------------------------------------
<S> <C> <C>
Jonathon K. Heffron.................. 44 Executive Vice President and General Counsel of the
Company since July 15, 1996 and of the Bank since
May 1990. Chief Operating Officer of the Company
since July 15, 1996 and of the Bank since May 1994.
Prior to joining the Bank, Mr. Heffron served for
two years as President and CEO of First Northern
Bank, Keene, New Hampshire. Prior to joining First
Northern Bank, Mr. Heffron served for more than 10
years in several capacities at the FHLB Board,
Washington, D.C. and at the FHLB Dallas, including
as Attorney Advisor, Trial Attorney, General
Counsel, Chief Administrative Officer, and Chief
Operating Officer. Mr. Heffron received a B.A. Magna
Cum Laude from the University of Minnesota, a J.D.
from Southwestern University School of Law, and an
LL.M. from the National Law Center of George
Washington University. Mr. Heffron serves on the
Boards of Directors of the Credit Coalition of
Greater Houston and the Texas Conference for
Homeowners' Rights and he is a member of the
Government Affairs Steering Committee and the FHLB
System Committee of America's Community Bankers.
George R. Bender..................... 57 Executive Vice President -- Mortgage Banking of the
Company since July 15, 1996 and of the Bank since
July 1990. Prior to joining the Bank, Mr. Bender was
employed by CenTrust Mortgage Corporation as
President and CEO from June 1985 to February 1990.
As President and CEO, Mr. Bender was responsible for
the overall management of this mortgage banking
subsidiary of CenTrust Savings. Mr. Bender's career
also includes positions as Chairman and CEO of
WestAmerica Mortgage Company in Denver, President
and CEO of Unity Mortgage Corporation in Chicago;
Senior Vice President of United First Mortgage
Corporation of San Diego; and Senior Vice President
of Production and Marketing at Advance Mortgage
Corporation. Mr. Bender attended the University of
Michigan in Ann Arbor.
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<PAGE>
NAME AGE POSITION AND OCCUPATION
- ------------------------------------- ---- ----------------------------------------------------
Ronald D. Coben...................... 39 Executive Vice President -- Community Banking of the
Company since July 15, 1996 and of the Bank since
July 1996. Previously, Mr. Coben served as Regional
Retail Director and Marketing Director since joining
the Bank in October 1989. Prior to joining the Bank,
Mr. Coben was employed by Texas Commerce Bancshares
(Chemical Bank) since 1986 as Vice President and
Manager of the Relationship Banking Division of the
Retail Bank. Prior to joining Texas Commence Banc-
shares, Mr. Coben served as the Director of Market
Research for ComputerCraft, Inc. and Foley's De-
partment Stores. Mr. Coben received a B.A. degree
from the University of Texas at Austin. He has
provided marketing skills to various organizations
including the Houston Symphony and the Houston
Holocaust Museum. Mr. Coben also received the MS
Leadership Award in 1996 and a Gold Effie for the
nation's most effective financial advertising
campaign of 1989.
Leslie H. Green...................... 59 Senior Vice President -- Operations and Technology
of the Company since July 15, 1996 and of the Bank
since June 1991. Prior to joining the Bank, Mr.
Green was employed by Equimark since 1988 as
Executive Vice President -- Systems and Operations.
Prior to joining Equimark, Mr. Green
served in several capacities at Keystone Computer
Associates, Fidelity Bank, National Information
Systems and RCA Computer Systems. Mr. Green received
a degree in Business Management from Rutgers
University.
Karen J. Hartnett.................... 48 Senior Vice President -- Human Resources of the
Company since July 15, 1996 and of the Bank since
January 1991. Prior to joining the Bank, Ms.
Hartnett was employed by Equimark as Senior Vice
President Human Resources since 1989. From 1988 to
1989, Ms. Hartnett was Senior Vice President and
Chief Personnel Officer for NCNB Texas, and she
served predecessor organizations as Vice President
and as Director of Human Resources from 1983. Ms.
Hartnett's human resources experiences include
positions at Zale Corporation, Mobil Oil Corporation
and Sweet Briar College. Ms. Hartnett received an
A.B. from Sweet Briar College in 1970. Ms. Hartnett
serves on the Board of Directors of the Gulf Coast
Chapter of the American Heart Association, on the
Board of Trustees for the Houston Ballet Foundation
and is a lifetime member of the Houston Livestock
Show and Rodeo.
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<PAGE>
NAME AGE POSITION AND OCCUPATION
- ------------------------------------- ---- ----------------------------------------------------
Sonny B. Lyles....................... 51 Senior Vice President and Chief Credit Officer of
the Company since July 15, 1996 and of the Bank
since February 1991. Prior to joining the Bank, Mr.
Lyles was employed by First Union National Bank as
Senior Credit Officer beginning in 1983. Prior to
joining First Union National Bank, Mr. Lyles was
employed at First Tulsa Bank, Florida National Bank
and South Carolina National Bank. Mr. Lyles received
a B.A. from Wofford College. Mr. Lyles is a member
of the Board, First Vice President of the Texas
Chapter, and a national member, of the Credit and
Risk Management Council of Robert Morris Associates,
a trade association of bank lending and credit
officers. Mr. Lyles is the Wofford College alumni
representative from Houston.
</TABLE>
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN COMPENSATION
The following table sets forth the cash and non-cash compensation for each
of the last three fiscal years awarded to or earned by the CEO of the Company
and the other four most highly compensated executive officers of the Company and
the Bank. The individuals listed below became executive officers of the Company
in June and July 1996. Prior to that time, Lewis S. Ranieri served as President
and CEO of the Company, Salvatore A. Ranieri served as Vice President, Secretary
and General Counsel of the Company, Scott A. Shay served as Vice President of
the Company and Robert A. Perro served as Chief Financial Officer of the
Company. None of the former executive officers received any compensation from
the Company.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS
------------------------------------------ -------------------------
OTHER SECURITIES PAYOUTS(7)
ANNUAL UNDERLYING -------
COMPEN- RESTRICTED OPTIONS/ LTIP
SALARY BONUS(1)(2) SATION(4) STOCK(5) SAR(6) PAYOUTS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- ------------------------------------- ---- ------- ----------- -------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Barry C. Burkholder.................. 1996 375,000 2,552,000 -- 1,578,051 491,327 --
President and 1995 375,000 594,000 -- -- -- --
Chief Executive Officer 1994 375,000 607,500 -- -- -- --
Anthony J. Nocella................... 1996 315,000 874,000 -- 508,103 157,959 --
Executive Vice President and 1995 315,000 235,000 -- -- -- --
Chief Financial Officer 1994 315,000 200,000 -- -- -- --
Financial Markets/Treasury
Commercial Banking
Jonathon K. Heffron.................. 1996 225,000 804,000 -- 508,103 157,959 --
Executive Vice President, 1995 225,000 200,000 -- -- -- --
General Counsel, and 1994 225,000 175,000 -- -- -- --
Chief Operating Officer
Ronald D. Coben(3)................... 1996 200,000 160,000 -- 79,115 24,534 --
Executive Vice President 1995 144,000 30,000 -- -- -- --
Community Banking 1994 144,000 25,000 -- -- -- --
Leslie H. Green...................... 1996 175,000 165,000 -- 79,115 24,534 --
Senior Vice President 1995 175,000 75,000 -- -- -- --
Operations & Technology 1994 175,000 70,000 -- -- -- --
</TABLE>
ALL
OTHER
COMPEN-
SATION(8)
NAME AND PRINCIPAL POSITION ($)
- ------------------------------------- --------
Barry C. Burkholder.................. 6,706
President and 9,240
Chief Executive Officer 9,240
Anthony J. Nocella................... 7,919
Executive Vice President and 9,402
Chief Financial Officer 8,878
Financial Markets/Treasury
Commercial Banking
Jonathon K. Heffron.................. 9,458
Executive Vice President, 9,402
General Counsel, and 8,984
Chief Operating Officer
Ronald D. Coben(3)................... 6,130
Executive Vice President 3,240
Community Banking 2,874
Leslie H. Green...................... 5,433
Senior Vice President 4,620
Operations & Technology 4,615
- ------------
(1) For all named executives, the bonus column for 1996 includes payments from:
(i) the Executive Management Compensation Plan and (ii) the Bank's annual
bonus plan.
(2) Mr. Burkholder was hired on April 10, 1991, and was paid a bonus based on
the financial performance of the Bank, according to the provisions of his
employment contract, for each of the first five full years of his
employment. Amounts indicated for 1994 and 1995 represent the amount paid in
the respective fiscal year. Mr. Burkholder's 1996 bonus amount included two
bonus payments pursuant to his employment contract: one payment of $550,000
for the 12-month period ended April 9, 1996 and a second payment of $300,000
for the period April 10, 1996 through September 30, 1996. The latter amount
was made to change Mr. Burkholder's performance cycle to correspond to the
Bank's fiscal year. See "-- Management Employment Arrangements". All other
management bonuses were paid as determined by the Compensation Committee of
the Bank's Board of Directors and were based on the Bank's financial and
individual performance for the respective fiscal year. The Bank's financial
performance is measured by net income, return on assets, and return on
equity as compared to the Bank's annual business plan and a specified peer
group of other thrifts of comparable size.
(3) Mr. Coben was promoted to Executive Vice President, Community Banking
effective July 1, 1996.
(4) Messrs. Burkholder, Coben, Nocella, and Heffron are each provided an auto
allowance and a country club and/or dining club membership. However, in no
case does the aggregated value of such auto allowance and memberships exceed
the lesser of $50,000 or 10% of such officer's annual cash compensation.
Therefore, the value of auto allowances and club memberships are excluded
from this table.
(5) A total of 236,265 shares of Class B Common Stock were awarded to the named
executive officers in June 1996 and these shares were subsequently converted
into Class A Common Stock of the Company. Such shares are subject to
restrictions on transfer, which lapse on August 8, 1999 ("Officers
Restricted Stock"). As there was no public market for the Common Stock at
the date of grant, the fair market value of the shares at that date was
estimated by the Bank. Based on the last reported sale price of the Class A
Common Stock on the NASDAQ on September 30, 1996, these shares had an
aggregate fair market value of $5,877,092 ($24.875 per share), without
giving effect to the diminution of value attributable to the restrictions on
such stock. Dividends will be paid on the Officers Restricted Stock at the
same rate payable on all other shares of Common Stock.
(6) In August 1996, the Company issued 856,313 options to the named executives
pursuant to management option agreements under the Executive Management
Compensation Plan.
(7) Represents the dollar value of all payouts pursuant to long-term incentive
plans ("LTIP"). An LTIP is any plan providing compensation intended to
serve as incentive for performance to occur over a period longer than one
fiscal year, whether such performance is measured by reference to financial
performance of the registrant or an affiliate, the registrant's stock price,
or any other measure, but excluding restricted stock, stock option and stock
appreciation right ("SAR") plans. The Bank made no such payments for the
periods presented.
(8) "All Other Compensation" amounts represent contributions by the Bank to
each executive's account in the Bank's 401(k) Plan.
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OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
individual grants of options under the Executive Management Compensation Plan
that were made during fiscal 1996 to the executive officers named in the Summary
Compensation Table. This table is intended to allow stockholders to ascertain
the number and size of option grants made during the fiscal year, the expiration
date of the grants, and the grant date present value of such options under
specified assumptions. All options granted in fiscal 1996 have an exercise price
no less than the fair market value at the date of grant.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE GRANT DATE
GRANTED IN FISCAL PRICE EXPIRATION PRESENT VALUE
NAME (#) YEAR(1) ($/SH) DATE $(2)
- ------------------------------------- ---------- ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Barry C. Burkholder.................. 491,327 42.6 20.125 8/8/06 3,173,972
Anthony J. Nocella................... 157,959 13.7 20.125 8/8/06 1,020,415
Jonathon K. Heffron.................. 157,959 13.7 20.125 8/8/06 1,020,415
Ronald D. Coben...................... 24,534 2.1 20.125 8/8/06 158,490
Leslie H. Green...................... 24,534 2.1 20.125 8/8/06 158,490
</TABLE>
- ------------
(1) Based upon 1,154,520 options to purchase Class A Common Stock granted in
fiscal 1996.
(2) The $6.46 per share value is based on the Black-Scholes Option pricing
model. The calculation included the following assumptions: estimated
volatility of 27.0% (based on 2-year stock prices of comparable companies);
risk-free interest rate of 6.55 percent (based on returns available through
U.S. Treasury bonds); dividend yield of 3.0 percent (assumes dividend yield
paid through expiration); and 3,612 days to expiration of options. Option
values are dependent on general market conditions and the performance of the
Common Stock. There can be no assurance that the values in this table will
be realized.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth, with respect to the executive officers
named in the Summary Compensation Table, information with respect to the
aggregate amount of options exercised during fiscal 1996, any value realized
thereon, the number of unexercised options at the end of the fiscal year
(exercisable and unexercisable) and the value with respect thereto.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
SHARES FISCAL YEAR END(#) AT FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry C. Burkholder.................. -- -- -- 491,327 -- 2,333,803
Anthony J. Nocella................... -- -- -- 157,959 -- 750,305
Jonathon K. Heffron.................. -- -- -- 157,959 -- 750,305
Ronald D. Coben...................... -- -- -- 24,534 -- 116,537
Leslie H. Green...................... -- -- -- 24,534 -- 116,537
</TABLE>
- ------------
(1) Total value of options based on a fair market value of $24.875 per share as
of September 30, 1996, the last reported sale price of the Class A Common
Stock as reported by the NASDAQ on that date.
EXECUTIVE MANAGEMENT COMPENSATION PROGRAM
In June 1996, the Board of Directors of the Company approved an Executive
Management Compensation Program (the "Compensation Program") providing for the
following: (i) a cash bonus of $4.0 million; (ii) the award of 318,342 shares of
Class B Common Stock pursuant to management stock grant agreements (the
"Management Stock Grant Agreements") providing that (I) such shares may not be
transferred for three years from the date of issuance and (II) such shares may
be converted into shares of Class A Common Stock only if the holder of such
stock would not, after such conversion, own more than 9.9% of the outstanding
shares of Class A Common Stock; and (iii) the issuance of 1,154,520 options upon
consummation of the August Offering pursuant to management option agreements
(the "Management Option Agreements") for purchase of an equivalent number of
shares of common stock providing that (I) such options have an exercise price of
$20.125 per share which approximated the fair market value of such stock on the
date of grant; (II) such options vest ratably over
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three years; (III) such options may not be exercised prior to the third
anniversary of the date of grant; and (IV) such options expire if not exercised
by the tenth anniversary of the date of grant. Twenty-three individuals,
including the eight executive officers -- Ms. Hartnett and Messrs. Burkholder,
Nocella, Heffron, Bender, Green, Lyles and Coben -- and three directors -- Drs.
Chimerine and Horvitz and Mr. Master -- are participating in the executive
management compensation program. The remaining twelve individuals participating
are other key officers and employees of the Bank. Mr. Burkholder received
$1,702,000 of the cash bonus and 491,327 of the stock options; he has received
135,455 of the shares of Class B Common Stock. Messrs. Nocella and Heffron each
received $549,000 of the cash bonus and 157,959 of the stock options; each one
received 43,614 of the shares of Class B Common Stock. Messrs. Bender and Green
each received $85,000 of the cash bonus and 24,534 of the stock options; each
one received 6,791 shares of the Class B Common Stock. Drs. Chimerine and
Horvitz each received $52,000 of the cash bonus and 15,087 of the stock options;
each one received 4,138 shares of the Class B Common Stock. Mr. Master received
$17,000 of the cash bonus and 4,854 of the stock options; he has received 1,380
shares of the Class B Common Stock. Implementation of this program replaced an
equity based bonus program previously contemplated in the case of all
participants except Mr. Burkholder, whose participation satisfies the terms of
his former employment agreement.
THE 1996 STOCK INCENTIVE PLAN
The Company has adopted the Bank United 1996 Stock Incentive Plan (the
"1996 Stock Incentive Plan"). The 1996 Stock Incentive Plan is designed to
promote the success and enhance the value of the Company by linking the
interests of certain of the full-time employees of the Company
("Participants") to those of the Company's stockholders and by providing
Participants with an incentive for outstanding performance. The 1996 Stock
Incentive Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract and retain Participants upon whose judgment,
interest and special efforts the Company's successful operation largely is
dependent. As determined by the Compensation Committee of the Board of Directors
of the Company, or any other designated committee of the Board of Directors of
the Company, the Company employees, including employees who are members of the
Board of Directors of the Company, are eligible to participate in the 1996 Stock
Incentive Plan. Non-employee directors are not eligible to participate in the
1996 Stock Incentive Plan. The Board of Directors of the Company has provided
for the 1996 Stock Incentive Plan to remain in effect for 10 years, to 2006. In
December 1996, the Company granted options to purchase 147,500 shares of Common
Stock, at the market price on the date of grant, to 30 employees of the Bank,
none of whom were the executive officers named herein.
The description below is intended as a summary of material terms only.
GENERAL
The 1996 Stock Incentive Plan is administered by the Compensation Committee
of the Board of Directors of the Company or, at the discretion of the Board of
Directors of the Company, any other committee appointed by the Company for such
purpose (the "Committee"). Four types of awards may be granted to Participants
under the 1996 Stock Incentive Plan: (i) stock options (both non-qualified and
incentive) ("Options"), (ii) SARs, (iii) restricted Common Stock ("Restricted
Stock") and (iv) performance units ("Performance Units", and together with
the Options, SARs and Restricted Stock, the "Awards").
Any authority granted to the Committee may also be exercised by the full
Board of Directors of the Company, except to the extent that the grant or
exercise of such authority would cause any Award or transaction to become
subject to (or lose an exemption under) the short-swing recovery profit recovery
provisions of Section 16 of the Securities Exchange Act of 1934, as amended
("Exchange Act") or cause an award designated as a qualified performance-based
award not to qualify for, or to cease to qualify for, the Section 162(m) of the
Code exemption. To the extent that any permitted action taken by the Board of
Directors of the Company conflicts with action taken by the Committee, the Board
of Directors of the Company action shall control.
The 1996 Stock Incentive Plan provides that the total number of shares of
Class A Common Stock available for grant under the 1996 Stock Incentive Plan may
not exceed 1,600,000 shares. No Participant may be granted Awards covering in
excess of 50% of the shares of Class A Common Stock Awards granted in any fiscal
year or 25% of the shares of Class A Common Stock available for issuance over
the life of the 1996 Stock Incentive
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Plan. If any Award is cancelled or forfeited or terminates, expires, or lapses
(other than a termination of a Tandem SAR (as defined herein)), upon exercise of
the related Option or the termination of a related Option upon exercise of the
corresponding Tandem SAR, shares subject to such Award will be available for the
grant of an Award under the 1996 Incentive Compensation Plan.
In the event of any change in corporate capitalization, such as a stock
split, or a corporate transaction, such as any merger, consolidation,
separation, including a spin-off, or other distribution of stock or property of
the Company, any reorganization or partial or complete liquidation of the
Company, the Committee or the Board of Directors of the Company may make such
substitutions or adjustments in the aggregate number and class of shares
reserved for issuance or subject to outstanding Awards and in the number, kind
and price of shares subject to outstanding Options of SARs as it may determine
to be appropriate.
The Committee may condition the grant of Restricted Stock and Performance
Units upon the attainment of one or more of the following performance goals:
earnings per share, sales, net profit after tax, gross profit, operations
profit, cash generation, unit volume, return on equity, change in working
capital, return on capital or shareholder return. Such performance goals shall
be set by the Committee within the time period prescribed by Section 162(m) of
the Code.
The 1996 Stock Incentive Plan is not subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and is
not qualified under Section 401(a) of the Code.
OPTIONS
The term of Options granted under the 1996 Stock Incentive Plan may not
exceed 10 years. The exercise price for each Option granted will be determined
by the Committee; provided that the exercise price may not be less than 100% of
the fair market value (as defined in the 1996 Stock Incentive Plan) of a share
of Class A Common Stock on the date of grant.
A Participant exercising an Option may pay the exercise price in full in
cash, or, if approved by the Committee, with previously acquired shares of Class
A Common Stock. The Committee, in its discretion, may allow cashless exercise of
Options.
Options are nontransferable other than by will or laws of descent and
distribution (and, in the case of a non-qualified Option, pursuant to a domestic
relations order or by gift to members of the holder's immediate family, whether
directly or indirectly or by means of a trust or partnership), and, during the
Participant's lifetime, may be exercised only by the Participant or his legal
representative.
SARS
SARs may be granted by the Committee in connection with all or part of any
Option grant ("Tandem SARs"). A Tandem SAR may be exercised only with respect
to the shares for which its related Option is then exercisable. SARs permit the
Participant to receive in cash or shares of Class A Common Stock (or a
combination of both) an amount equal to the excess of the fair market value of a
share of Class A Common Stock on the date the SAR is exercised over the exercise
price for the SAR times the number of shares of Class A Common Stock with
respect to which such SAR is exercised.
The term of SARs granted in connection with incentive stock options under
the 1996 Stock Incentive Plan may not exceed 10 years. The exercise price of a
Tandem SAR will equal the exercise price of the related Option.
SARs are nontransferable other than by will or laws of descent and
distribution, and, during the Participant's lifetime, may be exercised only by
the Participant; provided that, at the discretion of the Committee, an Award
agreement may permit transfer of an SAR by a Participant solely to members of
the Participant's immediate family or trusts or partnerships for the benefit of
such persons.
RESTRICTED STOCK
The Committee may grant Restricted Stock to eligible employees in such
amounts as the Committee determines. At the time of each award of Restricted
Stock the Committee will establish a restricted period (the "Restricted
Period") during which such stock may not be sold, transferred, pledged,
assigned or otherwise alienated; provided that the Committee may permit
transfers of Restricted Stock during such period to members
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<PAGE>
of the Participant's immediate family or trusts or partnerships for the benefit
of such persons. If a Participant terminates his employment or is involuntarily
terminated for cause during the Restricted Period, all Restricted Stock held by
such Participant will be forfeited. If a Participant is involuntarily terminated
other than for cause, the Committee may waive all or part of any remaining
restrictions on such Participant's Restricted Stock. After the Restricted Period
has expired, the related Restricted Stock is freely transferable.
PERFORMANCE UNITS
The Committee may from time to time grant Performance Units, either alone
or in addition to other Awards. The Committee will set the performance goals and
restrictions applicable to each Performance Unit, including establishing the
applicable performance period and the value of the Performance Unit. After the
applicable performance period has ended, the holder of a Performance Unit will
be entitled to receive the payout earned to the extent to which the
corresponding performance goals were satisfied.
A holder may elect to defer receipt of cash or stock in settlement of
Performance Units for a specified period or until a specified event, subject in
each case to the Committee's approval. Generally, upon a holder's termination of
employment for any reason during a performance period or before the applicable
performance goals are satisfied, the holder shall forfeit his right to receive
cash or stock in settlement of his Performance Units.
CHANGE OF CONTROL
In the event of a Change of Control (as defined herein), (i) any Option or
SAR that is not then exercisable and vested will become fully exercisable and
vested, (ii) the restrictions on any Restricted Stock will lapse and (iii) all
Performance Units will be deemed earned. The 1996 Stock Incentive Plan defines a
Change of Control as (i) the acquisition of 25% or more of the common stock of
the Company, (ii) a change in a majority of the Board of Directors, unless
approved by the incumbent directors (other than as a result of a contested
election) and (iii) certain reorganizations, mergers, consolidations,
liquidations or dissolutions.
During the 60-day period following a Change of Control, any Participant
will have the right to surrender all or part of any Option held by such
Participant, in lieu of payment of the exercise price, and to receive cash in an
amount equal to the difference between (i) the higher of the price received for
Common Stock in connection with the Change of Control and the highest reported
sales price of a share of Common Stock on a national exchange or on NASDAQ
during the 60-day period prior to and including the date of a Change of Control
(the "Change of Control Price"), and (ii) the exercise price (the difference
between (i) and (ii) being referred to as the "Spread") multiplied by the
number of shares of Class A Common Stock granted in connection with the exercise
of such Option; provided that such Change of Control transaction would not
thereby be made ineligible for pooling of interests accounting; and provided,
further, that, if the Option is an "incentive stock option" under Section 422
of the Code, the Change of Control Price will equal the fair market value of a
share of the Class A Common Stock on the date, if any, that such Option is
cancelled.
AMENDMENTS
The Board of Directors of the Company may at any time terminate, amend, or
modify the 1996 Stock Incentive Plan; provided that no amendment, alteration or
discontinuation will be made which will impair the rights of Award holders or
will disqualify the 1996 Stock Incentive Plan from the exemption provided by
Rule 16b-3 promulgated under the Exchange Act, and, to the extent required by
law, no such amendment will be made without the approval of the Company's
stockholders.
FEDERAL INCOME TAX CONSIDERATIONS
The following brief summary of the United States federal income tax rules
currently applicable to nonqualified stock options, incentive stock options,
SARs, restricted stock and performance awards is not intended to be specific tax
advice to Participants under the 1996 Stock Incentive Plan.
Two types of stock options may be granted under the 1996 Stock Incentive
Plan: nonqualified stock options ("NQOs") and incentive stock options
("ISOs"). SARs, Restricted Stock and Performance Awards may also be granted
under the Plan. The grant of an Award generally has no immediate tax
consequences to the Participant or
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the Company. Generally, Participants will recognize ordinary income upon: (i)
the exercise of NQOs or SARs; (ii) the vesting of shares of Restricted Stock;
and (iii) the actual receipt of cash or stock pursuant to Performance Awards. In
the case of NQOs and SARs, the amount of income recognized is measured by the
difference between the exercise price and the fair market value of Common Stock
on the date of exercise. In the case of Restricted Stock and Performance awards,
the amount of income is equal to the fair market value of the stock or other
property (including cash) received. The exercise of an ISO for cash generally
has no immediate tax consequences to a Participant or to the Company.
Participants may, in certain circumstances, recognize ordinary income upon the
disposition of shares acquired by exercise of an ISO, depending upon how long
such shares were held prior to disposition. Special rules apply to shares
acquired by exercise of ISOs for previously held shares. In addition, special
tax rules may result in the imposition of a 20% excise tax on any "excess
parachute payments" that result from the acceleration of the vesting or
exercisability of Awards upon a change of control.
The Company is generally required to withhold applicable income and Social
Security taxes ("employment taxes") from ordinary income which a Participant
recognizes on the exercise or receipt of an Award. The Company thus may either
require Participants to pay to the Company an amount equal to the employment
taxes the Company is required to withhold or retain or sell without notice a
sufficient number of the shares to cover the amount required to be withheld.
The Company generally will be entitled to a deduction for the amount
includible in a Participant's gross income for federal income tax purposes upon
the exercise or actual receipt of an Award. However, such deduction generally is
available only if the Company timely complies with applicable information
reporting requirements under Sections 6041 and 6041A of the Code. Furthermore,
Section 162(m) of the Code and the regulations thereunder may, in some
circumstances, limit deductibility with respect to "covered employees" whose
total annual compensation exceeds one million dollars, and Section 280G of the
Code and the regulations thereunder may render nondeductible amounts includible
in income by employees that are contingent upon a Change of Control and that are
characterized as "excess parachute payments".
RESALE OF SHARES
The registration requirements of any applicable state securities laws and
the resale restrictions of Rule 144 under the Securities Act may restrict the
sale of shares of Class A Common Stock acquired pursuant to the exercise of
Awards by "affiliates" of the Company within the meaning of the Securities
Act. For purposes of creating short-swing profit liability under Section 16 of
the Exchange Act, sales of such shares by certain affiliates will be matchable
with market purchases within less than six months before or after such sales.
THE DIRECTOR STOCK COMPENSATION PLAN
The Company has adopted the Bank United Director Stock Compensation Plan
(the "Director Stock Plan"). The purposes of the Director Stock Plan are to
(i) promote a greater identity of interest between the Company's non-employee
directors and its stockholders, and (ii) attract and retain individuals to serve
as directors and to provide a more direct link between directors' compensation
and stockholder value.
GENERAL
The Director Stock Plan is administered by the Board of Directors of the
Company or a committee of the Board of Directors of the Company designated for
such purpose.
Pursuant to the terms of the Director Stock Plan, non-employee directors of
the Company (each an "Eligible Director") will be eligible to participate in
the Director Stock Plan. A maximum of 250,000 shares of Class A Common Stock is
available for issuance and available for grants under the Director Stock Plan.
In the event of any change in corporate capitalization (such as a stock
split) or a corporate transaction (such as a merger, consolidation, separation
including a spin-off or other distribution of stock or property of the Company,
any reorganization or any complete liquidation of the Company), the Board of
Directors of the Company or the designated committee may make such substitution
or adjustments in the aggregate number and class of shares reserved for issuance
under the Director Stock Plan, in the number, kind and option price of shares
subject to outstanding Options, in the number and kind of shares subject to
other outstanding awards granted under the Director Stock Plan, and/or such
other equitable substitution or adjustments as it may determine to be
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appropriate in its sole discretion; provided, however, that the number of shares
subject to any award must always be a whole number.
CLASS A COMMON STOCK
With respect to the Annual Retainer, each Eligible Director may make an
annual irrevocable election prior to the beginning of the fiscal year to receive
shares of Class A Common Stock in lieu of all or any portion (in 25% increments)
of the Annual Retainer; provided that the election of cash and Class A Common
Stock under the Director Stock Plan are alternatives and taken together, may not
exceed 100% of such Annual Retainer. The number of shares of Class A Common
Stock granted to an Eligible Director will be equal to the appropriate
percentage of the Annual Retainer payable in each fiscal quarter divided by the
fair market value (as defined in the Director Stock Plan) of a share of Class A
Common Stock on the last business day of such fiscal quarter rounded to nearest
number of shares of Class A Common Stock. Fractional shares of Class A Common
Stock will not be granted and any remainder in Annual Retainer which otherwise
would have purchased fractional shares will be paid in cash.
OPTIONS CLASS A
On the first Tuesday following his or her election and thereafter on the
day after each annual meeting of stockholders during such director's term, each
Eligible Director shall be granted options ("Director Options") on 1,000
shares of Class A Common Stock. The exercise price for the options will be 115%
of the fair market value of Class A Common Stock on the date of the grant of
such option. Each Director Option will become vested and exercisable, if at all,
when and if, during the 30-day period commencing on the first anniversary of the
date of grant of such Director Option, a share of Class A Common Stock has a
fair market value equal to or greater than the exercise price of such Director
Option. If such stock does not attain such fair market value during such 30-day
period, then such Director Option will terminate and be cancelled as of the
close of business on the last business day during such 30-day period. Each
Director Option terminates no later than the tenth anniversary of the date of
grant. Any unvested Director Options terminate and are cancelled as of the date
the optionee's service as a Director ceases for any reason (including death,
disability, retirement, removal from office or otherwise). All Director Options
become fully vested and exercisable upon a Change of Control. The Parent Company
granted 10,000 Director Options during fiscal 1996.
TRANSFERABILITY
Grants and awards under the Director Stock Plan are nontransferable other
than by will or laws of descent and distribution, or pursuant to domestic
relations order or qualified domestic relations order or by gift to members of
the holder's immediate family, whether directly or indirectly or by means of a
trust or partnership, and, during the Eligible Director's lifetime, may be
exercised only by the Eligible Director.
AMENDMENTS
The Director Stock Compensation Plan may be amended by the Board of
Directors of the Company, provided that, to the extent required to qualify
transactions under the Director Stock Plan for exemption under Rule 16b-3
promulgated under the Exchange Act, no amendment to the Director Stock
Compensation Plan may be adopted without further approval by the holders of at
least a majority of the shares of Class A Common Stock present, or represented,
and entitled to vote at a meeting held for such purpose; and provided, further,
that, if and to the extent required for the Director Stock Compensation Plan to
comply with Rule 16b-3, no amendment to the Director Stock Compensation Plan
shall be made more than once in any six-month period that would change the
amount, price or timing of the grants of awards or Options thereunder other than
to comply with changes in the Code, ERISA, or the regulations thereunder.
TERMINATION
The Director Stock Compensation Plan may be terminated at any time by
either the Board of Directors of the Company or by holders of a majority of the
shares of Class A Common Stock present and entitled to vote at a duly convened
meeting of stockholders.
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CHANGE OF CONTROL
In the event of a Change of Control, any outstanding options that are not
then exercisable and vested will become fully exercisable and vested. During the
60-day period following a Change of Control, any Eligible Director will have the
right to surrender all or part of any option or award of Class A Common Stock
held by such Eligible Director, and, in the case of an option, in lieu of
payment of the exercise price, to receive cash in an amount equal to the Spread
multiplied by the number of shares of Class A Common Stock granted in connection
with the exercise of such option so surrendered, or, in the case of an award of
Class A Common Stock, to receive cash in an amount equal to the Change of
Control Price multiplied by the number of shares of Class A Common Stock so
surrendered; provided that, if the Change of Control is within six months of the
grant date for any such option or award, no such election may be made prior to
six months from such grant date. If such 60-day period ends within the period
six months after the grant date for an option or award, such option or award
will be cancelled and the holder thereof will receive six months and one day
after the grant of such option or award, an amount equal, in the case of an
option, to the Spread multiplied by the number of shares of Class A Common Stock
granted under such option and in the case of an award, the Change of Control
Price multiplied by the number of Class A Common Stock so awarded.
FEDERAL INCOME TAX CONSIDERATIONS
Eligible Directors electing Class A Common Stock in lieu of cash fees will
be taxed on the value of the Class A Common Stock at the time of receipt.
Eligible Directors will be taxed upon their exercise of the options. The amount
of income recognized is measured by the differences between the exercise price
and the fair market value of the Class A Common Stock covered by the option. In
each case, the Company will receive a corresponding deduction; provided that
Section 280G of the Code and the regulations thereunder may render nondeductible
amounts that are contingent upon a Change of Control and are characterized as
"excess parachute payments".
RESALE OF SHARES. The holders of shares of Class A Common Stock received
upon the exercise of an option must comply with the resale requirements of the
Securities Act and the rules and regulations promulgated thereunder. Securities
registration requirements under the Securities Act may be applicable to resales
by any Eligible Director. The restrictions imposed by Section 16 of the Exchange
Act upon any Eligible Director and the registration requirements of any
applicable state securities laws may restrict the resales of shares acquired
pursuant to the exercise of options by an Eligible Director.
MANAGEMENT EMPLOYMENT ARRANGEMENTS
Effective as of the date of the consummation of the August Offering, the
Company entered into new employment agreements with the following four
executives which superseded all prior employment arrangements.
Mr. Burkholder's agreement with the Company provides for his employment for
three years at an annual base salary of not less than $375,000 and a
discretionary bonus. Mr. Coben's agreement with the Company provides for his
employment for three years at an annual base salary of not less than $200,000
and a discretionary bonus. Mr. Nocella's agreement with the Company provides for
his employment for three years at an annual base salary of not less than
$315,000 and a discretionary bonus. Mr. Heffron's agreement with the Company
provides for his employment for three years at an annual base salary of not less
than $225,000 and a discretionary bonus. These agreements provide that the
period of employment is automatically extended on the first day of each month so
that the period of employment terminates three years from such date, unless the
executive or the Company gives notice to terminate the agreement at least sixty
days before such monthly renewal date. In addition, upon a change of control, if
the executive is still employed by the Company, the period of employment will be
extended until the third anniversary of the effective date of the change of
control or if the period of employment has terminated prior to the change of
control, a new three year employment period shall commence upon a change of
control. If for any reason other than cause the Company elects to terminate the
employment of any of the above executives before the scheduled expiration date
of his agreement, the executive's employment will be deemed to have been
terminated by the Company without cause for purpose of the severance and
retirement benefits described below.
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Under the terms of Mr. Burkholder's employment agreement, the amount of the
discretionary bonus paid to Mr. Burkholder is in the sole discretion of the
Board of Directors of the Company, which will take into account such matters as
(i) the Company's actual financial performance as compared to its budgeted
financial performance, (ii) Mr. Burkholder's performance in implementing new
business initiatives approved by the Board of Directors of the Company, (iii)
Mr. Burkholder's performance in improving the financial performance of any
division or unit of the Company or the Bank, or any of their respective
subsidiaries as determined by the Board of Directors of the Company in its sole
discretion, (iv) the Company's actual financial performance compared to its
peers', and (v) Mr. Burkholder's total compensation as compared to the total
compensation of CEOs at comparable financial institutions. The discretionary
bonuses to be paid to the other executive officers are at the discretion of the
CEO and the Board of Directors of the Company.
Under each agreement described above, if the executive's employment is
terminated (i) by the Company other than for cause or disability or (ii) by the
executive for good reason or within a 30-day period following the first
anniversary of a change of control, he is generally entitled to (a) receive a
lump sum equal to three times (for Mr. Burkholder) or two times (for Messrs.
Coben, Nocella and Heffron) (I) his annual base salary and (II) the higher of
his most recent bonus under the Company's annual incentive plans and the highest
bonus under such annual incentive plans for the last three full fiscal years
prior to the effective date of the change of control, (b) continue in the
Company's welfare benefit plans for three years (for Mr. Burkholder) or two
years (for Messrs. Coben, Nocella and Heffron), and (c) receive in a lump sum a
supplemental pension amount based on three years (for Mr. Burkholder) or two
years (for Messrs. Coben, Nocella and Heffron) of deemed employment after
termination, (d) have all stock options, restricted stock and other stock-based
compensation become immediately exercisable or vested, (e) receive outplacement
services, at the Company's sole expense, as incurred, up to a maximum of $45,000
(for Messrs. Burkholder, Nocella and Heffron), and $25,000 (for Mr. Coben). A
change of control ("Change of Control") is generally defined for purposes of
these agreements as (i) the acquisition of 25% or more of the common stock of
the Company, (ii) a change in a majority of the Board of Directors, unless
approved by the incumbent directors (other than as a result of a contested
election) and (iii) certain reorganizations, mergers, consolidations,
liquidations or dissolutions. If any payment or distribution by the Company to
an executive is determined to be subject to the excise tax imposed by Section
4999 of the Code, the amount of payment or distribution may be reduced so that
the excise tax liability of the executive is minimized.
In addition Mr. Burkholder received 42.5% of the executive management
compensation program, which satisfies the terms of his former employment
agreement.
Mr. Bender has an employment letter from the Bank. It provides for payment
of an annual salary and a bonus up to 2.86% of the added economic value of the
mortgage banking segment. The employment letter provides that added economic
value is defined to be the sum of pre-tax income and the value of new loan
servicing reduced by the sum of excess servicing revenues and revenues from the
sale of servicing.
NON-QUALIFIED RETIREMENT SAVINGS PLAN
In June 1995, the Board of Directors of the Bank approved the
implementation of a Supplemental Executive Savings Plan ("SESP"). The SESP was
effective on August 1, 1995. The 1995 SESP year covered the period of August 11,
1995 to December 31, 1995. In subsequent years, the SESP Plan coincides with the
calendar year. The SESP is available to a select group of management and other
highly compensated employees. Eligible employees are allowed to make irrevocable
decisions prior to the beginning of the plan year to defer up to 20% of
compensation (as defined in the SESP) and up to 100% of bonus income. As of
September 30, 1996, the monies deferred earn interest at a rate approximately
equal to the Bank's one year certificate of deposit rate. The Bank does not
contribute to the SESP.
The SESP is funded from the general assets of the Bank and participants are
general unsecured creditors of the Bank. As of September 30, 1996, there were 12
participants in the SESP, and the total amount of deferrals and interest equaled
approximately $433,629. The rate of interest for the SESP was 51.2% as of
September 30, 1996.
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DIRECTORS SUPPLEMENTAL SAVINGS PLAN
In June 1995, the Board of Directors of the Bank approved the
implementation of a Directors Supplemental Savings Plan ("DSSP"). The DSSP was
effective on August 1, 1995. The 1995 DSSP year covered the period of August 1,
1995 to December 31, 1995. In subsequent years the Plan year coincides with the
calendar year. The DSSP is available to outside directors. Eligible Directors
are allowed to make irrevocable decisions prior to the beginning of the plan
year to defer up to 100% of retainer and meeting fees. The monies deferred earn
interest at a rate approximately equal to the Bank's one year CD rate. The Bank
does not contribute to the DSSP.
The DSSP is funded from the general assets of the Bank, and participants
are general unsecured creditors of the Bank. As of September 30, 1996, there was
one participant in the DSSP and the total amount of deferrals and interest
equaled approximately $47,080. The rate of interest for the DSSP was 5.12% as of
September 30, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of the Company
determines the compensation of the Company's executive officers. The
Compensation Committee consists of all of the directors of the Company other
than Barry C. Burkholder and Anthony J. Nocella. No other member of the Bank
Compensation Committee is an officer or employee of the Company or the Bank.
Lewis S. Ranieri, Salvatore A. Ranieri and Scott A. Shay are also members of the
Compensation Committee of the Board of Directors of the Bank and are also
members of various boards of directors and compensation committees of various
companies which are subsidiaries of, or entities controlled by, Hyperion
Partners and, in the case of Lewis S. Ranieri, Scott A. Shay and David M.
Golush, of subsidiaries of, or entities controlled by, Hyperion Partners II as
well.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of the date hereof, the outstanding capital stock of the Company
consists of 28,354,276 shares of Class A Common Stock, which entitles the holder
thereof to one vote per share on each matter on which the stockholders of the
Company are entitled to vote, and 3,241,320 shares of Class B Common Stock,
which have no voting rights. Shares of Class B Common Stock are convertible, at
the election of the holder thereof, into shares of Class A Common Stock, subject
to certain restrictions set forth in the Certificate and the Letter Agreement
(as defined herein). Conversion of such shares of Class B Common Stock by a
holder thereof to shares of Class A Common Stock has the effect of diluting the
voting power of the existing holders of Class A Common Stock and increasing the
voting power of such holder commensurately.
The following table sets forth information, as of the date of this
Prospectus, about certain persons who own more than 5% of the Company's voting
stock. The Certificate, the Letter Agreements and the Management Stock Grant
Agreements impose certain restrictions on the ability of holders to convert
their shares of Class B Common Stock into Class A Common Stock and generally
prohibit any holder, other than the holders of the currently outstanding shares
of Class A Common Stock, from converting shares of Class B Common Stock into
Class A Common Stock if after giving effect to such conversion such holder would
become the beneficial owner of more than 9.9% of the then outstanding shares of
Class A Common Stock. In addition, under the terms of the Charter and the Letter
Agreements, the shares of Class B Common Stock owned by The Equitable Life
Assurance Society of the United States, Equitable Variable Life Insurance
Company and The Prudential Insurance Company of America are subject to
additional conversion restrictions. For further information concerning the
ownership of shares of Class A Common Stock and Class B Common Stock, see
" -- Security Ownership of Management".
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS OWNERSHIP OWNED
- ---------------------------------------- -------------------- ----------------- ------------
<S> <C> <C> <C>
The Prudential Insurance Company
of America............................ Class B Common Stock 2,441,137 7.7
c/o The Prudential Capital Group
100 Mulberry Street
Five Gateway Center Four
Newark, NJ 07102
LW-SP1, L.P. and LW-SP2, L.P............ Class A Common Stock 2,146,748 6.8
1201 Elm Street, Suite 5400
Dallas, TX 75270
</TABLE>
Under the terms of the Letter Agreement The Prudential Insurance Company of
America may sell its share of Common Stock beginning August 14, 1999 and LW-SP1,
L.P. and LW-SP2, L.P. may sell their shares beginning August 8, 1998.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information, as of the date of this
Prospectus, regarding the shares of Class A Common Stock beneficially owned by
each director and executive officer set forth in the Summary Compensation Table
and all of the directors and executive officers of the Company as a group.
SECURITY OWNERSHIP OF MANAGEMENT
NUMBER OF SHARES
AND NATURE OF PERCENT
NAME BENEFICIAL OWNERSHIP(1) OF CLASS
- ------------------------------------- ----------------------- --------
Lewis S. Ranieri..................... 1,283,067(2) 4.53%
Salvatore A. Ranieri................. 759,543(3) 2.68
Barry C. Burkholder.................. 139,455 *
Lawrence Chimerine................... 6,138 *
David M. Golush...................... 342,340 1.21
Paul M. Horvitz...................... 4,138 *
Alan E. Master....................... 1,430(4) *
Anthony J. Nocella................... 43,614 *
Scott A. Shay........................ 764,820(5) 2.70
Patricia A. Sloan.................... 156,745 *
Michael S. Stevens................... -- *
Kendrick R. Wilson III............... 227,311(6) *
Ronald D. Coben...................... 6,791 *
Leslie H. Green...................... 6,791 *
Jonathon K. Heffron.................. 43,614 *
Directors and executive officers as a
group (18 persons)................. 3,805,294 13.42%
- ------------
* Percentages do not exceed 1% of the issued and outstanding shares.
(1) Calculated in accordance with Rule 13d-3 under the Exchange Act. Nature of
beneficial ownership is direct unless indicated otherwise by footnote.
Beneficial ownership of shares owned indirectly arises from shared voting
and investment power, unless otherwise indicated.
(2) Includes 1,210,933 shares held by LSR Hyperion Corp., a corporation that is
wholly owned by Mr. Ranieri; 43,403 shares owned by Hyperion Funding Corp.,
a corporation of which Mr. Ranieri is a stockholder and a director; and
19,506 shares held by Ranieri Bros. Shay & Co., Inc., a corporation, of
which Mr. Ranieri is a stockholder and a director. Excludes 608 shares held
as custodian for minors, as to which Mr. Ranieri disclaims beneficial
ownership.
(3) All shares are held by SAR Hyperion Corp., a corporation that is wholly
owned by Mr. Ranieri. Excludes 6,078 shares held as custodian for a minor,
as to which Mr. Ranieri disclaims beneficial ownership.
(4) Includes 1,380 shares held by Mr. Master's wife.
(5) Includes 759,453 shares held by SAS Hyperion Corp., a corporation that is
wholly owned by Mr. Shay.
(6) All shares are held by KRW Hyperion Corp., a corporation that is wholly
owned by Mr. Wilson.
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<PAGE>
MANAGEMENT OWNERSHIP OF BANK PREFERRED STOCK
The following table sets forth with respect to the Bank's Preferred Stock,
Series A and Series B, as of the date hereof: (i) shares beneficially owned by
all directors; (ii) each of the executive officers named in the Summary
Compensation Table set forth herein; and (iii) shares beneficially owned by all
directors, and executive officers as a group.
MANAGEMENT OWNERSHIP OF BANK PREFERRED STOCK
<TABLE>
<CAPTION>
SERIES A SERIES B
------------------------------------ ------------------------------------
NUMBER OF SHARES NUMBER OF SHARES
AND NATURE OF PERCENT AND NATURE OF PERCENT
NAME BENEFICIAL OWNERSHIP(1) OF CLASS BENEFICIAL OWNERSHIP(1) OF CLASS
- ------------------------------------- ----------------------- --------- ----------------------- ---------
<S> <C> <C> <C> <C>
Lewis S. Ranieri..................... -- * -- *
Salvatore A. Ranieri................. -- * -- *
Barry C. Burkholder.................. 8,000 * -- *
Lawrence Chimerine................... 1,000 * 1,000 *
David M. Golush...................... 2,100 * -- *
Paul M. Horvitz...................... 400(2) * -- *
Alan E. Master....................... 600 * 2,000 *
Anthony J. Nocella................... 1,000 * 2,000 *
Scott A. Shay........................ -- * -- *
Patricia A. Sloan.................... -- * -- *
Michael S. Stevens................... -- * -- *
Kendrick R. Wilson III............... -- * -- *
Ronald D. Coben...................... 200 * -- *
Leslie H. Green...................... 1,000 * 1,000 *
Jonathon K. Heffron.................. 1,400(3) * -- *
Directors and executive officers as a
group (18 persons)................. 16,070 * 10,000 *
</TABLE>
- ------------
* Percentages do not exceed 1% of the issued and outstanding shares.
(1) Calculated in accordance with Rule 13d-3 under the Exchange Act. Nature of
beneficial ownership is direct unless indicated otherwise by footnote.
(2) 200 shares direct, 200 shares owned by spouse.
(3) 1,000 shares direct, 400 shares held as custodian for minor children.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank may from time to time make home mortgage or consumer loans to
directors, officers, and employees. Any such loan will be made in the ordinary
course of business, and on the same terms and conditions, including interest
rates and collateral, as those of comparable transactions prevailing at the time
with non-affiliated parties. The Bank had no loans to directors or executive
officers outstanding in fiscal 1996, 1995 or 1994.
Historically, expenses paid to related parties were (i) for services
provided in connection with hedging and asset and liability management
strategies, and (ii) for services provided in connection with the management and
marketing of real estate properties. No such expenses were incurred in fiscal
1996, 1995 or 1994. At September 30, 1996, 1995 and 1994, the Company and the
Bank had no outstanding receivables from or payables to related parties other
than those related to participation in the filing of the consolidated tax return
and there are no loans outstanding to directors, executive officers, or
principal holders of the Company's equity securities.
As a general benefit to all full-time employees with at least six months of
service (excluding executive officers), the Bank, through its Mortgage Banking
Group, will waive the 1% origination fee for a mortgage loan for the purchase or
refinance of the employee's principal residence. In addition, the Bank offers a
0.50% discount on its posted rates for consumer installment loans made to
employees.
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<PAGE>
The disinterested directors of the Bank have approved an agreement with a
subsidiary of Hyperion
Partners II, Cardholder Management Services L.P. ("CMS"), an affiliate of the
Bank, whereby CMS acts as the servicer for a debit card offered to customers of
the Bank and a credit card portfolio originated by the Bank. Lewis S. Ranieri,
Scott A. Shay, David M. Golush and Patricia A. Sloan, who are directors of the
Company, have a material interest in Hyperion Partners II. The Company believes
that the terms and conditions of this agreement are as favorable to the Bank as
those that could have been arranged with an independent third party.
In August 1996, the Company entered into a consulting agreement pursuant to
which Lewis S. Ranieri serves as a consultant to the Company providing strategic
and managerial advice to the Company in exchange for an annual consulting fee of
$250,000. The consulting agreement will be in effect until the earliest of (i)
the third anniversary of the agreement, (ii) the date that is 180 days after the
date on which either Mr. Ranieri or the Company delivers written notice to the
other party terminating the agreement, and (iii) the date on which Mr. Ranieri
becomes disabled or dies. The consulting agreement does not prevent Mr. Ranieri
from engaging in business endeavors which may be competitive with the businesses
of the Company. Mr. Ranieri is paid an Annual Retainer and meeting fees for his
service as a director of the Company and of the Bank.
The Bank is a party to a written investment advisory services agreement
which provides for payment by the Bank to Hyperion Capital, an affiliate of the
Bank, of $175,000 per year for investment advisory services and for payment by
Hyperion Capital to the Bank of $175,000 for information regarding the Bank's
mortgage pipeline. The Company believes that the terms and conditions of this
agreement are as favorable to the Bank as those that could have been arranged
with an independent third party.
The Company and the Bank have entered into an agreement with Hyperion
Partners acknowledging the relative value, as among the parties, of their claims
in the pending litigation. See "Legal Proceedings". The agreement confirms
that the Company and the Bank are entitled to receive 85% of the amount, if any,
recovered as a result of the settlement of or a judgment on such claims, and
that Hyperion Partners 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.
Prior to January 1993, Hyperion Holdings, as a subsidiary of Hyperion
Partners, held a majority interest in a number of closely-held corporations,
including Hyperion Capital, Centeq Holdings Inc., which held the Centeq
Companies, which were real estate service companies, and general partners in
limited partnerships that held real estate investments. In January 1993,
Hyperion Holdings transferred all of its holdings to Hyperion Partners in
exchange for a note of approximately $25 million which was paid out to Hyperion
Partners in April 1996 in connection with the Restructuring. See "Prospectus
Summary -- Background of the Company".
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<PAGE>
STOCKHOLDER LETTER AGREEMENT
In connection with the Company's initial public offering in August 1996,
certain of the holders of the Company's Common Stock (the "Restricted
Stockholders") entered into a Letter Agreement with each of Hyperion Partners
and the Company (the "Letter Agreement"). The following summary of the
material provisions of the Letter Agreement does not purport to be complete and
is qualified in its entirety by reference to the Letter Agreement which is an
exhibit to the Registration Statement on Form S-1 (File No. 333-06229) filed by
the Company with the Commission on August 7, 1996.
Pursuant to the Letter Agreement, each Restricted Stockholder consented to
the Distribution and agreed to hold the common stock of Hyperion Holdings
received pursuant to the Distribution according to the terms of such Letter
Agreement. Also, each Restricted Stockholder (including those who prior to the
Merger held voting shares of capital stock of Hyperion Holdings and those who
prior to the Merger held shares of Class C Common Stock), by executing the
Letter Agreement and agreeing to be bound thereby, consented to and approved of,
for purposes of Section 228 of the Delaware General Corporation Law (the
"DGCL") and otherwise, the Merger Agreement, dated as of June 17, 1996, by and
between Hyperion Holdings and the Company (the "Merger Agreement"), and the
Merger.
Pursuant to the Letter Agreement, each Restricted Stockholder acknowledged
(i) that under the By-Laws of Hyperion Holdings, it is not permitted to Transfer
any shares of capital stock of Hyperion Holdings except pursuant to the Merger
Agreement and (ii) that, under the By-Laws, after the Distribution and prior to
the consummation of the August Offering, such stockholder would not effect any
Transfer of shares of capital stock of the Company (a) in the case of Restricted
Stockholders who received shares in respect of Class C Common Stock in the
Merger, except as such stockholder would have been permitted to transfer such
Class C Common Stock under the Stockholders' Agreement, dated as of January 5,
1990, by and among the Company and the other parties specified therein (the
"Stockholders Agreement"), and (b) in the case of any other Restricted
Stockholders, except in accordance with the terms of the limited partnership
agreement of Hyperion Partners applicable to the transfer of partnership
interests of Hyperion Partners. Each 5% Stockholder acknowledged that it is not
permitted, prior to the earlier of an initial public offering ("IPO") or
October 31, 1996, to transfer any such shares owned by such 5% Stockholder
(other than to a person of whom the 5% Stockholder is a wholly-owned subsidiary)
or acquire any additional such shares. If an IPO had not been consummated within
six months of the date of the Letter Agreement, the Company would have been
obligated to provide each stockholder with registration and tag-along rights
substantially similar to those set forth in the Stock Purchase Agreement, dated
as of August 1, 1989, by and among the Company and certain Selling Stockholders
and the Stockholders' Agreement. Under the Letter Agreements, each Restricted
Stockholder was also obligated to provide certain cooperation to the Company in
the case of an IPO, including entering into customary underwriting and lockup
agreements.
Each Restricted Stockholder retaining shares of Common Stock is not
permitted to sell such shares for (1) one year after the August Offering, if
such stock was received in respect of general partnership interests in Hyperion
Partners or (2) six months after the August Offering (although a regulated New
Jersey insurance company may sell shares in a private off-market transaction
subject to Rule 144 limits and reasonable representations requested by the
underwriters). Subject to certain adjustments by the Board of Directors of the
Company based upon advice of the underwriters to improve the marketability of
the shares of Class A Common Stock sold in the August Offering, each 5%
Stockholder was permitted to sell up to 45% of such holder's shares of Common
Stock in the August Offering, except for LW-SP1 and LW-SP2, affiliates of Lehman
Brothers Inc., which were prohibited from selling any shares until August 8,
1998, and any other Restricted Stockholder was permitted to sell up to 16% of
its shares in the August Offering (subject to increase pro rata in the
discretion of the Board of Directors of the Company if the 5% Stockholders
elected to sell fewer than the maximum number of shares they are permitted to
sell in the August Offering). Each Selling Stockholder acknowledged that, except
for shares that could have been sold pursuant to the August Offering but were
not sold at the election of such 5% Stockholder, no 5% Stockholder is permitted
by the By-Laws to acquire or Transfer any shares of capital stock of the Company
for three years following the August Offering (or upon termination of the Letter
Agreement, if
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<PAGE>
earlier) unless as of an earlier date the Company Board determines that such
acquisition or Transfer would not be reasonably likely to have a material
adverse effect on the tax position of the Company.
The Board of Directors of the Company approved sales of shares of Class A
Common Stock in excess of the 45% and 16% limitations as necessary to satisfy
the underwriters' over-allotment options in the August Offering.
Pursuant to the Letter Agreement, in January 1997 the Company filed, and is
obligated to use best efforts to cause to promptly become effective, a
registration statement under the Securities Act with respect to shares of Class
A or Class B Common Stock then held by any Restricted Stockholder. The Company
is also obligated to take action to keep such registration statement effective
(subject to occasional periods of suspension of such effectiveness as necessary)
until the first to occur of (i) the date on which all shares of Common Stock
registered thereunder have been sold pursuant thereto, (ii) December 31, 1999,
and (iii) the date on which such registration under the Securities Act is no
longer required to sell such shares without restriction.
DESCRIPTION OF NOTES
The % Subordinated Notes Due 2004 (the "2004 Notes") and the %
Subordinated Notes Due 2007 (the "2007 Notes", and, together with the 2004
Notes, the "Notes") will be issued under an indenture, to be dated as of
, 1997 (the "Indenture"), between the Company and
, as trustee (the "Trustee").
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 as in
effect on the date of the Indenture (the "Trust Indenture Act"). The Notes are
subject to all such terms, and Noteholders are referred to the Indenture and the
Trust Indenture Act for a statement of those terms. The Indenture will, by its
terms, require the Company and the Trustee to comply with the Trust Indenture
Act.
The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to the provisions of the Indenture and the
Notes, including the definitions therein of certain terms used below.
Capitalized terms used in this section and not otherwise defined in this section
have the respective meanings assigned to them in the Indenture. For purposes of
this description, the term "Company" refers to Bank United Corp. and does not
include its subsidiaries.
GENERAL
The Notes are general unsecured obligations of the Company. The 2004 Notes
will be limited to $100 million aggregate principal amount and the 2007 Notes
will be limited to $120 million aggregate principal amount. The Notes will be
issued in fully registered form only, without coupons, in denominations of
$1,000 and integral multiples thereof.
The Company, as a savings and loan holding company, currently is not
subject to any regulatory capital ratio requirements of any federal banking
authority. However, if for any reason the Company were to become regulated as a
bank holding company in the future, the Company then would become subject to
capital adequacy requirements of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). If that were to occur, the terms of the
Notes are such that the Company expects that the Notes would qualify as Tier 2
capital under the Federal Reserve Board's regulatory capital guidelines
applicable to bank holding companies (as such guidelines are currently in
force). There can be no assurance that such bank holding company capital
guidelines may not change in the future.
PAYMENT TERMS
The 2004 Notes will bear interest at a rate of % per annum until
maturity, and the 2007 Notes will bear interest at a rate of % per annum until
maturity. Interest on the Notes will be payable semi-annually on
and of each year, commencing
, to the persons who are the registered Noteholders thereof
at the close of business on the or
immediately preceding such interest payment date.
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<PAGE>
The 2004 Notes will mature on , 2004, and the 2007
Notes will mature on , 2007. The Notes are not redeemable
prior to maturity and do not provide for any sinking fund.
The Indenture provides that interest on the Notes will be computed on the
basis of a 360-day year of twelve 30-day months. Initially, the Trustee will act
as Paying Agent and Registrar. However, the Company may designate its principal
subsidiary, the Bank, as Paying Agent and Registrar, and the Company may change
the Paying Agent or Registrar without prior notice to Noteholders. Principal and
interest will be payable initially at the offices of the Trustee but, at the
option of the Company, interest may be paid by check mailed to the persons who
are registered Noteholders at their registered addresses; provided that all
payments with respect to Global Notes are required to be made in same day funds
in accordance with the policies of the Depositary (as defined below). The Notes
may be presented for registration of transfer and exchange at the office of the
Registrar.
SUBORDINATION
The Indenture provides that the payment of the principal of, premium, if
any, and interest on the Notes will, to the extent set forth in the Indenture,
be subordinated in right of payment to the prior payment in full of all Senior
Indebtedness (as defined below). In certain events involving insolvency of the
Company, the payment of the principal of, premium, if any, and interest on the
Notes will, to the extent set forth in the Indenture, also be subordinated in
right of payment to the prior payment in full of all Other Financial Obligations
(as defined below). Upon any payment or distribution of assets to creditors upon
any liquidation, dissolution, winding up, reorganization, assignment for the
benefit of creditors, marshalling of assets or any bankruptcy, insolvency,
receivership or similar proceedings of the Company, the holders of all Senior
Indebtedness will first be entitled to receive payment in full of all amounts
due or to become due thereon before the holders of the Notes will be entitled to
receive any payment in respect of the principal of, premium, if any, or interest
on the Notes. If upon any such payment or distribution of assets to creditors,
there remains, after giving effect to such subordination provisions in favor of
the holders of Senior Indebtedness, any amounts of cash, property or securities
available for payment or distribution in respect of the Notes (as defined in the
Indenture, "Excess Proceeds"), and if at such time any Entitled Persons (as
defined below) in respect of Other Financial Obligations have not received
payment in full of all amounts due or to become due on or in respect of such
Other Financial Obligations, then such Excess Proceeds will first be applied to
pay or provide for the payment in full of such Other Financial Obligations
before any payment or distribution may be made in respect of the Notes. In the
event of the acceleration of the maturity of any of the Notes, the holders of
all Senior Indebtedness will first be entitled to receive payment in full of all
amounts due thereon before the holders of the Notes will be entitled to receive
any payment upon the principal of, premium, if any, or interest on the Notes. No
payments on account of principal of, premium, if any, or interest on the Notes
may be made if there has occurred and is continuing a default in any payment
with respect to Senior Indebtedness beyond any applicable grace period with
respect thereto or an event of default permitting the acceleration of such
Senior Indebtedness or if any judicial proceeding is pending with respect to any
such default or event of default.
By reason of such subordination in favor of the holders of Senior
Indebtedness, in certain events involving bankruptcy, insolvency or
reorganization of the Company, creditors of the Company who hold obligations
other than Senior Indebtedness or subordinated indebtedness (other than the
Notes) may recover less in respect of such obligations, ratably, than holders of
Senior Indebtedness, and may recover more in respect of such obligations,
ratably, than the holders of the Notes.
The term "SENIOR INDEBTEDNESS" means, with respect to the Company, the
principal of, premium, if any, and interest (including interest accruing
subsequent to the commencement of any proceeding for the bankruptcy or
reorganization of the Company) on (a) all indebtedness of the Company for money
borrowed, whether outstanding on the date of execution of the Indenture or
thereafter created, assumed or incurred, except such indebtedness as is by its
terms expressly stated to be not superior in right of payment to the Notes or to
rank PARI PASSU with or subordinate to the Notes, and (b) any deferrals,
renewals or extensions of any such indebtedness for money borrowed. The term
"indebtedness for money borrowed", as used in the definition of "Senior
Indebtedness" and "Other Financial Obligations", is defined to mean any
obligation of, or any obligation guaranteed by, the Company for the repayment of
borrowed money, whether or not evidenced by bonds,
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debentures, notes or other written instruments, and any deferred obligation for
the payment of the purchase price of property or assets.
The term "OTHER FINANCIAL OBLIGATIONS" means all obligations of the
Company to make payment pursuant to the terms of financial instruments, such as
(i) securities contracts and foreign currency exchange contracts, (ii)
derivative instruments, such as swap agreements (including interest rate and
foreign exchange rate swap agreements), cap agreements, floor agreements, collar
agreements, interest rate agreements, foreign exchange rate agreements, options,
commodity futures contracts, commodity option contracts, and (iii) in the case
of both (i) and (ii) above, similar financial instruments, other than (A)
obligations on account of Senior Indebtedness and (B) obligations on account of
indebtedness for money borrowed ranking PARI PASSU with or subordinate to the
Notes.
The term "ENTITLED PERSONS" means any persons entitled to payment
pursuant to the terms of Other Financial Obligations.
The Indenture does not limit the incurrence of additional Senior
Indebtedness and Other Financial Obligations, which may include indebtedness
that is senior to the Notes but subordinate to other obligations of the Company.
As of December 31, 1996, there was $ million of Senior Indebtedness and $
million of Other Financial Obligations outstanding. The Senior Indebtedness
included $115 million of outstanding Senior Notes, which Senior Notes the
Company intends to purchase from the holders thereof using a portion of the
proceeds of the Offering (see "Use of Proceeds").
The Company is a legal entity separate and distinct from the Bank. The
Company's principal asset is the common stock of the Bank, which is held through
Holdings, a wholly owned intermediary holding company. The principal sources of
the Company's income are dividends, interest and fees from the Bank. The Company
relies primarily on dividends from the Bank and Holdings to meet its obligations
for payment of principal and interest on its outstanding debt obligations and
corporate expenses. Accordingly, the Notes will be effectively subordinated to
all existing and future liabilities of all of the Company's subsidiaries and the
Bank Preferred Stock. The Bank is subject to claims of creditors for debt
obligations, including deposit liabilities, obligations for borrowings from the
FHLB Dallas, and securities sold under reverse repurchase agreements. Moreover,
the Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, and certain other transactions with, the Company and
certain other affiliates, and on investments in stock or other securities
thereof. In addition, payment of dividends to the Company by the Bank is subject
to ongoing review by banking regulators and is subject to various statutory
limitations and in certain circumstances requires approval by banking regulatory
authorities. See "Risk Factors -- Holding Company Structure; Restrictions on
Ability of Subsidiaries to Pay Dividends".
As of December 31, 1996, there was $4.9 billion of outstanding indebtedness
of the Company's subsidiaries. In addition, the Bank currently has outstanding
7,420,000 shares of the Bank Preferred Stock, with an aggregate liquidation
preference of $185.5 million. The annual dividend obligation on the Bank
Preferred Stock is approximately $18.25 million. While the Bank Preferred Stock
is noncumulative, dividends may not be paid on the Bank Common Stock if full
dividends on the Bank Preferred Stock have not been paid for the four most
recent quarterly dividend periods. The Bank is currently in compliance with this
requirement. The ability of the Company to make payments on the Notes is
contingent on the Bank having sufficient dividend capacity under applicable
regulatory guidelines to pay both the amount of such dividends to the Company,
plus full dividends on the Bank Preferred Stock. If for any reason the Bank
failed to declare and pay full dividends on the Bank Preferred Stock, the
Company and Holdings would not receive any cash dividends from the Bank, from
which the Company could pay debt service on the Notes, until four full quarterly
dividends on the Bank Preferred Stock had been paid. Unless an alternative
source of funding for the Company were secured, as to which there can be no
assurance and for which no arrangements have been made, this would likely result
in a default by the Company in payment on the Notes.
EVENTS OF DEFAULT AND WAIVER THEREOF
An Event of Default with respect to the Notes is defined in the Indenture
as being certain events involving a bankruptcy, insolvency or reorganization of
the Company, or bankruptcy, insolvency, receivership or similar
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proceedings of the Bank. If an Event of Default with respect to the Notes shall
have occurred and be continuing, either the Trustee or the holders of not less
than 25% in aggregate principal amount of the Notes then outstanding may declare
the principal of all the Notes, plus accrued and unpaid interest thereon, to be
due and payable immediately. The foregoing provision would be subject as to
enforcement to the broad equity powers of a federal bankruptcy court and to the
determination by that court of the nature of the rights of the Holders of the
Notes. The Company is required to furnish annually to the Trustee a statement as
to the performance by the Company of its obligations under the Indenture and as
to any default in such performance. Under certain circumstances, any declaration
of acceleration with respect to Notes may be rescinded and past defaults
(except, unless theretofore cured, a default in the payment of principal of,
premium, if any, or interest on such Notes) may be waived by the holders of a
majority in aggregate principal amount of the Notes then outstanding.
LIMITED RIGHT OF ACCELERATION
The Notes may be accelerated only in the case of an event of default as
described above. The Indenture does not provide for any right of acceleration of
the payment of the principal of the Notes upon a default in the payment of
principal, premium, if any, or interest on or a default in the performance of
any covenant or agreement in the Notes or in the Indenture. In the event of a
default in the payment of interest, principal or premium, if any, the holder of
a Note (or the Trustee on behalf of the holders of all of the Notes affected)
may, subject to certain limitations and conditions, seek to enforce payment of
such interest, principal or premium, if any.
MAINTENANCE OF STATUS OF SUBSIDIARIES AS INSURED DEPOSITORY INSTITUTIONS
The Company has agreed that it will do or cause to be done all things
necessary to preserve and keep in full force and effect the status of each of
its subsidiaries that is a depository institution (including the Bank) as an
insured depository institution and do or cause to be done all things necessary
to ensure that savings accounts of each such subsidiary are insured by the FDIC
or any successor organization up to the maximum amount permitted by 12 U.S.C.
Section 1811 ET SEQ. and the regulations thereunder or any succeeding federal
law, except as to individual accounts or interests in employee benefit plans
that are not entitled to pass-through insurance under 12 U.S.C. Section
1821(a)(1)(D).
CAPITAL AND DIVIDENDS
The Company has agreed that it will not declare or pay any dividend or make
any other distribution on any shares of its common stock (other than dividends
payable solely in shares of its common stock), or make (or permit any subsidiary
to make) any payment to purchase, redeem or otherwise retire or acquire any such
shares, if at the time of such action the Company is not in compliance, or would
fail as result of such action to remain in compliance, with any minimum capital
maintenance requirements established by the Federal Reserve Board or another
banking regulator that are then applicable to the Company.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
The Company has covenanted in the Indenture that it will not merge or
consolidate with any other corporation or sell or convey all or substantially
all of its assets to any person, firm or corporation unless the Company is the
continuing corporation, or the successor corporation is a corporation organized
under the laws of the United States of America or a state thereof and such
corporation expressly assumes the obligations under the Notes and the Indenture,
and the Company or such successor corporation is not, immediately after such
merger, consolidation, sale or conveyance, in default in the performance of any
of the covenants or conditions of the Indenture.
MODIFICATION AND WAIVER
The Indenture provides that, with the consent of the Holders of at least a
majority in principal amount of the Outstanding Notes, modifications and
alterations of the Indenture may be made which affect the rights of the Holders
of the Notes but no such modification or alteration may be made without the
consent of the Holder of each Note which would (i) change the fixed maturity of
the principal of, or any installment of principal of or interest on, any Note,
or reduce the principal amount thereof or change the rate of interest thereon,
or change any
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place where, or the coin or currency in which, the principal amount of any Note
or any premium or interest thereon is payable, or impair any right to institute
suit for the enforcement of any right to receive payment of the principal of
(and premium, if any) and interest, if any, on such Note on the stated maturity
dates expressed in such Note, or modify the provisions of the Indenture with
respect to the subordination of the Notes in a manner adverse to the Holders, or
(ii) reduce the above-stated percentage in principal amount of Outstanding Notes
required to modify or alter the Indenture.
REPORTS TO HOLDERS OF THE NOTES
The Company shall file with the Trustee and provide Noteholders, within 15
days after it files them with the SEC, copies of its annual report and the
information, documents and other reports which the Company is required to file
with the SEC pursuant to Section 13 or 15(d) of the Exchange Act.
Notwithstanding that the Company may not be required to remain subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall continue to file with the SEC and provide the Trustee and Noteholders with
the annual reports and the information, documents and other reports which are
specified in Sections 13 and 15(d) of the Exchange Act. The Company also shall
comply with the other provisions of Trust Indenture Act 314(a).
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar may require a Holder, among other things, to furnish appropriate
endorsements and transfer documents, and the Company may require a Holder to pay
any taxes and fees required by law or permitted by the Indenture. The Registrar
is not required to transfer or exchange any Note for a period of 15 days before
an interest payment date.
The registered holder of a Note may be treated as the owner of it for all
purposes.
BOOK-ENTRY, DELIVERY AND FORM
The Notes will initially be issued in the form of Global Notes (the
"Global Notes"). The Global Notes will be deposited on the date of the closing
of the sale of the Notes offered hereby (the "Closing Date") with the Trustee
as custodian for The Depository Trust Company ("DTC") and registered in the
name of Cede & Co., as nominee of DTC (the "Global Note Holder").
DTC is a limited-purpose trust company that was created to hold securities
for its participating organizations (collectively, the "Participants" or
"DTC's Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. DTC's Participants include
securities brokers and dealers (including the underwriters of the Notes), banks
and trust companies, clearing corporations and certain other organizations.
Access to DTC's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or "DTC's Indirect Participants") that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants may beneficially own securities
held by, or on behalf of, DTC only through DTC's Participants or DTC's Indirect
Participants.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the underwriters of the Notes with portions of the principal
amount of the Global Notes and (ii) ownership of the Notes evidenced by the
Global Notes will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC (with respect to the interests
of DTC's Participants), DTC's Participants and DTC's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to own, transfer or pledge Notes evidenced
by the Global Notes will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Notes. Beneficial owners of Notes evidenced by the
Global Notes will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee
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thereunder. Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records of DTC or for maintaining, supervising
or reviewing any records of DTC relating to the Notes.
Payments in respect of the principal, premium, if any, and interest on any
Notes registered in the name of the Global Note Holder on the applicable record
date will be payable by the Trustee to or at the direction of the Global Note
Holder in its capacity as the registered Holder under the Indenture. Under the
terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of Notes. The Company believes,
however, that it is currently the policy of DTC to credit immediately the
accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of DTC. Payments by DTC's Participants
and DTC's Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of DTC's Participants or DTC's Indirect Participants.
CERTIFICATED NOTES
If the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary and the Company is unable to locate a
qualified successor within 90 days then, upon surrender by the Global Note
Holder of the Global Notes, Notes in the form of registered definitive
certificates ("Certificated Notes") will be issued in denominations of $1,000
and integral multiples thereof, in exchange for the Global Notes, to each person
that the Global Note Holder and DTC identify as being the beneficial owner of
the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or DTC in identifying the beneficial owners of Notes, and the
Company and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the Global Note Holder or DTC for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Certificated
Notes, the Company will make all payments of principal, premium, if any, and
interest, by wire transfer of immediately available funds to the accounts
specified by the Holders thereof or, if no such account is specified, by mailing
a check to each such Holder's registered address. Secondary trading in long-term
notes and debentures of corporate issuers is generally settled in clearing-house
or next-day funds. In contrast, the Notes represented by the Global Notes are
expected to trade in DTCs Same-Day Funds Settlement System, and any permitted
secondary market trading activity in such Notes will, therefore, be required by
DTC to be settled in immediately available funds. The Company expects that
secondary trading in the Certificated Notes would also be settled in immediately
available funds.
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UNDERWRITING
Under the terms and subject to the conditions of the Underwriting
Agreement, each Underwriter named below has severally agreed to purchase, and
the Company has agreed to sell to each Underwriter, the principal amount of
Notes set forth opposite the name of such Underwriter below:
PRINCIPAL AMOUNT
--------------------------
2004 NOTES 2007 NOTES
---------- ----------
Smith Barney Inc..................... $ $
Lehman Brothers Inc..................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............
Total...................... $ $
========== ==========
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes are subject to approval
of certain legal matters by counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all of the Notes offered hereby
if any such Notes are taken.
The Underwriters have advised the Company that they propose initially to
offer part of the Notes directly to the public at the public offering price set
forth on the cover page of this Prospectus and part to certain dealers at a
price that represents a concession not in excess of % of the public
offering price of the Notes. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of % of the public offering price of
the Notes to certain other dealers. After the Offering, the public offering
price and such concessions may be changed from time to time by the Underwriters.
The Underwriters have informed the Company that the Underwriters do not intend
to confirm sales of the Notes to accounts over which they exercise discretionary
authority.
The Company has agreed to indemnify the Underwriters, and the Underwriters
have agreed to indemnify the Company, against certain liabilities, including
liabilities under the Securities Act of 1993, as amended (the "Securities
Act").
The Underwriters have informed the company that the Underwriters intend to
make market in the Notes, as permitted by applicable laws and regulations;
however, the Underwriters are not obligated to do so, and any such market
activity may be terminated at any time without notice to the Holders. No
assurance can be given as to the liquidity of or the trading market for the
Notes. See "Risk Factors -- Absence of Public Market for the Notes."
The Underwriters and their affiliates have in the past and may in the
future engage in transactions with and perform services for the Company or one
or more of its affiliates in the ordinary course of business.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Bracewell & Patterson, L.L.P., Houston, Texas. Certain legal matters
will be passed upon for the Underwriters by Cleary, Gottlieb, Steen & Hamilton,
New York, New York.
EXPERTS
The consolidated financial statements of the Company as of September 30,
1996 and 1995 and for each of the three years in the period ended September 30,
1996 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
This Prospectus, which constitutes a part of a Registration Statement filed
by the Company with the Commission under the Securities Act, omits certain of
the information set forth in the Registration Statement in accordance with the
rules and regulations of the Commission. Reference is hereby made to the
Registration Statement and to the exhibits thereto for further information with
respect to the Company and the securities
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offered hereby. Copies of the Registration Statement and the exhibits thereto
are on file at the offices of the Commission and may be obtained upon payment of
the prescribed fee or may be examined without charge at the public reference
facilities of the Commission described below. The Commission also maintains a
Web site (http: //www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants such as the Company which
file electronically with the Commission.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission may be inspected and copied
at the public reference facility maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and the
following regional offices of the Commission: New York Regional Office, Seven
World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material also may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
The Company furnishes its stockholders with annual reports containing
audited financial statements.
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================================================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE SUBORDINATED NOTES OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSONS IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary...................... 3
Risk Factors............................ 11
The Company............................. 17
Use of Proceeds......................... 18
The Tender Offer........................ 18
Capitalization.......................... 19
Ratios of Earnings to Fixed Charges..... 20
Selected Consolidated Financial and
Other Data............................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 25
Business................................ 51
Regulation.............................. 73
Properties.............................. 94
Legal Proceedings....................... 95
Management.............................. 98
Security Ownership of Certain Beneficial
Owners and Management................. 114
Description of Notes.................... 119
Underwriting............................ 125
Legal Matters........................... 125
Experts................................. 125
Available Information................... 125
Index to Consolidated Financial
Statements............................ F-1
$220,000,000
BANK
UNITED CORP.
___% SUBORDINATED NOTES DUE 2004
___% SUBORDINATED NOTES DUE 2007
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All amounts are estimated except the
Securities and Exchange Commission (the "Commission") registration fee and the
National Association of Securities Dealers, Inc. ("NASD") filing fee.
PAYABLE
BY THE
REGISTRANT
----------
SEC registration fee................. $ 66,668
NASD filing fee...................... 22,500
Blue Sky fees and expenses........... --
Accounting fees and expenses.........
Legal fees and expenses..............
Trustee's fees and expenses..........
Printing and engraving expenses......
Miscellaneous fees and expenses......
----------
Total........................... $
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by them in connection with specified actions, suits or proceedings, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation, a "derivative action") if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful. A similar standard is applicable in the case of derivative actions,
except that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with the defense or settlement of such actions, and the
statute requires court approval before there can be any indemnification where
the person seeking indemnification has been found liable to the corporation. The
statute provides that it is not exclusive of other indemnification that may be
granted by a corporation's bylaws, disinterested director vote, stockholder
vote, agreement or otherwise.
The Restated Certificate of Incorporation of the Company (the
"Certificate") provides that each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person, or a person of whom such person is the legal
representative, is or was a director or officer of the Company or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent, will be indemnified and held harmless by
the Company to the fullest extent authorized by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment), against all expense, liability and loss reasonably incurred or
suffered by such person in connection therewith. Such right to indemnification
includes the right to have the Company pay the expenses incurred in defending
any such proceeding in advance of its final disposition, subject to the
provisions of the DGCL. Such rights are not
II-1
<PAGE>
exclusive of any other right which any person may have or thereafter acquire
under any statute, provision of the Certificate, By-Laws, agreement, vote of
stockholders or disinterested directors or otherwise. No repeal or modification
of such provision will in any way diminish or adversely affect the rights of any
director, officer, employee or agent of the Company thereunder in respect of any
occurrence or matter arising prior to any such repeal or modification. The
Certificate also specifically authorizes the Company to maintain insurance and
to grant similar indemnification rights to employees or agents of the Company.
The DGCL permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) payments of unlawful dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit.
The Certificate provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except, if required by the DGCL as
amended from time to time, for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit. Neither the amendment
nor repeal of such provision will eliminate or reduce the effect of such
provision in respect of any matter occurring, or any cause of action, suit or
claim that, but for such provision, would accrue or arise prior to such
amendment or repeal.
The Underwriting Agreement provides for indemnification by the Underwriters
of the registrant, its Directors and officers, and by the registrant of the
Underwriters, for certain liabilities, including liabilities arising under the
Securities Act, and affords certain rights of contribution with respect thereto.
In addition, Lewis S. Ranieri, Salvatore A. Ranieri, and Scott A. Shay, who
are directors of the Company, may be entitled to indemnification from Hyperion
Partners L.P. and Hyperion Ventures L.P., the former upstream affiliates of the
Company. Such former upstream affiliates, at their sole discretion, may elect to
indemnify other persons who serve as directors or officers of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During June 1996, the following actions were taken in the order indicated:
(i) Hyperion Holdings exchanged shares of a newly created class of its
non-voting common stock for certain shares of its voting common stock held by
Hyperion Partners; (ii) Hyperion Partners then distributed the Hyperion Holdings
common stock to its limited and general partners in accordance with the limited
partnership agreement of Hyperion Partners (the "Distribution"); and (iii)
following the Distribution, Hyperion Holdings was merged with and into the
Company (the "Merger"), with the result that holders of Hyperion Holdings
voting and non-voting common stock received shares of Class A Common Stock and
Class B Common Stock and the holders of the Company's Class C common stock, par
value $0.01 per share ("Class C Common Stock") received shares of Class B
Common Stock as set forth under "Selling Stockholders". As part of the
Restructuring, the common stock of Hyperion Holdings and the Class C Common
Stock were converted 1,800 to one. Subsequent to the Restructuring, there were
no shares of Class C Common Stock outstanding. In addition, immediately prior to
the August Offering, the FDIC-FRF surrendered to the Bank a portion of the
Warrant to purchase 158,823 shares of Bank Common Stock for a cash payment of
$6.1 million and exercised the remainder of the Warrant. Immediately thereafter,
the FDIC-FRF exchanged the shares of Bank Common Stock for 1,503,560 shares of
Class B Common Stock, all of which are being sold in the August Offering. See
"Business -- The Assistance Agreement". In June 1996, the Company granted
318,342 shares of Class B Common Stock to certain executive officers of the
Company pursuant to the executive management compensation program. See
"Management -- Executive Management Compensation Program".
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are filed as part of this
Registration Statement. Except as otherwise indicated, each exhibit is
incorporated herein by reference to the exhibit of the same number in the
Registrant's Registration Statement on Form S-1 (Registration No. 333-06229).
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C> <C>
*1 -- Form of Underwriting Agreement by and among the Registrant and the Underwriters.
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.
2.2 -- Merger Agreement, dated as of June 17, 1996, by and between the Company and Hyperion
Holdings related to the Merger.
3.1 -- Form of Restated Certificate of Incorporation of the Registrant, as amended.
3.2 -- Form of By-Laws of the Registrant.
**4.1 -- Indenture, dated as of May 15, 1993, between USAT Holdings Inc. and The Bank of New York,
as Trustee, relating to the Company's 8.05% Senior Notes due May 15, 1998.
*4.2 -- Indenture, dated as of , between the Registrant and , as
Trustee, relating to the Registrant's % Subordinated Notes due , 2004 and %
Subordinated Notes due , 2007
4.3 -- Form of Subordinated Note due , 2004 (included in the Indenture filed as
Exhibit 4.2 hereto).
4.4 -- Form of % Subordinated Notes due , 2007 (included in the Indenture filed as
Exhibit 4.2 hereto)
**5 -- Form of Opinion of Bracewell & Patterson, L.L.P. as to the validity of the securities
registered hereunder.
10.1 -- Assistance Agreement, dated December 30, 1988, among the Bank, the Registrant, Hyperion
Holdings, Hyperion Partners, and the FSLIC.
10.1a -- Settlement and Termination Agreement, dated as of December 23, 1993, among the Bank, the
Registrant, Hyperion Holdings, Hyperion Partners and the FDIC.
10.1b -- Tax Benefits Agreement, dated December 28, 1993, among the Bank, the Registrant, Hyperion
Holdings, Hyperion Partners and the FDIC.
10.2 -- Acquisition Agreement, dated December 30, 1988, between the Bank and the FSLIC.
10.3 -- Warrant Agreement, dated December 30, 1988, between the Bank and the FSLIC.
10.3a -- Amended and Restated Warrant Agreement dated December 28, 1993, between the Bank and the
FDIC.
10.4 -- Regulatory Capital Maintenance Agreement, dated December 30, 1988 among the Bank, the
Registrant, Hyperion Holdings, Hyperion Partners, and the FSLIC (terminated)
10.5 -- Federal Stock Charter of the Bank and First Amendment to charter approved on August 26,
1992.
10.6 -- Amended and Restated Federal Stock Charter of the Bank and Second Amendment approved on
October 30, 1992
10.6a -- Third Amendment to the Federal Stock Charter of the Bank approved on April 23, 1996
10.6b -- Amended and Restated Bylaws of the Bank
10.7 -- Specimen Preferred Stock, Series A, certificate, $25.00 per share stated value of the Bank
10.7a -- Certificate of Designation of Noncumulative Preferred Stock, Series A, of the Bank
10.7b -- Specimen Preferred Stock, Series B, certificate, $25.00 per share stated value, of the
Bank
10.7c -- Certificate of Designation of Noncumulative Preferred Stock, Series B, of the Bank
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)
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.
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.
II-3
<PAGE>
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.
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.
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)
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
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.)
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.)
10.11 -- Lease Agreement, dated November 20, 1990, between the Bank and Greenway Plaza, LTD.
(Leased premises at 3800 Buffalo Speedway)
10.12 -- Employment Agreement, dated March 18, 1991, between the Bank and Barry C. Burkholder
10.12a -- Amendment, dated April 10, 1996, to the Employment Agreement between the Bank and Barry C.
Burkholder
10.13 -- Letter Agreement Related to Employment, dated April 4, 1990, between the Bank and Anthony
J. Nocella
10.14 -- Letter Agreement Related to Employment, dated June 18, 1990 between the Bank and George R.
Bender
10.15 -- Letter Agreement Related to Employment, dated April 6, 1990, between the Bank and Jonathon
K. Heffron
10.16 -- Letter Agreement Related to Employment, dated May 10, 1991, between the Bank and Leslie H.
Green
10.17 -- Management Incentive Plan, dated April 20, 1992
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
10.22 -- Supplemental Executive Savings Plan of the Bank
10.23 -- Directors Supplemental Savings Plan of the Bank
10.24 -- Warrant Purchase and Exchange Agreement, dated July 23, 1996, by and among the Company,
the Bank and the Federal Deposit Insurance Corporation
10.25 -- Tax Sharing Agreement dated as of May 1, 1996, by and between the Company and the Bank.
10.26 -- Form of The Company's 1996 Stock Incentive Plan
10.27 -- Form of The Company's Director Stock Plan
10.28 -- Employment Agreement, dated August 1, 1996, between the Company and Barry C. Burkholder
10.29 -- Employment Agreement, dated August 1, 1996, between the Company and Anthony J. Nocella
10.30 -- Employment Agreement, dated August 1, 1996, between the Company and Jonathon K. Heffron
10.31 -- Employment Agreement, dated August 1, 1996, between the Company and Ronald D. Coben
10.32 -- Form of Nontransferable Stock Agreement
10.33 -- Form of Stock Option Agreement
10.34 -- Consulting Agreement
10.35 -- Recovery Agreement
10.36 -- Stock Purchase Agreement, dated January 15, 1993, between Hyperion Partners and Hyperion
Holdings
II-4
<PAGE>
*12 -- Statement of Computation of Ratios of Earnings to Fixed Charges.
21 -- Subsidiaries of the Registrant
*23.1 -- Consent of Deloitte & Touche, LLP, independent auditors
**23.2 -- Consent of Bracewell & Patterson, L.L.P. (included in Exhibit 5)
*24 -- Powers of Attorney
**25 -- Statement of Eligibility of Trustee on Form T-1 under the Trust Indenture Act of 1939
</TABLE>
- ------------
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules.
Schedules to the Consolidated Financial Statements are not required under
the related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON THE 15TH DAY OF JANUARY, 1997.
BANK UNITED CORP.
By: /s/ BARRY C. BURKHOLDER
Barry C. Burkholder
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THE DATES INDICATED BELOW.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------------ ------------------------------------ -----------------
<S> <C> <C>
(1) Principal Executive Officer:
/s/BARRY C. BURKHOLDER President and January 15, 1997
BARRY C. BURKHOLDER Chief Executive Officer
(2) Principal Financial and Accounting Officer:
/s/ANTHONY J. NOCELLA Chief Financial Officer January 15, 1997
ANTHONY J. NOCELLA
(3) Directors:
* Director January 15, 1997
LEWIS S. RANIERI
* Director January 15, 1997
SALVATORE A. RANIERI
* Director January 15, 1997
SCOTT A. SHAY
/s/BARRY C. BURKHOLDER Director January 15, 1997
BARRY C. BURKHOLDER
* Director January 15, 1997
LAWRENCE CHIMERINE, PH.D.
* Director January 15, 1997
DAVID M. GOLUSH
* Director January 15, 1997
PAUL M. HORVITZ, PH.D.
II-6
<PAGE>
SIGNATURES TITLE DATE
- ------------------------------------------------------ ------------------------------------ -----------------
* Director January 15, 1997
ALAN E. MASTER
/s/ANTHONY J. NOCELLA Director January 15, 1997
ANTHONY J. NOCELLA
* Director January 15, 1997
PATRICIA A. SLOAN
* Director January 15, 1997
KENDRICK R. WILSON III
* Director January 15, 1997
MICHAEL S. STEVENS
* /s/JONATHON K. HEFFRON
JONATHON K. HEFFRON
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report ............................................. F-2
Consolidated Statements of Financial Condition as of September 30, 1996
and 1995 ............................................................... F-3
Consolidated Statements of Operations for the Years Ended September 30,
1996, 1995, and 1994 ................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1996, 1995, and 1994 ............................... F-5
Consolidated Statements of Cash Flows for the Years Ended September 30,
1996, 1995, and 1994 ................................................... F-6
Notes to Consolidated Financial Statements ............................... F-8
All supplemental schedules are omitted as inapplicable or because the
required information is included in the Consolidated Financial Statements or
Notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Bank United Corp.:
We have audited the accompanying consolidated statements of financial
condition of Bank United Corp. and its subsidiary (collectively known as the
"Company") as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1996. 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 at
September 30, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1996 in
conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The information as of
September 30, 1994, 1993, and 1992 and for the years ended September 30, 1993
and 1992 included in notes 3, 4, 5, and 8 is presented for the purpose of
additional analysis and is not a required part of the basic consolidated
financial statements. This information is the responsibility of the Company's
management. Such information has been subjected to the auditing procedures
applied in our audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements from which such information has been derived.
As discussed in notes 1 and 6 to the consolidated financial statements,
effective October 1, 1994, the Company changed its method of accounting for
mortgage servicing rights to conform with Statement of Financial Accounting
Standards No. 122.
DELOITTE & TOUCHE LLP
Houston, Texas
October 28, 1996
F-2
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
AT SEPTEMBER 30,
----------------------------
NOTES 1996 1995
----------- ------------- -------------
ASSETS
Cash and cash equivalents............ $ 119,523 $ 112,931
Securities purchased under agreements
to resell and federal funds sold... 2 674,249 471,052
Trading account assets, at fair
value.............................. 1,149 1,081
Securities 3, 12
Held to maturity, at amortized
cost (fair value of $169
thousand in 1996 and $2.7
million in 1995)............... 168 1,902
Available for sale, at fair
value.......................... 64,376 114,111
Mortgage-backed securities 4, 9, 10
Held to maturity, at amortized
cost (fair value of $609.2
million in 1996 and $2,031
million in 1995)............... 630,048 2,051,304
Available for sale, at fair
value.......................... 1,027,860 346,959
Loans 5, 9
Held to maturity (net of the
allowance for credit losses of
$39.6 million in 1996 and $36.8
million in 1995)............... 7,227,153 7,763,676
Held for sale................... 292,335 496,564
Federal Home Loan Bank stock......... 179,643 225,952
Premises and equipment............... 40,209 37,687
Mortgage servicing rights............ 6 123,392 75,097
Intangible assets.................... 16,922 26,519
Real estate owned (net of allowance
for losses of $986 thousand in 1996
and $1.1 million in 1995).......... 29,744 23,764
Deferred tax asset................... 14 168,323 77,571
Other assets......................... 117,283 157,364
------------- -------------
TOTAL ASSETS......................... $ 10,712,377 $ 11,983,534
============= =============
LIABILITIES, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY
LIABILITIES
Deposits............................. 8 $ 5,147,945 $ 5,182,220
Federal Home Loan Bank advances...... 4, 5, 9 3,490,386 4,383,895
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 4, 10 832,286 1,172,533
Senior Notes......................... 11 115,000 115,000
Advances from borrowers for taxes and
insurance.......................... 146,634 183,968
Other liabilities.................... 263,583 264,315
------------- -------------
Total liabilities.......... 9,995,834 11,301,931
------------- -------------
COMMITMENTS AND CONTINGENCIES........ 12, 15, 17
MINORITY INTEREST
Preferred stock issued by
consolidated subsidiary............ 16 185,500 185,500
------------- -------------
STOCKHOLDERS' EQUITY................. 15, 16
Common stock......................... 316 289
Paid-in capital...................... 129,286 117,722
Retained earnings.................... 403,674 384,739
Unrealized gains (losses) on
securities and mortgage-backed
securities available for sale, net
of tax............................. 4 (2,233) (6,647)
------------- -------------
Total stockholders'
equity................... 531,043 496,103
------------- -------------
TOTAL LIABILITIES, MINORITY INTEREST,
AND
STOCKHOLDERS' EQUITY............... $ 10,712,377 $ 11,983,534
============= =============
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED SEPTEMBER
30,
-------------------------------
NOTES 1996 1995 1994
------ --------- --------- ---------
INTEREST INCOME
Short-term interest-earning assets... $ 39,302 $ 29,675 $ 19,019
Trading account assets............... 67 62 (144)
Securities........................... 3 3,917 5,893 5,007
Mortgage-backed securities........... 4 128,143 173,155 151,972
Loans................................ 5 627,940 526,528 308,804
Federal Home Loan Bank stock......... 12,943 11,446 5,558
Covered Assets and related assets.... 7 -- -- 4,490
--------- --------- ---------
Total interest income....... 812,312 746,759 494,706
--------- --------- ---------
INTEREST EXPENSE
Deposits............................. 8 272,220 264,366 209,034
Federal Home Loan Bank advances...... 9 247,093 224,767 91,060
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 10 55,112 53,220 10,574
Senior Notes......................... 11 10,353 10,407 10,177
Other................................ -- -- 79
--------- --------- ---------
Total interest expense...... 584,778 552,760 320,924
--------- --------- ---------
Net interest income......... 227,534 193,999 173,782
PROVISION FOR CREDIT LOSSES.......... 5 16,469 24,293 6,997
--------- --------- ---------
Net interest income after
provision for credit
losses.................... 211,065 169,706 166,785
--------- --------- ---------
NON-INTEREST INCOME
Net gains (losses)
Sales of single family servicing
rights and single family
warehouse loans................. 43,074 60,495 63,286
Securities and mortgage-backed
securities...................... 3, 4 4,002 26 10,404
Other loans...................... 3,189 (1,210) 163
Loan servicing fees and charges...... 44,230 43,508 31,741
Other................................ 15,541 12,162 13,295
--------- --------- ---------
Total non-interest income... 110,036 114,981 118,889
--------- --------- ---------
NON-INTEREST EXPENSE
Compensation and benefits............ 13 87,640 83,520 86,504
Occupancy............................ 17 18,415 18,713 17,196
Data processing...................... 17 16,196 16,360 15,821
Advertising and marketing............ 8,025 9,262 10,796
Amortization of intangibles.......... 20,432 21,856 18,247
SAIF deposit insurance premiums...... 15 45,690 11,428 11,329
Furniture and equipment.............. 6,121 6,428 6,810
Restructuring charges................ 18 10,681 -- --
Other................................ 40,065 27,009 32,890
--------- --------- ---------
Total non-interest
expense................... 253,265 194,576 199,593
--------- --------- ---------
Income before income taxes
and minority interest..... 67,836 90,111 86,081
INCOME TAX (BENEFIT) EXPENSE......... 14 (75,765) 37,415 (31,899)
--------- --------- ---------
INCOME BEFORE MINORITY INTEREST...... 143,601 52,696 117,980
Less minority interest:
Subsidiary preferred stock
dividends....................... 18,253 10,600 8,653
Payments in lieu of dividends.... 16 6,413 377 357
--------- --------- ---------
NET INCOME........................... $ 118,935 $ 41,719 $ 108,970
========= ========= =========
EARNINGS PER COMMON SHARE............ 16 $ 3.87 $ 1.35 $ 3.55
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
CLASS A CLASS B CLASS C
------------------- ----------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ------ --------- ------ ----------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993.................. 23,828,400 $239 -- $ -- 5,034,600 $ 50 $ 121,480
Net income................................. -- -- -- -- -- -- --
Change in unrealized gains (losses)........ -- -- -- -- -- -- --
----------- ------ --------- ------ ----------- ------ ---------
BALANCE AT SEPTEMBER 30, 1994.................. 23,828,400 239 -- -- 5,034,600 50 121,480
Net income................................. -- -- -- -- -- -- --
Cost of subsidiary's preferred stock
issuance................................. -- -- -- -- -- -- (3,758)
Change in unrealized gains (losses)........ -- -- -- -- -- -- --
----------- ------ --------- ------ ----------- ------ ---------
BALANCE AT SEPTEMBER 30, 1995.................. 23,828,400 239 -- -- 5,034,600 50 117,722
Net income................................. -- -- -- -- -- -- --
Dividend declared: common stock ($3.46 per
share)................................... -- -- -- -- -- -- --
Restricted Stock issued (Note 13).......... -- -- 318,342 3 -- -- 3,706
Conversion of Warrant (Note 16)............ -- -- 1,503,560 15 -- -- (6,099)
Redistribution of common stock (Note 16)... 2,996,840 29 2,037,760 21 (5,034,600) (50) --
Common stock offering (Note 16)............ 910,694 9 -- -- -- -- 13,957
Change in unrealized gains (losses)........ -- -- -- -- -- -- --
----------- ------ --------- ------ ----------- ------ ---------
BALANCE AT SEPTEMBER 30, 1996.................. 27,735,934 $277 3,859,662 $ 39 -- $ -- $ 129,286
=========== ====== ========= ====== =========== ====== =========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED TOTAL
RETAINED GAINS STOCKHOLDERS'
EARNINGS (LOSSES) EQUITY
--------- ----------- -------------
<S> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1993.................. $ 234,050 $ 33,384 $ 389,203
Net income................................. 108,970 -- 108,970
Change in unrealized gains (losses)........ -- (46,811) (46,811)
--------- ----------- -------------
BALANCE AT SEPTEMBER 30, 1994.................. 343,020 (13,427) 451,362
Net income................................. 41,719 -- 41,719
Cost of subsidiary's preferred stock
issuance................................. -- -- (3,758)
Change in unrealized gains (losses)........ -- 6,780 6,780
--------- ----------- -------------
BALANCE AT SEPTEMBER 30, 1995.................. 384,739 (6,647) 496,103
Net income................................. 118,935 -- 118,935
Dividend declared: common stock ($3.46 per
share)................................... (100,000) -- (100,000)
Restricted Stock issued (Note 13).......... -- -- 3,709
Conversion of Warrant (Note 16)............ -- -- (6,084)
Redistribution of common stock (Note 16)... -- -- --
Common stock offering (Note 16)............ -- -- 13,966
Change in unrealized gains (losses)........ -- 4,414 4,414
--------- ----------- -------------
BALANCE AT SEPTEMBER 30, 1996.................. $ 403,674 $ (2,233) $ 531,043
========= =========== =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income...................................................................... $ 118,935 $ 41,719 $ 108,970
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for credit losses................................................ 16,469 24,293 6,997
Deferred tax (benefit) expense............................................. (93,401) 16,615 (31,436)
Net gains on sales of assets............................................... (53,491) (72,918) (80,524)
Net depreciation, amortization, and accretion.............................. (12,095) (49,335) (7,921)
Amortization of intangibles................................................ 20,432 21,856 18,247
Federal Home Loan Bank stock dividend...................................... (12,943) (11,446) (5,558)
Purchases of trading account assets........................................ (12,955) (203) (46)
Proceeds from sales of trading account assets.............................. 12,819 143 103
Originations of loans held for sale........................................ (2,872,307) (2,275,058) (4,128,979)
Purchases of loans held for sale........................................... (143,309) (103,926) (60,900)
Proceeds from sales of loans held for sale................................. 3,321,599 2,164,407 4,838,051
Change in mortgage servicing rights........................................ (62,142) (29,251) (50,955)
Change in loans held for sale.............................................. 17,991 5,661 53,117
Change in interest receivable.............................................. 25,957 (37,778) (10,284)
Change in other assets..................................................... 19,397 (3,068) 86,496
Change in other liabilities................................................ (3,274) 89,056 (44,432)
Management Restricted Stock award.......................................... 3,709 -- --
------------- ------------- -------------
Net cash provided (used) by operating activities...................... 291,391 (219,233) 690,946
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in securities purchased under agreements to resell and federal
funds sold............................................................... (203,197) (117,342) 189,278
Purchases of securities held to maturity................................... (6,327) (2,920) (32,812)
Proceeds from maturities of securities held to maturity.................... 7,715 3,472 33,000
Purchases of mortgage-backed securities held to maturity................... (3,841) (38,515) (83,854)
Proceeds from sales of mortgage-backed securities held to maturity......... -- -- 38,294
Repayments of mortgage-backed securities held to maturity.................. 178,926 390,364 162,328
Purchases of securities available for sale................................. (16,029) -- (135,930)
Proceeds from sales of securities available for sale....................... 96,815 -- 61,482
Purchases of mortgage-backed securities available for sale................. -- (230) (735,757)
Proceeds from sales of mortgage-backed securities available for sale....... 295,702 77,626 187,189
Repayments of mortgage-backed securities available for sale................ 272,059 16,346 760,111
Change in mortgage-backed securities available for sale.................... -- -- (12,148)
Purchases of loans held to maturity........................................ (148,510) (2,658,093) (1,406,275)
Proceeds from sales of loans held to maturity.............................. 3,539 31,543 27,093
Change in loans held to maturity........................................... 509,704 (379,229) (734,276)
Change in Covered Assets................................................... -- -- 318,176
Purchases of Federal Home Loan Bank stock.................................. -- (100,190) (793)
Redemption of Federal Home Loan Bank stock................................. 59,252 18,500 --
Purchases of premises and equipment........................................ (9,394) (6,132) (10,379)
Proceeds from sales of real estate owned acquired through
foreclosure.............................................................. 42,741 34,137 31,212
Proceeds from sales of servicing rights.................................... 33,187 48,237 58,880
------------- ------------- -------------
Net cash provided (used) by investing activities...................... 1,112,342 (2,682,426) (1,285,181)
------------- ------------- -------------
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
F-6
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposits.............. $ (34,378) $ 419,738 $ (73,290)
Proceeds from Federal Home Loan
Bank advances................. 1,498,700 3,821,754 2,161,384
Repayment of Federal Home Loan
Bank advances................. (2,391,764) (2,058,200) (1,726,500)
Net change in securities sold
under agreements to repurchase
and federal funds purchased... (340,247) 619,533 243,000
Change in advances from
borrowers for taxes and
insurance..................... (37,334) 38,585 1,191
Proceeds from issuance of common
stock......................... 13,966 -- --
Cost of converting Bank common
stock Warrant................. (6,084) -- --
Proceeds from issuance of the
Bank's preferred stock........ -- 96,242 --
Payment of common stock
dividends..................... (100,000) -- --
----------- ----------- -----------
Net cash (used) provided by
financing activities..... (1,397,141) 2,937,652 605,785
----------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 6,592 35,993 11,550
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 112,931 76,938 65,388
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 119,523 $ 112,931 $ 76,938
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION AND NONCASH INVESTING
ACTIVITIES
Cash paid for interest.......... $ 606,911 $ 523,250 $ 313,092
Cash paid for income taxes...... 3,953 9,863 5,102
Cash paid in lieu of taxes...... 12,096 157 4,000
Real estate owned acquired
through foreclosure........... 70,843 49,403 44,753
Securitization of loans......... 33,167 -- 1,182,172
Transfer of loans from held to
maturity to held for sale..... 188,957 810 88,100
Transfer of loans from held for
sale to held to maturity...... 84,722 1,615 486,745
Transfer of mortgage-backed
securities from available for
sale to held to maturity...... -- -- 1,318,877
Transfer of mortgage-backed
securities from held to
maturity to available for
sale.......................... 1,244,945 -- 68,741
Change in unrealized gains
(losses) on securities and
mortgage-backed securities
available for sale............ 4,414 6,780 (46,811)
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
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") was incorporated in the State of
Delaware on December 19, 1988, and became the holding company for Bank United, a
federal savings bank (the "Bank") upon the Bank's formation on December 30,
1988. The Parent Company has no significant assets other than its equity
interest in the Bank. The Parent Company owns all of the outstanding common
stock of the Bank. The Parent Company and the Bank, are referred to on a
consolidated basis as the "Company". Substantially all of the Company's
consolidated revenues are derived from the operations of the Bank.
Prior to June 1996, the Company was a subsidiary of Hyperion Holdings Inc.,
a Delaware corporation ("Hyperion Holdings"), which in turn was a subsidiary
of Hyperion Partners L.P., a Delaware limited partnership ("Hyperion
Partners"). In June 1996, in contemplation of a public offering of the
Company's common stock, the following actions were taken (collectively, the
"Restructuring"): (i) Hyperion Holdings exchanged shares of a newly created
class of its nonvoting common stock for certain shares of its voting common
stock held by Hyperion Partners; (ii) Hyperion Partners then distributed the
Hyperion Holdings common stock owned by it to its limited and general partners
in accordance with the terms of the limited partnership agreement of Hyperion
Partners (the "Distribution"); and (iii) following the Distribution, Hyperion
Holdings was merged with and into the Company (the "Merger"). As a result of
the Merger, the common stockholders of Hyperion Holdings (i.e. the limited and
general partners of Hyperion Partners) received shares of Class A voting and
Class B nonvoting common stock of the Company. As of the date of the Merger,
Hyperion Holdings had no significant assets, liabilities, or business other than
its investment in the Company. The Merger was accounted for in a manner similar
to a pooling of interests. Due to the immaterial nature of the assets,
liabilities, and operations of Hyperion Holdings prior to the Merger, prior
period results were not restated.
The Company is a broad-based financial services provider to consumers and
businesses in Texas and other selected regional markets throughout the United
States. The Company currently operates 70 Texas-based community banking branches
serving nearly 200,000 households and businesses, nine commercial banking
offices, and a nationwide network of mortgage offices.
The accompanying consolidated financial statements include the accounts of
the Parent Company, the Bank, and the Bank's wholly-owned subsidiaries. To date,
the results of operations of the Bank's subsidiaries have not been significant
to the consolidated results of operations. All significant intercompany accounts
and balances have been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires managment to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The accounting and reporting policies conform to generally accepted
accounting principles and general practices within the thrift and mortgage
banking industries.
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. Short-term instruments with original maturities of three
months or less (measured from their acquisition date) and highly liquid
instruments readily convertible to cash are generally considered to be cash
equivalents. Cash and cash equivalents consist primarily of interest-earning and
non-interest earning deposits in other banks.
The Board of Governors of the Federal Reserve System ("Federal Reserve
Board") regulations require average cash reserve balances based on deposit
liabilities to be maintained by the Bank with the Federal Reserve
F-8
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bank. The required reserve balances were approximately $48.7 million and $63.7
million for the periods including September 30, 1996 and 1995, respectively. The
Bank was in compliance with these requirements for each of these periods.
TRADING ACCOUNT ASSETS, SECURITIES, AND MORTGAGE-BACKED 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.
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.
Securities and MBS that the Company has the positive intent and ability to
hold to maturity are classified as held to maturity and recorded at 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 and MBS held to maturity may be sold or transferred to
another portfolio.
Securities and MBS that the Company intends to hold for indefinite periods
of time are classified as available for sale and are recorded at fair value.
Unrealized holding gains or losses are excluded from earnings and reported net
of tax as a separate component of stockholders' equity until realized.
In connection with the securitization of certain loans, a portion of the
original loan basis is allocated to an excess servicing receivable for all loans
having a servicing fee rate greater than the "normal" servicing fee rate. This
receivable represents the present value of the estimated future servicing
revenue in excess of a "normal" service fee. The securitized portion of the
receivable is classified and accounted for as MBS in the Consolidated Statements
of Financial Condition. That portion of the receivable not securitized is
classified as other assets in the Consolidated Statements of Financial Condition
and is amortized to operations over the lives of the underlying mortgages. The
Company reviews this asset periodically for valuation impairment in a manner
similar to its mortgage servicing rights ("MSRs").
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 premium or
discount. 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 or MBS classified as held to maturity or
available for sale was to decline for reasons other than temporary market
conditions, the carrying value of such a security would be written down to
current fair value by a charge to operations.
Net gains or losses on sales of trading account assets, securities, and MBS
are computed on the specific identification method.
LOANS
Loans that the Company has the intent and ability to hold to maturity are
classified as held to maturity and are carried at unpaid principal balances,
adjusted for unamortized premiums, unearned discounts, the allowance for credit
losses, and net deferred loan origination fees or costs ("Book Value"). Loans
held for sale, excluding single family mortgage warehouse loans, are carried at
the lower of allocated Book Value, as applicable, or fair value on an aggregate
basis, as determined by discounting contractual cash flows (adjusted for
anticipated prepayments) and using discount rates based on secondary market
sources. Single family mortgage warehouse loans held for sale are carried at the
lower of aggregate allocated Book Value or market value, as determined by
F-9
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commitments from investors or current investor yield requirements. Any net
unrealized losses on loans held for sale are recognized in a valuation allowance
by a charge to current operations. The Book Value is allocated to loans and the
MSRs in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 122. See "-- Loan Servicing".
Interest income on loans, including impaired loans, is recognized
principally using the level-yield method. Based upon management's periodic
evaluation or at the time a loan is ninety days past due ("nonperforming"),
the related accrued interest is generally reversed by a charge to operations and
the subject loan is simultaneously placed on nonaccrual. Once a loan becomes
current and the borrower demonstrates a continuation of its 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 warehouse loans held for sale are recognized in income when the
related loans are sold. Premiums, discounts, and loan fees (net of certain
direct loan origination costs) associated with other loans for which collection
is probable and estimable are recognized in income using the level-yield method,
over the loans' remaining lives (adjusted for anticipated prepayments) or when
such loans are sold. Net discounts associated with loans for which collection
may not be probable and estimable are not accreted to income ("non-accretable
discounts"). These non-accretable discounts relate to bulk purchases of loans,
a portion of which were nonperforming and acquired at discounts from their
principal balance. Management periodically evaluates current loss estimates on
loans with non-accretable discounts to determine if the remaining non-accretable
discounts should be accreted to income.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at levels management deems
adequate to cover estimated losses on loans. The adequacy of the allowance is
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 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. Provisions for credit losses are charged to current operations when they
are determined to be both probable and estimable. Losses are charged to the
allowance for credit losses when the loss actually occurs or when a
determination is made that a loss is likely to occur. Cash recoveries are
credited to the allowance for credit losses.
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures, an amendment of SFAS No. 114,"
effective October 1, 1995. These statements address the accounting by creditors
for impairment of certain loans. They apply to all creditors and to all loans,
uncollateralized as well as collateralized, except for large groups of
small-balance homogenous loans that are collectively evaluated for impairment,
loans that are measured at fair value or at lower of cost or fair value, leases,
and debt securities. These statements apply to the Company's single family
residential construction, multi-family, commercial real estate, business credit,
and mortgage banker finance line of credit loan categories in the held to
maturity portfolio. See Note 5. These statements apply to all loans that are
restructured in a troubled debt restructuring involving a modification of terms.
Loans within the scope of these statements are considered impaired when, based
on current information and events, it is probable that all principal and
interest amounts due will not be collected in accordance with the contractual
terms of the loans.
The adoption of SFAS No. 114 did not result in additional provisions for
credit losses. SFAS No. 114 requires that impaired loans that are within the
scope of this statement be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. Any excess of the Company's
recorded investment in the loans (unpaid principal balance, adjusted for
unamortized premium or discount, net deferred loan origination fees or costs and
accrued interest receivable) over the measured value of the loans is provided
for in the allowance for credit losses.
F-10
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LOAN SERVICING
In September 1995, the Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights, an amendment of Financial Accounting Standards Board
Statement No. 65," effective October 1, 1994. This statement requires mortgage
loan servicing rights to be recognized as separate assets from the related
loans, regardless of how those servicing rights are acquired. Upon origination
of a mortgage loan, the Book Value of the mortgage loan is allocated to the MSR
and to the loan (without the MSR) based on its estimated relative fair value,
provided there is a plan to sell or securitize the related loan. The allocation
of the Book Value of the loan between the MSR and the loan basis results in
increased gains on the sales of the loan, reflecting the value of the servicing
rights. Prior to the implementation of SFAS No. 122, the value of the originated
mortgage servicing rights ("OMSRs") was not recognized until the servicing
rights were sold.
The statement further requires that MSRs, both OMSRs and purchased mortgage
servicing rights ("PMSRs"), periodically be evaluated for impairment based on
the fair value of those rights. The fair value of MSRs is determined by
discounting the present value of estimated expected future cash flows using a
discount rate commensurate with the risks involved. This method of valuation
incorporates assumptions that market participants would use in their estimates
of 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). The amount of impairment is the amount by which
the MSRs, net of accumulated amortization, exceed their fair value. 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 collateralized by single family properties. The amortization expense
is reflected in amortization of intangibles in the Consolidated Statements of
Operations.
An allowance for other losses associated with the mortgage servicing
portfolio and certain receivables, advances, and other assets associated with
that portfolio is established for expected costs that are incurred as a result
of the Company's responsibility as servicer of Federal Housing Administration
("FHA") insured and Department of Veteran Affairs ("VA") guaranteed loans
and is determined based on a number of variables. The allowance is netted
against the related assets in the Consolidated Statements of Financial Condition
and the related provision is included in non-interest expense in the
Consolidated Statements of Operations.
SALES OF SINGLE FAMILY LOANS
Loans are sold periodically to institutional and private investors. Gains
or losses on loan sales are recognized at the time of sale, determined using the
specific identification method, and reflect the extent that net sales proceeds
differ from the allocated Book Value of the loans. Single family mortgage
warehouse loans are generally packaged into pools and sold as MBS. Accordingly,
gains or losses on loan sales include both gains from sales of MBS created from
single family mortgage warehouse loans and whole loan sales. Certain of the
loans and servicing rights are sold with general representations and warranties
under contracts for sales of loans and servicing rights. Repurchases of the
loans and servicing rights may be required when a loan fails to meet certain
conditions specified in the contract pursuant to which the loans and servicing
rights were sold and that failure was caused by a matter covered by the general
representations and warranties. An accrual is determined for the estimated
future costs of such obligations and is maintained at a level management
believes is adequate to cover estimated losses. This accrual is included in
other liabilities on the Consolidated Statements of Financial Condition and the
related expense is reflected in non-interest expense in the Consolidated
Statements of Operations.
FEDERAL HOME LOAN BANK STOCK
As a member of the Federal Home Loan Bank ("FHLB") System, the Bank is
required to purchase and maintain stock in the FHLB of Dallas in an amount equal
to the greater of 1% of the aggregate unpaid balance of
F-11
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loans and securities secured by single family and multi-family properties, .3%
of total assets, or 5% of total FHLB advances. FHLB stock is redeemable at par
value at the discretion of the FHLB of Dallas and is used to collateralize FHLB
advances.
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 two 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 identifiable and unidentifiable intangibles. The
identifiable portion relates to core deposit premiums paid and the value of
mortgage origination networks acquired. The core deposit premiums are amortized
using an accelerated method over the estimated lives of the deposit
relationships acquired. The premiums paid for mortgage origination networks are
amortized using the straight-line method over 5 years. The unidentifiable
intangible, or goodwill, resulting from thrift related acquisitions is amortized
at a constant rate applied to the carrying amount of the long-term
interest-earning assets acquired that are expected to be outstanding at the
beginning of each subsequent period based on their terms. The original estimated
lives of these long-term interest-earning assets ranged from one to 26 years.
The identifiable and unidentifiable intangibles are evaluated on an ongoing
basis to determine whether events and circumstances have developed that warrant
revision of the estimated lives of the related assets or their write-off. Debt
issuance costs are being amortized over the life of the notes using the
straight-line method.
REAL ESTATE OWNED ("REO")
At the time of foreclosure, REO is recorded at the lower of the outstanding
loan amount (including accrued interest, if any) or fair value (less estimated
costs to sell). The resulting loss, if any, is charged to the allowance for
credit losses. Subsequent to foreclosure, REO is carried at the lower of its new
cost basis or fair value, with any further declines in fair value charged to
current operations. Revenues, expenses, gains or losses on sales, and increases
or decreases in the allowance for losses are charged to operations as incurred.
Net gains on sales of certain REO properties, primarily single family
residences, are deferred (a) when such properties are acquired through the
foreclosure of loans that are part of discounted bulk purchases of loans and (b)
uncertainty exists as to the total gains or losses that would be realized from
foreclosures associated with the bulk loan purchase. Upon obtaining sufficient
loss history or seasoning of the purchases, the deferred net gains are
recognized.
OTHER FINANCIAL INSTRUMENTS
The Company enters into traditional financial instruments such as interest
rate exchange agreements ("swaps"), interest rate caps and floors, financial
options and futures contracts, and forward delivery contracts in the normal
course of business in an effort to reduce its exposure to changes in interest
rates. Fees incurred to enter into these financial contracts are amortized over
the lives of the contracts as a component of the income or expense on the asset
or liability hedged. Gains or losses on early termination of such contracts, if
any, are amortized over the remaining terms of the hedged items. The Company
does not utilize instruments such as leveraged derivatives or structured notes.
INTEREST RATE EXCHANGE AGREEMENTS, CAPS, FLOORS, AND OPTIONS. Amounts
receivable and payable are accrued and offset against interest income or expense
on the hedged items.
FINANCIAL FUTURES CONTRACTS. Changes in the market value of futures
contracts are deferred and recognized as interest income or expense over the
remaining terms of the hedged items or recognized at the time the hedged items
are sold.
F-12
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FORWARD DELIVERY CONTRACTS. Any gains or losses resulting from entering
into forward delivery contracts are recognized when the hedged items are sold as
net gains (losses) on sales of single family warehouse loans. Fees paid for
commitments to deliver loans are charged to other non-interest expense if the
likelihood that the commitment will be exercised is remote or the fees are
offset against the related net gains as the commitment is filled.
OTHER OFF-BALANCE-SHEET INSTRUMENTS. The Company has entered into other
off-balance-sheet financial instruments consisting of commitments to extend
credit. Such financial instruments are recorded in the financial statements when
they are funded.
FEDERAL INCOME TAXES
The Parent Company and the Bank are members of a consolidated group of
corporations as defined by the Internal Revenue Code of 1986, as amended (the
"Code") and accordingly participate in the filing of a consolidated tax
return. For financial reporting purposes, however, the Parent Company and the
Bank each compute their 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 attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. A deferred tax asset has been recognized for certain net operating losses
("NOLs") and credit carryforwards that will be utilized against future taxable
income. The valuation allowance reduces the net deferred tax asset to an amount
management believes will more likely than not be realized.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" was issued. This statement
establishes accounting standards for recognizing and measuring impairment of
long-lived assets (and related goodwill) to be held and used and for such assets
held for disposal. The statement is effective for financial statements with
fiscal years beginning after December 15, 1995. Implementation of this
pronouncement should have no material effect on the Consolidated Financial
Statements.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. This statement defines a fair value based method of accounting for
an employee stock option or similar equity instrument and encourages adoption of
that method for all employee stock compensation plans. However, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value based method currently being followed and make pro forma
disclosures of net income and earnings per share under the fair value based
method of accounting. This statement is effective for financial statements with
fiscal years beginning after December 15, 1995. Management is currently
evaluating the proposed alternatives under this statement. Existing stock-based
employee compensation plans have been accounted for in accordance with
Accounting Principals Board Opinion No. 25 "Accounting for Stock Issued to
Employees."
In June 1996, SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" was issued. This statement
requires that, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement provides consistent
standards of distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. This statement is effective for transfers
and servicing of financial assets and extinguishment of liabilities occurring
after December 31, 1996, and is to be applied prospectively. Earlier or
retroactive application is not permitted. Implementation of this pronouncement
should have no material effect on the Consolidated Financial Statements.
F-13
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER COMMON SHARE
Earnings per common share is calculated by dividing net income (adjusted
for earnings on the common stock equivalents attributable to the Bank's Warrant)
by the weighted average number of shares of common shares outstanding. Common
stock equivalents on the Bank's Warrant were computed using the treasury stock
method. Average shares and per common share results have been restated for all
periods presented to reflect an 1,800 to one stock conversion in June 1996.
RECLASSIFICATIONS
Certain amounts within the accompanying Consolidated Financial Statements
and the related Notes as of September 30, 1995, 1994, 1993, and 1992 have been
reclassified to conform to the current presentation. Such reclassifications had
no effect on previously presented net income or retained earnings.
2. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND
FEDERAL FUNDS SOLD
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
REPURCHASE AGREEMENTS
Balance outstanding at
period-end.................... $ 649,249 $ 428,052 $ 248,710
Fair value of collateral at
period-end.................... 693,306 449,152 255,210
Maximum outstanding at any
month-end..................... 785,178 602,274 768,200
Daily average balance........... 608,102 420,355 422,745
Average interest rate........... 5.83% 6.28% 4.04%
FEDERAL FUNDS SOLD
Balance outstanding at
period-end.................... $ 25,000 $ 43,000 $ 110,000
Maximum outstanding at any
month-end..................... 110,000 75,000 110,000
Daily average balance........... 50,418 37,493 16,948
Average interest rate........... 5.36% 5.68% 4.01%
The repurchase agreements outstanding at September 30, 1996 were
collateralized by single family, multi-family and commercial real estate loans,
and MBS. The loans and MBS underlying the repurchase agreements are held by the
counterparty in safekeeping for the account of the Company or by a third party
custodian for the benefit of the Company. All of the investments in repurchase
agreements and federal funds sold at September 30, 1996 matured on or before
October 21, 1996. The repurchase agreements provide for the same loans and MBS
to be resold at maturity. At September 30, 1996, the following concentrations of
repurchase agreements and federal funds sold outstanding with individual
counterparties exceeded ten percent of stockholders' equity:
CARRYING VALUE
--------------
(IN THOUSANDS)
Salomon Brothers Holding Company
Inc. .............................. $107,000
Paine Webber Real Estate Securities
Inc................................ 107,000
Bear Stearns and Company, Inc........ 106,547
Donaldson, Lufkin, and Jenrette
Mortgage Capital................... 95,524
Lehman Brothers...................... 77,000
--------------
$493,071
==============
F-14
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SECURITIES
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
HELD TO MATURITY
Federal agency.................. $ 168 $ 1 $-- $ 169 $ 168
========== ========== ==========
AVAILABLE FOR SALE
Federal agency.................. 12,082 $-- $ 40 12,042
U.S. Treasury notes............. 52,544 -- 210 52,334
---------- ---------- ---------- ----------
Available for sale......... 64,626 $-- $ 250 64,376 $ 64,376
---------- ========== ========== ---------- ==========
Total securities........... $ 64,794 $ 64,545
========== ==========
1995
HELD TO MATURITY
Federal agency.................. $ 1,902 $ 799 $ 1 $ 2,700 $ 1,902
========== ========== ==========
AVAILABLE FOR SALE
U.S. Treasury notes............. 114,924 $-- $ 813 114,111 $ 114,111
---------- ========== ========== ---------- ==========
Total securities........... $ 116,826 $ 116,811
========== ==========
1994
HELD TO MATURITY
Federal agency.................. $ 1,894 $ 541 $ 76 $ 2,359
U.S. Treasury notes............. 464 -- -- 464
---------- ---------- ---------- ----------
Held to maturity........... 2,358 $ 541 $ 76 2,823 $ 2,358
---------- ========== ========== ---------- ==========
AVAILABLE FOR SALE
U.S. Treasury notes............. 114,833 $-- $3,076 111,757 $ 111,757
---------- ========== ========== ---------- ==========
Total securities........... $ 117,191 $ 114,580
========== ==========
</TABLE>
During fiscal 1996, there were $96.5 million of available for sale
securities sold with proceeds of $96.8 million and a net gain of $267,000.
During fiscal 1994, there were $62.7 million of available for sale securities
sold with proceeds of $61.5 million and a gross loss of $1.2 million. There were
no sales of securities during fiscal 1995. At September 30, 1996, securities
with carrying values totalling $1.0 million and fair values totalling $1.0
million, were pledged toward margin requirements for interest rate swap
agreements.
Securities outstanding at September 30, 1996 mature as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less......................... $ -- $ -- $ 52,544 $ 52,334
Due from one to five years...................... 168 169 -- --
Due from five to ten years...................... -- -- 12,082 12,042
---------- --------- ---------- ---------
$168 $ 169 $ 64,626 $ 64,376
========== ========= ========== =========
</TABLE>
F-15
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
------------ ---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
HELD TO MATURITY
Agency
CMOs -- fixed-rate............ $ 1,548 $ 5 $ -- $ 1,553
Non-agency
Fixed-rate.................... 7,042 1,753 126 8,669
Adjustable-rate............... 521,280 401 17,634 504,047
CMOs -- fixed-rate............ 99,966 -- 5,277 94,689
Other........................... 212 55 -- 267
------------ ---------- ---------- ------------
Held to maturity........... 630,048 $2,214 $ 23,037 609,225 $ 630,048
------------ ========== ========== ------------ ============
AVAILABLE FOR SALE
Agency
Adjustable-rate............... 326,338 $1,860 $ 13 328,185
CMOs -- fixed-rate............ 1,818 -- 1 1,817
CMOs -- adjustable-rate....... 224,081 1,414 192 225,303
Non-agency
Fixed-rate.................... 61,893 2,253 -- 64,146
Adjustable-rate............... 373,876 1,119 1,702 373,293
CMOs -- adjustable-rate....... 34,017 -- 862 33,155
Other........................... 1,961 -- -- 1,961
------------ ---------- ---------- ------------
Available for sale......... 1,023,984 $6,646 $ 2,770 1,027,860 $ 1,027,860
------------ ========== ========== ------------ ============
Total mortgage-backed
securities............... $ 1,654,032 $ 1,637,085
============ ============
</TABLE>
F-16
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
------------ ---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1995
HELD TO MATURITY
Agency
Fixed-rate.................... $ 4,259 $ 167 $ 77 $ 4,349
Adjustable-rate............... 489,412 5,212 2,711 491,913
CMOs -- fixed-rate............ 57,935 96 1,623 56,408
Non-agency
Fixed-rate.................... 126,562 4,489 318 130,733
Adjustable-rate............... 1,130,102 4,343 21,256 1,113,189
CMOs -- fixed-rate............ 239,487 173 8,643 231,017
Other........................... 3,547 56 -- 3,603
------------ ---------- ---------- ------------
Held to maturity........... 2,051,304 $ 14,536 $ 34,628 2,031,212 $ 2,051,304
------------ ========== ========== ------------ ============
AVAILABLE FOR SALE
Agency
CMOs -- adjustable-rate....... 250,208 $ 1,132 $ 217 251,123
Non-agency
Fixed-rate.................... 22,060 627 -- 22,687
CMOs -- fixed-rate............ 36,895 -- 640 36,255
CMOs -- adjustable-rate....... 37,580 7 693 36,894
------------ ---------- ---------- ------------
Available for sale......... 346,743 $ 1,766 $ 1,550 346,959 $ 346,959
------------ ========== ========== ------------ ============
Total mortgage-backed
securities............... $ 2,398,047 $ 2,378,171
============ ============
1994
HELD TO MATURITY
Agency
Fixed-rate.................... $ 5,313 $ 20 $ 15 $ 5,318
Adjustable-rate............... 563,629 830 15,290 549,169
CMOs -- fixed-rate............ 81,395 -- 3,967 77,428
Non-agency
Fixed-rate.................... 184,929 603 2,057 183,475
Adjustable-rate............... 1,288,271 226 23,048 1,265,449
CMOs -- fixed-rate............ 267,658 -- 11,601 256,057
Other........................... 3,783 113 -- 3,896
------------ ---------- ---------- ------------
Held to maturity........... 2,394,978 $ 1,792 $ 55,978 2,340,792 $ 2,394,978
------------ ========== ========== ------------ ============
AVAILABLE FOR SALE
Agency
Fixed-rate.................... 85,492 $ 1,688 $ 1,552 85,628
CMOs -- adjustable-rate....... 254,933 -- 2,727 252,206
Non-agency
Fixed-rate.................... 22,141 -- 1,198 20,943
CMOs -- fixed-rate............ 41,825 -- 2,634 39,191
CMOs -- adjustable-rate....... 37,733 -- 1,776 35,957
------------ ---------- ---------- ------------
Available for sale......... 442,124 $ 1,688 $ 9,887 433,925 $ 433,925
------------ ========== ========== ------------ ============
Total mortgage-backed
securities............... $ 2,837,102 $ 2,774,717
============ ============
</TABLE>
F-17
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1995, the Financial Accounting Standards Board ("FASB")
issued, "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." This implementation guide provided
the Company the opportunity to reassess the appropriateness of the
classifications of its securities and provided that reclassifications of
securities from the held to maturity category resulting from this one-time
reassessment would not call into question the intent to hold other securities to
maturity in the future. During the first quarter of fiscal 1996, the Company
reassessed its securities portfolios and reclassified $1.2 billion in MBS from
the held to maturity portfolio to the available for sale portfolio. An
unrealized gain of $4.2 million before tax, or $2.6 million after tax, was
recorded in stockholders' equity as a result of this transfer.
During fiscal 1994, $68.7 million of fixed-rate collateralized mortgage
obligations ("CMOs") were transferred at fair value from the held to maturity
portfolio to the available for sale portfolio. The related unrealized gain
($66,000 at the time of transfer, before taxes) was included as a component of
stockholders' equity. This transfer was made in response to the classification
of securities as high-risk under the FASB's Emerging Issues Task Force
guidelines in effect at that time. Subsequent to the transfer, these securities
were sold.
During fiscal 1994, $38.3 million of non-agency MBS that had been included
in the held to maturity portfolio were sold. This sale was made due to a
deterioration of the issuer's creditworthiness and resulted in a gross gain of
$42,000.
MBS of approximately $1.3 billion were transferred from the available for
sale portfolio to the held to maturity portfolio at fair value during fiscal
1994. The gross unrealized loss of $10.8 million on these securities at the time
of transfer is included as a component of stockholders' equity and is being
amortized over the remaining lives of the securities.
At September 30, 1996, MBS with carrying values totalling $1,105.7 million
and fair values totalling $1,095.2 million were used to collateralize FHLB
advances and securities sold under agreements to repurchase ("reverse
repurchase agreements").
CHANGES IN UNREALIZED GAINS (LOSSES)
<TABLE>
<CAPTION>
MORTGAGE-BACKED
SECURITIES
----------------------- SECURITIES
AVAILABLE HELD TO AVAILABLE TAX
FOR SALE MATURITY FOR SALE EFFECT TOTAL
--------- --------- ----------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994........ $ (8,199) $ (10,202) $(3,076) $ 8,050 $(13,427)
Market value changes and the
effect of prepayments......... 8,431 -- 2,263 (4,005) 6,689
(Gains) losses realized due to
sales......................... (16) -- -- 6 (10)
Amortization of held to
maturity...................... -- 162 -- (61) 101
--------- --------- ----------- ------- --------
Balance at September 30, 1995........ 216 (10,040) (813) 3,990 (6,647)
--------- --------- ----------- ------- --------
Market value changes and the
effect of prepayments......... 3,332 -- 830 (1,561) 2,601
(Gains) losses realized due to
sales......................... (2,712) -- (267) 1,117 (1,862)
Transfer from held to
maturity...................... 3,040 1,114 -- (1,558) 2,596
Amortization of held to
maturity...................... -- 1,727 -- (648) 1,079
--------- --------- ----------- ------- --------
Balance at September 30, 1996........ $ 3,876 $ (7,199) $ (250) $ 1,340 $ (2,233)
========= ========= =========== ======= ========
</TABLE>
F-18
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In fiscal 1994, the Banking Segment securitized $1.2 billion of single
family loans into MBS. There were no securitizations of single family loans
during fiscal 1996 and 1995. In fiscal 1996, the Banking Segment securitized
business credit loans into securities totalling $30.5 million. There were no
business credit securitizations in fiscal 1995 and 1994. The activity in the
excess servicing receivable generated as a result of these securitizations was
as follows:
EXCESS SERVICING RECEIVABLE
FOR THE YEAR ENDED SEPTEMBER
30,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Balance at beginning of period....... $ 11,116 $ 12,182 $ 15,023
Additions....................... 2,645 -- 2,044
Amortization.................... (1,028) (1,066) (4,885)
Allowance for losses............ (5) -- --
--------- --------- ---------
Balance at end of period............. $ 12,728 $ 11,116 $ 12,182
========= ========= =========
Approximately $3.4 million, $4.0 million, and $4.3 million of the excess
servicing receivable balance at September 30, 1996, 1995, and 1994,
respectively, represented the securitized portion of the receivable, which was
included in the MBS portfolio. The remaining balance was included in other
assets.
The following table provides information related to the sales of MBS
available for sale.
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
---------- --------- ----------
(IN THOUSANDS)
Proceeds from sales.................. $ 295,702 $ 77,626 $ 186,190
Gross gains on sales................. 3,529 217 16,300
Gross losses on sales................ 817 201 4,812
F-19
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LOANS
The loan portfolio, less the non-accretable unearned discounts and the
undisbursed portion of loans in process, was as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
Single family................... $ 6,152,504 $ 7,061,088 $ 4,203,614 $ 2,847,602 $ 2,302,073
Single family residential
construction.................. 242,525 115,436 57,786 35,904 31,920
Consumer........................ 173,518 123,096 108,179 57,902 21,732
Multi-family.................... 479,833 356,587 256,362 94,120 50,741
Multi-family construction....... 31,355 35,430 20,437 17,935 --
Commercial real estate.......... 40,839 31,006 61,919 49,510 58,521
Business credit................. 22,798 6,495 -- -- --
Mortgage banker finance line of
credit........................ 139,872 109,339 147,754 385,548 --
------------ ------------ ------------ ------------ ------------
7,283,244 7,838,477 4,856,051 3,488,521 2,464,987
Allowance for credit losses..... (39,633) (36,763) (23,378) (27,970) (25,529)
Accretable unearned discounts... (12,846) (34,784) (50,384) (25,486) (53,174)
Net deferred loan origination
fees.......................... (3,612) (3,254) (1,961) (625) (402)
------------ ------------ ------------ ------------ ------------
Held to maturity........... 7,227,153 7,763,676 4,780,328 3,434,440 2,385,882
------------ ------------ ------------ ------------ ------------
HELD FOR SALE
Single family mortgage
warehouse..................... 260,745 411,287 252,153 899,602 1,016,854
Single family................... -- -- -- 528,579 783,002
Multi-family.................... -- 87,781 12,535 -- --
Business credit................. 32,790 825 -- -- --
------------ ------------ ------------ ------------ ------------
293,535 499,893 264,688 1,428,181 1,799,856
Allowance for credit losses..... (27) (38) (76) (1,894) (2,685)
Unrealized losses............... -- (1,142) -- -- --
Accretable unearned discounts... (2,461) (3,676) (266) (2,437) (85,115)
Net deferred loan origination
costs......................... 1,288 1,527 1,500 4,089 3,778
------------ ------------ ------------ ------------ ------------
Held for sale.............. 292,335 496,564 265,846 1,427,939 1,715,834
------------ ------------ ------------ ------------ ------------
Total loans................ $ 7,519,488 $ 8,260,240 $ 5,046,174 $ 4,862,379 $ 4,101,716
============ ============ ============ ============ ============
SUPPLEMENTAL INFORMATION
Non-accretable unearned
discounts..................... $ (7,075) $ (15,423) $ (31,917) $ (42,975) $ (41,060)
Undisbursed portion of loans in
process....................... (262,081) (179,737) (136,797) (39,162) (41,534)
</TABLE>
F-20
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the geographic distribution of loans by
states with concentrations of 4% of loans or greater at September 30, 1996. The
geographic data was based on gross loan principal and excludes non-accretable
unearned discounts.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
---------------------------------------------------------------------------------------------
SINGLE SINGLE SINGLE
FAMILY FAMILY COMMERCIAL FAMILY TOTAL NON-REAL
AND RESIDENTIAL MULTI- REAL MORTGAGE REAL ESTATE ESTATE
STATE CONSUMER CONSTRUCTION FAMILY ESTATE WAREHOUSE LOANS LOANS
- ------------------------------------- ------------- ------------- -------- ---------- ---------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
California........................... 3$3,383,554 $ -- $ 21,177 $ -- $ -- $3,404,731 $ 66
Texas................................ 851,832 124,941 242,554 26,132 -- 1,245,459 119,999
Florida.............................. 393,402 28,440 12,522 1,974 -- 436,338 89
Other................................ 1,608,008 89,144 236,341 14,276 260,745 2,208,514 168,658
------------- ------------- -------- ---------- ---------- ------------ ---------
Total.............................. $6,236,796 $ 242,525 $512,594 $ 42,382 $260,745 $7,295,042 $288,812
============= ============= ======== ========== ========== ============ =========
% of Total........................... 82.24% 3.20% 6.76% 0.55% 3.44% 96.19% 3.81%
============= ============= ======== ========== ========== ============ =========
</TABLE>
AT SEPTEMBER 30, 1996
---------------------
% OF
STATE TOTAL TOTAL
- ------------------------------------- --------- ------
California........................... $3,404,797 44.90%
Texas................................ 1,365,458 18.00
Florida.............................. 436,427 5.75
Other................................ 2,377,172 31.35
--------- ------
Total.............................. $7,583,854 100.00%
========= ======
% of Total........................... 100.00%
=========
Contractual maturities of the loans held to maturity portfolio as of
September 30, 1996, were as follows:
<TABLE>
<CAPTION>
PRINCIPAL PAYMENTS CONTRACTUALLY DUE IN YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
2000- 2002- 2007- 2012 AND
1997 1998 1999 2001 2006 2011 THEREAFTER TOTAL
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Single family........................ $ 94,810 $ 102,314 $ 110,413 $ 247,738 $ 812,708 $1,189,495 $3,595,026 $6,152,504
Single family residential
construction....................... 242,525 -- -- -- -- -- -- 242,525
Consumer............................. 86,119 11,175 12,353 28,747 35,124 -- -- 173,518
Multi-family......................... 92,631 100,890 84,795 28,811 172,706 -- -- 479,833
Multi-family construction............ 13,134 13,173 1,763 3,285 -- -- -- 31,355
Commercial real estate............... 1,576 1,708 1,853 3,156 20,096 7,367 5,083 40,839
Business credit...................... 4,786 5,284 5,833 6,736 159 -- -- 22,798
Mortgage banker finance line of
credit............................. 137,186 -- -- 2,686 -- -- -- 139,872
--------- --------- --------- --------- --------- --------- --------- ---------
Total............................ $ 672,767 $ 234,544 $ 217,010 $ 321,159 $1,040,793 $1,196,862 $3,600,109 $7,283,244
========= ========= ========= ========= ========= ========= ========= =========
TYPE OF INTEREST
Fixed-rate loans..................... $ 47,176 $ 51,297 $ 55,790 $ 124,938 $ 411,665 $ 297,328 $ 18,025 $1,006,219
Adjustable-rate loans................ 625,591 183,247 161,220 196,221 629,128 899,534 3,582,084 6,277,025
--------- --------- --------- --------- --------- --------- --------- ---------
Total............................ $ 672,767 $ 234,544 $ 217,010 $ 321,159 $1,040,793 $1,196,862 $3,600,109 $7,283,244
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
The performing single family loans are pledged, under a blanket lien, as
collateral securing advances from the FHLB at September 30, 1996.
F-21
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPAL BALANCE OF NONACCRUAL LOANS
AT SEPTEMBER 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
NONACCRUAL LOANS
Single family................... $ 92,187 $ 83,954 $ 85,722
Single family residential
construction.................. -- 505 --
Consumer........................ 1,039 563 506
Multi-family.................... 144 213 3,802
Commercial real estate and
business credit............... 350 -- 2,342
---------- ---------- ----------
93,720 85,235 92,372
Discounts....................... (4,077) (9,727) (16,053)
---------- ---------- ----------
Net nonaccrual loans............ $ 89,643 $ 75,508 $ 76,319
========== ========== ==========
ALLOWANCE FOR CREDIT LOSSES TO NET
NONACCRUAL LOANS
Single family................... 32.46% 39.74% 22.70%
Total........................... 44.24 48.74 30.73
At September 30, 1994, nonaccrual loans above included $5.7 million of
single family loans that were ninety days delinquent, subject to government
guaranty, and upon which interest continued to accrue. There were no such loans
at September 30, 1996 and 1995.
If the nonaccrual loans as of September 30, 1996 had been performing in
accordance with their original terms throughout fiscal 1996, interest income
recognized would have been $8.3 million. The actual interest income recognized
on these loans for fiscal 1996 was $3.4 million. No commitments exist to lend
additional funds to borrowers whose loans were on nonaccrual status at September
30, 1996.
At September 30, 1996, the recorded investment in impaired loans pursuant
to SFAS No. 114 totalled $3.9 million and the average outstanding balance for
fiscal 1996 was $4.4 million. No allowance for credit losses was required on
these loans because the measured values of the loans exceeded the recorded
investments in the loans. Interest income of $393,000 was recognized on impaired
loans during fiscal 1996, of which $355,000 was collected in cash.
F-22
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
LOANS HELD TO MATURITY LOANS
--------------------------------------------------------------------------------- HELD FOR
COMMERCIAL SALE
REAL MORTGAGE ---------
SINGLE ESTATE BANKER SINGLE
FAMILY MULTI- AND FINANCE FAMILY
SINGLE RESIDENTIAL MULTI- FAMILY BUSINESS LINE OF MORTGAGE
FAMILY CONSTRUCTION CONSUMER FAMILY CONSTRUCTION CREDIT CREDIT WAREHOUSE
------- ------------ -------- ------ ------------ ---------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1991................. $ 8,956 $186 $ 81 $ 144 $-- $ 552 $-- $ 229
Provision........................ 14,156 135 39 75 -- 6,261 -- 467
Charge-offs...................... (2,835) -- (76 ) -- -- -- -- (118)
Recoveries....................... 8 -- -- -- -- -- -- --
Other............................ (6,817) -- 100 -- -- 4,564 -- --
------- ------------ -------- ------ ------------ ---------- -------- ---------
Balance at
September 30, 1992................. 13,468 321 144 219 -- 11,377 -- 578
Provision........................ 1,824 56 264 1,178 107 (25) 944 (265)
Charge-offs...................... (2,167) (71) (72 ) -- -- -- -- (148)
Recoveries....................... 6 -- 19 -- -- -- -- --
Other............................ 378 -- -- (31 ) 1 30 -- --
------- ------------ -------- ------ ------------ ---------- -------- ---------
Balance at
September 30, 1993................. 13,509 306 355 1,366 108 11,382 944 165
Provision........................ 2,369 93 2,794 1,187 28 875 (260) (89)
Charge-offs...................... (1,722) -- (1,365 ) (233 ) -- (10,145) -- --
Recoveries....................... 20 -- 38 -- -- -- -- --
Other............................ 1,729 -- -- 9 (9) -- -- --
------- ------------ -------- ------ ------------ ---------- -------- ---------
Balance at
September 30, 1994................. 15,905 399 1,822 2,329 127 2,112 684 76
Provision........................ 18,493 (38) 4,178 524 72 1,374 (274) (36)
Charge-offs...................... (4,840) -- (2,847 ) -- -- (3,389) -- (2)
Recoveries....................... 36 -- 94 2 -- -- -- --
------- ------------ -------- ------ ------------ ---------- -------- ---------
Balance at
September 30, 1995................. 29,594 361 3,247 2,855 199 97 410 38
Provision........................ 6,771 332 7,823 1,263 33 256 2 (11)
Charge-offs...................... (7,751) -- (5,995 ) -- -- (39) -- --
Recoveries....................... 31 -- 144 -- -- -- -- --
------- ------------ -------- ------ ------------ ---------- -------- ---------
Balance at
September 30, 1996................. $28,645 $693 $ 5,219 $4,118 $ 232 $ 314 $ 412 $ 27
======= ============ ======== ====== ============ ========== ======== =========
</TABLE>
SINGLE
FAMILY TOTAL
------- --------
Balance at
September 30, 1991................. $ -- $ 10,148
Provision........................ -- 21,133
Charge-offs...................... -- (3,029)
Recoveries....................... -- 8
Other............................ 2,107 (46)
------- --------
Balance at
September 30, 1992................. 2,107 28,214
Provision........................ -- 4,083
Charge-offs...................... -- (2,458)
Recoveries....................... -- 25
Other............................ (378) --
------- --------
Balance at
September 30, 1993................. 1,729 29,864
Provision........................ -- 6,997
Charge-offs...................... -- (13,465)
Recoveries....................... -- 58
Other............................ (1,729) --
------- --------
Balance at
September 30, 1994................. -- 23,454
Provision........................ -- 24,293
Charge-offs...................... -- (11,078)
Recoveries....................... -- 132
------- --------
Balance at
September 30, 1995................. -- 36,801
Provision........................ -- 16,469
Charge-offs...................... -- (13,785)
Recoveries....................... -- 175
------- --------
Balance at
September 30, 1996................. $ -- $ 39,660
======= ========
F-23
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LOAN SERVICING
SINGLE FAMILY SERVICING PORTFOLIO
PRINCIPAL BALANCES
AT SEPTEMBER 30,
----------------------------
1996 1995
------------- -------------
(IN THOUSANDS)
OWNED LOANS.......................... $ 6,694,634 $ 7,602,869
Less: Loans serviced by
others........................ 2,700,049 3,476,733
------------- -------------
Total owned loans serviced
by Company............... 3,994,585 4,126,136
------------- -------------
LOANS SERVICED FOR OTHERS
Purchased servicing rights...... 4,841,534 4,652,081
Loans originated and sold with
servicing retained............ 3,008,615 1,186,951
Servicing sales -- not yet
transferred from Company...... 464,053 1,045,839
Other........................... 349,389 276,457
------------- -------------
Total loans serviced for
others................... 8,663,591 7,161,328
MORTGAGE-BACKED SECURITIES
SECURITIZED BY BANKING SEGMENT..... 831,197 1,360,443
------------- -------------
Total servicing
portfolio................ $ 13,489,373 $ 12,647,907
============= =============
The table above includes single family, single family residential
construction, and single family mortgage warehouse loans. In addition to the
single family servicing portfolio, there were $283 million and $177 million of
multi-family loans serviced for others at September 30, 1996 and 1995,
respectively.
FAIR VALUE OF SINGLE FAMILY SERVICING PORTFOLIO
AT SEPTEMBER 30,
----------------------------
1996 1995
------------- -------------
(IN THOUSANDS)
PRINCIPAL
Total loans serviced for
others........................ $ 8,663,591 $ 7,161,328
Mortgage-backed securities
securitized by Banking
Segment....................... 831,197 1,360,443
Servicing sales -- not yet
transferred from Company...... (464,053) (1,045,839)
Single family mortgage warehouse
loans subject to SFAS No.
122........................... 260,745 411,287
------------- -------------
Total single family
servicing portfolio, as
adjusted................. $ 9,291,480 $ 7,887,219
============= =============
FAIR VALUE........................... $ 168,971 $ 122,250
------------- -------------
BOOK VALUE
OMSR............................ 62,571 23,062
PMSR............................ 60,821 52,035
------------- -------------
Total book value........... 123,392 75,097
------------- -------------
Fair value in excess of
book value (see Note
12)...................... $ 45,579 $ 47,153
============= =============
F-24
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGE SERVICING RIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1996 1995 1994
-------------------- -------------------- ---------
OMSRS PMSRS OMSRS PMSRS PMSRS
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....... $ 23,062 $ 52,035 $ -- $ 56,677 $ 10,650
Additions....................... 48,412 23,535 28,694 12,546 50,955
Amortization.................... (4,107) (9,740) (1,010) (9,821) (4,928)
Deferred hedging gains.......... -- (2,140) -- (7,173) --
Sales........................... (4,796) (2,869) (4,622) (194) --
--------- --------- --------- --------- ---------
Balance at end of period............. $ 62,571 $ 60,821 $ 23,062 $ 52,035 $ 56,677
========= ========= ========= ========= =========
</TABLE>
7. COVERED ASSETS AND FEDERAL FINANCIAL ASSISTANCE
Concurrent with the Bank's incorporation on December 30, 1988, the Parent
Company, the Bank, and certain of their direct and indirect parent entities
entered into an Assistance Agreement ("Assistance Agreement") with the Federal
Savings and Loan Insurance Corporation ("FSLIC") whereby the Bank acquired
substantially all of the assets and assumed all of the deposits and certain
liabilities of United Savings Association of Texas ("Old USAT"), an insolvent
thrift institution (the "Acquisition"). The majority of assets acquired were
designated as Covered Assets ("Covered Assets") and were subject to certain
provisions contained in the Assistance Agreement. The Assistance Agreement
provided for, among other things, financial assistance to the Bank.
On December 23, 1993, the Parent Company, the Bank, and certain of their
direct and indirect parent entities, and the Federal Deposit Insurance
Corporation, ("FDIC") as manager of the FSLIC Resolution Fund ("FRF"),
entered into a Settlement and Termination Agreement (the "Settlement
Agreement") providing, among other things, for the termination of the
Assistance Agreement and the disposition of Covered Assets. Accordingly,
effective December 28, 1993, the Bank no longer owned or managed any Covered
Assets and stopped receiving financial assistance from the FRF. In connection
with this settlement, the Bank received a payment totalling $195.3 million. The
following table shows the composition of FRF payments received in fiscal 1994.
(IN THOUSANDS)
Payments affecting the results of
operations......................... $ 23,143
Other payments
Settlement payment.............. 195,300
Other........................... 468
--------------
Total FRF payments......... $218,911
==============
F-25
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DEPOSITS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- -------- ----------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NON-INTEREST BEARING DEPOSITS........ $ 284,304 -- % $ 181,196 -- % $ 76,498 -- %
INTEREST-BEARING DEPOSITS
Transaction accounts............. 211,976 1.00 219,307 1.50 233,666 1.49
Insured money fund accounts
Consumer....................... 588,585 4.36 397,473 3.73 407,029 3.12
Commercial..................... 810,743 5.29 857,669 5.82 416,571 4.84
----------- -------- ----------- --- ----------- ---
Subtotal.................... 1,399,328 4.90 1,255,142 5.16 823,600 3.99
----------- -------- ----------- --- ----------- ---
Savings accounts................. 130,137 2.48 144,301 2.73 222,769 2.60
Certificates of deposit
Consumer....................... 2,911,682 5.71 3,063,631 5.84 2,949,715 4.88
Commercial..................... 2,667 4.88 2,273 5.36 -- --
Wholesale...................... 207,851 10.28 316,370 9.06 457,956 7.92
----------- -------- ----------- --- ----------- ---
Subtotal.................... 3,122,200 6.01 3,382,274 6.14 3,407,671 5.29
----------- -------- ----------- --- ----------- ---
Total interest-bearing
deposits.................. 4,863,641 5.38 5,001,024 5.59 4,687,706 4.74
----------- -------- ----------- --- ----------- ---
Total deposits.............. $ 5,147,945 5.08% $ 5,182,220 5.40% $ 4,764,204 4.67%
=========== ======== =========== === =========== ===
Consumer............................. $ 3,939,631 $ 3,868,498 $ 3,834,239
Commercial........................... 1,000,463 997,352 472,009
Wholesale............................ 207,851 316,370 457,956
----------- ----------- -----------
Total deposits.............. $ 5,147,945 $ 5,182,220 $ 4,764,204
=========== =========== ===========
</TABLE>
At September 30, 1996, certificates of deposit ("CDs") summarized by
scheduled maturity by year and weighted average interest rate were as follows:
<TABLE>
<CAPTION>
CERTIFICATES MATURING IN THE YEAR ENDING SEPTEMBER 30,
-----------------------------------------------------------------------
STATED RATE 1997 1998 1999 2000 2001 THEREAFTER TOTAL
- ------------------------------------- ------------ ---------- ---------- --------- --------- ---------- ------------
(IN THOUSANDS)
<C> <C> <C> <C> <C> <C> <C> <C>
2.99% and below...................... $ 1,584 $ -- $ -- $ -- $ -- $-- $ 1,584
3.00% to 3.99%....................... 21,867 740 8 -- -- 3 22,618
4.00% to 4.99%....................... 437,650 23,983 33,839 1,063 2,645 61 499,241
5.00% to 5.99%....................... 861,376 409,903 92,854 6,826 34,185 449 1,405,593
6.00% to 6.99%....................... 440,730 246,208 74,373 61,165 49,022 1,788 873,286
7.00% to 7.99%....................... 79,767 7,747 5,778 21,536 11,276 1,529 127,633
8.00% to 8.99%....................... 1,399 678 4,485 2,326 354 27 9,269
9.00% to 9.99%....................... 579 6,480 3,062 12 138 308 10,579
10.00% to 10.99%..................... 40,224 14,699 11,166 664 97 228 67,078
Over 10.99%.......................... 88,281 16,757 281 -- -- -- 105,319
------------ ---------- ---------- --------- --------- ---------- ------------
$ 1,973,457 $ 727,195 $ 225,846 $ 93,592 $ 97,717 $4,393 $ 3,122,200
============ ========== ========== ========= ========= ========== ============
</TABLE>
F-26
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of CDs of $100,000 or more outstanding at September
30, 1996 were as follows:
NUMBER OF DEPOSIT
ACCOUNTS AMOUNT
--------- --------
(DOLLARS IN
THOUSANDS)
Three months or less................. 1,234 $130,243
Over three through six months........ 551 57,661
Over six through twelve months....... 957 101,299
Over twelve months................... 1,813 190,973
--------- --------
Total...................... 4,555 $480,176
========= ========
INTEREST EXPENSE ON DEPOSITS
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Transaction and insured money fund
accounts........................... $ 71,693 $ 61,232 $ 22,261
Savings accounts..................... 3,598 4,715 7,311
Certificates of deposit.............. 196,929 198,419 179,462
---------- ---------- ----------
Total........................... $ 272,220 $ 264,366 $ 209,034
========== ========== ==========
9. FEDERAL HOME LOAN BANK ADVANCES
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Maximum outstanding at any
month-end.......................... $ 4,384,798 $ 4,386,605 $ 2,697,829
Daily average balance................ 4,073,297 3,560,844 2,285,630
Average interest rate................ 6.07% 6.31% 3.98%
The aggregate amounts of principal maturities for FHLB advances for the
periods indicated were as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------
1996 1995
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
<C> <C> <C> <C> <C>
1996................................. $ -- -- % $ 2,391,885 6.22%
1997................................. 2,564,095 5.82 1,855,765 6.33
1998................................. 905,046 5.47 115,000 6.60
1999................................. 8,700 7.65 8,700 7.65
2000................................. 2,700 7.80 2,700 7.80
2001................................. 7,145 8.16 4,800 7.92
Thereafter........................... 2,700 8.04 5,045 8.33
------------ -------- ------------ --------
Total...................... $ 3,490,386 5.74% $ 4,383,895 6.28%
============ ======== ============ ========
</TABLE>
F-27
<PAGE>
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,
--------------------------------------
1996 1995 1994
------------ ------------ ----------
(DOLLARS IN THOUSANDS)
REVERSE REPURCHASE AGREEMENTS
Balance outstanding at
period-end.................... $ 832,286 $ 1,172,533 $ 553,000
Fair value of collateral at
period-end.................... 1,020,405 1,239,527 673,000
Maximum outstanding at any
month-end..................... 1,096,508 1,355,540 553,000
Daily average balance........... 955,681 887,932 273,899
Average interest rate........... 5.77% 5.99% 3.85%
FEDERAL FUNDS PURCHASED
Balance outstanding at
period-end.................... $ -- $ -- $ --
Maximum outstanding at any
month-end..................... -- -- 15,000
Daily average balance........... 27 521 767
Average interest rate........... 6.02% 5.95% 3.73%
Scheduled maturities of reverse repurchase agreements outstanding at
September 30, 1996 were as follows:
(IN THOUSANDS)
October 1996......................... $472,286
March 1997........................... 360,000
--------------
$832,286
==============
The counterparties to all reverse repurchase agreements at September 30,
1996 have agreed to resell the same securities upon maturity of such agreements.
The securities collateralizing the reverse repurchase agreements have been
delivered to the counterparty or its agent. At September 30, 1996, the reverse
repurchase agreements were outstanding with the following counterparties:
CARRYING VALUE
---------------
(IN THOUSANDS)
Morgan Stanley and Co.
Incorporated....................... $ 360,000
Donaldson, Lufkin, and Jenrette
Securities Corporation............. 301,524
Goldman, Sachs and Co................ 57,000
Federal Home Loan Bank............... 45,000
CS First Boston Corporation.......... 44,215
PaineWebber, Inc..................... 24,547
---------------
$ 832,286
===============
11. SENIOR NOTES
In May 1993, the Parent Company issued $115 million of 8.05% Senior Notes
due May 15, 1998 ("Senior Notes") and repaid long-term debt and a note payable
to a related party.
The Senior Notes were not registered under the Securities Act of 1933, as
amended (the "Securities Act"), but were offered and sold in a private
offering to qualified institutional investors in reliance on Rule 144A under the
Securities Act and to a limited number of institutional accredited investors
within the meaning of Rule 501 of Regulation D under the Securities Act.
The Senior Notes had an initial interest rate of 8.05% PER ANNUM, payable
semi-annually. The interest rate on the Senior Notes was subject to increase in
certain circumstances if an exchange offer ("Exchange Offer")
F-28
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was not consummated by certain dates. The PER ANNUM interest rate on the Senior
Notes increased by 0.5%, to 8.55% in October 1993, and increased by 0.5% to
9.05% in February 1994. The Exchange Offer was consummated in August 1996 and
the interest rate reverted to the initial rate of 8.05% in September 1996.
The Senior Notes are not redeemable prior to maturity, except upon the
occurrence of a change of control (as defined) of the Parent Company or the Bank
(i) at the option of the Parent Company, in whole but not in part, and (ii) at
the option of holders, in whole or in part, in each case, at 101% of their
principal amount plus accrued interest to the date of redemption. The Senior
Notes do not have the benefit of any sinking fund obligation.
The cost of issuing the Senior Notes, including the costs of the Exchange
Offering, totalled $5.4 million, and amortization for fiscal 1996, 1995, and
1994 was $1.0 million, $976,000, and $977,000, respectively.
The Parent Company's ability to meet its long-term obligations is
contingent on the Bank's ability to pay dividends on its common stock. As
discussed in Note 15, the ability of the Bank to pay dividends on its preferred
or common stock without prior Office of Thrift Supervision ("OTS") approval is
subject to its continued profitability and the maintenance of certain capital
ratios. Further, the payment of dividends by the Bank to the Parent Company on
the Bank's common stock is subordinate to the payment of dividends on the Bank's
preferred stock. See Note 16 for a discussion of the preferred stock of the
Bank. Under the Senior Note indenture, aggregate dividends paid by the Parent
Company on its common stock and by the Bank on its preferred stock, and certain
other payments or investments, is limited to the sum of (i) 50% of cumulative
consolidated net income (or, if negative 100% of such deficit) after March 31,
1993, subject to certain exclusions, (ii) the proceeds from any issuance of
capital stock by the Parent Company after March 31, 1993, and (iii) $12 million.
At September 30, 1996, $76.8 million was available for payment of future
dividends by the Parent Company under this restriction.
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. Quoted market
prices, when available, are used as the measure of fair value. In cases where
quoted market prices are not available, fair values are based on present value
estimates or other valuation techniques. Because assumptions used in these
valuation techniques are inherently subjective in nature, the estimated fair
values cannot always be substantiated by comparison to independent market quotes
and, in many cases, the estimated fair values could not necessarily be realized
in an immediate sale or settlement of the instrument.
The fair value estimates presented herein are based on relevant information
available to management as of September 30, 1996 and 1995. Management is not
aware of any factors that would significantly affect these estimated fair value
amounts. As these reporting requirements exclude certain financial instruments
and all non-financial instruments, the aggregate fair value amounts presented
herein do not represent management's estimate of the underlying value of the
Company. Additionally, such amounts exclude intangible asset values such as the
value of core deposit intangibles. 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 that value.
SHORT-TERM INTEREST-EARNING ASSETS. The carrying amount approximates fair
value.
TRADING ACCOUNT ASSETS. The carrying values are market values, which are
generally based on quoted market prices or dealer quotes, if available. If a
quoted market price is not available, market value is estimated using quoted
market prices for instruments with similar credit, maturity, and interest
characteristics.
SECURITIES AND MORTGAGE-BACKED SECURITIES. The carrying amounts for
certain securities and MBS approximate their fair values as they mature within
90 days and do not present significant credit concerns. The fair
F-29
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
values of securities and MBS with longer maturities are estimated based on bid
prices published in financial newspapers 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. As adjustable-rate loans (excluding single family)
reprice frequently, their carrying value approximates their fair value. For
fixed-rate loans and single family loans, excluding the single family mortgage
warehouse, fair value is estimated using contractual cash flows discounted at
secondary market rates, adjusted for prepayment estimates, or using current
rates offered for similar loans. Fair value of the single family mortgage
warehouse loans is estimated using outstanding commitment prices from investors
or current investor yield requirements. The fair value of nonperforming loans is
estimated using the carrying value less any related allowance for credit losses.
FHLB STOCK. The carrying amount approximates fair value as it is
redeemable at its par value.
DEPOSITS. Under SFAS No. 107, 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. Although market premiums
paid for depository institutions reflect 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, AND FEDERAL FUNDS
PURCHASED. 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.
SENIOR NOTES. The fair value of the Senior Notes is based on discounting
future cash flows using the current rates at which similar debt would be issued
by issuers with similar credit ratings and remaining maturities.
OTHER ASSETS AND LIABILITIES. With the exception of that portion of the
excess servicing receivable classified as other assets, the carrying amounts of
financial instruments in these classifications are considered a reasonable
estimate of fair value due to their short-term nature. At September 30, 1996 and
1995, the fair value of the excess servicing receivable exceeded its carrying
value of $9.3 million and $7.1 million, by $5.2 million and $5.1 million,
respectively. The fair value of the excess servicing receivable is equal to the
present value of estimated net future cash flows discounted at a current market
rate.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK. The fair values of
financial instruments with off-balance-sheet risk are based on current market
prices.
SERVICING PORTFOLIO. See Note 1 for a description of the method used to
value the single family servicing portfolio.
F-30
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS NO. 107 FAIR VALUES
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------
1996 1995
------------------------- -------------------------
CARRYING SFAS NO. CARRYING SFAS NO.
VALUE 107 VALUE VALUE 107 VALUE
------------- --------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Short-term interest-earning
assets........................ $ 793,772 $ 793,772 $ 583,983 $ 583,983
Trading account assets.......... 1,149 1,149 1,081 1,081
Securities...................... 64,544 64,545 116,013 116,811
Mortgage-backed securities...... 1,657,908 1,637,085 2,398,263 2,378,171
Loans........................... 7,519,488 7,657,483 8,260,240 8,418,464
FHLB stock...................... 179,643 179,643 225,952 225,952
Other assets.................... 110,441 115,658 150,542 155,631
NON-FINANCIAL ASSETS................. 385,432 N/A 247,460 N/A
------------- ========= ------------- =========
Total assets............... $ 10,712,377 $ 11,983,534
============= =============
FINANCIAL LIABILITIES
Deposits........................ $ 5,147,945 $5,164,988 $ 5,182,220 $5,215,438
FHLB advances................... 3,490,386 3,493,086 4,383,895 4,395,965
Reverse repurchase agreements
and federal funds purchased... 832,286 832,328 1,172,533 1,171,884
Senior Notes.................... 115,000 118,396 115,000 115,383
Other liabilities............... 170,870 170,870 162,073 162,073
NON-FINANCIAL LIABILITIES, MINORITY
INTEREST, AND STOCKHOLDERS'
EQUITY............................. 955,890 N/A 967,813 N/A
------------- ========= ------------- =========
Total liabilities, minority
interest, and
stockholders' equity..... $ 10,712,377 $ 11,983,534
============= =============
OTHER FINANCIAL ASSETS
(LIABILITIES) -- FAIR VALUE
Interest rate swaps........... $ (66) $ (1,517)
Interest rate caps............ 1,057 1,113
Interest rate floors.......... 2,515 4,895
Financial options............. -- 103
Financial futures contracts... -- (1,869)
Forward delivery contracts.... (176) (2,877)
Commitments to extend
credit..................... 2,238 897
OTHER NON-FINANCIAL
ASSETS -- UNREALIZED GAINS
Single family servicing
portfolio, as adjusted (See
Note 6).................... 45,579 47,153
</TABLE>
The carrying values of other financial assets (liabilities) and other
non-financial assets, if any, were included with the carrying values of the
related assets and liabilities.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company enters into certain financial instruments with
off-balance-sheet risk in the ordinary course of business to reduce its exposure
to changes in interest rates. The Company does not enter into instruments such
as leveraged derivatives or structured notes. The financial instruments used for
hedging interest rate risk include interest rate swaps, caps, and floors,
financial options, financial futures contracts, and forward delivery contracts.
A hedge is an attempt to reduce risk by creating a relationship whereby any
losses on the hedged asset or liability
F-31
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are expected to be offset in whole or part by gains 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. 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 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.
AT SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
Interest rate swaps.................. $ 50,000 $ 615,000
Interest rate caps................... 659,000 565,000
Interest rate floors................. 688,500 310,000
Financial options.................... -- 23,000
Financial futures contracts.......... -- 529,000
Forward delivery contracts........... 321,923 509,463
Commitments to extend credit......... 988,120 999,792
Financial instruments with off-balance-sheet risk at September 30, 1996
were scheduled to mature as follows:
<TABLE>
<CAPTION>
MATURING IN THE YEAR ENDING SEPTEMBER 30,
------------------------------------------------
1997 1998 1999 THEREAFTER TOTAL
------------ ---------- --------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest rate swaps.................. $ 50,000 $ -- $ -- $ -- $ 50,000
Interest rate caps................... 237,000 121,000 58,000 243,000 659,000
Interest rate floors................. 60,000 250,000 -- 378,500 688,500
Forward delivery contracts........... 321,923 -- -- -- 321,923
Commitments to extend credit......... 844,112 100,459 9,728 33,821 988,120
------------ ---------- --------- ---------- ------------
Total...................... $ 1,513,035 $ 471,459 $ 67,728 $ 655,321 $ 2,707,543
============ ========== ========= ========== ============
</TABLE>
F-32
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE SWAPS. Below is an itemization of swaps by type and items
hedged. These swaps were entered into in an effort to more closely match the
repricing of the Company's liabilities with the related assets. During fiscal
1996, $565.0 million of interest rate swap contracts expired.
<TABLE>
<CAPTION>
NOTIONAL FIXED FLOATING HEDGED
AMOUNT RATE RATE ITEM
-------- ------- -------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
AT SEPTEMBER 30, 1996
Receive Fixed/Pay Floating........... $ 25,000 6.00% 5.50%(1) Consumer deposits
25,000 4.60 5.69(2) Consumer deposits
--------
Total........................... $ 50,000
========
AT SEPTEMBER 30, 1995
Receive Floating/Pay Fixed........... $ 75,000 6.10 5.81(1) FHLB advances
340,000 6.50 5.86(1) Reverse repurchase
agreements
100,000 6.58 6.00(2) Commercial deposits
Receive Fixed/Pay Floating........... 75,000 4.32 5.88(2) Consumer deposits
25,000 6.00 5.81(1) Consumer deposits
--------
Total........................... $615,000
========
</TABLE>
(1) Based on the one month London InterBank Offered Rate ("LIBOR") as of the
last reset prior to the date reported.
(2) Based on the three month LIBOR as of the last reset prior to the date
reported.
INTEREST RATE CAPS. During fiscal 1995, interest rate caps with original
notional principal amounts totalling $565.0 million were entered into in an
effort to hedge certain adjustable-rate loans. After considering expected
prepayments and the amortization of the loans that were being hedged, the
amortized notional principal amounts of these caps totalled $459.0 million at
September 30, 1996. Interest rate caps with notional principal amounts totalling
$950.0 million were entered into during fiscal 1996 in an effort to hedge
certain adjustable-rate MBS and FHLB advances. During fiscal 1996, $750.0
million of the caps entered into during fiscal 1996 were sold as the MBS being
hedged were sold. The resulting gain on the sale of the caps of $1.9 million
partially offset the loss on the sale of the MBS.
NOTIONAL INDEX CONTRACTED
AMOUNT RATE RATE
-------- ----- ----------
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 1996............ buy $459,000 5.93 %(1) 7.86%
200,000 5.66 (2) 6.19
sell 459,000 5.93 (1) 8.57
AT SEPTEMBER 30, 1995............ buy 565,000 5.91 (1) 7.86
sell 565,000 5.91 (1) 8.57
(1) Based on the six month LIBOR as of the last reset prior to the date
reported.
(2) Based on the three month LIBOR as of the last reset prior to the date
reported.
F-33
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE FLOORS. Floor contracts were entered into during fiscal 1996
and 1995 in an effort to hedge the MSRs against declines in value as a result of
prepayments.
AVERAGE
NOTIONAL INDEX FLOOR HEDGED
AMOUNT RATE RATE ITEM
-------- ----- ------- ------
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 1996............. $498,500 6.67 %(1) 5.99% MSRs
190,000 6.88 (2) 6.25 MSRs
--------
Total........................ $688,500
========
AT SEPTEMBER 30, 1995............. $260,000 6.01 (1) 6.70 MSRs
50,000 6.17 (2) 7.20 MSRs
--------
Total........................ $310,000
========
(1) Based on the five year Constant Maturity Treasury ("CMT") as of the last
reset prior to the date reported.
(2) Based on the ten year CMT as of the last reset prior to the date reported.
An interest rate floor agreement with a notional principal amount of $530.0
million hedging single family MSRs was sold prior to its original maturity
during fiscal 1995, resulting in a gain of $6.4 million. The gain was deferred
and is being accreted to operations offsetting the related MSR intangible
amortization expense. At September 30, 1996, the deferred gain remaining from
the sale of the interest rate floor was approximately $4.9 million. Interest
received on interest rate floor agreements totalled $2.1 million and $817,000 at
September 30, 1996 and 1995, respectively. The interest received was deferred
and is being amortized over the life of the MSRs.
FINANCIAL OPTIONS. At September 30, 1995 there was a Treasury call option
outstanding with a notional principal amount of $23.0 million. A Treasury call
option with a notional principal amount of $22.5 million was purchased and
expired during fiscal 1996. These options were entered into in an effort to
hedge MSRs against declines in value as a result of an increase in prepayments
caused by declining interest rates. The Treasury call option outstanding at
September 30, 1995 was sold during fiscal 1996, for a gain of $319,000 as the
MSRs being hedged were sold. This gain was included in the gain on the sale of
MSRs.
During fiscal 1996, a Eurodollar put option with notional principal amount
of $2.0 billion was purchased in an effort to hedge certain MBS. The Eurodollar
put option was sold during fiscal 1996 for a loss of $49,000 as the MBS being
hedged were sold. The loss was included in the gain on the sale of the MBS.
During fiscal 1996, Treasury put options with notional principal amounts
totalling $26.6 million were entered into in an effort to hedge loans the
Company originated for its own portfolio from the date that the interest rate is
locked until the date the loans are sold or funded ("portfolio pipeline").
These options were sold during fiscal 1996.
A Treasury call option with a notional principal amount of $50.0 million
was purchased and expired during fiscal 1996. The option was entered into as
trading activity.
At September 30, 1996 there were no options outstanding.
FINANCIAL FUTURES CONTRACTS. Treasury futures were entered into during
fiscal 1996 and 1995 in an effort to hedge loans in the portfolio pipeline. As
of September 30, 1996, all such Treasury futures contracts were closed or had
expired as the loans being hedged had been sold or were included in the held to
maturity loan portfolio. A net gain of $222,000 on the sale of Treasury futures
contracts as of September 30, 1996 was deferred and is being amortized over the
life of the loans. A loss of $6.0 million on the sale of Treasury futures
contracts was deferred as of September 30, 1995 and recognized into income
during fiscal 1996 as the loans being hedged were sold.
F-34
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Eurodollar futures contracts outstanding at September 30, 1995 were
entered into in an effort to hedge the interest costs for a fixed period on
certain borrowings that reprice based on short-term rates. As of September 30,
1996, all of the Eurodollar futures contracts outstanding at September 30, 1995
were closed or had expired. At September 30, 1996, losses of $135,000 on closed
Eurodollar futures contracts were deferred and are being amortized over the life
of the borrowings.
FORWARD DELIVERY CONTRACTS. Forward delivery contracts are entered into to
sell single family mortgage warehouse loans and to manage the risk that a change
in interest rates will decrease the value of the single family mortgage loan
warehouse or commitments to originate mortgage loans ("mortgage pipeline").
FORWARD DELIVERY CONTRACTS
AT SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
COUNTERPARTY
GNMA............................ $ 197,389 $ 205,250
FNMA............................ 89,203 264,797
Other........................... 35,331 39,416
---------- ----------
Total...................... $ 321,923 $ 509,463
========== ==========
TYPE
Fixed........................... $ 252,587 $ 428,013
Variable........................ 69,336 81,450
---------- ----------
Total...................... $ 321,923 $ 509,463
========== ==========
LOANS AVAILABLE TO FILL COMMITMENTS
Single family mortgage
warehouse....................... $ 260,745 $ 411,287
Mortgage pipeline (estimated)... 174,883 185,204
---------- ----------
Total...................... $ 435,628 $ 596,491
========== ==========
COMMITMENTS TO EXTEND CREDIT. The Company's exposure to credit loss for
commitments to extend credit is represented by the contractual amount of those
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
AT SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
Single family........................ $ 429,332 $ 589,157
Other................................ 558,788 410,635
---------- ----------
Total...................... $ 988,120 $ 999,792
========== ==========
Fixed................................ $ 201,649 $ 282,101
Variable............................. 786,471 717,691
---------- ----------
Total...................... $ 988,120 $ 999,792
========== ==========
F-35
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the commitments to extend credit amounts above were letters of
credit of $8.8 million and $5.4 million at September 30, 1996 and 1995,
respectively.
RECOURSE OBLIGATIONS. The Company had servicing of approximately $20.8
million and $26.6 million at September 30, 1996 and 1995, respectively, for
which certain recourse obligations apply. Management believes that it has
adequately provided reserves for its recourse obligations related to this
servicing.
13. EMPLOYEE BENEFITS
SAVINGS PLAN
The Company has an employee tax deferred savings plan (plan 401(k) under
the Code) available to all eligible employees. Through June 30, 1995, the
Company contributed dollar for dollar up to three percent of the participant's
earnings and employees could contribute up to twelve percent of their earnings
on a tax deferred basis. The Company's 401(k) plan was amended effective July 1,
1995. The Company currently contributes fifty cents for every dollar contributed
up to two percent of the participant's earnings, and dollar for dollar for
contributions between two and four percent of the participant's earnings. The
maximum contribution percentage is now fifteen percent of an employee's earnings
on a tax deferred basis, subject to Internal Revenue Service maximum
contributions limitations. This is a participant directed plan. Plan assets are
held in trust and managed by Fidelity Institutional Retirement Services Company.
Contributions to the plan are in such amounts and within certain limitations as
the Company may authorize. The Company's contributions to the plan were
approximately $1.5 million, $1.5 million, and $1.7 million, for fiscal 1996,
1995, and 1994, respectively.
MANAGEMENT COMPENSATION PROGRAM
In June 1996, the Company's Board of Directors approved a management
compensation program for the Company's executive officers, other key officers
and employees, and certain directors containing the following provisions: (i) a
cash bonus of $4.0 million; (ii) the award of 318,342 shares of Company Class B
common stock with restrictions on its transferability for a period of three
years from its issuance ("Restricted Stock"); and (iii) the issuance of
1,154,520 options for purchase of an equivalent number of shares of Company
common stock (such options vest ratably over three years from the date of grant
and may not be exercised prior to the third anniversary of the date of grant).
The options' exercise price of $20.125 per share was set at an amount not less
than the fair market value at the date of the grant and the options will expire
if not exercised within ten years of the date of the grant.
Compensation expense totalling $7.8 million, $4.8 million net of tax, was
recognized in the quarter ended June 30, 1996 for the cash bonus and the
Restricted Stock award. Compensation expense was not recognized for the stock
options, as the options had an exercise price approximating the fair value of
the Company's common stock at the date of issuance.
DIRECTOR STOCK COMPENSATION PLAN
In June 1996, the Company's Board of Directors approved a director stock
plan for each member of the Company's Board who is not an employee of the
Company or any subsidiary of the Company ("Eligible Director"). Each Eligible
Director will be granted stock options to purchase 1,000 shares of Class A
common stock of the Company when first elected to the Company's Board of
Directors and following each annual stockholders' meeting thereafter. The
options exercise price is 115% of the fair value of the Company's common stock
at the date of grant. The Company granted 10,000 options under the director
stock plan during fiscal 1996. These options vest and become exerciseable 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 ("vesting window"). If these stock
options do not vest during the vesting window, they will be cancelled and all
vested options will expire if not exercised within ten years of the date of
grant.
F-36
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
----------- --------- ----------
(IN THOUSANDS)
CURRENT TAX EXPENSE (BENEFIT)
Federal......................... $ 3,012 $ 3,459 $ 1,145
State........................... 3,097 2,080 1,841
Payments due in lieu of taxes... 11,528 15,261 (3,449)
DEFERRED TAX EXPENSE (BENEFIT)
Federal......................... 8,910 16,575 17,681
State........................... 1,388 40 (1,279)
Change in valuation
allowance -- utilization of
NOLs.......................... (101,700) -- (47,838)
Change in valuation
allowance -- reduction of
NOLs.......................... (2,000) -- --
----------- --------- ----------
Total income tax (benefit)
expense.................. $ (75,765) $ 37,415 $ (31,899)
=========== ========= ==========
In June 1996, the Parent Company's Certificate of Incorporation and By-Laws
were restated with the intent to preserve certain beneficial tax attributes
limiting the disposition of certain common stock and other interests in the
Parent Company by certain of its stockholders. The preservation of certain tax
attributes allowed the recognition of tax benefits of $85.2 million by the Bank
in June 1996 for the expected utilization of $365 million of NOLs against future
taxable income. These tax benefits were not recognized in prior periods due to
limitations on the utilization of NOLs if an Ownership Change ("Ownership
Change," as defined in Section 382 of the Code) had occurred. In June 1996, the
Parent Company and the Bank entered into a tax sharing agreement. This agreement
resulted in the recognition of a tax benefit of $16.5 million by the Parent
Company for the expected utilization of $47 million of the Parent Company's NOLs
by the Bank. The total tax benefit of $101.7 million was recognized as a
reduction of income tax expense and an increase in the net deferred tax asset,
in accordance with SFAS No. 109, "Accounting for Income Taxes".
In fiscal 1995, no tax benefits were recorded by the Parent Company or the
Bank. The Parent Company recognized no benefit for its stand alone NOLs as it
did not generate taxable income to offset such losses and it was not party to a
federal tax sharing agreement with the Bank at that time. The Bank recognized no
tax benefits due to limitations on the utilization of its NOLs if an Ownership
Change had occurred.
In fiscal 1994, no tax benefits were recorded by the Parent Company due to
circumstances similar to those described in the preceding paragraph. The Bank
recognized a $58.2 million tax benefit in fiscal 1994 for the expected
utilization of $249 million of its NOLs against future taxable income.
Tax NOLs at September 30, 1996 were as follows:
ALTERNATIVE EXPIRATION
YEAR GENERATED REGULAR TAX MINIMUM TAX DATE
- ------------------------------------- ----------- ----------- ----------
(IN MILLIONS)
December 30, 1988.................... $ 33 $ 53 2003
September 30, 1989................... 329 154 2004
September 30, 1990................... 296 141 2005
September 30, 1991................... 119 56 2006
September 30, 1992................... 33 7 2007
September 30, 1994................... 7 -- 2009
Utilization of the NOLs generated for the year ended December 30, 1988 is
subject to federal income tax rules that limit the utilization to federal
taxable income of the Bank and its subsidiaries only. The remaining NOLs may be
utilized against the federal taxable income of the other companies within the
"affiliated group" of which the Parent Company and the Bank are members.
F-37
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Parent Company and the Bank are subject to regular income tax and
alternative minimum tax ("AMT"). For fiscal 1996 and 1995, the current federal
tax expense is the result of AMT. Even though the Parent Company and the Bank
have AMT net operating loss carryforwards ("AMT NOLs"), the Code limits the
amount of utilization of AMT NOLs by 90% of alternative minimum taxable income
("AMTI"). For fiscal 1994, the federal tax expense was the result of
residential interests in real estate mortgage investment conduits ("REMIC"),
which could not be offset by NOLs.
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,
----------------------------------
1996 1995 1994
----------- --------- ----------
(IN THOUSANDS)
TAXES CALCULATED..................... $ 23,743 $ 31,539 $ 34,356
INCREASE (DECREASE) FROM
Reduction in valuation allowance
for the utilization of NOLs... (101,700) -- (47,838)
Reduction in valuation allowance
for reduction of NOLs......... (2,000) -- --
Change in estimate of net
deferred tax assets........... -- -- (11,340)
Nontaxable assistance........... -- -- (8,100)
Benefit for payments due in lieu
of taxes...................... -- -- (3,449)
State income tax................ 3,097 2,080 1,841
Other........................... 1,095 3,796 2,631
----------- --------- ----------
Total...................... $ (75,765) $ 37,415 $ (31,899)
=========== ========= ==========
F-38
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED TAX ASSETS AND LIABILITIES
AT SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Net operating losses............ $ 196,326 $ 211,637
Purchase accounting............. 6,252 10,064
Capital loss carryforwards...... 1,449 --
Tax mark to market.............. 3,654 --
Unrealized losses on securities
available for sale............. 1,340 3,990
REMIC........................... 6,830 7,083
Goodwill amortization........... 1,897 413
State........................... 1,455 2,817
AMT credit...................... 4,065 2,985
Depreciation -- premises and
equipment...................... 2,975 3,084
SAIF assessment(1).............. 11,780 --
Other........................... 9,832 2,926
----------- -----------
Total deferred tax
assets................... 247,855 244,999
----------- -----------
DEFERRED TAX LIABILITIES
Bad debt reserve................ 18,199 11,577
FHLB stock...................... 12,196 8,673
OMSR............................ 19,958 --
REO............................. -- 7,096
Tax mark to market.............. -- 2,816
State........................... -- 16
Other........................... 1,679 6,050
----------- -----------
Total deferred tax
liabilities.............. 52,032 36,228
----------- -----------
Net deferred tax asset before
valuation allowance............ 195,823 208,771
Valuation allowance............. (27,500) (131,200)
----------- -----------
Net deferred tax assets.... $ 168,323 $ 77,571
=========== ===========
- ------------
(1) Assessed in fiscal 1996, but not tax-deductible until fiscal 1997 when paid.
See Note 15.
The Bank is permitted under the Code to deduct an annual addition to a
reserve for bad debts in determining taxable income, subject to certain
limitations. This addition differs from the provision for credit losses for
financial reporting purposes. Due to recently enacted legislation, the Bank's
post-1987 tax bad debt reserve will be required to be recaptured into income
beginning with fiscal 1997. The reserve will be recaptured over a six taxable
year period with the opportunity to defer recapture by up to two years if
certain residential loan requirements are met. Management believes the Bank will
not have the opportunity to defer recapture of the bad debt reserve as the
residential loan requirements will not be met. At September 30, 1996, the Bank
has approximately $90 million of post-1987 tax bad debt reserves. There will be
no financial statement impact from this recapture as a deferred tax liability
has already been provided for 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
F-39
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
PAYMENTS DUE IN LIEU OF TAXES
Pursuant to the terms of the Assistance Agreement, the amount of financial
assistance paid to the Bank by the FRF was reduced each year by an amount equal
to one-third of any federal and state net tax benefits ("Net Tax Benefits")
(as defined by the Assistance Agreement). The Assistance Agreement further
provided that in no event would the amount paid to the FRF related to Net Tax
Benefits be less than a guaranteed minimum totalling $10 million payable over
five years. Additional payments due in lieu of taxes above the guaranteed
minimum payments are included in the Consolidated Statements of Operations as
incurred as a component of tax expense. The final guaranteed payment was made in
July 1994 for fiscal 1993. The Assistance Agreement was terminated in December
1993. As part of the Settlement Agreement, the Parent Company, the Bank, and
certain of their direct and indirect parent entities entered into a tax benefit
agreement (the "Tax Benefits Agreement"), pursuant to which the Bank will pay
one-third of certain tax benefits that are utilized by the Bank through the
taxable year ending nearest to September 30, 2003. The amounts reflected in the
Consolidated Financial Statements 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.
15. REGULATORY MATTERS
The Bank is subject to regulatory capital requirements as defined in the
OTS capital regulations (as set forth in the table below). Any savings
association that fails to meet its regulatory capital requirements is subject to
enforcement actions by the OTS which could have a material effect on its
financial statements. Under the capital adequacy requirements and prompt
corrective action provisions, the Bank must meet specific capital requirements
based on its capital, assets, and certain off-balance-sheet items as calculated
under regulatory accounting practices.
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 set forth in the table below). As of September 30, 1996 and 1995,
the Bank met all capital adequacy requirements.
As of September 30, 1996 and 1995, 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
capital, and total risk-based capital (as set forth in the table below). As of
September 30, 1996, there are no conditions or events since the OTS notification
that management believes would change the institution's category.
F-40
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables show the Bank's compliance with the regulatory capital
requirements:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------
CAPITAL ADEQUACY WELL-CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
-------------------- -------------------- --------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996
Stockholders' equity of the Bank..................... $ 793,527
Add: Net unrealized losses......................... 2,233
Less: Intangible assets of the Bank................ (14,867)
Non-qualifying deferred tax assets............. (85,036)
Non-qualifying MSRs............................ (36)
---------
TANGIBLE CAPITAL..................................... 6.57% 695,821 1.50% $ 158,943
Add: Core deposit intangibles...................... 8,087
---------
CORE CAPITAL......................................... 6.64% $ 703,908 3.00% 318,129 5.00% $ 530,216
=========
TIER 1 CAPITAL....................................... 12.40% $ 703,908 6.00% 340,734
Add: Allowance for loan and MBS credit losses...... 39,715
---------
TOTAL RISK-BASED CAPITAL............................. 13.09% $ 743,623 8.00% 454,312 10.00% 567,890
=========
1995
Stockholders' equity of the Bank..................... $ 794,678
Add: Net unrealized losses......................... 6,647
Less: Intangible assets of the Bank................ (23,956)
Non-qualifying deferred tax assets............. (37,617)
Non-qualifying MSRs............................ (25)
---------
TANGIBLE CAPITAL..................................... 6.20% 739,727 1.50% $ 178,844
Add: Core deposit intangibles...................... 10,838
---------
CORE CAPITAL......................................... 6.29% $ 750,565 3.00% 358,013 5.00% $ 596,688
=========
TIER 1 CAPITAL....................................... 12.82% $ 750,565 6.00% 351,184
Add: Allowance for loan and MBS credit losses...... 36,855
---------
TOTAL RISK-BASED CAPITAL............................. 13.45% $ 787,420 8.00% 468,245 10.00% 585,307
=========
</TABLE>
The Bank meets its fully phased-in capital requirements. OTS regulations
generally allow dividends to be paid without prior OTS approval under certain
conditions provided that the level of regulatory capital, following the payment
of such dividends, meets the fully phased-in capital requirements. At September
30, 1996, there was an aggregate of approximately $152.7 million 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, 1996.
FORBEARANCE
Notwithstanding the above capital requirements, the Bank's capital
requirements were established pursuant to the forbearance letter (a
"Forbearance Agreement") issued simultaneously with the Assistance Agreement.
The OTS has taken the position, with which the Bank disagrees, that the capital
forbearances are no longer available because of the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). Despite
the OTS position, management believes that all significant waivers, approvals,
and
F-41
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
forbearances related to the Bank's acquisition, including the capital
forbearances, remain in full force and effect following the enactment of FIRREA.
Pursuant to the Settlement Agreement, the Bank has retained all claims relating
to the forbearances against the United States of America, and on July 25, 1995,
the Bank, the Parent Company, and Hyperion Partners (collectively,
"Plaintiffs") filed suit against the United States in the Court of Federal
Claims for alleged failures of the United States (i) to abide by a capital
forbearance which would have allowed the Bank to operate for ten years under
negotiated capital levels lower than the levels required by the then existing
regulations or successor regulations, (ii) to abide by its commitment to allow
the Bank to count $110 million of subordinated debt as regulatory capital for
all purposes and (iii) to abide by an accounting forbearance, which would have
allowed the Bank to count as capital for regulatory purposes, and to amortize
over a period of twenty-five years, the $30.7 million difference between certain
FSLIC payment obligations to the Bank and the discounted present value of those
future FSLIC payments. The lawsuit is in a preliminary stage. The lawsuit was
stayed pending the United States Supreme Court's review of UNITED STATES V.
WINSTAR CORP., an action by three other thrifts raising similar issues (the
"WINSTAR cases"). On July 1, 1996, the Supreme Court upheld lower court
rulings that the United States had breached the contracts involved in the
WINSTAR case and remanded the case for further proceedings on the issue of
damages. Since the Supreme Court ruling, the Chief Judge of the Court of Federal
Claims convened a number of status conferences to establish a case management
protocol for the more than 100 lawsuits on the Court of Federal Claims docket,
that, like Plaintiffs case, involve issues similar to those raised in the
WINSTAR case. Following a number of status conferences beginning on July 30,
1996, Chief Judge Loren Smith of the United States Court of Federal Claims has
transferred all WINSTAR-related cases to his own docket and entered an Omnibus
Case Management Order governing proceedings in such cases, including the
Company's case. Under the Omnibus Case Management Order, Chief Judge Smith
serves as the "Managing Judge" for all WINSTAR-related cases and may assign
other judges of the United States Court of Federal Claims to resolve pre-trial
discovery disputes and common legal issues and to conduct trials. The Government
and Plaintiffs in WINSTAR-related cases were directed to exchange certain
significant documents as early as October 2, 1996. Trials on damages in two of
the three WINSTAR cases that were decided by the United States Supreme Court in
July 1996 are scheduled for early 1997. Damages trials in the remaining cases
subject to the Omnibus Case Management Plan are scheduled to begin four months
after completion of the first two damages trials. The Company's case is one of
thirteen cases that "shall be accorded priority in the scheduling" of the
damages trials under the Omnibus Case Management Order.
The Company intends to move promptly for partial summary judgement on
liability and to pursue an early trial on damages. Uncertainties remain
concerning the administration of the Omnibus Case Management Order and the
future course of the Company's lawsuit pursuant to this order. Accordingly, the
Company cannot predict the timing of any resolution of its claims. The Company
expects the trial of its case to commence during the first quarter of fiscal
1998. The Company is also unable to predict the outcome of its suit against the
United States and the amount of judgment for damages, if any, that may be
awarded. Consequently, no assurances can be given as to the results of this
suit. The Company and the Bank have entered into an agreement with Hyperion
Partners 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 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.
SAIF ASSESSMENT
The United States Congress passed legislation that was signed into law on
September 30, 1996, which resulted in an assessment on all Savings Association
Insurance Fund ("SAIF")-insured deposits in such amounts that will
fully-capitalize the SAIF at a reserve ratio of 1.25% of SAIF-insured deposits.
This one-time assessment has been set at 65.7 basis points of SAIF-assessable
deposits at March 31, 1995. The Company's assessment of
F-42
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$33.7 million, $20.7 million net of tax, was recorded in the fourth quarter of
fiscal 1996 and will be paid in the first quarter of fiscal 1997.
16. MINORITY INTEREST AND STOCKHOLDERS' EQUITY
MINORITY INTEREST
The Bank is authorized by its charter to issue a total of 10,000,000 shares
of preferred stock. In fiscal 1995, the Bank publicly issued 4,000,000 shares,
$25 liquidation preference per share, of 9.60% noncumulative preferred stock
(par value $0.01) (the "Preferred Stock, Series B"). In fiscal 1993, the Bank
publicly issued 3,420,000 shares, $25 liquidation preference per share, of
10.12% noncumulative preferred stock (par value $0.01) (the "Preferred Stock,
Series A"). Costs incurred in connection with the stock issuances were recorded
as reductions of paid-in capital. These shares are not owned by the Company.
Shares of the Series A and Series B Preferred Stock are not subject to
redemption prior to December 31, 1997 and September 30, 2000, respectively,
except in the event of certain mergers and other transactions. The shares of
Series A and Series B Preferred Stock 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:
<TABLE>
<CAPTION>
SERIES A SERIES B DOLLAR EQUIVALENT
BEGINNING DECEMBER 31, BEGINNING SEPTEMBER 30, REDEMPTION PRICE PER SHARE
- ----------------------- ------------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
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
</TABLE>
WARRANT
In connection with the Acquisition, the Bank issued a warrant, which
entitled the FDIC to purchase 158,823 shares of the Bank's common stock for an
exercise price of $0.01 per share (the "Warrant"). In August 1996, the FDIC
surrendered a portion of the Warrant for a cash payment of $6.1 million, and
exercised the remainder of the Warrant. The FDIC immediately exchanged the
shares of common stock of the Bank it received for 1,503,560 shares of common
stock of the Company. The FDIC sold all of the 1,503,560 shares of common stock
of the Company in the offering discussed below.
As part of the Settlement Agreement discussed in Note 7, the Bank made
payments to the FDIC in lieu of dividends on the common stock of the Bank from
December 1993 through August 1996 when the Warrant was no longer outstanding.
CAPITAL STOCK
On May 6, 1996, the Bank paid a $100 million dividend to the Company on the
common stock of the Bank and on the same day, the Company paid a dividend on its
common stock in the amount of $100 million.
Prior to June 1996, the Company had 13,238 shares of Class A and 2,797
shares of Class C common stock outstanding. The June 1996 Merger and
Restructuring discussed in Note 1 included a 1,800 to one stock conversion and
the conversion of Class C and certain Class A shares to Class B shares. After
conversion, the Class C shares were cancelled. Also in June 1996, 318,342 shares
of Restricted Stock were awarded as part of the management compensation program
discussed in Note 13.
In August 1996, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") and 12,075,000 shares of the
Company Class A common stock were sold to the public (the
F-43
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Offering"). The Company sold 910,694 shares and certain shareholders
("selling shareholders") sold 11,164,306 shares. The net proceeds to the
Company, proceeds to the selling shareholders and the underwriting discount were
$14.0 million, $210.4 million, and $13.9 million, respectively. The net proceeds
to the Company from the Offering will be contributed to the capital of the Bank
in the first quarter of fiscal 1997 for general corporate purposes.
After the 1,800 to one stock conversion, the Warrant conversion, the
issuance of Restricted Stock, and the Offering, the Company had a total of
31,595,596 shares of common stock (par value $0.01) outstanding as follows:
Class A (voting) -- 27,735,934 shares and Class B (nonvoting) -- 3,859,662
shares. The authorized stock of the Company consists of the following: Class A
common stock -- 40,000,000 shares, Class B common stock -- 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.
EARNINGS PER COMMON SHARE
The table below presents information necessary for the computation of
earnings per common share (in thousands, except per share data). The dilutive
effect of the Bank Warrant has been considered in computing earnings per common
share. Average shares and per share results have been restated to reflect the
1,800 to one stock conversion in June 1996.
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
---------- --------- ----------
Net income........................... $ 118,935 $ $41,719 $ 108,970
Less: Bank's net income attributable
to common stock equivalents on the
Warrant............................ (5,608) (2,895) (6,451)
---------- --------- ----------
Net income applicable to common
shares............................. $ 113,327 $ 38,824 $ 102,519
========== ========= ==========
Average number of common shares
outstanding........................ 29,260 28,863 28,863
========== ========= ==========
EARNINGS PER COMMON SHARE............ $ 3.87 $ 1.35 $ 3.55
========== ========= ==========
17. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
A petition for review has been filed in the United States District Court of
Appeals for the Fifth Circuit seeking to modify, terminate, and set aside the
order approving the Acquisition, which involved substantially all of the Bank's
initial assets and liabilities. The same petitioner filed a Motion to Intervene
and a Complaint in Intervention in an action pending in the U.S. District Court
of Texas, also seeking to set aside the order approving the Acquisition. The
petitioner contends, in both cases, that it submitted the most favorable bid to
acquire the assets and liabilities of Old USAT and that it should have been
selected as the winning bidder.
The Parent Company is not a party to either of these proceedings. The Bank
has intervened in the Fifth Circuit case and may file a Motion to Intervene in
the District Court case at a later date. Management believes, after consultation
with legal counsel, that the claims of the petitioner are barred by applicable
time limits, have no basis for assertion under existing law, and will not have a
material adverse effect on the Bank's or the Company's financial condition,
results of operations, or liquidity.
A substantial part of the Bank's business has involved the origination,
purchase, and sale of mortgage loans. During the past several years, numerous
individual claims and purported consumer class actions were commenced against a
number of financial institutions, their subsidiaries, and other mortgage lending
companies seeking civil statutory and actual damages and rescission under the
federal Truth In Lending Act (the "TILA"), as well as remedies for alleged
violations of various state unfair trade practices laws and restitution or
unjust enrichment in connection with certain mortgage loan transactions.
F-44
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank has a substantial mortgage loan servicing portfolio and maintains
escrow accounts in connection with this servicing. During the past several
years, numerous individual claims and purported consumer class action claims
were commenced against a number of financial institutions, their subsidiaries,
and other mortgage lending institutions generally seeking declaratory relief
that certain of the lenders' escrow account servicing practices violate the Real
Estate Settlement Practices Act and breach the lenders' contracts with
borrowers. Such claims also generally seek actual damages and attorney's fees.
In addition to the foregoing, mortgage lending institutions have been
subjected to an increasing number of other types of individual claims and
purported consumer class action claims that relate to various aspects of the
origination, pricing, closing, servicing, and collection of mortgage loans and
that allege inadequate disclosure, breach of contract, or violation of state
laws. Claims have involved, among other things, interest rates and fees charged
in connection with loans, interest rate adjustments on adjustable-rate mortgage
loans, timely release of liens upon loan payoffs, the disclosure and imposition
of various fees and charges, and the placing of collateral protection insurance.
While the Bank has had various claims similar to those discussed above
asserted against it, management does not expect these claims to have a material
adverse effect on the Bank's or the Company's financial condition, results of
operations, or liquidity.
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.
FACILITIES OPERATIONS
Future minimum commitments on data processing agreements and significant
operating leases in effect at September 30, 1996 were as follows (in thousands):
YEARS ENDING
SEPTEMBER 30, AMOUNT
- ------------------------------------- ---------
1997.............................. $ 19,707
1998.............................. 15,900
1999.............................. 9,279
2000.............................. 2,331
2001.............................. 1,906
Thereafter........................ 10,853
---------
$ 59,976
=========
Total data processing and rental expense for fiscal 1996, 1995, and 1994
under the same or similar agreements as in the preceding table, after
consideration of certain credits and rental income, were $22.4 million, $22.9
million, and $22.4 million, respectively.
F-45
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. FINANCIAL HIGHLIGHTS BY PRINCIPAL BUSINESS OPERATION
The Company operates as a broad-based financial services provider to
consumers and businesses in Texas and other selected regional markets throughout
the United States. This business is conducted through the Community Banking,
Financial Markets, and Commercial Banking Groups, which comprise the Banking
Segment, and the Mortgage Banking Segment. Summarized financial information by
business segment and for the Parent Company for the periods indicated, was as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
MORTGAGE
BANKING BANKING PARENT
SEGMENT SEGMENT COMPANY ELIMINATIONS COMBINED
------------- ------------- ------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
Revenues................................ $ 248,968 $ 103,161 $98,714 $ (113,273) $ 337,570
Earnings before income taxes and
minority interest..................... 82,449 (3,120) 97,518 (109,011) 67,836
Depreciation and amortization of
intangibles........................... 9,214 23,155 1,000 (4,262) 29,107
Capital expenditures.................... 8,951 443 -- -- 9,394
Average identifiable assets............. 10,947,844 640,780 9,972 (369,165) 11,229,431
Loan transfers to (from)................ 818,563 (818,563) -- -- --
Interest income (expense) on single
family mortgage warehouse outstanding
loan balance.......................... 21,878 (21,878) -- -- --
Servicing (expense) income on Banking
Segment's loans....................... (13,723) 13,723 -- -- --
1995
Revenues................................ $ 203,115 $ 119,601 $(3,910) $ (9,826) $ 308,980
Earnings before income taxes and
minority interest..................... 82,163 19,357 (5,000 ) (6,409) 90,111
Depreciation and amortization of
intangibles........................... 12,305 20,965 976 (3,417) 30,829
Capital expenditures.................... 5,859 273 -- -- 6,132
Average identifiable assets............. 10,258,857 482,965 8,061 (312,820) 10,437,063
Loan transfers to (from)................ 1,012,771 (1,012,771) -- -- --
Interest income (expense) on single
family mortgage warehouse outstanding X
loan balance.......................... 19,903 (19,903) -- -- --
Servicing (expense) income on Banking
Segment's loans....................... (12,672) 12,672 -- -- --
</TABLE>
F-46
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
MORTGAGE
BANKING BANKING PARENT
SEGMENT SEGMENT COMPANY ELIMINATIONS COMBINED
------------ ------------ ------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1994
Revenues................................ $ 189,378 $ 115,544 $1,279 $ (13,530) $ 292,671
Earnings before income taxes and
minority interest..................... 73,757 24,404 (645 ) (11,435) 86,081
Depreciation and amortization of
intangibles........................... 16,560 10,696 977 (2,095) 26,138
Capital expenditures.................... 5,456 4,962 -- -- 10,418
Average identifiable assets............. 8,174,275 717,551 4,401 (612,600) 8,283,627
Loan transfers to (from)................ 1,319,020 (1,319,020) -- -- --
Interest income (expense) on single
family mortgage warehouse outstanding X
loan balance.......................... 33,173 (33,173) -- -- --
Servicing (expense) income on Banking
Segment's loans....................... (10,223) 10,223 -- -- --
</TABLE>
Revenues are comprised of net interest income (before the provision for
credit losses) and non-interest income, and, in the case of Parent Company only
revenue, dividends received from the Bank. On May 6, 1996, the Bank paid a $100
million dividend to the Parent Company on the common stock of the Bank. Interest
costs incurred by the Parent Company are included in its revenues above since
they relate to long-term debt and are not directly attributable to a specific
segment. Earnings before income taxes and minority interest equal revenue, less
the provision for credit losses and non-interest expenses. Non-interest expenses
of the Bank are fully allocated to each segment of the Bank. Non-interest
expenses incurred by support departments that are directly attributable to a
segment are charged to that segment. General corporate overhead expenses not
specifically identified to an individual segment, but necessary for the
maintenance of the Bank as a going concern, are also allocated to the two
segments. Parent Company expenses are not allocated to the Bank's business
segments. The elimination amounts reflect the following: (i) dividends received
by the Parent Company from the Bank, (ii) interest income and MSR amortization
expense relating to loans held by the Banking Segment serviced by the Mortgage
Banking Segment, and (iii) the single family mortgage warehouse funded by the
Banking Segment.
For segment reporting purposes, the value of servicing related to loans
purchased from third parties by the Banking Segment is segregated from the
original loan basis and is allocated to the Mortgage Banking Segment. The
amortization of this capitalized amount approximated $2.3 million for fiscal
1996, $2.4 million for fiscal 1995, and $1.8 million for fiscal 1994 and is
reflected in the Mortgage Banking Segment figures above.
For loans transferred from the Mortgage Banking Segment to the Banking
Segment, the difference, if any, between the Banking Segment's "purchase
price" and the actual Book Value of the loans is retained by the Mortgage
Banking Segment at the time of transfer. The amount retained is amortized to
operations of the Mortgage Banking Segment and approximated $1.9 million for
fiscal 1996, $1.0 million for fiscal 1995, and $283,000 for fiscal 1994.
MORTGAGE BANKING CHARGES
In June 1996, the Company recorded a restructuring charge of $10.7 million
before tax, to recognize the costs of closing or consolidating production
offices and several regional operations centers and recorded $1.8 million of
other expenses related to the mortgage origination business. These closures and
consolidations will result in personnel reductions of approximately 265 people,
including both salaried and commissioned employees. The restructuring charge
included estimated costs for severance and other benefits of $800,000, asset
write-downs of $5.3 million, lease termination costs of $3.4 million and other
costs of $1.2 million. The non-cash write-off of $5.3 million reflects $3.5
million of goodwill and $1.8 million of fixed assets and leasehold
F-47
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
improvements written off in connection with the closed production offices. At
September 30, 1996, the unpaid liability relating to the restructuring charge
was $4.6 million and is expected to be paid in full by fiscal 1999. As of
September 30, 1996, 31 mortgage origination branches and 6 regional operation
centers had been closed and the workforce was reduced by 208.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents summarized data for each of the quarters in
fiscal 1996 and 1995 (in thousands, except earnings per share).
<TABLE>
<CAPTION>
1996 1995
------------------------------------------ ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $ 191,893 $ 199,198 $ 203,436 $ 217,785 $ 224,308 $ 194,865 $ 172,992 $ 154,594
Interest expense..................... 136,752 138,737 148,548 160,741 166,580 146,220 129,915 110,045
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income.............. 55,141 60,461 54,888 57,044 57,728 48,645 43,077 44,549
Provision for credit losses.......... 6,314 4,305 3,181 2,669 9,663 10,473 3,223 934
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for credit losses.................. 48,827 56,156 51,707 54,375 48,065 38,172 39,854 43,615
Non-interest income.................. 31,954 23,473 27,687 26,922 25,201 23,127 30,641 36,012
Non-interest expense................. 85,272 68,689 50,012 49,292 52,466 40,465 51,553 50,092
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
minority interest.................. (4,491) 10,940 29,382 32,005 20,800 20,834 18,942 29,535
Income tax (benefit) expense......... (2,121) (98,922) 12,144 13,134 8,169 9,060 8,062 12,124
--------- --------- --------- --------- --------- --------- --------- ---------
Net income before minority
interest........................... (2,370) 109,862 17,238 18,871 12,631 11,774 10,880 17,411
Less minority interest:
Subsidiary preferred stock
dividends...................... 4,564 4,563 4,563 4,563 4,111 2,163 2,163 2,163
Payments in lieu of dividends.... -- 6,189 -- 224 -- 71 -- 306
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCOME....................... $ (6,934) $ 99,110 $ 12,675 $ 14,084 $ 8,520 $ 9,540 $ 8,717 $ 14,942
========= ========= ========= ========= ========= ========= ========= =========
Net income applicable to common
shares............................. $ (6,934) $ 94,143 $ 11,824 $ 13,144 $ 7,936 $ 8,851 $ 8,086 $ 13,951
Earnings per common share............ $ (0.23) $ 3.26 $ 0.41 $ 0.46 $ 0.28 $ 0.31 $ 0.28 $ 0.48
Average common shares outstanding.... 30,441 28,863 28,863 28,863 28,863 28,863 28,863 28,863
</TABLE>
The 1995 figures have been restated to reflect the implementation of SFAS
No. 122 effective October 1, 1994. See Note 1. Average shares and per share
results have been restated to reflect the 1,800 to one stock conversion in June
1996. See Note 16.
F-48
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
The condensed financial statements of the Parent Company do not include all
of the information and notes normally included with financial statements
prepared in accordance with generally accepted accounting principles.
PARENT COMPANY
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
ASSETS
Cash and cash equivalents............ $ 18,790 $ 1
Securities purchased under agreements
to resell.......................... -- 2,121
Investment in Bank United............ 608,027 609,178
Intangible assets.................... 2,055 2,563
Deferred tax asset................... 19,527 --
Other assets......................... 5,281 1,287
---------- ----------
TOTAL ASSETS......................... $ 653,680 $ 615,150
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Senior Notes......................... $ 115,000 $ 115,000
Other liabilities.................... 7,637 4,047
---------- ----------
Total liabilities.......... 122,637 119,047
---------- ----------
STOCKHOLDERS' EQUITY
Common stock......................... 316 289
Paid-in capital...................... 129,286 117,722
Retained earnings.................... 403,674 384,739
Unrealized gains (losses) on
subsidiary's securities and
mortgage-backed securities
available for sale, net of tax..... (2,233) (6,647)
---------- ----------
Total stockholders'
equity................... 531,043 496,103
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $ 653,680 $ 615,150
========== ==========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-49
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
---------- --------- ----------
INCOME
Dividends from the Bank.............. $ 109,011 $ 6,409 $ 11,435
Short-term interest-earning assets... 56 88 21
---------- --------- ----------
Total income............... 109,067 6,497 11,456
---------- --------- ----------
EXPENSE
Interest expense -- Senior Notes..... 10,353 10,407 10,177
Amortization of intangibles.......... 1,000 976 977
Other................................ 196 114 947
---------- --------- ----------
Total expense.............. 11,549 11,497 12,101
---------- --------- ----------
INCOME (LOSS) BEFORE UNDISTRIBUTED
INCOME OF BANK AND INCOME TAXES.... 97,518 (5,000) (645)
Equity in undistributed income of the
Bank............................... 519 45,322 104,316
---------- --------- ----------
INCOME BEFORE INCOME TAXES........... 98,037 40,322 103,671
Income tax benefit................... (20,898) (1,397) (5,299)
---------- --------- ----------
NET INCOME........................... $ 118,935 $ 41,719 $ 108,970
========== ========= ==========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-50
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------
1996 1995 1994
---------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 118,935 $ 41,719 $ 108,970
Adjustments to reconcile net income
to net cash
(used) provided by operating
activities:
Equity in undistributed income
of the Bank................... (519) (45,322) (104,316)
Deferred tax benefit............ (19,527) -- --
Amortization of intangibles..... 1,000 976 977
Change in other assets.......... (4,486) 4,111 (5,393)
Change in other liabilities..... 3,590 (73) 159
Management Restricted Stock
award......................... 3,709 -- --
---------- ---------- -----------
Net cash provided by
operating activities..... 102,702 1,411 397
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in securities
purchased under agreements to
resell........................ 2,121 (1,411) (397)
---------- ---------- -----------
Net cash provided (used) by
investing activities..... 2,121 (1,411) (397)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common
stock......................... 13,966 -- --
Payment of common stock
dividends..................... (100,000) -- --
---------- ---------- -----------
Net cash used by financing
activities............... (86,034) -- --
---------- ---------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 18,789 -- --
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 1 1 1
---------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 18,790 $ 1 $ 1
========== ========== ===========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-51
EXHIBIT 1
CGSH DRAFT 1/13/97
$220,000,000
BANK UNITED CORP.
____% Subordinated Notes due 2004
____% Subordinated Notes due 2007
UNDERWRITING AGREEMENT
January __, 1997
SMITH BARNEY INC.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Bank United Corp., a Delaware corporation (the "Company"), proposes,
upon the terms and conditions set forth herein, to issue and sell $100,000,000
aggregate principal amount of its _____% Subordinated Notes due 2004 (the "2004
Notes") and $120,000,000 aggregate principal amount of its _____% Subordinated
Notes due 2007 (the "2007 Notes" and, together with the 2004 Notes, the "Notes")
to the several Underwriters named in Schedule I hereto (the "Underwriters"). The
Notes will be issued pursuant to the provisions of an Indenture to be dated as
of January __, 1997 (the "Indenture") between the Company and
_______________________, as Trustee (the "Trustee").
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Notes by the
Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 under the Act (the "registration
statement"), including a prospectus subject to completion relating to the Notes.
The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits), as
amended at the time it becomes effective, or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution
<PAGE>
of this Agreement. If, at the time this Agreement is executed, it is
contemplated that a post-effective amendment to the registration statement will
be filed and must be declared effective before the offering of the Notes may
commence, the term "Registration Statement" as used in this Agreement means the
registration statement as amended by said post-effective amendment. The term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement, or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the Act
and such information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information contained
in the prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from the Company, at a purchase price of % of the principal amount
thereof, the principal amount of Notes set forth opposite the name of such
Underwriter in Schedule I hereto (or such principal amount of Notes increased as
set forth in Section 10 hereof).
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Notes as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Notes upon the terms set forth in the Prospectus.
4. DELIVERY OF THE NOTES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Notes shall be made at the office of Smith
Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New York
City time, on January __, 1997 (the "Closing Date"). The place of closing for
the Notes and the Closing Date may be varied by agreement between you and the
Company.
The Notes will be delivered to you for the accounts of the several
Underwriters against payment of the purchase price therefor by certified or
official bank check or checks payable in New York Clearing House (next day)
funds to the order of the Company and registered in such names and in such
denominations as you shall request prior to 9:30 A.M., New York City time, on
the third business day preceding the Closing Date. The Notes to be
-2-
<PAGE>
delivered to the Underwriters shall be made available to you in New York City
for inspection and packaging not later than 9:30 A.M., New York City time, on
the business day next preceding the Closing Date.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters as follows:
(a)If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Notes may commence, the
Company will endeavor to cause the Registration Statement or such post-effective
amendment to become effective as soon as possible and will advise you promptly
and, if requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become effective.
(b)The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Notes for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus (as then
amended or supplemented) to comply with the Act or any other law. If at any time
the Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible time.
(c)The Company will furnish to you, without charge (i) four (4)
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits to the registration statement, (ii) such number of conformed copies of
the registration statement as originally filed and of each amendment thereto,
but without exhibits, as you may request, and (iii) such number of copies of the
Indenture as you may request.
(d)The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which you
shall not previously have been advised or to which you shall object after being
so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a
Prospectus is required to be delivered in connection with sales by any
Underwriter or dealer, file any information, documents or reports pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), without
delivering a copy of such information, documents or reports to you, as
Representatives of the Underwriters, prior to or concurrently with such filing.
(e)Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
requested, copies of each form of the Prepricing Prospectus. The
-3-
<PAGE>
Company consents to the use, in accordance with the provisions of the Act and
with the securities or blue sky laws ("Blue Sky laws") of the jurisdictions in
which the Notes are offered by the several Underwriters and by dealers, prior to
the date of the Prospectus, of each Prepricing Prospectus so furnished by the
Company.
(f)As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the opinion of
counsel for the Underwriters a prospectus is required by the Act to be delivered
in connection with sales by any Underwriter or dealer, the Company will
expeditiously deliver to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the Notes
are offered by the several Underwriters and by all dealers to whom Notes may be
sold, both in connection with the offering and sale of the Notes and for such
period of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer. If during such
period of time any event shall occur that in the judgment of the Company or in
the opinion of counsel for the Underwriters is required to be set forth in the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Prospectus in order to comply with the Act or any other law, the
Company will forthwith prepare and, subject to the provisions of paragraph (d)
above, file with the Commission an appropriate supplement or amendment thereto,
and will expeditiously furnish to the Underwriters and dealers a reasonable
number of copies thereof. In the event that the Company and you, as
Representatives of the several Underwriters, agree that the Prospectus should be
amended or supplemented, the Company, if requested by you, will promptly issue a
press release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g)The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Notes
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to service of process in suits, other than those arising out of the
offering or sale of the Notes, in any jurisdiction where it is not now so
subject.
(h)The Company will make generally available to its security holders
a consolidated earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as practicable
after the end of such period, which consolidated earnings statement shall
satisfy the provisions of Section 11(a) of the Act.
(i)So long as any of the Notes are outstanding, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission, and (ii) from time to time
such other information concerning the Company as you may request.
(j)If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 hereof or by notice given by you terminating this
Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Company to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Representatives for all
out-of-pocket expenses (including fees and expenses of counsel for the
Underwriters) incurred by you in connection herewith.
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(k)The Company will apply the net proceeds from the sale of the
Notes substantially in accordance with the description set forth in the
Prospectus.
(l)If Rule 430A of the Act is employed, the Company will timely file
the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the
time and manner of such filing.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a)Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing Prospectus.
(b)The registration statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of the
Act and will not at any such times contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, except that this representation
and warranty does not apply to statements in or omissions from the registration
statement or the prospectus made in reliance upon and in conformity with (i)
information relating to any Underwriter furnished to the Company in writing by
or on behalf of any Underwriter through you expressly for use therein, or (ii)
the Trustee's Statement of Eligibility and Qualification (Form T-1) under the
Trust Indenture Act of 1939, as amended (the "1939 Act").
(c)The execution and delivery of, and the performance by the Company
of its obligations under, this Agreement have been duly and validly authorized
by the Company, and this Agreement has been duly executed and delivered by the
Company and constitutes the valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as rights
to indemnity and contribution hereunder may be limited by federal or state
securities laws.
(d)The Indenture has been duly and validly authorized and, upon its
execution and delivery by the Company and assuming due execution and delivery by
the Trustee, will be a valid and binding agreement of the Company, enforceable
in accordance with its terms, except as enforcement thereof may be limited by
bankruptcy, insolvency or other similar laws affecting creditors' rights
generally, and has been (or will have been) duly qualified under the 1939 Act
and conforms to the description thereof in the Registration Statement and the
Prospectus.
(e)The Notes have been duly authorized and, when executed by the
Company and authenticated by the Trustee in accordance with the Indenture and
delivered to you against payment therefor in accordance with the terms hereof,
will have been validly issued and delivered, and will constitute valid and
binding obligations of the Company entitled to the benefits of the Indenture and
enforceable in accordance with their terms, except as enforcement thereof may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally, and the Notes will conform to the
description thereof in the Registration Statement and the Prospectus.
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(f)The authorized and outstanding capital stock of the Company is as
set forth under the caption "Capitalization" in the Prospectus.
(g)The Company is a corporation duly organized and validly existing
in good standing under the laws of the State of Delaware with full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business and is in good standing in
each jurisdiction or place where the nature of its properties or the conduct of
its business requires such registration or qualification, except where the
failure so to register or qualify does not have a materially adverse effect on
the condition (financial or other), business, properties, net worth or results
of operations of the Company and the Subsidiaries (as hereinafter defined) taken
as a whole (a "Materially Adverse Effect").
(h)All the Company's subsidiaries (collectively, the "Subsidiaries")
are listed in an exhibit to the Company's Annual Report on Form 10-K. Each
Subsidiary is a corporation duly organized, validly existing and in good
standing in the jurisdiction of its incorporation, with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus, and is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify does not have a materially adverse effect on the
condition (financial or other), business, properties, net worth or results of
operations of such Subsidiary; all the outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable, and are owned by the Company directly, or indirectly
through one of the other Subsidiaries, free and clear of any lien, adverse
claim, security interest, equity or other encumbrance.
(i)There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties is subject, that are required to be described
in the Registration Statement or the Prospectus but are not described as
required, and there are no agreements, contracts, indentures, leases or other
instruments that are required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement that
are not described or filed as required by the Act or the Exchange Act.
(j)Neither the Company nor any of the Subsidiaries is in violation
of its certificate or articles of incorporation or by-laws, or other
organizational documents, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries or of any decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries, or in default in any
material respect in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any material agreement, indenture, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by which any of them or any of
their respective properties may be bound.
(k)Neither the issuance and sale of the Notes, the execution,
delivery or performance of this Agreement and the Indenture by the Company, nor
the consummation by the Company of the transactions contemplated hereby and
thereby (i) requires any consent, approval, authorization or other order of or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency or official (except such as may be required
for the registration of the Notes under the Act and the Exchange Act,
qualification of the Indenture under the 1939 Act, and compliance with the
securities or Blue Sky laws of various jurisdictions, all of which have been or
will be effected in accordance with this Agreement) or conflicts or will
conflict with or constitutes
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or will constitute a breach of, or a default under, the certificate or articles
of incorporation or bylaws, or other organizational documents, of the Company or
any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, any agreement, indenture,
lease or other instrument to which the Company or any of the Subsidiaries is a
party or by which any of them or any of their respective properties may be
bound, or violates or will violate any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of the Subsidiaries pursuant to the terms of any
agreement or instrument to which any of them is a party or by which any of them
may be bound or to which any of the property or assets of any of them is
subject.
(l)The accountants, Deloitte & Touche LLP, who have certified or
shall certify the financial statements included or incorporated by reference in
the Registration Statement and the Prospectus (or any amendment or supplement
thereto), are independent public accountants as required by the Act.
(m) The financial statements, together with related schedules and
notes, included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto), present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and the Subsidiaries on the basis stated in the Registration Statement at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial and
statistical information and data included or incorporated by reference in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company and the
Subsidiaries.
(n)Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the capital
stock, or material increase in the short-term debt or long-term debt, of the
Company or any of the Subsidiaries, or any materially adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective materially adverse change, in the condition (financial or other),
business, net worth or results of operations of the Company and the Subsidiaries
taken as a whole.
(o)Each of the Company and the Subsidiaries has good and marketable
title to all property (real and personal) described in the Prospectus as being
owned by it, free and clear of all liens, claims, security interests or other
encumbrances, except such as are described in the Registration Statement and the
Prospectus or in a document filed as an exhibit to the Registration Statement,
and all the property described in the Prospectus as being held under lease by
each of the Company and the Subsidiaries is held by it under valid, subsisting
and enforceable leases.
(p)The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the Notes,
will not distribute any offering material in connection with the offering and
sale of the Notes other than the Registration Statement, the Prepricing
Prospectus, the Prospectus or other materials, if any, permitted by the Act.
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(q)The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties and to
conduct its business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; the Company and each of
the Subsidiaries has fulfilled and performed all its material obligations with
respect to such permits and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such permit,
subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, none of such permits
contains any restriction that is materially burdensome to the Company or any of
the Subsidiaries.
(r)The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(s)To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has made
any payment of funds of the Company or any Subsidiary or received or retained
any funds in violation of any law, rule or regulation, which payment, receipt or
retention of funds is of a character required to be disclosed in the Prospectus.
(t)The Company and each of the Subsidiaries have filed all tax
returns required to be filed, which returns are complete and correct, and
neither the Company nor any Subsidiary is in default in the payment of any taxes
which were payable pursuant to said returns or any assessments with respect
thereto.
(u)No holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company
because of the filing of the registration statement or consummation of the
transactions contemplated by this Agreement.
(v)The Company and the Subsidiaries own all patents, trademarks,
trademark registration, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectus as being owned by them or any of them or necessary for the conduct of
their respective businesses, and the Company is not aware of any claim to the
contrary or any challenge by any other person to the rights of the Company and
the Subsidiaries with respect to the foregoing.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each of you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any Prepricing Prospectus or in
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading,
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except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to such
Underwriter furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith; provided,
however, that the indemnification contained in this paragraph (a) with respect
to any Prepricing Prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of the
Notes by such Underwriter to any person if a copy of the Prospectus shall not
have been delivered or sent to such person within the time required by the Act
and the regulations thereunder, and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
Prepricing Prospectus was corrected in the Prospectus, provided that the Company
has delivered the Prospectus to the several Underwriters in requisite quantity
on a timely basis to permit such delivery or sending. The foregoing indemnity
agreement shall be in addition to any liability which the Company may otherwise
have.
(b)If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company and the Company shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such Underwriter or any such controlling person shall
have the right to employ separate counsel in any such action, suit or proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the Company has agreed in writing to pay such fees and expenses, (ii)
the Company has failed to assume the defense and employ counsel, or (iii) the
named parties to any such action, suit or proceeding (including any impleaded
parties) include both such Underwriter or such controlling person and the
Company and such Underwriter or such controlling person shall have been advised
by its counsel that representation of such indemnified party and the Company by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Company shall not have the right to assume the defense of such
action, suit or proceeding on behalf of such Underwriter or such controlling
person). It is understood, however, that the Company shall, in connection with
any one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The Company
shall not be liable for any settlement of any such action, suit or proceeding
effected without its written consent, but if settled with such written consent,
or if there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Company agrees to indemnify and hold harmless any Underwriter,
to the extent provided in the preceding paragraph, and any such controlling
person from and against any loss, claim, damage, liability or expense by reason
of such settlement or judgment.
(c)Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same
extent as the foregoing
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indemnity from the Company to each Underwriter, but only with respect to
information relating to such Underwriter furnished in writing by or on behalf of
such Underwriter through you expressly for use in the Registration Statement,
the Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto. If any action, suit or proceeding shall be brought against the Company,
any of its directors, any such officer, or any such controlling person, based on
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against any Underwriter pursuant to this paragraph (c), such Underwriter shall
have the rights and duties given to the Company by paragraph (b) above (except
that if the Company shall have assumed the defense thereof such Underwriter
shall not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at such Underwriter's expense), and the Company, its directors, any
such officer, and any such controlling person, shall have the rights and duties
given to the Underwriters by paragraph (b) above. The foregoing indemnity
agreement shall be in addition to any liability which the Underwriters may
otherwise have.
(d)If the indemnification provided for in this Section 7 is
unavailable to an indemnified party under paragraphs (a) or (c) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Notes, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or by the
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(e)The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by a
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in paragraph (d) above. The amount paid
or payable by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price of the Notes
underwritten by it and distributed to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective principal
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amounts of Notes set forth opposite their names in Schedule I hereto (or such
principal amounts of Notes increased as set forth in Section 10 hereof) and not
joint.
(f)No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g)Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any person
controlling the Company, (ii) acceptance of any Notes and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter or any person controlling any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, shall be entitled
to the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 7.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations
of the Underwriters to purchase the Notes hereunder are subject to the following
conditions:
(a)If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Notes may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the registration
statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the registration statement or the prospectus or
otherwise) shall have been complied with to your satisfaction.
(b)Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, in or affecting the condition (financial or other), business,
properties, net worth, or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would materially adversely affect
the market for the Notes, or (ii) any event or development relating to or
involving the Company or any officer or director of the Company which makes any
statement made in the Prospectus untrue or which, in the opinion of the Company
and its counsel or the Underwriters and their counsel, requires the making of
any addition to or change in the Prospectus in order to state a material fact
required by the Act or any other law to be stated therein or necessary in order
to make the statements therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your opinion, as
Representatives of the several Underwriters, materially adversely affect the
market for the Notes.
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(c)You shall have received on the Closing Date, an opinion of
Bracewell & Patterson, L.L.P., counsel for the Company, dated the Closing Date
and addressed to you, as Representatives of the several Underwriters, to the
effect that:
i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware with
full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement thereto),
and is duly registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not
have a Materially Adverse Effect;
ii)The Bank has been duly organized and is validly existing as a
federally chartered savings bank in good standing under the laws of the
United States;
iiiEach of the Subsidiaries is a corporation duly organized and
validly existing in good standing under the laws of the jurisdiction of
its organization, with full corporate power and authority to own, lease,
and operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto); and all the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable, and are owned by the Company directly, or indirectly
through one of the other Subsidiaries, free and clear of any perfected
security interest, or, to the best knowledge of such counsel after
reasonable inquiry, any other security interest, lien, adverse claim,
equity or other encumbrance;
iv)The activities described in the Prospectus of each of the Bank's
subsidiaries are permitted activities of subsidiaries of a federally
chartered savings bank, the deposits of which are insured by the Savings
Association Insurance Fund ("SAIF"), which is administered by the FDIC;
v) In the event the Company shall become either directly or
indirectly a bank holding company for purposes of the Bank Holding Company
Act of 1956, as amended (the "BHC Act") and the rules and regulations of
the Board of Governors of the Federal Reserve System thereunder (the "BHC
Rules"), the current activities of the Company and its subsidiaries (as
defined in the BHC Rules) as described in the Prospectus would be
activities permissible for a bank holding company under the BHC Act and
the BHC Rules;
-12-
<PAGE>
vi) The authorized and outstanding capital stock of the Company is
as set forth under the caption "Capitalization" in the Prospectus;
vii) The Company has corporate power and authority to enter into
this Agreement and to issue, sell and deliver the Notes to the
Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company and is a valid, legal
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as enforcement of rights to indemnity
and contribution hereunder may be limited by Federal or state securities
laws or principles of public policy and subject to the qualification that
the enforceability of the Company's obligations hereunder may be limited
by bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium, and other laws relating to or affecting creditors' rights
generally and by general equitable principles;
viii) The Indenture has been duly and validly authorized, executed
and delivered by the Company and, assuming due execution and delivery by
the Trustee, is a valid and binding agreement of the Company, enforceable
in accordance with its terms, except as enforcement thereof may be limited
by bankruptcy, insolvency or other similar laws affecting creditors'
rights generally, and has been duly qualified under the 1939 Act;
ix)The Notes have been duly and validly authorized and executed by
the Company and, assuming due authentication of the Notes by the Trustee,
upon delivery to the Underwriters against payment therefor in accordance
with the terms hereof, will have been validly issued and delivered, and
will constitute valid and binding obligations of the Company entitled to
the benefits of the Indenture;
x) The Registration Statement and all post-effective amendments, if
any, have become effective under the Act and, to the best knowledge of
such counsel after reasonable inquiry, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose are pending before or contemplated by the
Commission; and any required filing of the Prospectus pursuant to Rule
424(b) has been made in accordance with Rule 424(b);
xi)Neither the Company nor any of the Subsidiaries is in violation
of its respective certificate or articles of incorporation or bylaws, or
other organizational documents, or to the best knowledge of such counsel
after reasonable inquiry, is in default in the performance of any material
obligation, agreement or condition contained in any
-13-
<PAGE>
bond, debenture, note or other evidence of indebtedness, except as may be
disclosed in the Prospectus;
xii) Neither the offer, sale or delivery of the Notes, the
execution, delivery or performance of this Agreement and the Indenture,
compliance by the Company with the provisions hereof and thereof, nor
consummation by the Company of the transactions contemplated hereby and
thereby, conflicts or will conflict with or constitutes or will constitute
a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company
or any of the Subsidiaries or any agreement, indenture, lease or other
instrument to which the Company or any of the Subsidiaries is a party or
by which any of them or any of their respective properties is bound, or
will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of the
Subsidiaries, nor will any such action result in any violation of any
existing law, regulation, ruling (assuming compliance with all applicable
state securities and Blue Sky laws), judgment, injunction, order or decree
known to such counsel after reasonable inquiry, applicable to the Company,
the Subsidiaries or any of their respective properties;
xiii) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official, including, without
limitation, the Office of Thrift Supervision (the "OTS") and the FDIC, is
required on the part of the Company (except as have been obtained under
the Act, the Exchange Act, the 1939 Act, and such as may be required under
state securities or Blue Sky laws) for the valid issuance and sale of the
Notes to the Underwriters as contemplated by this Agreement;
xiv) The Company is not, and upon the issuance and sale of the Notes
as contemplated in this Underwriting Agreement and the application of the
net proceeds therefrom as described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment company,"
as such terms are defined in the Investment Company Act of 1940, as
amended;
xv) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements and
the notes thereto and the schedules and other financial and statistical
data included therein, as to which such counsel need not express any
opinion) comply as to form in all material respects with the requirements
of the Act and the rules and regulations of the Commission thereunder;
-14-
<PAGE>
xvi) The statements in the Registration Statement and Prospectus,
insofar as they are descriptions of contracts, agreements or other legal
documents, or refer to statements of law or legal conclusions, are
accurate and present fairly the information required to be shown;
xvii) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are
not described as required;
xviii) To the best knowledge of such counsel after reasonable
inquiry, (A) other than as described or contemplated in the Prospectus (or
any supplement thereto), there are no legal or governmental proceedings
pending or threatened against the Company or any of the Subsidiaries, or
to which the Company or any of the Subsidiaries, or any of their property,
is subject, which are required to be described in the Registration
Statement or Prospectus (or any amendment or supplement thereto) and (B)
there are no agreements, contracts, indentures, leases or other
instruments, that are required to be described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto) or to
be filed as an exhibit to the Registration Statement that are not
described or filed as required, as the case may be;
xix) To the best knowledge of such counsel after reasonable inquiry,
neither the Company nor any of the Subsidiaries is in violation of any
law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries or of any decree of
any court or governmental agency or body having jurisdiction over the
Company or any of the Subsidiaries; and
xx) Although counsel has not undertaken, except as otherwise
indicated in their opinion, to determine independently, and does not
assume any responsibility for, the accuracy or completeness of the
statements in the Registration Statement, such counsel has participated in
the preparation of the Registration Statement and the Prospectus,
including review and discussion of the contents thereof, and nothing has
come to the attention of such counsel that has caused them to believe that
the Registration Statement at the time the Registration Statement became
effective, or the Prospectus, as of its date and as of the Closing Date,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that any amendment or supplement to
the Prospectus, as of its respective date, and as of the Closing Date,
contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading (it
being understood that such
-15-
<PAGE>
counsel need express no opinion with respect to the financial statements
and the notes thereto and the schedules and other financial and
statistical data included in the Registration Statement or the Prospectus.
In rendering their opinion as aforesaid, counsel may rely upon an
opinion or opinions, each dated the Closing Date, of other counsel retained by
them or the Company as to laws of any jurisdiction other than the United States
or the State of Texas, provided that (1) each such local counsel is acceptable
to the Representatives, (2) such reliance is expressly authorized by each
opinion so relied upon and a copy of each such opinion is delivered to the
Representatives and is, in form and substance satisfactory to them and their
counsel, and (3) counsel shall state in their opinion that they believe that
they and the Underwriters are justified in relying thereon.
(d)You shall have received on the Closing Date, an opinion of
Jonathan K. Heffron, Esq., corporate counsel for the Company, dated the Closing
Date and addressed to you, as Representatives of the several Underwriters, to
the effect that:
i) The Bank is the only "significant subsidiary" of the Company (as
such term is defined in Rule 1-02 of Regulation S-X). The activities of
all of the Bank's subsidiaries are permitted to subsidiaries of a
federally chartered savings bank, the deposits of which are insured by the
SAIF, which is administered by the FDIC;
ii)Bank United (the "Bank"), a direct subsidiary of the Company, is
a federally chartered stock savings bank, duly incorporated and validly
existing under the laws of the United States and the Bank's charter is in
full force and effect. The Bank is a member of the Federal Home Loan Bank
of Dallas, and has been duly issued a certificate stating that its savings
accounts are insured by the Federal Deposit Insurance Corporation ("FDIC")
in accordance with applicable law, and no proceedings for the termination
or revocation of such membership or insurance are pending or, to the best
of our knowledge, threatened;
iiiThe Company and each of the Subsidiaries has full corporate power
and authority, and all necessary governmental authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental regulatory officials and bodies (except where the failure to
so have any such authorizations, approvals, orders, licenses,
certificates, franchises or permits, individually or in the aggregate,
would not have a Materially Adverse Effect), to own their respective
properties and to conduct their respective businesses as now being
conducted, as described in the Prospectus;
-16-
<PAGE>
iv)Except as disclosed in the Prospectus, the Company owns of
record, directly or indirectly, all the outstanding shares of capital
stock of each of the Subsidiaries free and clear of any lien, adverse
claim, security interest, equity, or other encumbrance;
v) Other than as described or contemplated in the Prospectus (or any
supplement thereto), there are no legal or governmental proceedings
pending or threatened against the Company or any of the Subsidiaries, or
to which the Company or any of the Subsidiaries, or any of their property,
is subject, which are required to be described in the Registration
Statement or Prospectus (or any amendment or supplement thereto);
vi)There are no agreements, contracts, indentures, leases or other
instruments, that are required to be described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto) or to
be filed as an exhibit to the Registration Statement that are not
described or filed as required, as the case may be;
vii) To the best of my knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are
not described as required;
viii) The Company and the Subsidiaries own all patents, trademarks,
trademark registrations, service marks, service mark registrations, trade
names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by them or any of them or
necessary for the conduct of their respective businesses, and such counsel
is not aware of any claim to the contrary or any challenge by any other
person to the rights of the Company and the Subsidiaries with respect to
the foregoing;
ix)Neither the Company nor any of the Subsidiaries is in violation
of any law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries or of any decree of
any court or governmental agency or body having jurisdiction over the
Company or any of the Subsidiaries;
x) Except as described in the Prospectus, there is no holder of any
security of the Company or any other person who has the right, contractual
or otherwise, to cause the Company to sell or otherwise issue to them, or
to permit them to underwrite the sale of, the Notes or the right to have
any Common Stock or other securities of the Company included in the
registration statement or the right, as a result of the filing of the
registration statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company;
-17-
<PAGE>
xi)No cease and desist order has been entered by the OTS or the FDIC
against the Company, the Bank or any of their respective subsidiaries. No
labor dispute with the employees of the Company or any subsidiary exists
or, to the knowledge of the Company, is imminent, and the Company is not
aware of any existing or imminent labor disturbance by the employees of
any of its or any subsidiary's principal suppliers, manufacturers,
customers or contractors, which, in either case, may reasonably be
expected to result in a Material Adverse Effect; and
xii) In the event the Company shall become either directly or
indirectly a bank holding company for purposes of the BHC Act and the BHC
Rules, the current activities of the Company and its subsidiaries (as
defined in the BHC Rules) would be activities permissible for a bank
holding company under the BHC Act and the BHC Rules.
(e)You shall have received on the Closing Date an opinion of Cleary,
Gottlieb, Steen & Hamilton, counsel for the Underwriters, dated the Closing Date
and addressed to you, as Representatives of the several Underwriters, with
respect to the matters referred to in clauses (vii) through (ix) and clauses
(x), (xv), and (xx) of the foregoing paragraph (c) and such other related
matters as you may request.
(f)You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date from Deloitte & Touche LLP, independent certified public
accountants, substantially in the forms heretofore approved by you.
(g)(i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there shall
not have been any change in the capital stock of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or Supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any materially adverse change in the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Company and the
Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall not
have any liabilities or obligations, direct or contingent (whether or not in the
ordinary course of business), that are material to the Company and the
Subsidiaries, taken as a whole, other than those reflected in the Registration
Statement or the Prospectus (or any amendment or supplement
-18-
<PAGE>
thereto); and (v) all the representations and warranties of the Company
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), to the effect set
forth in this Section 8(g) and in Section 8(h) hereof.
(h)The Company shall not have failed at or prior to the Closing Date
to have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(i)There shall not have been any announcement by any "nationally
recognized statistical rating organization", as defined for purposes of Rule
436(g) under the Act, that (i) it is downgrading its rating assigned to any debt
securities of the Company, or (ii) it is reviewing its rating assigned to any
debt securities of the Company with a view to possible downgrading, or with
negative implications, or direction not determined.
(j)The Company shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have reasonably requested.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are satisfactory in form
and substance to you and your counsel.
Any certificate or document signed by any officer of the Company and
delivered to you, as Representatives of the Underwriters, or to counsel for the
Underwriters, shall be deemed a representation and warranty by the Company to
each Underwriter as to the statements made therein.
9. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing (or reproduction), and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
each amendment or supplement to any of them, this Agreement, the Indenture and
the Statement of Eligibility and Qualification of the Trustee; (ii) the printing
(or reproduction) and delivery (including postage, air freight charges and
charges for counting and packaging) of such copies of the registration
statement, each Prepricing Prospectus, the Prospectus, and all amendments or
supplements to any of them, as may be reasonably requested for use in connection
with the offering and sale of the Notes; (iii) the preparation, printing (or
reproduction), execution and delivery of the Indenture and the preparation,
-19-
<PAGE>
printing, authentication, issuance and delivery of the Notes, including any
stamp taxes in connection with the original issuance of the Notes; (iv) the
printing (or reproduction) and delivery of this Agreement, the preliminary and
supplemental Blue Sky Memoranda and all other agreements or documents printed
(or reproduced) and delivered in connection with the offering of the Notes; (v)
the registration of the Notes under the Exchange Act; (vi) the registration or
qualification of the Notes for offer and sale under the securities or Blue Sky
laws of the several states as provided in Section 5(g) hereof (including the
reasonable fees, expenses and disbursements of counsel for the Underwriters
relating to the preparation, printing (or reproduction), and delivery of the
preliminary and supplemental Blue Sky Memoranda and such registration and
qualification); (vii) the filing fees and the fees and expenses of counsel for
the Underwriters in connection with any filings required to be made with the
National Association of Securities Dealers, Inc.; (viii) the fees and expenses
of the Trustee; (ix) the fees and expenses associated with obtaining ratings for
the Notes from nationally recognized statistical rating organizations; (x) the
transportation and other expenses incurred by or on behalf of Company
representatives in connection with presentations to prospective purchasers of
the Notes; and (xi) the fees and expenses of the Company's accountants and the
fees and expenses of counsel (including local and special counsel) for the
Company.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Notes may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company.
If any one or more of the Underwriters shall fail or refuse to
purchase Notes which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate principal amount of Notes which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate principal amount of Notes which the
Underwriters are obligated to purchase on the Closing Date, each non-defaulting
Underwriter shall be obligated, severally, in the proportion which the principal
amount of Notes set forth opposite its name in Schedule I hereto bears to the
aggregate principal amount of Notes set forth opposite the names of all
non-defaulting Underwriters or in such other proportion as you may specify in
accordance with Section 20 of the Master Agreement Among Underwriters of Smith
Barney Inc., to purchase the Notes which such defaulting Underwriter or
Underwriters are obligated, but fail or refuse, to purchase. If any one or more
of the Underwriters shall fail or refuse to purchase Notes which it or they are
obligated to purchase on the Closing Date and the aggregate principal amount
-20-
<PAGE>
of Notes with respect to which such default occurs is more than one-tenth of the
aggregate principal amount of Notes which the Underwriters are obligated to
purchase on the Closing Date and arrangements satisfactory to you and the
Company for the purchase of such Notes by one or more non-defaulting
Underwriters or other party or parties approved by you and the Company are not
made within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company. In any
such case which does not result in termination of this Agreement, either you or
the Company shall have the right to postpone the Closing Date, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any such default of any such
Underwriter under this Agreement. The term "Underwriter" as used in this
Agreement includes, for all purposes of this Agreement, any party not listed in
Schedule I hereto who, with your approval and the approval of the Company,
purchases Notes which a defaulting Underwriter is obligated, but fails or
refuses, to purchase.
Any notice under this Section 10 may be made by telegram, telecopy
or telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company by notice to the Company, if prior to the Closing
Date, (i) trading in the Common Stock of the Company shall be suspended or
subject to any restriction or limitation not in effect on the date of this
Agreement; (ii) trading in securities generally on the New York Stock Exchange,
the American Stock Exchange or the Nasdaq National Market shall have been
suspended or materially limited, (iii) a general moratorium on commercial
banking activities in New York or Texas shall have been declared by either
federal or state authorities, or (iv) there shall have occurred any outbreak or
escalation of hostilities or other international or domestic calamity, crisis or
change in political, financial or economic conditions, the effect of which on
the financial markets of the United States is such as to make it, in your
judgment, impracticable or inadvisable to commence or continue the offering of
the Notes on the terms set forth on the cover page of the Prospectus or to
enforce contracts for the resale of the Notes by the Underwriters. Notice of
such termination may be given to the Company by telegram, telecopy or telephone
and shall be subsequently confirmed by letter.
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside cover page, and the statements in the first and third paragraphs under
the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 6(b) and 7 hereof.
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<PAGE>
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10
and 11 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company, at the office of the
Company at 3200 Southwest Freeway, Suite 1600, Houston, Texas 77251, Attention:
Jonathan K. Heffron, Esq., Executive Vice President and General Counsel; or (ii)
if to you, as Representatives of the several Underwriters, care of Smith Barney
Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager,
Investment Banking Division, with a copy to Peter H. Darrow, Esq., Cleary,
Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York 10006.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors and officers, and the other
controlling persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Notes in his status
as such purchaser.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours, BANK UNITED CORP.
By:
Name:
Title:
Confirmed as of the date first
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<PAGE>
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I hereto.
SMITH BARNEY INC.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
By SMITH BARNEY INC.
By:
Name:
Title:
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SCHEDULE I
BANK UNITED CORP.
Principal Amount
UNDERWRITER 2004 NOTES 2007 NOTES
- ----------- ---------- ----------
Smith Barney Inc. $ $
Lehman Brothers Inc. $ $
Merrill Lynch, Pierce, Fenner & Smith
Incorporated $ $
-------- ---------
TOTAL $ $
-------- ---------
-24-
EXHIBIT 4.2
Draft, 1/14/97
BANK UNITED CORP.,
TO
-----------------------------------
Trustee
------------------------
INDENTURE
Dated as of , 1997
------------------------
<PAGE>
Certain Sections of this Indenture relating to
Sections 310 through 318, inclusive, of the
Trust Indenture Act of 1939:
TRUST INDENTURE
ACT SECTION Indenture Section
ss. 310 (a)(1) ......................................... 609
(a)(2) ........................................... 609
(a)(3) ........................................... Not Applicable
(a)(4) ........................................... Not Applicable
(a)(5) ........................................... 609
(b) .............................................. 608, 610
ss.311 (a) ............................................. 613
(b) .............................................. 613
(c) .............................................. Not Applicable
ss.312 (a) ............................................. 701, 702(a)
(b) .............................................. 702(b)
(c) .............................................. 702(c)
ss.313 (a) ............................................. 703(a)
(b) .............................................. 703(a)
(c) .............................................. 703(a)
(d) .............................................. 703(b)
ss.314 (a)(1) .......................................... 704
(a)(2) ........................................... 704
(a)(3) ........................................... 704
(a)(4) ........................................... 101, 1004
(b) .............................................. Not Applicable
(c)(1) ........................................... 102
(c)(2) ........................................... 102
(c)(3) ........................................... Not Applicable
(d) .............................................. Not Applicable
(e) .............................................. 102
ss.315 (a) ............................................. 601
(b) .............................................. 602
(c) .............................................. 601
(d) .............................................. 514
(e) .............................................. 514
ss.316 (a) ............................................. 101
(a)(1)(A) ........................................ 502, 512
(a)(1)(B) ........................................ 513
(a)(2) ........................................... Not Applicable
(b) .............................................. 508
i
<PAGE>
(c)............................................... 104(c)
ss.317 (a)(1)........................................... 503
(a)(2)............................................ 504
(b)............................................... 1003
ss.318 (a).............................................. 107
..............................................................................
NOTE:This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
ii
<PAGE>
TABLE OF CONTENTS
PAGE
PARTIES......................................................................1
RECITALS OF THE COMPANY......................................................1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 101. Definitions.....................................................1
Act.............................................................2
Affiliate.......................................................2
Authenticating Agent............................................2
Bank............................................................2
Board of Directors..............................................2
Board Resolution................................................2
Book-Entry Note.................................................2
Business Day....................................................2
Certificated Notes..............................................2
Commission......................................................2
Company.........................................................3
Company Request or Company Order................................3
Corporate Trust Office..........................................3
Corporation.....................................................3
default.........................................................3
Defaulted Interest..............................................3
Depositary......................................................3
Entitled Persons................................................3
Event of Default................................................3
Excess Proceeds.................................................3
FDIC............................................................3
Global Notes....................................................3
Holder..........................................................3
indebtedness for money borrowed.................................4
Indenture.......................................................4
Interest Payment Date...........................................4
Issue Date......................................................4
Maturity........................................................4
Notes...........................................................4
Officers' Certificate...........................................4
Opinion of Counsel..............................................4
Other Financial Obligations.....................................4
OTS.............................................................4
Outstanding.....................................................5
NOTE: THIS TABLE OF CONTENTS SHALL NOT, FOR ANY PURPOSE, BE DEEMED TO BE A PART
OF THE INDENTURE.
iii
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Paying Agent....................................................5
Person..........................................................5
Place of Payment................................................5
Predecessor Security............................................6
Registered Note.................................................6
Regular Record Date.............................................6
Note Register and Security Registrar............................6
Senior Indebtedness.............................................6
Special Record Date.............................................6
Stated Maturity.................................................6
Trust Indenture Act.............................................6
Trustee.........................................................6
Vice President..................................................7
2004 Global Note................................................7
2007 Global Note................................................7
2004 Note.......................................................7
2007 Note.......................................................7
2004 Certificated Note..........................................7
2007 Certificated Note..........................................7
Section 102. Compliance Certificates and Opinions............................7
Section 103. Form of Documents Delivered to Trustee..........................8
Section 104. Acts of Holders; Record Dates...................................8
Section 105. Notices, Etc., to Trustee and Company..........................10
Section 106. Notice to Holders; Waiver......................................10
Section 107. Conflict with Trust Indenture Act..............................11
Section 108. Effect of Headings and Table of Contents.......................11
Section 109. Successors and Assigns.........................................11
Section 110. Severability Clause............................................11
Section 111. Benefits of Indenture..........................................11
Section 112. Governing Law..................................................11
Section 113. Legal Holidays.................................................11
ARTICLE TWO
FORM OF NOTES
Section 201. Form and Dating................................................12
ARTICLE THREE
THE NOTES
Section 301. Title and Terms................................................14
Section 302. Authorized Denominations.......................................14
Section 303. Execution, Authentication, Delivery and Dating.................14
Section 304. Temporary Notes................................................15
Section 305. Registrar and Paying Agent.....................................16
Section 306. Paying Agent to Hold Money in Trust............................17
Section 307. Global Notes...................................................17
NOTE: THIS TABLE OF CONTENTS SHALL NOT, FOR ANY PURPOSE, BE DEEMED TO BE A PART
OF THE INDENTURE.
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Section 308. Transfer and Exchange..........................................17
Section 309. Mutilated, Destroyed, Lost and Stolen Notes....................19
Section 310. Payment of Interest; Interest Rights Preserved.................19
Section 311. Persons Deemed Owners..........................................20
Section 312. Cancellation...................................................21
Section 313. Computation of Interest........................................21
Section 314. CUSIP Number...................................................21
ARTICLE FOUR
SATISFACTION AND DISCHARGE
Section 401. Satisfaction and Discharge of Indenture........................21
Section 402. Application of Trust Money.....................................22
ARTICLE FIVE
REMEDIES
Section 501. Events of Default..............................................22
Section 502. Acceleration of Maturity; Rescission and Annulment.............24
Section 503. Collection of Indebtedness and Suits for Enforcement by
Trustee........................................................24
Section 504. Trustee May File Proofs of Claim...............................25
Section 505. Trustee May Enforce Claims Without Possession of Notes.........26
Section 506. Application of Money Collected.................................26
Section 507. Limitation on Suits............................................26
Section 508. Unconditional Right of Holders to Receive Principal, Premium and
Interest......................................................27
Section 509. Restoration of Rights and Remedies.............................27
Section 510. Rights and Remedies Cumulative.................................27
Section 511. Delay or Omission Not Waiver...................................28
Section 512. Control by Holders.............................................28
Section 513. Waiver of Past Defaults........................................28
Section 514. Undertaking for Costs..........................................28
Section 515. Waiver of Stay or Extension Laws...............................29
ARTICLE SIX
THE TRUSTEE
Section 601. Certain Duties and Responsibilities............................29
Section 602. Notice of Defaults.............................................29
Section 603. Certain Rights of Trustee......................................29
Section 604. Not Responsible for Recitals or Issuance of Notes..............31
Section 605. May Hold Notes.................................................31
Section 606. Money Held in Trust............................................31
Section 607. Compensation and Reimbursement.................................31
Section 608. Disqualification; Conflicting Interests........................32
Section 609. Corporate Trustee Required; Eligibility........................32
Section 610. Resignation and Removal; Appointment of Successor..............32
Section 611. Acceptance of Appointment by Successor.........................33
NOTE: THIS TABLE OF CONTENTS SHALL NOT, FOR ANY PURPOSE, BE DEEMED TO BE A PART
OF THE INDENTURE.
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Section 612. Merger, Conversion, Consolidation or Succession to Business....34
Section 613. Preferential Collection of Claims Against Company..............35
Section 614. Appointment of Authenticating Agent............................35
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 701. Company to Furnish Trustee Names and Addresses of Holders......36
Section 702. Preservation of Information; Communications to Holders.........36
Section 703. Reports by Trustee.............................................36
Section 704. Reports by Company.............................................37
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Section 801. Company May Consolidate, Etc., Only on Certain Terms...........37
Section 802. Successor Substituted..........................................37
Section 803. Opinion of Counsel to Trustee..................................38
ARTICLE NINE
SUPPLEMENTAL INDENTURES
Section 901. Supplemental Indentures Without Consent of Holders.............38
Section 902. Supplemental Indentures with Consent of Holders................39
Section 903. Execution of Supplemental Indentures...........................40
Section 904. Effect of Supplemental Indentures..............................40
Section 905. Conformity with Trust Indenture Act............................40
Section 906. Reference in Notes to Supplemental Indentures..................40
Section 907. Subordination Unimpaired.......................................40
ARTICLE TEN
COVENANTS
Section 1001. Payment of Principal, Premium and Interest....................41
Section 1002. Maintenance of Office or Agency...............................41
Section 1003. Money for Notes Payments to be Held in Trust..................41
Section 1004. Statement by Officers as to Default...........................42
Section 1005. Corporate Existence...........................................42
Section 1006. Waiver of Certain Covenants...................................43
Section 1007. Maintenance of Status of Subsidiaries as Insured Depository
Institution...................................................43
Section 1008. Capital and Dividends.........................................43
ARTICLE ELEVEN
SUBORDINATION OF NOTES
Section 1101. Notes Subordinated to Extent Provided........................44
Section 1102. Payment Over of Proceeds Upon Dissolution, Etc................44
Section 1103. Prior Payment to Senior Indebtedness Upon Acceleration
of Notes......................................................45
NOTE: THIS TABLE OF CONTENTS SHALL NOT, FOR ANY PURPOSE, BE DEEMED TO BE A PART
OF THE INDENTURE.
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Section 1104. No Payment When Senior Indebtedness in Default................45
Section 1105. Payment Permitted If No Default...............................46
Section 1106. Subrogation to Rights of Holders of Senior Indebtedness.......46
Section 1107. Obligations of Company Unconditional; Provisions Solely to
Define Relative Rights........................................47
Section 1108. Authorization of Trustee to Effectuate Subordination of
Notes.........................................................47
Section 1109. No Waiver of Subordination Provisions.........................47
Section 1110. Notice to Trustee; Trustee Not Charged with Knowledge of
Prohibition...................................................48
Section 1111. Reliance on Judicial Order or Certificate of Liquidating
Agent.........................................................48
Section 1112. No Fiduciary Duty to Holders of Senior Indebtedness or Other
Financial Obligations.........................................49
Section 1113. Right of Trustee to Hold Senior Indebtedness of Company.......49
Section 1114. Article Applicable to Paying Agents...........................49
Section 1115. 2004 Notes and 2007 Notes to Rank Pari Passu with Each Other;
Payment of Proceeds in Certain Cases..........................49
ARTICLE TWELVE
MISCELLANEOUS
Section 1201. Rules by Trustee, Paying Agent and Registrar.................51
Section 1203. No Recourse Against Others...................................51
Section 1203. Counterparts.................................................51
Section 1204. Further Instruments and Acts.................................51
NOTE: THIS TABLE OF CONTENTS SHALL NOT, FOR ANY PURPOSE, BE DEEMED TO BE A PART
OF THE INDENTURE.
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INDENTURE, dated as of _____ __, 1997, between Bank United Corp., a
corporation duly organized and existing under the laws of the State of Delaware
(herein called the "Company"), having its principal office at 3200 Southwest
Freeway, Suite 600, Houston, Texas 77027, and ____________, a national banking
association duly organized and existing under the laws of the United States, as
Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of its __% Subordinated
Notes due 2004 (the "2004 Notes") and its __% Subordinated Notes due 2007 (the
"2007 Notes", and together with the 2004 Notes, the "Notes") of substantially
the tenor and amount hereinafter set forth, and to provide therefor, the Company
has duly authorized the execution and delivery of this Indenture.
All things necessary to make the Notes, when executed by the Company
and authenticated and delivered by the Trustee hereunder and duly issued by the
Company, the valid obligations of the Company and to make this Indenture a valid
agreement of the Company in accordance with its terms have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Notes by the Holders (as hereinafter defined) thereof, it is mutually agreed,
for the equal and proportionate benefit of all Holders of the Notes, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
Section 101. DEFINITIONS.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles; and
<PAGE>
(4) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision.
"Act", when used with respect to any Holder, has the meaning
specified in Section 104.
"Affiliate" of any specified Person means any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 614 to act on behalf of the Trustee to authenticate any of
the 2004 Notes or the 2007 Notes. Each reference herein to authentication by the
Trustee includes authentication by an Authenticating Agent.
"Bank" means Bank United, a federally chartered savings bank that is
an indirect wholly-owned subsidiary of the Company.
"Board of Directors" means the board of directors of the Company or
the Executive Committee or any other committee of the Board of Directors duly
authorized to act on behalf of such Board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Book-Entry Note" means a Registered Note bearing the legend
specified in Section 203, and registered in the name of a Depository or its
nominee.
"Business Day", when used with respect to any Place of Payment,
unless otherwise specified in a Board Resolution and in an Officers'
Certificate, or in a supplemental indenture hereto, means each Monday, Tuesday,
Wednesday, Thursday and Friday that is not a day on which banking institutions
in an applicable Place of Payment or the city in which the Trustee's Corporate
Trust Office is located or in the Borough of Manhattan in The City and State of
New York are authorized or obligated by law, executive order or regulation to
remain closed.
"Certificated Notes" has the meaning set forth in Section 201(c)
hereof.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Securities Exchange Act of 1934, or,
if at any time after the execution of this instrument such Commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, then the body performing such duties at such time.
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"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman of the Board, its Vice
Chairman of the Board, its President or a Vice President, and by its Treasurer,
an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered
to the Trustee.
"Corporate Trust Office" means the principal office of the Trustee at
which at any particular time its corporate trust business shall be principally
administered, which office is, at the date of execution of this instrument,
located at _______________________.
"Corporation" means a corporation, association, company, joint-stock
company or business trust.
"default" for purposes of Sections and Section 310(b) and 315 of the
Trust Indenture Act is defined to mean an "Event of Default" as specified in
Section 501 hereof.
"Defaulted Interest" has the meaning specified in Section 310.
"Depositary" means, with respect to the Notes issuable or issued in
the form of a Global Security, the Person designated as a Depositary by the
Company pursuant to Section 301 until a successor Depositary shall have become
such pursuant to the applicable provision of this Indenture, and thereafter
"Depositary" shall mean or include each Person who is then a Depositary
hereunder and if at any time there is more than one such person acting
separately in respect of the 2004 Notes and the 2007 Notes, "Depositary" as used
with respect to the Notes shall mean each such Depositary.
"Entitled Persons" means any person entitled to payment pursuant to
the terms of Other Financial Obligations.
"Event of Default" has the meaning specified in Section 501.
"Excess Proceeds" has the meaning specified in Section 1115(c).
"FDIC" means the Federal Deposit Insurance Corporation, as from time
to time constituted, created under the Federal Deposit Insurance Improvement Act
of 1991, or if at any time after the execution of this instrument, such
corporation is not existing and performing the duties now assigned to it, then
the body performing such duties on such date, or any other successor to the
FDIC.
"Global Notes" means the 2004 Global Note and the 2007 Global Notes
together.
"Holder" means (i) in the case of any Certificated Note, the person
in whose name such Certificated Note is registered on the Note Registry, and
(ii) in the case of any Global Note, the Depositary.
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"indebtedness for money borrowed" as used in the definitions of
"Senior Indebtedness" and "Other Financial Obligations" means any obligation of,
or any obligation guaranteed by, the Company for the repayment of borrowed
money, whether or not evidenced by bonds, debentures, notes or other written
instruments, and any deferred obligation for the payment of the purchase price
of property or assets.
"Indenture" means this instrument as originally executed or as it
may from time to time be supplemented or amended by one or more indentures
supplemental hereto, entered into pursuant to the applicable provisions hereof.
"Interest Payment Date" means, when used with respect to any of the
2004 Notes or the 2007 Notes, the Stated Maturity of an installment of interest
on such Note.
"Issue Date" means with respect to the 2004 Notes or the 2007 Notes,
the date of initial issuance of such Notes.
"Maturity" means, when used with respect to any of the 2004 Notes or
the 2007 Notes, the date on which the principal of such Note or an installment
of principal becomes due and payable as therein or herein provided, whether at
the Stated Maturity or by declaration of acceleration or otherwise.
"Notes" has the meaning stated in the first recital of this
Indenture and more particularly means the 2004 Notes or the 2007 Notes
authenticated and delivered under this Indenture.
"Officers' Certificate" means a certificate signed by the Chairman
of the Board, a Vice Chairman of the Board, the President or a Vice President,
and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant
Secretary, of the Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of legal counsel, who
may be either counsel to the Company or an employee of the Company, which
Opinion shall be reasonably satisfactory to the Trustee and which is delivered
to the Trustee.
"Other Financial Obligations" means all obligations of the Company
to make payment pursuant to the terms of financial instruments, such as (i)
securities contracts and foreign currency exchange contracts, (ii) derivative
instruments, such as swap agreements (including interest rate and foreign
exchange rate swap agreements), cap agreements, floor agreements, collar
agreements, interest rate agreements, foreign exchange rate agreements, options,
commodity futures contracts, commodity options contracts, and (iii) in the case
of both (i) and (ii) above, similar financial instruments, other than (A)
obligations on account of Senior Indebtedness and (B) obligations on account of
indebtedness for money borrowed ranking PARI PASSU with or subordinate to the
Securities.
"OTS" " means the Office of Thrift Supervision, as from time to time
constituted, created under the Home Owners' Loan Act, or if at any time after
the execution of instrument
4
<PAGE>
such office is not existing and performing the duties now assigned to it, then
the body performing such duties on such date or any other successor to the OTS.
"Outstanding", when used with respect to the 2004 Notes or the 2007
Notes, means, as of the date of determination, all such Notes theretofore
authenticated and delivered under this Indenture, EXCEPT:
(i) Notes theretofore cancelled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Notes or portions thereof for whose payment money in the
necessary amount has been theretofore deposited with the Trustee or any
Paying Agent (other than the Company or an Affiliate of the Company) in
trust or set aside and segregated in trust by the Company (if the Company
shall act as its own Paying Agent) for the Holders of such Notes; and
(iii) Notes in exchange for or in lieu of which other Notes have been
authenticated and delivered pursuant to this Indenture;
PROVIDED, HOWEVER, that in determining whether the Holders of the requisite
principal amount of the Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Company or any other obligor upon the Notes or any Affiliate of the Company
or of such other obligor shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Trustee shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent or
waiver, only Notes which the Trustee knows to be so owned shall be so
disregarded. Notes so owned which have been pledged in good faith may be
regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Notes and that the
pledgee is not the Company or any other obligor upon the Notes or any Affiliate
of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of or premium, if any, or interest on any of the 2004 Notes or the
2007 Notes on behalf of the Company.
"Person" means any individual, corporation, partnership,
association, joint venture, joint stock company, Depositary institution, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Place of Payment", when used with respect to the Notes, unless
otherwise specified in a Board Resolution and in an Officers' Certificate, or in
a supplemental indenture hereto, means the office or agency of the Company in
the Borough of Manhattan, in the City of New York and State of New York, and
such other place or places, if any, where the principal of (and premium, if any)
and interest on the Notes are payable, as contemplated by Section 301.
5
<PAGE>
"Predecessor Security" of any particular Note means every previous
Note evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 309 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Note shall be deemed to evidence the same
debt as the mutilated, destroyed, lost or stolen Note.
"Registered Note" means any Note that is registered as to principal
and interest, if any.
"Regular Record Date" for the interest payable on any Interest
Payment Date on any of the 2004 Notes or on the 2007 Notes means the date
specified in Section 310.
"Note Register" and "Security Registrar" have the respective
meanings specified in Section 305.
"Senior Indebtedness" of the Company means the principal of,
premium, if any, and interest (including interest accruing subsequent to the
commencement of any proceeding for the bankruptcy or reorganization of the
Company under applicable bankruptcy, insolvency or similar law now or hereafter
in effect) on (a) all indebtedness of the Company for money borrowed, whether
outstanding on the date of execution of this Indenture or thereafter created,
assumed or incurred, except such indebtedness as is by its terms expressly
stated to be not superior in right of payment to the Notes or to rank PARI PASSU
with or subordinate to the Notes, and (b) any deferrals, renewals or extensions
of any such indebtedness for money borrowed.
"Special Record Date" for the payment of any Defaulted Interest
means a date fixed by the Trustee pursuant to Section 310.
"Stated Maturity" means, when used with respect to any of the 2004
Notes or the 2007 Notes or any installment of principal thereof or interest
thereon, the date specified in such Note as the fixed date on which the
principal of such Note or such installment of principal or interest is due and
payable.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended by the Trust Indenture Reform Act of 1990 as in force at the date as of
which this instrument was executed; PROVIDED, HOWEVER, that in the event the
Trust Indenture Act is amended after such date, "Trust Indenture Act" means, to
the extent required by any such amendment, the Trust Indenture Act as so
amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean or include each Person who is then a Trustee hereunder, and
if at any time there is more than one such Person, "Trustee" as used with
respect to either the 2004 Notes or the 2007 Notes, shall mean the Trustee with
respect to such Notes.
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"Vice President", when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president".
"2004 Global Note" has the meaning set forth in Section 201(c)(i)
hereof.
"2007 Global Note" has the meaning set forth in Section 201(c)(ii)
hereof.
"2004 Note" has the meaning set forth in the first recital hereof.
"2007 Note" has the meaning set forth in the first recital hereof.
"2004 Certificated Note" has the meaning set forth in Section
201(c)(i) hereof.
"2007 Certificated Note" " has the meaning set forth in Section
201(c)(ii) hereof.
Section 102. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Company to the Trustee to
take any action under any of the provisions of this Indenture, the Company shall
furnish to the Trustee an Officers' Certificate stating that all conditions
precedent, if any, provided for in this Indenture relating to the proposed
action have been complied with and an Opinion of Counsel stating that in the
opinion of such counsel all such conditions precedent, if any, have been
complied with, except that in the case of any such application or request as to
which the furnishing of such documents is specifically required by any provision
of this Indenture relating to such particular application or request, no
additional certificate or opinion need be furnished.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he or
she has made such examination or investigation as is necessary to enable
him or her to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
7
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Section 103. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by,
or covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by or covered by the opinion of only one such Person,
or that they be so certified or covered by only one document, but one such
Person may certify or give an opinion with respect to some matters and one or
more other such Persons as to other matters, and any such Person may certify or
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certificate or opinion of
or representations by counsel, unless such officer knows or in the exercise of
reasonable care should know that the certificate or opinion or representations
with respect to the matters upon which his or her certificate or opinion is
based are erroneous. Any such certificate or opinion of counsel may be based,
insofar as it relates to factual matters, upon a certificate or opinion of or
representations by an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows or in the exercise of reasonable care should
know that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 104. ACTS OF HOLDERS; RECORD DATES.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 601) conclusive in favor of the Trustee and
the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his or her individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his or her authority. The fact and date of the execution of any such
instrument or writing, or the authority of the
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Person executing the same, may also be proved in any other manner which the
Trustee deems sufficient.
(c) The Company may set any day as the record date for the purpose
of determining, as applicable, the Holders of Outstanding 2004 Notes or 2007
Notes entitled to make any request or demand, or give any authorization,
direction, notice, consent or waiver, or take other action, provided or
permitted by this Indenture to be made, given or taken by Holders of such Notes.
With regard to any record date set pursuant to this paragraph, the
Holders of Outstanding Notes on such record date (or their duly appointed
agents), and only such Persons, shall be entitled to take relevant action,
whether or not such Holders remain Holders after such record date. With regard
to any action that may be taken hereunder only by Holders of a requisite
principal amount of Outstanding Notes (or their duly appointed agents) and for
which a record date is set pursuant to this paragraph, the Company may, at its
option , set an expiration date after which no such action purported to be taken
by any Holder shall be effective hereunder unless taken on or prior to such
expiration date by Holders of the requisite principal amount of Outstanding
Notes on such record date (or their duly appointed agents). On or prior to any
expiration date set pursuant to this paragraph, the Company may, on one or more
occasions at its option, extend such expiration date to any later date. Nothing
in this paragraph shall prevent any Holder (or any duly appointed agent thereof)
from taking at any time any action contrary to or different from any action
previously taken or purported to have been taken hereunder by such Holder, in
which event the Company may set a record date in respect thereof pursuant to
this paragraph. Notwithstanding the foregoing or the Trust Indenture Act, the
Company shall not set a record date for, and the provisions of this paragraph
shall not apply with respect to, any action to be taken by Holders pursuant to
Section 501, 502 or 512.
Upon receipt by the Trustee of notice of any default described in
Section 501, any declaration of acceleration, or any rescission and annulment of
any such declaration, pursuant to Section 502 or of any direction in accordance
with Section 512, a record date shall automatically and without any other action
by any Person be set for the purpose of determining the Holders of Outstanding
2004 Notes or 2007 Notes entitled to join in such notice, declaration, or
rescission and annulment, or direction, as the case may be, which record date
shall be the close of business on the day the Trustee receives such notice,
declaration, rescission and annulment or direction, as the case may be. The
Holders of Outstanding Notes on such record date (or their duly appointed
agent), and only such Persons, shall be entitled to join in such notice,
declaration, rescission and annulment, or direction, as the case may be, whether
or not such Holders remain Holders after such record date; PROVIDED THAT, unless
such notice, declaration, rescission and annulment, or direction, as the case
may be, shall have become effective by virtue of Holders of the requisite
principal amount of Outstanding Notes on such record date (or their duly
appointed agents) having joined therein on or prior to the 90th day after such
record date, such notice of default, declaration, or rescission and annulment or
direction given or made by the Holders, as the case may be, shall automatically
and without any action by any Person be canceled and of no further effect.
Nothing in this paragraph shall prevent a Holder (or a duly appointed agent
thereof) from giving, before or after the expiration of such 90-day period, a
notice of default, a declaration of
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acceleration, a rescission and annulment of a declaration of acceleration or a
direction in accordance with Section 512, contrary to or different from, or,
after the expiration of such period, identical to, a previously given notice,
declaration, rescission and annulment, or direction, as the case may be, that
has been canceled pursuant to the proviso to the preceding sentence, in which
event a new record date in respect thereof shall be set pursuant to this
paragraph.
(d) The ownership of Notes shall be proved by the Note Register.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Note shall bind every future Holder of
the same Note and the Holder of every Note issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such Note.
Section 105. NOTICES, ETC., TO TRUSTEE AND COMPANY.
Any request, demand, authorization, direction, notice, consent,
waiver or Act of Holders or other document provided or permitted by this
Indenture to be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if made, given, furnished or filed in writing
to or with the Trustee at its Corporate Trust Office: Corporate Trust
Services, ______________________________
__________________________________________________ or
(2) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to the Company
addressed to it at the address of its principal office specified in the
first paragraph of this instrument to the attention of the Office of the
Secretary or at any other address previously furnished in writing to the
Trustee by the Company.
Section 106. NOTICE TO HOLDERS; WAIVER.
Where this Indenture provides for notice to Holders of any event,
such notice shall be sufficiently given (unless otherwise herein expressly
provided) if in writing and mailed, first-class postage prepaid, to each Holder
affected by such event, at his address as it appears in the Note Register, not
later than the latest date (if any), and not earlier than the earliest date (if
any), prescribed for the giving of such notice. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
Person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
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In case by reason of the suspension of regular mail service or by reason of any
other cause it shall be impracticable to give such notice by mail, then such
notification as shall be made with the approval of the Trustee shall constitute
a sufficient notification for every purpose hereunder.
Section 107. CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with another
provision hereof that is required under the Trust Indenture Act to be included
in this Indenture by any of the provisions of such Act, such required provision
shall control. If any provision of this Indenture modifies or excludes any
provision of the Trust Indenture Act that may be so modified or excluded, such
provision of the Act as so modified or excluded, as the case may be, shall be
deemed to apply to this Indenture.
Section 108. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents
are for convenience only and shall not affect the construction hereof.
Section 109. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
Section 110. SEVERABILITY CLAUSE.
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 111. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Notes, express or implied, shall
give to any Person, other than the parties hereto and their successors hereunder
and the Holders, and, subject to Section 907, holders of Senior Indebtedness or
Entitled Persons in respect of Other Financial Obligations, any benefit or any
legal or equitable right, remedy or claim under this Indenture.
Section 112. GOVERNING LAW.
THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
TO BE PERFORMED IN SAID STATE.
Section 113. LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Stated Maturity or any
other payment date of any of the 2004 Notes or the 2007 Notes shall not be a
Business Day at the
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Place of Payment of such Note at which such Note is presented for payment, then
(notwithstanding any other provision of this Indenture or of the Notes, payment
of interest on or principal and premium, if any, of such Notes need not be made
at such Place of Payment on such date, but may be made on the next succeeding
Business Day at such Place of Payment with the same force and effect as if made
on such payment date and no interest shall accrue for the period from and after
such payment date.
ARTICLE TWO
FORM OF NOTES
Section 201. FORM AND DATING
(a) (i) The Global and Certificated Notes and the certificate of
authentication of the Trustee thereon with respect to the 2004 Notes shall be
substantially in the forms of Exhibit A or Exhibit B hereto, respectively, which
are hereby incorporated in and expressly made a part of this Indenture.
(ii) The Global and Certificated Notes and the certificate of
authentication of the Trustee thereon with respect to the 2007 Notes shall be
substantially in the forms of Exhibit C or Exhibit D hereto, respectively, which
are hereby incorporated in and expressly made a part of this Indenture.
(b) The Notes may have such letters, numbers or other marks of
identification and such legends and endorsements, stamped, printed, lithographed
or engraved thereon, (i) as the Company may deem appropriate and as are not
inconsistent with the provisions of this Indenture, (ii) such as may be required
to comply with this Indenture, any law or any rule of any securities exchange on
which the Notes may be listed and (iii) such as may be necessary to conform to
customary usage. Each Note shall be dated the date of its authentication by the
Trustee. The Notes shall be issued only in fully registered form, without
coupons, in denominations of $1,000 and integral multiples thereof.
(c) (i) The 2004 Notes shall be issued initially in the form of one
global note substantially in the form of Exhibit A hereto (a "2004 Global
Note"). Upon issuance, such Global Note shall be duly executed by the Company
and authenticated by the Trustee as hereinafter provided and deposited with the
Trustee as custodian for the Depositary and registered in the name of Cede &
Co., as nominee of the Depositary (such nominee being referred to as the "2004
Global Note Holder"). The 2004 Global Note may be exchanged for securities in
definitive form substantially in the form of Exhibit B hereto ("2004
Certificated Notes") pursuant to Section 308 hereof. Upon issuance, any
Certificated Note shall be duly executed by the Company and authenticated by the
Trustee as hereinafter provided.
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(ii) The 2007 Notes shall be issued initially in the form of one global
note substantially in the form of Exhibit C hereto (a "2007 Global Note"). Upon
issuance, such Global Note shall be duly executed by the Company and
authenticated by the Trustee as hereinafter provided and deposited with the
Trustee as custodian for the Depositary and registered in the name of Cede &
Co., as nominee of the Depositary (such nominee being referred to as the "2007
Global Note Holder"). The 2007 Global Note may be exchanged for securities in
definitive form substantially in the form of Exhibit D hereto (" 2007
Certificated Notes") pursuant to Section 308 hereof. Upon issuance, any
Certificated Note shall be duly executed by the Company and authenticated by the
Trustee as hereinafter provided.
(d) Each Global Note shall bear the following legend on the face
thereof:
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY TO BANK UNITED CORP. OR THE REGISTRAR FOR
REGISTRATION OF TRANSFER OR EXCHANGE AND ANY NOTE ISSUED IS REGISTERED IN
THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS HAS BEEN REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT
HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS HAS BEEN REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY
PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.
TRANSFER OF THIS NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, AND
NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF INTERESTS IN THIS
NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 308 OF THE INDENTURE DATED AS OF
____________, 1997, BETWEEN BANK UNITED CORP., AS ISSUER, AND THE TRUSTEE
NAMED THEREIN, PURSUANT TO WHICH THIS NOTE WAS ISSUED.
(e) Definitive Notes shall be typed, printed, lithographed or
engraved or produced by any combination of such methods or produced in any other
manner permitted by the rules of any securities exchange on which such Notes may
be listed, all as determined by the officers of the Company executing such
Notes, as evidenced by their execution of such Notes.
ARTICLE THREE
THE NOTES
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Section 301. TITLE AND TERMS.
The aggregate principal amount of 2004 Notes and 2007 Notes which
may be authenticated and delivered under this Indenture and Outstanding at any
time may not exceed $100,000,000 and $120,000,000, respectively, except for
Notes authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, other 2004 Notes or 2007 Notes pursuant to Sections
304, 305, 309 or 906.
The 2004 Notes and the 2007 Notes shall each be issued in a single
series, known and designated, respectively, as the __% Subordinated Notes due
2004, and the __% Subordinated Notes due 2007. The Stated Maturity for the
payment of principal of (a) the 2004 Notes shall be _______, 2004, which Notes
shall bear interest at a rate of ____% per annum from the Issue Date, and (b)
the 2007 Notes shall be ______________, 2007, which Notes shall bear interest at
__% per annum from the Issue Date, or from the most recent Interest Payment Date
to which interest has been paid thereon or duly provided for, payable
semiannually on ___ __ and ______ __ of each year (commencing ____ __, 1997)
until the principal thereof is paid or duly provided for.
The principal of (premium, if any,) and interest on the Notes shall
be payable at the office or agency of the Company in the Borough of Manhattan,
The City of New York, maintained for such purpose and at any other office or
agency maintained by the Company for such purpose; PROVIDED, HOWEVER, that
interest may be payable at the option of the Company by check mailed to the
address of the person entitled thereto as such address shall appear on the Note
Register.
Section 302. AUTHORIZED DENOMINATIONS.
The Notes shall be issuable in denominations of $1,000 and any
integral multiple thereof.
Section 303. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
The Notes shall be executed on behalf of the Company by its Chairman
of the Board, its President, a Vice Chairman or one of its Vice Presidents,
under its corporate seal reproduced or imprinted on the Notes by facsimile or
otherwise, and shall be attested by the Company's Secretary or one of its
Assistant Secretaries, in each case by manual or facsimile signature.
In the event that any of the Notes shall have been signed (either
manually or by facsimile) by a Person that shall have ceased to be an
appropriate officer of the Company before any such Note shall have been
authenticated and delivered by the Trustee, or disposed of by the Company, such
Notes nevertheless may be authenticated and delivered or disposed of as though
the Person who signed such Notes had not ceased to be such appropriate officer
of the Company, and any Note may be signed on behalf of the Company by such
Persons as, at the actual time of execution of such Note, shall be the proper
officers of the Company, although at the date of such Note or of the execution
of this instrument such Person was not such officer.
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The Trustee shall, upon receipt of a Company Order requesting such
action, authenticate Notes for original issue up to the aggregate principal
amount not to exceed $100,000,000 Outstanding in respect of the 2004 Notes at
any given time in the form of a Global Note, and $120,000,000 Outstanding in
respect of the 2007 Notes at any given time in the form of a Global Note.
Upon the occurrence of any event specified in Section 308(a) hereof,
the Company shall execute and the Trustee shall authenticate and make available
for delivery to each beneficial owner identified by the Depositary, in exchange
for such beneficial owner's interest in the 2004 Global Note and in the 2007
Global Note, Certificated Notes representing Notes theretofore represented by
such Global Note.
At any time after the execution and delivery of this Indenture, the
Company may deliver Notes executed by the Company to the Trustee for
authentication, together with a Company Order for the authentication and
delivery of such Notes; and the Trustee in accordance with such Company Order
shall authenticate such Notes by manual signature of an authorized signatory of
the Trustee and deliver such Notes as in this Indenture provided and not
otherwise. The Notes shall not be valid for any purpose unless so authenticated.
A Note shall not be valid or entitled to any benefit under this
Indenture or obligatory for any purpose unless executed and issued by the
Company and authenticated by the manual signature of the Trustee as provided
herein. The signature of the Trustee shall be conclusive evidence, and the only
evidence, that the Note has been authenticated and delivered under this
Indenture and is entitled to the benefits of this Indenture.
Notwithstanding the foregoing, if any Note shall have been
authenticated and delivered hereunder but never issued and sold by the Company,
and the Company shall deliver such Note to the Trustee for cancellation as
provided in Section 312 together with a written statement (which need not comply
with Section 103 and need not be accompanied by an Opinion of Counsel) stating
that such Note has never been issued and sold by the Company, for all purposes
of this Indenture such Note shall be deemed never to have been authenticated and
delivered hereunder and shall not be entitled to the benefits of this Indenture.
Section 304. TEMPORARY NOTES.
Pending the preparation of definitive Notes, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Notes which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any authorized denomination, substantially of the tenor
of the definitive Notes in lieu of which they are issued and with such
appropriate insertions, omissions, substitutions and other variations as the
officers executing such Notes may determine, as evidence execution of such
Notes.
If temporary Notes are issued, the Company will cause definitive
Notes to be prepared without unreasonable delay. After the preparation of
definitive Notes, the temporary Notes shall be exchangeable for definitive Notes
upon surrender of the temporary Notes at the office or agency of the Company in
a Place of Payment, without charge to the Holder. Upon
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surrender for cancellation of any one or more temporary Notes the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor one
or more definitive Notes, of any authorized denominations and of a like
aggregate principal amount and tenor. Until so exchanged the temporary Notes
shall in all respects be entitled to the same benefits under this Indenture as
definitive Notes and tenor.
Section 305. REGISTRAR AND PAYING AGENT.
The Company shall maintain, pursuant to Section 1002 hereof, an
office or agency where the Notes may be presented for registration of transfer
or for exchange (the "Registrar"), an office or agency where Notes may be
presented for payment (the "Paying Agent") and an office or agency where notices
and demands to or upon the Company in respect of the Notes and this Indenture
may be served.
The Company shall cause to be kept at such office a register (the
register maintained in such office and in any other office or agency of the
Company in a Place of Payment being herein sometimes collectively referred to as
the "Note Register") in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of Notes and of
transfers of Notes entitled to be registered or transferred as provided herein.
The Trustee, at its Corporate Trust Office, is initially appointed Registrar for
the purpose of registering Notes and transfers of Notes as herein provided. The
Company may, upon written notice to the Trustee, change the designation of the
Trustee as Registrar and appoint another Person to act as Registrar for purposes
of this Indenture. If any Person other than the Trustee acts as Registrar, the
Trustee shall have the right at any time, upon reasonable notice, to inspect or
examine the Note Register and to make such inquiries of the Registrar as the
Trustee shall in its discretion deem necessary or desirable in performing its
duties hereunder.
The Company shall enter into an appropriate agency agreement with
any Person designated by the Company as Registrar or Paying Agent that is not a
party to this Indenture, which agreement shall incorporate the provisions of the
Trust Indenture Act and shall implement the provisions of this Indenture that
relate to such Registrar or Paying Agent. Prior to the designation of any such
Person, the Company shall, by written notice (which notice shall include the
name and address of such Person), inform the Trustee of such designation. The
Trustee, at its Corporate Trust Office, is initially appointed Paying Agent
under this Indenture. If the Company fails to maintain a Registrar or Paying
Agent, the Trustee shall act as such.
All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Notes surrendered
upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or
for exchange shall (if so required by the Company or the Trustee) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Note Register duly executed, by the Holder
thereof or his attorney duly authorized in writing.
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No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Notes, other than exchanges
pursuant to Section 304 or 906 not involving any transfer.
SECTION 306. PAYING AGENT TO HOLD MONEY IN TRUST. On or prior to
each due date of the principal, premium, or any payment of interest with respect
to any Note, the Company shall deposit with the Paying Agent a sum sufficient to
pay such principal, premium or interest when so becoming due.
The Company shall require each Paying Agent (other than the Trustee)
to agree in writing that such Paying Agent shall hold in trust for the benefit
of Holders or the Trustee all money held by such Paying Agent for the payment of
principal, premium and interest with respect to the Notes, shall notify the
Trustee of any default by the Company in making any such payment and at any time
during the continuance of any such default, upon the written request of the
Trustee, shall forthwith pay to the Trustee all sums held in trust by such
Paying Agent.
The Company at any time may require a Paying Agent to pay all money
held by it to the Trustee and to account for any funds disbursed by such Paying
Agent. Upon complying with this Section 306, the Paying Agent shall have no
further liability for the money delivered to the Trustee.
SECTION 307. GLOBAL NOTES. (a) So long as the Global Notes are
registered in the name of the Depositary or its nominee, members of, or
participants in, the Depositary ("Agent Members") shall have no rights under
this Indenture with respect to the Global Notes held on their behalf by the
Depositary or the Trustee as its custodian, and the Depositary may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of such Global Notes for all purposes. Notwithstanding the
foregoing, nothing herein shall (i) prevent the Company, the Trustee or any
agent of the Company or the Trustee, from giving effect to any written
certification, proxy or other authorization furnished by the Depositary or (ii)
impair, as between the Depositary and its Agent Members, the operation of
customary practices governing the exercise of the rights of a Holder of Notes.
(b) The Holder of each Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in such Global Note through Agent Members, to take any action which a
Holder of Notes is entitled to take under this Indenture or the Notes.
SECTION 308. TRANSFER AND EXCHANGE. (a) The Global Notes shall be
exchanged by the Company for Certificated Notes if (i) the Depositary (A) has
notified the Company that it is unwilling or unable to continue as, or ceases to
be, a clearing agency registered under Section 17A of the Exchange Act and (B) a
successor to the Depositary registered as a clearing agency under Section 17A of
the Exchange Act is not able to be appointed by the Company within 90 calendar
days or (ii) the Depositary is at any time unwilling or unable to continue as
Depositary and a successor to the Depositary is not able to be appointed by the
Company within 90 calendar
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days. If an Event of Default occurs and is continuing, the Company shall, at the
request of the Holder of each Global Note, exchange all or part of such Global
Note for one or more Certificated Notes; PROVIDED THAT the principal amount of
each of such Certificated Notes, and such Global Note, after such exchange,
shall be $1,000 or an integral multiple thereof. Whenever the Global Notes are
exchanged as a whole for Certificated Notes such Global Notes shall be
surrendered by the Holder thereof to the Trustee for cancellation. Whenever the
Global Notes are exchanged in part for one or more Certificated Notes pursuant
to this Section 308(c), it shall be surrendered by the Holder thereof to the
Trustee and the Trustee shall make the appropriate notations thereon pursuant to
Section 307(a) hereof. All Certificated Notes issued in exchange for Global
Notes or any portion thereof shall be registered in such names, and delivered,
as the Depositary shall instruct the Trustee.
(h) A Holder may transfer a Note only upon the surrender of such
Note for registration of transfer. No such transfer shall be effected until, and
the transferee shall succeed to the rights of a Holder only upon, final
acceptance and registration of the transfer in the Note Register by the
Registrar. When Notes are presented to the Registrar with a request to register
the transfer of, or to exchange, such Notes, the Registrar shall register the
transfer or make such exchange as requested if its requirements for such
transactions and any applicable requirements hereunder are satisfied. To permit
registrations of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Certificated Notes at the Registrar's request.
(i) No service charge shall be made for any registration of transfer
or exchange of Notes, but the Company may require payment by Holders of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer of Notes.
(j) All Notes issued upon any registration of transfer or exchange
pursuant to the terms of this Indenture will evidence the same debt and will be
entitled to the same benefits under this Indenture as the Notes surrendered for
such registration of transfer or exchange.
(k) Any Holder of a Global Note shall, by acceptance of such Global
Note, agree that transfers of beneficial interests in such Global Note may be
effected only through a Book Entry system maintained by such Holder (or its
agent), and that ownership of a beneficial interest in the Notes represented
thereby shall be required to be reflected in Book Entry form. Transfers of a
Global Note shall be limited to transfers in whole and not in part, to the
Depositary, its successors, and their respective nominees. Interests of
beneficial owners in a Global Note shall be transferred in accordance with the
rules and procedures of the Depositary (or its successors).
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Section 309. MUTILATED, DESTROYED, LOST AND STOLEN NOTES.
If any mutilated Note is surrendered to the Trustee, the Company
shall execute and upon its written request the Trustee shall authenticate and
make available for delivery, in exchange for any such mutilated Note, a new Note
containing identical provisions and of like principal amount, bearing a number
not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any Note and
(ii) such Note or indemnity as may be required by them to save each of them and
any agent of either of them harmless, then, in the absence of notice to the
Company or the Trustee that such Note has been acquired by a bona fide
purchaser, the Company shall execute and upon the Company's request the Trustee
shall authenticate and deliver, in lieu of any such destroyed, lost or stolen
Note, a new Note of like tenor and principal amount and bearing a number not
contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Note has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new 2004 or 2007 Note issued pursuant to this Section in lieu
of any such destroyed, lost or stolen Note shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Note shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other 2004 Notes or 2007 Notes, as the case may be, duly issued
hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Notes.
Section 310. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Note which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Note is registered at the close of business on the Regular
Record Date for such interest, which shall be _____ __ or ____ __ (whether or
not a Business Day) immediately preceding such Interest Payment Date.
Any interest on any Note which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder on the
relevant Regular Record Date by virtue of having been such Holder, and such
Defaulted Interest may be paid by the Company, at its election in each case, as
provided in Clause (1) or (2) below:
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(1) The Company may elect to make payment of any Defaulted Interest
and any interest payable on such Defaulted Interest to the Persons in
whose names the Notes are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be
fixed in the following manner. The Company shall notify the Trustee in
writing of the amount of Defaulted Interest proposed to be paid on each
Note and the date of the proposed payment, and at the same time the
Company shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Defaulted Interest
or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment, such money when deposited to be
held in trust for the benefit of the Persons entitled to such Defaulted
Interest as in this Clause provided. Thereupon the Trustee shall fix a
Special Record Date for the payment of such Defaulted Interest which shall
be not more than 15 days and not less than 10 days prior to the date of
the proposed payment and not less than 10 days after the receipt by the
Trustee of the notice of the proposed payment. The Trustee shall promptly
notify the Company of such Special Record Date and, in the name and at the
expense of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the Special Record Date therefor to be mailed,
first-class postage prepaid, to each Holder of Notes at his or her or its
address as it appears in the Note Register, not less than 10 days prior to
such Special Record Date. Notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor having been so mailed, such
Defaulted Interest shall be paid to the Persons in whose names the Notes
are registered at the close of business on such Special Record Date and
shall no longer be payable pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest, and any
interest payable on such Defaulted Interest, on the Notes in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which such Notes may be listed, and upon such notice as may be
required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this Clause, such manner of
payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
Section 311. PERSONS DEEMED OWNERS.
Prior to due presentment for registration of transfer of any Note,
the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar
may deem or treat the Person in whose name a Note is registered as the absolute
owner of such Note for the purpose of receiving payment of principal of and any
premium and any interest on such Note and for all other purposes whatsoever,
whether or not such Note be overdue, and none of the Company, the Trustee, the
Paying Agent, the Registrar or any co-registrar shall be affected by notice to
the contrary.
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Section 312. CANCELLATION.
All Notes surrendered for payment, registration of transfer or
exchange shall, if surrendered to any Person other than the Trustee, be
delivered to the Trustee and, if not already cancelled, shall be promptly
cancelled by it. The Company may at any time deliver to the Trustee for
cancellation any Note previously authenticated and delivered hereunder which the
Company may have acquired in any manner whatsoever, and may deliver to the
Trustee (or to any other Person for delivery to the Trustee) for cancellation
any Notes previously authenticated hereunder which the Company has not issued
and sold, and all Notes so delivered shall be promptly cancelled by the Trustee.
No Notes shall be authenticated in lieu of or in exchange for any Notes
cancelled as provided in this Section, except as expressly permitted by this
Indenture. All cancelled Notes held by the Trustee shall be disposed of as
directed by a Company Order.
If the Company shall acquire any of the Notes, such acquisition
shall not operate as a satisfaction of the indebtedness represented by such
Notes unless and until the same are delivered to the Trustee cancelled or for
cancellation.
Section 313. COMPUTATION OF INTEREST.
Interest on the Notes shall be computed on the basis of a 360-day year of
twelve 30-day months.
Section 314. CUSIP NUMBER
The Company, in issuing either 2004 Notes or 2007 Notes, may use a
"CUSIP" number and, if so, the Trustee shall use the CUSIP number in any notice
to Holders as a convenience to such Holders PROVIDED THAT any such notice may
state that no representation is made as to the correctness or accuracy of the
CUSIP number printed in the notice or on the Notes and that reliance may be
placed only on the other identification numbers printed on the Notes. The
Trustee shall promptly notify the Trustee of any change in CUSIP number.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
Section 401. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall upon Company Request cease to be of further
effect (except as to any surviving rights of registration of transfer or
exchange of Notes herein expressly provided for), and the Trustee, at the
expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when
(1) either
(A) all Notes theretofore authenticated and delivered (other
than (i) Notes which have been destroyed, lost or stolen and which
have been replaced or paid as provided in Section 309 and (ii) Notes
for whose payment money has
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theretofore been deposited in trust or segregated and held in trust
by the Company and thereafter repaid to the Company or discharged
from such trust, as provided in Section 1003) have been delivered to
the Trustee cancelled or for cancellation; or
(B) the Company has deposited or caused to be deposited with
the Trustee as trust funds in trust an amount of money sufficient to
pay and discharge the entire indebtedness on such Notes not
theretofore delivered to the Trustee cancelled or for cancellation,
for principal (and premium, if any) and interest to the date of such
deposit (in the case of Notes which have become due and payable) or
to the Stated Maturity, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all
conditions precedent herein provided for relating to the
satisfaction and discharge of this Indenture have been complied
with.
Notwithstanding the satisfaction and discharge of this Indenture,
the obligations of the Company to the Trustee under Section 607, the
obligations of the Company to any Authenticating Agent under Section
614 and, if money shall have been deposited with the Trustee
pursuant to subclause (B) of Clause (1) of this Section, the
obligations of the Trustee under Section 402 and the last paragraph
of Section 1003 shall survive.
Section 402. APPLICATION OF TRUST MONEY.
Subject to provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in trust
and applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal and any premium and
interest for whose payment such money has been deposited with the Trustee.
ARTICLE FIVE
REMEDIES
Section 501. EVENTS OF DEFAULT.
"Event of Default", wherever used herein with respect to the 2004
Notes and the 2007 Notes, means any one of the following events (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or
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pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(1) a decree or order by a court having jurisdiction in the premises
shall have been entered adjudging the Company a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization of the
Company under the Federal Bankruptcy Act or any other similar applicable
federal or state law, and such decree or order shall have continued
undischarged and unstayed for a period of 60 days; or a decree or order of
a court having jurisdiction in the premises for the appointment of a
receiver or liquidator or trustee or assignee in bankruptcy or insolvency
of the Company or substantially all of its property, or for the winding up
or liquidation of its affairs, shall have been entered, and such decree or
order shall have continued undischarged and unstayed for a period of 60
days; or
(2) the Company shall institute proceedings to be adjudicated a
bankrupt, or shall consent to the filing of a bankruptcy proceeding
against it, or shall file a petition or answer or consent seeking
reorganization under the Federal Bankruptcy Act or any other similar
applicable federal or state law, or shall consent to the filing of any
such petition, or shall consent to the appointment of a receiver or
liquidator or trustee or assignee in bankruptcy or insolvency of it or
substantially all of its property or shall make an assignment for the
benefit of creditors; or
(3) the entry by a court or supervisory authority having
jurisdiction in the premises and applying any federal or state bankruptcy,
insolvency, reorganization or other similar law or regulation of (a) a
decree or order for relief in respect of the Bank in an involuntary case
or proceeding or (b) a decree or order adjudging the Bank a bankrupt or
insolvent, or approving as properly filed, a petition seeking
reorganization, arrangement, adjustment or composition of, or in respect
of, the Bank, or ordering that a receiver, liquidator, assignee,
custodian, trustee, conservator, sequestrator or other similar official
shall be appointed as to, or take possession of, the Bank or any
substantial part of its property without its consent, or ordering the
winding up or liquidation of the affairs of the Bank, and the continuance
of any such decree or order unstayed and in effect for a period of 60
consecutive days; or
(4) the commencement by the Bank of a voluntary case under any
applicable Federal or state bankruptcy, insolvency or other similar law,
or the consent by it to the entry of an order for relief in an involuntary
case under any such law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of
the Bank or of any substantial part of its property, or the making by it
of an assignment for the benefit of creditors, or the admission by it in
writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Bank in furtherance of any action;
or
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(5) The FDIC or any successor thereto shall be appointed by any court or
the OTS or any successor thereto to act as conservator, liquidator,
receiver or other legal custodian for the Bank.
Section 502. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default with respect to Notes at the time Outstanding
occurs and is continuing, then in every such case the Trustee or the Holders of
not less than 25% in principal amount of the Outstanding Notes may declare the
unpaid principal of (and premium, if any), PLUS accrued and unpaid interest on
all of the Notes then Outstanding to be immediately due and payable, by a notice
in writing to the Company (and to the Trustee if given by Holders), and upon any
such declaration such principal amount (and premium, if any) and accrued
interest shall become immediately due and payable.
At any time after such a declaration of acceleration with respect to
Notes has been made and before a judgment or decree for payment of the money due
has been obtained by the Trustee as hereinafter in this Article provided, the
Holders of a majority in principal amount of the Outstanding Notes, by written
notice to the Company and the Trustee, may rescind and annul such declaration
and its consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue interest on all Notes,
(B) the principal of (and premium, if any, on) any Notes which
have become due otherwise than by such declaration of acceleration
and any interest thereon at the rate or rates prescribed therefor in
such Notes,
(C) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate or rates prescribed
therefor in such Notes, and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel;
and
(2) all Events of Default with respect to Notes, other than the
non-payment of the principal of Notes which have become due solely by such
declaration of acceleration, have been cured or waived as provided in
Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Section 503. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Company covenants that if
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(1) default is made in the payment of any interest on any Note when
such interest becomes due and payable and such default continues for a
period of 30 days, or
(2) default is made in the payment of the principal of (or premium,
if any, on) any Note at the Maturity thereof,
the Company shall, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Notes, the whole amount then due and payable on such Notes for
principal and any premium and interest and, to the extent that payment of such
interest shall be legally enforceable, interest on any overdue principal and
premium and on any overdue interest, at the rate or rates prescribed therefor in
such Notes; and, in addition thereto, such further amount as shall be sufficient
to cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company or any other obligor upon such Notes and collect the moneys
adjudged or decreed to be payable in the manner provided by law out of the
Property of the Company or any other obligor upon such Notes, wherever situated.
If an Event of Default with respect to Notes occurs and is
continuing, the Trustee may in its discretion, subject to applicable law,
proceed to protect and enforce its rights and the rights of the Holders of Notes
under this Indenture by such appropriate judicial proceedings as the Trustee
shall deem most effectual to protect and enforce any such rights, whether for
the specific enforcement of any covenant or agreement in this Indenture or in
aid of the exercise of any power granted herein, or to enforce any other proper
remedy.
Section 504. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of any judicial proceeding relative to the Company (or any
other obligor upon the Notes), its property or its creditors, the Trustee shall
be entitled and empowered, by intervention in such proceeding or otherwise, to
take any and all actions authorized under the Trust Indenture Act in order to
have claims of the Holders and the Trustee allowed in any such proceeding. In
particular, the Trustee shall be authorized to collect and receive any moneys or
other property payable or deliverable on any such claims and to distribute the
same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator
or other similar official in any such judicial proceeding is hereby authorized
by each Holder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders, to
pay to the Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 607.
No provision of this Indenture shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization,
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arrangement, adjustment or composition affecting the Notes or the rights of any
Holder thereof or to authorize the Trustee to vote in respect of the claim of
any Holder in any such proceeding.
Section 505. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES.
All rights of action and claims under this Indenture or the Notes
may be prosecuted and enforced by the Trustee without the possession of any of
the Notes or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Notes in respect of which such judgment has been recovered.
Section 506. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal or any premium
or interest, upon presentation of the Notes and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
607;
SECOND: to the payment of the amounts then due and unpaid for
principal of and any premium and interest on the Notes in respect of which
or for the benefit of which such money has been collected, ratably,
without preference or priority of any kind, according to the amounts due
and payable on such Notes for principal and any premium and interest,
respectively; and
THIRD: the balance, if any, to the Company.
Section 507. LIMITATION ON SUITS.
No Holder of any Note shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of
a continuing Event of Default with respect to the Notes;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name
as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
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(4) the Trustee for 30 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 30-day period by the Holders of a
majority in principal amount of the Outstanding Notes;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
such Holders, or to obtain or to seek to obtain priority or preference over any
other of such Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all of such
Holders.
Section 508. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM
AND INTEREST.
Notwithstanding any other provision in this Indenture, the Holder of
any Note shall have the right, which is absolute and unconditional, to receive
payment of the principal of and any premium and (subject to Section 310) any
interest on such Note on the Stated Maturity or Maturities expressed in such
Note and to institute suit for the enforcement of any such payment, and such
rights shall not be impaired without the consent of such Holder.
Section 509. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
Section 510. RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of
Section 309, no right or remedy herein conferred upon or reserved to the Trustee
or to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
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Section 511. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Notes to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.
Section 512. CONTROL BY HOLDERS.
The Holders of a majority in principal amount of the Outstanding
Notes shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee, or exercising any trust
or power conferred on the Trustee, with respect to the Notes, provided that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
(2) the Trustee shall not determine that the action so directed would
be unjustly prejudicial to Holders not taking part in such direction, and
(3) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
Section 513. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in principal amount of the
Outstanding Notes may on behalf of the Holders of all the Notes waive any past
default hereunder and its consequences, except a default
(1) in the payment of the principal of or any premium, if any, or
interest on any Note, or
(2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Note.
Upon any such waiver, such default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
Section 514. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Trustee for any action taken, suffered or
omitted by it as Trustee, a court may
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require any party litigant in such suit to file an undertaking to pay the costs
of such suit, and may assess costs against any such party litigant, in the
manner and to the extent provided in the Trust Indenture Act; provided that
neither this Section nor the Trust Indenture Act shall be deemed to authorize
any court to require such an undertaking or to make such an assessment in any
suit instituted by the Company.
Section 515. WAIVER OF STAY OR EXTENSION LAWS.
The Company covenants (to the extent that it may lawfully do so)
that it will not at any time insist upon, or plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE SIX
THE TRUSTEE
Section 601. CERTAIN DUTIES AND RESPONSIBILITIES.
The duties and responsibilities of the Trustee shall be as provided
by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this
Indenture shall require the Trustee to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it. Whether or not therein
expressly so provided, every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section.
Section 602. NOTICE OF DEFAULTS.
If an Event of Default or a default in the performance and
observance of any of the terms, provisions and conditions of this Indenture
occurs hereunder with respect to the Notes, the Trustee shall give the Holders
of Outstanding Notes notice of such default as and to the extent provided by the
Trust Indenture Act.
Section 603. CERTAIN RIGHTS OF TRUSTEE.
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness
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or other paper or document believed by it to be genuine and to have been
signed or presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of
bad faith on its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel and the written advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable Note or indemnity
against the costs, expenses and liabilities which might be incurred by it
in compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company, personally or by agent or attorney;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder; and
(h) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority in principal amount of the
Outstanding Notes relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any
trust or power conferred upon the Trustee, under this Indenture.
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Section 604. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF NOTES.
The recitals contained herein and in the Notes, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company,
and the Trustee or any Authenticating Agent assumes no responsibility for their
correctness. The Trustee makes no representations as to the validity or
sufficiency of this Indenture or of the Notes. The Trustee or any Authenticating
Agent shall not be accountable for the use or application by the Company of
Notes or the proceeds thereof.
Section 605. MAY HOLD NOTES.
The Trustee, any Authenticating Agent, any Paying Agent, any
Security Registrar or any other agent of the Company, in its individual or any
other capacity, may become the owner or pledgee of Notes and, subject to
Sections 608 and 613, may otherwise deal with the Company with the same rights
it would have if it were not Trustee, Authenticating Agent, Paying Agent,
Security Registrar or such other agent.
Section 606. MONEY HELD IN TRUST.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed with the Company.
Section 607. COMPENSATION AND REIMBURSEMENT.
The Company agrees
(1) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad
faith; and
(3) to indemnify the Trustee for, and to hold it harmless against,
any loss, liability or expense incurred without negligence or bad faith on
its part, arising out of or in connection with the acceptance or
administration of the trust or trusts hereunder, including the costs and
expenses of defending itself against any claim or liability in connection
with the exercise or performance or any of its powers or duties hereunder.
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Section 608. DISQUALIFICATION; CONFLICTING INTERESTS.
If the Trustee has or shall acquire a conflicting interest within
the meaning of Section 310(b) of the Trust Indenture Act, the Trustee shall
either eliminate such interest or resign, to the extent and in the manner
provided by, and subject to the provisions of, the Trust Indenture Act and this
Indenture.
Section 609. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which shall be a
Person that is eligible pursuant to the Trust Indenture Act to act as such and
has a combined capital and surplus of at least $50,000,000. If such Person
publishes reports of condition at least annually, pursuant to law or to the
requirements of said supervising or examining authority, then for the purposes
of this Section the combined capital and surplus of such Person shall be deemed
to be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article.
Section 610. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 611.
(b) The Trustee may resign at any time with respect to the Notes by
giving written notice thereof to the Company. If the instrument of acceptance by
a successor Trustee required by Section 611 shall not have been delivered to the
Trustee within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor Trustee with respect to the Notes.
(c) The Trustee may be removed at any time with respect to the Notes
by Act of the Holders of a majority in principal amount of the Outstanding
Notes, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 608 after written
request therefor by the Company or by any Holder who has been a bona fide
Holder of a Note for at least six months, or
(2) the Trustee shall cease to be eligible under Section 609 and
shall fail to resign after written request therefor by the Company or by
any such Holder, or
(3) the Trustee shall become incapable of acting or shall be adjudged
a bankrupt or insolvent or a receiver of the Trustee or of its property
shall be appointed or
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any public officer shall take charge or control of the Trustee or of its
property or affairs for the purpose of rehabilitation, conservation or
liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to all Notes, or (ii) subject to Section 514, any Holder
who has been a bona fide Holder of a Note for at least six months may, on behalf
of himself and all others similarly situated, petition any court of competent
jurisdiction for the removal of the Trustee with respect to all Notes and the
appointment of a successor Trustee or Trustees.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, with
respect to the Notes, the Company, by a Board Resolution, shall promptly appoint
a successor Trustee or Trustees with respect to the Notes (it being understood
that any such successor Trustee may be appointed with respect to the Notes and
that at any time there shall be only one Trustee with respect to the Notes and
shall comply with the applicable requirements of Section 611. If, within one
year after such resignation, removal or incapability, or the occurrence of such
vacancy, a successor Trustee with respect to the Notes shall be appointed by Act
of the Holders of a majority in principal amount of the Outstanding Notes
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment in accordance
with the applicable requirements of Section 611, become the successor Trustee
with respect to the Notes and to that extent supersede the successor Trustee
appointed by the Company. If no successor Trustee with respect to the Notes
shall have been so appointed by the Company or the Holders and accepted
appointment in the manner required by Section 611, any Holder who has been a
bona fide Holder of a Note for at least six months may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the appointment of a successor Trustee with respect to the Notes.
(f) The Company shall give notice of each resignation and each
removal of the Trustee with respect to the Notes and each appointment of a
successor Trustee with respect to the Notes to all Holders of Notes in the
manner provided in Section 106. Each notice shall include the name of the
successor Trustee with respect to the Notes and the address of its Corporate
Trust Office.
Section 611. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
(a) In case of the appointment hereunder of a successor Trustee with
respect to all Notes, every such successor Trustee so appointed shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee; but, on the request of the
Company or the successor Trustee, such retiring Trustee shall, upon payment of
its charges, execute and deliver an instrument transferring to such successor
Trustee all the rights, powers and trusts of the retiring Trustee and shall duly
assign, transfer and deliver to such successor Trustee all property and money
held by such retiring Trustee hereunder.
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(b) In case of the appointment hereunder of a successor Trustee with
respect to the Notes, the Company, the retiring Trustee and such successor
Trustee shall execute and deliver an indenture supplemental hereto wherein such
successor Trustee shall accept such appointment and which (1) shall contain such
provisions as shall be necessary or desirable to transfer and confirm to, and to
vest in, such successor Trustee all the rights, powers, trusts and duties of the
retiring Trustee with respect to the Notes to which the appointment of such
successor Trustee relates (2) if the retiring Trustee is not retiring with
respect to all Notes, shall contain such provisions as shall be deemed necessary
or desirable to confirm that all the rights, powers, trusts and duties of the
retiring Trustee with respect to the Notes as to which the retiring Trustee is
not retiring shall continue to be vested in the retiring Trustee, and (3) shall
add to or change any of the provisions of this Indenture as shall be necessary
to provide for or facilitate the administration of the trusts hereunder by more
than one Trustee, it being understood that nothing herein or in such
supplemental indenture shall constitute such Trustee's co-trustees of the same
trust and that each such Trustee shall be trustee of a trust or trusts hereunder
separate and apart from any trust or trusts hereunder administered by any other
such Trustee; and upon the execution and delivery of such supplemental indenture
the resignation or removal of the retiring Trustee shall become effective to the
extent provided therein and such successor Trustee, without any further act,
deed or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee with respect to the Notes; but, on request of the
Company or any successor Trustee, such retiring Trustee shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder with respect to the Notes to which the
appointment of such successor Trustee relates.
(c) Upon request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts referred
to in paragraph (a) and (b) of this Section, as the case may be.
(d) No successor Trustee shall accept its appointment unless at the
time of such acceptance such successor Trustee shall be qualified and eligible
under this Article.
Section 612. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Notes shall have been authenticated, but
not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Notes so authenticated with the same effect as if
such successor Trustee had itself authenticated such Notes.
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Section 613. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee shall comply with the provisions of Section 311 of the
Trust Indenture Act.
Section 614. APPOINTMENT OF AUTHENTICATING AGENT.
The Trustee may appoint an Authenticating Agent or Agents with
respect to the Notes which shall be authorized to act on behalf of the Trustee
to authenticate Notes issued upon original issue and upon exchange or
registration of transfer or pursuant to Section 309, and Notes so authenticated
shall be entitled to the benefits of this Indenture and shall be valid and
obligatory for all purposes as if authenticated by the Trustee hereunder.
Wherever reference is made in this Indenture to the authentication and delivery
of Notes by the Trustee or the Trustee's certificate of authentication, such
reference shall be deemed to include authentication and delivery on behalf of
the Trustee by an Authenticating Agent and a certificate of authentication
executed on behalf of the Trustee by an Authenticating Agent. Each
Authenticating Agent shall be acceptable to the Company and shall at all times
be a corporation organized and doing business under the laws of the United
States of America, any State thereof or the District of Columbia, authorized
under such laws to act as Authenticating Agent, having a combined capital and
surplus of not less than $50,000,000 and subject to supervision or examination
by Federal or State authority. If such Authenticating Agent publishes reports of
condition at least annually, pursuant to law or to the requirements of said
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such Authenticating Agent shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time an Authenticating Agent shall cease to be
eligible in accordance with the provisions of this Section, such Authenticating
Agent shall resign immediately in the manner and with the effect specified in
this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall mail written notice of
such appointment by first-class mail, postage prepaid, to all Holders of 2004
Notes and the 2007 Notes, as applicable, with respect to which such
Authenticating Agent will serve, as their names and addresses appear in the Note
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Register. Any successor Authenticating Agent upon acceptance of its appointment
hereunder shall become vested with all the rights, powers and duties of its
predecessor hereunder, with like effect as if originally named as an
Authenticating Agent. No successor Authenticating Agent shall be appointed
unless eligible under the provisions of this Section.
The Company agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section.
__________________________ is initially designated as the
Authenticating Agent for the Notes.
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 701. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.
The Company will furnish or cause to be furnished to the Trustee,
not more than 60 days after each semi-annual interest payment, as the case may
be, where such interest payments are to be made, and at such other times as the
Trustee may request in writing, within 30 days after receipt by the Company of
any such request, a list in such form as the Trustee may reasonably require
containing all information in the possession or control of the Company, or any
of its paying agents other than the Trustee, as to the names and addresses of
the Holders of Notes obtained since the date as of which the next previous list,
if any, was furnished.
Section 702. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS.
(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders contained in the most
recent list furnished to the Trustee as provided in Section 701 and the names
and addresses of Holders received by the Trustee in its capacity as Note
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 701 upon receipt of a new list so furnished.
(b) Holders may communicate as provided in Section 312(b) of the
Trust Indenture Act with other Holders with respect to their rights under this
Indenture or under the Notes.
(c) Every Holder of Notes agrees with the Company and the Trustee
that neither the Company nor the Trustee nor any agent of either of them shall
be held accountable by reason of any disclosure of information as to names and
addresses of Holders made pursuant to the Trust Indenture Act.
Section 703. REPORTS BY TRUSTEE.
(a) Within 60 days after _____ __ of each year commencing with the
year 1997, if and so long as any Notes shall be outstanding hereunder, the
Trustee shall transmit to Holders such reports as may be required pursuant to
Section 313 (a) of the Trust Indenture Act.
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(b) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange upon
which any Notes are listed, with the Commission and with the Company. The
Company will notify the Trustee when any Notes are listed on any stock exchange.
Section 704. REPORTS BY COMPANY.
The Company shall file with the Trustee and the Commission, and
transmit to Holders, such information, documents and other reports, and such
summaries thereof, as may be required pursuant to Section 314 of the Trust
Indenture Act at the times and in the manner provided pursuant thereto; provided
that any such information, documents or reports required to be filed with the
Commission pursuant to Section 13 or 15(d) of the Notes Exchange Act of 1934
shall be filed with the Trustee within 15 days after the same is so required to
be filed with the Commission.
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
Section 801. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Company covenants that it will not merge or consolidate with any
other corporation or sell or convey all or substantially all of its assets to
any person, firm or corporation, except that the Company may merge or
consolidate with, or sell or convey all or substantially all of its assets to,
any other corporation, PROVIDED that (i) either the Company shall be the
continuing corporation, or the successor corporation (if other than the Company)
shall be a corporation organized and existing under the laws of the United
States of America or a State thereof and such corporation shall expressly assume
the due and punctual payment of the principal of (and premium, if any) and
interest on all the Notes, according to their tenor, and the due and punctual
performance and observance of all of the covenants and conditions of this
Indenture to be performed by the Company by supplemental indenture in form
satisfactory to the Trustee, executed and delivered to the Trustee by such
corporation, and (ii) the Company or such successor corporation, as the case may
be, shall not, immediately after such merger or consolidation, or such sale or
conveyance, be in default in the performance of any such covenant or condition.
Section 802. SUCCESSOR SUBSTITUTED.
Upon any consolidation of the Company with, or merger of the Company
into, any other Person or any sale or conveyance of all or substantially all of
the assets of the Company in accordance with Section 801, the successor Person
formed by such consolidation or into which the Company is merged or to which
such sale or conveyance, is made shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under this Indenture with the
same effect as if such successor Person had been named as the Company herein,
and thereafter, except in the case of a lease, the predecessor Person shall be
relieved of all obligations and covenants under this Indenture and the Notes.
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Section 803. OPINION OF COUNSEL TO TRUSTEE.
The Trustee, may receive and shall be fully protected in relying
upon an Opinion of Counsel stating that any such consolidation, merger, sale or
conveyance, and any such assumption, complies with the provisions of this
Article.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
Section 901. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders, the Company, when authorized by
a Board Resolution, and the Trustee, at any time and from time to time, may
enter into one or more indentures supplemental hereto, in form satisfactory to
the Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the Company and
the assumption by any such successor of the covenants of the Company
herein and in the Notes; or
(2) to add to the covenants of the Company for the benefit of the
Holders of all or any of the Notes (and if such covenants are to be for
the benefit of less than all of the Notes, stating that such covenants are
expressly being included solely for the benefit of such Notes) or to
surrender any right or power herein conferred upon the Company; or
(3) to add any additional Events of Default; or
(4) to provide for uncertificated Notes in addition to or in place of
Certificated Notes; or
(5) to change or eliminate any of the provisions of this Indenture,
PROVIDED THAT any such change or elimination shall become effective only
when there is no Note Outstanding created prior to the execution of such
supplemental indenture which is entitled to the benefit of such provision;
or
(6) to secure the Notes; or
(7) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Notes and to add to
or change any of the provisions of this Indenture as shall be necessary to
provide for or facilitate the administration of the trusts hereunder by
more than one Trustee, pursuant to the requirements of Section 611(b); or
(8) subject to Section 907, to add to, change or eliminate any of the
provisions of Article Twelve in respect of the Notes, including
outstanding securities, PROVIDED that
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any such addition, change or elimination shall not adversely affect the
interests of the Holders of Outstanding Notes in any material respect;
(9) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising
under this Indenture, PROVIDED that such action pursuant to this clause
(9) shall not adversely affect the interests of the Holders of Notes; or
(10) to comply with the requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust
Indenture Act.
Section 902. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.
With the consent of the Holders of not less than 66-2/3% in
principal amount of the Outstanding Notes affected by such supplemental
indenture, by Act of said Holders delivered to the Company and the Trustee, the
Company, when authorized by a Board Resolution, and the Trustee may enter into
an indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture, or for the purpose of waiving or modifying in any manner the
rights of the Holders of Notes under this Indenture; PROVIDED, HOWEVER, that no
such supplemental indenture shall, without the consent of the Holder of each
Outstanding Note affected thereby,
(1) change the Stated Maturity of the principal of, or any
installment of principal of or interest on, any of the 2004 or 2007 Notes,
or change any Place of Payment where, or the coin or currency in which,
any such Note or any premium or interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment on or
after the Stated Maturity thereof, or
(2) reduce the percentage in principal amount of the Outstanding 2004
Notes or 2007 Notes , the consent of whose Holders is required for any
such supplemental indenture, or the consent of whose Holders is required
for any waiver (of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences) provided for in this
Indenture, or
(3) modify any of the provisions of this Section, Section 513 or
Section 1006 except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived
without the consent of the Holder of each Outstanding Note affected
thereby.
It shall not be necessary for any Act of Holders under this Section
to approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act shall approve the substance thereof.
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Section 903. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and shall be fully protected in relying upon, an Opinion of Counsel stating that
the execution of such supplemental indenture is authorized or permitted by this
Indenture. The Trustee may, but shall not be obligated to, enter into any such
supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
Section 904. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Notes theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby.
Section 905. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act.
Section 906. REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the
Company, to any such supplemental indenture may be prepared and executed by the
Company and authenticated and delivered by the Trustee in exchange for
Outstanding Notes.
Section 907. SUBORDINATION UNIMPAIRED.
No provision in any supplemental indenture that affects the superior
position of the holders of Senior Indebtedness shall be effective against any
holder of Senior Indebtedness, unless such holder shall have consented thereto.
Notwithstanding any provision in this Indenture or otherwise, the rights of
Entitled Persons in respect of Other Financial Obligations under this Indenture
and otherwise in respect of any of the 2004 Notes or the 2007 Notes, at any time
and from time to time, be modified in any respect or eliminated without the
consent of any Entitled Person in respect of Other Financial Obligations.
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ARTICLE TEN
COVENANTS
Section 1001. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company covenants and agrees for the benefit of Notes that it
shall duly and punctually pay the principal of and any premium and interest on
the Notes in accordance with the terms of the Notes and this Indenture.
Section 1002. MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in each Place of Payment for Notes an
office or agency where Notes may be presented or surrendered for payment, where
Notes may be surrendered for registration of transfer or exchange and where
notices and demands to or upon the Company in respect of the Notes and this
Indenture may be served. The Company will give prompt written notice to the
Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.
The Company may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; PROVIDED,
HOWEVER, that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in each Place of
Payment for Notes for such purposes. The Company will give prompt written notice
to the Trustee of any such designation or rescission and of any change in the
location of any such other office or agency.
Section 1003. MONEY FOR NOTES PAYMENTS TO BE HELD IN TRUST.
If the Company, any subsidiary or any of their respective affiliates
shall at any time act as its own Paying Agent with respect to the Notes, such
Paying Agent shall, on or before each due date of the principal of or any
premium or interest on any of the Notes, segregate and hold in trust for the
benefit of the Persons entitled thereto a sum sufficient to pay the principal
and any premium and interest so becoming due until such sums shall be paid to
such Persons or otherwise disposed of as herein provided and will promptly
notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for the
Notes, it shall, on or prior to each due date of the principal of or any premium
or interest on any Notes , deposit with a Paying Agent a sum sufficient to pay
such amount, such sum to be held as provided by the Trust Indenture Act, and
(unless such Paying Agent is the Trustee) the Company will promptly notify the
Trustee of its action or failure so to act.
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The Company shall cause the Paying Agent for the Notes other than
the Trustee to execute and deliver to the Trustee an instrument in which such
Paying Agent shall agree with the Trustee, subject to the provisions of this
Section, that such Paying Agent shall (i) comply with the provisions of the
Trust Indenture Act applicable to it as a Paying Agent and (ii) during the
continuance of any default by the Company (or any other obligor upon the Notes)
in the making of any payment in respect of the Notes, upon the written request
of the Trustee, forthwith pay to the Trustee all sums held in trust by such
Paying Agent for payment in respect of the Notes.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal of or any premium
or interest on any Note and remaining unclaimed for two years after such
principal, premium or interest has become due and payable shall be paid to the
Company on Company Request, or (if then held by the Company) shall be discharged
from such trust; and the Holder of such Note shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease.
Section 1004. STATEMENT BY OFFICERS AS TO DEFAULT.
The Company shall deliver to the Trustee, within 60 days after the
end of each fiscal year of the Company ending after the date hereof, a
certificate in accordance with Section 314 (a) (4) of the Trust Indenture Act
stating whether or not to the best knowledge of the signers thereof the Company
is in default in the performance and observance of any of the terms, provisions
and conditions of this Indenture (without regard to any requirement of notice
provided hereunder) and, if the Company shall be in default, specifying all such
defaults and the nature and status thereof of which they may have knowledge.
Section 1005. CORPORATE EXISTENCE.
Subject to Article Eight, the Company shall do or cause to be done
all things necessary to preserve and keep in full force and effect its corporate
existence, rights (charter and statutory) and franchises; PROVIDED, HOWEVER,
that the Company shall not be required to preserve any such right or franchise
if the Company shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Holders.
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Section 1006. WAIVER OF CERTAIN COVENANTS.
The Company may omit in any particular instance to comply with any
term, provision or condition of any covenant (other than the covenants contained
in Sections 1001 to 1005) made applicable to the Notes pursuant to Section 301
hereof with respect to the Notes if before the time for such compliance the
Holders of at least 66-2/3% in principal amount of the Outstanding Notes shall,
by Act of such Holders, either waive such compliance in such instance or
generally waive compliance with such term, provision or condition, but no such
waiver shall extend to or affect any term, provision or condition except to the
extent so expressly waived, and, until such waiver shall become effective, the
obligations of the Company and the duties of the Trustee in respect of any such
term, provision or condition shall remain in full force and effect.
Section 1007. MAINTENANCE OF STATUS OF SUBSIDIARIES AS INSURED DEPOSITORY
INSTITUTION.
The Company shall do or cause to be done all things necessary to
preserve and keep in full force and effect the status of each of its
subsidiaries that is a depository institution (including the Bank) as an insured
depository institution and do or cause to be done all things necessary to ensure
that savings accounts of each such subsidiary are insured by the FDIC or any
successor organization up to the maximum amount permitted by 12 U.S.C. Section
1811 ET SEQ. and the regulations thereunder or any succeeding federal law,
except as to individual accounts or interests in employee benefit plans that are
not entitled to "pass-through" insurance under 12 U.S.C. Section 1821(a)(1)(D).
Section 1008. CAPITAL AND DIVIDENDS.
The Company shall not declare or pay any dividend or make any other
distribution on any shares of its common stock (other than dividends payable
solely in shares of its common stock), or make (or permit any subsidiary to
make) any payment to purchase or otherwise retire or acquire any such shares, if
at the time of such action the Company is not in compliance, or would fail as a
result of such action to remain in compliance, with any minimum capital
maintenance requirements established by the Federal Reserve Board or another
banking regulator that are then applicable to the Company.
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ARTICLE ELEVEN
SUBORDINATION OF NOTES
Section 1101. NOTES SUBORDINATED TO EXTENT PROVIDED.
The Company covenants and agrees, and each Holder of a Note, by his
or her acceptance thereof, likewise covenants and agrees, that, to the extent
and in the manner hereinafter set forth in this Article, the indebtedness
represented by the Notes and the payment of the principal of, premium, if any,
and interest on each and all of the Notes are hereby expressly made subordinate
and subject in right of payment to the prior payment in full of all Senior
Indebtedness, and, to the extent set forth in Section 1115, to Other Financial
Obligations.
Section 1102. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC.
In the event of (a) any insolvency or bankruptcy case or proceeding,
or any receivership, liquidation, reorganization or other similar case or
proceeding in connection therewith, relative to the Company or to its assets, or
(b) any liquidation, dissolution or other winding up of the Company, whether
voluntary or involuntary and whether or not involving solvency or bankruptcy, or
(c) any assignment for the benefit of creditors or any other marshalling of
assets and liabilities of the Company, then and in any such event the holders of
Senior Indebtedness shall be entitled to receive payment in full of all amounts
due or to become due on or in respect of all Senior Indebtedness, or provision
shall be made for such payment in money or money's worth, before the Holders of
the Notes are entitled to receive any payment on account of principal of or
premium, if any, or interest on the Notes, and to that end the holders of Senior
Indebtedness shall be entitled to receive, for application to the payment
thereof, any payment or distribution of any kind or character, whether in cash,
property or securities, which may be payable or deliverable in respect of the
2004 Notes or the 2007 Notes in any such case, proceeding, dissolution,
liquidation or other winding up or event.
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or Holder of any 2004 Note or 2007 Note shall have received
any payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, before all Senior Indebtedness is paid
in full or payment thereof provided for, and if such fact shall, at or prior to
the time of such payment or distribution, have been made known to the Trustee
or, as the case may be, such Holder, then and in such event such payment or
distribution shall be paid over or delivered by the Trustee or the Holder, as
the case may be, forthwith to the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee, agent or other Person making payment or
distribution of assets of the Company for application to the payment of all
Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.
For purposes of this Article only, the words "cash, property or
securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or
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readjustment which are subordinated in right of payment to all Senior
Indebtedness which may at the time be outstanding to substantially the same
extent as, or to a greater extent than, the Notes are so subordinated as
provided in this Article. The consolidation of the Company with, or the merger
of the Company into, another Person or the liquidation or dissolution of the
Company following the conveyance or transfer of its properties and assets
substantially as an entirety to another Person upon the terms and conditions set
forth in Article Eight shall not be deemed a dissolution, winding up,
liquidation, reorganization, assignment for the benefit of creditors or
marshalling of assets and liabilities of the Company for the purposes of this
Section if the Person formed by such consolidation or into which the Company is
merged or the Person which acquires by conveyance or transfer such properties
and assets substantially as an entirety, as the case may be, shall, as a part of
such consolidation, merger, conveyance or transfer, comply with the conditions
set forth in Article Eight.
Section 1103. PRIOR PAYMENT TO SENIOR INDEBTEDNESS UPON ACCELERATION OF
NOTES.
In the event that any of the 2004 Notes or the 2007 Notes are
declared due and payable before their Stated Maturity, then and in such event
the holders of the Senior Indebtedness shall be entitled to receive payment in
full of all amounts due on or in respect of all Senior Indebtedness, or
provision shall be made for such payment in money or money's worth, before the
Holders of the 2004 Notes or the 2007 Notes are entitled to receive any payment
of principal of or premium, if any, or interest on the 2004 Notes or the 2007
Notes or on account of the purchase or other acquisition of the 2004 Notes or
the 2007 Notes.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any of the 2004 Notes or the
2007 Notes prohibited by the foregoing provisions of this Section, and if such
fact shall, at or prior to the time of such payment, have been made known to the
Trustee or, as the case may be, such Holder, then and in such event such payment
shall be paid over and delivered by the Trustee or the Holder, as the case may
be, forthwith to the Company.
The provisions of this Section shall not apply to any payment with
respect to which Section 1102 would be applicable.
Section 1104. NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT.
In the event and during the continuation of any default in the
payment of principal of (or premium, if any) or interest on any Senior
Indebtedness beyond any applicable grace period with respect thereto, or in the
event that any event of default with respect to any Senior Indebtedness shall
have occurred and be continuing permitting the holders of such Senior
Indebtedness (or a trustee on behalf of the holders thereof) to declare such
Senior Indebtedness due and payable prior to the date on which it would
otherwise have become due and payable, unless and until such event of default
shall have been cured or waived or shall have ceased to exist and such
acceleration shall have been rescinded or annulled, or (b) in the event any
judicial proceeding shall be pending with respect to any such default in
payment, or event of default, then no payment shall be made by the Company on
account of principal of (or premium, if any) or
45
<PAGE>
interest on the Notes or on account of the purchase or other acquisition of any
of the 2004 Notes or the 2007 Notes.
In the event that, notwithstanding the foregoing, the Company shall
make any payment to the Trustee or the Holder of any of the 2004 Notes or the
2007 Notes prohibited by the foregoing provisions of this Section, and if such
fact shall, at or prior to the time of such payment, have been made known to the
Trustee or, as the case may be, such Holder, then and in such event such payment
shall be paid over and delivered by the Trustee or the Holder, as the case may
be, forthwith to the Company.
The provisions of this Section shall not apply to any payment with
respect to which Section 1102 would be applicable.
Section 1105. PAYMENT PERMITTED IF NO DEFAULT.
Nothing contained in this Article or elsewhere in this Indenture or
in any of the Notes shall prevent (a) the Company, at any time except during the
pendency of any case, proceeding, dissolution, liquidation or other winding up,
assignment for the benefit of creditors or other marshalling of assets and
liabilities of the Company referred to in Section 1102 or under the conditions
described in Section 1103 or 1104, from making payments at any time of principal
of or interest on the Notes, or (b) the application by the Trustee or any Paying
Agent of any moneys deposited with it hereunder to the payment of or on account
of the principal of or premium, if any, or interest on the Notes and the
retention by the Holders of any moneys so received if, at the time of such
payment, the Trustee or such Paying Agent did not have knowledge that such
payment would have been prohibited by the provisions of this Article.
Section 1106. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS.
Subject to the payment in full of all Senior Indebtedness, the
Holders of the Notes shall be subrogated (equally and ratably with the holders
of all indebtedness of the Company which by its express terms is subordinated to
indebtedness of the Company to substantially the same extent as the Notes are
subordinated and is entitled to like rights of subrogation) to the rights of the
holders of such Senior Indebtedness to receive payments and distributions of
cash, property and securities applicable to the Senior Indebtedness until the
principal of, premium, if any, and interest on the Notes shall be paid in full.
For purposes of such subrogation, no payments or distributions to the holders of
the Senior Indebtedness of any cash, property or securities to which the Holders
of the Notes or the Trustee would be entitled except for the provisions of this
Article, and no payments over pursuant to the provisions of this Article to the
holders of Senior Indebtedness by Holders of the Notes or the Trustee, shall, as
among the Company, its creditors other than holders of Senior Indebtedness and
the Holders of the Notes, be deemed to be a payment or distribution by the
Company to or on account of the Senior Indebtedness.
46
<PAGE>
Section 1107. OBLIGATIONS OF COMPANY UNCONDITIONAL; PROVISIONS SOLELY TO
DEFINE RELATIVE RIGHTS.
The provisions of this Article are and are intended solely for the
purpose of defining the relative rights of the Holders of the Notes on the one
hand and the holders of Senior Indebtedness (and, in the case of Section 1115,
Entitled Persons in respect of Other Financial Obligations) on the other hand.
Nothing contained in this Article or elsewhere in this Indenture or in the Notes
is intended to or shall: (a) impair, as among the Company, its creditors other
than holders of Senior Indebtedness, Entitled Persons in respect of Other
Financial Obligations and the Holders of the Notes, the obligation of the
Company, which is absolute and unconditional (and which, subject to the rights
under this Article of the holders of Senior Indebtedness and the rights under
Section 1115 of Entitled Persons in respect of Other Financial Obligations, is
intended to rank equally with all other general obligations of the Company), to
pay to the Holders of the Notes the principal of, premium, if any, and interest
on the Notes as and when the same shall become due and payable in accordance
with their terms; (b) affect the relative rights against the Company of the
Holders of the Notes and creditors of the Company other than the holders of
Senior Indebtedness and of Entitled Persons in respect of Other Financial
Obligations; or (c) prevent the Trustee or the Holder of any Note from
exercising all remedies otherwise permitted by applicable law upon default under
this Indenture, subject to the rights, if any, under this Article of the holders
of Senior Indebtedness, and under Section 1115 of Entitled Persons in respect of
Other Financial Obligations, to receive cash, property and securities otherwise
payable or deliverable to the Trustee or such Holder.
Section 1108. AUTHORIZATION OF TRUSTEE TO EFFECTUATE SUBORDINATION OF
NOTES.
Each Holder of a Note, by his or her acceptance thereof, authorizes
and expressly directs the Trustee on his or her behalf to take such action as
may be necessary or appropriate to effectuate the subordination and payment
provided in this Article.
Section 1109. NO WAIVER OF SUBORDINATION PROVISIONS.
No right of any present or future holder of any Senior Indebtedness
and Entitled Persons in respect of Other Financial Obligations, as the case may
be, to enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
non-compliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof any such holder may have or be
otherwise charged with.
Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Indebtedness and Entitled Persons in respect of
Other Financial Obligations, as the case may be, may, at any time and from time
to time, without the consent of or notice to the Trustee or the Holders of the
Notes, without incurring responsibility to the Holders of the Notes and without
impairing or releasing the subordination provided in this Article or the
obligations hereunder of the Holders of the Notes to the holders of Senior
Indebtedness or Other Financial Obligations, do any one or more of the
following: (i) change the manner, place or terms of
47
<PAGE>
payment or extend the time of payment of, or renew or alter, Senior Indebtedness
or Other Financial Obligations, or otherwise amend or supplement in any manner
Senior Indebtedness or Other Financial Obligations or any instrument evidencing
the same or any agreement under which Senior Indebtedness or Other Financial
Obligations is outstanding; (ii) sell, exchange, release or otherwise deal with
any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii)
release any Person liable in any manner for the collection of Senior
Indebtedness or Other Financial Obligations; and (iv) exercise or refrain from
exercising any rights against the Company and any other Person.
Section 1110. NOTICE TO TRUSTEE; TRUSTEE NOT CHARGED WITH KNOWLEDGE OF
PROHIBITION.
The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment or
distribution to or by the Trustee in respect of the any of the 2004 Notes or the
2007 Notes. Notwithstanding the provisions of this Article or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts which would prohibit the making of any payment or
distribution to or by the Trustee in respect of any of the 2004 Notes or the
2007 Notes, unless and until the Trustee shall have received written notice
thereof from the Company or a holder of Senior Indebtedness or from any trustee
therefor or from any Entitled Persons in respect of Other Financial Obligations,
and, prior to the receipt of any such written notice, the Trustee shall be
entitled in all respects to assume that no such facts exist.
The Trustee shall be entitled to rely on the delivery to it of a
written notice by a Person representing himself to be a holder of Senior
Indebtedness (or a trustee therefor) or an Entitled Person in respect of Other
Financial Obligations to establish that such notice has been given by a holder
of Senior Indebtedness (or a trustee therefor) or an Entitled Person in respect
of Other Financial Obligations. In the event that the Trustee determines in good
faith that further evidence is required with respect to the right of any Person
as a holder of Senior Indebtedness or an Entitled Person in respect of Other
Financial Obligations to participate in any payment or
distribution pursuant to this Article, Trustee may request such Person to
furnish evidence to the reasonable satisfaction of the Trustee as to the amount
of Senior Indebtedness or Other Financial Obligations held by such Person, the
extent to which such Person is entitled to participate in such payment or
distribution and any other facts pertinent to the rights of such Person under
this Article, and if such evidence is not furnished, the Trustee may defer any
payment or distribution to such Person pending judicial determination as to the
right of such Person to receive such payment.
Section 1111. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING
AGENT.
Upon any payment or distribution of assets of the Company referred
to in this Article, the Trustee and the Holders of the Notes shall be entitled
to rely upon any order or decree entered by any court of competent jurisdiction
in which such insolvency, bankruptcy, receivership, liquidation, reorganization,
dissolution, winding up or similar case or proceeding is pending, or a
certificate of the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee for the benefit of creditors, agent or other Person making
such payment or distribution,
48
<PAGE>
delivered to the Trustee or to the Holders of Notes, for the purpose of
ascertaining the Persons entitled to participate in such payment or
distribution, the holders of the Senior Indebtedness and other indebtedness of
the Company and the Entitled Persons in respect of Other Financial Obligations,
the amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Article.
Section 1112. NO FIDUCIARY DUTY TO HOLDERS OF SENIOR INDEBTEDNESS OR OTHER
FINANCIAL OBLIGATIONS.
The Trustee shall not be deemed to owe any duty to the holders of
Senior Indebtedness of the Company or Entitled Persons in respect of Other
Financial Obligations, except as provided in this Article.
Section 1113. RIGHT OF TRUSTEE TO HOLD SENIOR INDEBTEDNESS OF COMPANY.
The Trustee shall be entitled to all of the rights set forth in this
Article in respect of any Senior Indebtedness or Other Financial Obligations of
the Company at any time held by it to the same extent as any other holder of
such Senior Indebtedness or of any Entitled Person in respect of Other Financial
Obligations , and nothing in this Indenture shall be construed to deprive the
Trustee of any of its rights as such holder or as such Entitled Person.
Section 1114. ARTICLE APPLICABLE TO PAYING AGENTS.
(a) In case at any time any Paying Agent other than the Trustee
shall have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article shall in such case (unless the context
otherwise requires) be construed as extending to and including such Paying Agent
within its meaning as fully for all intents and purposes as if such Paying Agent
were named in this Article in addition to or in place of the Trustee; provided,
however, that Section 1113 shall not apply to the Company or any Affiliate of
the Company if it or such Affiliate acts as Paying Agent.
Section 1115. 2004 NOTES AND 2007 NOTES TO RANK PARI PASSU WITH EACH OTHER;
PAYMENT OF PROCEEDS IN CERTAIN CASES.
(a) Subject to the provisions of this Section, the 2004 Notes and
the 2007 Notes shall rank pari passu in right of payment with each other.
(b) Upon the occurrence of any of the events specified in clauses
(a), (b) and (c) of the first paragraph of Section 1102, the provisions of that
Section shall be given effect to determine the amount of cash, property or
securities which may be payable or deliverable as between the holders of Senior
Indebtedness, on the one hand, and the Holders of any of the 2004 Notes or the
2007 Notes, on the other hand.
(c) If, after giving effect to the provisions of Section 1102 and
Section 1106, any amount of cash, property or securities shall be available for
payment or distribution in respect of the Notes ("EXCESS PROCEEDS"), and, if at
such time, any Entitled Persons in respect of Other
49
<PAGE>
Financial Obligations shall not have received payment in full of all amounts due
or to become due on or in respect of such Other Financial Obligations (and
provision shall not have been made for such payment in money or money's worth),
then such Excess Proceeds shall first be applied (ratably with any amount of
cash, property or securities available for payment or distribution in respect of
any other indebtedness of the Company that by its express terms provides for the
payment over of amounts corresponding to Excess Proceeds to Entitled Persons in
respect of Other Financial Obligations) to pay or provide for the payment of the
Other Financial Obligations remaining unpaid, to the extent necessary to pay all
Other Financial Obligations in full, after giving effect to any concurrent
payment or distribution to or for Entitled Persons in respect of Other Financial
Obligations. Any Excess Proceeds remaining after the payment (or provision for
payment) in full of all Other Financial Obligations shall be available for
payment or distribution in respect of the Notes.
(d) In the event that, notwithstanding the foregoing provisions of
subsection (c) of this Section, the Trustee or Holder of any Note shall have
received any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, before all Other Financial
Obligations are paid in full or payment thereof duly provided for, and if such
fact shall, at or prior to the time of such payment or distribution have been
made known to the Trustee or, as the case may be, such Holder, then and in such
event, subject to any obligation that the Trustee or such Holder may have
pursuant to Section 1102, such payment or distribution shall be paid over or
delivered by the Trustee or the Holder, as the case may be, forthwith to the
trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee, agent
or other Person making payment or distribution of assets of the Company for
payment in accordance with subsection (c).
(e) Subject to the payment in full of all Other Financial
Obligations, the Holders of the Notes shall be subrogated (equally and ratably
with the holders of all indebtedness of the Company that by its express terms
provides for the payment over of amounts corresponding to Excess Proceeds to
Entitled Persons in respect of Other Financial Obligations and is entitled to
like rights of subrogation) to the rights of the Entitled Persons in respect of
Other Financial Obligations to receive payments and distributions of cash,
property and securities applicable to the Other Financial Obligations until the
principal of and interest on the Notes shall be paid in full. For purposes of
such subrogation, no payments or distributions to Entitled Persons in respect of
Other Financial Obligations of any cash, property or securities to which Holders
of the Notes or the Trustee would be entitled except for the provisions of this
Section, and no payments over pursuant to the provisions of this Section to
Entitled Persons in respect of Other Financial Obligations by Holders of Notes
or the Trustee, shall, as among the Company, its creditors other than Entitled
Persons in respect of Other Financial Obligations and the Holders of Notes be
deemed to be a payment or distribution by the Company to or on account of the
Other Financial Obligations.
(f) The provisions of subsections (c), (d) and (e) of this Section
are and are intended solely for the purpose of defining the relative rights of
the Holders of the Notes, on the one hand, and the Entitled Persons in respect
of Other Financial Obligations, on the other hand, after giving effect to the
rights of the holders of Senior Indebtedness, as provided in this Article.
50
<PAGE>
Nothing contained in subsections (c), (d) and (e) of this Section is intended to
or shall affect the relative rights against the Company of the Holders of the
Notes and (1) the holders of Senior Indebtedness, (2) the holders of
Indebtedness other than holders of indebtedness that by its express terms
provides for the payment over of amounts corresponding to Excess Proceeds to
Entitled Persons in respect of Other Financial Obligations or (3) other
creditors of the Company other than Entitled Persons in respect of Other
Financial Obligations.
ARTICLE TWELVE
MISCELLANEOUS
SECTION 1201. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The
Trustee may make reasonable rules for action by or a meeting of Holders, and any
Registrar and Paying Agent may make reasonable rules for their functions;
PROVIDED THAT no such rule shall conflict with terms of this Indenture or the
Trust Indenture Act.
SECTION 1203. NO RECOURSE AGAINST OTHERS. No director, officer,
employee, incorporator or stockholder of the Company, as such, shall have any
liability for any obligations of the Company under the Notes or this Indenture
or for any claim based on, in respect of, or by reason of, such obligations or
their creation, solely by reason of its status as a director, officer, employee,
incorporator or stockholder of the Company. By accepting a Note, each Holder
waives and releases all such liability (but only such liability) as part of the
consideration for issuance of such Note to such Holder.
SECTION 1203. COUNTERPARTS. This Indenture may be executed in any
number of counterparts and by the parties thereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
SECTION 1204. FURTHER INSTRUMENTS AND ACTS. Upon request of the
Trustee, the Company will execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purposes of this Indenture.
51
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
BANK UNITED CORP.
By______________________________
Name:
Title
Attest:
AS TRUSTEE
By______________________________
Name:
Title
Attest:
52
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the day of , 1997, before me personally came ,
to me known, who, being by me duly sworn, did depose and say that he is a
_________ of BANK UNITED CORP., one of the parties described in and which
executed the foregoing instrument; that he knows the seal of said corporation;
that the seal affixed to said instrument is such corporate seal; that it was so
affixed by authority of the Board of Directors of said corporation, and that he
signed his name thereto by like authority.
---------
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the th day of , 1997, before me personally came ,
to me known, who, being by me duly sworn, did depose and say that he is
Corporate Trust Officer of _____________________ , N.A., one of the parties
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
---------
<PAGE>
EXHIBIT A
[FORM OF 2004 NOTE GLOBAL NOTE]
2
<PAGE>
EXHIBIT B
[FORM OF 2004 NOTE CERTIFICATED NOTE]
3
<PAGE>
EXHIBIT C
[FORM OF 2007 NOTE GLOBAL NOTE]
4
<PAGE>
EXHIBIT D
[FORM OF 2007 NOTE CERTIFICATED NOTE]
5
EXHIBIT 12
BANK UNITED CORP
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
EARNINGS
Income before income taxes, minority
interest, and extraordinary loss... $ 67,836 $ 90,111 $ 86,081 $ 122,303 $ 56,805
Fixed charges........................ 592,670 560,989 328,940 308,181 355,860
---------- ---------- ---------- ---------- ----------
Income before income taxes, minority
interest, extraordinary loss, and
fixed charges...................... $ 660,506 $ 651,100 $ 415,021 $ 430,484 $ 412,665
========== ========== ========== ========== ==========
FIXED CHARGES
Interest expense..................... $ 584,778 $ 552,760 $ 320,924 $ 300,831 $ 348,291
One-third net rental expense......... 6,892 7,253 7,039 6,656 7,007
Amortization of debt expense......... 1,000 976 977 694 562
---------- ---------- ---------- ---------- ----------
Total fixed charges.................. $ 592,670 $ 560,989 $ 328,940 $ 308,181 $ 355,860
========== ========== ========== ========== ==========
Earnings to fixed charges ratio:
Actual.......................... 1.11 1.16 1.26 1.40 1.16
1
<PAGE>
EXHIBIT 12
BANK UNITED CORP.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND BANK'S PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
EARNINGS
Income before income taxes, minority
interest, and extraordinary loss...... $ 67,836 $ 90,111 $ 86,081 $ 122,303 $ 56,805
Fixed charges........................... 592,670 560,989 328,940 308,181 355,860
---------- ---------- ---------- ---------- ----------
Income before income taxes, minority
interest, extraordinary loss, and
fixed charges......................... $ 660,506 $ 651,100 $ 415,021 $ 430,484 $ 412,665
========== ========== ========== ========== ==========
COMBINED FIXED CHARGES AND BANK'S
PREFERRED STOCK DIVIDENDS
Interest expense........................ $ 584,778 $ 552,760 $ 320,924 $ 300,831 $ 348,291
One-third net rental expense............ 6,892 7,253 7,039 6,656 7,007
Amortization of debt expense............ 1,000 976 977 694 562
---------- ---------- ---------- ---------- ----------
Total fixed charges........... 592,670 560,989 328,940 308,181 355,860
Bank's Preferred Stock dividends,
pre-tax basis:
Series A........................... 14,711 14,011 14,006 10,581 --
Series B........................... 16,321 3,152 -- -- --
---------- ---------- ---------- ---------- ----------
Combined fixed charges and Bank's
Preferred Stock dividends............. $ 623,702 $ 578,152 $ 342,946 $ 318,762 $ 355,860
========== ========== ========== ========== ==========
Earnings to combined fixed charges and
Bank's Preferred Stock dividends
ratio:
Actual........................ 1.06 1.13 1.21 1.35 1.16
</TABLE>
2
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Bank United Corp.
on Form S-1 of our report dated October 28, 1996, appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial and Other Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
January 15, 1997
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration under the Securities Act of 1933, as amended, by Bank United Corp.,
a Delaware corporation (the "Company"), of up to $100,000,000 aggregate
principal amount of its ___% Subordingated Notes due 2004 and up to $120,000,000
aggregate principal amount of its ___% Subordinated Notes due 2007, the
undersigned director of the Company hereby constitutes and appoints each of
Barry C. Burkholder and Jonathon K. Heffron, with full power to act without the
other, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and on the
undersinged's behalf and in the undersigned's name, place and stead, in any and
all capacities, to sign a Registration Statement on Form S-1 relating to such
securities and any amendments or post-effective amendments thereto and file the
same with Securities and Exchange Commission and to sign and file all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that the said attorney-in-fact and agent may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 10th day of January, 1997.
/s/ LEWIS S. RANIERI
Name: Lewis S. Ranieri
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration under the Securities Act of 1933, as amended, by Bank United Corp.,
a Delaware corporation (the "Company"), of up to $100,000,000 aggregate
principal amount of its ___% Subordingated Notes due 2004 and up to $120,000,000
aggregate principal amount of its ___% Subordinated Notes due 2007, the
undersigned director of the Company hereby constitutes and appoints each of
Barry C. Burkholder and Jonathon K. Heffron, with full power to act without the
other, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and on the
undersinged's behalf and in the undersigned's name, place and stead, in any and
all capacities, to sign a Registration Statement on Form S-1 relating to such
securities and any amendments or post-effective amendments thereto and file the
same with Securities and Exchange Commission and to sign and file all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that the said attorney-in-fact and agent may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 10th day of January, 1997.
/s/ SALVATORE A. RANIERI
Name: Salvatore A. Ranieri
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration under the Securities Act of 1933, as amended, by Bank United Corp.,
a Delaware corporation (the "Company"), of up to $100,000,000 aggregate
principal amount of its ___% Subordingated Notes due 2004 and up to $120,000,000
aggregate principal amount of its ___% Subordinated Notes due 2007, the
undersigned director of the Company hereby constitutes and appoints each of
Barry C. Burkholder and Jonathon K. Heffron, with full power to act without the
other, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and on the
undersinged's behalf and in the undersigned's name, place and stead, in any and
all capacities, to sign a Registration Statement on Form S-1 relating to such
securities and any amendments or post-effective amendments thereto and file the
same with Securities and Exchange Commission and to sign and file all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that the said attorney-in-fact and agent may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 10th day of January, 1997.
/s/ SCOTT A. SHAY
Name: Scott A. Shay
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration under the Securities Act of 1933, as amended, by Bank United Corp.,
a Delaware corporation (the "Company"), of up to $100,000,000 aggregate
principal amount of its ___% Subordingated Notes due 2004 and up to $120,000,000
aggregate principal amount of its ___% Subordinated Notes due 2007, the
undersigned director of the Company hereby constitutes and appoints each of
Barry C. Burkholder and Jonathon K. Heffron, with full power to act without the
other, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and on the
undersinged's behalf and in the undersigned's name, place and stead, in any and
all capacities, to sign a Registration Statement on Form S-1 relating to such
securities and any amendments or post-effective amendments thereto and file the
same with Securities and Exchange Commission and to sign and file all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that the said attorney-in-fact and agent may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 10th day of January, 1997.
/s/ LAWRENCE CHIMERINE, Ph. D.
Name: Lawrence Chimerine, Ph. D.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration under the Securities Act of 1933, as amended, by Bank United Corp.,
a Delaware corporation (the "Company"), of up to $100,000,000 aggregate
principal amount of its ___% Subordingated Notes due 2004 and up to $120,000,000
aggregate principal amount of its ___% Subordinated Notes due 2007, the
undersigned director of the Company hereby constitutes and appoints each of
Barry C. Burkholder and Jonathon K. Heffron, with full power to act without the
other, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and on the
undersinged's behalf and in the undersigned's name, place and stead, in any and
all capacities, to sign a Registration Statement on Form S-1 relating to such
securities and any amendments or post-effective amendments thereto and file the
same with Securities and Exchange Commission and to sign and file all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that the said attorney-in-fact and agent may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 10th day of January, 1997.
/s/ DAVID M. GOLUSH
Name: David M. Golush
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration under the Securities Act of 1933, as amended, by Bank United Corp.,
a Delaware corporation (the "Company"), of up to $100,000,000 aggregate
principal amount of its ___% Subordingated Notes due 2004 and up to $120,000,000
aggregate principal amount of its ___% Subordinated Notes due 2007, the
undersigned director of the Company hereby constitutes and appoints each of
Barry C. Burkholder and Jonathon K. Heffron, with full power to act without the
other, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and on the
undersinged's behalf and in the undersigned's name, place and stead, in any and
all capacities, to sign a Registration Statement on Form S-1 relating to such
securities and any amendments or post-effective amendments thereto and file the
same with Securities and Exchange Commission and to sign and file all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that the said attorney-in-fact and agent may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 10th day of January, 1997.
/s/ PAUL M. HORVITZ, Ph. D.
Name: Paul M. Horvitz, Ph. D.
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration under the Securities Act of 1933, as amended, by Bank United Corp.,
a Delaware corporation (the "Company"), of up to $100,000,000 aggregate
principal amount of its ___% Subordingated Notes due 2004 and up to $120,000,000
aggregate principal amount of its ___% Subordinated Notes due 2007, the
undersigned director of the Company hereby constitutes and appoints each of
Barry C. Burkholder and Jonathon K. Heffron, with full power to act without the
other, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and on the
undersinged's behalf and in the undersigned's name, place and stead, in any and
all capacities, to sign a Registration Statement on Form S-1 relating to such
securities and any amendments or post-effective amendments thereto and file the
same with Securities and Exchange Commission and to sign and file all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that the said attorney-in-fact and agent may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 10th day of January, 1997.
/s/ ALAN E. MASTER
Name: Alan E. Master
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration under the Securities Act of 1933, as amended, by Bank United Corp.,
a Delaware corporation (the "Company"), of up to $100,000,000 aggregate
principal amount of its ___% Subordingated Notes due 2004 and up to $120,000,000
aggregate principal amount of its ___% Subordinated Notes due 2007, the
undersigned director of the Company hereby constitutes and appoints each of
Barry C. Burkholder and Jonathon K. Heffron, with full power to act without the
other, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and on the
undersinged's behalf and in the undersigned's name, place and stead, in any and
all capacities, to sign a Registration Statement on Form S-1 relating to such
securities and any amendments or post-effective amendments thereto and file the
same with Securities and Exchange Commission and to sign and file all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that the said attorney-in-fact and agent may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 10th day of January, 1997.
/s/ PATRICIA A. SLOAN
Name: Patricia A. Sloan
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration under the Securities Act of 1933, as amended, by Bank United Corp.,
a Delaware corporation (the "Company"), of up to $100,000,000 aggregate
principal amount of its ___% Subordingated Notes due 2004 and up to $120,000,000
aggregate principal amount of its ___% Subordinated Notes due 2007, the
undersigned director of the Company hereby constitutes and appoints each of
Barry C. Burkholder and Jonathon K. Heffron, with full power to act without the
other, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and on the
undersinged's behalf and in the undersigned's name, place and stead, in any and
all capacities, to sign a Registration Statement on Form S-1 relating to such
securities and any amendments or post-effective amendments thereto and file the
same with Securities and Exchange Commission and to sign and file all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that the said attorney-in-fact and agent may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 10th day of January, 1997.
/s/ KENDRICK R. WILSON III
Name: Kendrick R. Wilson III
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that in connection with the proposed
registration under the Securities Act of 1933, as amended, by Bank United Corp.,
a Delaware corporation (the "Company"), of up to $100,000,000 aggregate
principal amount of its ___% Subordingated Notes due 2004 and up to $120,000,000
aggregate principal amount of its ___% Subordinated Notes due 2007, the
undersigned director of the Company hereby constitutes and appoints each of
Barry C. Burkholder and Jonathon K. Heffron, with full power to act without the
other, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and on the
undersinged's behalf and in the undersigned's name, place and stead, in any and
all capacities, to sign a Registration Statement on Form S-1 relating to such
securities and any amendments or post-effective amendments thereto and file the
same with Securities and Exchange Commission and to sign and file all documents
required to be filed with respect thereto with any regulatory authority,
granting unto said attorney full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully to all intents and purposes as the
undersigned might or could do if personally present, hereby ratifying and
confirming all that the said attorney-in-fact and agent may lawfully do or cause
to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has hereto signed this power of
attorney this 10th day of January, 1997.
/s/ MICHAEL S. STEVENS
Name: Michael S. Stevens
