AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 14, 1997
REGISTRATION NO. 333-19237
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BANK UNITED CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
6711
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
DELAWARE 13-3528556
(I.R.S. EMPLOYER
(STATE OF INCORPORATION) 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
HOUSTON, TX 77027
(713) 543-6958
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPY TO:
CRAIG M. WASSERMAN, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ
51 WEST 52ND STREET
NEW YORK, NY 10019
(212) 403-1000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At such
time or times after the Registration Statement becomes effective as the Selling
Stockholders may determine.
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. [X]
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: [ ]
------------------------
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
BANK UNITED CORP.
CROSS-REFERENCE SHEET PURSUANT TO REGULATION S-K, ITEM 501(B)
<TABLE>
<CAPTION>
ITEM
NO. LOCATION IN PROSPECTUS
- ---- ----------------------
<C> <S>
I. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus......................Outside Front Cover Page
II. Inside Front and Outside Back Cover Pages of
Prospectus..........................................Inside Front Cover Page; Table of Contents
III. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges...........................Prospectus Summary; Risk Factors;
The Company
IV. Use of Proceeds......................................Use of Proceeds
V. Determination of Offering Price.....................Not Applicable
VI. Dilution............................................Not Applicable
VII. Selling Security Holders............................Selling Stockholders
VIII. Plan of Distribution................................Outside Front Cover Page; Plan of Distribution
IX. Description of Securities to be Registered..........Outside Front Cover Page; Inside Front Cover Page;
Description of Capital Stock
X. Interests of Named Experts and Counsel..............Not Applicable
XI. Information with respect to the Registrant..........Outside Front Cover Page; Prospectus Summary; Risk
Factors; The Company; Use of Proceeds; Dividend
Policy; Capitalization; Selected Consolidated
Financial and Other Data; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business; Regulation; Description of
Properties; Legal Proceedings; Management; Selling
Stockholders; Description of Capital Stock; Plan of
Distribution; Legal Matters; Experts; Available
Information; Financial Statements
XII. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities......Not Applicable
</TABLE>
<PAGE>
PROSPECTUS DATED AUGUST 14, 1997
PROSPECTUS
10,208,610 SHARES
BANK
UNITED CORP.
CLASS A COMMON STOCK
The 10,208,610 shares of Class A common stock, par value $0.01 per share
("Class A Common Stock"), of Bank United Corp. (the "Company") covered
hereby (the "Shares") may be offered (the "Offering") and sold from time to
time by the holders named in this Prospectus or by their transferees, pledgees,
donees or successors (collectively, the "Selling Stockholders") pursuant to
this Prospectus as appropriately amended or supplemented. The Selling
Stockholders are the general partners and limited partners of Hyperion Partners
L.P., a Delaware limited partnership ("Hyperion Partners") and three other
entities with which an affiliate of Hyperion Partners has a fiduciary
relationship. See "Selling Stockholders". The Company will not receive any of
the proceeds from the sale of the Shares by the Selling Stockholders. The
Company has agreed to bear certain registration and similar expenses in
connection with the Offering and the Selling Stockholders will bear all other
expenses of the Offering, including brokerage fees and any underwriting
discounts or commissions.
The Shares may be offered or sold by the Selling Stockholders from time to
time directly to purchasers or through agents, underwriters or dealers on terms
to be determined at the time of sale. See "Plan of Distribution". If required,
the names of any such agents or underwriters involved in the sale of the Shares
in respect of which this Prospectus is being delivered and the applicable
agent's commission, dealer's purchase price or underwriter's discount, if any,
will be set forth in an accompanying supplement to this Prospectus.
The Company has two classes of common stock outstanding: Class A Common
Stock and Class B Common Stock, par value $0.01 per share ("Class B Common
Stock"). The Class A Common Stock and the Class B Common Stock (together, the
"Common Stock") have identical dividend and other rights, except that the
Class B Common Stock is non-voting and is convertible into Class A Common Stock
upon sale or transfer to unaffiliated parties or, subject to certain
limitations, at the election of the holder thereof. The Shares to be offered by
the Selling Stockholders pursuant to this Prospectus will consist solely of
shares of Class A Common Stock.
The Selling Stockholders and any broker-dealers, agents or underwriters
which participate in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"), and any commission received by them or any profit
received by them on the resale of Shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. See "Plan of
Distribution".
The Class A Common Stock is traded on the Nasdaq Stock Market's National
Market (the "NASDAQ") under the symbol "BNKU". On August 12, 1997, the last
reported sale price of the Class A Common Stock on the NASDAQ was $37.25 per
share. Prospective purchasers of the Class A Common Stock are urged to obtain
current information as to market prices of the Class A Common Stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE CLASS A COMMON
STOCK 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 SHARES OF CLASS A COMMON STOCK 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.
<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. The Company operates a 70-branch community banking network serving
approximately 216,000 households and businesses, ten regional commercial banking
offices, six wholesale mortgage origination offices, a mortgage servicing
business, and a financial markets business. At June 30, 1997, the Company had
assets of $11.4 billion, deposits of $5.2 billion and stockholders' equity of
$582.7 million and was the largest publicly traded depository institution
headquartered in Texas, in terms of both assets and deposits.
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. 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"). 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 $115 million 8.05% senior notes due May 15,
1998 (the "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
headquarters were relocated from Uniondale, New York to Houston, Texas. The
Company's address is 3200 Southwest Freeway, Houston, TX 77027, and its phone
number is (713) 543-6500.
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 single
family mortgage lending 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 to those present in traditional single family
mortgage lending, 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 "Business -- Community Banking Group" and
"Business -- Commercial Banking Group".
2
<PAGE>
OPERATIONAL OVERVIEW
-- COMMUNITY BANKING GROUP. The Community Banking Group's principal
activities include deposit gathering, consumer lending, small business
banking, investment product sales and retail mortgage originations. The
Community Banking Group, which has marketed itself under the name
"Bank United" since 1993, operates a 70-branch community banking
network, a 24-hour telephone banking center, and a 69-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 36 branches in the greater Houston area, 29 branches in the
Dallas/Ft. Worth Metroplex and two branches each in Austin and San
Antonio as well as a branch and credit card processing center in
Phoenix, Arizona. Through its branch network, the Company maintains
approximately 480,000 accounts with approximately 216,000 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
healthcare 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, wholesale mortgage originations, 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 GROUP. The Mortgage Banking Group principally engaged
in three activities prior to February 1, 1997: retail mortgage
originations, wholesale mortgage originations and mortgage servicing.
In June 1996, the Company recorded a restructuring charge of $10.7
million before tax, to recognize the costs of closing or consolidating
mortgage production offices and several regional operation centers and
recorded $1.8 million of other expenses related to its mortgage
origination business. Effective February 1, 1997, the Company sold
certain of its retail and wholesale mortgage origination offices. In
connection with this sale, the remaining offices were restructured or
closed. The net gain on the sale of these offices, reduced by
additional restructuring costs, was $4.0 million before tax and was
recorded in the quarter ended March 31, 1997. The Company's sale of
these offices was consistent with its commitment to advance its
strategic focus on traditional community and commercial banking
products and services. The Company intends to continue its mortgage
servicing business as a separate group (see below), its retail mortgage
origination capability in Texas through its community banking branches,
and its wholesale mortgage origination capability through its Financial
Markets Group. See "Business -- Mortgage Banking Group".
-- MORTGAGE SERVICING GROUP.__The Mortgage Servicing Group services first
mortgage loans for single family residences for both the Company's
portfolio and for investors. The Company's servicing portfolio at June
30, 1997 was $17.3 billion and approximately 225,000 loans. Additional
servicing rights recently acquired by the Company associated with $7.1
billion in single family loans had not been transferred to the Company
as of June 30, 1997. The total servicing portfolio at June 30, 1997,
adjusted for the acquired servicing rights, was $24.4 billion.
Included in the servicing portfolio at June 30, 1997 is $3.6 billion
of servicing related to loans held in the Company's portfolio. See
"Business_-- Mortgage Servicing Group".
BACKGROUND OF THE OFFERING
The Company was organized, and through June 17, 1996, operated as a
subsidiary of Hyperion Holdings Inc., a Delaware corporation ("Hyperion
Holdings"). During that period, all of the outstanding shares of
3
<PAGE>
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 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.
DIVIDEND, DISTRIBUTION AND RESTRUCTURING
In May 1996, the Company paid a dividend of $100 million to Hyperion
Holdings and other holders of its common stock and made a related contractually
required payment in lieu of dividends to the FDIC, as manager of the Federal
Savings and Loan Insurance Corporation ("FSLIC") Resolution Fund (the
"FDIC-FRF"), in the amount of $5.9 million. The dividends received by Hyperion
Holdings were paid by Hyperion Holdings as a dividend to Hyperion Partners which
distributed such amount to its limited and general partners in accordance with
its limited partnership agreement. During the quarter ended June 30, 1996, the
Company also recorded a $101.7 million tax benefit related to its net operating
loss carryforwards ("NOLs").
During June 1996, the following actions were taken in the order indicated
(collectively, the "Restructuring"): (1) 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; (2) Hyperion Partners then
distributed the Hyperion Holdings common stock owned by it to its limited and
general partners in accordance with its limited partnership agreement (the
"Distribution"); and (3) 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 part of the Restructuring, the common stock
of the Company was converted 1,800 to one. Subsequent to the Restructuring,
there were no shares of Class C Common Stock outstanding. The Restructuring was
undertaken 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 addition, the FDIC-FRF
surrendered to the Bank a portion of the warrant (the "Warrant") it held to
purchase 158,823 shares of common stock of the Bank ("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
issued upon exercise of the balance of the Warrant for 1,503,560 shares of
Common Stock. See "Business -- The Assistance Agreement" and "Selling
Stockholders".
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, including the FDIC-FRF which sold all of the shares received upon
exercise of the Warrant. Since the August Offering, the Class A Common Stock has
been listed on the NASDAQ under the symbol "BNKU". On August 12, 1997, the last
reported sale price of the Class A Common Stock on the NASDAQ was $37.25 per
share. The 10,208,610 shares of Class A Common Stock covered by this Prospectus
are subject to restrictions on sale and transfer due to agreements entered into
in connection with the August Offering. After the restrictive dates, the shares
may be sold from time to time by holding stockholders. On February 10, 1997,
restrictions on 7,189,763 shares expired and certain stockholders sold 4,276,713
shares in a secondary public offering on that date. On August 14, 1997,
restrictions on the remaining 3,018,847 shares covered by this Prospectus
expired and certain shareholders sold 1,218,511 shares in a secondary public
offering on that date. See "Selling Stockholders" and "Plan of Distribution".
LONG-TERM DEBT
In May 1997, the Company issued $220 million of fixed-rate Subordinated
Notes due May 2007, with a stated rate of 8.875% and an effective rate of 8.896%
("Subordinated Notes"). Net proceeds from the issuance of the Subordinated
Notes were used to repurchase and retire $114.5 million of the Company's Senior
Notes, pay
4
<PAGE>
the related costs and expenses, and provide additional capital to the Bank. The
costs associated with retiring the Senior Notes are reflected as an
extraordinary loss of $3.6 million, or $2.3 million after tax, in the quarter
ended June 30, 1997. In connection with the repurchase of the Senior Notes, the
Company obtained consents from the holders of the Senior Notes, which
substantially eliminated all restrictive covenants of the related indenture,
including limitations on dividends. The Subordinated Notes are subordinate to
all liabilities of the Company's subsidiaries, including preferred stock and
deposit liabilities.
MANAGEMENT
Day-to-day operations of the Bank are directed by Barry C. Burkholder,
President and CEO of the Bank, who brings over 20 years of commercial banking
experience to the Bank, with specific experience in consumer banking, mortgage
banking and related areas. In connection with the Restructuring and the August
Offering, on July 15, 1996 Mr. Burkholder became Chairman of the Board of the
Bank as well as President and CEO of the Company. The executive management group
of the Bank consists of seven 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 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 NOLs which have resulted in
certain tax benefits. As of June 30, 1997, the Company had NOLs of $724 million
available to reduce taxable income in future years. Pursuant to the Tax Benefits
Agreement (as defined herein), the Bank is required to pay to the FDIC-FRF a
specified portion of net tax benefits obtained through the taxable year ending
nearest to September 30, 2003. See "Regulation -- Taxation -- FSLIC
Assistance".
The August Offering and the Offering have been structured with the intent
to preserve the beneficial tax attributes of the Company as described above. See
"Regulation -- Taxation". Accordingly, transfers and other dispositions of
Common Stock by certain of the Selling Stockholders and other holders of the
Common Stock were limited by provisions of the Company's Restated Certificate of
Incorporation (the "Certificate") and the Company's By-Laws (the "By-Laws")
for up to three years following the August Offering, except in certain
circumstances, including the approval of the Board of Directors of the Company.
See "Description of Capital Stock -- Common Stock". The limitations on
transfers and other dispositions of Common Stock allowed the Company to record a
$101.7 million tax benefit in fiscal 1996. See "Risk Factors -- Limitations on
Use of Tax Losses; Restrictions on Transfers of Stock", "Capitalization" and
Note 14 to the Consolidated Financial Statements.
CLAIMS RELATED TO FORBEARANCE AGREEMENT
In connection with the original acquisition of the Bank by the Company, the
Federal Home Loan Bank Board (the "FHLBB") approved a forbearance letter,
issued on February 15, 1989 (the "Forbearance Agreement"). Under the terms of
the Forbearance Agreement, the FSLIC agreed to waive or forbear from the
enforcement of certain regulatory provisions with respect to regulatory capital
requirements, liquidity requirements, accounting requirements and other matters.
After the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), the OTS took the position that the capital
standards set forth in FIRREA apply to all savings institutions, including those
institutions, such as the Bank, that had been operating under previously granted
capital and accounting forbearances, and that FIRREA eliminated these
5
<PAGE>
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 1999. 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 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".
6
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary selected historical 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, 1995 and 1994 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. Information at or for the nine months ended June 30, 1997
and 1996 is not audited, but, in the opinion of management, includes all
adjustments (which include only normal recurring adjustments) necessary for a
fair presentation of operations and financial condition for those periods.
Results of operations for the nine months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the entire fiscal
year.
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA
Total assets......................... $11,439,050 $11,023,270 $10,712,377 $11,983,534 $8,910,161 $8,440,556 $6,255,283
Loans................................ 8,271,904 7,597,406 7,519,488 8,260,240 5,046,174 4,862,379 4,101,716
Mortgage-backed securities........... 1,601,857 1,732,771 1,657,908 2,398,263 2,828,903 2,175,925 833,425
Deposits............................. 5,249,888 5,053,605 5,147,945 5,182,220 4,764,204 4,839,388 4,910,760
Federal Home Loan Bank advances(1)... 3,630,060 3,883,758 3,490,386 4,383,895 2,620,329 2,185,445 632,345
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 1,181,382 885,506 832,286 1,172,533 553,000 310,000 --
Long-term debt(1).................... 220,194 115,000 115,000 115,000 115,000 115,000 106,090
Minority interest -- Bank Preferred
Stock(2)........................... 185,500 185,500 185,500 185,500 85,500 85,500 --
Total stockholders' equity(3)........ 582,676 529,432 531,043 496,103 451,362 389,203 232,373
Book value per common share(4)....... 18.44 18.14 16.81 17.19 15.64 13.48 8.19
STATEMENT OF OPERATIONS DATA
Interest income...................... $ 599,934 $ 620,419 $ 812,312 $ 746,759 $ 494,706 $ 482,490 $ 502,854
Interest expense..................... 401,025 448,026 584,778 552,760 320,924 300,831 348,291
---------- ---------- ---------- ---------- --------- --------- ---------
Net interest income.............. 198,909 172,393 227,534 193,999 173,782 181,659 154,563
Provision for credit losses.......... 14,644 10,155 16,469 24,293 6,997 4,083 21,133
---------- ---------- ---------- ---------- --------- --------- ---------
Net interest income after
provision for credit losses.... 184,265 162,238 211,065 169,706 166,785 177,576 133,430
Non-interest income.................. 86,892 78,082 110,036 114,981 118,889 146,691 103,790
Non-interest expense................. 153,000 167,993 253,265 194,576 199,593 201,964 180,415
---------- ---------- ---------- ---------- --------- --------- ---------
Income before income taxes,
minority interest and
extraordinary loss............. 118,157 72,327 67,836 90,111 86,081 122,303 56,805
Income tax expense (benefit)......... 45,499 (73,644) (75,765) 37,415 (31,899) (26,153) 200
Minority interest(2)(5).............. 13,689 20,102 24,666 10,977 9,010 6,537 --
Extraordinary loss(6)................ 2,323 -- -- -- -- 14,549 --
---------- ---------- ---------- ---------- --------- --------- ---------
Net income....................... $ 56,646 $ 125,869 $ 118,935 $ 41,719 $ 108,970 $ 127,370 $ 56,605
========== ========== ========== ========== ========= ========= =========
Net income applicable to common
shares......................... $ 56,646 $ 119,111 $ 113,327 $ 38,824 $ 102,519 $ 118,640 $ 52,406
Earnings per common share(4)......... 1.79 4.13 3.87 1.35 3.55 4.11 1.85
Dividends per common share........... 0.42 3.46 3.46 -- -- -- --
Average number of common shares
outstanding(4)..................... 31,596 28,863 29,260 28,863 28,863 28,863 28,366
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CERTAIN RATIOS AND OTHER DATA(7)
Return on average assets(8).......... 0.86% 1.72% 1.28% 0.50% 1.42% 1.83% 0.89%
Return on average common equity...... 13.56 33.06 23.06 8.80 26.32 44.87 28.18
Stockholders' equity to assets....... 5.09 4.80 4.96 4.14 5.07 4.61 3.71
Tangible stockholders' equity to
tangible assets.................... 4.97 4.65 4.81 3.93 4.68 4.14 2.58
Net yield on interest-earning
assets(9).......................... 2.58 2.09 2.10 1.92 2.20 2.61 2.60
Non-interest expense to average total
assets............................. 1.87 1.97 2.26 1.86 2.41 2.76 2.85
Efficiency ratio(10)................. 54.02 66.88 74.97 59.50 66.38 65.11 63.98
Allowance for credit losses to net
nonaccrual loans(11)............... 71.59 45.21 44.24 48.74 30.73 71.71 74.04
Allowance for credit losses to total
loans.............................. 0.46 0.49 0.52 0.44 0.46 0.61 0.68
Net loan charge-offs to average
loans(11).......................... 0.26 0.17 0.17 0.16 0.30 0.05 0.07
Nonperforming assets to total
assets............................. 0.67 1.03 1.12 0.84 1.09 0.72 0.89
Regulatory capital ratios of the
Bank(12)
Tangible capital................. 7.59 6.15 6.57 6.20 6.01 6.17 4.24
Core capital..................... 7.65 6.23 6.64 6.29 6.17 6.43 5.04
Total risk-based capital......... 14.05 12.53 13.09 13.45 14.02 14.87 12.19
Number of community banking
branches........................... 70 70 70 65 62 62 65
Number of commercial banking
origination offices................ 10 9 9 9 5 3 2
Number of mortgage origination
offices (13)....................... 6 91 85 122 145 109 93
Single family servicing portfolio.... $17,235,304 $12,037,262 $13,246,848 $12,532,472 $8,920,760 $8,073,226 $7,187,000
Single family originations(14)....... 1,603,305 2,846,514 3,762,198 3,447,250 5,484,111 6,737,762 6,118,363
Loans purchased for held to maturity
portfolio.......................... 842,270 102,230 148,510 2,658,093 1,406,275 1,212,103 916,613
CERTAIN RATIOS AND OTHER
DATA -- EXCLUDING NON-RECURRING AND
CERTAIN OTHER ITEMS(15)
Net income........................... $ 56,507 $ 42,597 $ 56,392 $ 41,719 $ 50,804 $ 97,736 $ 56,605
Net income applicable to common
shares............................. 56,507 39,876 53,295 38,824 47,585 91,461 52,406
Earnings per common share............ 1.78 1.38 1.82 1.35 1.65 3.17 1.85
Operating earnings(16)............... 110,890 86,836 114,659 91,295 75,514 77,105 50,024
Return on average assets(8).......... 0.86% 0.67% 0.67% 0.50% 0.72% 1.42% 0.89%
Return on average common equity...... 13.54 11.38 11.47 8.80 12.27 34.43 28.18
Efficiency ratio(10)................. 54.02 58.87 58.85 59.50 66.38 65.11 63.98
</TABLE>
- ------------
(1) Long-term debt is comprised of Senior Notes, Subordinated Notes, and other
long-term debt. Long-term debt excludes Federal Home Loan Bank ("FHLB")
advances with maturities greater than one year. FHLB advances with
maturities greater than one year were $2,564,801 and $1,109,945 as of June
30, 1997 and 1996, respectively, and were $926,291, $1,992,010, $782,129,
$708,945, and $55,445 at September 30, 1996, 1995, 1994, 1993, and 1992,
respectively. See Notes 9 and 11 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 August 1996, the Company filed a registration statement with the
Commission and 12,075,000 shares of the Company's 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.
(NOTES CONTINUED ON FOLLOWING PAGE)
8
<PAGE>
(4) Earnings per common share ("EPS") is net income (adjusted for earnings on
the common stock equivalents attributable to the Bank's Warrant for periods
prior to August 1996. See Note 5 herein) 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.
(5) In connection with its Acquisition, the Bank 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) Fiscal 1997 extraordinary loss is costs and charges associated with the
repurchase and retirement of the Senior Notes. See Note 11 to the
Consolidated Financial Statements. Fiscal 1993 extraordinary loss is 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").
(7) Ratio, yield, and rate information are based on weighted average daily
balances for fiscal 1993 and subsequent periods and average monthly
balances for fiscal 1992, with the exception of return on average common
equity, which is based on average monthly balances for all periods
presented. Interim rates are annualized.
(8) Return on average assets is net income without deduction of minority
interest, divided by average total assets.
(9) Net yield on interest-earning assets is net interest income as a percentage
of average interest-earning assets.
(10) Efficiency ratio is non-interest expenses (excluding goodwill
amortization), divided by net interest income plus non-interest income,
excluding net gains (losses) on securities, MBS, other loans, and the sale
of mortgage offices.
(11) During April 1997, $31.3 million of nonperforming loans were sold with
related charge-offs of $5.0 million. Primarily as a result of this
transaction, the allowance for credit losses to net nonaccrual loans
increased to 71.59% at June 30, 1997 from 45.21% at June 30, 1996.
Excluding the charge-offs related to this sale of nonperforming assets, net
loan charge-offs to average loans would have been 0.18% for the nine months
ended June 30, 1997.
(12) 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".
(13) During fiscal 1997, the Company sold certain of its mortgage origination
offices. In connection with this sale, the remaining offices were
restructured or closed. The mortgage origination branches shown at June 30,
1997 are the wholesale mortgage origination offices, which are currently
part of the Financial Markets Group.
(14) Includes $106.3 million, $100.0 million, $129.0 million, $135.3 million,
$100.3 million, $116.5 million, and $127.0 million of brokered and
purchased loans for the nine months ended June 30, 1997 and 1996, and
fiscal 1996, 1995, 1994, 1993, and 1992, respectively.
(15) Non-recurring items, deemed not to be part of the routine core business
operations of the Company, are composed of the following for the nine
months ended June 30, 1997 and fiscal 1996, 1994, and 1993:
-- 1997 (increased EPS $0.01) -- (1) the gain on the sale of mortgage
offices of $3,998 ($2,462 net of tax) and (2) the extraordinary loss on
extinguishment of debt of $3,574 ($2,323 net of tax).
-- 1996 (increased EPS $2.05) -- (1) a one-time SAIF assessment charge
of $33,657 ($20,729 net of tax), (2) compensation expense of $7,820
($4,816 net of tax), (3) charges totalling $12,537 ($7,729 net of
tax) related to the restructuring of and items associated with the
mortgage origination business, (4) a contractual payment to
previous minority interests of $5,883, and (5) a tax benefit of
$101,700.
-- 1994 (increased EPS $1.90) -- tax benefit of $58,166
-- 1993 (increased EPS $0.94) -- (1) tax benefit of $44,183 and (2)
extraordinary loss on extinguishment of debt of $14,549.
(16) Operating earnings consists of net income, including net gains (losses) on
the sales of single family servicing rights and single family warehouse
loans, before taxes, minority interest, and extraordinary losses and
excludes net gains (losses) on securities, MBS, other loans, and applicable
non-recurring items. See note 15 herein and "Business -- General."
9
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Class A Common Stock offered by
the Selling Stockholders................ 10,208,610 shares
Common Stock to be outstanding immediately
after the Offering...................... 28,354,276 shares Class A Common Stock(1)
3,241,320 shares Class B Common Stock(2)
Total........................... 31,595,596 shares of Common Stock
Risk Factors.............................. General Business Risks; Evolution of Business; Interest Rate Risk;
Competition; Funding and Liquidity; Concentration of Loan Portfolio;
Active Purchaser of Loan Portfolios; Limitations on Use of Tax
Losses; Restrictions on Transfers of Stock; Holding Company
Structure; Ability to Pay Dividends; Regulation; Limitations on Stock
Ownership; Anti-takeover Provisions; Dependence on Key Personnel;
Conversion of Class B Common Stock; Dilution of Voting Power;
Potential Effect of Shares Eligible for Future Sale; Liability under
Representations and Warranties and Other Credit Risks; Litigation.
Use of Proceeds........................... The Company will receive none of the proceeds of the sales of shares
by the Selling Stockholders. See "Use of Proceeds".
NASDAQ Symbol............................. BNKU
</TABLE>
- ------------
(1) Excludes shares issuable upon exercise of options to be issued to employees
of the Company and shares to be issued, or issuable upon exercise of options
to be issued, to non-employee directors of the Company. See
"Management -- Executive Management Compensation Program" and
"Management -- Compensation of Directors".
(2) Assumes no conversion of Class B Common Stock into Class A Common Stock
other than as a result of sale pursuant to the Offering. As described under
"Description of Capital Stock", the two classes of Common Stock are
identical other than with respect to conversion and voting rights. The Class
B Common Stock is non-voting common stock, but is convertible to Class A
Common Stock upon sale or transfer to unaffiliated parties or at the
election of the holder, subject to certain restrictions. See "Description
of Capital Stock -- Common Stock -- Conversion".
10
<PAGE>
RISK FACTORS
Investment in the Class A Common Stock 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.
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.
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 single family 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 single family mortgage lending. Loan balances for these types
of loans are typically larger than those for single family mortgage loans and,
thus, when there are defaults and losses, they can be greater on a per loan
basis than those for single family 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
single family 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 single family 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
single family mortgage lending and require skills and experience of management
and staff different than that for single family 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 single family mortgage lending. Commercial and
community banking pricing is very competitive and more subjective than that for
single family mortgage lending.
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".
11
<PAGE>
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.
FUNDING AND LIQUIDITY
In recent years, the Company has relied primarily on collateralized
borrowings, such as borrowings from the FHLB of Dallas ("FHLB Dallas") and
borrowings on securities sold under agreements to repurchase ("reverse
repurchase agreements") to fund its asset growth. For the nine months ended
June 30, 1997, such borrowings funded 42% of the Company's average assets. The
Company's collateralized borrowings have an average maturity of approximately 19
months.
The Company borrows funds from the FHLB Dallas under a security and pledge
agreement that restricts the amount of such borrowings to the greater of 65% of
fully disbursed single family loans, unless assets are physically pledged to the
FHLB Dallas and 45% of total assets. At June 30, 1997, the amounts available
under these restrictions were $4.4 billion and $5.1 billion, respectively, $3.6
billion of which had been advanced at June 30, 1997.
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 June 30, 1997, the Company had $1.3
billion in such collateral, $1.2 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.
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.
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
12
<PAGE>
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; RESTRICTIONS ON TRANSFERS OF STOCK
As of June 30, 1997, the Company had NOLs of $724 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 5.64% for June 30,
1997). 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 $68 million based on the closing market price at June 30, 1997. If
the Company were to undergo an Ownership Change, a significant portion of the
$101.7 million tax benefit recognized in fiscal 1996 would be required to be
reversed, with a corresponding charge to earnings. The amount of the charge to
earnings declines as the Company utilizes its NOLs.
Although the Company has attemped to protect against a future Ownership
Change that is not initiated by the Company by imposing in the Company's
Certificate and 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
prohibition on transfers by stockholders who own or have owned, directly or
indirectly, 5% or more of the common stock of the Company or are otherwise
treated as 5% stockholders or a "higher tier entity" under Section 382 of the
Code and the regulations promulgated thereunder ("5% Stockholders") does not
limit transactions in the securities of such 5% Stockholders 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".
HOLDING COMPANY STRUCTURE; ABILITY 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 pay
dividends on the Common Stock and to meet its other cash obligations, including
debt service on the Subordinated Notes and its other debt obligations, is
dependent upon the receipt of dividends from Holdings, which, in turn, is
dependent on receipt of dividends from the Bank on the Bank Common Stock. The
declaration of dividends by the Bank on all classes of its capital stock is
subject to the discretion of the Board of Directors of the Bank, the terms of
the Bank Preferred Stock, and applicable regulatory requirements. 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
13
<PAGE>
the Subordinated Notes and to pay dividends to the holders of 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.
As of June 30, 1997, the Bank had $182.3 million of available capacity for
the payment of dividends on its capital stock without prior approval of the OTS.
See "Dividend Policy", "Management's Discussion and Analysis -- Capital
Resources and Liquidity", "Regulation -- Safety and Soundness
Regulations -- Capital Distributions" and Notes 11, 15 and 16 to the
Consolidated Financial Statements. If the Company were to undergo an Ownership
Change, these amounts would be significantly reduced. See " -- Limitations on
Use of Tax Losses; Restriction on Transfers of Stock".
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 "Federal Reserve Board"), whether as a result of the consolidation into
the Federal Reserve Board 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 Subordinated Notes would constitute Tier 2 Capital, as currently
defined by the regulations of the Federal Reserve Board.
LIMITATIONS ON STOCK OWNERSHIP
With certain limited exceptions, federal regulations prohibit a person or
company or a group of persons deemed to be acting in concert from, directly or
indirectly, acquiring more than 10% of any class of voting stock or obtaining
the ability to control in any manner the election of a majority of the directors
or otherwise direct the management or policies of a savings institution, such as
the Bank, without prior notice or application to and the approval of the OTS.
See "Regulation -- Regulation of Savings and Loan Holding Companies". See also
" -- Limitations on Use of Tax Losses; Restrictions on Transfers of Stock".
ANTI-TAKEOVER PROVISIONS
The Certificate, By-Laws, and applicable provisions of the Delaware General
Corporation Law (the "DGCL"), contain several provisions that may make more
difficult the acquisition of control of the Company without the approval of the
Company Board. Certain provisions of the Certificate and the By-Laws, among
other things, (1) authorize the issuance of additional shares of Common Stock
and shares of "blank check" preferred stock; (2) classify the Company Board
into three classes, each of which (after an initial transition period) will
serve for staggered three year periods; (3) provide that a director of the
Company may be removed by the stockholders only for cause; (4) provide that only
the Company Board or the Chairman of the Board of the Company may call special
meetings of the stockholders; (5) provide that the stockholders may take action
only at a meeting of the stockholders or by unanimous written consent; (6)
provide that stockholders must comply with certain advance notice procedures in
order to nominate candidates for election to the Company Board or to place
stockholders' proposals on the agenda for consideration at meetings of the
stockholders; and (7) provide that the stockholders may amend or repeal any of
the foregoing provisions of the Certificate or the By-Laws only by a vote of 80%
of the stock entitled to vote generally in the election of directors (the
"Voting Stock"). With certain
14
<PAGE>
exceptions, Section 203 of the DGCL ("Section 203") imposes certain
restrictions on mergers and other business combinations between the Company and
any holder of 15% or more of the Common Stock. See "Description of Capital
Stock -- Certain Provisions of the Certificate and By-Laws; Anti-Takeover
Effects" and "Description of Capital Stock -- Delaware Business Combination
Statute".
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, 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. In addition to Mr. Lewis Ranieri, four other members of
the boards of directors of the Company and the Bank are Selling Stockholders who
received their shares through the general partner of Hyperion Partners.
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 overview 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.
CONVERSION OF CLASS B COMMON STOCK; DILUTION OF VOTING POWER
Certain Selling Stockholders retain shares of Class B Common Stock (which
have no voting rights) which they may elect to convert to Class A Common Stock
subject to certain restrictions. See "Description of Capital Stock -- Common
Stock -- Conversion". Class B Common Stock is also converted to Class A Common
Stock automatically upon transfer to a person who is not an affiliate of the
holder, including in any such transfer effected pursuant to the Offering.
Transfers of Class B Common Stock by certain persons are subject to certain
restrictions. See "Description of Capital Stock -- Common Stock -- Restrictions
on Transfers of Stock".
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 31,595,596 shares of Common Stock outstanding. Of
such shares, 12,075,000 were registered under the Securities Act of 1933 and
sold to the public in August 1996 and 19,520,596 are subject to contractual
restrictions on sale which expire at various times. The Company has agreed to
use its best efforts to register the 19,520,596 shares under the Securities Act
and to maintain the effectiveness of such registration for a specified period.
The Registration Statement of which this Prospectus forms a part covers the
10,208,610 shares which have or will become available for sale in fiscal 1997.
Pursuant to the terms of the Letter Agreement (as defined, herein), the Company
intends to register the remaining 9,311,986 shares of Common Stock covered
hereby as promptly as practicable. See "Selling Stockholders".
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
15
<PAGE>
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.
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. The Company operates a 70-branch community banking network serving
approximately 216,000 households and businesses, ten regional commercial banking
offices, six wholesale mortgage origination offices, a mortgage servicing
business, and a financial markets business. At June 30, 1997, the Company had
assets of $11.4 billion, deposits of $5.2 billion and stockholders' equity of
$582.7 million and was the largest publicly traded depository institution
headquartered in Texas, in terms of both assets and deposits.
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. 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. Beginning in July 1992, the Bank purchased several
mortgage origination networks as well as MSRs. In June 1996, the Company,
through a restructuring plan, began closing or consolidating mortgage production
offices and several regional operation centers. Effective February 1997, the
Company sold, restructured, or closed the remaining offices. The Company will
continue its wholesale mortgage origination capability through its Financial
Markets Group. The Company intends to continue to pursue additional community
and commercial banking expansion opportunities, including acquisitions, while
maintaining adequate capitalization.
The Company was organized, and through June 17, 1996, 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>
DIVIDEND, DISTRIBUTION AND RESTRUCTURING
In fiscal 1996, the Company paid a dividend of $100 million on its Common
Stock to Hyperion Holdings and other holders of its Common Stock and made a
related contractually required payment in lieu of dividends to the FDIC-FRF in
the amount of $5.9 million. The proceeds of this dividend received by Hyperion
Holdings were paid by Hyperion Holdings as a dividend to Hyperion Partners which
distributed such amount to its limited and general partners in accordance with
its limited partnership agreement. During fiscal 1996, the Company also recorded
a $101.7 million tax benefit related to its NOLs.
During fiscal 1996, the Restructuring was effected as follows: (1) 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; (2)
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; and (3) following the Distribution, Hyperion
Holdings was merged with and into the Company, with the result that holders of
Hyperion Holdings voting and nonvoting common stock received shares of Class A
Common Stock and Class B Common Stock and the holders of Class C Common Stock
received shares of Class B Common Stock. As part of the Restructuring, the
common stock of the Company was converted 1,800 to one. The Restructuring was
undertaken to simplify the ownership structure of the Company in order to
facilitate financial and tax reporting, marketing of the Common Stock and
management of the Company's operations. In addition, the FDIC-FRF surrendered to
the Bank a portion of the Warrant 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 issued upon exercise of the balance of
the Warrant for 1,503,560 shares of the Company's Common Stock.
In August 1996, the Company completed the August Offering of 12,075,000
shares of Class A Common Stock. Of the 12,075,000 shares sold, 910,694 were sold
by the Company, with the balance sold by certain stockholders, including the
FDIC-FRF which sold all of the shares received upon exercise of the Warrant. See
"Business -- The Assistance Agreement" and "Selling Stockholders". The Class
A Common Stock is listed on NASDAQ under the symbol "BNKU". On August 12,
1997, the last reported sale price of the Class A Common Stock on the NASDAQ was
$37.25 per share. Prospective purchasers of the Class A Common Stock are
advised to obtain current information as to market prices of the Class A Common
Stock.
The 10,208,610 shares of Class A Common Stock covered by this Prospectus
may be sold by the Selling Stockholders from time to time following the
expiration of certain restrictions on sale and transfer to which the Shares are
subject, the first of which expired on February 10, 1997. See "Selling
Stockholders" and "Plan of Distribution."
The August Offering and this Offering were structured with the intent to
preserve the beneficial tax attributes of the Company as described below. See
"Regulation -- Taxation". Accordingly, pursuant to the provisions of the
Certificate, certain of the Selling Stockholders and other holders of Common
Stock may not make further transfers or other dispositions of Common Stock for
up to three years following the August Offering except in certain circumstances,
including with approval of the Board of Directors of the Company. See
"Description of Capital Stock -- Common Stock -- Restrictions on Transfers of
Stock". The limitations on Transfers allowed the Company to record a $101.7
million tax benefit in fiscal 1996. See "Risk Factors -- Limitations on Use of
Tax Losses; Restrictions on Transfers of Stock" and Note 14 to the Consolidated
Financial Statements.
Pursuant to the terms of the Letter Agreement, (as defined herein), this
Prospectus covers 10,208,610 of the Shares received by the Selling Stockholders
in the Restructuring and not sold in the August Offering. This Prospectus
enables the Selling Stockholders to sell the Shares held by them upon the
expiration of the restrictions on sale and transfer to which such Shares are
subject. See "Selling Stockholders". The table contained under the caption
"Selling Stockholders" sets forth the Shares held by each Selling Stockholder
covered by this Prospectus and also indicates the time when the Shares held by
each of the Selling Stockholders became available for sale: February 10, 1997 or
August 14, 1997. The sale of Shares may also be subject to additional
restrictions on sale and transfer contained in the Certificate and By-Laws. See
"Description of Capital Stock -- Common Stock -- Restrictions on Transfer of
Stock."
18
<PAGE>
MANAGEMENT
Day-to-day operations of the Bank are directed by Barry C. Burkholder,
President and CEO of the Bank, who brings over 20 years of commercial banking
experience to the Bank, with specific experience in consumer banking, mortgage
banking and related areas. In connection with the Restructuring and the August
Offering, on July 15, 1996, Mr. Burkholder became Chairman of the Board of the
Bank as well as President and CEO of the Company. The executive management group
of the Bank consists of seven 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 MBSs, serves as non-executive Chairman of
the Board of the Company and as a director of the Bank, for which he is paid an
annual retainer and meeting fees, and provides strategic and managerial advice
to the Company.
CLAIMS RELATED TO FORBEARANCE AGREEMENT
In connection with the original acquisition of the Bank by the Company, the
FHLBB approved the Forbearance Agreement. Under the terms of the Forbearance
Agreement, the FSLIC agreed to waive or forbear from the enforcement of certain
regulatory provisions with respect to regulatory capital requirements, liquidity
requirements, accounting requirements and other matters. After the enactment of
FIRREA, the OTS took the position that the capital standards set forth in FIRREA
apply to all savings institutions, including those institutions such as the
Bank, 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, 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 1999. 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 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".
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.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of Class A
Common Stock by the Selling Stockholders. See "Selling Stockholders".
19
<PAGE>
DIVIDEND POLICY
The Company intends, subject to its financial results, contractual, legal,
and regulatory restrictions, and other factors that the Company's Board of
Directors may deem relevant, to declare and pay a dividend for the Common Stock
on a quarterly basis. The Company's ability to pay dividends and to meet its
other cash obligations, including debt service on the Subordinated Notes and its
other debt obligations, is dependent on the receipt of dividends from Holdings,
which, in turn, is dependent on receipt of dividends from the Bank on the Bank
Common Stock. The declaration of dividends by the Bank on all classes of its
capital stock is subject to the discretion of the Board of Directors of the
Bank, the terms of the Bank Preferred Stock, and applicable regulatory
requirements. 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. Thus, if for any reason the Bank failed to
declare and pay full quarterly dividends on the Bank Preferred Stock, the
Company through Holdings would not receive any cash dividends from the Bank
until four full quarterly dividends on the Bank Preferred Stock had been paid.
See "Risk Factors -- Holding Company Structure; Ability to Pay Dividends".
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 Subordinated Notes and to pay dividends to holders of 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. See "Risk Factors -- Holding Company
Structure; Ability to Pay Dividends". Prior to the August Offering, the Company
had not historically paid dividends on its Common Stock with the exception of a
$100 million dividend paid to holders of Class A Common Stock and its former
Class C Common Stock on May 6, 1996. On the same day, the Bank paid a dividend
on the Bank Common Stock in the amount of $100 million and also made a related
contractually required payment in lieu of dividends in the amount of $5.9
million to the FDIC, the holder of the Warrant. Thus, the dividends historically
paid by the Company are not indicative of its future dividend policy.
On December 5, 1996, the Company's Board declared a dividend of $0.14 per
share, payable on
December 26, 1996 to holders of record of the Company's Class A and Class B
Common Stock on December 16, 1996. On March 6, 1997, the Company's Board
declared a dividend of $0.14 per share, payable on March 26, 1997 to holders of
record of the Company's Class A and Class B Common Stock on March 17, 1997. On
June 2, 1997, the Company's Board declared a dividend of $0.14 per share,
payable on June 25, 1997 to holders of record of the Company's Class A and Class
B Common Stock on June 13, 1997.
20
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
at June 30, 1997 and the pro forma capitalization of the Company as of June 30,
1997. In addition to the long-term debt of the Company reflected below, the Bank
had long-term borrowings consisting of deposits, FHLB advances, and certain
other funding liabilities incurred in the ordinary course of business. See
"Management's Discussion and Analysis -- Capital Resources and Liquidity" and
Notes 8, 9, 10 and 11 to the Consolidated Financial Statements.
AT JUNE 30, 1997
---------------------------
HISTORICAL PRO FORMA
----------- ----------
(IN THOUSANDS, EXCEPT
RATIOS AND SHARE DATA)
Long-term debt(1).................... $ 220,194 $ 220,194
Minority Interest(2)................. 185,500 185,500
Stockholders' equity:
Preferred stock(3).............. -- --
Common stock.................... 316 316
Paid-in capital................. 129,286 129,286
Retained earnings(4)............ 447,050 446,990
Unrealized gains on securities
and mortgage-backed securities
available for sale, net of
tax........................... 6,024 6,024
----------- ----------
Total stockholders' equity...... 582,676 582,616
----------- ----------
Total consolidated
capitalization........... $ 988,370 $ 988,310
=========== ==========
Ratio of equity to assets............ 5.09% 5.09%
Ratio of tangible equity to tangible
assets............................. 4.97% 4.97%
Shares outstanding
Class A......................... 28,354,276 28,354,276
Class B......................... 3,241,320 3,241,320
Book value per common share.......... $ 18.44 $ 18.44
Tangible book value per share........ $ 17.99 $ 17.99
Regulatory capital of the Bank
Tangible capital
Amount..................... $ 858,915 $ 858,855
Ratio...................... 7.59% 7.59%
Core capital
Amount..................... $ 865,469 $ 865,409
Ratio...................... 7.65% 7.65%
Total risk-based capital
Amount..................... $ 904,080 $ 904,020
Ratio...................... 14.05% 14.05%
- ------------
(1) See Note 11 to the Consolidated Financial Statements.
(2) Minority interest consists of $185.5 million stated value of the Bank
Preferred Stock. See Note 16 to the Consolidated Financial Statements.
(3) The Company had 10,000,000 shares of Preferred Stock authorized, none of
which were issued as of June 30, 1997.
(4) Offering expenses are estimated to be $60,000 per quarter.
21
<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. The selected consolidated financial and other data
as of and for the nine months ended June 30, 1997 and 1996 are not audited, but,
in the opinion of management, include all adjustments (consisting only of normal
recurring adjustments), necessary for a fair presentation of operations and
financial condition for those periods. Results of operations for the nine months
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the entire fiscal year.
FIVE-YEAR CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AT JUNE 30, AT SEPTEMBER 30,
---------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION
ASSETS
Cash and cash equivalents............ $ 102,811 $ 96,647 $ 119,523 $ 112,931 $ 76,938 $ 65,388 $ 94,723
Securities purchased under agreements
to resell and
federal funds sold................. 577,059 856,178 674,249 471,052 358,710 547,988 206,000
Trading account assets............... 1,211 1,129 1,149 1,081 1,011 1,006 94,691
Securities........................... 56,142 66,809 64,544 116,013 114,115 43,430 4,909
Mortgage-backed securities........... 1,601,857 1,732,771 1,657,908 2,398,263 2,828,903 2,175,925 833,425
Loans................................ 8,271,904 7,597,406 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..................... 828,066 672,330 675,516 623,954 484,310 351,929 308,918
---------- ---------- ---------- ---------- --------- --------- ---------
Total assets................. $11,439,050 $11,023,270 $10,712,377 $11,983,534 $8,910,161 $8,440,556 $6,255,283
========== ========== ========== ========== ========= ========= =========
LIABILITIES, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY
Deposits............................. $5,249,888 $5,053,605 $5,147,945 $5,182,220 $4,764,204 $4,839,388 $4,910,760
Federal Home Loan Bank advances(2)... 3,630,060 3,883,758 3,490,386 4,383,895 2,620,329 2,185,445 632,345
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 1,181,382 885,506 832,286 1,172,533 553,000 310,000 --
Subordinated Notes................... 219,694 -- -- -- -- -- --
Senior Notes......................... 500 115,000 115,000 115,000 115,000 115,000 --
Long-term debt ("15.75% Notes").... -- -- -- -- -- -- 102,000
Note payable to related party........ -- -- -- -- -- -- 4,090
All other liabilities................ 389,350 370,469 410,217 448,283 320,766 516,020 373,715
---------- ---------- ---------- ---------- --------- --------- ---------
Total liabilities............ 10,670,874 10,308,338 9,995,834 11,301,931 8,373,299 7,965,853 6,022,910
---------- ---------- ---------- ---------- --------- --------- ---------
Minority interest -- Bank Preferred
Stock(3)........................... 185,500 185,500 185,500 185,500 85,500 85,500 --
Total stockholders' equity... 582,676 529,432 531,043 496,103 451,362 389,203 232,373
---------- ---------- ---------- ---------- --------- --------- ---------
Total liabilities, minority
interest, and
stockholders'
equity(4)................ $11,439,050 $11,023,270 $10,712,377 $11,983,534 $8,910,161 $8,440,556 $6,255,283
========== ========== ========== ========== ========= ========= =========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income...................... $ 599,934 $ 620,419 $ 812,312 $ 746,759 $ 494,706 $ 482,490 $ 502,854
Interest expense..................... 401,025 448,026 584,778 552,760 320,924 300,831 348,291
---------- ---------- ---------- ---------- --------- --------- ---------
Net interest income.............. 198,909 172,393 227,534 193,999 173,782 181,659 154,563
Provision for credit losses.......... 14,644 10,155 16,469 24,293 6,997 4,083 21,133
---------- ---------- ---------- ---------- --------- --------- ---------
Net interest income after
provision for credit losses.... 184,265 162,238 211,065 169,706 166,785 177,576 133,430
Non-interest income
Net gains (losses)
Sales of single family
servicing rights and single
family warehouse loans..... 20,475 29,581 43,074 60,495 63,286 67,403 67,223
Securities and
mortgage-backed
securities................. 2,277 3,821 4,002 26 10,404 43,702 2,022
Other loans.................. 992 2,027 3,189 (1,210) 163 1,496 4,759
Sale of mortgage offices..... 3,998 -- -- -- -- -- --
Loan servicing fees and
charges........................ 44,225 31,739 44,230 43,508 31,741 21,780 20,823
Other............................ 14,925 10,914 15,541 12,162 13,295 12,310 8,963
---------- ---------- ---------- ---------- --------- --------- ---------
Total non-interest income........ 86,892 78,082 110,036 114,981 118,889 146,691 103,790
---------- ---------- ---------- ---------- --------- --------- ---------
Non-interest expense
Compensation and benefits........ 57,201 66,907 87,640 83,520 86,504 81,472 69,476
SAIF deposit insurance
premiums....................... 3,985 9,102 45,690 11,428 11,329 10,162 11,101
Amortization of intangibles...... 23,940 15,002 20,432 21,856 18,247 24,469 22,832
Restructuring charges............ -- 10,681 10,681 -- -- -- --
Other............................ 67,874 66,301 88,822 77,772 83,513 85,861 77,006
---------- ---------- ---------- ---------- --------- --------- ---------
Total non-interest expense....... 153,000 167,993 253,265 194,576 199,593 201,964 180,415
---------- ---------- ---------- ---------- --------- --------- ---------
Income before income taxes,
minority interest, and
extraordinary loss............. 118,157 72,327 67,836 90,111 86,081 122,303 56,805
Income tax expense (benefit)......... 45,499 (73,644) (75,765) 37,415 (31,899) (26,153) 200
---------- ---------- ---------- ---------- --------- --------- ---------
Income before minority interest
and extraordinary loss......... 72,658 145,971 143,601 52,696 117,980 148,456 56,605
Minority interest
Bank Preferred Stock
dividends(3)................... 13,689 13,689 18,253 10,600 8,653 6,537 --
Payments in lieu of
dividends(5)................... -- 6,413 6,413 377 357 -- --
---------- ---------- ---------- ---------- --------- --------- ---------
Income before extraordinary
loss........................... 58,969 125,869 118,935 41,719 108,970 141,919 56,605
Extraordinary loss(6)................ 2,323 -- -- -- -- 14,549 --
---------- ---------- ---------- ---------- --------- --------- ---------
Net income(7).................... $ 56,646 $ 125,869 $ 118,935 $ 41,719 $ 108,970 $ 127,370 $ 56,605
========== ========== ========== ========== ========= ========= =========
Net income applicable to common
shares......................... $ 56,646 $ 119,111 $ 113,327 $ 38,824 $ 102,519 $ 118,640 $ 52,406
========== ========== ========== ========== ========= ========= =========
Earnings per common share(8)
Income before extraordinary
loss........................... $ 1.86 $ 4.13 $ 3.87 $ 1.35 $ 3.55 $ 4.61 $ 1.85
Extraordinary loss............... 0.07 -- -- -- -- 0.50 --
---------- ---------- ---------- ---------- --------- --------- ---------
Net income....................... $ 1.79 $ 4.13 $ 3.87 $ 1.35 $ 3.55 $ 4.11 $ 1.85
========== ========== ========== ========== ========= ========= =========
Book value per common share(8)....... $ 18.44 $ 18.14 $ 16.81 $ 17.19 $ 15.64 $ 13.48 $ 8.19
Dividends per common share........... 0.42 3.46 3.46 -- -- -- --
Average number of common shares
outstanding(8)..................... 31,596 28,863 29,260 28,863 28,863 28,863 28,366
CERTAIN RATIOS AND OTHER DATA(9)
Regulatory capital ratios of the
Bank(10)
Tangible capital................. 7.59% 6.15% 6.57% 6.20% 6.01% 6.17% 4.24%
Core capital..................... 7.65 6.23 6.64 6.29 6.17 6.43 5.04
Total risk-based capital......... 14.05 12.53 13.09 13.45 14.02 14.87 12.19
Return on average assets(11)......... 0.86 1.72 1.28 0.50 1.42 1.83 0.89
Return on average common equity...... 13.56 33.06 23.06 8.80 26.32 44.87 28.18
Stockholders' equity to assets....... 5.09 4.80 4.96 4.14 5.07 4.61 3.71
Tangible stockholders' equity to
tangible assets.................... 4.97 4.65 4.81 3.93 4.68 4.14 2.58
Net yield on interest-earning
assets(12)......................... 2.58 2.09 2.10 1.92 2.20 2.61 2.60
Interest rate spread(12)............. 2.32 1.82 1.78 1.61 1.95 2.41 2.54
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- -------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CERTAIN RATIOS AND OTHER DATA --
CONTINUED(9)
Average interest-earning assets to
average interest-bearing
liabilities........................ 1.05 1.06 1.06 1.06 1.06 1.04 1.01
Non-interest expense to average total
assets............................. 1.87% 1.97% 2.26% 1.86% 2.41% 2.76% 2.85%
Net operating expense ratio(13)...... 0.81 1.06 1.28 0.76 0.97 0.76 1.21
Efficiency ratio(14)................. 54.02 66.88 74.97 59.50 66.38 65.11 63.98
Nonperforming assets to total
assets............................. 0.67 1.03 1.12 0.84 1.09 0.72 0.89
Net nonaccrual loans to total
loans.............................. 0.65 1.07 1.19 0.91 1.51 0.85 0.92
Allowance for credit losses to net
nonaccrual loans(15)............... 71.59 45.21 44.24 48.74 30.73 71.71 74.04
Allowance for credit losses to
nonperforming assets............... 50.63 32.80 32.95 36.65 24.18 49.28 50.54
Allowance for credit losses to total
loans.............................. 0.46 0.49 0.52 0.44 0.46 0.61 0.68
Net loan charge-offs to average
loans(15).......................... 0.26 0.17 0.17 0.16 0.30 0.05 0.07
Full-time equivalent employees....... 1,462 2,501 2,310 2,663 2,894 3,122 2,720
Number of community banking
branches........................... 70 70 70 65 62 62 65
Number of commercial banking
origination offices................ 10 9 9 9 5 3 2
Number of mortgage origination
offices(16)........................ 6 91 85 122 145 109 93
Single family servicing portfolio.... $17,235,304 $12,037,262 $13,246,848 $12,532,472 $8,920,760 $8,073,226 $7,187,000
Single family originations(17)....... 1,603,305 2,846,514 3,762,198 3,447,250 5,484,111 6,737,762 6,118,363
Loans purchased for held to maturity
portfolio.......................... 842,270 102,230 148,510 2,658,093 1,406,275 1,212,103 916,613
CERTAIN RATIOS AND OTHER DATA --
EXCLUDING NON-RECURRING AND CERTAIN
OTHER ITEMS(18)
Net income........................... $ 56,507 $ 42,597 $ 56,392 $ 41,719 $ 50,804 $ 97,736 $ 56,605
Net income applicable to common
shares............................. 56,507 39,876 53,295 38,824 47,585 91,461 52,406
Earnings per common share............ 1.78 1.38 1.82 1.35 1.65 3.17 1.85
Operating earnings(19)............... 110,890 86,836 114,659 91,295 75,514 77,105 50,024
Return on average assets(11)......... 0.86% 0.67% 0.67% 0.50% 0.72% 1.42% 0.89%
Return on average common equity...... 13.54 11.38 11.47 8.80 12.27 34.43 28.18
Efficiency ratio(14)................. 54.02 58.87 58.85 59.50 66.38 65.11 63.98
</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 $2,564,801 and
$1,109,945 as of June 30, 1997 and 1996, respectively. 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 its Preferred Stock, Series A, and,
during fiscal 1995, the Bank issued its 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) In connection with its Acquisition, the Bank 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".
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
24
<PAGE>
(6) Fiscal 1997 extraordinary loss is costs and charges associated with the
repurchase and retirement of the Senior Notes. See Note 11 to the
Consolidated Financial Statements. Fiscal 1993 extraordinary loss is 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").
(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 1997,
1996, or 1995 as a result of the termination of the Assistance Agreement in
December 1993. See "Business -- Assistance Agreement".
(8) EPS is net income (adjusted for earnings on the common stock equivalents
attributable to the Bank's Warrant for periods prior to August 1996. See
note 5 herein) 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 1993 and subsequent periods and average monthly
balances for fiscal 1992, with the exception of return on average common
equity, which is based on average monthly balances for all periods
presented. Interim periods are annualized.
(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) Return on average assets is net income without deduction of minority
interest, divided by average total assets.
(12) Net yield on interest-earning assets is 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.
(13) Net operating expense ratio is total non-interest expense less total
non-interest income as a percentage of average assets for each period.
(14) Efficiency ratio is non-interest expenses (excluding goodwill
amortization), divided by net interest income plus non-interest income,
excluding net gains (losses) on securities, MBS, other loans, and the sale
of mortgage offices.
(15) During April 1997, $31.3 million of nonperforming loans were sold with
related charge-offs of $5.0 million. Primarily as a result of this
transaction, the allowance for credit losses to net nonaccrual loans
increased to 71.59% at June 30, 1997 from 45.21% at June 30, 1996.
Excluding the charge-offs related to this sale of nonperforming assets, net
loan charge-offs to average loans would have been 0.18% for the nine months
ended June 30, 1997.
(16) During fiscal 1997, the Company sold certain of its mortgage origination
offices. In connection with this sale, the remaining offices were
restructured or closed. The mortgage origination branches shown at June
30, 1997 are the wholesale mortgage originiation offices, which are
currently part of the Financial Markets Group.
(17) Includes $106.3 million, $100.0 million, $129.0 million, $135.3 million,
$100.3 million, $116.5 million, and $127.0 million of brokered and
purchased loans for the nine months ended June 30, 1997 and 1996 and for
fiscal 1996, 1995, 1994, 1993, and 1992, respectively.
(18) Non-recurring items, deemed not to be part of the routine core business
operations of the Company, are composed of the following for the nine
months ended June 30, 1997 and fiscal 1996, 1994, and 1993:
-- 1997 (increased EPS $0.01 -- (1) the gain on the sale of mortgage
offices of $3,998 ($2,462 net of tax) and (2) the extraordinary loss
on extinguishment of debt of $3,574 ($2,323 net of tax)
-- 1996 (increased EPS $2.05) -- (1) a one-time SAIF assessment charge of
$33,657 ($20,729 net of tax), (2) compensation expense of $7,820
($4,816 net of tax), (3) charges totalling $12,537 ($7,729 net of tax)
related to the restructuring of and items associated with the mortgage
origination business, (4) a contractual payment to previous minority
interests of $5,883, and (5) a tax benefit of $101,700
-- 1994 (increased EPS $1.90) -- tax benefit of $58,166
-- 1993 (increased EPS $0.94) -- (1) tax benefit of $44,183 and (2)
extraordinary loss on extinguishment of debt of $14,549.
(19) Operating earnings consists of net income, including net gains (losses) on
the sales of single family servicing rights and single family warehouse
loans, before taxes, minority interest, and extraordinary losses and
excludes net gains (losses) on securities, MBS, other loans, and
applicable non-recurring items. See Note 18 herein and
"Business -- General."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCUSSION OF RESULTS OF OPERATIONS
OVERVIEW
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE NINE MONTHS ENDED JUNE 30,
1996. Net income was $56.6 million ($1.79 per share) for the nine months ended
June 30, 1997, and $125.9 million ($4.13 per share) for the nine months ended
June 30, 1996. Excluding several non-recurring items in both periods, the most
significant of which was a $101.7 million tax benefit recorded during 1996.
Operating earnings were $110.9 million and $86.8 million for the nine months
ended June 30, 1997 and 1996. The increase in operating earnings is principally
the result of an improved interest rate margin.
Operating earnings consists of net income before taxes, minority interest
and extraordinary losses, and excludes net gains (losses) on securities, MBS,
other loans and applicable non-recurring items. See "Business_-- General".
Management believes operating earnings 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.
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: (1) a
one-time SAIF assessment charge of $33.7 million ($20.7 million after tax, or
$0.67 per share); (2) 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; (3) $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 (4) 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 for fiscal 1996
excludes a one-time SAIF assessment, compensation expense related to the
adoption of a management compensation program, and charges related to the
restructuring of the Mortgage Banking Group because these items are considered
non-recurring. See Notes 13, 15, and 18 to the Consolidated Financial
Statements.
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
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.
26
<PAGE>
MORTGAGE BANKING RESTRUCTURINGS AND SALE OF OFFICES
In June 1996, the Company recorded a restructuring charge of $10.7 million
before tax, to recognize the costs of closing or consolidating mortgage
origination offices and several regional operation centers and recorded $1.8
million of other expenses related to its mortgage origination business.
Effective February 1, 1997, the Company sold certain of its retail and wholesale
mortgage origination offices. In connection with this sale, the remaining
offices were restructured or closed. The net gain on the sale of these offices,
reduced by additional restructuring costs, was $4.0 million before tax, $2.5
million after tax, or $0.08 per share and was recorded in the quarter ended
March 31, 1997. At June 30, 1997, the unpaid liability relating to the sale, the
two restructurings and the branch closures was $6.4 million, and is expected to
be paid in full by fiscal 1999. See "Business -- Mortgage Banking Group" and
Note 18 to the Consolidated Financial Statements.
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
FOR THE NINE MONTHS ENDED JUNE 30, SEPTEMBER 30,
--------------------------------------------------------------- ---------------------
1997 1996 1996
------------------------------ ------------------------------ ---------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE(2) BALANCE INTEREST RATE(2) BALANCE INTEREST
---------- --------- ------- ---------- --------- ------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Short-term interest-earning
assets............................ $ 589,249 $ 26,732 5.98% $ 621,604 $ 27,576 5.83% $ 668,657 $ 39,302
Trading account assets.............. 1,203 53 5.87 1,150 51 5.91 1,154 67
Securities.......................... 73,204 3,699 6.76 78,354 2,943 5.02 76,637 3,917
Mortgage-backed securities.......... 1,552,690 78,946 6.78 2,064,035 100,913 6.52 1,968,230 128,143
Loans(1)............................ 7,938,565 482,077 8.10 7,994,274 478,846 7.99 7,889,828 627,940
FHLB stock.......................... 191,650 8,427 5.88 220,452 10,090 6.11 213,242 12,943
Covered Assets and related assets... -- -- -- -- -- -- -- --
---------- --------- ------- ---------- --------- ------- ---------- ---------
TOTAL INTEREST-EARNING ASSETS... 10,346,561 599,934 7.73 10,979,869 620,419 7.53 10,817,748 812,312
--------- ------- --------- ------- ---------
Non-interest-earning assets......... 600,225 383,785 411,683
---------- ---------- ----------
Total assets.................... $10,946,786 $11,363,654 $11,229,431
========== ========== ==========
INTEREST-BEARING LIABILITIES
Deposits:
Transaction accounts............ $ 218,040 1,730 1.06 $ 218,657 2,020 1.23 $ 218,859 2,593
Insured money fund accounts..... 1,537,774 60,118 5.23 1,248,034 50,072 5.36 1,464,577 69,100
Savings accounts................ 126,573 2,316 2.45 136,876 2,749 2.68 138,007 3,598
Certificates of deposit......... 3,203,905 130,943 5.46 3,444,227 149,297 5.79 3,244,291 196,929
---------- --------- ------- ---------- --------- ------- ---------- ---------
Total deposits................ 5,086,292 195,107 5.13 5,047,794 204,138 5.40 5,065,734 272,220
---------- --------- ------- ---------- --------- ------- ---------- ---------
FHLB advances....................... 3,696,314 157,701 5.63 4,219,633 193,726 6.03 4,073,297 247,093
Reverse repurchase agreements and
federal funds purchased........... 934,166 39,703 5.60 973,039 42,357 5.72 955,708 55,112
Subordinated Notes.................. 44,264 2,932 8.90 -- -- --
Senior Notes........................ 92,352 5,582 8.05 115,000 7,805 9.05 115,000 10,353
Other............................... -- -- -- -- -- -- -- --
---------- --------- ------- ---------- --------- ------- ---------- ---------
TOTAL INTEREST-BEARING
LIABILITIES................... 9,853,388 401,025 5.41 10,355,466 448,026 5.71 10,209,739 584,778
Non-interest-bearing liabilities and
stockholders' equity.............. 1,093,398 1,008,188 1,019,692
---------- --------- ------- ---------- --------- ------- ---------- ---------
Total liabilities and
stockholders' equity.......... $10,946,786 $11,363,654 $11,229,431
========== ========== ==========
Net interest income/interest rate
spread................................ $ 198,909 2.32% $ 172,393 1.82% $ 227,534
========= ======= ========= ======= =========
Net yield on interest-earning assets.... 2.58% 2.09%
======= =======
Ratio of average interest-earning assets
to average interest-bearing
liabilities........................... 1.05 1.06 1.06
========== ========== ==========
<CAPTION>
1995 1994
----------------------------- ----------------------------
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------ ---------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Short-term interest-earning
assets............................ 5.88% $ 466,276 $ 29,675 6.36% $ 461,530 $ 19,019 4.12%
Trading account assets.............. 5.81 1,079 62 5.75 1,026 (144) (14.04)
Securities.......................... 5.11 116,934 5,893 5.04 108,751 5,007 4.60
Mortgage-backed securities.......... 6.51 2,618,990 173,155 6.61 2,595,163 151,972 5.86
Loans(1)............................ 7.96 6,707,868 526,528 7.85 4,524,158 308,804 6.83
FHLB stock.......................... 6.07 180,416 11,446 6.34 132,277 5,558 4.20
Covered Assets and related assets... -- -- -- -- 74,547 4,490 6.02
------ ---------- --------- ------ --------- --------- ------
TOTAL INTEREST-EARNING ASSETS... 7.51 10,091,563 746,759 7.40 7,897,452 494,706 6.26
------ --------- ------ --------- ------
Non-interest-earning assets......... 345,500 386,175
---------- ---------
Total assets.................... $10,437,063 $8,283,627
========== =========
INTEREST-BEARING LIABILITIES
Deposits:
Transaction accounts............ 1.18 $ 225,799 3,384 1.50 $ 237,537 3,753 1.58
Insured money fund accounts..... 4.72 1,032,873 57,848 5.60 582,126 18,508 3.18
Savings accounts................ 2.61 171,308 4,715 2.75 284,885 7,311 2.57
Certificates of deposit......... 6.07 3,560,420 198,419 5.57 3,662,043 179,462 4.90
------ ---------- --------- ------ --------- --------- ------
Total deposits................ 5.37 4,990,400 264,366 5.30 4,766,591 209,034 4.39
------ ---------- --------- ------ --------- --------- ------
FHLB advances....................... 6.07 3,560,844 224,767 6.31 2,285,630 91,060 3.98
Reverse repurchase agreements and
federal funds purchased........... 5.77 888,453 53,220 5.99 274,666 10,574 3.85
Subordinated Notes..................
Senior Notes........................ 9.00 115,000 10,407 9.05 115,000 10,177 8.85
Other............................... -- -- -- -- 3,350 79 2.36
------ ---------- --------- ------ --------- --------- ------
TOTAL INTEREST-BEARING
LIABILITIES................... 5.73 9,554,697 552,760 5.79 7,445,237 320,924 4.31
Non-interest-bearing liabilities and
stockholders' equity.............. 882,366 838,390
------ ---------- --------- ------ --------- --------- ------
Total liabilities and
stockholders' equity.......... $10,437,063 $8,283,627
========== =========
Net interest income/interest rate
spread................................ 1.78% $ 193,999 1.61% $ 173,782 1.95%
====== ========= ====== ========= ======
Net yield on interest-earning assets.... 2.10% 1.92% 2.20%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing
liabilities........................... 1.06 1.06
========== =========
</TABLE>
- ------------
(1) Includes nonaccrual loans.
(2) Annualized.
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 NINE MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------- -----------------------------------------------------
1997 VS. 1996 1996 VS. 1995 1995 VS. 1994
------------------------------- ------------------------------- --------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Short-term interest-earning
assets........................... $ (1,511) $ 667 $ (844) $ 12,015 $ (2,388) $ 9,627 $ 198 $ 10,458
Trading account assets............. 2 -- 2 4 1 5 (7) 213
Securities......................... (204) 960 756 (2,057) 81 (1,976) 390 496
Mortgage-backed securities......... (25,855) 3,888 (21,967) (42,429) (2,583) (45,012) 1,418 19,765
Loans.............................. (3,347) 6,578 3,231 93,941 7,471 101,412 166,278 51,446
FHLB stock......................... (1,291) (372) (1,663) 2,002 (505) 1,497 2,453 3,435
Covered assets and related
assets........................... -- -- -- -- -- -- (4,490) --
--------- --------- --------- --------- --------- --------- --------- ---------
Total........................ (32,206) 11,721 (20,485) 63,476 2,077 65,553 166,240 85,813
--------- --------- --------- --------- --------- --------- --------- ---------
INTEREST EXPENSE
Deposits........................... 1,503 (10,534) (9,031) 4,189 3,665 7,854 10,219 45,113
FHLB advances...................... (23,471) (12,554) (36,025) 31,178 (8,852) 22,326 65,246 68,461
Reverse repurchase agreements and
federal funds purchased.......... (1,740) (914) (2,654) 3,906 (2,014) 1,892 34,151 8,495
Subordinated Notes................. 2,932 -- 2,932 -- -- -- -- --
Senior Notes....................... (1,429) (794) (2,223) -- (54) (54) -- 230
Other.............................. -- -- -- -- -- -- (79) --
--------- --------- --------- --------- --------- --------- --------- ---------
Total........................ (22,205) (24,796) (47,001) 39,273 (7,255) 32,018 109,537 122,299
--------- --------- --------- --------- --------- --------- --------- ---------
NET CHANGE IN NET INTEREST
INCOME............................. $ (10,001) $ 36,517 $ 26,516 $ 24,203 $ 9,332 $ 33,535 $ 56,703 $ (36,486)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
NET
---------
INTEREST INCOME
Short-term interest-earning
assets........................... $ 10,656
Trading account assets............. 206
Securities......................... 886
Mortgage-backed securities......... 21,183
Loans.............................. 217,724
FHLB stock......................... 5,888
Covered assets and related
assets........................... (4,490)
---------
Total........................ 252,053
---------
INTEREST EXPENSE
Deposits........................... 55,332
FHLB advances...................... 133,707
Reverse repurchase agreements and
federal funds purchased.......... 42,646
Subordinated Notes................. --
Senior Notes....................... 230
Other.............................. (79)
---------
Total........................ 231,836
---------
NET CHANGE IN NET INTEREST
INCOME............................. $ 20,217
=========
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE NINE MONTHS ENDED JUNE 30,
1996. Net interest income was $198.9 million for the nine months ended June 30,
1997, compared to $172.4 million for the nine months ended June 30, 1996,
reflecting a $26.5 million, or 15% increase. This increase is attributable to a
49 basis point increase in the net yield on interest-earning assets ("net
yield"), partially offset by an $633.3 million decrease in average
interest-earning assets.
The yield on interest-earning assets increased 20 basis points for the nine
months ended June 30, 1997 in comparison to the prior year period, primarily due
to the shift of assets to higher yielding commercial and consumer loans from the
traditionally lower yielding single family mortgages and to higher rates on
adjustable-rate MBS. Average interest-earning assets decreased primarily due to
principal repayments on loans and MBS.
The cost of funds decreased 30 basis points during the nine months ended
June 30, 1997 in comparison to the prior year period, primarily due to a
decrease in FHLB advance rates and lower deposit rates, reflecting the turnover
of deposits from products with higher rates to lower cost transaction accounts.
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.
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, approximately $1.9 billion. The increase in average
interest-earning assets was funded primarily with FHLB advances and reverse
repurchase agreements.
29
<PAGE>
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.
During fiscal 1995, average market interest rates increased, and the
interest income from adjustable-rate loans and MBS increased more slowly than
the cost of deposits and borrowing because of the effect of periodic interest
rate caps applicable to the loans and MBS. During fiscal 1996, the negative
effect of the periodic interest rate caps decreased, and, as a result, the net
interest rate spread improved. The net interest rate spread was also positively
impacted during fiscal 1996 by 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.
PROVISION FOR CREDIT LOSSES
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO NINE MONTHS ENDED JUNE 30,
1996. The provision for credit losses increased $4.5 million for the nine
months ended June 30, 1997. The increase results from charge-offs taken in
conjunction with a bulk sale of nonperforming single family loans, increased
commercial and multi-family originations, and the addition of new product lines,
including healthcare loans and commercial loan participations. During April
1997, the Company sold $31.3 million of nonperforming single family loans and
recorded related charge-offs of $5.0 million. Due to losses experienced in the
consumer line of credit portfolio, the level of reserves were increased through
higher provisions for the nine months ended June 30, 1996. This portfolio has
decreased from $54.8 million at June 30, 1996 to $44.7 million at June 30, 1997,
resulting in lower provisions and reserves in the nine months ended June 30,
1997. See "-- Asset Quality" and Note 5 to the Consolidated Financial
Statements.
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
consumer 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 primarily includes gains (losses) from sales of assets
and mortgage loan servicing fees and charges.
NON-INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
------------------------ -------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NON-INTEREST INCOME
Net gains (losses)
Sales of single family servicing
rights......................... $ 1,736 $ -- $ 4,678 $ 34,080 $ 67,198
Single family warehouse loans.... 18,739 29,581 38,396 26,415 (3,912)
Securities and mortgage-backed
securities..................... 2,277 3,821 4,002 26 10,404
Other loans...................... 992 2,027 3,189 (1,210) 163
Sale of mortgage offices......... 3,998 -- -- -- --
Loan servicing fees and charges.... 44,225 31,739 44,230 43,508 31,741
Other.............................. 14,925 10,914 15,541 12,162 13,295
----------- ----------- ----------- ----------- -----------
Total non-interest income... $ 86,892 $ 78,082 $ 110,036 $ 114,981 $ 118,889
=========== =========== =========== =========== ===========
PRINCIPAL SOLD
MSRs............................... $ 106,748 $ 955,678 $ 1,488,885 $ 2,854,114 $ 4,521,491
Single family warehouse loans...... 1,078,304 2,333,319 2,984,211 2,100,662 4,786,413
</TABLE>
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE NINE MONTHS ENDED JUNE 30,
1996. Non-interest income increased $8.8 million during the nine months ended
June 30, 1997 compared to the nine months ended June 30, 1996. A majority of
this increase was due to higher mortgage loan servicing fees and charges, which
primarily reflects a larger portfolio of single family loans serviced for others
at June 30, 1997 compared to June 30, 1996 ($20.8 billion versus $8.2 billion).
See "-- Discussion of Changes in Financial Condition". Net gains (losses)
declined $7.7 million to $27.7 million during the nine months ended June 30,
1997, compared to $35.4 million during the same period in 1996. This decrease
primarily reflects a decrease in net gains on sales of single family warehouse
loans due to the sale of certain of the Company's mortgage origination offices
during the second quarter of fiscal 1997, partially offset by the gain recorded
on that sale. See " -- Mortgage Banking Restructurings and Sale of Offices".
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 Statement of Financial Accounting Standards
("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 Changes in 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
31
<PAGE>
for a gain of $608,000 and $178.4 million of multi-family loans for a gain of
$2.7 million. See " -- Discussion of Changes in 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.
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, for fiscal 1995 and 1994, respectively.
In September 1995, the Company adopted SFAS No. 122, effective October 1,
1994. This statement required 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 was
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
fiscal 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 Changes in 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
32
<PAGE>
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.
NON-INTEREST EXPENSE
Non-interest expense was comprised of the following significant items:
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Compensation and benefits............ $ 57,201 $ 66,907 $ 87,640 $ 83,520 $ 86,504
Occupancy............................ 11,372 13,904 18,415 18,713 17,196
Data processing...................... 10,217 12,319 16,196 16,360 15,821
Advertising and marketing............ 5,979 5,956 8,025 9,262 10,796
Amortization of intangibles.......... 23,940 15,002 20,432 21,856 18,247
SAIF deposit insurance premiums...... 3,985 9,102 45,690 11,428 11,329
Furniture and equipment.............. 3,201 4,656 6,121 6,428 6,810
Restructuring charges................ -- 10,681 10,681 -- --
Other................................ 37,105 29,466 40,065 27,009 32,890
---------- ---------- ---------- ---------- ----------
Total non-interest expense...... $ 153,000 $ 167,993 $ 253,265 $ 194,576 $ 199,593
========== ========== ========== ========== ==========
</TABLE>
NINE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE NINE MONTHS ENDED JUNE 30,
1996. Non-interest expense was $153.0 million for the nine months ended June
30, 1997 and $168.0 million for the nine months ended June 30, 1996, or 1.87%
and 1.97% of average total assets for those same periods. Non-interest expense
for the nine months ended June 30, 1996 included two items deemed to be
non-recurring; (1) a charge to compensation expense of $7.8 million recorded in
June 1996 related to the implementation of a management compensation program and
(2) a $10.7 million charge recorded in June 1996 related to the restructuring of
the mortgage origination business. See Notes 13 and 18 to the Consolidated
Financial Statements. Excluding these non-recurring items, non-interest expense
was $153.0 million compared to $149.5 million for an increase of 2% period over
period. This increase was primarily due to a $8.9 million increase in intangible
amortization expense and a $2.4 million increase in legal expenses, partially
offset by decreases in compensation expenses, SAIF premiums, and the effect of
the sale of certain of the Company's retail and wholesale mortgage origination
offices. Intangible amortization expense increased due to purchases of MSRs
during fiscal 1997 and legal expenses were higher than the prior period due to
the forbearance litigation ($3.0 million and $533,000 for the nine months ended
June 30, 1997 and 1996, respectively). See "-- Discussion of Changes in
Financial Condition" and "Legal Proceedings."
Compensation expense decreased $9.7 million, or 15%, during the nine months
ended June 30, 1997 compared to the nine months ended June 30, 1996, primarily
due to the $7.8 million non-recurring charge discussed above. Excluding this
non-recurring charge, compensation expense decreased $1.9 million, or 3%.
Average full-time equivalents decreased 30% from 2,610 for the nine months ended
June 30, 1996 to 1,838 for the nine months ended June 30, 1997 as a result of
the restructuring and sale of certain of the Company's retail and wholesale
mortgage origination offices. However, the decline in compensation expense was
less than the decrease in average full-time equivalents due to the deferral of
compensation into the basis of loans originated during both periods. SAIF
deposit insurance premiums decreased $5.1 million during the nine months ended
June 30, 1997 compared to the nine months ended June 30, 1996 due to an
assessment reduction from 23 to 6.48 basis points effective January 1, 1997. The
sale of certain of the Company's retail and wholesale mortgage origination
offices contributed to decreases in occupancy, data processing, furniture and
equipment, and other non-interest expenses as the mortgage origination branches
were reduced from 91 at June 30, 1996 to six at June 30, 1997.
33
<PAGE>
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 Restructurings and Sale of Offices". 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
Bank United Corp. is a savings and loan holding company (the "Parent
Company"), Holdings is a wholly owned, Delaware subsidiary, and the Bank is a
federal savings bank. The provision for income taxes before extraordinary loss
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, excluding taxes on the extraordinary loss, was an expense of $45.5
million for the nine months ended June 30, 1997 and a net benefit of $73.6
million for the nine months ended June 30, 1996, 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 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 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 Parent 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 and By-laws, a total
tax benefit of $101.7 million was recognized for the nine months ended June 30,
1996 and in fiscal 1996 as a reduction of income tax expense and an increase in
the net deferred tax asset. For the nine months ended June 30, 1997, no tax
benefits were recorded for the expected utilization of NOLs against future
taxable income by the Company or the Bank because the criteria under SFAS No.
109, "Accounting for Income Taxes" to recognize a tax benefit was not met. 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.
34
<PAGE>
As of June 30, 1997, future taxable income of $557 million would fully
utilize the net deferred tax asset.
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 fiscal 1996 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.
EXTRAORDINARY LOSS
In May 1997, the Company issued $220 million of Subordinated Notes and used
a portion of the net proceeds to retire $114.5 million of Senior Notes. The
costs associated with retiring the Senior Notes are reflected as an
extraordinary loss of $3.6 million, or $2.3 million after tax ($0.07 per share).
See Note 11 to the Consolidated Financial Statements.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION
OVERVIEW
The Company 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 its 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. 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 acquisitions, while maintaining adequate capital.
35
<PAGE>
The following table reflects activity in the MBS portfolio.
MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
------------------------- -------------------------------------
1997 1996 1996 1995 1994
----------- ------------ ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
Beginning balance.................... $ 630,048 $ 2,051,304 $ 2,051,304 $ 2,394,978 $ 358,896
Loans securitized.................. -- -- -- -- 906,652
Purchases.......................... 2,134 3,841 3,841 38,515 83,854
Net change in unrealized gains
(losses) before tax.............. 1,055 2,384 2,841 162 (10,202)
Sales.............................. -- -- -- -- (38,252)
Repayments......................... (60,931) (156,456) (178,926) (390,364) (162,328)
Transfers.......................... (6,843) (1,244,945) (1,244,945) -- 1,260,971
Other.............................. (2,094) (3,104) (4,067) 8,013 (4,613)
----------- ------------ ----------- ----------- -----------
Ending balance....................... $ 563,369 $ 653,024 $ 630,048 $ 2,051,304 $ 2,394,978
=========== ============ =========== =========== ===========
AVAILABLE FOR SALE
Beginning balance.................... $ 1,027,860 $ 346,959 $ 346,959 $ 433,925 $ 1,817,029
Loans securitized.................. -- -- -- -- 275,520
Purchases.......................... 171,918 -- -- 230 583,444
Net change in unrealized gains
(losses) before tax.............. 11,653 3,137 3,660 8,415 (61,613)
Sales.............................. (6,892) (292,990) (292,990) (77,610) (174,702)
Repayments......................... (177,858) (220,089) (272,059) (16,346) (760,111)
Transfers.......................... 13,212 1,244,945 1,244,945 -- (1,260,971)
Other.............................. (1,405) (2,215) (2,655) (1,655) 15,329
----------- ------------ ----------- ----------- -----------
Ending balance....................... $ 1,038,488 $ 1,079,747 $ 1,027,860 $ 346,959 $ 433,925
=========== ============ =========== =========== ===========
</TABLE>
The unrealized gains on the MBS held to maturity portfolio were $665,000 at
June 30, 1997, $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 $20.3 million at June 30, 1997, $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 primarily relate to changes in market
conditions relating to MBS and also reflect the implementation of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" in fiscal 1997. See Note 4 to the Consolidated Financial
Statments. At June 30, 1997, the Company's MBS held to maturity portfolio was
comprised primarily of privately-issued and credit-enhanced MBS, of which 100%
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 June
30, 1997, 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."
36
<PAGE>
The following table reflects activity in the loan portfolio.
LOANS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
------------------------- ----------------------------------------
1997 1996 1996 1995 1994
----------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
Beginning balance.................... $ 7,227,153 $ 7,763,676 $ 7,763,676 $ 4,780,328 $ 3,434,440
Originations
Single family.................... 543,460 649,885 818,563 1,012,771 1,319,020
Single family construction....... 595,374 386,459 554,260 239,481 133,609
Consumer......................... 109,056 94,352 125,596 99,249 94,153
Multi-family, commercial real
estate, commercial, healthcare,
and small business............. 440,163 170,016 248,185 246,131 207,546
Purchases
Single family.................... 677,420 94,303 140,583 2,640,755 1,312,827
Consumer......................... 88,424 -- -- 68 24,982
Multi-family, commercial real
estate and small business...... 76,426 7,927 7,927 17,270 68,466
Net change in mortgage banker
finance line of credit........... 169,260 38,733 30,481 (38,124) (238,223)
Repayments......................... (1,809,411) (1,773,891) (2,298,915) (1,188,489) (807,574)
Securitized loans sold or
transferred...................... -- -- -- -- (1,125,050)
Transfers from (to) held for
sale............................. -- (187,463) (104,235) 805 398,645
Sales.............................. (84,106) (4,420) (4,420) (34,865) (26,930)
Other.............................. (41,953) (36,067) (54,548) (11,704) (15,583)
----------- ------------ ------------ ------------ ------------
Ending balance....................... $ 7,991,266 $ 7,203,510 $ 7,227,153 $ 7,763,676 $ 4,780,328
=========== ============ ============ ============ ============
HELD FOR SALE
Beginning balance.................... $ 292,335 $ 496,564 $ 496,564 $ 265,846 $ 1,427,939
Originations
Single family.................... 1,059,845 2,196,629 2,783,446 2,213,553 4,105,530
Multi-family, commercial real
estate, and small business..... 10,211 71,622 88,861 61,505 23,449
Purchases
Single family.................... 37,714 71,645 85,715 65,103 60,900
Multi-family, commercial real
estate, and small business..... 270,743 13,856 57,594 38,823 --
Repayments......................... (14,626) (12,234) (15,581) (3,667) (54,846)
Securitized loans sold or
transferred...................... (1,175,579) (2,071,520) (2,669,406) (1,864,313) (4,470,275)
Transfers (to) from held to
maturity......................... -- 187,463 104,235 (805) (398,645)
Sales.............................. (205,011) (555,113) (642,559) (273,747) (430,342)
Other.............................. 5,006 (5,016) 3,466 (5,734) 2,136
----------- ------------ ------------ ------------ ------------
Ending balance....................... $ 280,638 $ 393,896 $ 292,335 $ 496,564 $ 265,846
=========== ============ ============ ============ ============
</TABLE>
1997 ACTIVITY. Total assets increased during the nine months ended June
30, 1997 by $726.7 million, or 7%, to $11.4 billion. The majority of the
increase is the result of commercial and consumer loan purchases and
originations, as well as purchases of MSRs. These increases were funded
primarily with FHLB advances and reverse repurchase agreements.
Total loans increased $752.4 million, or 10%, during the nine months ended
June 30, 1997. This increase, which is primarily reflected in the commercial and
consumer loan portfolios, reflects the Company's strategy to reduce its reliance
on traditionally lower yielding single family residential lending lines of
business by developing higher margin commercial and consumer lending lines of
business.
37
<PAGE>
Single family loans declined during the nine months ended June 30, 1997,
primarily due to higher principal repayments. Mortgage loan originations were
down due to the sale of certain of the Company's retail mortgage origination
offices during the second quarter of fiscal 1997. The retail mortgage
origination offices not sold in this transaction were subsequently closed.
Despite the sale of the retail mortgage origination business, the Company
intends to continue its origination capability in Texas through its community
banking branches and its wholesale capability through its Financial Markets
Group. Most of the loans originated through these businesses will be held for
the Company's portfolio.
Commercial loans, which include single family construction, multi-family,
healthcare, small business, and mortgage banker finance line of credit loans,
increased $674.5 million, or 69%, during the nine months ended June 30, 1997,
compared to an increase of $134.7 million, or 18%, during the nine months ended
June 30, 1996. Additionally, the Company had $1.1 billion of outstanding
commercial loan commitments that had not been funded as of June 30, 1997, and
are not reflected in the table above.
Consumer loans increased $117.6 million, or 70%, during the nine months
ended June 30, 1997. This increase reflects purchases of home equity line of
credit loans outside the state of Texas and increased home improvement loan
originations, offset by a lower consumer line of credit portfolio balance.
MSRs increased $151.6 million, or 123%, during the nine months ended June
30, 1997. During this period, the Company purchased servicing rights associated
with $12.3 billion of single family loans at a premium of $158.2 million. As of
June 30, 1997, $7.1 billion of these servicing rights had not yet been
transferred to the Company, and are expected to be transferred during the first
quarter of fiscal 1998. The total single family servicing portfolio serviced for
others at June 30, 1997, adjusted for the acquired servicing rights, was $20.8
billion. The Company also services $3.6 billion of loans held in its own
portfolio.
Deposits increased $101.9 million, or 2%, during the nine months ended June
30, 1997. Although total deposits were relatively unchanged, the composition
changed. Higher cost brokered deposits and certificates of deposit ("CDs")
were allowed to run-off and were replaced with lower cost transaction accounts.
In the aggregate, FHLB advances, reverse repurchase agreements, and federal
funds purchased increased $488.8 million during the nine months ended June 30,
1997, primarily to fund commercial and consumer loan purchases and originations.
During the nine months ended June 30, 1997, the Company issued $220 million
of Subordinated Notes. Net proceeds were used to repurchase and retire $114.5
million of Senior Notes, pay the related costs and expenses and provide
additional capital to the Bank. See Note 11 to the Consolidated Financial
Statements.
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.
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 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.
38
<PAGE>
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
Mortgage Banker Finance ("MBF") 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 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.
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
39
<PAGE>
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 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 (at fair value,
less estimated costs to sell). 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 June 30, 1997,
September 30,
40
<PAGE>
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 June 30, 1997 and September 30,
1996, $3.5 million and $10.6 million, respectively, of such loans were excluded
from single family nonaccrual loans.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
AT AT SEPTEMBER 30,
JUNE 30, ----------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NONACCRUAL LOANS
Single family(1)................ $ 51,186 $ 92,187 $ 83,954 $ 85,722 $ 61,451 $ 60,209
Single family construction...... -- -- 505 -- -- 672
Consumer........................ 855 1,039 563 506 427 --
Multi-family.................... 16 144 213 3,802 3,233 --
Commercial real estate and small
business...................... 2,622 350 -- 2,342 -- --
---------- ---------- ---------- ---------- ---------- ----------
54,679 93,720 85,235 92,372 65,111 60,881
---------- ---------- ---------- ---------- ---------- ----------
DISCOUNTS
Accretable(2)................... 17 (286) (560) (669) (781) (1,524)
Non-accretable(3)............... (835) (3,791) (9,167) (15,384) (22,684) (21,250)
---------- ---------- ---------- ---------- ---------- ----------
(818) (4,077) (9,727) (16,053) (23,465) (22,774)
---------- ---------- ---------- ---------- ---------- ----------
Net nonaccrual loans....... 53,861 89,643 75,508 76,319 41,646 38,107
REO, primarily single family
properties......................... 22,297 30,730 24,904 20,684 18,954 17,722
---------- ---------- ---------- ---------- ---------- ----------
Total nonperforming
assets................... $ 76,158 $ 120,373 $ 100,412 $ 97,003 $ 60,600 $ 55,829
========== ========== ========== ========== ========== ==========
</TABLE>
- ------------
(1) Originated single family nonaccrual loans to total single family nonaccrual
loans were 28.24%, 33.04%, 20.64%, and 13.66% at June 30, 1997, 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 total accretable discount on performing
and nonperforming loans is included with the allowance for credit losses,
the resulting ratio of the allowance for credit losses to total loans would
have been 0.48% and 0.73% at June 30, 1997 and September 30, 1996,
respectively.
(3) The loan principal amount related to the non-accretable discounts were $1.7
million, $29.5 million, $33.7 million, $60.2 million, $41.4 million, and
$43.1 million at June 30, 1997, September 30, 1996, 1995, 1994, 1993, and
1992, respectively.
41
<PAGE>
SELECTED ASSET QUALITY RATIOS
<TABLE>
<CAPTION>
AT OR
FOR THE
NINE MONTHS
ENDED AT OR FOR THE YEAR ENDED SEPTEMBER 30,
JUNE 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allowance for credit losses to net
nonaccrual loans
Single family................... 49.89% 32.46% 39.74% 22.70% 39.69% 41.61%
Total........................... 71.59 44.24 48.74 30.73 71.71 74.04
Allowance for credit losses to
nonperforming assets............... 50.63 32.95 36.65 24.18 49.28 50.54
Allowance for credit losses and
non-accretable discounts to net
nonaccrual loans................... 73.14 48.47 60.88 50.89 126.18 129.80
Allowance for credit losses to total
loans.............................. 0.46 0.52 0.44 0.46 0.61 0.68
Nonperforming assets to total
assets............................. 0.67 1.12 0.84 1.09 0.72 0.89
Net nonaccrual loans to total
loans.............................. 0.65 1.19 0.91 1.51 0.85 0.92
Nonperforming assets to total loans
and REO............................ 0.91 1.59 1.21 1.91 1.23 1.35
Net loan charge-offs to average
loans -- Annualized
Single family................... 0.23(1) 0.12 0.08 0.04 0.05 0.07
Total........................... 0.26(1) 0.17 0.16 0.30 0.05 0.07
</TABLE>
(1) Excluding charge-offs totalling $5.0 million related to a nonperforming
loan sale in April, 1997, the single family charge-off ratio would have
been 0.12% and the total charge-off ratio would have been 0.18%.
PORTFOLIO OF GROSS NONACCRUAL LOANS BY STATE AND TYPE
AT JUNE 30, 1997
% OF
STATE SINGLE FAMILY OTHER TOTAL TOTAL
- ---------------------------- ------------- ------ --------- ------
(IN THOUSANDS)
California.................. $26,424 $ -- $ 26,424 48.33%
Texas....................... 2,870 3,434 6,304 11.53%
New York.................... 3,103 -- 3,103 5.67%
Florida..................... 3,026 59 3,085 5.64%
Illinois.................... 1,889 -- 1,889 3.45%
New Jersey.................. 1,367 -- 1,367 2.50%
Pennsylvania................ 1,339 -- 1,339 2.45%
Virginia.................... 1,081 -- 1,081 1.98%
Connecticut................. 1,030 -- 1,030 1.88%
Minnesota................... 605 -- 605 1.11%
Other....................... 8,452 -- 8,452 15.46%
------------- ------ --------- ------
Total.................. $51,186 $3,493 $ 54,679 100.00%
============= ====== ========= ======
% of Total............. 93.61% 6.39% 100.00%
============= ====== =========
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 ratio increased to 71.59% at June 30, 1997
primarily due to a sale of $31.3 million of nonperforming loans with related
charge-offs to reserves totalling $5.0 million in April 1997.
42
<PAGE>
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 87.36% and 81.66%
at September 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 0.54%
and 0.54% for the twelve months ended September 30, 1996 and 1995, respectively,
for peer institutions. Because 98% of the Company's nonaccrual loans at
September 30, 1996 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. At September 30, 1996 and 1995 the Company's single family
loan portfolio represented 81.2% and 84.7%, respectively, of gross loans
outstanding compared to 73.45% and 72.22% for peer institutions.
Nonperforming assets decreased $44.2 million, or 36.73%, to $76.2 million
at June 30, 1997 compared to $120.4 million at September 30, 1996. Single family
nonaccrual loans decreased $41.0 million during the nine months ended June 30,
1997, primarily due to a sale of $31.3 million of nonperforming loans in April
1997 and transfers of foreclosed properties to REO. The portion of the purchase
discount attributable to potential credit risk on certain acquired single family
loans is treated as non-accretable discount. The Company believes that these
purchase discounts have been historically sufficient to cover losses from these
portfolios and to provide a market rate of return. These non-accretable
discounts are recognized into income upon obtaining sufficient seasoning,
payoffs, and stabilizing delinquencies. During the nine months ended June 30,
1997, the Company recognized $3.3 million of such discounts as a yield
adjustment.
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 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.
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 June 30, 1997 and September 30, 1996, the recorded investment in impaired
loans, pursuant to SFAS No. 114, totalled $3.6 million and $3.9 million,
respectively. There was no allowance
43
<PAGE>
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.
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 JUNE 30, 1997
NONPERFORMING PERFORMING TOTAL
------------- ---------- ----------
(IN THOUSANDS)
Criticized assets
Special Mention
Multi-family....................... $-- $ 10,038 $ 10,038
Commercial real estate and small
business......................... -- 1,522 1,522
------------- ---------- ----------
Total criticized assets....... -- 11,560 11,560
------------- ---------- ----------
Classified
Substandard
Single family...................... 51,186 -- 51,186
Single family construction......... -- 8,152 8,152
Consumer........................... 789 -- 789
Multi-family....................... -- 13,687 13,687
Commercial real estate and small
business......................... 1,869 1,684 3,553
Real estate owned.................. 22,297 -- 22,297
------------- ---------- ----------
76,141 23,523 99,664
Doubtful
Multi-family....................... -- 318 318
Commercial real estate and small
business......................... -- -- --
------------- ---------- ----------
-- 318 318
Loss.................................. -- -- --
Total classified assets....... 76,141 23,841 99,982
------------- ---------- ----------
Total criticized and
classified assets........... $76,141 $ 35,401 $ 111,542
============= ========== ==========
Total classified assets as a %
of total gross loans........ 1.20%
Total allowance for credit
losses as a % of total
classified assets........... 38.56%
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 obligators 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.
44
<PAGE>
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
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR ENDED
ENDED JUNE 30, SEPTEMBER 30,
--------------------- -------------------------------
1997 1996 1996 1995 1994
---------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance....................... $ 39,660 $ 36,801 $ 36,801 $ 23,454 $ 29,864
Provision.......................... 14,644 10,155 16,469 24,293 6,997
Charge-offs, net of recoveries..... (15,746) (9,900) (13,610) (10,946) (13,407)
---------- --------- --------- --------- ---------
Ending balance.......................... $ 38,558 $ 37,056 $ 39,660 $ 36,801 $ 23,454
========== ========= ========= ========= =========
</TABLE>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
AT JUNE 30, AT SEPTEMBER 30,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Single family........................ $ 25,546 $ 28,308 $ 28,645 $ 29,594 $ 15,905
Single family construction........... 1,095 584 693 361 399
Consumer............................. 5,178 4,165 5,219 3,247 1,822
Multi-family......................... 4,616 3,080 4,118 2,855 2,329
Multi-family construction............ 443 232 232 199 127
Commercial real estate, small
business and healthcare............ 1,039 252 314 97 2,112
Mortgage Banker Finance line of
credit............................. 639 412 412 410 684
Single family warehouse.............. 2 23 27 38 76
--------- --------- --------- --------- ---------
Total........................... $ 38,558 $ 37,056 $ 39,660 $ 36,801 $ 23,454
========= ========= ========= ========= =========
</TABLE>
The allowance for credit losses decreased to $38.6 million at June 30, 1997
from $39.7 million at September 30, 1996. The decreased allowance for credit
losses resulted from an April 1997 sale of $31.3 million of nonperforming single
family loans with related charge-offs of $5.0 million.
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.
45
<PAGE>
The components of charge-offs and recoveries by property type for the
periods indicated are as follows:
NET LOAN CHARGE-OFFS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CHARGE-OFFS
Single family................... $ (10,818) $ (5,436) $ (7,751) $ (4,840) $ (1,722)
Single family construction...... (73) -- -- -- --
Consumer........................ (4,679) (4,588) (5,995) (2,847) (1,365)
Multi-family.................... (148) -- -- -- (233)
Commercial real estate and small
business...................... (315) -- (39) (3,389) (10,145)
Single family warehouse......... -- -- -- (2) --
---------- ---------- ---------- ---------- ----------
Total charge-offs.......... (16,033) (10,024) (13,785) (11,078) (13,465)
---------- ---------- ---------- ---------- ----------
RECOVERIES
Single family................... 31 18 31 36 20
Consumer........................ 253 106 144 94 38
Multi-family.................... -- -- -- 2 --
Commercial real estate and small
business...................... 3 -- -- -- --
---------- ---------- ---------- ---------- ----------
Total recoveries........... 287 124 175 132 58
---------- ---------- ---------- ---------- ----------
Total net charge-offs...... $ (15,746) $ (9,900) $ (13,610) $ (10,946) $ (13,407)
========== ========== ========== ========== ==========
Net loan charge-offs to
average loans............ 0.26% 0.17% 0.17% 0.16% 0.30%
</TABLE>
Net loan charge-offs for all loan types increased to $15.7 million for the
nine months ended June 30, 1997 from $9.9 million for the nine months ended June
30, 1996. The loan portfolio consists primarily of single family mortgage loans.
Net charge-offs on the single family portfolio increased to $10.8 million for
the nine months ended June 30, 1997 from $5.4 million for the nine months ended
June 30, 1996. The resulting annualized net charge-offs as a percentage of
single family loans on average were 0.23% and 0.11%, respectively, for the nine
months ended June 30, 1997 and 1996. Excluding charge-offs totalling $5.0
million related to a nonperforming loan sale in April 1997, the single family
charge-off ratio would have been 0.12% and the total charge-off ratio would have
been 0.18% for the nine months ended June 30, 1997.
Net loan charge-offs for all loan types increased to $13.6 million for
fiscal 1996 from $10.9 million for fiscal 1995. Net charge-offs on the single
family portfolio increased to $7.7 million for fiscal 1996 from $4.8 million for
fiscal 1995. This resulted in net charge-offs as a percentage of single family
loans on average of 0.12% and 0.08%, 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-offs in
fiscal 1994 resulted primarily from a $10.1 million charge-off related to a
single commercial real estate loan. The charge-offs in fiscal 1995 included an
additional $3.4 million charge related to the sale of a 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.
46
<PAGE>
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. Due to the initial growth and loss experience in this
portfolio, the underwriting, approval, and collection processes were modified
and the percentage of reserves required for this product was increased. At June
30, 1997, this product had loans outstanding of $44.7 million with a related
allowance of $3.8 million, compared to an outstanding balance of $54.8 million
and related allowance of $3.9 million at June 30, 1996. The Company believes
that its current formula reserve policy is appropriate for this product.
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 a certain level of liquidity. The Bank's liquidity ratios for June
30, 1997 were as follows:
ACTUAL REQUIREMENT
------- ------------
Average daily liquidity.............. 5.47% 5.00%
Average short-term liquidity......... 2.45% 1.00%
The primary sources of funds consist of deposits, advances from the FHLB,
reverse repurchase agreements, and principal repayments on loans and MBS, and
proceeds from the issuance of debt and Bank Preferred Stock. Liquidity may also
be provided from other sources including investments in short-term high credit
quality instruments. At June 30, 1997, these instruments generally comprised
repurchase agreements, federal funds sold, trading account assets, and MBS and
securities available for sale. These instruments totalled $1.7 billion at June
30, 1997, and $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. Management
believes that the Bank has adequate resources to fund all of its commitments.
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's and Holdings' ability to pay dividends on their
common stock and to meet their other cash obligations is dependent upon the
receipt of dividends from the Bank. The declaration of dividends by the Bank on
all classes of its capital stock is subject to the discretion of the Board of
Directors of the Bank, the terms of the Bank Preferred Stock, applicable
regulatory requirements, and until May 1997, compliance with the covenants of
the Senior Notes. In connection with the repurchase of the Senior Notes, the
Company obtained consents from the holders of the Senior Notes. These consents
allowed the amendment of the Senior Note indenture eliminating substantially all
of their restrictive covenants, including limitations on dividends. See Note 11
to the Consolidated Financial Statements.
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 Subordinated Notes 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 June 30, 1997, the Bank had $182.3 million of available capacity for
the payment of dividends on its capital stock without prior approval of
47
<PAGE>
the OTS. See "Regulation -- Safety and Soundness Regulations -- 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 46% of average total assets for the nine
months ended June 30, 1997, 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.
The following table reflects net activity in the Company's deposit
accounts:
DEPOSIT ACCOUNT ACTIVITY
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consumer accounts
Checking accounts (including
interest-bearing and
non-interest bearing).......... $ 89,690 $ 45,040 $ 43,541 $ 4,984 $ 5,467
Savings accounts................. (6,091) (11,238) (17,762) (83,089) (97,286)
Money market accounts............ 131,231 117,656 171,064 (24,028) (1,275)
Time deposits.................... (119,338) (227,983) (231,656) 35,425 (389,465)
---------- ---------- ---------- ---------- ----------
Total consumer activity..... 95,492 (76,525) (34,813) (66,708) (482,559)
Commercial deposits.................. 14,347 (63,045) (45,682) 482,726 384,387
Wholesale deposits................... (133,520) (117,315) (125,859) (157,019) (108,196)
---------- ---------- ---------- ---------- ----------
Total activity before
interest credited......... (23,681) (256,885) (206,354) 258,999 (206,368)
Interest credited.................... 125,624 128,270 172,079 159,017 131,184
---------- ---------- ---------- ---------- ----------
Net change in deposits...... $ 101,943 $ (128,615) $ (34,275) $ 418,016 $ (75,184)
========== ========== ========== ========== ==========
</TABLE>
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 (1) operating accounts of
MBF customers, (2) escrow deposits, and (3) principal and interest payments on
the loans serviced by the MBF customers. At June 30, 1997, September 30, 1996,
1995, and 1994, these deposits totalled $907.6 million, $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 42% of the funding of average assets for the nine months ended
June 30, 1997, 45% 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 (1) fully disbursed single family loans, unless
assets are physically pledged to the FHLB Dallas, and (2) total assets. At June
30, 1997, 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
48
<PAGE>
collateral that is available to collateralize those reverse repurchase
agreements. At June 30, 1997, the Company had $1.3 billion in such collateral,
$1.2 billion of which was collateralizing 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 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% in September 1996. In May
1997, the Company issued $220 million of fixed-rate Subordinated Notes due 2007
with a stated rate of 8.875% and an effective rate of 8.896%. A portion of the
proceeds were used to retire $114.5 million of the Company's Senior Notes. See
Note 11 to the Consolidated Financial Statements.
COMMITMENTS
At June 30, 1997 the Company had $1.4 billion 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 June 30, 1997, total
$1.7 billion and $2.2 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: (1) 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; (2) 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 in the Distribution; and (3) following the Distribution, the Merger was
consummated pursuant to which Hyperion Holdings was merged with and into the
Company. 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 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 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 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
49
<PAGE>
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.
On February 5, 1997, the Securities and Exchange Commission ("SEC")
declared effective a registration statement for 10.2 million outstanding shares
of the Company's Class A common stock. These shares were previously subject to
restrictions on sale and transfer due to agreements entered into in connection
with the Company's August 1996 common stock public offering. On February 10,
1997, restrictions on 7.2 million shares expired, and restrictions on the
remaining 3.0 million shares expired on August 14, 1997. After these dates, the
10.2 million shares may be offered and sold from time to time by the holding
shareholders. The Company will not receive any of the proceeds from the sale of
these shares.
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. See "The Company -- General".
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) -- 3,859,662 shares. During fiscal 1997, 618,342 shares of Class B
Common Stock were converted to Class A, Common Stock and at June 30, 1997, the
Company had 28,354,276 shares of Class A and 3,241,320 shares of Class B Common
Stock outstanding. 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.
REGULATORY MATTERS
The Bank is subject to regulatory capital requirements as defined in the
OTS capital regulations. The Bank's capital level at June 30, 1997 and 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,
AT JUNE 30, -------------------------------
1997 1996 1995 1994
------------ --------- --------- ---------
Tangible capital........... 7.59% 6.57% 6.20% 6.01%
Core capital............... 7.65 6.64 6.29 6.17
Tier I capital............. 13.45 12.40 12.82 13.44
Total risk-based capital... 14.05 13.09 13.45 14.02
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 fully capitalized the SAIF at a reserve ratio of 1.25% of
SAIF-insured deposits. This one-time assessment was 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 was paid in the first quarter of fiscal 1997.
As a result of this one-time assessment, the SAIF 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 applied to pay interest on the
Financing Corporation ("FICO") obligations. Effective January 1, 1997, well
capitalized SAIF institutions that are in the most favorable supervisory
category will pay a base assessment rate of 0 basis points and FICO assessments
of 6.48 basis points. Other SAIF institutions will pay deposit insurance
assessment rates from 3 to 27 basis points, plus the FICO assessment.
50
<PAGE>
CONTINGENCIES AND UNCERTAINTIES
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
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 June 30, 1997, the Company had NOLs of $724 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".
RECENT ACCOUNTING STANDARDS
On October 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement requires that long-lived assets and certain identified
intangibles held and used by an entity, along with goodwill related to those
assets, be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss must be recognized if the estimate of the future cash flows
(undiscounted and without interest charges) resulting from the use of the asset
and its eventual disposition is less than the carrying amount of the asset. The
adoption of this pronouncement did not have a material effect on the Company's
Consolidated Financial Statements.
51
<PAGE>
On October 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation". 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 by
the Company and make pro forma disclosures of net income and EPS under the fair
value based method of accounting. The Company will continue accounting for
stock-based employee compensation plans in accordance with Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
is disclosing pro forma fair value information as prescribed by SFAS No. 123.
See Note 13 to the Consolidated Financial Statements.
On January 1, 1997, the Company adopted SFAS No. 125. 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 distinguishes between transfers of
financial assets that are sales and transfers that are secured borrowings. This
statement superseded SFAS No. 122 and requires, among other things, that the
book value of loans be allocated between MSRs and the related loans at the time
of the loan sale or securitization, if servicing is retained. SFAS No. 125 also
requires that assets be classified as available for sale or trading if the
assets can be settled in such a way that the holder may not recover
substantially all of their recorded investment. See Note 3 to the Consolidated
Financial Statements for certain reclassifications made pursuant to the
implementation of SFAS No. 125. Under SFAS No. 127, "Deferral of Certain
Provisions of FASB Statement No. 125", certain provisions of SFAS No. 125 are
not effective until January 1, 1998. The deferred provisions relate to: (1)
secured borrowings and collateral for all transactions and (2) transfers of
financial assets for repurchase agreements, dollar rolls, securities lending,
and similar transactions. Implementation of the deferred portion of SFAS No. 125
should have no material effect on the Company's Consolidated Financial
Statements.
In February 1997, SFAS No. 128, "Earnings per Share" was issued. This
statement establishes standards for computing and presenting EPS. It replaces
the presentation of primary EPS with basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
entities with complex capital structures and requires a reconciliation of the
basic EPS computation to the diluted EPS computation. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Earlier application is not permitted and all
prior period EPS data must be restated.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, SEPTEMBER 30,
--------------- -------------------------
1997 1996 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
EPS, as reported..................... $1.79 $4.13 $3.87 $1.35 $3.55
Pro forma EPS under SFAS No. 128
(unaudited)
Basic........................... 1.79 4.36 4.06 1.45 3.78
Diluted......................... 1.77 4.13 3.87 1.35 3.55
</TABLE>
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued.
This statement requires that all components of comprehensive income and total
comprehensive income be reported on one of the following: (1) the statement of
operations, (2) the statement of stockholders' equity, or (3) a new separate
statement of comprehensive income. Comprehensive income is comprised of net
income and all changes to stockholders' equity, except those due to investments
by owners (changes in paid in capital) and distributions to owners (dividends).
This statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. This statement does not change the current
accounting treatment for components of comprehensive income (i.e. changes in
unrealized gains or losses on securities and MBS available for sale) and thus
the implementation of SFAS No. 130 should have no material impact on the
Company's Consolidated Financial Statements.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information" was issued. This statement requires public companies
to report certain information about their operating segments in their annual
financial statements and quarterly reports issued to shareholders. It also
requires public companies to report certain information about their products and
services, the geographic areas in which they operate, and their major customers.
This statement is effective for fiscal years beginning after December 15, 1997.
Earlier
52
<PAGE>
application is encouraged. Implementation of SFAS No. 131 should have no
material effect on the Company's Consolidated Financial Statements.
RECENT SEC DISCLOSURE REQUIREMENTS
In January 1997, the SEC adopted new rules to expand existing disclosure
requirements to include quantitative and qualitative information about market
risk inherent in market risk sensitive instruments. The required quantitative
and qualitative information should be disclosed outside of the Company's
Consolidated Financial Statements and related Notes. The expanded disclosures
must be included in SEC filings that include annual financial statements for
fiscal years ending after June 15, 1997 and thus must be included in the
Company's fiscal 1997 Annual Report on Form 10-K. The Company is currently
evaluating the disclosure options under these new requirements.
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 and sale of a substantial part 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
orginated 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; 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".
53
<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. The Company operates a 70-branch community banking network serving
approximately 216,000 households and businesses, ten regional commercial banking
offices, six wholesale mortgage origination offices, a mortgage servicing
business, and a financial markets business. At June 30, 1997, the Company had
assets of $11.4 billion, deposits of $5.2 billion and stockholders' equity of
$582.7 million and was the largest publicly traded depository institution
headquartered in Texas, in terms of both assets and deposits.
The operating structure below reflects the Company's business strategy at
June 30, 1997, with four business groups in two business segments.
[PASTEUP ORGANIZATIONAL CHART]
ACTIVITIES
o Deposit Gathering
o Consumer Lending
o Small Business Banking
o Investment Product Sales
o Retail Mortgage Originations
o Mortgage Banker Finance
o Multi-Family Lending
o Residential Construction Lending
o Healthcare Lending
o Commercial Real Estate Lending
o Loan Acquisitions
o Wholesale Mortgage Originations
o Wholesale Fundings
o Investment Portfolio Management
o Securitization and Sale of Loans
o Mortgage Servicing Operations
<PAGE>
The tables below present an overview of the operating results of the
Company and its business segments for fiscal 1997, 1996, 1995, and 1994. The
Mortgage Servicing Segment activity includes activity associated with the
Company's mortgage origination business prior to its sale and restructuring
effective February 1, 1997. See "-- Mortgage Banking Group". The wholesale
mortgage origination offices that were retained have been integrated into the
existing Financial Markets Group, and therefore the Banking Segment, as of the
same date. Prior period segment information has not been restated. See
"Management's Discussion and Analysis -- Discussion of Results of Operations"
and Note 18 to the Consolidated Financial Statements.
EARNINGS (LOSS) BY BUSINESS SEGMENT(3)
<TABLE>
<CAPTION>
MORTGAGE PARENT COMPANY
BANKING SERVICING AND TOTAL
SEGMENT SEGMENT HOLDINGS(1) ELIMINATIONS(2) EARNINGS
------- --------- -------------- --------------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Nine months ended June 30,
1997............................... $115.5 $13.5 $ 2.7 $ (13.5) $ 118.2
1996............................... 91.0 (10.1) 100.4 (109.0) 72.3
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
OPERATING EARNINGS (LOSS) BY BUSINESS SEGMENT
<CAPTION>
MORTGAGE PARENT COMPANY TOTAL
BANKING SERVICING AND OPERATING
SEGMENT SEGMENT HOLDINGS(1) ELIMINATIONS(2) EARNINGS
------- --------- -------------- --------------- ---------
(IN MILLIONS)
Nine months ended June 30,
1997............................... $112.2 $ 9.5 $ 2.7 $ (13.5) $ 110.9
1996............................... 93.0 2.4 100.4 (109.0) 86.8
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 and Holdings from the Bank,
net of interest expense on the Senior Notes and Subordinated 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 and Holdings
from the Bank.
(3) Comprised of net income before income taxes, minority interest, and
extraordinary losses.
Operating earnings consists of net income, including net gains (losses) on
the sales of single family servicing rights and single family warehouse loans,
before taxes, minority interest, and extraordinary losses, and excludes net
gains (losses) on securities, MBS, other loans and applicable non-recurring
items. Operating earnings for the nine months ended June 30, 1997 exclude the
gain on the sale of mortgage offices of $4.0 million. See "-- Mortgage Banking
Group.". 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 restructuring of the Mortgage Banking Group. See 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.
55
<PAGE>
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, operates a 70-branch community banking network, a
24-hour telephone banking center, and a 69-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 36 branches in the
greater Houston area, 29 branches in the Dallas / Ft. Worth metropolitan area,
and two branches each in Austin and San Antonio, as well as a branch and credit
card processing center in Phoenix, Arizona. Through this branch network, the
Company maintains approximately 480,000 accounts with approximately 216,000
households and businesses.
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 June 30, 1997, the Community
Banking Group maintained over 361,000 deposit accounts with $4.2 billion in
deposits.
CONSUMER LENDING
Since 1992, the Community Banking Group has engaged in consumer lending for
its own portfolio. At June 30, 1997, consumer loans outstanding totalled $290.4
million and there were $188.5 million in unfunded commitments. 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 lines of credit 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. In addition, while the Company has offered its customers
credit cards since 1990, the Company began 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 home equity lending in the state of Texas; however, the
Company has in place the systems and controls needed to manage a Texas based
home equity operation in anticipation of a public referendum to be held in
November 1997 approving Texas legislative and constitutional changes, allowing
certain types of home equity lending in Texas beginning in January 1998. 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 having no collateral, greater chance of
fraud, and are subject to 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 can 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 cash flow of the
business. Additionally, the Company requires borrowers to provide periodic
financial information for review and assessment. At June 30, 1997, the Community
Banking Group had approximately 519 small business loans outstanding, totalling
approximately $45.3 million and also had approximately $24.2 million in unfunded
commitments and another $21.1 million in pending applications for small business
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
56
<PAGE>
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 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 are generally made on a secured basis;
however, the value of the accounts receivable and inventory collateral often
fluctuates with local economic conditions. Small business equipment loan
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 conventional loan products. However,
SBA loans generally carry guarantees from the SBA for up to 75% of the loan
balance.
INVESTMENT PRODUCT SALES
Since 1993, a subsidiary of the Bank has been marketing investment products
to the Company's consumer customer base. At June 30, 1997, the investment
product sales force was comprised of 26 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 were $101.2 million
for the nine months ended June 30, 1997 and $112.8 million for the nine months
ended June 30, 1996, and increased to $157.2 million for fiscal 1996 from $81.0
million for fiscal 1995. Gross fee revenue from such sales were $5.1 million and
$3.8 million for the nine months ended June 30, 1997 and 1996, respectively, and
$5.4 million and $3.6 million for fiscal 1996 and 1995, respectively.
RETAIL MORTGAGE ORIGINATIONS
In 1997, the Company began offering mortgages through its community banking
branch network. During the nine months ended June 30, 1997, the Community
Banking Group originated $12.1 million of retail mortgage loans.
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. 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
healthcare lending, and other industrial and commercial loan products.
MORTGAGE BANKER FINANCE
The Commercial Banking Group provides small- and medium-sized 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 credit facilities provided to
these mortgage companies are generally collateralized by single family mortgages
or related servicing rights. The Company lends based on a percentage of the
market value of the collateral. At June 30, 1997, the Company had $324.0 million
in unfunded commitments and $309.4 million of MBF loans outstanding. Since 1994,
the Commercial Banking Group 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 $907.6 million at June
30, 1997. 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 have
lower capital levels than other commercial borrowers.
57
<PAGE>
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
June 30, 1997, the Multi-Family Lending unit had $146.6 million unfunded
multi-family commitments and $686.4 million of such loans outstanding ($597.4
million in permanent loans and $89.0 million 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 June 30, 1997,
the multi-family servicing portfolio totalled $791.4 million, of which $547.3
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 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. The Company opened offices in San Francisco and in Washington D.C.
in fiscal 1997. Current markets in Texas include Houston, Dallas, Austin, and
San Antonio. At June 30, 1997, the Company had $216.0 million in unfunded
commitments for single family construction loans and $367.1 million of such
loans outstanding.
HEALTHCARE LENDING
The Commercial Banking Group makes construction and permanent loans for the
development and operation of long-term care facilities to select experienced
operators of senior housing and long-term care facilities. Such loans are
subject to risks specific to the industry such as occupancy and competition. At
June 30, 1997, the Company had $175.1 million in loan commitments for healthcare
loans. The Company applies competitive marketplace underwriting guidelines in
evaluating the credit-worthiness of these loans.
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 retail shopping centers. At June 30, 1997, the Company had
$194.0 million of unfunded commercial real estate commitments and $173.2 million
in such 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 applied in evaluating each loan transaction.
FINANCIAL MARKETS GROUP
The Financial Markets Group manages the Company's asset portfolio
activities, including loan acquisition and management, the securitization of
loans and began originating wholesale mortgages in February 1997.
58
<PAGE>
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). Beginning in fiscal 1994 through
June 30, 1997, the Company purchased approximately $5.7 billion of loans. A
majority of these transactions were entered into by the 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. A majority of the $8.3 billion of loans held by the Company at
June 30, 1997 were managed by the Financial Markets Group. See " -- Loan
Portfolio."
WHOLESALE MORTGAGE ORIGINATIONS
In February 1997, the wholesale mortgage origination offices that were not
sold or closed in the restructuring of the Mortgage Banking Group were
integrated into the Financial Markets Group. See " -- Mortgage Banking Group".
The wholesale mortgage origination offices provide qualified mortgage brokers
nationwide with a variety of fixed and adjustable-rate mortgage products. These
offices originate loans for the Company's portfolio and for sale and originated
$547.8 million of loans in the five months beginning February 1, 1997 and ending
June 30, 1997 and at June 30, 1997 there were $90.1 million in unfunded
commitments.
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 June 30, 1997, wholesale activities
provided $4.9 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 approximately $2.2 billion at June 30, 1997. 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 AND SALE 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. In fiscal 1992 through fiscal 1994,
the Financial Markets Group structured seven single family 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 participated in the structuring and issuance of a multi-family MBS
totalling $152.7 million. 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. During the nine months ended June 30, 1997,
$270.7 million in SBA loans were purchased, a portion of which were pooled into
securities totalling $241.7 million. These securitization activities are
separate from secondary marketing activities involving single family warehouse
loans.
MORTGAGE SERVICING GROUP
The Mortgage Servicing Group services residential mortgage loans owned by
the Company and by others, including the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"),
the Federal Home Loan Mortgage Corporation ("FHLMC"), and private mortgage
investors.
59
<PAGE>
At June 30, 1997, the Mortgage Servicing Group serviced over $17.3 billion in
mortgage loans, including $3.6 billion for the Company's portfolio and $13.7
billion for others. Additional servicing rights recently acquired by the Company
associated with $7.1 billion in single family loans had not been transferred to
the Company as of June 30, 1997. The total servicing portfolio at June 30, 1997,
adjusted for the acquired servicing rights, was $24.4 billion. 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".
MORTGAGE BANKING GROUP
Historically, the Mortgage Banking Group's principal activities were
comprised of retail originations, wholesale mortgage originations and mortgage
servicing. Consistent with the increasing emphasis on its community and
commercial banking business, the Company evaluated 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 implemented a profitability improvement plan. As a result of
this plan, in June 1996 the Company recorded a restructuring charge of $10.7
million before tax, to recognize the costs of closing or consolidating mortgage
origination offices and several regional operation centers and recorded $1.8
million of other expenses related to its mortgage origination business.
Effective February 1, 1997, the Company sold certain of its retail and wholesale
mortgage origination offices. In connection with this sale, the remaining
offices were restructured or closed. The net gain on the sale of these mortgage
offices, reduced by additional restructuring costs, was $4.0 million before tax,
$2.5 million after tax, or $0.08 per share, and was recorded in the quarter
ended March 31, 1997. At June 30, 1997, the unpaid liability relating to the
sale, the two restructurings and the branch closures was estimated to be $6.4
million and is expected to be paid in full by fiscal 1999. The Company intends
to continue its mortgage servicing business, its retail mortgage origination
capability in Texas through its community banking branches and its wholesale
mortgage origination capability through its Financial Markets Group. See Note 18
to the Consolidated Financial Statements.
RETAIL MORTGAGE OPERATIONS
The Mortgage Banking Group offered a variety of fixed and adjustable-rate
mortgage products for consumers through a network of retail mortgage origination
offices in Texas. For the nine months ended June 30, 1997 and fiscal 1996, the
Mortgage Banking Group originated $648.4 million and $1.6 billion, respectively,
in retail mortgage loans. The retail mortgage origination offices outside of
Texas and one located in El Paso, Texas were sold effective February 1, 1997.
The retail mortgage origination offices not sold in this transaction were
subsequently closed. Retail mortgage products are now offered through the
community banking branches.
WHOLESALE MORTGAGE OPERATIONS
The Mortgage Banking Group provided qualified mortgage brokers nationwide
with a variety of fixed and adjustable-rate mortgage products through its
network of wholesale mortgage origination offices. Effective February 1, 1997,
the Company sold three of its twelve wholesale offices. Subsequently, the
Company closed three offices and retained six offices, which were integrated in
to the Financial Markets Group. For the nine months ended June 30, 1997, and
fiscal 1996, the Mortgage Banking Group originated $572.5 million and $1.3
billion, respectively, in mortgage loans through its wholesale operations.
60
<PAGE>
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 Changes in Financial Condition" and see Note 5 to the
Consolidated Financial Statements.
LOAN ORIGINATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------- ----------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Single family........................ $ 1,603,305 $ 2,846,514 $ 3,602,009 $ 3,226,324 $ 5,424,550
Commercial........................... 1,045,748 628,097 891,306 547,117 364,604
Consumer............................. 109,056 94,352 125,596 99,249 94,153
------------ ------------ ------------ ------------ ------------
Total...................... $ 2,758,109 $ 3,568,963 $ 4,618,911 $ 3,872,690 $ 5,883,307
============ ============ ============ ============ ============
LOAN PORTFOLIO
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, ----------------------------------------
1997 1996 1995 1994
----------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Single family........................ $6,313,295 $ 6,152,504 $ 7,061,088 $ 4,203,614
Single family construction........... 367,120 242,525 115,436 57,786
Consumer............................. 290,435 173,518 123,096 108,179
Multi-family......................... 597,389 479,833 444,368 268,897
Multi-family construction............ 89,049 31,355 35,430 20,437
Commercial real estate, commercial,
healthcare, and small business..... 303,450 96,427 38,326 61,919
Mortgage banker finance line of
credit............................. 309,417 139,872 109,339 147,754
Single family warehouse.............. 38,671 260,745 411,287 252,153
----------- ------------ ------------ ------------
8,308,826 7,576,779 8,338,370 5,120,739
Allowance for credit losses.......... (38,558) (39,660) (36,801) (23,454)
Accretable unearned discount and
deferred loan origination fees..... 1,636 (17,631) (40,187) (51,111)
Unrealized losses.................... -- -- (1,142) --
----------- ------------ ------------ ------------
Total loans................ $8,271,904 $ 7,519,488 $ 8,260,240 $ 5,046,174
=========== ============ ============ ============
</TABLE>
61
<PAGE>
GEOGRAPHIC DISTRIBUTION OF REAL ESTATE LOAN PORTFOLIO
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, ----------------------------------------
STATE 1997 1996 1995 1994
- ---------------------------------------- ----------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
California.............................. $3,372,923 $ 3,404,731 $ 3,958,293 $ 1,764,531
Texas................................... 1,329,403 1,245,459 1,259,306 1,131,225
Florida................................. 463,421 436,338 479,379 456,812
Illinois................................ 201,258 166,783 190,801 138,072
Arizona................................. 200,212 139,264 115,260 30,142
Georgia................................. 148,526 120,881 94,413 56,442
New Jersey.............................. 144,717 108,113 118,825 80,727
Washington.............................. 137,241 98,243 81,005 32,899
Pennsylvania............................ 131,887 125,876 128,693 68,728
Virginia................................ 123,879 100,565 107,420 92,704
Other states............................ 1,528,979 1,088,044 1,202,943 827,480
Other -- single family warehouse........ 38,671 260,745 411,287 252,153
----------- ------------ ------------ ------------
Total real estate loans............ 7,821,117 7,295,042 8,147,625 4,931,915
Mortgage banker finance line of
credit................................ 309,417 139,872 109,339 147,754
Small business.......................... 75,924 55,588 7,320 --
Non-real estate consumer................ 104,197 93,352 89,509 72,987
----------- ------------ ------------ ------------
8,310,655 7,583,854 8,353,793 5,152,656
Non-accretable unearned discounts....... (1,829) (7,075) (15,423) (31,917)
----------- ------------ ------------ ------------
Total.............................. $8,308,826 $ 7,576,779 $ 8,338,370 $ 5,120,739
=========== ============ ============ ============
</TABLE>
GEOGRAPHIC AND PRODUCT DISTRIBUTION OF LOAN PORTFOLIO
AT JUNE 30, 1997
<TABLE>
<CAPTION>
SINGLE COMMERCIAL
FAMILY SINGLE REAL SINGLE TOTAL NON-REAL
AND FAMILY MULTI- ESTATE AND FAMILY REAL ESTATE ESTATE
STATE CONSUMER CONSTRUCTION FAMILY HEALTHCARE WAREHOUSE LOANS LOANS
- ---------------------------------------- --------- ------------ -------- ---------- --------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
California.............................. $3,292,077 $ -- $ 62,186 $ 18,660 $ -- $3,372,923 $ 89
Texas................................... 833,413 169,335 253,406 73,249 -- 1,329,403 148,268
Florida................................. 372,110 50,167 23,873 17,271 -- 463,421 52
Illinois................................ 184,229 14,685 2,344 -- -- 201,258 --
Arizona................................. 116,560 23,677 42,878 17,097 -- 200,212 19
Georgia................................. 77,800 33,957 30,971 5,798 -- 148,526 --
New Jersey.............................. 144,717 -- -- -- -- 144,717 --
Washington.............................. 68,102 -- 66,748 2,391 -- 137,241 --
Pennsylvania............................ 113,547 11,492 6,848 -- -- 131,887 --
Virginia................................ 115,285 -- 1,970 6,624 -- 123,879 2
Other................................... 1,182,077 63,807 195,230 87,865 38,671 1,567,650 341,108
--------- ------------ -------- ---------- --------- ----------- --------
Total............................... $6,499,917 $367,120 $686,454 $228,955 $ 38,671 $7,821,117 $489,538
========= ============ ======== ========== ========= =========== ========
% of Total.............................. 78.21% 4.42% 8.26% 2.75% 0.47 % 94.11% 5.89%
========= ============ ======== ========== ========= =========== ========
</TABLE>
% OF
STATE TOTAL TOTAL
- ---------------------------------------- --------- ------
California.............................. $3,373,012 40.59%
Texas................................... 1,477,671 17.78%
Florida................................. 463,473 5.58%
Illinois................................ 201,258 2.42%
Arizona................................. 200,231 2.41%
Georgia................................. 148,526 1.79%
New Jersey.............................. 144,717 1.74%
Washington.............................. 137,241 1.65%
Pennsylvania............................ 131,887 1.59%
Virginia................................ 123,881 1.49%
Other................................... 1,908,758 22.96%
--------- ------
Total............................... $8,310,655 100.00%
========= ======
% of Total.............................. 100.00%
=========
LOAN SERVICING PORTFOLIO
At June 30, 1997, the Mortgage Servicing Group serviced $3.6 billion in
residential mortgage loans owned by the Company and $13.7 billion in mortgages
owned by others. Additional servicing rights recently acquired by the Company
associated with $7.1 billion in single family loans had not been transferred to
the Company as of June 30, 1997. The total servicing portfolio at June 30, 1997,
adjusted for the acquired servicing rights, was $24.4 billion. 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,
62
<PAGE>
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.
In return for performing the servicing functions listed above, the Mortgage
Servicing 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
recognized 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 Federal Housing
Administration ("FHA") against foreclosure loss on FHA loans, and by the
Department of Veteran's Affairs ("VA") through guarantees on VA loans.
Although 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.
The following table sets forth information on the Company's single family
servicing portfolio.
SINGLE FAMILY SERVICING PORTFOLIO
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------- ---------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning servicing portfolio........ $ 13,246,848 $ 12,532,472 $ 12,532,472 $ 8,920,760 $ 8,073,226
------------ ------------ ------------ ------------ -----------
Add: Servicing acquisitions
transferred in(1).................. 4,817,534 236,842 1,189,387 3,730,401 567,010
Servicing on loans purchased by
the Company................... 47,649 15,953 21,192 439,834 97,681
Servicing originated............ 1,618,252 2,917,927 3,689,994 3,338,628 5,406,548
Subservicing acquired........... 2,990 18,983 22,538 254,959 --
------------ ------------ ------------ ------------ -----------
Total additions............. 6,486,425 3,189,705 4,923,111 7,763,822 6,071,239
------------ ------------ ------------ ------------ -----------
Less: Prepayments.................... 1,238,696 1,258,929 1,600,195 937,509 1,050,849
Foreclosures................... 78,830 77,838 104,572 79,790 40,764
Servicing
released / transferred(1).... 882,345 2,071,543 2,130,004 2,840,244 3,913,243
Amortization................... 298,097 276,605 373,964 294,567 218,849
------------ ------------ ------------ ------------ -----------
Total reductions............ 2,497,968 3,684,915 4,208,735 4,152,110 5,223,705
------------ ------------ ------------ ------------ -----------
Ending servicing portfolio........... $ 17,235,305 $ 12,037,262 $ 13,246,848 $ 12,532,472 $ 8,920,760
============ ============ ============ ============ ===========
COMPOSITION OF ENDING SERVICING
PORTFOLIO BY TYPE
Conventional..................... $ 11,902,128 $ 9,248,167 $ 9,663,715 $ 9,442,600 $ 6,143,604
Government....................... 5,333,177 2,789,095 3,583,133 3,089,872 2,777,156
------------ ------------ ------------ ------------ -----------
Total servicing portfolio............ $ 17,235,305 $ 12,037,262 $ 13,246,848 $ 12,532,472 $ 8,920,760
============ ============ ============ ============ ===========
COMPOSITION OF ENDING SERVICING
PORTFOLIO BY OWNER
Others........................... $ 13,596,258 $ 8,208,417 $ 9,494,788 $ 8,521,772 $ 6,206,469
Company.......................... 3,639,047 3,828,845 3,752,060 4,010,700 2,714,291
------------ ------------ ------------ ------------ -----------
Total servicing portfolio............ $ 17,235,305 $ 12,037,262 $ 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 the nine months ended June 30, 1997 and 1996, and for fiscal 1996,
1995, and 1994, the Company purchased MSRs associated with loan principal
amounts of $12.3 billion, $1.1 billion, $1.2 billion, $594.7 million, and $3.9
billion at premiums of $158.2 million, $23.1 million, $23.5 million, $12.5
million, and
63
<PAGE>
$50.9 million, respectively. Additional servicing rights recently acquired by
the Company associated with $7.1 billion in single family loans had not been
transferred to the Company as of June 30, 1997. The total servicing portfolio at
June 30, 1997, adjusted for the acquired servicing rights was $24.4 billion,
including $3.6 billion of servicing related to loans in the Company's portfolio.
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 June 30, 1997 or September 30, 1996.
In September 1995, the Company adopted SFAS No. 122, effective October 1,
1994. This statement required 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. On
January 1, 1997, the Company adopted SFAS No. 125. This statement superseded
SFAS No. 122 and requires, among other things, that the book value of loans be
allocated between MSRs and related loans at the time of the loan sale or
securitization, if servicing is retained.
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 JUNE 30, 1997
-----------------------------------------------------------------------
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........................... 5.20% 12.60% 9.10% 3.10% 0.70% 0.20% 0.10%
Conventional......................... 5.60 25.70 31.50 4.60 1.00 0.30 0.30
--------- --------- --------- ------ ------ ------ -------
Total........................... 10.80% 38.30% 40.60% 7.70% 1.70% 0.50% 0.40%
========= ========= ========= ====== ====== ====== =======
</TABLE>
The weighted average interest rate in the single family servicing portfolio
has decreased from 9.57% at September 30, 1991 to 8.10% at June 30, 1997,
principally as a result of the origination of mortgage loans with increasingly
lower rates during fiscal 1991 to 1997, the prepayment and refinancing of higher
rate mortgages, and purchases of MSRs on loans originated by others at lower
rates. At June 30, 1997, the weighted average contractual maturity (remaining
years to maturity) of the loans in the residential mortgage loan servicing
portfolio was 23.3 years.
64
<PAGE>
At June 30, 1997, the single family servicing portfolio was secured by
properties located in the following states:
STATE PERCENT
- ------------------------------------- -------
California........................... 21.4%
Texas................................ 12.8
Massachusetts........................ 7.1
Florida.............................. 5.4
Illinois............................. 4.9
Georgia.............................. 4.8
New Jersey........................... 4.0
Arizona.............................. 3.6
Pennsylvania......................... 3.1
Other states, individually less than
3%................................. 32.9
-------
Total........................... 100.0%
=======
Of the approximately 225,000 loans serviced by the Mortgage Servicing
Group, at June 30, 1997, 5.25% were delinquent and an additional 0.5% were in
foreclosure. The following table presents certain information regarding the
number of the delinquent single family loans serviced by the Mortgage Servicing
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,
AT JUNE 30, ----------------------
1997 1996 1995 1994
----------- ---- ---- ----
30-59 Days Past Due.................. 4.0% 3.3 % 2.7 % 2.3 %
60-89 Days Past Due.................. 0.7 0.6 0.6 0.5
90+ Days Past Due.................... 0.6 0.5 0.9 0.8
Loans in foreclosure................. 0.5 0.6 0.6 0.7
--- ---- ---- ----
Total........................... 5.8% 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 Servicing 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
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, ----------------------------------------
1997 1996 1995 1994
----------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities purchased under agreements
to resell and federal funds sold... $ 577,059 $ 674,249 $ 471,052 $ 358,710
Trading account assets............... 1,211 1,149 1,081 1,011
Securities........................... 56,142 64,544 116,013 114,115
Mortgage-backed securities........... 1,601,857 1,657,908 2,398,263 2,828,903
----------- ------------ ------------ ------------
Total........................... $2,236,269 $ 2,397,850 $ 2,986,409 $ 3,302,739
=========== ============ ============ ============
</TABLE>
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
65
<PAGE>
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").
MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES FAIR VALUE VALUE
------------ ---------- ---------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
Agency
Fixed-rate......................... $ 2,127 $ -- $ -- $ 2,127
CMOs -- fixed-rate.............. 20 -- -- 20
Non-agency
Adjustable-rate................. 466,277 612 16,040 450,849
CMOs -- fixed-rate.............. 94,952 -- 4,285 90,667
Other.............................. (7) 53 -- 46
------------ ---------- ---------- ------------
Held to maturity........... $ 563,369 $ 665 $ 20,325 $ 543,709 $ 563,369
------------ ========== ========== ------------ =========
AVAILABLE FOR SALE
Agency
Fixed rate...................... $ 10 $ 255 $ -- $ 265
Adjustable-rate................. 252,231 3,503 -- 255,734
CMOs--fixed-rate................ 46,392 24 -- 46,416
CMOs -- adjustable-rate......... 323,454 1,557 351 324,660
Non-agency
Fixed-rate...................... 47,678 1,558 -- 49,236
Adjustable-rate................. 303,587 2,235 644 305,178
CMOs -- fixed-rate.............. 11,139 7,153 147 18,145
CMOs -- adjustable-rate......... 35,107 460 74 35,493
Other.............................. 3,361 -- -- 3,361
------------ ---------- ---------- ------------
Available for sale......... $ 1,022,959 $ 16,745 $ 1,216 $ 1,038,488 $1,038,488
------------ ========== ========== ------------ =========
Total mortgage-backed
securities............... $ 1,586,328 $ 1,582,197
============ ============
</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 June 30, 1997, 98% of the non-agency MBS in
the held to maturity and available for sale portfolios had a credit rating of
AA/Aa or higher as defined by the Standard & Poor's Corporation or Moody's
Investor Services, Inc., respectively.
The securities purchased under repurchase agreements outstanding at June
30, 1997 and 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 June 30, 1997 matured on or before July 23, 1997 and those outstanding
at
66
<PAGE>
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.
As a result of the implementation of SFAS No. 125 on January 1, 1997, the
Company reclassified $6.8 million from MBS held to maturity and $15.5 million
from other assets to MBS and securities available for sale. An unrealized gain
of $8.2 million, or $5.1 million after tax, was recorded in stockholders'
equity. 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 its 70-branch community banking
network located primarily in the Houston and Dallas/Ft. Worth areas. 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 June 30, 1997.
COMMUNITY BANKING NETWORK
AVERAGE
DEPOSITS
NUMBER OF DEPOSITS PER
LOCATION BRANCHES OUTSTANDING BRANCH
- ------------------------------------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
Houston area......................... 36 $ 2,596,322 $ 72,120
Dallas/Ft. Worth area................ 29 1,411,660 48,678
Other................................ 5 238,428 47,686
--
------------
Total........................... 70 $ 4,246,410 60,663
== ============
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 June 30, 1997, these deposits totalled
$907.6 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.
67
<PAGE>
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,
AT JUNE 30, ------------------------------------------------------------------
1997 1996 1995 1994
-------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NON-INTEREST BEARING DEPOSITS........ $ 334,942 -- % $ 284,304 -- % $ 181,196 -- % $ 76,498 -- %
INTEREST-BEARING DEPOSITS
Transaction accounts............... 252,913 1.00 211,976 1.00 219,307 1.50 233,666 1.49
Insured money fund accounts
Consumer......................... 728,475 4.42 588,585 4.36 397,473 3.73 407,029 3.12
Commercial....................... 860,289 5.63 810,743 5.29 857,669 5.82 416,571 4.84
--------- -------- --------- -------- --------- --- --------- ---
Subtotal....................... 1,588,764 5.08 1,399,328 4.90 1,255,142 5.16 823,600 3.99
--------- -------- --------- -------- --------- --- --------- ---
Savings accounts................... 126,317 2.33 130,137 2.48 144,301 2.73 222,769 2.60
Certificates of deposit
Consumer......................... 2,859,758 5.71 2,911,682 5.71 3,063,631 5.84 2,949,715 4.88
Commercial....................... 4,477 5.10 2,667 4.88 2,273 5.36 -- --
Wholesale........................ 82,717 9.59 207,851 10.28 316,370 9.06 457,956 7.92
--------- -------- --------- -------- --------- --- --------- ---
Subtotal....................... 2,946,952 5.82 3,122,200 6.01 3,382,274 6.14 3,407,671 5.29
--------- -------- --------- -------- --------- --- --------- ---
Total interest-bearing
deposits..................... 4,914,946 5.24 4,863,641 5.38 5,001,024 5.59 4,687,706 4.74
--------- -------- --------- -------- --------- --- --------- ---
Total deposits................. $5,249,888 4.90 $5,147,945 5.08% $5,182,220 5.40% $4,764,204 4.67%
========= ======== ========= ======== ========= === ========= ===
Consumer............................. $4,115,197 $3,939,631 $3,868,498 $3,834,239
Commercial........................... 1,051,974 1,000,463 997,352 472,009
Wholesale............................ 82,717 207,851 316,370 457,956
--------- --------- --------- ---------
Total deposits................. $5,249,888 $5,147,945 $5,182,220 $4,764,204
========= ========= ========= =========
</TABLE>
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
June 30, 1997.
DEPOSIT MATURITIES
<TABLE>
<CAPTION>
CERTIFICATES MATURING IN THE YEAR ENDING JUNE 30,
------------------------------------------------------------------
STATED RATE 1998 1999 2000 2001 2002 THEREAFTER TOTAL
----------------- --------- --------- --------- --------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
2.99% and below...................... $ 3,957 $ -- $ -- $ -- $ -- $-- $ 3,957
3.00% to 3.99%....................... 8,268 8 -- -- -- 3 8,279
4.00% to 4.99%....................... 200,700 39,032 949 2,477 9 -- 243,167
5.00% to 5.99%....................... 1,274,841 591,752 32,388 37,030 30,209 238 1,966,458
6.00% to 6.99%....................... 134,824 265,958 88,745 9,987 100,304 396 600,214
7.00% to 7.99%....................... 7,497 5,153 23,085 1,673 10,973 132 48,513
8.00% to 8.99%....................... 833 3,858 2,955 480 106 25 8,257
9.00% to 9.99%....................... 4,591 5,517 14 141 -- 308 10,571
10.00% to 10.99%..................... 8,391 23,042 173 593 -- 228 32,427
Over 10.99%.......................... 24,806 8 295 -- -- -- 25,109
--------- --------- --------- --------- --------- ---------- ---------
$1,668,708 $ 934,328 $ 148,604 $ 52,381 $ 141,601 $1,330 $2,946,952
========= ========= ========= ========= ========= ========== =========
</TABLE>
68
<PAGE>
The following table sets forth the amount of the Company's CDs that are
$100,000 or greater by time remaining until maturity at June 30, 1997.
TIME DEPOSITS GREATER THAN $100,000
NUMBER OF DEPOSIT
ACCOUNTS AMOUNT
---------- --------
(DOLLARS IN THOUSANDS)
Three months or less.................... 719 $ 76,735
Over three through six months........... 671 73,427
Over six through twelve months.......... 1,035 109,694
Over twelve months...................... 2,133 224,797
---------- --------
4,558 $484,653
========== ========
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 42% of the funding of average assets for the nine months ended
June 30, 1997, 45% 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 (1) fully disbursed single family loans, unless
assets are physically pledged to the FHLB Dallas, and (2) total assets. At June
30, 1997, 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 June 30, 1997, the Company had $1.3 billion in such
collateral, $1.2 billion of which was collateralizing reverse repurchase
agreements. See Notes 9 and 10 to the Consolidated Financial Statements.
The following table sets forth certain information regarding the borrowings
of the Company as of or for the periods indicated.
BORROWINGS
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
AT OR FOR THE SEPTEMBER 30,
NINE MONTHS ENDED -------------------------------------
JUNE 30, 1997 1996 1995 1994
----------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FHLB ADVANCES
Balance outstanding period-end........ $3,630,060 $ 3,490,386 $ 4,383,895 $ 2,620,329
Maximum outstanding at any
month-end........................... 3,936,551 4,384,798 4,386,605 2,697,829
Daily average balance................. 3,696,314 4,073,297 3,560,844 2,285,630
Average interest rate................. 5.63% 6.07% 6.31% 3.98%
REVERSE REPURCHASE AGREEMENTS
Balance outstanding at period-end..... $1,181,382 $ 832,286 $ 1,172,533 $ 553,000
Fair value of collateral at
period-end.......................... 1,219,361 1,020,405 1,239,527 673,000
Maximum outstanding at any
month-end........................... 1,181,382 1,096,508 1,355,540 553,000
Daily average balance................. 933,891 955,681 887,932 273,899
Average interest rate................. 5.60% 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................. 275 27 521 767
Average interest rate................. 5.27% 6.02% 5.95% 3.73%
</TABLE>
69
<PAGE>
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
an acceptable level of risk to changes in market interest rates. The achievement
of this goal requires a balance between profitability, liquidity, and interest
rate risk.
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 June 30, 1997 was negative $277.7 million or 2.43%
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 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 for the purposes of reducing
interest rate risk. 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.
70
<PAGE>
The following table sets forth the expected repricing characteristics of
the Company's consolidated assets and liabilities at June 30, 1997, 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)
Cash and investment
securities(2).................... $ 845,925 $ -- $ -- $ 25,000 $ 24,624 $ --
Adjustable-rate loans and
mortgage-backed securities....... 3,948,893 1,915,226 1,168,279 879,357 55,796 --
Fixed-rate loans and
mortgage-backed securities....... 129,846 81,829 156,088 812,597 647,800 --
Other assets....................... -- -- -- -- -- 747,790
---------- ----------- ----------- ---------- ---------- ---------
Total assets................... $4,924,664 $1,997,055 $1,324,367 $1,716,954 $728,220 $ 747,790
========== =========== =========== ========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Certificates of deposit............ $ 478,226 $ 466,370 $ 726,427 $1,275,637 $ 292 $ --
Checking and savings(3)............ 2,302,936 -- -- -- -- --
---------- ----------- ----------- ---------- ---------- ---------
Total deposits................. 2,781,162 466,370 726,427 1,275,637 292 --
Subordinated Notes................. -- -- -- -- 219,694 --
Senior Notes....................... -- -- 500 -- -- --
FHLB advances and other
borrowings....................... 4,306,610 478,674 5,000 21,245 -- --
Other liabilities.................. -- -- -- -- -- 389,263
Minority interest.................. -- -- -- -- -- 185,500
Stockholders' equity............... -- -- -- -- -- 582,676
---------- ----------- ----------- ---------- ---------- ---------
Total liabilities, minority
interest, and stockholders'
equity....................... $7,087,772 $ 945,044 $ 731,927 $1,296,882 $219,986 $1,157,439
========== =========== =========== ========== ========== =========
Gap before off-balance-sheet
financial instruments.............. $(2,163,108) $1,052,011 $ 592,440 $ 420,072 $508,234 $ (409,649)
OFF-BALANCE-SHEET(4)
Interest rate swap
agreements -- pay fixed.......... 241,000 -- -- (205,500) (35,500) --
---------- ----------- ----------- ---------- ---------- ---------
Gap.................................. $(1,922,108) $1,052,011 $ 592,440 $ 214,572 $472,734 $ (409,649)
========== =========== =========== ========== ========== =========
Cumulative gap....................... $(1,922,108) $ (870,097) $ (277,657)
========== =========== ===========
Cumulative gap as a percentage of
total assets....................... (16.80)% (7.61)% (2.43)%
========== =========== ===========
</TABLE>
TOTAL
----------
ASSETS(1)
Cash and investment
securities(2).................... $ 895,549
Adjustable-rate loans and
mortgage-backed securities....... 7,967,551
Fixed-rate loans and
mortgage-backed securities....... 1,828,160
Other assets....................... 747,790
----------
Total assets................... $11,439,050
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Certificates of deposit............ $ 2,946,952
Checking and savings(3)............ 2,302,936
----------
Total deposits................. 5,249,888
Subordinated Notes................. 219,694
Senior Notes....................... 500
FHLB advances and other
borrowings....................... 4,811,529
Other liabilities.................. 389,263
Minority interest.................. 185,500
Stockholders' equity............... 582,676
----------
Total liabilities, minority
interest, and stockholders'
equity....................... $11,439,050
==========
Gap before off-balance-sheet
financial instruments..............
OFF-BALANCE-SHEET(4)
Interest rate swap
agreements -- pay fixed..........
Gap..................................
Cumulative gap.......................
Cumulative gap as a percentage of
total assets.......................
- ------------
(1) Fixed-rate loans and MBS are distributed based on 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 18%.
(2) Investment securities include repurchase agreements, federal funds sold,
trading account assets, securities, and FHLB stock.
(3) Checking and savings deposits are presented in the earliest repricing period
since amounts in these accounts are subject to withdrawal upon demand.
(4) 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.
71
<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. 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 June 30, 1997, 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 June 30,
1997, the Bank was authorized to have a maximum investment of approximately
$342.4 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 direct subsidiary of the Company and the Bank
is the sole direct 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. This subsidiary is currently inactive.
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.
This subsidiary 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 community banking 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
72
<PAGE>
operations in late 1992, and its activities have been expressly approved by the
OTS. UFM changed its name to Bank United Securities Corp. effective April 1,
1997.
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 June 30, 1997, the Company employed 1,343 full-time employees and 225
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,
73
<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 original acquisition of the Bank by the Company, 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 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.
74
<PAGE>
On July 25, 1995, Plaintiffs filed suit against the United States in the
Court of Federal Claims for alleged failures of the United States (1) to abide
by a capital forbearance, which would have allowed the Bank to operate for ten
years under negotiated capital levels lower than the levels required by the then
existing regulations or successor regulations, (2) to abide by its commitment to
allow the Bank to count $110 million of subordinated debt as regulatory capital
for all purposes, and (3) to abide by an accounting forbearance, which would
have allowed the Bank to count as capital for regulatory purposes, and to
amortize over a period of twenty-five years, the $30.7 million difference
between certain FSLIC payment obligations to the Bank and the discounted present
value of those future FSLIC payments. The lawsuit is in a preliminary stage. The
lawsuit was stayed pending the United States Supreme Court's review in 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 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 have responded 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. On January 3, 1997, the court issued a scheduling order
scheduling the trial of the Company's case in the third month after the trials
of the "priority" cases begin.
In December 1996, Chief Judge Smith decided the motion IN LIMINE on damage
theories of Glendale Federal, one of 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
judgement on liability and the Government has opposed the motion. The Company is
pursuing an early trial on damages. Uncertainties remain concerning the
administration of the Omnibus Case Management Order and the future 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 1999. 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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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 (1) acquire control of a savings association or savings and loan holding
company without prior OTS approval; (2) 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 (3) 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 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 totalled approximately $1.1 million, $1.5 million and $1.2 million
during the nine months ended June 30, 1997, 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, provided, however, that the FDIC may not collect more than is
necessary to reach or maintain the SAIF's designated reserve ratio ("DRR") and
must rebate any excess collected. 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
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capital" ratio (the ratio of total capital to risk-weighted assets), a 6%
"tier 1 risk-based capital" ratio (the ratio of 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................ 0 3 17
Adequately capitalized.......... 3 10 24
Undercapitalized................ 10 24 27
For purposes of assessments of FDIC insurance premiums, the Company
believes that the Bank is a "well-capitalized" institution as of June 30,
1997. FDIC regulations prohibit disclosure of the supervisory subgroup to which
an insured institution is assigned. The Bank's insurance assessments for the
nine months ended June 30, 1997, and fiscal 1996 and 1995 were $4.0 million,
$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. The assessment rates
schedules for SAIF and BIF are established independently of one another, and
banks and savings associations with the same assessment base may pay assessments
at different rates. The first SAIF and BIF assessment rate schedules established
by the FDIC, effective January 1, 1993, were identical, and assessments ranged
from a low of 0.23% to a high of 0.31%. 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 0.04% and 0.31% of insured deposits,
while retaining the assessment rate of 0.23% to 0.31% 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 0.27% of insured deposits, subject to a former statutory
requirement that all institutions pay at least $2,000 annually. Approximately
92% of BIF members qualify for the lowest assessment rate. The assessment rates
for savings associations were not lowered because SAIF had not reached the DRR,
in large part because a portion of the payments into SAIF were required by law
to be used to pay interest on bonds issued by FICO and necessary to resolve
numerous savings associations that failed during the late 1980s and early 1990s.
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, and the continuing obligation of savings associations, but not banks,
to pay interest on the FICO bonds, 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
DRR as of October 1, 1996. Effective October 1, 1996, the FDIC established new
risk-based assessments for SAIF-insured institutions. Beginning January 1, 1997,
the SAIF base assessment rates effectively range from 0 to 27 basis points as
set forth in the schedule above.
ASSESSMENTS TO PAY FICO BONDS. The 1996 Act also obligates banks, for the
first time, to pay assessments to be used to service the FICO bonds. For the
last calendar quarter of 1996, a special interim schedule of
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assessment rates ranging from 18 to 27 basis points applied to SAIF-insured
savings associations, 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 in one or more installments, with
interest. Thus, except to the extent of FICO assessments, SAIF and BIF
institutions 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 6.48 basis points toward
FICO bonds and BIF-insured institutions will pay 1.296 basis points. Starting in
the year 2000, BIF and SAIF institutions will begin sharing the FICO burden on a
pro rata basis until termination of the FICO obligation in 2017, 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 practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, or order, or any condition imposed in writing by, or
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 implementing
statutory annual independent audit and financial reporting requirements for all
depository institutions with assets of more than $500 million, and for their
management, and their independent auditors. The rules also establish
requirements for the composition, duties, and authority of such institutions'
audit committees and boards of directors. Among other things, all depository
institutions with assets in excess of $500 million are required to prepare and
make available to the public annual reports on their financial condition and
management, including statements of management's responsibility for preparing
the institution's financial statements, for establishing and maintaining an
internal control structure and procedures for financial reporting, and for
complying with specified laws and regulations relating to safety and soundness,
and an assessment of the effectiveness of such internal controls and procedures
and the institution's compliance with laws and regulations designated by the
FDIC. The institution's independent auditors are required to attest to these
management assertions, except the procedures employed by management to detect
and report violations of designated laws. Each such institution also is required
to have an audit committee composed of directors who are independent of
management of the institution. Audit committees of large institutions
(institutions with assets exceeding $3.0 billion) must: (1) include members with
banking or related financial management expertise; (2) have the ability to
engage their own independent legal counsel; and (3) must not include any
individuals designated as "large customers" of the institution. In some cases,
the institution's responsibilities under these rules may be fulfilled by its
holding company. The 1996 Act 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, and a majority of the
committee are outside directors.
FEDERAL RESERVE BOARD. The Federal Reserve Board requires all depository
institutions (including savings associations) to maintain reserves against their
deposit accounts (primarily transaction accounts and nonpersonal time deposits)
and Eurocurrency liabilities. Reserves of 3% must be maintained against net
transaction accounts of $49.3 million or less. In addition, if net transaction
accounts exceed $49.3 million, institutions must maintain reserves equal to 10%
on the excess. The reserve requirement for nonpersonal time deposits and
Eurocurrency liabilities is 0%. Reserve requirements are subject to adjustment
by the Federal Reserve Board, and must be adjusted at least annually. 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 a Federal Reserve Bank. The Federal Reserve
Banks are not obligated to lend to any depository institution, and are
restricted in the extensions of credit that they may make to any institution
that is not at least adequately capitalized.
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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: (1) 1%
of the aggregate principal amount of its unpaid mortgage loans, home purchase
contracts and similar obligations at the beginning of each year; (2) 0.3% of its
assets; or (3) 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 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 June 30, 1997, the Bank's core capital included
$264.3 million of MSRs.
In determining core capital, all investments in and loans to subsidiaries
engaged in activities not permissible for national banks ("nonconforming
subsidiaries"), which are generally more limited than activities permissible
for savings associations and their subsidiaries must be deducted. Certain
exceptions are provided, including exceptions for mortgage banking subsidiaries
and subsidiaries engaged in agency activities for customers (unless determined
otherwise by the FDIC on safety and soundness grounds). Generally, all
subsidiaries engaged in activities permissible for national banks are required
to be consolidated for purposes of calculating capital compliance by the parent
savings association.
TANGIBLE CAPITAL REQUIREMENT. The tangible capital requirement mandates
that a savings association maintain tangible capital of at least 1.5% of
adjusted total assets. For purposes of this requirement, adjusted total assets
are calculated on the same basis as for the leverage limit. "Tangible capital"
is defined in the same manner as core capital, except that all intangible assets
except qualifying MSRs must be deducted. At June 30, 1997, the Bank's tangible
capital ratio was 7.59%.
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 (to the extent it does not exceed core capital).
Supplementary capital includes: cumulative perpetual preferred stock; mutual
capital certificates, income capital certificates and net worth certificates;
nonwithdrawable accounts and pledged deposits to the extent not included in core
capital; perpetual
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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 June 30, 1997, the Bank's core
capital and total capital ratios were 7.65% and 14.05%, respectively.
In determining the amount of risk-weighted assets, savings associations
must assign balance sheet assets to one of four risk-weight categories,
reflecting the relative credit risk inherent in the asset. Off-balance-sheet
items are assigned to one of the four risk-weight categories after a "credit
conversion factor" is applied.
INTEREST RATE RISK ("IRR") COMPONENT. OTS regulations add an IRR
component to the 8% risk-based capital requirement discussed above. Only savings
associations with more than a "normal" level of IRR are subject to IRR
requirements. Specifically, savings associations with IRR exposure in excess of
2% (measured in accordance with an OTS Model and Guidelines) must deduct an IRR
component from total capital prior to calculating their risk-based capital
ratios. The IRR component is calculated as one-half of the difference between
the institution's measured IRR and 2%, multiplied by the market value of the
institution's assets. This deduction will have the effect of requiring savings
associations with IRR exposures of more than 2% to hold more capital than those
with IRR exposure of 2% or less.
On 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 may be subject to enforcement actions by the
OTS or the FDIC. The OTS must limit the asset growth of any undercapitalized
association and require the association to develop and implement a capital
restoration plan. 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 OTS 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: (1) tangible capital to adjusted total assets ratio of
1.50%, (2) core capital to adjusted total assets ratio of 3.00%, and (3) 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 but that is less than the amount of its fully phased-in
capital requirement, 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' written 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 make capital distributions in excess of the foregoing limitations if, after
written notice to the OTS, the OTS does not 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 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.
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Under the prompt corrective action provisions discussed below, no insured
depository institution may make a capital distribution if it would be
undercapitalized after such distribution. See " -- Enforcement -- Prompt
Corrective Action". 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: (1) loans made on the security of
residential and nonresidential real estate, (2) commercial loans (up to 20% of
assets, the last 10% of which must be small business loans), (3) consumer loans
(subject to certain percentage of asset limitations), and (4) credit card loans.
The lending authority of federally chartered associations is subject to various
OTS requirements, including, as applicable, requirements governing 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: (1) obligations of the United States government or
certain agencies or instrumentalities thereof; (2) stock issued or loans made by
the FHLBs or the FNMA; (3) obligations issued or guaranteed by the FNMA, the
Student Loan Marketing Association, the GNMA, or any agency of the United States
government; (4) certain mortgages, obligations, or other securities that have
been sold by the FHLMC; (5) stock issued by a national housing partnership
corporation; (6) demand, time, or savings deposits, shares, or accounts of any
insured depository institution; (7) certain "liquidity" investments approved
by the OTS to meet liquidity requirements; (8) shares of registered investment
companies the portfolios of which are limited to investments that a federal
association is otherwise authorized to make; (9) certain MBS; (10) general
obligations of any state of the United States or any political subdivision or
municipality thereof, PROVIDED that not more than 10% of a savings association's
capital may be invested in the general obligations of any one issuer; (11) loans
on the security of liens upon residential real property; (12) credit card loans;
and (13) education loans. Federally chartered savings associations may invest in
secured or unsecured loans for commercial, corporate, business, or agricultural
purposes, up to 20% of assets, provided that the last 10% is invested in small
business loans. The HOLA also limits a federal savings association's aggregate
nonresidential real property loans to 400% of the savings association's capital
as determined pursuant to the OTS's capital requirements. See "-- Capital
Requirements". The OTS may allow a savings association to exceed the aggregate
limitation if the OTS determines that exceeding the limitation would pose no
significant risk to the safe and sound operations of the association and would
be consistent with prudent operating practices. Federally chartered savings
associations are also authorized by the HOLA to make investments in consumer
loans, business development credit corporations, certain commercial paper and
corporate debt securities, service corporations, and small business investment
companies, all of which investments are subject to percentage-of-assets and
various other limitations.
LENDING LIMITS. Generally, savings associations, such as the Bank, are
subject to the same loans to one borrower limits that apply to national banks.
Generally, a savings association may lend to a single borrower or group of
related borrowers, on an unsecured basis, in an amount not greater than 15% of
its unimpaired capital and unimpaired surplus. An additional amount, not greater
than 10% of the savings association's unimpaired capital and unimpaired surplus,
may be loaned if the loan is secured by readily marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. Notwithstanding the
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general lending limits, a savings association may make loans to one borrower for
any purpose of up to $500,000; or to develop domestic residential housing units,
up to the lesser of $30 million or 30% of the savings association's unimpaired
capital and unimpaired surplus, if certain conditions are satisfied. The OTS may
also impose more stringent limits on an association's loans to one borrower, if
it determines that such limits are necessary to protect the safety and soundness
of the association.
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: (1) it engages only in activities that a federal
savings association is permitted to engage in directly; (2) the parent savings
association owns, directly or indirectly, more than 50% of the subsidiary's
voting stock; and (3) no person or entity other than the parent thrift may
exercise effective operating control over the subsidiary. While a savings
association's investment in its service corporations is generally limited to an
amount that does not exceed 3% of the parent savings association's total assets,
OTS regulations do not limit the amount that a parent savings association may
invest in its operating subsidiaries. Operating subsidiaries may be incorporated
and operated in any geographical location where its parent may operate. An
operating subsidiary that is a depository institution may accept deposits in any
location, provided that the subsidiary has federal deposit insurance.
In December 1996, the OTS adopted substantial revisions to its regulations
governing subsidiaries. The revised regulations, 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. A savings association is a QTL if it either meets the Code test for
being a domestic building and loan association, as that term is defined in
Section 7701(a)(19) of the Code; or has invested at least 65% of its portfolio
assets in qualified thrift investments and maintains this level of qualified
thrift investments on a monthly average basis in nine of every 12 months.
"Portfolio assets" is defined as total assets less intangibles, properties
used to conduct business and liquid assets (up to 20% of total assets). The
following assets may be included as qualified thrift investments without limit:
domestic residential housing or manufactured housing loans; home equity loans
and MBS backed by residential housing or manufactured housing loans; FHLB stock;
certain obligations of the FDIC and certain other related entities; and
education, small business, and credit card loans. Other qualifying assets, which
may be included up to an aggregate of 20% of portfolio assets, are: (1) 50% of
originated residential mortgage loans sold within 90 days of origination; (2)
investments in debt or equity of service corporations that derive 80% of their
gross revenues from housing-related activities; (3) 200% of certain loans to,
and investment in, low cost one-to four-family housing; (4) 200% of loans for
residential real property, churches, nursing homes, schools and small businesses
in areas where the credit needs of low- and moderate-income families are not
met; (5) other loans for
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churches, schools, nursing homes and hospitals; and (6) personal, family, or
household loans (other than education, small business, or credit card loans).
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies. A savings association may
requalify the next time it meets the requirement in nine of the preceding 12
months, but it may requalify only one time. If an institution that fails the QTL
test has not yet requalified and has not converted to a national bank, its new
investments and activities are limited to those permissible for a national bank,
it is immediately ineligible to receive any new FHLB advances, and is subject to
national bank limits for payment of dividends, and it may not establish a branch
office at any location at which a national bank located in the savings
association's home state could not establish a branch.
LIQUIDITY. The Bank is required to maintain an average daily balance of
"liquid assets" (cash, certain time deposits, bankers' acceptances, highly rated
corporate debt securities and commercial paper, securities of certain mutual
funds, reserves maintained pursuant to 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. It may not acquire more
than 5% unless it takes 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 the Bank Control Act and the savings and loan holding company
provisions of the HOLA, together with the regulations of the OTS under such
Acts, require that the consent of the OTS be obtained prior to any person or
company acquiring control of a savings association or a savings and loan holding
company. Under OTS regulations, "control" is conclusively presumed to exist if
an individual or company acquires more than 25% of any class of voting stock of
a savings association or holding company. There is a rebuttable presumption of
control if a person or company acquires more than 10% of any class of voting
stock (or more than 25% of any class of non-voting stock) and is subject to any
of several "control factors". The control factors relate, among other matters,
to the relative ownership position of a person or company, the percentage of
debt and/or equity of the association or holding company controlled by the
person or company, agreements giving the person or company influence over a
material aspect of the operations of the association or holding company, and the
number of seats on the board of directors thereof held by the person or company,
or his designees. The regulations provide a procedure for challenge of the
rebuttable control presumption. Certain restrictions applicable to the
operations of savings and loan holding companies and certain conditions imposed
by the OTS in connection with its approval of companies to become savings and
loan holding companies may deter companies from seeking to obtain control of the
Bank.
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.
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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 or director of a savings
association, or to any person who directly or indirectly, or acting through or
in concert with one or more persons, owns, controls, or has the power to vote
more than 10% of any class of voting securities of such institution ("Principal
Shareholder"); to any related interests of such persons (I.E., any company
controlled by such executive officer, director, or Principal Shareholder); or to
any political or campaign committee, the funds or services of which will benefit
such executive officer, director or Principal Shareholder, or which is
controlled by such executive officer, director or Principal Shareholder, are
subject to Sections 22(g) and 22(h) of the 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 comparable
transactions made to unaffiliated individuals, and may not involve more than the
normal risk of repayment or present other unfavorable features. Certain
extensions of credit to such persons must first be approved in advance by a
disinterested majority of a savings association's entire board of directors.
Section 22(h) of the FRA prohibits loans to any such individuals where the
aggregate amount exceeds an amount equal to 15% of an insured institution's
unimpaired capital and surplus, plus an additional 10% of unimpaired capital and
surplus (as defined) in the case of loans that are fully secured by readily
marketable collateral, or when the aggregate amount on all such extensions of
credit outstanding to all such persons would exceed the Bank's unimpaired
capital and unimpaired surplus. Section 22(g) establishes additional limitations
on loans to executive officers.
CHANGES IN DIRECTORS AND SENIOR EXECUTIVE OFFICERS. Section 32 of the
FDIA, as amended by the 1996 Act, requires a depository institution or holding
company thereof to give 30 days' prior written notice to its primary federal
regulator of any proposed appointment of a director or senior executive officer
if the institution is not in compliance with the minimum capital requirements or
otherwise is in a troubled condition. The regulator then has the opportunity to
disapprove any such appointment.
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, or low quality assets from an
affiliate. Sections 23A and 23B of the FRA provide that a loan transaction with
an affiliate generally must be collateralized (but may not be collateralized by
a low quality asset or securities issued by an affiliate) and that all Covered
Transactions, as well as the sale of assets, the payment of money, or the
provision of services by the Bank to an affiliate, must be on terms and
conditions that are substantially the same, or at least as favorable to the
Bank, as those prevailing for comparable nonaffiliate transactions.
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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.
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 if such consultants
or contractors knowingly or recklessly participate in a wrongful action likely
to have adverse effect on an insured institution). This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal and prohibition orders, and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. The OTS may
use written agreements to correct compliance deficiencies with respect to
applicable laws and regulations and to
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ensure safe and sound practices. Except under certain narrow circumstances,
public disclosure of final enforcement actions by the federal banking agencies,
including the OTS, is required.
The OTS has the authority, when statutorily prescribed grounds exist, to
appoint a conservator or receiver for a savings association. Grounds for such
appointment include: insolvency; substantial dissipation of assets or earnings;
existence of an unsafe or unsound condition to transact business; likelihood
that the association will be unable to pay its obligations in the normal course
of business; undercapitalization where the association (1) has no reasonable
prospect of becoming adequately capitalized, (2) fails to become adequately
capitalized when required to do so, (3) fails to timely submit an acceptable
capital restoration plan, or (4) materially fails to implement a capital
restoration plan; or where the association is "critically undercapitalized" or
"otherwise has substantially insufficient capital".
CONSUMER PROTECTION REGULATIONS
The Bank is subject to many federal consumer protection statutes and
regulations including, but not limited to, the following:
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: (1) the
occurrence that gives rise to the right of rescission; (2) 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
(3) 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: (1) the expiration of three years after
the occurrence giving rise to the right of rescission; (2) transfer of all the
consumer's interest in the property; or (3) 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, including the OTS with regard to the Bank, 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
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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 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.
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. Federal Reserve Board 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
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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. HUD 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:
(1) the loan is made by any lender, the deposits of which are federally insured
or any lender that is regulated by a federal agency; or (2) the loan is insured,
guaranteed or supplemented by a federal agency; or (3) the loan is intended to
be sold to the FNMA, the GNMA, or the FHLMC; or (4) the loan is made by any
creditor who makes or invests in residential real estate loans aggregating more
than $1 million per year.
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: (1) civil liability equal to three times the amount of any charge
paid for the settlement services; (2) the possibility that court costs and
attorneys' fees can be recovered; and (3) 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 ("CRA"). The CRA, enacted into law in
1977, is intended to encourage insured depository institutions, while operating
safely and soundly, to help meet the credit needs of their communities. The CRA
specifically directs the federal regulatory agencies, in examining insured
depository institutions, to assess 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.
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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:
(1) activities conducted by a financial institution to ascertain the credit
needs of its community; (2) the extent of marketing and special credit related
programs to make members of the community aware of credit services; (3) the
extent of participation of the financial institution's board of directors in
formulating policy and reviewing performance; (4) the presence or absence of
practices intended to discourage applications for types of credit set forth in
the institution's CRA statement; (5) the geographic distribution for the
financial institution's credit extensions, credit applications, and denials; (6)
the presence or absence of evidence of prohibited discriminatory or other
illegal credit practices; (7) the financial institution's record of opening and
closing offices and providing services at offices; (8) the financial
institution's participation, including investments, in local community
development projects; (9) 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; (10) the
financial institution's participation in governmentally insured, guaranteed, or
subsidized loan programs for housing and small farms and businesses; (11) the
financial institution's ability to meet various community credit needs based on
its financial condition, size, and other factors; and (12) 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 were subject to a two-year phase-in period. Most large retail
institutions are subject to the new examination criteria beginning July 1, 1997.
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 December 2, 1996 and
received a CRA assessment rating of "outstanding". The Bank's previous CRA
assessment rating, as of October 24, 1994, 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
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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 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: (1) make funds available to its
customers within specified time frames; (2) ensure that interest accrues on
funds in interest-bearing transaction accounts not later than the day the
financial institution receives credit; and (3) 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
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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 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: (1)
has a physical or mental impairment that substantially limits one or more major
life activities; (2) has a record of such an impairment; or (3) is regarded as
having such an impairment.
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.
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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
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, and 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
The Parent Company is a savings and loan holding company, Holdings is a
wholly owned, Delaware subsidiary, and the Bank is a federal savings bank. All
are subject to provisions of the Code, in the same manner, with certain
exceptions, as other corporations. The Parent Company, Holdings, 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, Holdings, 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,
Holdings', and the Bank's taxable income before extraordinary loss for the nine
months ended June 30, 1997 and 1996, and 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; 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 Taxpayer Relief Act of 1997 ("Relief Act") was signed into law during
August 1997. Most of the tax relief is concentrated in five areas: a phased-in
$500 child credit, expanded Individual Retirement Accounts, educational tax
incentives, estate tax relief and a reduction in capital gains taxes for
individuals. The Relief Act also contains specific provisions affecting
corporations including: restrictions on tax-free spinoffs under Section 355, the
treatment of preferred stock as boot, shortening NOL and general business
carrybacks. The Relief Act will not effect the utilization of NOLs generated
before the enactment of this legislation and should have no material effect on
the Company's Consolidated Financial Statements.
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
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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".
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 $89 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 fully-capitalized
the SAIF at a reserve ratio of 1.25% of SAIF-insured deposits. See "-- Safety
and Soundness Regulations -- Charter, Supervision, and Examination -- Insurance
Assessments" and Note 15 to the Consolidated Financial Statements. This one-time
assessment was tax-deductible in the first quarter of fiscal 1997, when paid.
The deduction associated with the one-time assessment was deferred at September
30, 1996 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 does 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 for fiscal 1997 and thereafter.
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 (1) the experience method, or (2) the
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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. For
the nine months ended June 30, 1996 and for fiscal 1996, 1995 and 1994, the Bank
computed its bad debt deduction pursuant to the experience method. Due to
enacted legislation, the Bank's post-1987 bad debt reserve of approximately $89
million is required to be recaptured ratably over a six year period 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 "Business -- The
Assistance Agreement". Although the amounts received by the Bank pursuant to the
Assistance Agreement are not taxable for federal income tax purposes, a portion
of such amounts are considered to be an ACE adjustment. For the nine months
ended June 30, 1997 and 1996 and 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 0.12% 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. The environmental tax imposed by the Code applies to taxable years
beginning after December 31, 1986 and before January 1, 1996, therefore, for
fiscal 1997, this tax does not apply.
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 "Business_-- 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 (1) 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, (2) the
exclusion from gross income of the amount of certain interest or assistance
payments made to the Bank by the FRF, and (3) the deduction of certain costs,
expenses, or losses incurred by the
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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.
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
FOR THE NINE
MONTHS ENDED
JUNE 30,
- -------------------------------------
1997............................ $23.2
NET OPERATING LOSSES
The Company's total NOLs at June 30, 1997 were $724 million, of which $63
million are attributable to tax relief discussed above. The remaining NOLs of
$661 million are a result of the Company's taxable losses from business
operations in years prior to fiscal 1993. The Company's total NOLs of $724
million 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 5.64% for June 1997). 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 $68 million based
on the closing market price at June 30, 1997.
The Company would undergo an Ownership Change if, among other things, 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 August 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
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uncertain in some respects, the August Offering, sales pursuant to the Offering,
the conversion of the Warrant, and the issuance of stock options during fiscal
1997 and 1996 did not cause an Ownership Change. However, 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
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. While Transfers are deemed prohibited by the Certificate, 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% 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:
(1) is not entitled to vote; (2) is limited and preferred as to dividends and
does not participate in corporate growth to any significant extent; (3) has
redemption and liquidation rights which do not exceed the issue price of such
stock (except for a reasonable redemption or liquidation premium); and (4) 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 Preferred Stock, Series B. In fiscal 1993, the Bank
publicly issued 3,420,000 shares, $25 liquidation preference per share, of
noncumulative Preferred Stock, Series A. 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 Parent Company, Holdings, and the Bank 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
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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 $675 million. See " -- Net Operating Losses".
TAX SHARING AGREEMENT
The Parent Company, Holdings, and the Bank are parties to a tax sharing
agreement pursuant to which the Bank will pay to the Parent Company and Holdings
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 Parent Company
is the common parent. The tax sharing agreement will 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 affiliated group.
ACCOUNTING FOR INCOME TAXES
Effective October 1, 1992, the Company adopted SFAS No. 109 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 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 APB 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 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. For the nine months ended June 30, 1997, no tax benefits were recorded
by the Parent Company or the Bank for the expected utilization of its NOLs
against future taxable income because the criteria under SFAS No. 109 to
recognize a tax benefit was not met.
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.
STATE TAXATION
The Parent Company, Holdings, and the Bank file unitary and combined state
returns with certain subsidiaries and also file separate state returns. The
location of branches and offices, loan solicitations, or real property securing
loans creates jurisdiction for taxation in certain states, which results in the
filing of state income tax returns. Amounts for state tax liabilities are
included in the Statements of Operations for the nine months ended June 30, 1997
and 1996, and for fiscal 1996, 1995, and 1994. See Note 14 to the Consolidated
Financial Statements.
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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 two to
three years, with annual rental expenses of $4.6 million, subject to increases
under certain circumstances. The following table sets forth the number and
location of the community banking, commercial banking, and mortgage origination
offices of the Company as of June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF OFFICES
------------------------------------------------------------
COMMUNITY
BANKING WHOLESALE
BRANCHES COMMERCIAL MORTGAGE
--------------- BANKING ORIGINATION
LOCATION OWNED LEASED OFFICES LEASED OFFICES LEASED TOTAL
- ------------------------------------- ----- ------ -------------- -------------- -----
<S> <C> <C> <C> <C> <C>
Houston Area......................... 14 22 1 1 38
Dallas/Ft. Worth Area................ 12 17 1 - 30
Other Texas.......................... - 4 - - 4
California........................... - - 1 2 3
Other U.S............................ - 1 7 3 11
-- --
----- ------ -----
Total............................ 26 44 10 6 86
===== ====== == == =====
</TABLE>
A majority of leases outstanding at June 30, 1997 expire within five years
or less. See Note 17 to the Consolidated Financial Statements.
Net investment in premises and equipment totalled $38.5 million at June 30,
1997.
LEGAL PROCEEDINGS
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 "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.
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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 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 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
(1) to abide by a capital forbearance, which would have allowed the Bank to
operate for ten years under negotiated capital levels lower than the levels
required by the then existing regulations or successor regulations, (2) to abide
by its commitment to allow the Bank to count $110 million of subordinated debt
as regulatory capital for all purposes, and (3) to abide by an accounting
forbearance, which would have allowed the Bank to count as capital for
regulatory purposes, and to amortize over a period of twenty-five years, the
$30.7 million difference between certain FSLIC payment obligations to the Bank
and the discounted present value of those future FSLIC payments. The lawsuit
seeks monetary relief for the breaches by the United States of its contractual
obligations to Plaintiffs and, 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 have responded 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 were scheduled for early 1997.
The trial of one of these two cases is in progress and the trial of the other
case has not yet begun. 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. On January 3, 1997, the court issued a
scheduling order scheduling the trial of the Company's case in the third month
after the trials of the "priority" cases begin.
In December 1996, Chief Judge Smith decided the motion IN LIMINE on damage
theories of Glendale Federal, one of four WINSTAR plaintiffs, and allowed
Glendale Federal to assert several other alternative damage theories against the
Government. While the Company expects Plaintiffs' claims for damages to exceed
$200 million, the
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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 the Government has opposed the motion. The Company is pursuing an early
trial on damages. Uncertainties remain concerning the administration of the
Omnibus Case Management Order and the future 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 damage trial in the
first case has lasted longer than was originally estimated, and the Company now
expects the trial of its case to commence during the first quarter of fiscal
1999. 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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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, Chairman.... 50 1988 1988 2000
Barry C. Burkholder........... 57 1996 1991 2000
Lawrence Chimerine............ 57 1996 1990 2000
David M. Golush............... 52 1996 1988 1998
Paul M. Horvitz............... 61 1996 1990 1999
Alan E. Master................ 57 1996 1995 2000
Anthony J. Nocella............ 55 1996 1990 1998
Salvatore A. Ranieri.......... 48 1988 1988 1998
Scott A. Shay................. 39 1988 1988 1999
Patricia A. Sloan............. 53 1996 1988 1999
Michael S. Stevens............ 47 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, an investment partnership formed to make investments
primarily in the financial and real estate sectors of the economy. He is a
director of Delphi Financial Group, Inc. and also serves as Chairman of the
Board and a director of American Marine Holdings, Inc. ("American Marine").
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 mortgage-backed
securities 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.
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. 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
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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
employed by 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 Benefit 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
Massachusetts Institute of Technology.
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 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 past 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 Vice Chairman and Chief
Financial Officer of the Company since July 22, 1997. Mr. Nocella was 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
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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 KPMG 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.
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 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.
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 of 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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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 first
Assistant to the Mayor of the City of Houston on Housing and Inner-City
Revitalization, as well as the President of the Housing Finance Corporation for
the City of Houston. He plays a major role in leading Houston's affordable
housing program, HOMES FOR HOUSTON. Mr. Stevens serves as Chairman of the
National Advisory Council of FNMA and 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, 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.
AUDIT 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 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 Drs. Chimerine and Horvitz
and Mr. Master, none of whom is an employee of the Company with Dr. Horvitz
serving as Chair.
COMPENSATION COMMITTEE. The Compensation Committee's functions include
administering management incentive compensation plans and making recommendations
to the Board 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, with Mr. Lewis Ranieri serving as Chair.
To the extent that any permitted action taken by the Company Board
conflicts with action taken by the Compensation Committee, the Company Board
action shall control. Mr. Burkholder and Mr. Nocella have excused themselves
from Board 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
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the Company that they attend and a fee of $500 for each telephonic meeting of
the Board and each meeting of any Committee of the Board 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
Board of 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.
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 Commerce 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.
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION AND OCCUPATION
- ------------------------------------- ---- ----------------------------------------------------
<S> <C> <C>
Leslie H. Green...................... 59 Senior Vice President -- Technology of the Company
since May 28, 1997 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.................... 49 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.
Sonny B. Lyles....................... 52 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 National Bank and Trust Co. of
Tulsa, 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,
immediate past President of the Texas Chapter, and a
national member of the Agency Regulatory and
Communications Council of Robert Morris Associates,
a trade association of lending and credit risk
managers. 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.
106
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS(7)
------------------------------------------ ------------------------- -------
OTHER SECURITIES
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 --
Vice Chairman 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 -- -- -- --
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
Vice Chairman 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
Technology 4,615
- ------------
(1) For all named executives, the bonus column for 1996 includes payments from:
(a) the Executive Management Compensation Plan and (b) 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 dining club memberships. However, in no
case does the aggregate 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 Company. 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 ($24.875 per share), without
giving effect to the diminution of value attributable to the restrictions on
such stock. Dividends will be paid on the Officers Restricted Stock at the
same rate as all other shares of Common Stock.
(6) In August 1996, the Company issued 856,313 options to the named executives
pursuant to management option agreements under the Executive Management
Compensation Plan.
(7) Represents the dollar value of all payouts pursuant to long-term incentive
plans ("LTIP"). An LTIP is any plan providing compensation intended to
serve as incentive for performance to occur over a period longer than one
fiscal year, whether such performance is measured by reference to financial
performance of the registrant or an affiliate, the registrant's stock price,
or any other measure, but excluding restricted stock, stock option and stock
appreciation right ("SAR") plans. The Bank made no such payments for the
periods presented.
(8) "All Other Compensation" amounts represent contributions by the Bank to
each executive's account in the Bank's 401(k) Plan.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
individual grants of options under the Executive Management Compensation Plan
that were made during fiscal 1996 to the executive officers named in the Summary
Compensation Table. This table is intended to allow stockholders to ascertain
the number and size of option grants made during the fiscal year, the expiration
date of the grants, and the grant date present value of such options under
specified assumptions. All options granted in fiscal 1996 have an exercise price
no less than the fair market value at the date of grant.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE GRANT DATE
GRANTED IN FISCAL PRICE EXPIRATION PRESENT VALUE
NAME (#) YEAR(1) ($/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 Boards of Directors of the Company and the Bank approved
an Executive Management Compensation Program (the "Compensation Program")
providing for the following: (1) a cash bonus of $4.0 million; (2) the award of
318,342 shares of Class B Common Stock pursuant to management stock grant
agreements (the "Management Stock Grant Agreements") providing that such
shares may not be transferred for three years from the date of issuance and 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 (3) 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 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; such options vest ratably over
108
<PAGE>
three years; such options may not be exercised prior to the third anniversary of
the date of grant; and such options expire if not exercised by the tenth
anniversary of the date of grant. Twenty-three individuals, including the seven
current executive officers -- Messrs. Burkholder, Nocella, Heffron, Coben,
Green, Lyles and Hartnett -- one former executive officer -- Mr. Bender -- and
three directors -- Drs. Chimerine and Horvitz and Mr. Master -- participated in
the Compensation Program. The remaining twelve individuals who participated are
other key officers and employees of the Bank. In connection with the February
1997 sale of mortgage offices, 33,718 of these options became fully vested. See
"Business -- Mortgage Banking Group". 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 satisfied 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 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 is largely 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: (1) stock options (both non-qualified and
incentive) ("Options"), (2) SARs, (3) restricted Common Stock ("Restricted
Stock") and (4) 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 ("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
109
<PAGE>
25% of the shares of Class A Common Stock available for issuance over the life
of the 1996 Stock Incentive 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
110
<PAGE>
alienated; provided that the Committee may permit transfers of Restricted Stock
during such period to members 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), (1) any Option or
SAR that is not then exercisable and vested will become fully exercisable and
vested, (2) the restrictions on any Restricted Stock will lapse and (3) all
Performance Units will be deemed earned. The 1996 Stock Incentive Plan defines a
Change of Control as (1) the acquisition of 25% or more of the common stock of
the Company, (2) 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 (3) 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 (1) 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 (2) the exercise price (the difference
between (1) and (2) 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
111
<PAGE>
granted under the Plan. The grant of an Award generally has no immediate tax
consequences to the Participant or the Company. Generally, Participants will
recognize ordinary income upon: (1) the exercise of NQOs or SARs; (2) the
vesting of shares of Restricted Stock; and (3) 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
(1) promote a greater identity of interest between the Company's non-employee
directors and its stockholders, and (2) 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 will be 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
will be 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
112
<PAGE>
under the Director Stock Plan, and/or such other equitable substitution or
adjustments as it may determine to be 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 and 10,000 Director Options
during fiscal 1997.
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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<PAGE>
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 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. 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. 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. 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.
114
<PAGE>
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
(1) the Company's actual financial performance as compared to its budgeted
financial performance, (2) Mr. Burkholder's performance in implementing new
business initiatives approved by the Board of Directors of the Company, (3) 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, (4)
the Company's actual financial performance compared to its peers', and (5) 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 by the Company other than for cause or disability or 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 (1) receive a lump sum equal to
three times (for Mr. Burkholder) or two times (for Messrs. Nocella, Heffron, and
Coben) his annual base salary and 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, (2) continue in the Company's welfare benefit plans
for three years (for Mr. Burkholder) or two years (for Messrs. Nocella, Heffron,
and Coben), and (3) receive in a lump sum a supplemental pension amount based on
three years (for Mr. Burkholder) or two years (for Messrs. Nocella, Heffron, and
Coben) of deemed employment after termination, (4) have all stock options,
restricted stock, and other stock-based compensation become immediately
exercisable or vested, (5) 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
(1) the acquisition of 25% or more of the common stock of the Company, (2) 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 (3) 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.
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 June
30, 1997, the monies deferred earn interest at a rate approximately equal to the
Bank's five-year borrowing 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 June 30, 1997, there were 12
participants in the SESP, and a total amount of deferrals and interest equaled
approximately $275,472. 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 6.78% and 5.12% as of June 30,
1997 and September 30, 1996, respectively.
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 five-year borrowing rate.
The Bank does not contribute to the DSSP.
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<PAGE>
The DSSP is funded from the general assets of the Bank, and participants
are general unsecured creditors of the Bank. As of June 30, 1997, there were
three participants in the DSSP and the total amount of deferrals and interest
equaled approximately $129,898. 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 6.78% and 5.12% as
of June 30, 1997 and Sepember 30, 1996, respectively.
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. See "Description of Capital
Stock -- Common Stock -- Conversion".
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information, as of the date of this
Prospectus, about certain persons who own beneficially more than 5% of the
Company's voting stock. As discussed under "Description of Capital Stock --
Common Stock -- Conversion," 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 which 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 Certificate 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 before and following the Offering, see "Selling Stockholders"
and " -- Security Ownership of Management".
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL COMMON STOCK
NAME 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
LW-SP1, L.P. and LW-SP2, L.P............ Class A Common Stock 2,146,748 6.8
</TABLE>
Under the terms of the Letter Agreement, The Prudential Insurance Company
of America may sell its shares of Common Stock beginning August 14, 1999 and
LW-SP1, L.P. and LW-SP2, L.P. may sell a limited number of their shares
beginning August 8, 1998, and the balance on August 14, 1999.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information, as of the date of this
Prospectus, regarding each class of equity securities of the Company
beneficially owned by all directors and each of the executive officers 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
CLASS A COMMON STOCK
NUMBER OF SHARES
AND NATURE OF PERCENT
NAME BENEFICIAL OWNERSHIP(1) OF CLASS
- ------------------------------------- ----------------------- --------
Lewis S. Ranieri, Chairman........... 1,263,561(2) 4.46%
Barry C. Burkholder.................. 139,455 *
Lawrence Chimerine................... 6,138 *
David M. Golush...................... 342,340 1.21
Paul M. Horvitz...................... 4,138 *
Alan E. Master....................... 1,630(3) *
Anthony J. Nocella................... 43,614 *
Salvatore A. Ranieri................. 759,543(4) 2.68
Scott A. Shay........................ 764,910(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 (17 persons)................. 3,779,287 13.33%
- ------------
* 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 and 43,403 shares owned by Hyperion Funding
Corp., 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) Includes 1,380 shares held by Mr. Master's wife.
(4) All shares are held by SAR Hyperion Corp., a corporation that is wholly
owned by Mr. Ranieri. Excludes 6,078 shares held as trustee for a minor, as
to which Mr. Ranieri disclaims beneficial ownership.
(5) Includes 759,543 shares held by SAS Hyperion Corp., a corporation that is
wholly owned by Mr. Shay. Excludes 4,058 shares held as trustee for minor
children, as to which Mr. Shay disclaims beneficial ownership.
(6) All shares are held by KRW Hyperion Corp., a corporation that is wholly
owned by Mr. Wilson.
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PRINCIPAL STOCKHOLDERS, 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: (1) shares beneficially owned by
all directors; (2) each of the executive officers named in the Summary
Compensation Table set forth herein; and (3) shares beneficially owned by all
directors, and executive officers as a group.
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, Chairman........... -- * -- *
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 *
Salvatore A. Ranieri................. -- * -- *
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 (17 persons)................. 16,070 * 6,000 *
</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 held directly and 200 shares owned by Dr. Horvitz's spouse.
(3) 1,000 shares held directly and 400 shares held as custodian for Mr.
Heffron's 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 has had no loans to directors or executive
officers outstanding during fiscal 1997, 1996, 1995, or 1994.
Historically, expenses paid to related parties were for services provided
in connection with hedging and asset and liability management strategies, and
for services provided in connection with the management and marketing of real
estate properties. No such expenses were incurred during the nine months ended
June 30, 1997, or in fiscal 1996, 1995, or 1994. At June 30, 1997, 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 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 affilate 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 (1)
the third anniversary of the agreement, (2) 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 (3) 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. See "Selling
Stockholders". 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 Offering".
119
<PAGE>
SELLING STOCKHOLDERS
The Selling Stockholders consist of the general partners and certain of the
limited partners of Hyperion Partners, and three other entities with which an
affiliate of Hyperion Partners has a fiduciary relationship. The Selling
Stockholders received Class A Common Stock and Class B Common Stock in the
Restructuring which was effected in June 18, 1996. See "Prospectus
Summary -- Background of the Offering". The following table sets forth
information with respect to the beneficial ownership of Common Stock by the
Selling Stockholders and the number of shares of Class A Common Stock offered
hereby.
CLASS A COMMON
STOCK OWNED OFFERED
PRIOR TO OFFERING HEREBY
----------------------- (8)
PERCENT ---------
HOLDER SHARES OF CLASS SHARES
- ------------------------------------- ----------- -------- ---------
LSR Hyperion Corp.(1)................ 1,210,933 4.27% 198,184
SAR Hyperion Corp.(2)................ 759,543 2.68 759,543
SAS Hyperion Corp.(3)................ 759,543 2.68 759,543
Hyperion Funding Corp.(4)............ 43,403 * 43,403
Lewis S. Ranieri..................... 9,225 * 9,225
Ranieri Bros. Shay & Co. Inc.(5)..... 19,506 * 19,506
KRW Hyperion Corp.(6)................ 227,311 * 227,311
CJK Hyperion Corp.(7)................ 183,343 * 183,343
David M. Golush...................... 342,340 1.21 342,340
Patricia A. Sloan.................... 156,745 * 156,745
David W. Marcus...................... 142,866 * 142,866
Jeffrey P. Cheesman.................. 128,813 * 128,813
Robert A. Perro...................... 79,386 * 79,386
Equitable Deal Flow Fund LP.......... 733,774 2.59 733,774
Equitable Capital Partners LP........ 877,908 3.10 877,908
Equitable Capital Partners
(Retirement Fund) LP................ 432,403 1.53 432,403
Salvatore A. Ranieri Cust. for
Margaret Ranieri, NY UGMA Age 21.... 6,078 * 6,078
Lewis S. Ranieri A/C/F Eric Jimenez
NJ UTMA -- 21....................... 304 * 304
Lewis S. Ranieri A/C/F Jason Jimenez
NJ UTMA -- 21....................... 304 * 304
Ranieri Family Trust F/B/O -- Claudia
L. Ranieri U/A 7/1/93............... 3,994 * 3,994
Ranieri Family Trust F/B/O -- Angela
S. Ranieri U/A 7/1/93............... 3,994 * 3,994
Trust F/B/O Dara Jen Golush U/A
12/20/84............................ 2,496 * 2,496
Trust F/B/O Jason Reid Golush U/A
12/20/84............................ 2,170 * 2,170
Gail W. Marcus....................... 1,845 * 1,845
Janet L. Perro....................... 867 * 867
The Sweater Trust.................... 520,908 1.84 520,908
Sun America Life Insurance Company... 868,181 3.06 868,181
Marilyn B. Arison.................... 694,545 2.45 694,545
Masco Capital Corp................... 434,091 1.53 434,091
Leslie Wexner........................ 347,273 1.22 347,273
The Airlie Group, L.P................ 347,273 1.22 347,273
Julius Berman........................ 53,570 * 53,570
FAME Associates...................... 65,260 * 65,260
Institutional Interests.............. 266,993 * 266,993
Houston Fireman's Relief & Retirement
Fund................................ 434,091 1.53 434,091
Alpine Investment Partners........... 173,636 * 173,636
Mortimer Zuckerman................... 17,363 * 17,363
Edward Linde......................... 17,363 * 17,363
Connie S. Maniatty................... 17,363 * 17,363
Micha Astrachan...................... 53,571 * 53,571
Scott A. Shay........................ 5,367 * 5,367
Trust F/B/O Benjamin Jacob Shay U/A
7/23/93............................. 2,254 * 2,254
Trust F/B/O Ariel Rebecca Shay U/A
7/23/93............................. 2,254 * 2,254
Henry Reichman....................... 144,704 * 144,704
Alan & Carol Charity Fund Inc........ 1,891 * 1,891
Barbara & Mark Kronman Foundation.... 1,757 * 1,757
United Congregation Mesorah.......... 486,596 1.72 486,596
CHESED Congregations of America...... 135,961 * 135,961
- ------------
* Less than 1%.
(1) All stock owned by Lewis S. Ranieri. Assuming all shares registered
hereunder are sold by LSR Hyperion Corp., it will still own 1,012,749, or
3.57%, of the shares of Class A Common Stock following the Offering.
(2) All stock owned by Salvatore A. Ranieri.
(3) All stock owned by Scott A. Shay.
(4) All stock owned by Lewis S. Ranieri, Salvatore A. Ranieri, Scott A. Shay and
Kendrick R. Wilson III.
(5) All stock owned by Lewis S. Ranieri, Salvatore A. Ranieri, Scott A. Shay,
David M. Golush, Patricia A. Sloan, David W. Marcus and Jeffrey P. Cheesman.
(6) All stock owned by Kendrick R. Wilson III.
(7) All stock owned by Clinton J. Kendrick.
(8) Represents all shares held by Selling Stockholders that are registered
pursuant to the Registration Statement of which this Prospectus forms a
part. Additional restrictions on sales of such Shares may apply. See
" -- Selling Stockholder Letter Agreement" and "Description of Capital
Stock -- Common Stock -- Restrictions on Transfers of Stock".
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SELLING STOCKHOLDER 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.
Each of the Selling Stockholders has entered into a Letter Agreement with
each of Hyperion Partners and the Company (the "Letter Agreement"). Pursuant
to the Letter Agreement, each Selling 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
Selling 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 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 Selling Stockholder acknowledged (1)
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 (2) 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 in the case of Selling
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 in the case of any other Selling 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. An IPO was completed in August 1996.
Each Selling Stockholder who retained shares of Common Stock was 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 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 Selling 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 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 Selling 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 (1) the date on which all shares of Common Stock
registered
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thereunder have been sold pursuant thereto, (2) December 31, 1999, and (3) the
date on which such registration under the Securities Act is no longer required
to sell such shares without restriction. The Registration Statement of which
this Prospectus forms a part is being filed by the Company to satisfy this
obligation.
Pursuant to the terms of the Letter Agreement, this Prospectus covers all
of the Shares received by the Selling Stockholders in the Restructuring and not
sold in the August Offering. This Prospectus enables the Selling Stockholders to
sell the Shares held by them upon the expiration of the restrictions on sale and
transfer to which such Shares are subject. The table above sets forth the Shares
held by each Selling Stockholder covered by this Prospectus and also indicates
the time when the Shares held by each of the Selling Stockholders have or will
become available for sale: February 10, 1997 or August 14, 1997. The sale of
Shares may also be subject to additional restrictions on sale and transfer
contained in the Certificate and By-Laws. See "Description of Capital
Stock -- Common Stock -- Restrictions on Transfer of Stock". The Letter
Agreement also restricts the conversion rights of holders of Class B Common
Stock. See "Description of Capital Stock -- Common Stock -- Conversion".
PLAN OF DISTRIBUTION
All or part of the Shares may be offered by the Selling Stockholders from
time to time in transactions on the Nasdaq, in privately negotiated
transactions, through the writing of options on the Shares or a combination of
such methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The methods by which the Shares may be sold or
distributed may include, but not be limited to, the following: (1) a cross or
block trade in which the broker or dealer so engaged will attempt to sell the
Shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (2) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account; (3) an exchange
distribution in accordance with the rules of such exchange; (4) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
(5) privately negotiated transactions; (6) short sales or borrowings, returns
and reborrowings of the Shares pursuant to stock loan agreements to settle short
sales; and (7) delivery in connection with the issuance of securities by
issuers, other than the Company that are exchangeable for (whether optional or
mandatory), or payable in, such Shares (whether such securities are listed on a
national securities exchange or otherwise) or pursuant to which such Shares may
be distributed, and (8) a combination of any such methods of sale or
distribution. In effecting sales, brokers or dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate. Brokers or
dealers may receive commissions or discounts from the Selling Stockholders or
from the purchasers in amounts to be negotiated immediately prior to the sale.
The Selling Stockholders may also sell such shares in accordance with Rule 144
under the Securities Act. If Shares are sold in an underwritten offering, the
Shares may be acquired by the underwriters for their own account and may be
further resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. The names of the underwriters with respect to
any such offering and the terms of the transactions, including any underwriting
discounts, concessions or commissions and other items constituting compensation
of the underwriters and broker-dealers, if any, will be set forth in a
Prospectus Supplement relating to such offering. Any public offering price and
any discounts, concessions or commissions allowed or reallowed or paid to
broker-dealers may be changed from time to time. Unless otherwise set forth in a
Prospectus Supplement, the obligations of the underwriters to purchase the
Shares will be subject to certain conditions precedent and the underwriters will
be obligated to purchase all of the Shares specified in such Prospectus
Supplement if any such Shares are purchased. This Prospectus also may be used by
donees of the Selling Stockholders or by other persons acquiring Shares,
including brokers who borrow the Shares to settle short sales of shares of the
Common Stock, and who wish to offer and sell such Shares under circumstances
requiring or making desirable its use.
From time to time the Selling Stockholders may engage in short sales, short
sales against the box, puts and calls and other transactions in securities of
the Company or derivatives thereof, and may sell and deliver the shares in
connection therewith. From time to time Selling Stockholders may pledge their
Shares pursuant to the margin provisions of their respective customer agreements
with their respective brokers or otherwise. Upon a
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default by a Selling Stockholder, the broker or pledgees may offer and sell the
pledged shares of Class A Common Stock from time to time.
The Company has agreed to use its best efforts to maintain the
effectiveness of the registration of the Shares being offered hereunder until
the first to occur of (1) the date on which all shares of Common Stock
registered thereunder have been sold pursuant thereto, (2) December 31, 1999,
and (3) the date on which such registration under the Securities Act is no
longer required to sell such shares without restriction.
None of the proceeds from the sales of the Shares by the Selling
Stockholders will be received by the Company. No underwriting commissions or
discounts will be paid by the Company in connection with the Offering. The
Company has agreed to bear certain expenses in connection with the registration
of the Shares being offered by the Selling Stockholders. The Company has agreed
to indemnify the Selling Stockholders and any underwriters, brokers, dealers or
agents (and controlling persons) against certain liabilities, including certain
liabilities under the Securities Act.
The Selling Stockholders and any broker-dealers who act in connection with
the sale of Shares hereunder may be deemed to be "underwriters" as that term
is defined in the Securities Act, and any commissions received by them and
profit on any resale of the Shares as principal might be deemed to be
underwriting discounts and commissions under the Securities Act.
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained or incorporated by
reference in this Prospectus, and any information or representation not
contained or incorporated herein must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy, by any person in any jurisdiction in which
it is unlawful for such person to make such offer or solicitation. Neither the
delivery of this Prospectus at any time nor any sale made hereunder shall, under
any circumstances, imply that the information herein is correct as of any date
subsequent to the date hereof.
DESCRIPTION OF CAPITAL STOCK
The following summary of the material provisions of the Certificate and
By-Laws and the Letter Agreements and does not purport to be complete and is
qualified in its entirety by reference to the Certificate and By-Laws and the
Letter Agreements which are exhibits to the Registration Statement on Form S-1
(File No. 333-06229) filed by the Company with the Commission on August 7, 1996.
AUTHORIZED CAPITAL STOCK
The Company's authorized capital stock consists of 10 million shares of
preferred stock, par value $0.01 per share ("Preferred Stock"), 40 million
shares of Class A Common Stock and, 40 million shares of Class B Common Stock.
As of the date of this Prospectus, 28,354,276 shares of Class A Common Stock and
3,241,320 shares of Class B Common Stock were outstanding. All of the shares of
Class A Common Stock outstanding are validly issued, fully paid and
nonassessable.
COMMON STOCK
DIVIDENDS
The holders of each class of Common Stock, to the exclusion of the holders
of Preferred Stock, share equally, share for share, in all dividends or other
distributions. The Company's ability to pay dividends is limited by certain
restrictions generally imposed on Delaware corporations. Under these
restrictions, dividends may be paid only out of "surplus," as defined by
Delaware law, or, if there should be no surplus, out of the corporation's net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. See "Dividend Policy".
LIQUIDATION RIGHTS
In the event of a liquidation, dissolution or winding up of the affairs of
the Company, after payment has been made to the holders of Preferred Stock of
the full amount to which they are entitled, the holders of Common
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Stock share ratably according to the number of shares of Common Stock held by
them, in all remaining assets of the Company available for distribution to its
stockholders.
VOTING RIGHTS
The holders of Class A Common Stock are entitled to vote on each matter on
which the stockholders of the Company are entitled to vote, and each holder of
Class A Common Stock is entitled to one vote for each share held. The holders of
Class B Common Stock do not have any voting rights except as otherwise required
by applicable law.
CONVERSION
Each share of Class B Common Stock is convertible into one share of Class A
Common Stock (1) automatically, upon the sale or other transfer of such share of
Class B Common Stock to a person other than an Affiliate (as defined in the
Certificate) of the holder or (2) at the election of the holder of such share of
Class B Common Stock, subject to the terms, conditions and restrictions set
forth in the Letter Agreements, except that clause (2) does not apply to shares
of Class B Common Stock held by The Equitable Life Assurance Society of the
United States or Equitable Variable Life Insurance Company. An "Affiliate" of
a person is defined in the Certificate as any other person directly or
indirectly controlling, controlled by or under common control with such person,
and "control" with respect to any person means the possession, directly or
indirectly, of the power to direct the management and policies of such person,
whether through the ownership of voting securities, by contract or otherwise.
Elective conversion of Class B Common Stock pursuant to clause (2) of the first
sentence of this paragraph was not permitted to be effected by a Selling
Stockholder prior to the earlier to occur of the consummation of an initial
public offering of shares of capital stock of the Company (including the August
Offering) or October 31, 1996, unless the Board of Directors of the Company
agrees to such conversion or unless such holder is subject to Title I of ERISA.
Pursuant to the Letter Agreement no holder of Class B Common Stock may convert
such Class B Common Stock to Class A Common Stock if after the conversion the
holder would beneficially own (within the meaning of applicable federal banking
and thrift regulations) more than 9.9% of the outstanding shares of Class A
Common Stock (or such lower percentage as may apply to such holder under
regulatory restrictions). In addition, based upon certain federal bank
regulations requirements, the shares of Class B Common Stock held by The
Prudential Insurance Company of America are currently treated as being non-
convertible into shares of Class A Common Stock under the restrictions contained
in the Letter Agreement. The Management Stock Grant Agreements contain
restrictions on the ability to convert shares of Class B Common Stock into Class
A Common Stock that are substantially similar to the restrictions contained in
the Letter Agreements.
RESTRICTIONS ON TRANSFERS OF STOCK
The Certificate prohibits and renders void any transfer of legal or
beneficial ownership of the capital stock of the Company, including warrants,
options and other arrangements that would be treated as options or as stock of
the Company under the Code and applicable IRS regulations, prior to the earlier
of (1) three years following the consummation of an offering of the Company's
capital stock, and (2) October 31, 1996, if the trading of Common Stock on the
New York Stock Exchange or NASDAQ has not occurred prior to October 31, 1996, in
either case if such transfer would either cause any person or group of persons
to become a 5% Stockholder or increase the percentage ownership of a 5%
Stockholder. The Certificate's prohibition will not, however, preclude the
settlement of any transaction on the NASDAQ, and will not apply to any
transaction approved in advance by the Board of Directors of the Company or made
in compliance with exceptions adopted by the Board of Directors of the Company.
This restriction was intended to prevent transfers of stock of the Company from
triggering an Ownership Change which would result in the limitation of certain
potential tax benefits available to the Company. See "Regulation -- Taxation".
Also, pursuant to the Letter Agreement, the holders of shares of Class B
Common Stock may not transfer such shares of Class B Common Stock other than (1)
to an affiliate, (2) in a widely-dispersed offering of shares of the Company's
capital stock under an effective registration statement filed under the
Securities Act, or (3) to any single person, entity or group acting in concert
if the number of shares of Class B Common Stock, if converted into shares of
Class A Common Stock, would entitle the holder to exercise more than 2% of the
voting
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power of all of the shares of Class A Common Stock that would be outstanding
upon conversion of such shares of Class B Common Stock.
PREFERRED STOCK
The Certificate authorizes the Board of Directors of the Company to
establish one or more series of Preferred Stock and to determine, with respect
to any series of Preferred Stock, the terms and rights of such series, including
(1) the designation of the series, (2) the number of shares of the series, which
number the Company Board may thereafter (except where otherwise provided in the
applicable certificate of designation) increase or decrease (but not below the
number of shares thereof then outstanding), (3) whether dividends, if any, will
be cumulative or noncumulative, and, in the case of shares of any series having
cumulative dividend rights, the date or dates or method of determining the date
or dates from which dividends on the shares of such series shall be cumulative,
(4) the rate of any dividends (or method of determining such dividends) payable
to the holders of the shares of such series, any conditions upon which such
dividends will be paid and the date or dates or the method for determining the
date or dates upon which such dividends will be payable; (5) the redemption
rights and price or prices, if any, for shares of the series, (6) the terms and
amounts of any sinking funds provided for the purchase or redemption of shares
of the series, (7) the amounts payable on and the preferences, if any, of shares
of the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, (8) whether the shares
of the series will be convertible or exchangeable into shares of any other class
or series, or any other security, of the Company or any other corporation, and,
if so, the specification of such other class or series or such other security,
the conversion or exchange price or prices or rate or rates, any adjustments
thereof, the date or dates as of which such shares will be convertible or
exchangeable and all other terms and conditions upon which such conversion or
exchange may be made, (9) restrictions on the issuance of shares of the same
series or of any other class or series, (10) the voting rights, if any, of the
holders of the shares of the series, and (11) any other relative rights,
preferences and limitations of such series.
The Company believes that the ability of the Board of Directors of the
Company to issue one or more series of Preferred Stock, while providing the
Company with flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs which might arise, could make
it more difficult for a third party to acquire a majority of the outstanding
voting stock. The authorized shares of Preferred Stock, as well as shares of
Common Stock, will be available for issuance without further action by the
Company's stockholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. If the approval of the Company's
stockholders is not required for the issuance of shares of Preferred Stock or
Common Stock, the Board of Directors of the Company may determine not to seek
stockholder approval. Accordingly, the issuance of Preferred Stock may be used
as an "anti-takeover" device without further action on the part of the
Company's stockholders.
Although the Board of Directors of the Company has no intention at the
present time of doing so, it could issue a series of Preferred Stock that could,
depending on the terms of such series, impede the completion of a merger, tender
offer or other takeover attempt. The Board of Directors of the Company will make
any determination to issue such shares based on its judgment as to the best
interests of the Company and its stockholders. The Board of Directors of the
Company, in so acting, could issue Preferred Stock having terms that could
discourage an acquisition attempt through which an acquirer may be able to
change the composition of the Board of Directors of the Company, including a
tender offer or other transaction that some, or a majority, of the Company's
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
CERTAIN PROVISIONS OF THE CERTIFICATE AND BY-LAWS; ANTI-TAKEOVER EFFECTS
BOARD OF DIRECTORS
The Certificate provides that, except as otherwise fixed by or pursuant to
the provisions of a certificate of designations setting forth the rights of the
holders of any class or series of Preferred Stock, the number of the directors
of the Company will be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the total number of directors which the
Company would have if there were no vacancies (the "Whole Board") (but shall
not be less than three). The directors, other than those who may be elected by
the holders of
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Preferred Stock, will be classified with respect to the time for which they
severally hold office into three classes, as nearly equal in number as possible,
one class to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 1996, another class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 1997 and
another class to be originally elected for a term expiring at the annual meeting
of stockholders to be held in 1998, with each director to hold office until its
successor is duly elected and qualified. Commencing with the 1996 annual meeting
of stockholders, directors elected to succeed directors whose terms then expire
will be elected for a term of office to expire at the third succeeding annual
meeting of stockholders after their election, with each director to hold office
until such person's successor is duly elected and qualified.
The Certificate provides that, except as otherwise provided for or fixed by
or pursuant to a certificate of designations setting forth the rights of the
holders of any class or series of Preferred Stock, newly created directorships
resulting from any increase in the number of directors and any vacancies on the
Board of Directors of the Company resulting from death, resignation,
disqualification, removal or other cause will be filled by the affirmative vote
of a majority of the remaining directors then in office, even though less than a
quorum of the Board of Directors of the Company, and not by the stockholders.
Any director elected in accordance with the preceding sentence will hold office
for the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been duly elected and qualified. No decrease in the number
of directors constituting the Board of Directors of the Company will shorten the
term of any incumbent director. Subject to the rights of holders of Preferred
Stock, any director may be removed from office only for cause by the affirmative
vote of the holders of at least a majority of the voting power of all Voting
Stock then outstanding, voting together as a single class.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of the Board of Directors of the
Company by filling the vacancies created by removal with its own nominees. Under
the classified board provisions described above, it would take at least two
elections of directors for any individual or group to gain control of the Board
of Directors of the Company. Accordingly, these provisions could discourage a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to gain control of the Company.
STOCKHOLDER ACTION BY UNANIMOUS WRITTEN CONSENT; SPECIAL MEETINGS
Except as otherwise required by law and subject to the rights of the
holders of any Preferred Stock, special meetings of stockholders of the Company
for any purpose or purposes may be called only by the Board of Directors of the
Company pursuant to a resolution stating the purpose or purposes thereof
approved by a majority of the Whole Board or by the Chairman of the Board. Any
power of stockholders to call a special meeting is specifically denied. No
business other than that stated in the notice shall be transacted at any special
meeting. Stockholders entitled to vote at an annual or special meeting may act
by written consent in lieu of such meeting only if such consent is unanimous.
These provisions may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting unless a special meeting is called by the
Board of Directors of the Company or the Chairman of the Board.
ADVANCE NOTICE PROCEDURES
The By-Laws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or to bring other business
before an annual meeting of stockholders of the Company (the "Stockholder
Notice Procedure"). The Stockholder Notice Procedure provides that only
individuals who are nominated by, or at the direction of, the Chairman of the
Board, or by a stockholder who has given timely written notice to the Secretary
of the Company prior to the meeting at which directors are to be elected, will
be eligible for election as directors of the Company. The Stockholder Notice
Procedure also provides that at an annual meeting only such business may be
conducted as has been brought before the meeting by, or at the direction of, the
Chairman of the Board or the Board of Directors of the Company, or by a
stockholder who has given timely written notice to the Secretary of the Company
of such stockholder's intention to bring such business before such meeting.
Under the Stockholder Notice Procedure, for notice of stockholder nominations to
be made at an annual meeting to be timely, such notice must be received by the
Company not later than the close of business on the
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90th calendar day nor earlier than the close of business on the 120th calendar
day prior to the first anniversary of the preceding year's annual meeting
(except that, in the event that the date of the annual meeting is more than 30
calendar days before or more than 60 calendar days after such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
close of business on the 120th calendar day prior to such annual meeting and not
later than the close of business on the later of the 90th calendar day prior to
such annual meeting or the 10th calendar day following the day on which public
announcement of a meeting date is first made by the Company).
Notwithstanding the foregoing, in the event that the number of directors to
be elected to the Board of Directors of the Company is increased and there is no
public announcement by the Company naming all of the nominees for director or
specifying the size of the increased Board of Directors of the Company at least
100 calendar days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice also will be considered timely, but only with
respect to nominees for any new positions created by such increase, if it shall
be delivered not later than the close of business on the 10th calendar day
following the day on which such public announcement is first made by the
Company. Under the Stockholder Notice Procedure, for notice of a stockholder
nomination to be made at a special meeting at which directors are to be elected
to be timely, such notice must be received by the Company not earlier than the
close of business on the 120th calendar day prior to such special meeting and
not later than the close of business on the 90th calendar day prior to such
special meeting or the 10th calendar day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors of the Company to be elected at such
meeting.
In addition, under the Stockholder Notice Procedure, a stockholder's notice
to the Company proposing to nominate an individual for election as a director or
relating to the conduct of business other than the nomination of directors must
contain certain specified information. If the chairman of a meeting determines
that an individual was not nominated, or other business was not brought before
the meeting, in accordance with the Stockholder Notice Procedure, such
individual will not be eligible for election as a director, or such business
will not be conducted at such meeting, as the case may be.
AMENDMENT
The Certificate provides that the affirmative vote of the holders of at
least 80% of the Voting Stock, voting together as a single class, is required to
amend provisions of the Certificate relating to stockholder action without a
meeting; the calling of special meetings; the number, election and term of the
Company's directors; the filling of vacancies; and the removal of directors. The
Certificate further provides that the related By-Laws described above (including
the Stockholder Notice Procedure) may be amended only by the Board of Directors
of the Company or by the affirmative vote of the holders of at least 80% of the
voting power of the outstanding shares of Voting Stock, voting together as a
single class.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for a
three-year period following the time that such stockholder becomes an interested
stockholder unless (1) prior to such time, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (2) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (3) at or subsequent to such time, the
business combination is approved by the board of directors of the corporation
and authorized at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include any person that is
(1) the owner of 15% or more of the outstanding voting stock of the corporation,
or (2) is an affiliate or associate of the corporation and
127
<PAGE>
was the owner of 15% or more of the outstanding voting stock of the corporation
at any time within the three-year period immediately prior to the date of
determination; and the affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. The
provisions of Section 203 may encourage persons interested in acquiring the
Company to negotiate in advance with the Board of Directors of the Company since
the stockholder approval requirement would be avoided if a majority of the
directors then in office approves either the business combination or the
transaction which results in any such person becoming an interested shareholder.
Such provisions also may have the effect of preventing changes in the management
of the Company. It is possible that such provisions could make it more difficult
to accomplish transactions which the Company's stockholders may otherwise deem
to be in their best interests.
LIABILITY OF DIRECTORS; INDEMNIFICATION
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 (1) for any breach of the director's
duty of loyalty to the Company or its stockholders, (2) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (3) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (4) 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.
While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Certificate will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
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 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.
TRANSFER AGENT AND REGISTRAR
The Bank of New York is the transfer agent and registrar for the Class A
Common Stock.
128
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the Class A Common
Stock offered hereby will be passed upon for the Company by Wachtell, Lipton,
Rosen & Katz, 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 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.
129
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report ............................................ F-2
Consolidated Statements of Financial Condition as of
June 30, 1997 (unaudited) and September 30, 1996 and 1995 ............. F-3
Consolidated Statements of Operations for the Nine Months Ended
June 30, 1997 (unaudited) and June 30, 1996 (unaudited) and
for the Years Ended September 30, 1996, 1995, and 1994 ................ F-4
Consolidated Statements of Stockholders' Equity for the Nine
Months Ended June 30, 1997 (unaudited) and June 30, 1996
(unaudited) and 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
Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 1997 and 1996 (unaudited) .............................. F-8
Notes to Consolidated Financial Statements .............................. F-10
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)
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, ----------------------------
NOTES 1997 1996 1995
----------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............ $ 102,811 $ 119,523 $ 112,931
Securities purchased under agreements
to resell and federal funds sold... 2 577,059 674,249 471,052
Trading account assets, at fair
value.............................. 1,211 1,149 1,081
Securities 3, 12
Held to maturity, at amortized
cost (fair value of $166
thousand in 1997, $169
thousand in 1996, and $2.7
million in 1995).............. 162 168 1,902
Available for sale, at fair
value......................... 55,980 64,376 114,111
Mortgage-backed securities 4, 9, 10
Held to maturity, at amortized
cost (fair value of $543.7
million in 1997, $609.2
million in 1996, and $2,031
million in 1995).............. 563,369 630,048 2,051,304
Available for sale, at fair
value......................... 1,038,488 1,027,860 346,959
Loans 5, 9
Held to maturity (net of the
allowance for credit losses of
$38.6 million in 1997, $39.7
million in 1996, and $36.8
million in 1995).............. 7,991,266 7,227,153 7,763,676
Held for sale................... 280,638 292,335 496,564
Federal Home Loan Bank stock......... 186,907 179,643 225,952
Premises and equipment............... 38,495 40,209 37,687
Mortgage servicing rights............ 6 274,980 123,392 75,097
Real estate owned (net of allowance
for losses of $928 thousand in
1997, $986 thousand in 1996, and
$1.1 million in 1995).............. 21,369 29,744 23,764
Deferred tax asset................... 14 130,026 168,323 77,571
Other assets......................... 176,289 134,205 183,883
----------- ------------- -------------
TOTAL ASSETS......................... $11,439,050 $ 10,712,377 $ 11,983,534
=========== ============= =============
LIABILITIES, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY
LIABILITIES
Deposits............................. 8 $ 5,249,888 $ 5,147,945 $ 5,182,220
Federal Home Loan Bank advances...... 4, 5, 9 3,630,060 3,490,386 4,383,895
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 4, 10 1,181,382 832,286 1,172,533
Subordinated Notes................... 11 219,694 -- --
Senior Notes......................... 11 500 115,000 115,000
Advances from borrowers for taxes and
insurance.......................... 164,042 146,634 183,968
Other liabilities.................... 225,308 263,583 264,315
----------- ------------- -------------
Total liabilities.......... 10,670,874 9,995,834 11,301,931
----------- ------------- -------------
COMMITMENTS AND CONTINGENCIES........ 12, 15, 17
MINORITY INTEREST
Preferred stock issued by
consolidated subsidiary............ 16 185,500 185,500 185,500
----------- ------------- -------------
STOCKHOLDERS' EQUITY................. 15, 16
Common stock......................... 316 316 289
Paid-in capital...................... 129,286 129,286 117,722
Retained earnings.................... 447,050 403,674 384,739
Unrealized gains (losses) on
securities and mortgage-backed
securities available for sale, net
of tax............................. 4 6,024 (2,233) (6,647)
----------- ------------- -------------
Total stockholders'
equity................... 582,676 531,043 496,103
----------- ------------- -------------
TOTAL LIABILITIES, MINORITY INTEREST,
AND STOCKHOLDERS' EQUITY........... $11,439,050 $ 10,712,377 $ 11,983,534
=========== ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, SEPTEMBER 30,
-------------------- -------------------------------
NOTES 1997 1996 1996 1995 1994
------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Short-term interest-earning assets... $ 26,732 $ 27,576 $ 39,302 $ 29,675 $ 19,019
Trading account assets............... 53 51 67 62 (144)
Securities........................... 3 3,699 2,943 3,917 5,893 5,007
Mortgage-backed securities........... 4 78,946 100,913 128,143 173,155 151,972
Loans................................ 5 482,077 478,846 627,940 526,528 308,804
Federal Home Loan Bank stock......... 8,427 10,090 12,943 11,446 5,558
Covered Assets and related assets.... 7 -- -- -- -- 4,490
--------- --------- --------- --------- ---------
Total interest income....... 599,934 620,419 812,312 746,759 494,706
--------- --------- --------- --------- ---------
INTEREST EXPENSE
Deposits............................. 8 195,107 204,138 272,220 264,366 209,034
Federal Home Loan Bank advances...... 9 157,701 193,726 247,093 224,767 91,060
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 10 39,703 42,357 55,112 53,220 10,574
Subordinated Notes................... 11 2,932 -- -- -- --
Senior Notes......................... 11 5,582 7,805 10,353 10,407 10,177
Other................................ -- -- -- -- 79
--------- --------- --------- --------- ---------
Total interest expense...... 401,025 448,026 584,778 552,760 320,924
--------- --------- --------- --------- ---------
Net interest income......... 198,909 172,393 227,534 193,999 173,782
PROVISION FOR CREDIT LOSSES.......... 5 14,644 10,155 16,469 24,293 6,997
--------- --------- --------- --------- ---------
Net interest income after
provision for credit
losses.................... 184,265 162,238 211,065 169,706 166,785
--------- --------- --------- --------- ---------
NON-INTEREST INCOME
Net gains (losses)
Sales of single family servicing
rights and single family
warehouse loans................ 20,475 29,581 43,074 60,495 63,286
Securities and mortgage-backed
securities..................... 3, 4 2,277 3,821 4,002 26 10,404
Other loans...................... 992 2,027 3,189 (1,210) 163
Sale of mortgage offices......... 18 3,998 -- -- -- --
Loan servicing fees and charges...... 44,225 31,739 44,230 43,508 31,741
Other................................ 14,925 10,914 15,541 12,162 13,295
--------- --------- --------- --------- ---------
Total non-interest income... 86,892 78,082 110,036 114,981 118,889
--------- --------- --------- --------- ---------
NON-INTEREST EXPENSE
Compensation and benefits............ 13 57,201 66,907 87,640 83,520 86,504
Occupancy............................ 17 11,372 13,904 18,415 18,713 17,196
Data processing...................... 17 10,217 12,319 16,196 16,360 15,821
Advertising and marketing............ 5,979 5,956 8,025 9,262 10,796
Amortization of intangibles.......... 23,940 15,002 20,432 21,856 18,247
SAIF deposit insurance premiums...... 15 3,985 9,102 45,690 11,428 11,329
Furniture and equipment.............. 3,201 4,656 6,121 6,428 6,810
Restructuring charges................ 18 -- 10,681 10,681 -- --
Other................................ 37,105 29,466 40,065 27,009 32,890
--------- --------- --------- --------- ---------
Total non-interest
expense................... 153,000 167,993 253,265 194,576 199,593
--------- --------- --------- --------- ---------
Income before income taxes,
minority interest,
and extraordinary loss.... 118,157 72,327 67,836 90,111 86,081
INCOME TAX EXPENSE (BENEFIT)......... 14 45,499 (73,644) (75,765) 37,415 (31,899)
--------- --------- --------- --------- ---------
Income before minority
interest and extraordinary
loss...................... 72,658 145,971 143,601 52,696 117,980
MINORITY INTEREST
Subsidiary preferred stock
dividends...................... 16 13,689 13,689 18,253 10,600 8,653
Payments in lieu of dividends.... 16 -- 6,413 6,413 377 357
--------- --------- --------- --------- ---------
Income before extraordinary
loss...................... 58,969 125,869 118,935 41,719 108,970
EXTRAORDINARY LOSS................... 11 2,323 -- -- -- --
--------- --------- --------- --------- ---------
NET INCOME.................. $ 56,646 $ 125,869 $ 118,935 $ 41,719 $ 108,970
========= ========= ========= ========= =========
EARNINGS PER COMMON SHARE
Income before extraordinary loss..... 16 $ 1.86 $ 4.13 $ 3.87 $ 1.35 $ 3.55
Extraordinary loss................... 16 0.07 -- -- -- --
--------- --------- --------- --------- ---------
Net income.................. 16 $ 1.79 $ 4.13 $ 3.87 $ 1.35 $ 3.55
========= ========= ========= ========= =========
</TABLE>
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............................... -- -- -- -- -- -- --
Dividends 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)
Conversion 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
============ ====== =========== ====== =========== ====== =========
(unaudited)
BALANCE AT SEPTEMBER 30, 1995................ 23,828,400 $239 -- $ -- 5,034,600 $ 50 $ 117,722
Net income............................... -- -- -- -- -- -- --
Dividends declared: common stock ($3.46
per share)............................. -- -- -- -- -- -- --
Conversion of common stock (Note 16)..... (23,446,475) (235) 28,481,075 285 (5,034,600) $(50) --
Restricted Stock issued (Note 13)........ -- -- 318,342 3 -- -- 3,706
Change in unrealized gains (losses)...... -- -- -- -- -- -- --
------------ ------ ----------- ------ ----------- ------ ---------
BALANCE AT JUNE 30, 1996..................... 381,925 $ 4 28,799,417 $288 -- $ -- $ 121,428
============ ====== =========== ====== =========== ====== =========
(unaudited)
BALANCE AT SEPTEMBER 30, 1996................ 27,735,934 $277 3,859,662 $ 39 -- $ -- $ 129,286
Net income............................... -- -- -- -- -- -- --
Dividends declared: common stock ($0.42
per share)............................. -- -- -- -- -- -- --
Conversion of common stock (Note 16)..... 618,342 7 (618,342) (7) -- -- --
Change in unrealized gains (losses) (Note
4)..................................... -- -- -- -- -- -- --
------------ ------ ----------- ------ ----------- ------ ---------
BALANCE AT JUNE 30, 1997..................... 28,354,276 $284 3,241,320 $ 32 -- $ -- $ 129,286
============ ====== =========== ====== =========== ====== =========
<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
Dividends 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)
Conversion 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
========= =========== =============
BALANCE AT SEPTEMBER 30, 1995................ $ 384,739 $ (6,647) $ 496,103
Net income............................... 125,869 -- 125,869
Dividends declared: common stock ($3.46
per share)............................. (100,000) -- (100,000)
Conversion of common stock (Note 16)..... -- -- --
Restricted Stock issued (Note 13)........ -- -- 3,709
Change in unrealized gains (losses)...... -- 3,751 3,751
--------- ----------- -------------
BALANCE AT JUNE 30, 1996..................... $ 410,608 $ (2,896) $ 529,432
========= =========== =============
BALANCE AT SEPTEMBER 30, 1996................ $ 403,674 $ (2,233) $ 531,043
Net income............................... 56,646 -- 56,646
Dividends declared: common stock ($0.42
per share)............................. (13,270) -- (13,270)
Conversion of common stock (Note 16)..... -- -- --
Change in unrealized gains (losses) (Note
4)..................................... -- 8,257 8,257
--------- ----------- -------------
BALANCE AT JUNE 30, 1997..................... $ 447,050 $ 6,024 $ 582,676
========= =========== =============
</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
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
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 (to) held
to maturity................... 104,235 (805) (398,645)
Transfer of mortgage-backed
securities from (to) held to
maturity...................... 1,244,945 -- (1,250,136)
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.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS
ENDED JUNE 30,
----------------------------
1997 1996
------------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 56,646 $ 125,869
Adjustments to reconcile net income
to net cash (used) provided by
operating activities:
Provision for credit losses..... 14,644 10,155
Deferred tax (benefit)
expense....................... 33,534 (86,218)
Net gains on sales of assets.... (28,139) (37,037)
Net depreciation, amortization,
and accretion................. 2,331 (10,887)
Amortization of intangibles..... 23,940 15,002
Federal Home Loan Bank stock
dividend...................... (8,426) (10,090)
Purchases of trading account
assets........................ (3,743) (10,739)
Proceeds from sales of trading
account assets................ 3,700 10,620
Originations of loans held for
sale.......................... (1,070,056) (2,268,251)
Purchases of loans held for
sale.......................... (308,457) (85,501)
Proceeds from sales of loans
held for sale................. 1,152,836 2,647,624
Change in mortgage servicing
rights........................ (172,178) (51,701)
Change in loans held for sale... 8,990 16,890
Change in interest receivable... (8,562) 22,401
Change in other assets.......... (45,737) 39,088
Change in other liabilities..... (39,481) (6,129)
Management Restricted Stock
award......................... -- 3,709
------------- -------------
Net cash (used) provided by
operating activities..... (388,158) 324,805
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in securities
purchased under agreements to
resell and federal funds
sold.......................... 97,190 (385,126)
Purchases of securities held to
maturity...................... -- (6,327)
Proceeds from maturities of
securities held to maturity... -- 6,105
Purchases of mortgage-backed
securities held to maturity... (2,134) (3,841)
Repayments of mortgage-backed
securities held to maturity... 60,931 156,456
Purchases of securities
available for sale............ (34,944) (16,029)
Proceeds from maturities of
securities available for
sale.......................... 52,600 --
Proceeds from sales of
securities available for
sale.......................... 241,929 78,509
Purchases of mortgage-backed
securities available for
sale.......................... (171,918) --
Proceeds from sales of
mortgage-backed securities
available for sale............ 6,965 295,702
Repayments of mortgage-backed
securities available for
sale.......................... 177,858 220,089
Purchases of loans held to
maturity...................... (842,270) (102,230)
Proceeds from sales of loans
held to maturity.............. 84,974 3,343
Change in loans held to
maturity...................... (46,753) 425,302
Purchases of Federal Home Loan
Bank stock.................... (16,998) --
Redemption of Federal Home Loan
Bank stock.................... 18,160 38,800
Purchases of premises and
equipment..................... (9,655) (5,022)
Proceeds from sales of real
estate owned acquired through
foreclosure................... 51,627 31,832
Proceeds from sales of servicing
rights........................ 7,112 6,174
------------- -------------
Net cash (used) provided by
investing activities..... (325,326) 743,737
------------- -------------
(CONTINUED ON FOLLOWING PAGE)
F-8
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS --(CONTINUED)
(IN THOUSANDS)
FOR THE NINE MONTHS
ENDED JUNE 30,
----------------------------
1997 1996
------------- -------------
(UNAUDITED)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in deposits.............. $ 102,130 $ (128,696)
Proceeds from Federal Home Loan
Bank advances................. 2,750,202 1,498,700
Repayment of Federal Home Loan
Bank advances................. (2,610,528) (1,998,200)
Net change in securities sold
under agreements to repurchase
and federal funds purchased... 349,096 (287,027)
Change in advances from
borrowers for taxes and
insurance..................... 17,408 (69,603)
Payment of common stock
dividends..................... (13,270) (100,000)
Proceeds from issuance of
Subordinated Notes............ 216,234 --
Repayment of Senior Notes....... (114,500) --
------------- -------------
Net cash provided (used) by
financing activities..... 696,772 (1,084,826)
------------- -------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS........................ (16,712) (16,284)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 119,523 112,931
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 102,811 $ 96,647
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION AND NONCASH
INVESTING ACTIVITIES
Cash paid for interest.......... $ 394,231 $ 434,050
Cash paid for income taxes...... 1,106 2,204
Real estate owned acquired
through foreclosure........... 51,657 55,105
Sales of real estate owned
financed by the Bank.......... 17,451 452
Securitization of loans......... 246,617 13,601
Net transfer of loans from held
to maturity................... -- 187,463
Transfer of mortgage-backed
securities from held to
maturity to available for
sale.......................... 6,843 1,244,945
Change in unrealized gains
(losses) on securities and
mortgage-backed securities
available for sale............ 8,257 3,751
See accompanying Notes to Consolidated Financial Statements.
F-9
<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. In December 1996, the Parent Company formed a new, wholly owned, Delaware
subsidiary, BNKU Holdings, Inc. ("Holdings"). After acquiring all of the
common stock of Holdings, the Parent Company contributed all of the common stock
of the Bank to Holdings, and Holdings assumed the Parent Company's obligations
for $115 million 8.05% senior notes due May 15, 1998 (the "Senior Notes"). See
Note 11. As a result of these transactions, Holdings is the sole subsidiary of
the Parent Company and the Bank is the sole subsidiary of Holdings.
The accompanying Consolidated Financial Statements include the accounts of
the Parent Company, Holdings, the Bank, and the Bank's wholly owned subsidiaries
(collectively known as the "Company"). All significant intercompany accounts
have been eliminated in consolidation. The Parent Company has no significant
assets other than the equity interest in Holdings and Holdings has no
significant assets other than the equity interest in the Bank. 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"): (1) 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; (2) 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 (3) 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 operates a 70-branch community banking network serving
approximately 216,000 households and businesses, ten commercial banking offices,
six wholesale mortgage origination offices, a mortgage servicing business, and a
financial markets business.
The accompanying Consolidated Financial Statements and information as of
June 30, 1997 and for the nine months ended June 30, 1997 and 1996 are
unaudited, and include all adjustments (consisting of only normal recurring
adjustments), that are necessary, in the opinion of management, for a fair
presentation.
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.
F-10
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Bank. The
required reserve balances were approximately $34.0 million, $48.7 million, and
$63.7 million for the periods including June 30, 1997, 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.
Prior to the implementation of Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", when certain loans were securitized, a
portion of the original loan basis was allocated to an excess servicing
receivable for all loans having a servicing fee rate greater than the "normal"
servicing fee rate. This receivable represented the present value of the
estimated future servicing revenue in excess of a "normal" service fee. The
securitized portion of the receivable was classified and accounted for as MBS in
the Consolidated Statements of Financial Condition. That portion of the
receivable not securitized was classified as other assets in the Consolidated
Statements of Financial Condition and amortized to operations over the lives of
the underlying mortgages. Pursuant to the implementation of SFAS No. 125, these
assets are now classified as MBS and securities available for sale. See
"-- Recent Accounting Standards" and Note 4. The Company reviews these assets
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.
F-11
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 warehouse loans held for sale are carried at the lower of allocated Book
Value or market value, on an aggregate basis, as determined by 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 SFAS No. 125. 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
construction, multi-family, commercial, commercial real estate, healthcare,
small business, 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
F-12
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 required mortgage
loan servicing rights to be recognized as separate assets from the related
loans, regardless of how those servicing rights were acquired. Upon origination
of a mortgage loan, the Book Value of the mortgage loan was allocated to the MSR
and to the loan (without the MSR) based on its estimated relative fair value,
provided there was a plan to sell or securitize the related loan. On January 1,
1997, the Company adopted SFAS No. 125, which superseded SFAS No. 122, and
requires, among other things, that the book value of loans be allocated between
MSRs and the related loans at the time of the loan sale or securitization, if
servicing is retained. 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.
MSRs, both OMSRs and purchased mortgage servicing rights ("PMSRs"), are
periodically evaluated for impairment based on the fair value of those rights.
The fair value of MSRs is determined by discounting the estimated 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 by
strata. 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 warehouse loans
are generally
F-13
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 loans and securities
secured by single family and multi-family properties, 0.3% 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 were
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
and included in non-interest expense on the Consolidated Statement of
Operations. Net gains on sales of certain REO properties, primarily single
family residences, are deferred (1) when such properties are acquired through
the foreclosure of loans that are part of discounted bulk purchases of loans and
(2) 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. A majority of the Company's REO is
F-14
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
single family properties held by the banking segment. The historical average
holding period for REO is six months.
OFF-BALANCE-SHEET FINANCIAL STATEMENTS
The Company enters into traditional off-balance-sheet financial instruments
such as interest rate exchange agreements ("swaps"), interest rate caps and
floors, financial options, and futures contracts in the normal course of
business in an effort to reduce its exposure to changes in interest rates. The
Company does not utilize instruments such as leveraged derivatives or structured
notes. The off-balance-sheet financial instruments utilized by the Company are
typically classified as hedges of existing assets, liabilities, or anticipated
transactions. Criteria for these methods follows:
Hedge of an Existing Asset or Liability: (1) the hedged asset or liability must
be interest rate sensitive and (2) the off-balance-sheet financial instrument
must be designated and be effective as a hedge of the asset or liability.
Hedge of Anticipated Transactions: (1) the transaction to be hedged must be
interest rate sensitive, (2) the off-balance-sheet financial instrument must be
designated and be effective as a hedge of the transaction, (3) significant
characteristics and terms of the transaction must be identified, and (4) it is
probable the transaction will occur.
Gains or losses on early termination of financial contracts, if any, are
amortized over the remaining terms of the hedged items. Generally, the Company
terminates the off-balance-sheet financial instrument when the hedged asset or
liability is sold or if the anticipated transaction is not likely to occur. In
these instances, the gain or loss on the financial contract is recognized in
income.
Off-balance-sheet financial instruments that do not satisfy the criteria
for classification as hedges above, including those used for trading activities,
are carried at market value. Changes in market value are recognized in
non-interest income.
INTEREST RATE EXCHANGE AGREEMENTS, CAPS, FLOORS AND OPTIONS. Accrual
accounting is applied for those financial contracts classified as hedges as
described above. Amounts receivable and payable are offset against interest
income or expense on the hedged items. Fees incurred to enter into the financial
contracts are amortized over the lives of the contracts as a component of the
income or expense on the asset or liability hedged.
FINANCIAL FUTURES AND FORWARD DELIVERY CONTRACTS. Deferral accounting is
applied for those financial contracts classified as hedges as described above.
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. 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.
STOCK-BASED COMPENSATION
On October 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation". 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 by
the Company and make pro forma disclosures of net income and earnings per common
share ("EPS") under the fair value based method of accounting. The Company
will continue accounting for stock-based employee compensation plans in
accordance with Accounting Principles Board
F-15
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and is
disclosing pro forma fair value information as prescribed by SFAS No. 123. See
Note 13.
FEDERAL INCOME TAXES
The Parent Company, Holdings, 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, Holdings, 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. A valuation allowance reduces the net deferred
tax asset to an amount management believes will more likely than not be
realized. See Note 14.
RECENT ACCOUNTING STANDARDS
On October 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement requires that long-lived assets and certain identified
intangibles held and used by an entity, along with goodwill related to those
assets, be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss must be recognized if the estimate of the future cash flows
(undiscounted and without interest charges) resulting from the use of the asset
and its eventual disposition is less than the carrying amount of the asset. The
adoption of this pronouncement did not have a material effect on the Company's
Consolidated Financial Statements.
On January 1, 1997, the Company adopted SFAS No. 125. 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 distinguishes between transfers of
financial assets that are sales and transfers that are secured borrowings. This
statement superseded SFAS No. 122 and requires, among other things, that the
book value of loans be allocated between MSRs and the related loans at the time
of the loan sale or securitization, if servicing is retained. SFAS No. 125 also
requires that assets be classified as available for sale or trading if the
assets can be settled in such a way that the holder may not recover
substantially all of their recorded investment. See Note 3 for certain
reclassifications made pursuant to the implementation of SFAS No. 125. Under
SFAS No. 127, "Deferral of Certain Provisions of FASB Statement No. 125",
certain provisions of SFAS No. 125 are not effective until January 1, 1998. The
deferred provisions relate to: (1) secured borrowings and collateral for all
transactions and (2) transfers of financial assets for repurchase agreements,
dollar rolls, securities lending, and similar transactions. Implementation of
the deferred portion of SFAS No. 125 should have no material effect on the
Company's Consolidated Financial Statements.
F-16
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, SFAS No. 128, "Earnings per Share" was issued. This
statement establishes standards for computing and presenting EPS. It replaces
the presentation of primary EPS with basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
entities with complex capital structures and requires a reconciliation of the
basic EPS computation to the diluted EPS computation. This statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Earlier application is not permitted and all
prior period EPS data must be restated.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR ENDED SEPTEMBER
ENDED JUNE 30, 30,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
EPS as reported...................... $ 1.79 $ 4.13 $ 3.87 $ 1.35 $ 3.55
Pro forma EPS under SFAS No. 128
(unaudited)
Basic........................... 1.79 4.36 4.06 1.45 3.78
Diluted......................... 1.77 4.13 3.87 1.35 3.55
</TABLE>
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued.
This statement requires that all components of comprehensive income and total
comprehensive income be reported on one of the following: (1) the statement of
operations, (2) the statement of stockholders' equity, or (3) a new separate
statement of comprehensive income. Comprehensive income is comprised of net
income and all changes to stockholders' equity, except those due to investments
by owners (changes in paid in capital) and distributions to owners (dividends).
This statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. This statement does not change the current
accounting treatment for components of comprehensive income (i.e. changes in
unrealized gains or losses on securities and MBS available for sale) and thus
the implementation of SFAS No. 130 should have no material impact on the
Company's Consolidated Financial Statements.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information" was issued. This statement requires public companies
to report certain information about their operating segments in their annual
financial statements and quarterly reports issued to shareholders. It also
requires public companies to report certain information about their products and
services, the geographic areas in which they operate, and their major customers.
This statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is encouraged. Implementation of SFAS No. 131 should have no
material effect on the Company's Consolidated Financial Statements.
EARNINGS PER COMMON SHARE
EPS is calculated by dividing net income (adjusted for earnings on the
common stock equivalents attributable to the Bank's Warrant for periods prior to
the Warrant redemption in August 1996) by the weighted-average number of shares
of common stock 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. See Note 16.
RECLASSIFICATIONS
Certain amounts within the accompanying Consolidated Financial Statements
and the related Notes have been reclassified to conform to the current
presentation. Such reclassifications had no effect on previously presented net
income or retained earnings.
F-17
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND
FEDERAL FUNDS SOLD
<TABLE>
<CAPTION>
FOR THE
NINE
MONTHS
ENDED FOR THE YEAR ENDED SEPTEMBER 30,
JUNE 30, ----------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REPURCHASE AGREEMENTS
Balance outstanding at
period-end.................... $ 555,059 $ 649,249 $ 428,052 $ 248,710
Fair value of collateral at
period-end.................... 563,371 693,306 449,152 255,210
Maximum outstanding at any
month-end..................... 582,236 785,178 602,274 768,200
Daily average balance........... 530,970 608,102 420,355 422,745
Average interest rate........... 5.79% 5.83% 6.28% 4.04%
FEDERAL FUNDS SOLD
Balance outstanding at
period-end.................... $ 22,000 $ 25,000 $ 43,000 $ 110,000
Maximum outstanding at any
month-end..................... 85,000 110,000 75,000 110,000
Daily average balance........... 48,209 50,418 37,493 16,948
Average interest rate........... 5.22% 5.36% 5.68% 4.01%
</TABLE>
The repurchase agreements outstanding at June 30, 1997 and 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 outstanding at June 30, 1997
matured on or before July 23, 1997, and those outstanding 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 June 30, 1997 and September 30,
1996, the following concentrations of repurchase agreements and federal funds
sold outstanding with individual counterparties exceeded ten percent of
stockholders' equity:
AT AT
JUNE 30, SEPTEMBER 30,
1997 1996
---------- -------------
CARRYING VALUE
--------------------------
(IN THOUSANDS)
Salomon Brothers Holding Company
Inc. .............................. $ 100,860 $ 107,000
Paine Webber Real Estate Securities
Inc................................ 108,972 107,000
Merrill Lynch Mortgage Capital
Inc................................ 60,000 25,000
Donaldson, Lufkin, and Jenrette
Mortgage Capital................... 96,020 95,524
Lehman Commercial Paper Inc.......... 49,801 77,000
Bear Stearns and Company, Inc........ -- 106,547
---------- -------------
$ 415,653 $ 518,071
========== =============
F-18
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SECURITIES
<TABLE>
<CAPTION>
AT JUNE 30,
--------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
HELD TO MATURITY
Federal agency.................. $ 162 $ 4 $-- $ 166 $ 162
========== ========== ==========
AVAILABLE FOR SALE
Federal agency.................. 30,776 $ 68 $ 1 30,843
U.S. Treasury notes............. 24,949 188 -- 25,137
---------- ---------- ---------- ----------
55,725 $ 256 $ 1 55,980 $ 55,980
---------- ========== ========== ---------- ==========
Total securities........... $ 55,887 $ 56,146
========== ==========
AT SEPTEMBER 30,
--------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
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>
F-19
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the nine months ended June 30, 1997, securities available for sale
were sold for a net gain of $2.2 million. 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. There were no securities pledged toward margin
requirements on interest rate swaps at June 30, 1997. See Note 4 for certain
reclassifications made pursuant to the implementation of SFAS No. 125.
Securities outstanding at June 30, 1997 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........................ $-- $ -- $ -- $ --
Due from one to five years..................... 162 166 24,949 25,137
Due from five to ten years..................... -- -- 729 724
Due in more than ten years..................... -- -- 30,047 30,119
---------- --------- ---------- ---------
$ 162 $ 166 $ 55,725 $ 55,980
========== ========= ========== =========
</TABLE>
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-20
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. MORTGAGE-BACKED SECURITIES
<TABLE>
<CAPTION>
AT JUNE 30,
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
------------ ---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
HELD TO MATURITY
Agency
Fixed-rate.................... $ 2,127 $ -- $ -- $ 2,127
CMOs -- fixed-rate............ 20 -- -- 20
Non-agency
Adjustable-rate............... 466,277 612 16,040 450,849
CMOs -- fixed-rate............ 94,952 -- 4,285 90,667
Other........................... (7) 53 -- 46
------------ ---------- ---------- ------------
Held to maturity........... 563,369 $ 665 $ 20,325 543,709 $ 563,369
------------ ========== ========== ------------ ============
AVAILABLE FOR SALE
Agency
Fixed-rate.................... 10 $ 255 $ -- 265
Adjustable-rate............... 252,231 3,503 -- 255,734
CMOs--fixed-rate.............. 46,392 24 -- 46,416
CMOs -- adjustable-rate....... 323,454 1,557 351 324,660
Non-agency
Fixed-rate.................... 47,678 1,558 -- 49,236
Adjustable-rate............... 303,587 2,235 644 305,178
CMOs -- fixed-rate............ 11,139 7,153 147 18,145
CMOs -- adjustable-rate....... 35,107 460 74 35,493
Other........................... 3,361 -- -- 3,361
------------ ---------- ---------- ------------
Available for sale......... 1,022,959 $ 16,745 $ 1,216 1,038,488 1,038,488
------------ ========== ========== ------------ ============
Total mortgage-backed
securities............... $ 1,586,328 $ 1,582,197
============ ============
</TABLE>
F-21
<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>
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
============ ============
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
============ ============
</TABLE>
F-22
<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
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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>
As a result of the implementation of SFAS No. 125, on January 1, 1997, the
Company reclassified $6.8 million from MBS held to maturity and $15.5 million
from other assets to MBS and securities available for sale. An unrealized gain
of $8.2 million before tax, or $5.1 million after tax, was recorded in
stockholders' equity.
In November 1995, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" was issued.
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 Financial Accounting Standards Board's
("FASB") 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
F-23
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 June 30, 1997 and September 30, 1996, MBS with carrying values totalling
$1,240.0 million and $1,030.9 million, respectively, and fair values totalling
$1,219.4 million and $1,020.4 million, respectively, were used to collateralize
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)
--------- --------- ----------- ------- --------
Market value changes and the
effect of prepayments......... 3,698 -- 2,538 (2,339) 3,897
(Gains) losses realized due to
sales......................... (73) -- (2,200) 852 (1,421)
Amortization of held to
maturity...................... -- 1,055 -- (396) 659
Implementation of SFAS No.
125........................... 8,028 -- 167 (3,073) 5,122
--------- --------- ----------- ------- --------
Balance at June 30, 1997............. $ 15,529 $ (6,144) $ 255 $(3,616) $ 6,024
========= ========= =========== ======= ========
</TABLE>
F-24
<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 the nine months ended June 30, 1997, fiscal 1996 and 1995. During the
nine months ended June 30, 1997 and fiscal 1996, the banking segment securitized
small business loans into securities totalling $241.7 million and $30.5 million,
respectively. There were no small business 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
Sales........................... -- -- --
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. These assets are currently classified as securities and MBS available
for sale pursuant to SFAS No. 125.
The following table provides information related to the sales of MBS
available for sale.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- ---------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proceeds from sales............................. $ 6,965 $ 295,702 $ 295,702 $ 77,626 $ 186,190
Gross gains on sales............................ 73 3,529 3,529 217 16,300
Gross losses on sales........................... -- 817 817 201 4,812
</TABLE>
F-25
<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,
AT JUNE 30, --------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
Single family................... $6,112,617 $ 6,152,504 $ 7,061,088 $ 4,203,614 $ 2,847,602 $ 2,302,073
Single family construction...... 367,120 242,525 115,436 57,786 35,904 31,920
Consumer........................ 290,435 173,518 123,096 108,179 57,902 21,732
Multi-family.................... 597,389 479,833 356,587 256,362 94,120 50,741
Multi-family construction....... 89,049 31,355 35,430 20,437 17,935 --
Commercial real estate.......... 99,461 10,538 27,393 61,919 49,510 58,521
Commercial real estate
construction.................. 41,788 21,551 3,613 -- -- --
Commercial...................... 31,919 -- -- -- -- --
Healthcare and healthcare
construction.................. 54,358 8,750 -- -- -- --
Small business.................. 42,271 22,798 6,495 -- -- --
Mortgage banker finance line of
credit........................ 309,417 139,872 109,339 147,754 385,548 --
------------- ------------ ------------ ------------ ------------ ------------
8,035,824 7,283,244 7,838,477 4,856,051 3,488,521 2,464,987
Allowance for credit losses..... (38,556) (39,633) (36,763) (23,378) (27,970) (25,529)
Accretable unearned discounts
and deferred loan origination
fees.......................... (6,002) (16,458) (38,038) (52,345) (26,111) (53,576)
------------- ------------ ------------ ------------ ------------ ------------
Held to maturity........... 7,991,266 7,227,153 7,763,676 4,780,328 3,434,440 2,385,882
------------- ------------ ------------ ------------ ------------ ------------
HELD FOR SALE
Single family warehouse......... 38,671 260,745 411,287 252,153 899,602 1,016,854
Single family................... 200,678 -- -- -- 528,579 783,002
Multi-family.................... -- -- 87,781 12,535 -- --
Small business.................. 33,653 32,790 825 -- -- --
------------- ------------ ------------ ------------ ------------ ------------
273,002 293,535 499,893 264,688 1,428,181 1,799,856
Allowance for credit losses..... (2) (27) (38) (76) (1,894) (2,685)
Unrealized losses............... -- -- (1,142) -- -- --
Accretable unearned premiums
(discounts) and deferred loan
origination costs............. 7,638 (1,173) (2,149) 1,234 1,652 (81,337)
------------- ------------ ------------ ------------ ------------ ------------
Held for sale.............. 280,638 292,335 496,564 265,846 1,427,939 1,715,834
------------- ------------ ------------ ------------ ------------ ------------
Total loans................ $8,271,904 $ 7,519,488 $ 8,260,240 $ 5,046,174 $ 4,862,379 $ 4,101,716
============= ============ ============ ============ ============ ============
SUPPLEMENTAL INFORMATION
Non-accretable unearned
discounts..................... $ (1,829) $ (7,075) $ (15,423) $ (31,917) $ (42,975) $ (41,060)
Undisbursed portion of loans in
process....................... (292,002) (262,081) (179,737) (136,797) (39,162) (41,534)
</TABLE>
F-26
<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 5% of loans or greater at June 30, 1997 and
September 30, 1996. The geographic data was based on gross loan principal and
excludes non-accretable unearned discounts.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
---------------------------------------------------------------------------------------
SINGLE COMMERCIAL
FAMILY SINGLE REAL ESTATE SINGLE TOTAL NON-REAL
AND FAMILY MULTI- AND FAMILY REAL ESTATE ESTATE
STATE CONSUMER CONSTRUCTION FAMILY HEALTHCARE WAREHOUSE LOANS LOANS
- ------------------------------------- --------- ------------ --------- ------------ --------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
California........................... $3,292,077 $ -- $ 62,186 $ 18,660 $ -- $3,372,923 $ 89
Texas................................ 833,413 169,335 253,406 73,249 -- 1,329,403 148,268
Florida.............................. 372,110 50,167 23,873 17,271 -- 463,421 52
Other................................ 2,002,317 147,618 346,989 119,775 38,671 2,655,370 341,129
--------- ------------ --------- ------------ --------- ----------- --------
Total.............................. $6,499,917 $367,120 $ 686,454 $228,955 $ 38,671 $7,821,117 $489,538
========= ============ ========= ============ ========= =========== ========
% of Total........................... 78.21% 4.42% 8.26% 2.75% 0.47 % 94.11% 5.89%
========= ============ ========= ============ ========= =========== ========
</TABLE>
% OF
STATE TOTAL TOTAL
- ------------------------------------- --------- ---------
(DOLLARS IN THOUSANDS)
California........................... $3,373,012 40.59%
Texas................................ 1,477,671 17.78
Florida.............................. 463,473 5.58
Other................................ 2,996,499 36.05
--------- ---------
Total.............................. $8,310,655 100.00%
========= =========
% of Total........................... 100.00%
=========
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
---------------------------------------------------------------------------------------
SINGLE COMMERCIAL
FAMILY SINGLE REAL ESTATE SINGLE TOTAL NON-REAL
AND FAMILY MULTI- AND FAMILY REAL ESTATE ESTATE
STATE CONSUMER CONSTRUCTION FAMILY HEALTHCARE 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
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>
% OF
STATE TOTAL TOTAL
- ------------------------------------- --------- ---------
(DOLLARS IN THOUSANDS)
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 June
30, 1997, were as follows:
<TABLE>
<CAPTION>
PRINCIPAL PAYMENTS CONTRACTUALLY DUE IN YEARS ENDED JUNE 30,
---------------------------------------------------------------------------
2001- 2003- 2008- 2013 AND
1998 1999 2000 2002 2007 2012 THEREAFTER TOTAL
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Single family........................ $ 86,267 $ 93,189 $ 100,665 $ 226,206 $ 744,753 $1,095,454 $3,766,083 $6,112,617
Single family construction........... 367,120 -- -- -- -- -- -- 367,120
Consumer............................. 61,989 16,780 18,387 42,220 135,007 11,018 5,034 290,435
Multi-family......................... 66,878 72,544 78,691 144,225 218,398 16,653 -- 597,389
Multi-family construction............ 54,841 34,208 -- -- -- -- -- 89,049
Commercial real estate............... 10,278 11,182 12,166 27,635 36,574 1,626 -- 99,461
Commercial real estate
construction....................... 31,316 10,472 -- -- -- -- -- 41,788
Commercial........................... 31,919 -- -- -- -- -- -- 31,919
Healthcare and healthcare
construction....................... 18,434 16,578 171 390 18,785 -- -- 54,358
Small business....................... 7,028 7,756 8,559 18,212 716 -- -- 42,271
Mortgage banker finance line of
credit............................. 267,674 34,804 -- 6,939 -- -- -- 309,417
--------- --------- --------- --------- --------- --------- --------- ---------
Total............................ $1,003,744 $ 297,513 $ 218,639 $ 465,827 $1,154,233 $1,124,751 $3,771,117 $8,035,824
========= ========= ========= ========= ========= ========= ========= =========
TYPE OF INTEREST
Fixed-rate loans..................... $ 52,902 $ 49,204 $ 53,519 $ 121,539 $ 570,075 $ 271,772 $ 482,802 $1,601,813
Adjustable-rate loans................ 950,842 248,309 165,120 344,288 584,158 852,979 3,288,315 6,434,011
--------- --------- --------- --------- --------- --------- --------- ---------
Total............................ $1,003,744 $ 297,513 $ 218,639 $ 465,827 $1,154,233 $1,124,751 $3,771,117 $8,035,824
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
F-27
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
Small business....................... 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 June 30, 1997 and September 30,
1996.
PRINCIPAL BALANCE OF NONACCRUAL LOANS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, ----------------------------------
1997 1996 1995 1994
----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
NONACCRUAL LOANS
Single family................... $ 51,186 $ 92,187 $ 83,954 $ 85,722
Single family construction...... -- -- 505 --
Consumer........................ 855 1,039 563 506
Multi-family.................... 16 144 213 3,802
Commercial real estate and small
business...................... 2,622 350 -- 2,342
----------- ---------- ---------- ----------
54,679 93,720 85,235 92,372
Discounts....................... (818) (4,077) (9,727) (16,053)
----------- ---------- ---------- ----------
Net nonaccrual loans............ $ 53,861 $ 89,643 $ 75,508 $ 76,319
=========== ========== ========== ==========
ALLOWANCE FOR CREDIT LOSSES TO NET
NONACCRUAL LOANS
Single family................... 49.89% 32.46% 39.74% 22.70%
Total........................... 71.59 44.24 48.74 30.73
</TABLE>
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 June 30, 1997, and September 30, 1996 and 1995.
If the nonaccrual loans as of June 30, 1997 and September 30, 1996 had been
performing in accordance with their original terms throughout the nine months
ended June 30, 1997, and fiscal 1996, interest income recognized would have been
$3.2 million and $8.3 million, respectively. The actual interest income
recognized on these loans for the nine months ended June 30, 1997 was $1.0
million and for fiscal 1996 was $3.4 million. No commitments exist to lend
additional funds to borrowers whose loans were on nonaccrual status at June 30,
1997 and September 30, 1996.
F-28
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1997, the recorded investment in impaired loans pursuant to
SFAS No. 114 totalled $3.6 million and the average outstanding balance for the
nine months ended June 30, 1997 was $3.6 million. 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 determined in accordance with SFAS No. 114 was
required on these impaired loans because the measured values of the loans
exceeded the recorded investments in the loans.
Interest income of $243,000 was recognized on impaired loans during the
nine months ended June 30, 1997 of which $199,000 was collected in cash.
Interest income of $393,000 was recognized on impaired loans during fiscal 1996,
of which $355,000 was collected in cash.
F-29
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
LOANS HELD TO MATURITY
-------------------------------------------------------------------------------------
MORTGAGE
BANKER
SINGLE MULTI- FINANCE
SINGLE FAMILY MULTI- FAMILY LINE OF
FAMILY CONSTRUCTION CONSUMER FAMILY CONSTRUCTION COMMERCIAL(1) CREDIT
------- ------------ -------- ------ ------------ ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1991................. $ 8,956 $ 186 $ 81 $ 144 $-- $ 552 $--
Provision........................ 14,156 135 39 75 -- 6,261 --
Charge-offs...................... (2,835) -- (76) -- -- -- --
Recoveries....................... 8 -- -- -- -- -- --
Other............................ (6,817) -- 100 -- -- 4,564 --
------- ------------ ------- ------ ------------ ------------- ---------
Balance at
September 30, 1992................. 13,468 321 144 219 -- 11,377 --
Provision........................ 1,824 56 264 1,178 107 (25) 944
Charge-offs...................... (2,167) (71) (72) -- -- -- --
Recoveries....................... 6 -- 19 -- -- -- --
Other............................ 378 -- -- (31) 1 30 --
------- ------------ ------- ------ ------------ ------------- ---------
Balance at
September 30, 1993................. 13,509 306 355 1,366 108 11,382 944
Provision........................ 2,369 93 2,794 1,187 28 875 (260)
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
Provision........................ 18,493 (38) 4,178 524 72 1,374 (274)
Charge-offs...................... (4,840) -- (2,847) -- -- (3,389) --
Recoveries....................... 36 -- 94 2 -- -- --
------- ------------ ------- ------ ------------ ------------- ---------
Balance at
September 30, 1995................. 29,594 361 3,247 2,855 199 97 410
Provision........................ 6,771 332 7,823 1,263 33 256 2
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
======= ============ ======= ====== ============ ============= =========
Balance at
September 30, 1995................. $29,594 $ 361 $ 3,247 $2,855 $ 199 $ 97 $ 410
Provision........................ 4,132 223 5,400 225 33 155 2
Charge-offs...................... (5,436) -- (4,588) -- -- -- --
Recoveries....................... 18 -- 106 -- -- -- --
------- ------------ ------- ------ ------------ ------------- ---------
Balance at
June 30, 1996...................... $28,308 $ 584 $ 4,165 $3,080 $ 232 $ 252 $ 412
======= ============ ======= ====== ============ ============= =========
Balance at
September 30, 1996................. $28,645 $ 693 $ 5,219 $4,118 $ 232 $ 314 $ 412
Provision........................ 7,600 475 4,385 646 211 1,037 227
Charge-offs...................... (10,813) (73) (4,679) (148) -- (315) --
Recoveries....................... 31 -- 253 -- -- 3 --
Other............................ 83 -- -- -- -- -- --
------- ------------ ------- ------ ------------ ------------- ---------
Balance at
June 30, 1997...................... $25,546 $1,095 $ 5,178 $4,616 $ 443 $ 1,039 $ 639
======= ============ ======= ====== ============ ============= =========
</TABLE>
LOANS
HELD FOR SALE
-------------------
SINGLE
FAMILY SINGLE
WAREHOUSE FAMILY TOTAL
--------- ------- --------
Balance at
September 30, 1991................. $ 229 $ -- $ 10,148
Provision........................ 467 -- 21,133
Charge-offs...................... (118) -- (3,029)
Recoveries....................... -- -- 8
Other............................ -- 2,107 (46)
--------- ------- --------
Balance at
September 30, 1992................. 578 2,107 28,214
Provision........................ (265) -- 4,083
Charge-offs...................... (148) -- (2,458)
Recoveries....................... -- -- 25
Other............................ -- (378) --
--------- ------- --------
Balance at
September 30, 1993................. 165 1,729 29,864
Provision........................ (89) -- 6,997
Charge-offs...................... -- -- (13,465)
Recoveries....................... -- -- 58
Other............................ -- (1,729) --
--------- ------- --------
Balance at
September 30, 1994................. 76 -- 23,454
Provision........................ (36) -- 24,293
Charge-offs...................... (2) -- (11,078)
Recoveries....................... -- -- 132
--------- ------- --------
Balance at
September 30, 1995................. 38 -- 36,801
Provision........................ (11) -- 16,469
Charge-offs...................... -- -- (13,785)
Recoveries....................... -- -- 175
--------- ------- --------
Balance at
September 30, 1996................. $ 27 $ -- $ 39,660
========= ======= ========
Balance at
September 30, 1995................. $ 38 $ -- $ 36,801
Provision........................ (15) -- 10,155
Charge-offs...................... -- -- (10,024)
Recoveries....................... -- -- 124
--------- ------- --------
Balance at
June 30, 1996...................... $ 23 $ -- $ 37,056
========= ======= ========
Balance at
September 30, 1996................. $ 27 $ -- $ 39,660
Provision........................ 63 -- 14,644
Charge-offs...................... (5) -- (16,033)
Recoveries....................... -- -- 287
Other............................ (83) -- --
--------- ------- --------
Balance at
June 30, 1997...................... $ 2 $ -- $ 38,558
========= ======= ========
- ------------
(1) Includes commercial real estate, commercial, small business, and healthcare
loans.
F-30
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LOAN SERVICING
SINGLE FAMILY SERVICING PORTFOLIO
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, ----------------------------
1997 1996 1995
----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
OWNED LOANS.......................... $ 6,736,055 $ 6,694,634 $ 7,602,869
Less: Loans serviced by
others........................ 2,729,888 2,700,049 3,476,733
----------- ------------- -------------
Total owned loans serviced
by Company............... 4,006,167 3,994,585 4,126,136
----------- ------------- -------------
LOANS SERVICED FOR OTHERS
Purchased servicing rights...... 16,118,251 4,841,534 4,652,081
Loans originated and sold with
servicing retained............ 3,782,779 3,008,615 1,186,951
Servicing purchases -- not yet
transferred to Company........ (7,135,649) -- --
Servicing sales -- not yet
transferred by Company........ 48,025 464,053 1,045,839
Other........................... 46,705 349,389 276,457
----------- ------------- -------------
Total loans serviced for
others................... 12,860,111 8,663,591 7,161,328
MORTGAGE-BACKED SECURITIES
SECURITIZED BY BANKING SEGMENT..... 736,147 831,197 1,360,443
----------- ------------- -------------
Total servicing
portfolio................ $17,602,425 $ 13,489,373 $ 12,647,907
=========== ============= =============
</TABLE>
The table above includes single family, single family construction, and
single family warehouse loans. In addition to the single family servicing
portfolio, there were $244.1 million, $283 million, and $177 million of
multi-family loans serviced for others at June 30, 1997, September 30, 1996, and
1995, respectively.
FAIR VALUE OF SINGLE FAMILY SERVICING PORTFOLIO
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, ----------------------------
1997 1996 1995
----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
PRINCIPAL
Total loans serviced for
others........................ $12,860,111 $ 8,663,591 $ 7,161,328
Mortgage-backed securities
securitized by banking
segment....................... 736,147 831,197 1,360,443
Servicing purchases -- not yet
transferred to Company........ 7,135,649 -- --
Servicing sales -- not yet
transferred by Company........ (48,025) (464,053) (1,045,839)
Single family warehouse loans
subject to SFAS No. 122....... -- 260,745 411,287
----------- ------------- -------------
Total single family
servicing portfolio, as
adjusted................. $20,683,882 $ 9,291,480 $ 7,887,219
=========== ============= =============
FAIR VALUE........................... $ 320,793 $ 168,971 $ 122,250
----------- ------------- -------------
BOOK VALUE
OMSR............................ 71,377 62,571 23,062
PMSR............................ 203,603 60,821 52,035
----------- ------------- -------------
Total book value........... 274,980 123,392 75,097
----------- ------------- -------------
Fair value in excess of
book value (see Note
12)...................... $ 45,813 $ 45,579 $ 47,153
=========== ============= =============
</TABLE>
F-31
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGE SERVICING RIGHTS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------ ------------------------------------------
1997 1996 1996 1995
-------------------- -------------------- -------------------- --------------------
OMSRS PMSRS OMSRS PMSRS OMSRS PMSRS OMSRS PMSRS
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period....... $ 62,571 $ 60,821 $ 23,062 $ 52,035 $ 23,062 $ 52,035 $ -- $ 56,677
Additions........................ 14,917 158,187 38,168 21,492 48,412 23,535 28,694 12,546
Amortization..................... (6,111) (14,479) (2,606) (6,991) (4,107) (9,740) (1,010) (9,821)
Deferred hedging gains........... -- (926) -- (1,993) -- (2,140) -- (7,173)
Sales............................ -- -- (6,126) (122) (4,796) (2,869) (4,622) (194)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at end of period............. $ 71,377 $ 203,603 $ 52,498 $ 64,421 $ 62,571 $ 60,821 $ 23,062 $ 52,035
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1994
---------
PMSRS
Balance at beginning of period....... $ 10,650
Additions........................ 50,955
Amortization..................... (4,928)
Deferred hedging gains........... --
Sales............................ --
---------
Balance at end of period............. $ 56,677
=========
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-32
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DEPOSITS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, ------------------------------------------------------------------
1997 1996 1995 1994
-------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NON-INTEREST BEARING DEPOSITS........ $ 334,942 -- % $ 284,304 -- % $ 181,196 -- % $ 76,498 -- %
INTEREST-BEARING DEPOSITS
Transaction accounts............. 252,913 1.00 211,976 1.00 219,307 1.50 233,666 1.49
Insured money fund accounts
Consumer....................... 728,475 4.42 588,585 4.36 397,473 3.73 407,029 3.12
Commercial..................... 860,289 5.63 810,743 5.29 857,669 5.82 416,571 4.84
--------- -------- --------- -------- --------- ---- --------- ----
Subtotal..................... 1,588,764 5.08 1,399,328 4.90 1,255,142 5.16 823,600 3.99
--------- -------- --------- -------- --------- ---- --------- ----
Savings accounts................. 126,317 2.33 130,137 2.48 144,301 2.73 222,769 2.60
Certificates of deposit
Consumer....................... 2,859,758 5.71 2,911,682 5.71 3,063,631 5.84 2,949,715 4.88
Commercial..................... 4,477 5.10 2,667 4.88 2,273 5.36 -- --
Wholesale...................... 82,717 9.59 207,851 10.28 316,370 9.06 457,956 7.92
--------- -------- --------- -------- --------- ---- --------- ----
Subtotal..................... 2,946,952 5.82 3,122,200 6.01 3,382,274 6.14 3,407,671 5.29
--------- -------- --------- -------- --------- ---- --------- ----
Total interest-bearing
deposits................... 4,914,946 5.24 4,863,641 5.38 5,001,024 5.59 4,687,706 4.74
--------- -------- --------- -------- --------- ---- --------- ----
Total deposits............... $5,249,888 4.90% $5,147,945 5.08% $5,182,220 5.40% $4,764,204 4.67%
========= ======== ========= ======== ========= ==== ========= ====
Consumer............................. $4,115,197 $3,939,631 $3,868,498 $3,834,239
Commercial........................... 1,051,974 1,000,463 997,352 472,009
Wholesale............................ 82,717 207,851 316,370 457,956
--------- --------- --------- ---------
Total deposits............... $5,249,888 $5,147,945 $5,182,220 $4,764,204
========= ========= ========= =========
</TABLE>
At June 30, 1997 and 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 JUNE 30,
------------------------------------------------------------------------
STATED RATE 1998 1999 2000 2001 2002 THEREAFTER TOTAL
- ------------------------------------- ------------ ---------- ---------- --------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
2.99% and below...................... $ 3,957 $ -- $ -- $ -- $ -- $-- $ 3,957
3.00% to 3.99%....................... 8,268 8 -- -- -- 3 8,279
4.00% to 4.99%....................... 200,700 39,032 949 2,477 9 -- 243,167
5.00% to 5.99%....................... 1,274,841 591,752 32,388 37,030 30,209 238 1,966,458
6.00% to 6.99%....................... 134,824 265,958 88,745 9,987 100,304 396 600,214
7.00% to 7.99%....................... 7,497 5,153 23,085 1,673 10,973 132 48,513
8.00% to 8.99%....................... 833 3,858 2,955 480 106 25 8,257
9.00% to 9.99%....................... 4,591 5,517 14 141 -- 308 10,571
10.00% to 10.99%..................... 8,391 23,042 173 593 -- 228 32,427
Over 10.99%.......................... 24,806 8 295 -- -- -- 25,109
------------ ---------- ---------- --------- ---------- ---------- ------------
$ 1,668,708 $ 934,328 $ 148,604 $ 52,381 $ 141,601 $1,330 $ 2,946,952
============ ========== ========== ========= ========== ========== ============
</TABLE>
F-33
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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>
Scheduled maturities of CDs of $100,000 or more outstanding at June 30,
1997 and September 30, 1996 were as follows:
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT SEPTEMBER 30, 1996
--------------------- ---------------------
NUMBER OF DEPOSIT NUMBER OF DEPOSIT
ACCOUNTS AMOUNT ACCOUNTS AMOUNT
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Three months or less................. 719 $ 76,735 1,234 $130,243
Over three through six months........ 671 73,427 551 57,661
Over six through twelve months....... 1,035 109,694 957 101,299
Over twelve months................... 2,133 224,797 1,813 190,973
--------- -------- --------- --------
Total...................... 4,558 $484,653 4,555 $480,176
========= ======== ========= ========
</TABLE>
INTEREST EXPENSE ON DEPOSITS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Transaction and insured money fund
accounts........................... $ 61,848 $ 52,092 $ 71,693 $ 61,232 $ 22,261
Savings accounts..................... 2,316 2,749 3,598 4,715 7,311
Certificates of deposit.............. 130,943 149,297 196,929 198,419 179,462
---------- ---------- ---------- ---------- ----------
Total........................... $ 195,107 $ 204,138 $ 272,220 $ 264,366 $ 209,034
========== ========== ========== ========== ==========
</TABLE>
F-34
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FEDERAL HOME LOAN BANK ADVANCES
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED FOR THE YEAR ENDED SEPTEMBER 30,
JUNE 30, ----------------------------------------
1997 1996 1995 1994
----------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Maximum outstanding at any
month-end.......................... $3,936,551 $ 4,384,798 $ 4,386,605 $ 2,697,829
Daily average balance................ 3,696,314 4,073,297 3,560,844 2,285,630
Average interest rate................ 5.63% 6.07% 6.31% 3.98%
</TABLE>
The aggregate amounts of principal maturities for FHLB advances for the periods
indicated were as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, -------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------ -------- ------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996................................. $ -- -- % $ -- -- % $ 2,391,885 6.22%
1997................................. -- -- 2,564,095 5.82 1,855,765 6.33
1998................................. 1,065,259 5.84 905,046 5.47 115,000 6.60
1999................................. 1,058,256 5.70 8,700 7.65 8,700 7.65
2000................................. 660,200 5.71 2,700 7.80 2,700 7.80
2001................................. 304,645 5.81 7,145 8.16 4,800 7.92
2002 and Thereafter.................. 541,700 5.67 2,700 8.04 5,045 8.33
------------ -------- ------------ -------- ------------ --------
Total...................... $ 3,630,060 5.75% $ 3,490,386 5.74% $ 4,383,895 6.28%
============ ======== ============ ======== ============ ========
</TABLE>
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
AND FEDERAL FUNDS PURCHASED
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED FOR THE YEAR ENDED SEPTEMBER 30,
JUNE 30, --------------------------------------
1997 1996 1995 1994
------------ ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVERSE REPURCHASE AGREEMENTS
Balance outstanding at
period-end.................... $1,181,382 $ 832,286 $ 1,172,533 $ 553,000
Fair value of collateral at
period-end.................... 1,219,361 1,020,405 1,239,527 673,000
Maximum outstanding at any
month-end..................... 1,181,382 1,096,508 1,355,540 553,000
Daily average balance........... 933,891 955,681 887,932 273,899
Average interest rate........... 5.60% 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........... 275 27 521 767
Average interest rate........... 5.27% 6.02% 5.95% 3.73%
</TABLE>
F-35
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of reverse repurchase agreements outstanding at June
30, 1997 and September 30, 1996 were as follows:
AT JUNE 30, 1997 AT SEPTEMBER 30, 1996
---------------- ---------------------
(IN THOUSANDS)
October 1996...................... $ -- $ 472,286
March 1997........................ -- 360,000
July 1997......................... 751,708 --
September 1997.................... 360,000 --
December 1997..................... 69,674 --
---------------- ---------------------
$1,181,382 $ 832,286
================ =====================
The counterparties to all reverse repurchase agreements at June 30, 1997
and 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 June 30,
1997 and September 30, 1996, the reverse repurchase agreements were outstanding
with the following counterparties:
AT JUNE 30, 1997 AT SEPTEMBER 30, 1996
----------------- ---------------------
CARRYING VALUE
------------------------------------------
(IN THOUSANDS)
Morgan Stanley and Co.
Incorporated..................... $ 360,000 $ 360,000
Credit Suisse First Boston Inc..... 57,501 44,215
Donaldson, Lufkin, and Jenrette
Securities Corporation........... 292,528 301,524
Goldman, Sachs and Co.............. 362,381 57,000
Federal Home Loan Bank............. 50,000 45,000
PaineWebber, Inc................... 58,972 24,547
----------------- ---------------------
$1,181,382 $ 832,286
================= =====================
11. LONG-TERM DEBT
In May 1993, the Parent Company issued $115 million of 8.05% Senior Notes
due May 15, 1998. The interest rate on the Senior Notes was subject to increase
in certain circumstances if an exchange offer ("Exchange Offer") was not
consummated by certain dates. The 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 cost of issuing the Senior
Notes, including the costs of the Exchange Offering, totalled $5.4 million, and
amortization for the nine months ended June 30, 1997 and 1996 and for fiscal
1996, 1995, and 1994 was $738,000, $733,000, $1.0 million, $976,000, and
$977,000, respectively.
In May 1997, the Company issued $220 million of fixed-rate Subordinated
Notes due May 2007, with a stated rate of 8.875% and an effective rate of 8.896%
("Subordinated Notes"). Net proceeds from the issuance of the Subordinated
Notes were used to repurchase and retire $114.5 million of the Company's Senior
Notes, pay the related costs and expenses, and provide additional capital to the
Bank. The costs associated with retiring the Senior Notes are reflected as an
extraordinary loss of $3.6 million, or $2.3 million after tax, in the quarter
ended June 30, 1997. In connection with the repurchase of the Senior Notes, the
Company obtained consents from the holders of the Senior Notes, which
substantially eliminated all restrictive covenants of the related indenture,
including limitations on dividends. The Subordinated Notes are subordinate to
all liabilities of the Company's subsidiaries, including preferred stock and
deposit liabilities.
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. In
December 1996, the Parent Company contributed all of the outstanding stock
F-36
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of its subsidiary, the Bank, to Holdings, and Holdings assumed the obligations
of the Senior Notes. The Parent Company has no significant assets other than its
equity in Holdings and the Parent 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
Parent Company is dependent on the extent to which it receives common stock
dividends from the Bank. 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.
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 June 30, 1997, 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 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 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 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.
F-37
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The carrying amount of financial instruments
in these classifications are considered a reasonable estimate of their fair
value due to the short-term nature of the instruments.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK. The fair values of
financial instruments with off-balance-sheet risk are based on current market
prices.
SERVICING PORTFOLIO. See Note 1 for a description of the method used to
value the single family servicing portfolio.
F-38
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS NO. 107 FAIR VALUES
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
AT JUNE 30, -----------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
CARRYING SFAS NO. CARRYING SFAS NO. CARRYING SFAS NO.
VALUE 107 VALUE VALUE 107 VALUE VALUE 107 VALUE
---------- --------- ---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS
Short-term interest-earning
assets......................... $ 679,870 $ 679,870 $ 793,772 $ 793,772 $ 583,983 $ 583,983
Trading account assets........... 1,211 1,211 1,149 1,149 1,081 1,081
Securities....................... 56,142 56,146 64,544 64,545 116,013 116,811
Mortgage-backed securities....... 1,601,857 1,582,196 1,657,908 1,637,085 2,398,263 2,378,171
Loans............................ 8,271,904 8,393,599 7,519,488 7,657,483 8,260,240 8,418,464
FHLB stock....................... 186,907 186,907 179,643 179,643 225,952 225,952
Other assets..................... 157,457 157,457 110,441 115,658 150,542 155,631
NON-FINANCIAL ASSETS................. 483,702 N/A 385,432 N/A 247,460 N/A
---------- ========= ---------- ========= ---------- =========
Total assets................. $11,439,050 $10,712,377 $11,983,534
========== ========== ==========
FINANCIAL LIABILITIES
Deposits......................... $5,249,888 $5,265,029 $5,147,945 $5,164,988 $5,182,220 $5,215,438
FHLB advances.................... 3,630,060 3,624,528 3,490,386 3,493,086 4,383,895 4,395,965
Reverse repurchase agreements and
federal funds purchased........ 1,181,382 1,181,386 832,286 832,328 1,172,533 1,171,884
Subordinated Notes............... 219,694 223,680 -- -- -- --
Senior Notes..................... 500 502 115,000 118,396 115,000 115,383
Other liabilities................ 112,683 112,683 170,870 170,870 162,073 162,073
NON-FINANCIAL LIABILITIES, MINORITY
INTEREST, AND STOCKHOLDERS'
EQUITY............................. 1,044,843 N/A 955,890 N/A 967,813 N/A
---------- ========= ---------- ========= ---------- =========
Total liabilities, minority
interest, and stockholders'
equity..................... $11,439,050 $10,712,377 $11,983,534
========== ========== ==========
OTHER FINANCIAL ASSETS
(LIABILITIES) -- FAIR VALUE
Interest rate swaps............ $ 686 $ (66) $ (1,517)
Interest rate caps............. 359 1,057 1,113
Interest rate floors........... 7,871 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)...................... 45,813 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 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,
F-39
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
AT JUNE 30, ----------------------
1997 1996 1995
----------- ---------- ----------
(IN THOUSANDS)
Interest rate swaps.................. $ 241,000 $ 50,000 $ 615,000
Interest rate caps................... 913,000 659,000 565,000
Interest rate floors................. 2,638,500 688,500 310,000
Financial options.................... -- -- 23,000
Financial futures contracts.......... -- -- 529,000
Forward delivery contracts........... -- 321,923 509,463
Commitments to extend credit......... 1,369,220 988,120 999,792
Financial instruments with off-balance-sheet risk at June 30, 1997 and
September 30, 1996 were scheduled to mature as follows:
<TABLE>
<CAPTION>
MATURING IN THE YEAR ENDING JUNE 30,
--------------------------------------------------
1998 1999 2000 THEREAFTER TOTAL
------------ ---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest rate swaps.................. $ -- $ 146,000 $ 59,500 $ 35,500 $ 241,000
Interest rate caps................... 500,000 -- -- 413,000 913,000
Interest rate floors................. 310,000 532,000 756,500 1,040,000 2,638,500
Commitments to extend credit......... 730,965 145,908 178,698 313,649 1,369,220
------------ ---------- ---------- ------------ ------------
Total...................... $ 1,540,965 $ 823,908 $ 994,698 $ 1,802,149 $ 5,161,720
============ ========== ========== ============ ============
<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-40
<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 the nine
months ended June 30, 1997 and fiscal 1996, $50.0 million and $565.0 million,
respectively, 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 JUNE 30, 1997
Receive Floating/Pay Fixed........... $ 75,000 6.06% 5.84%(1) FHLB advances
45,000 6.20 5.84(1) FHLB advances
37,500 6.38 5.84(1) FHLB advances
26,000 5.87 5.56(1) FHLB advances
22,500 6.75 5.84(1) FHLB advances
22,000 6.00 5.56(1) FHLB advances
13,000 6.34 5.56(1) FHLB advances
--------
Total........................... $241,000
========
AT SEPTEMBER 30, 1996
Receive Fixed/Pay Floating........... $ 25,000 6.00 5.50(2) Consumer deposits
25,000 4.60 5.69(1) Consumer deposits
--------
Total........................... $ 50,000
========
AT SEPTEMBER 30, 1995
Receive Floating/Pay Fixed........... $ 75,000 6.10 5.81(2) FHLB advances
340,000 6.50 5.86(2) Reverse repurchase agreements
100,000 6.58 6.00(1) Commercial deposits
Receive Fixed/Pay Floating........... 75,000 4.32 5.88(1) Consumer deposits
25,000 6.00 5.81(2) Consumer deposits
--------
Total........................... $615,000
========
</TABLE>
(1) Based on the three month London InterBank Offered Rate ("LIBOR") as of the
last reset prior to the date reported.
(2) Based on the one month LIBOR as of the last reset prior to the date
reported.
F-41
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and $413.0 million at June 30, 1997. 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.
During the nine months ended June 30, 1997, $300.0 million in interest rate caps
were entered into in an effort to hedge FHLB advances.
AVERAGE
NOTIONAL INDEX CONTRACTED
AMOUNT RATE RATE
-------- ----- ----------
(DOLLARS IN THOUSANDS)
AT JUNE 30, 1997................ buy $413,000 5.66 %(1) 7.86%
500,000 5.82 (2) 6.22
sell 413,000 5.66 (1) 8.57
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.
INTEREST RATE FLOORS. Floor contracts were entered into during the nine
months ended June 30, 1997 and 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 JUNE 30, 1997................ $2,055,000 6.55 %(1) 5.64% MSRs
583,500 6.39 (2) 5.98 MSRs
---------
Total...................... $2,638,500
=========
AT SEPTEMBER 30, 1996........... $ 498,500 6.67 (2) 5.99 MSRs
190,000 6.88 (1) 6.25 MSRs
---------
Total...................... $ 688,500
=========
AT SEPTEMBER 30, 1995........... $ 260,000 6.01 (2) 6.70 MSRs
50,000 6.17 (1) 7.20 MSRs
---------
Total...................... $ 310,000
=========
(1) Based on the ten year Constant Maturity Treasury ("CMT") as of the last
reset prior to the date reported.
(2) Based on the five year CMT as of the last reset prior to the date reported.
F-42
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Interest received on interest rate floor agreements
totalled $905,000, $2.1 million, and $817,000 during the nine months ended June
30, 1997 and during fiscal 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 June 30, 1997 and 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 $220,000 and $222,000 on the sale of
Treasury futures contracts as of June 30, 1997 and September 30, 1996,
respectively, 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.
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 were fully amortized at June 30,
1997.
At June 30, 1997, there were no future contracts outstanding.
FORWARD DELIVERY CONTRACTS. Forward delivery contracts were entered into
to sell single family warehouse loans and to manage the risk that a change in
interest rates would decrease the value of single family warehouse loans or
commitments to originate mortgage loans ("mortgage pipeline"). At June 30,
1997, there were no forward delivery contracts outstanding.
F-43
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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,
AT JUNE 30, ----------------------
1997 1996 1995
----------- ---------- ----------
(IN THOUSANDS)
Single family........................ $ 90,148 $ 253,453 $ 329,364
Single family construction........... 216,028 175,879 259,793
Consumer............................. 188,463 182,356 229,299
Commercial, multi-family and
healthcare......................... 515,648 152,254 173,598
Small business....................... 24,217 16,193 2,319
Mortgage banker finance line of
credit............................. 323,982 199,175 --
Letters of credit.................... 10,734 8,810 5,419
----------- ---------- ----------
$1,369,220 $ 988,120 $ 999,792
=========== ========== ==========
Variable............................. $1,312,754 $ 786,471 $ 717,691
Fixed................................ 56,466 201,649 282,101
----------- ---------- ----------
Total...................... $1,369,220 $ 988,120 $ 999,792
=========== ========== ==========
RECOURSE OBLIGATIONS. The Company had servicing of approximately $36.9
million, $20.8 million, and $26.6 million at June 30, 1997 and 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.
F-44
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $852,000, $1.1 million, $1.5 million, $1.5 million, and $1.7
million, for the nine months ended June 30, 1997 and 1996, and for fiscal 1996,
1995, and 1994, respectively.
1996 STOCK INCENTIVE PLAN
In December 1996, the Company granted options to purchase 147,500 shares of
its common stock to certain employees of the Bank under the Bank United 1996
Stock Incentive Plan. Compensation expense was not recognized for the stock
options because the options had an exercise price approximating the fair value
of the Company's common stock at the date of grant. These options will vest at
the end of three years and will expire if not exercised within ten years of the
date of grant. The maximum number of options of Class A common stock available
for grant under this plan is 1,600,000.
MANAGEMENT COMPENSATION PROGRAM
In June 1996, the Bank's and the Company's Boards 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: (1) a cash bonus of $4.0 million, (2) 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 (3) the
issuance of 1,154,520 options for purchase of an equivalent number of shares of
Company common stock (such options vest ratably from the date of grant through
June 26, 1999 and may not be exercised prior to the third anniversary of the
date of grant). The options' exercise price 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 grant.
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 ("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 the fourth quarter of fiscal 1996 and
10,000 of such options during the second quarter of fiscal 1997. These options
vest and become exercisable if and when the fair value of the Company's common
stock equals or exceeds the exercise price of the option on any day during the
30-day period
F-45
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The maximum number of options of Class A common
stock available for grant under this plan is 250,000.
A summary of the status of the Company's stock option plans as of June 30,
1997 and September 30, 1996 and changes during the nine months ended June 30,
1997 and fiscal 1996 is presented below. No options were exercised, forfeited or
expired during the nine months ended June 30, 1997 or fiscal 1996, however, in
connection with the February 1997 sale of certain of the Company's mortgage
origination offices, 33,718 options became fully vested during the second
quarter of 1997. See Note 18. The weighted-average remaining contractual life of
options outstanding at June 30, 1997 was 9.1 years. None of the options
outstanding at June 30, 1997 were exercisable.
The weighted-average grant date fair value for the options granted during
the nine months ended June 30, 1997 was $9.67 per share. The fair value of each
stock option was estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in nine months ended June
30, 1997: estimated volatility of 26.10%; risk-free interest rate of 6.24%;
dividend yield of 2.08%; and an expected life of ten years. The weighted-average
grant date fair value for the options granted during fiscal 1996 was $6.46 per
share. The fair value of each stock option was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
grants in fiscal 1996: estimated volatility of 27.00%; risk-free interest rate
of 6.55%; dividend yield of 3.00%; and an expected life of ten years. The
Company granted no options prior to fiscal 1996.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE RANGE OF
SHARES EXERCISE PRICE EXERCISE PRICES
---------- ----------------- -------------------
<S> <C> <C> <C>
Granted during fiscal 1996........... 1,164,520 $ 20.15 $20.125 - $27.394
Granted during fiscal 1997........... 157,500 27.48 $25.250 - $36.297
----------
Outstanding at June 30, 1997......... 1,322,020 21.02 $20.125 - $36.297
==========
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its stock
compensation plans. Accordingly, no compensation cost has been recognized for
its stock option plans. If compensation expense had been recorded based on the
fair value at the grant date for awards consistent with SFAS No. 123, the
Company's net income and EPS would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR
MONTHS ENDED ENDED
JUNE 30, 1997 SEPTEMBER 30, 1996
--------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net income As reported........................... $56,646 $118,935
Pro forma............................. 54,472 118,316
Earnings per share As reported........................... 1.79 3.87
Pro forma............................. 1.72 3.85
</TABLE>
The weighted-average grant date fair value for the 318,342 shares of
Restricted Stock issued during fiscal 1996 was $11.65 per share. See
" -- Management Compensation Program."
F-46
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
--------- ----------- ----------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CURRENT TAX EXPENSE (BENEFIT)
Federal......................... $ 1,409 $ 1,871 $ 3,012 $ 3,459 $ 1,145
State........................... 2,786 2,427 3,097 2,080 1,841
Payments due in lieu of taxes... 7,961 8,614 11,528 15,261 (3,449)
DEFERRED TAX EXPENSE (BENEFIT)
Federal......................... 32,195 17,144 8,910 16,575 17,681
State........................... 1,148 -- 1,388 40 (1,279)
Change in valuation
allowance -- utilization of
NOLs.......................... -- (101,700) (101,700) -- (47,838)
Change in valuation
allowance -- reduction of
NOLs.......................... -- (2,000) (2,000) -- --
--------- ----------- ----------- --------- ----------
Total income tax expense
(benefit) before
extraordinary loss....... $ 45,499 $ (73,644) $ (75,765) $ 37,415 $ (31,899)
========= =========== =========== ========= ==========
</TABLE>
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 June 30, 1997 were as follows:
ALTERNATIVE EXPIRATION
YEAR GENERATED REGULAR TAX MINIMUM TAX DATE
- ------------------------------------- ----------- ----------- ----------
(IN MILLIONS)
September 30, 1989................... $ 269 $ 123 2004
September 30, 1990................... 296 141 2005
September 30, 1991................... 119 56 2006
September 30, 1992................... 33 7 2007
September 30, 1994................... 7 -- 2009
F-47
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, Holdings, and the Bank are
members.
The Parent Company, Holdings, and the Bank are subject to regular income
tax and alternative minimum tax ("AMT"). For the nine months ended June 30,
1997 and 1996, and 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:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
--------- ----------- ----------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TAXES CALCULATED BEFORE EXTRAORDINARY
LOSS............................... $ 41,355 $ 25,314 $ 23,743 $ 31,539 $ 34,356
INCREASE (DECREASE) FROM
Reduction in valuation allowance
for the utilization of NOLs... -- (101,700) (101,700) -- (47,838)
Reduction in valuation allowance
for reduction of NOLs......... -- (2,000) (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................ 3,934 2,427 3,097 2,080 1,841
Other........................... 210 2,315 1,095 3,796 2,631
--------- ----------- ----------- --------- ----------
Total...................... $ 45,499 $ (73,644) $ (75,765) $ 37,415 $ (31,899)
========= =========== =========== ========= ==========
</TABLE>
F-48
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED TAX ASSETS AND LIABILITIES
AT AT SEPTEMBER 30,
JUNE 30, ------------------------
1997 1996 1995
--------- ----------- -----------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Net operating losses............ $ 174,128 $ 196,326 $ 211,637
Purchase accounting............. 5,727 6,252 10,064
Capital loss carryforwards...... 1,449 1,449 --
Tax mark to market.............. 4,269 3,654 --
Unrealized losses on securities
available for sale............ -- 1,340 3,990
REMIC........................... 6,642 6,830 7,083
Goodwill amortization........... 1,897 1,897 413
State........................... 307 1,455 2,817
AMT credit...................... 5,450 4,065 2,985
Depreciation -- premises and
equipment..................... 3,086 2,975 3,084
SAIF assessment(1).............. -- 11,780 --
Other........................... 7,082 9,832 2,926
--------- ----------- -----------
Total deferred tax
assets................... 210,037 247,855 244,999
--------- ----------- -----------
DEFERRED TAX LIABILITIES
Bad debt reserve................ 10,152 18,199 11,577
FHLB stock...................... 12,196 12,196 8,673
OMSR............................ 23,078 19,958 --
REO............................. -- -- 7,096
Tax mark to market.............. -- -- 2,816
State........................... -- -- 16
Unrealized gain on securities
available for sale............ 3,614 -- --
Other........................... 3,471 1,679 6,050
--------- ----------- -----------
Total deferred tax
liabilities.............. 52,511 52,032 36,228
--------- ----------- -----------
Net deferred tax asset before
valuation allowance........... 157,526 195,823 208,771
Valuation allowance............. (27,500) (27,500) (131,200)
--------- ----------- -----------
Net deferred tax assets.... $ 130,026 $ 168,323 $ 77,571
========= =========== ===========
- ------------
(1) Assessed in fiscal 1996, tax-deductible in 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. 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
$89 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
F-49
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liquidation of the Bank following a merger or liquidation; or a dividend
distribution in excess of certain earnings and profits. However, if a thrift
with a pre-1988 reserve is merged, liquidated on a tax free basis, or acquired
by another depository institution, the remaining institution will inherit the
thrift's pre-1988 reserve and post-1951 earnings and profits. Because management
believes the circumstances requiring recapture of the reserve are not likely to
occur, deferred income taxes of approximately $18 million have not been
provided.
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 June 30, 1997 and September 30,
1996 and 1995, the Bank met all capital adequacy requirements.
As of June 30, 1997 and 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 June 30, 1997 and September 30, 1996, there are no conditions or
events since the OTS notification that management believes would change the
institution's category.
F-50
<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 JUNE 30,
----------------------------------------------------------------
CAPITAL ADEQUACY WELL-CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
-------------------- -------------------- --------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1997
Stockholders' equity of the Bank..................... $ 962,446
Less: Net unrealized gains......................... (6,024)
Intangible assets of the Bank.................. (10,426)
Non-qualifying deferred tax assets............. (85,036)
Non-qualifying MSRs............................ (2,045)
---------
TANGIBLE CAPITAL..................................... 7.59% 858,915 1.50% $ 169,670
Add: Core deposit intangibles...................... 6,554
---------
CORE CAPITAL......................................... 7.65% $ 865,469 3.00% 339,538 5.00% $ 565,896
=========
TIER 1 CAPITAL....................................... 13.45% $ 865,469 6.00% 386,061
Add: Allowance for loan and MBS credit losses...... 38,611
---------
TOTAL RISK-BASED CAPITAL............................. 14.05% $ 904,080 8.00% 514,748 10.00% 643,435
=========
AT SEPTEMBER 30,
----------------------------------------------------------------
CAPITAL ADEQUACY WELL-CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
-------------------- -------------------- --------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
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
=========
</TABLE>
F-51
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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>
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 June 30,
1997 and September 30, 1996, there was an aggregate of approximately $182.3
million and $152.7 million, respectively, 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
quarterly report on Form 10-Q for the quarter ended June 30, 1997 and 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 June 30, 1997 and 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 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 of America in the United
States Court of Federal Claims for alleged failures of the United States (1) to
abide by a capital forbearance which would have allowed the Bank to operate for
ten years under negotiated capital levels lower than the levels required by the
then existing regulations or successor regulations, (2) to abide by its
commitment to allow the Bank to count $110 million of subordinated debt as
regulatory capital for all purposes and (3) to abide by an accounting
forbearance, which would have allowed the Bank to count as capital for
regulatory purposes, and to amortize over a period of twenty-five years, the
$30.7 million difference between certain FSLIC payment obligations to the Bank
and the discounted present value of those future FSLIC payments. The lawsuit was
stayed from the outset by a judge of the Court of Federal Claims pending the
United States Supreme Court's decision in UNITED STATES V. WINSTAR CORP., an
action by three other thrifts raising similar issues (the "WINSTAR cases").
Since the Supreme Court ruling, the Chief Judge of the Court of Federal Claims
convened a number of
F-52
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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 have responded 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 were scheduled for early 1997.
The trial of one of these two cases is in progress and the trial of the other
has not yet begun. 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. On January 3, 1997, the court issued a scheduling
order scheduling the trial of the Company's case in the third month after the
trials of the "priority" cases begin.
In December 1996, Chief Judge Smith decided the motion IN LIMINE on damage
theories of Glendale Federal, one of four WINSTAR plaintiffs, and allowed
Glendale Federal to assert several other alternative damage theories against the
Government. While the Company expects Plaintiffs' claims for damages to exceed
$200 million, 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 the Government opposed the motion. The Company is
pursuing an early trial on damages. Uncertainties remain concerning the
administration of the Omnibus Case Management Order and the future 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
damage trial in the first case has lasted longer than was originally estimated,
and the Company now expects the trial of its case to commence during the first
quarter of fiscal 1999. The Company is unable to predict the outcome of its suit
against the United States and the amount of judgment for damages, if any, that
may be awarded. Consequently, no assurances can be given as to the results of
this suit.
The Company 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 fully
capitalized the SAIF at a reserve ratio of 1.25% of SAIF-insured deposits. This
one-time assessment was set at 65.7 basis points of SAIF-assessable deposits at
March 31, 1995. The Company's assessment of $33.7 million, $20.7 million net of
tax, was recorded in the fourth quarter of fiscal 1996 and paid in the first
quarter of fiscal 1997.
F-53
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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 "August Offering").
The Company sold 910,694 shares and certain stockholders ("Selling
Stockholders") sold 11,164,306 shares. The net proceeds to the Company,
proceeds to 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
F-54
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from the August Offering was contributed to the capital of the Bank in the first
quarter of fiscal 1997 for general corporate purposes.
On February 5, 1997, the SEC declared effective a registration statement
for 10.2 million outstanding shares of the Company's Class A common stock. These
shares were previously subject to restrictions on sale and transfer due to
agreements entered into in connection with the Company's August Offering. On
February 10, 1997, restrictions on 7.2 million shares expired, and restrictions
on the remaining 3.0 million shares expired on August 14, 1997. After these
dates, the 10.2 million shares may be offered and sold from time to time by the
holding shareholders. The Company will not receive any of the proceeds from the
sale of these shares.
At September 30, 1996, after the 1,800 to one stock conversion, the Warrant
conversion, the issuance of Restricted Stock, and the August 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. During fiscal 1997, 618,342 shares of Class B
common stock were converted to Class A common stock. At June 30, 1997, the
Company had 28,354,276 shares of Class A and 3,241,320 shares of Class B common
stock outstanding. 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 the computation of EPS (in thousands, except per
share data). The dilutive effect of the Bank Warrant has been considered in
computing EPS for periods prior to its redemption in August 1996. Average shares
and per share results have been restated to reflect an 1,800 to one stock
conversion in June 1996.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
--------------------- ---------------------------------
1997 1996 1996 1995 1994
--------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net income before extraordinary
loss............................... $ 58,969 $ 125,869 $ 118,935 $ 41,719 $ 108,970
Less: Bank's net income attributable
to common stock equivalents on the
Warrant............................ -- (6,758) (5,608) (2,895) (6,451)
--------- ---------- ---------- --------- ----------
Net income applicable to common
shares before extraordinary loss... 58,969 119,111 113,327 38,824 102,519
Extraordinary loss................... 2,323 -- -- -- --
--------- ---------- ---------- --------- ----------
Net income applicable to common
shares............................. $ 56,646 $ 119,111 $ 113,327 $ 38,824 $ 102,519
========= ========== ========== ========= ==========
Average number of common shares
outstanding........................ 31,596 28,863 29,260 28,863 28,863
========= ========== ========== ========= ==========
Earnings per share before
extraordinary loss................. $ 1.86 $ 4.13 $ 3.87 $ 1.35 $ 3.55
Extraordinary loss................... 0.07 -- -- -- --
--------- ---------- ---------- --------- ----------
EARNINGS PER COMMON SHARE............ $ 1.79 $ 4.13 $ 3.87 $ 1.35 $ 3.55
========= ========== ========== ========= ==========
</TABLE>
17. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
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
F-55
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 the nine months ended June 30,
1997 and 1996, and 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 $15.8 million, $16.9 million, $22.4 million, $22.9 million,
and $22.4 million, respectively.
F-56
<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 Servicing Segment. Summarized financial information by
business segment and for the Parent Company for the periods indicated, was as
follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------
MORTGAGE PARENT
BANKING SERVICING COMPANY
OPERATIONS SEGMENT(1) AND HOLDINGS ELIMINATIONS COMBINED
------------- ----------- ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
Revenues................................ $ 226,554 $ 70,519 $ 5,066 $ (16,338) $ 285,801
Earnings before income taxes, minority
interest, and extraordinary loss...... 115,542 13,490 2,705 (13,580) 118,157
Depreciation and amortization of
intangibles........................... 7,085 24,339 802 (2,758) 29,468
Capital expenditures.................... 9,350 305 -- -- 9,655
Average identifiable assets............. 10,592,891 559,205 28,795 (234,105) 10,946,786
Loan transfers to (from)................ 543,460 (543,460) -- -- --
Interest income (expense) on single
family warehouse outstanding loan
balance............................... 9,946 (9,946) -- -- --
Servicing (expense) income on Banking
Segment's loans....................... (8,136) 8,136 -- -- --
1996
Revenues................................ $ 187,936 $ 73,322 $101,258 $ (112,041) $ 250,475
Earnings before income taxes and
minority interest..................... 91,016 (10,107) 100,429 (109,011) 72,327
Depreciation and amortization of
intangibles........................... 6,880 17,007 733 (3,030) 21,590
Capital expenditures.................... 4,709 313 -- -- 5,022
Average identifiable assets............. 11,097,157 651,042 5,181 (389,726) 11,363,654
Loan transfers to (from)................ 649,885 (649,885) -- -- --
Interest income (expense) on single
family warehouse outstanding loan
balance............................... 17,467 (17,467) -- -- --
Servicing (expense) income on Banking
Segment's loans....................... (10,338) 10,338 -- -- --
</TABLE>
- ------------
(1) Includes activity associated with the Company's mortgage origination
business prior to the sale of certain retail and wholesale mortgage
origination offices effective February 1, 1997 and the restructuring or
closing of the remaining offices. Revenues for the mortgage servicing
segment for the nine months ended June 30, 1997 included $17.8 million
related to the mortgage origination business. Earnings before income taxes,
minority interest and extraordinary loss for the same period includes $1.9
million related to the mortgage origination business.
F-57
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
MORTGAGE PARENT
BANKING BANKING COMPANY
SEGMENT SEGMENT AND HOLDINGS 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 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 warehouse outstanding loan
balance............................... 19,903 (19,903) -- -- --
Servicing (expense) income on Banking
Segment's loans....................... (12,672) 12,672 -- -- --
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 warehouse outstanding 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 also include dividends received from
the Bank for the Parent Company and Holdings. 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 and Holdings 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, minority
interest,
F-58
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and extraordinary loss, 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 and Holdings expenses are not
allocated to the Bank's business segments. The elimination amounts reflect the
following: (1) dividends received by the Parent Company and Holdings from the
Bank, (2) interest income and MSR amortization expense relating to loans held by
the Banking Segment serviced by the Mortgage Banking Segment or Mortgage
Servicing Segment, and (3) single family warehouse loans 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 or Mortgage
Servicing Segment. The amortization of this capitalized amount approximated
$890,000 and $1.8 million for the nine months ended June 30, 1997 and 1996,
respectively, $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 or
Mortgage Servicing 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 was retained by the Mortgage
Banking Segment at the time of transfer. The amount retained was amortized to
operations of the Mortgage Banking Segment and approximated $1.9 million and 1.3
million for the nine months ended June 30, 1997 and 1996, respectively, $1.9
million for fiscal 1996, $1.0 million for fiscal 1995, and $283,000 for fiscal
1994.
MORTGAGE BANKING RESTRUCTURINGS AND SALE OF OFFICES
In June 1996, the Company recorded a restructuring charge of $10.7 million
before tax, to recognize the costs of closing or consolidating certain mortgage
origination offices and several regional operation centers and recorded $1.8
million of other expenses related to its mortgage origination business. 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
reflected $3.5 million of goodwill and $1.8 million of fixed assets and
leasehold improvements written off in connection with the closed production
offices.
Effective February 1, 1997, the Company sold certain of its retail and
wholesale mortgage origination offices. In connection with this sale, the
remaining offices were restructured or closed. The net gain on the sale of these
offices, reduced by additional restructuring costs, was $4.0 million before tax,
$2.5 million after tax, or $0.08 per share, and was recorded in the quarter
ended March 31, 1997. The additional restructuring costs were principally
comprised of estimated costs of severance and other benefits of $2.0 million and
estimated contractual obligations for which no future benefit will be derived of
$3.3 million.
At June 30, 1997 and September 30, 1996, the unpaid liability relating to
the sale, the two restructurings, and the branch closures was estimated to be
$6.4 million and $4.6 million, respectively, and is expected to be paid in full
by fiscal 1999. The Company intends to continue its mortgage servicing business,
its retail mortgage origination capability in Texas through its community
banking branches and its wholesale mortgage origination capability through its
Financial Markets Group.
Effective February 1, 1997, the Company no longer has a Mortgage Banking
Segment. Activity associated with the Company's mortgage origination business
prior to its sale has been included with the Mortgage Servicing Segment activity
for fiscal 1997. The wholesale mortgage origination offices that were retained
have been integrated into the existing Financial Markets Group, and therefore
the Banking Segment, as of the same date. Prior period segment information has
not been restated.
F-59
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents summarized data for the first three quarters
of fiscal 1997 and each of the quarters in fiscal 1996 and 1995 (in thousands,
except earnings per share).
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------- ------------------------------------------ ---------
THIRD SECOND FIRST FOURTH THIRD SECOND FIRST FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $ 202,903 $ 197,928 $ 199,103 $ 191,893 $ 199,198 $ 203,436 $ 217,785 $ 224,308
Interest expense..................... 136,283 131,424 133,318 136,752 138,737 148,548 160,741 166,580
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income.............. 66,620 66,504 65,785 55,141 60,461 54,888 57,044 57,728
Provision for credit losses.......... 3,425 4,305 6,914 6,314 4,305 3,181 2,669 9,663
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for credit losses.................. 63,195 62,199 58,871 48,827 56,156 51,707 54,375 48,065
Non-interest income.................. 25,871 31,355 29,666 31,954 23,473 27,687 26,922 25,201
Non-interest expense................. 49,814 50,108 53,078 85,272 68,689 50,012 49,292 52,466
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes,
minority interest, and
extraordinary loss................. 39,252 43,446 35,459 (4,491) 10,940 29,382 32,005 20,800
Income tax expense (benefit)......... 15,086 16,780 13,633 (2,121) (98,922) 12,144 13,134 8,169
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) before minority
interest and extraordinary loss.... 24,166 26,666 21,826 (2,370) 109,862 17,238 18,871 12,631
Minority interest
Subsidiary preferred stock
dividends...................... 4,563 4,563 4,563 4,564 4,563 4,563 4,563 4,111
Payments in lieu of dividends.... -- -- -- -- 6,189 -- 224 --
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCOME (loss) before
extraordinary loss............. $ 19,603 $ 22,103 $ 17,263 $ (6,934) $ 99,110 $ 12,675 $ 14,084 $ 8,520
Extraordinary loss................... 2,323 -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 17,280 $ 22,103 $ 17,263 $ (6,934) $ 99,110 $ 12,675 $ 14,084 $ 8,520
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss) applicable to
common shares...................... $ 17,280 $ 22,103 $ 17,263 $ (6,934) $ 94,143 $ 11,824 $ 13,144 $ 7,936
========= ========= ========= ========= ========= ========= ========= =========
Earnings per common share
Income before extraordinary
loss........................... $ 0.61 $ 0.70 $ 0.55 $ (0.23) $ 3.26 $ 0.41 $ 0.46 $ 0.28
Extraordinary loss............... 0.07 -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 0.54 $ 0.70 $ 0.55 $ (0.23) $ 3.26 $ 0.41 $ 0.46 $ 0.28
========= ========= ========= ========= ========= ========= ========= =========
Average common shares outstanding.... 31,596 31,596 31,596 30,441 28,863 28,863 28,863 28,863
</TABLE>
THIRD SECOND FIRST
QUARTER QUARTER QUARTER
--------- --------- ---------
Interest income...................... $ 194,865 $ 172,992 $ 154,594
Interest expense..................... 146,220 129,915 110,045
--------- --------- ---------
Net interest income.............. 48,645 43,077 44,549
Provision for credit losses.......... 10,473 3,223 934
--------- --------- ---------
Net interest income after provision
for credit losses.................. 38,172 39,854 43,615
Non-interest income.................. 23,127 30,641 36,012
Non-interest expense................. 40,465 51,553 50,092
--------- --------- ---------
Income (loss) before income taxes,
minority interest, and
extraordinary loss................. 20,834 18,942 29,535
Income tax expense (benefit)......... 9,060 8,062 12,124
--------- --------- ---------
Net income (loss) before minority
interest and extraordinary loss.... 11,774 10,880 17,411
Minority interest
Subsidiary preferred stock
dividends...................... 2,163 2,163 2,163
Payments in lieu of dividends.... 71 -- 306
--------- --------- ---------
NET INCOME (loss) before
extraordinary loss............. $ 9,540 $ 8,717 $ 14,942
Extraordinary loss................... -- -- --
--------- --------- ---------
Net income........................... $ 9,540 $ 8,717 $ 14,942
========= ========= =========
Net income (loss) applicable to
common shares...................... $ 8,851 $ 8,086 $ 13,951
========= ========= =========
Earnings per common share
Income before extraordinary
loss........................... $ 0.31 $ 0.28 $ 0.48
Extraordinary loss............... -- -- --
--------- --------- ---------
Net income....................... $ 0.31 $ 0.28 $ 0.48
========= ========= =========
Average common shares outstanding.... 28,863 28,863 28,863
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 an 1,800 to one stock conversion in June
1996. See Note 16.
F-60
<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,
JUNE 30, ----------------------
1997 1996 1995
-------- ---------- ----------
ASSETS
Cash and cash equivalents............ $ 1,712 $ 18,790 $ 1
Securities purchased under agreements
to resell.......................... -- -- 2,121
Investment in subsidiary............. 779,128 608,027 609,178
Intangible assets.................... 3,930 2,055 2,563
Deferred tax asset................... 21,233 19,527 --
Other assets......................... 863 5,281 1,287
-------- ---------- ----------
TOTAL ASSETS......................... $806,866 $ 653,680 $ 615,150
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Subordinated Notes (Note 11)......... $219,694 $ -- $ --
Senior Notes (Note 11)............... -- 115,000 115,000
Other liabilities.................... 4,496 7,637 4,047
-------- ---------- ----------
Total liabilities.......... 224,190 122,637 119,047
-------- ---------- ----------
STOCKHOLDERS' EQUITY
Common stock......................... 316 316 289
Paid-in capital...................... 129,286 129,286 117,722
Retained earnings.................... 447,050 403,674 384,739
Unrealized gains (losses) on
subsidiary's securities and
mortgage-backed securities
available for sale, net of tax..... 6,024 (2,233) (6,647)
-------- ---------- ----------
Total stockholders'
equity................... 582,676 531,043 496,103
-------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $806,866 $ 653,680 $ 615,150
======== ========== ==========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-61
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
--------------------- ---------------------------------
1997 1996 1996 1995 1994
--------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
INCOME
Dividends from subsidiary............ $ 13,570 $ 109,011 $ 109,011 $ 6,409 $ 11,435
Short-term interest-earning assets... -- 52 56 88 21
--------- ---------- ---------- --------- ----------
Total income............... 13,570 109,063 109,067 6,497 11,456
--------- ---------- ---------- --------- ----------
EXPENSE
Interest expense -- Long-term debt... 4,845 7,805 10,353 10,407 10,177
Amortization of intangibles.......... 326 733 1,000 976 977
Other................................ 1,546 96 196 114 947
--------- ---------- ---------- --------- ----------
Total expense.............. 6,717 8,634 11,549 11,497 12,101
--------- ---------- ---------- --------- ----------
INCOME (LOSS) BEFORE UNDISTRIBUTED
INCOME OF SUBSIDIARY AND INCOME
TAXES.............................. 6,853 100,429 97,518 (5,000) (645)
Equity in undistributed income of
subsidiary......................... 47,211 6,198 519 45,322 104,316
--------- ---------- ---------- --------- ----------
INCOME BEFORE INCOME TAXES........... 54,064 106,627 98,037 40,322 103,671
Income tax benefit................... (2,582) (19,242) (20,898) (1,397) (5,299)
--------- ---------- ---------- --------- ----------
NET INCOME........................... $ 56,646 $ 125,869 $ 118,935 $ 41,719 $ 108,970
========= ========== ========== ========= ==========
</TABLE>
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-62
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JUNE 30, FOR THE YEAR ENDED SEPTEMBER 30,
------------------------ -----------------------------------
1997 1996 1996 1995 1994
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 56,646 $ 125,869 $ 118,935 $ 41,719 $ 108,970
Adjustments to reconcile net income
to net cash (used) provided by
operating activities:
Equity in undistributed income
of subsidiary................. (47,211) (6,198) (519) (45,322) (104,316)
Deferred tax benefit............ (1,706) (18,312) (19,527) -- --
Amortization of intangibles..... 326 733 1,000 976 977
Change in other assets.......... 3,719 (4,693) (4,486) 4,111 (5,393)
Change in other liabilities..... (8,882) (2,615) 3,590 (73) 159
Management Restricted Stock
award......................... -- 3,709 3,709 -- --
----------- ----------- ---------- ---------- -----------
Net cash provided by
operating activities..... 2,892 98,493 102,702 1,411 397
----------- ----------- ---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in securities
purchased under agreements to
resell........................ -- 1,507 2,121 (1,411) (397)
Capital contributions to
subsidiary.................... (108,434) -- -- -- --
----------- ----------- ---------- ---------- -----------
Net cash (used) provided by
investing activities..... (108,434) 1,507 2,121 (1,411) (397)
----------- ----------- ---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common
stock......................... -- -- 13,966 -- --
Proceeds from issuance of
Subordinated Notes............ 216,234 -- -- -- --
Repayment of Senior Notes....... (114,500) -- -- -- --
Payment of common stock
dividends..................... (13,270) (100,000) (100,000) -- --
----------- ----------- ---------- ---------- -----------
Net cash provided (used) by
financing activities..... 88,464 (100,000) (86,034) -- --
----------- ----------- ---------- ---------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................... (17,078) -- 18,789 -- --
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 18,790 1 1 1 1
----------- ----------- ---------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 1,712 $ 1 $ 18,790 $ 1 $ 1
=========== =========== ========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES
Net transfer of investment in Bank
and Senior Notes to Holdings
(Note 1)........................ 525,751 -- -- -- --
Capital contributed to Holdings.... 121,186 -- -- -- --
</TABLE>
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-63
<PAGE>
================================================================================
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 SHARES OF CLASS A COMMON STOCK 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 .................................................... 2
Risk Factors .......................................................... 11
The Company ........................................................... 17
Use of Proceeds ....................................................... 19
Dividend Policy ....................................................... 20
Capitalization ........................................................ 21
Selected Consolidated Financial and Other Data ........................ 22
Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 26
Business .............................................................. 54
Regulation ............................................................ 76
Properties ............................................................ 98
Legal Proceedings ..................................................... 98
Management ............................................................ 101
Selling Stockholders .................................................. 120
Description of Capital Stock .......................................... 123
Legal Matters ......................................................... 129
Experts ............................................................... 129
Available Information ................................................. 129
Index to Consolidated Financial Statements ............................ F-1
10,208,610 SHARES
[LOGO--BANK UNITED CORP.]
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
AUGUST 14, 1997
================================================================================
<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.
PAYABLE
BY THE
REGISTRANT
----------
SEC registration fee................. $ --
NASD filing fee...................... --
NASDAQ listing fee................... --
Blue Sky fees and expenses........... --
Accounting fees and expenses......... 15,000
Legal fees and expenses.............. --
Printing and engraving expenses...... 45,000
Miscellaneous fees and expenses...... --
----------
Total........................... $ 60,000
==========
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 exclusive of any other right which
any person may have or thereafter acquire under any statute, provision of the
II-1
<PAGE>
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 (1) any breach of the
director's duty of loyalty to the corporation or its stockholders, (2) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) payments of unlawful dividends or unlawful stock
repurchases or redemptions, or (4) 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 (1) for any breach of the director's
duty of loyalty to the Company or its stockholders, (2) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (3) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (4) 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 Purchase 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:
(1) 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; (2) 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 (3)
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" and "Selling Stockholders". 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".
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are filed as part of this
Registration Statement.
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
1.1 -- Form of Sales Agency Agreement.
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. (Exhibit 2.1 to Form S-1 filed on June 18, 1996)
2.2 -- Merger Agreement, dated as of June 17, 1996, by and between the Company and Hyperion
Holdings related to the Merger. (Exhibit 2.2 to Form S-1 filed on August 7, 1996)
3.1 -- Form of Restated Certificate of Incorporation of the Registrant, as amended. (Exhibit 3.1
to Form S-1 filed on June 18, 1996)
3.2 -- Form of By-Laws of the Registrant. (Exhibit 3.2 to Form S-1 filed on June 18, 1996)
4.1 -- Indenture, dated as of May 15, 1993, between the Registrant and Bank of New York, as
Trustee, relating to the Registrant's 8.05% Senior Notes due May 15, 1998. (Exhibit 4.1 to
Form S-1 filed on June 18, 1996)
4.2 -- Form of 8.05% Senior Note due May 15, 1998 (included in the Indenture filed as Exhibit 4.1
hereto). (Exhibit 4.2 to Form S-1 filed on June 18, 1996)
4.3 -- Exchange and Registration Rights relating to Registrant's 8.05% Senior Notes due May 15,
1998. (Exhibit 4.3 to Form S-1 filed on June 18, 1996)
4.4 -- First Supplemental Indenture, dated as of January 23, 1995, between the Registrant and the
Bank of New York, as Trustee, relating to Registrant's 8.05% Senior Notes due May 15,
1998. (Exhibit 4.4 to Form S-1 filed on June 18, 1996)
4.5 -- Form of Class A common stock Certificate. (Exhibit 4.5 to Form S-1 filed on July 25, 1996)
4.6 -- Indenture, dated as of May 7, 1997, between the Registrant and The Bank of New York, as
Trustee, relating to the Registrant's 8.875% Subordinated Notes due May 1, 2007 (Exhibit
4.2 to Form S-1 filed on April 24, 1997)
4.7 -- Form of 8.875% Subordinated Notes due May 1, 2007 (included in the Indenture filed as
Exhibit 4.2 hereto) (Exhibit 4.3 to Form S-1 on April 24, 1997)
4.8 -- Form of 8.05% Senior Note due May 15, 1998 (included in Indenture filed as Exhibit 4.1
hereto) (Exhibit 4.4 to Form S-1 filed on April 24, 1997)
4.9 -- Exchange and Registration Rights relating to Registrant's 8.05% Senior Notes due May 15,
1998. (Incorporated by reference to Exhibit 4.3 in the Registrant's Registration Statement
on Form S-1, Registration No. 333-06229.)
4.10 -- First Supplemental Indenture, dated as of January 23, 1995, between the Registrant and The
Bank of New York, as Trustee, relating to Registrant's 8.05% Senior Notes due May 15,
1998. (Incorporated by reference to Exhibit 4.4 in the Registrant's Registration Statement
on Form S-1, Registration No. 333-06229.)
4.11 -- Second Supplemental Indenture, dated as of December 3, 1996 among Registrant, BNKU
Holdings, Inc. and The Bank of New York, as Trustee, relating to Registrant's 8.05% Senior
Notes due May 15, 1998 (Exhibit 4.7 to Form S-1 filed on April 24, 1997)
4.12 -- Third Supplemental Indenture, dated as of March 27, 1997 between the Registrant and The
Bank of New York, as Trustee, relating to the Registrant's 8.05% Senior Notes due May 15,
1998 (Exhibit 4.8 to Form S-1 filed on April 24, 1997)
5 -- Opinion of Wachtell, Lipton, Rosen & Katz as to the validity of the shares of Class A
Common Stock. (Exhibit 5 to Form S-1 filed on January 27, 1997)
10.1 -- Assistance Agreement, dated December 30, 1988, among the Bank, the Registrant, Hyperion
Holdings, Hyperion Partners, and the FSLIC. (Exhibit 10.1 to Form S-1 filed on June 18,
1996)
10.1a -- Settlement and Termination Agreement, dated as of December 23, 1993, among the Bank, the
Registrant, Hyperion Holdings, Hyperion Partners and the FDIC. (Exhibit 10.1a to Form S-1
filed on June 18, 1996)
10.1b -- Tax Benefits Agreement, dated December 28, 1993, among the Bank, the Registrant, Hyperion
Holdings, Hyperion Partners and the FDIC. (Exhibit 10.1b to Form S-1 filed on June 18,
1996)
10.2 -- Acquisition Agreement, dated December 30, 1988, between the Bank and the FSLIC.(Exhibit
10.2 to Form S-1 filed on June 18, 1996)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.3 -- Warrant Agreement, dated December 30, 1988, between the Bank and the FSLIC. (Exhibit 10.3
to Form S-1 filed on June 18, 1996)
10.3a -- Amended and Restated Warrant Agreement dated December 28, 1993, between the Bank and the
FDIC. (Exhibit 10.3a to Form S-1 filed on June 18, 1996)
10.4 -- Regulatory Capital Maintenance Agreement, dated December 30, 1988 among the Bank, the
Registrant, Hyperion Holdings, Hyperion Partners, and the FSLIC (terminated). (Exhibit
10.4 to Form S-1 filed on June 18, 1996)
10.5 -- Federal Stock Charter of the Bank and First Amendment to charter approved on August 26,
1992. (Exhibit 10.5 to Form S-1 filed on June 18, 1996)
10.6 -- Amended and Restated Federal Stock Charter of the Bank and Second Amendment approved on
October 30, 1992. (Exhibit 10.6 to Form S-1 filed on June 18, 1996)
10.6a -- Third Amendment to the Federal Stock Charter of the Bank approved on April 23, 1996.
(Exhibit 10.6a to Form S-1 filed on June 18, 1996)
10.6b -- Amended and Restated Bylaws of the Bank. (Exhibit 10.6b to Form S-1 filed on June 18,
1996)
10.7 -- Specimen Preferred Stock, Series A, certificate, $25.00 per share stated value of the
Bank. (Exhibit 10.7 to Form S-1 filed on June 18, 1996)
10.7a -- Certificate of Designation of Noncumulative Preferred Stock, Series A, of the Bank.
(Exhibit 10.7a to Form S-1 filed on June 18, 1996)
10.7b -- Specimen Preferred Stock, Series B, certificate, $25.00 per share stated value, of the
Bank. (Exhibit 10.7b to Form S-1 filed on June 18, 1996)
10.7c -- Certificate of Designation of Noncumulative Preferred Stock, Series B, of the Bank.
(Exhibit 10.7c to Form S-1 filed on June 18, 1996)
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). (Exhibit 10.8 to Form S-1 filed on June 18, 1996)
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. (Exhibit 10.8a to Form
S-1 filed on June 18, 1996)
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. (Exhibit 10.8b to Form S-1
filed on June 18, 1996)
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. (Exhibit 10.8c to Form S-1
filed on June 18, 1996)
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. (Exhibit 10.8d to Form
S-1 filed on June 18, 1996)
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). (Exhibit 10.9 to Form S-1 filed on June 18,
1996)
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.
(Exhibit 10.10 to Form S-1 filed on June 18, 1996)
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.). (Exhibit
10.10a to Form S-1 filed on June 18, 1996)
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.). (Exhibit
10.10b to Form S-1 filed on June 18, 1996)
10.11 -- Lease Agreement, dated November 20, 1990, between the Bank and Greenway Plaza, LTD.
(Leased premises at 3800 Buffalo Speedway). (Exhibit 10.11 to Form S-1 filed on June 18,
1996)
10.12 -- Employment Agreement, dated March 18, 1991, between the Bank and Barry C. Burkholder.
(Exhibit 10.12 to Form S-1 filed on June 18, 1996)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.12a -- Amendment, dated April 10, 1996, to the Employment Agreement between the Bank and Barry C.
Burkholder. (Exhibit 10.12a to Form S-1 filed on June 18, 1996)
10.13 -- Letter Agreement Related to Employment, dated April 4, 1990, between the Bank and Anthony
J. Nocella. (Exhibit 10.13 to Form S-1 filed on June 18, 1996)
10.14 -- Letter Agreement Related to Employment, dated June 18, 1990 between the Bank and George R.
Bender. (Exhibit 10.14 to Form S-1 filed on June 18, 1996)
10.15 -- Letter Agreement Related to Employment, dated April 6, 1990, between the Bank and Jonathon
K. Heffron. (Exhibit 10.15 to Form S-1 filed on June 18, 1996)
10.16 -- Letter Agreement Related to Employment, dated May 10, 1991, between the Bank and Leslie H.
Green. (Exhibit 10.16 to Form S-1 filed on June 18, 1996)
10.17 -- Management Incentive Plan, dated April 20, 1992. (Exhibit 10.17 to Form S-1 filed on June
18, 1996)
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. (Exhibit 10.18 to Form S-1 filed on June 18, 1996)
10.22 -- Supplemental Executive Savings Plan of the Bank. (Exhibit 10.22 to Form S-1 filed on June
18, 1996)
10.23 -- Directors Supplemental Savings Plan of the Bank. (Exhibit 10.23 to Form S-1 filed on June
18, 1996)
10.24 -- Warrant Purchase and Exchange Agreement, dated July 23, 1996, by and among the Company,
the Bank and the Federal Deposit Insurance Corporation. (Exhibit 10.24 to Form S-1 filed
on July 25, 1996)
10.25 -- Tax Sharing Agreement dated as of May 1, 1996, by and between the Company and the Bank.
10.26 -- Form of The Company's 1996 Stock Incentive Plan. (Exhibit 10.26 to Form S-1 filed on July
25, 1996)
10.27 -- Form of The Company's Director Stock Plan. (Exhibit 10.27 to Form S-1 filed on July 25,
1996)
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. (Exhibit 10.32 to Form S-1 filed on July 25,
1996)
10.33 -- Form of Stock Option Agreement. (Exhibit 10.33 to Form S-1 filed on July 25, 1996)
10.34 -- Consulting Agreement. (Exhibit 10.23 to Form 10-K filed on December 20, 1996)
10.35 -- Recovery Agreement. (Exhibit 10.24 to Form 10-K filed on December 20, 1996)
10.36 -- Stock Purchase Agreement, dated January 15, 1993, between Hyperion Partners and Hyperion
Holdings. (Exhibit 10.36 to Form S-1 filed on July 25, 1996)
10.37 -- Asset Purchase and Sale Agreement, dated January 17, 1997, between the Bank and National
City Mortgage Co. (Exhibit 10.38 to Form 10-Q filed on February 14, 1997)
21 -- Subsidiaries of the Registrant. (Exhibit 21 to Form S-1 filed on August 7, 1996)
*23.1 -- Consent of Deloitte & Touche LLP, independent auditors.
*27 -- Financial Data Schedule.
</TABLE>
- ------------
* Filed herewith.
All other Exhibits have been filed previously.
(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.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN HOUSTON, TEXAS, ON AUGUST 14, 1997.
BANK UNITED CORP.
By: /s/ BARRY C. BURKHOLDER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON THE DATES
INDICATED BELOW.
SIGNATURES TITLE DATE
- --------------------------------- -------------------------- ----------------
(1) Principal Executive Officer:
/s/BARRY C. BURKHOLDER President and August 14, 1997
BARRY C. BURKHOLDER Chief Executive Officer
(2) Principal Financial and Accounting Officer:
/s/ANTHONY J. NOCELLA Vice Chairman and August 14, 1997
ANTHONY J. NOCELLA Chief Financial Officer
(3) Directors:
* Chairman and Director August 14, 1997
LEWIS S. RANIERI
Director August 14, 1997
BARRY C. BURKHOLDER
* Director August 14, 1997
LAWRENCE CHIMERINE, PH.D.
* Director August 14, 1997
DAVID M. GOLUSH
* Director August 14, 1997
PAUL M. HORVITZ, PH.D.
* Director August 14, 1997
ALAN E. MASTER
* Director August 14, 1997
ANTHONY J. NOCELLA
II-7
<PAGE>
SIGNATURES TITLE DATE
- --------------------------------- -------------------------- ----------------
* Director August 14, 1997
SALVATORE A. RANIERI
* Director August 14, 1997
SCOTT A. SHAY
* Director August 14, 1997
PATRICIA A. SLOAN
* Director August 14, 1997
MICHAEL S. STEVENS
* Director August 14, 1997
KENDRICK R. WILSON III
- ------------
* Signed through a Power of Attorney granted to
Barry C. Burkholder and Jonathan K. Heffron.
II-8
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 5 to
Registration Statement No. 333-19237 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
August 13, 1997
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