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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
COMMISSION FILE NUMBER: 0000906420
BANK UNITED CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3528556
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3200 SOUTHWEST FREEWAY, SUITE 1600
HOUSTON, TEXAS 77027
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 543-6958
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of December 17, 1997 was $1,147,963,561.
The number of shares outstanding as of the registrant's $0.01 par value
common stock as of December 17, 1997 were as follows:
TITLE OF EACH CLASS NUMBER OF SHARES
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Class A 28,354,276
Class B 3,241,320
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's 1997 Annual
Meeting of Shareholders are incorporated by reference to Part III of this Annual
Report on Form 10-K.
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BANK UNITED CORP.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 1
General................................................ 1
Community Banking Group................................ 2
Commercial Banking Group............................... 4
Financial Markets Group................................ 5
Mortgage Servicing Group............................... 6
Mortgage Banking Group................................. 8
Loan Portfolio......................................... 9
Investment Portfolio................................... 10
Deposits............................................... 11
Asset and Liability Management......................... 12
Competition............................................ 15
Subsidiaries........................................... 15
Personnel.............................................. 15
Federal Financial Assistance........................... 16
Regulation............................................. 17
Taxation............................................... 27
ITEM 2. PROPERTIES.................................................. 30
ITEM 3. LEGAL PROCEEDINGS........................................... 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 31
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 32
ITEM 6. SELECTED FINANCIAL DATA..................................... 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 37
Discussion of Results of Operations.................... 37
Discussion of Changes in Financial Condition........... 42
Asset Quality.......................................... 44
Capital Resources and Liquidity........................ 48
Contingencies and Uncertainties........................ 50
Recent Accounting Standards............................ 50
Forward-Looking Information............................ 50
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 51
(i)
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 51
ITEM 11. EXECUTIVE COMPENSATION...................................... 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 52
SIGNATURES 56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 58
(ii)
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PART I
ITEM 1. BUSINESS
GENERAL
Bank United Corp. (the "Parent Company") was incorporated in Delaware on
December 19, 1988 as USAT Holdings Inc. and became the holding company for Bank
United (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
Federal Deposit Insurance Corporation ("FDIC"). In December 1996 the Parent
Company formed a wholly owned Delaware subsidiary, BNKU Holdings, Inc.
("Holdings"). After acquiring the common stock of Holdings, the Parent Company
contributed its common stock investment in the Bank to Holdings, and Holdings
assumed the obligations of the Parent Company. As a result of these
transactions, Holdings became the sole direct subsidiary of the Parent Company
and the Bank became the sole direct subsidiary of Holdings. The Consolidated
Financial Statements included herein include the accounts of the Parent Company,
Holdings, the Bank, and the Bank's wholly owned subsidiaries (collectively known
as the "Company").
The Company is a broad-based financial services provider to consumers and
businesses in Texas and selected regional markets throughout the United States.
At September 30, 1997 the Company operated a 71-branch community banking network
serving nearly 211,000 households, as well as 11 commercial banking offices in
nine states across the country. As of September 30, 1997, the Company was the
largest publicly traded depository institution headquartered in Texas, with
$12.0 billion in assets, $5.2 billion in deposits and $598.5 million in
stockholders' equity. The Company's address is 3200 Southwest Freeway, Houston,
Texas 77027, and its telephone number is (713) 543-6500.
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 commercial and consumer
lending lines of business. During this time, the Company has engaged in more
aggressive marketing campaigns and increased its commercial and consumer loan
portfolios and the level of lower cost transaction and commercial deposit
accounts. During fiscal 1997, commercial loans increased $1.2 billion, or 124%.
Also during fiscal 1997, the outstanding balance of transaction accounts
increased to 45% of total deposits, from 39% at September 30, 1996.
While the pursuit of this strategy entails risks different than those
present in traditional single family mortgage lending, the Company believes it
has taken appropriate measures to manage these risks. 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 risks, the Company has hired experienced commercial banking
professionals and trained other personnel to manage and staff these businesses,
and the Company closely monitors the conduct and performance of the businesses.
In September and October 1997, the Company signed agreements to purchase
twenty-one branches with deposits totalling $1.5 billion. See " -- Deposits".
The Company intends to continue to pursue additional expansion opportunities,
including acquisitions, while maintaining adequate capitalization.
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 is
subject to 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.
The Company has traditionally managed its business to limit its overall
exposure to changes in interest rates; however, under the current policies of
the Company's Board of Directors, management has some latitude to
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increase the Company's interest rate sensitivity position within certain limits.
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 "-- Asset and Liability Management."
An increase in the general level of interest rates may affect the Company's
net interest spread because of the periodic caps that limit the interest rate
change on the Company's mortgage-backed securities ("MBS") and loans that pay
interest at adjustable rates. Additionally, an increase in interest rates may
reduce, among other things, 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.
The Company's business is conducted through the Community Banking,
Financial Markets, and Commercial Banking Groups, which comprise the Banking
Segment, and the Mortgage Banking Segment. See Note 17 to the Consolidated
Financial Statements for summarized financial information by business segment.
COMMUNITY BANKING GROUP
The Community Banking Group's principal activities include deposit
gathering, consumer lending, small business banking, and investment product
sales. The Community Banking Group, which has marketed itself under the name
"Bank United" since 1993, operates a 71-branch community banking network, a
24-hour telephone banking center, and a 70-unit ATM network, which together
serve as the platform for the Company's consumer and small business banking
activities. The community banking branch network includes 37 branches in the
greater Houston area, 29 branches in the Dallas / Ft. Worth metropolitan area,
and two branches each in Austin and San Antonio, as well as a branch and credit
card processing center in Phoenix, Arizona. Through this branch network, the
Company maintains approximately 472,000 accounts for approximately 211,000
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 certificates of deposit ("CDs"), and deposit products and
services tailored specifically to consumer and 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. At September 30, 1997, the Community Banking Group maintained nearly
365,000 deposit accounts having $4.2 billion in deposits. See " -- Deposits."
CONSUMER LENDING
Since 1992, the Community Banking Group has engaged in consumer lending for
its own portfolio. At September 30, 1997, consumer loans outstanding totalled
$305.5 million and there were $190.0 million in unfunded commitments. Through
the Community Banking Group, the Company offers a variety of consumer loan
products, including home improvement loans, purchase-money second lien loans,
and automobile loans. The Community Banking Group also provides a specialty
lending program in which a preferred rate and faster service is offered to home
improvement loan prospects referred to the Company by contractors. 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. Recent Texas
legislative and constitutional changes now permit certain types of home equity
lending in Texas. The Community Banking Group began accepting applications for
home equity loans in Texas on November 5, 1997 and will be able to close and
fund loans in January 1998. The Community Banking Group has implemented the
technology and processes appropriate for efficient loan underwriting and
processing, including loan applications by telephone and automated underwriting.
Consumer loans generally have higher risk of loss than single family
residential loans. For example, credit card loans are easily accessible to
consumers thereby contributing to an increased level of risk, fraud in
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particular, generally have no collateral, and are subject to complex consumer
protection laws and regulations. Automobile loans carry the risk of collateral
depreciation and mobility and 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 Small Business
Administration ("SBA") loans. These loans are offered with both fixed and
adjustable-rates on a term basis, and adjustable-rate on a 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 borrower. Additionally, borrowers are
contractually required to provide periodic financial information for review. At
September 30, 1997, the Community Banking Group had 561 small business loans
outstanding totalling $49.5 million, $24.7 million in unfunded commitments, and
$11.7 million in pending applications. The Community Banking Group's small
business strategy is focused on offering loan products and services tailored
specifically to most small business needs, with highly responsive credit
decision-making.
The Company is aggressively seeking to increase its small business lending
volume by offering a comprehensive line of small business products and services.
The Company's small business services are distributed through three channels:
branch personnel, generally focusing on smaller customers with credit needs of
$100,000 or less, relationship managers handling larger businesses with credit
needs of up to $3,000,000, and correspondent relationships with referral sources
that provide loan applications primarily for SBA loans. The Company offers 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 and may
have limited marketability. 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, on 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. The Company is a preferred lender under the SBA program for its major
retail markets of Houston, the Dallas/Ft. Worth metroplex, Austin, and San
Antonio. This designation allows the Company to approve SBA-guaranteed loan
applications without prior review from the SBA, thereby accelerating the
decision-making process for small business loan applications. Preferred lenders
receive priority funding and service from the SBA. Loans approved through the
preferred lender program carry a maximum SBA guarantee of 75%. The rapid
turnaround time on approvals and the longer repayment terms on SBA loans are
expected to attract more small business clients for the Company.
INVESTMENT PRODUCT SALES
Since 1993, a subsidiary of the Bank has been marketing investment products
to the Company's consumer customer base. During 1997, this subsidiary changed
its name from United Financial Markets, Inc., to Bank United Securities Corp. A
broad range of investment products, including stocks, bonds, mutual funds,
annuities, securities, and certain other insurance policies are offered by
commissioned Series 7 and Group I licensed, registered representatives. As of
September 30, 1997, there were 33 such representatives operating out of certain
offices located in the community banking branches. Each representative will
typically be responsible for investment product sales at two to three community
banking branches. Investment product sales were $150.2 million, $157.2 million,
and $81 million for fiscal 1997, 1996, and 1995, respectively. Gross fee revenue
from such sales were $7.2 million, $5.4 million, and $3.6 million for fiscal
1997, 1996, and 1995, respectively.
RETAIL MORTGAGE ORIGINATIONS
In fiscal 1997 the Company began offering mortgages through its community
banking branch network. The types of loans offered during fiscal 1997 were
limited to 15-and 30-year fixed-rate mortgage loans. The Community Banking Group
has developed an abbreviated initial application, a promised response within two
days of application, and provides a discount on the rate if the customer has the
payment automatically withdrawn
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from a Bank United checking account. For fiscal 1997, the Community Banking
Group originated $38.2 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 commercial businesses, which are
primarily real estate related. 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 has expanded its products and industry specialties to
include healthcare lending, commercial syndications, 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 mortgage servicing rights
("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 September 30, 1997, the Company had $299.7 million in unfunded commitments
and $464.2 million of Mortgage Banker Finance ("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 $951.7 million at
September 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 also
are subject to the risk that the collateral may be documented fraudulently or
improperly. MBF loans are made generally to borrowing entities that have lower
capital levels than other commercial borrowers.
MULTI-FAMILY LENDING
Since 1990, the Commercial Banking Group has been providing multi-family
financing for established, operating multi-family properties, real estate
investment trusts, and selected construction, acquisition, and rehabilitation
projects. 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 misrepresent the progress or status of the project. Additionally, the value
of the completed collateral is subject to market value changes and may be
adversely affected by the presence of undetected, environmentally sensitive
substances. To reduce these risks, the Company limits the loan amount to an
amount less than its appraised value, verifies historical cash flows, and
assesses the general economic conditions and the financial condition of the
borrower. At September 30, 1997, the Company had $238.4 million of unfunded
multi-family commitments and $775.2 million of such loans outstanding ($661.8
million in permanent loans, $107.2 million in construction loans, and $6.2
million of warehouse 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.
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 major markets outside of
Texas, including Atlanta, Chicago, Denver, Orlando, Phoenix, and Philadelphia.
The Company opened offices in San Francisco, San Diego, and Washington, D.C.
during fiscal 1997. Current markets in Texas include Houston, Dallas, Austin,
and San Antonio. At September 30, 1997, the Company had
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$274.7 million in unfunded commitments for single family construction loans and
$389.2 million of such loans outstanding.
HEALTHCARE LENDING
In fiscal 1996, the Commercial Banking Group began making 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 September 30, 1997, the Company had $153.6 million in unfunded
commitments for healthcare loans and $96.0 million of such loans outstanding
($65.9 million in permanent loans and $30.1 million in construction loans). The
Company applies competitive marketplace underwriting guidelines in evaluating
the creditworthiness 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 September 30, 1997, the Company
had $182.5 million of unfunded commercial real estate commitments and $304.8
million in such loans outstanding ($275.7 million in permanent loans and $29.1
million in construction loans). 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.
COMMERCIAL LOAN SYNDICATIONS
As part of the Company's strategy to develop its commercial lines of
business, the Company implemented an initiative to purchase participation
interests in syndicated commercial loans starting in October 1996. At September
30, 1997, this business line had $59.8 million of unfunded loan commitments, $25
million of letters of credit, and $73.0 million of loans outstanding.
FINANCIAL MARKETS GROUP
The Financial Markets Group manages the Company's asset portfolio
activities, including the acquisition, management, and securitization of loans,
and began originating wholesale mortgages in February 1997. Additionally, under
the supervision of the Asset and Liabilities Committee ("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). In fiscal 1997, 1996, and 1995
the Company purchased approximately $795.8 million, $226.3 million, and $2.7
billion of single family loans, respectively. While the Company intends to
continue to pursue this strategy on a selective basis, there can be no assurance
of the continued availability of portfolio acquisition opportunities or the
Company's ability to obtain such portfolios on favorable terms. A majority of
the $9.0 billion of loans held by the Company at September 30, 1997 was 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 and other
mortgage origination activities that were retained were integrated into the
Financial Markets Group. See " -- Mortgage Banking Group". These offices
provide qualified mortgage brokers nationwide with a variety of fixed and
adjustable-rate mortgage products. The wholesale mortgage origination offices
originate loans for the Company's portfolio and for sale and originated $1.5
billion and $1.7 billion of loans in fiscal 1997 and 1996, respectively
including loans originated by the Mortgage Banking Group
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through January 31, 1997. At September 30, 1997, there were $211.5 million in
unfunded commitments for wholesale mortgage originations.
Recent Texas legislative and constitutional changes now permit certain
types of home equity lending in Texas. The wholesale mortgage origination
offices began accepting applications for home equity loans in Texas on November
5, 1997 and will be able to close and fund loans in January 1998.
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 Federal Home Loan Bank of Dallas ("FHLB Dallas"), borrowings
on securities sold under agreements to repurchase ("reverse repurchase
agreements") and brokered deposits. At September 30, 1997, wholesale activities
provided $5.4 billion in funding. See "Management's Discussion and
Analysis -- Capital Resources and Liquidity" and Notes 7, 8, and 9 to the
Consolidated Financial Statements.
INVESTMENT PORTFOLIO MANAGEMENT
The Financial Markets Group manages the Company's investment portfolio,
which totalled approximately $2.0 billion at September 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 maximizes 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
In May 1996 the Financial Market Group began purchasing the
government-guaranteed portion of SBA loans through Bank United Securities Corp,
the Bank's broker-dealer subsidiary. These loans are then pooled and
securitized. During fiscal 1997 and 1996, $406.3 million and $58 million,
respectively, of SBA loans were purchased. A portion of these SBA loans were
pooled into securities totalling $341.5 million and $30.5 million during fiscal
1997 and 1996, respectively. The Company was the fourth largest SBA pool
assembler in the United States as of September 30, 1997.
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.
These securitization activities are separate from secondary marketing
activities involving single family warehouse loans.
SERVICING RETENTION UNIT
In September 1997 the Company established a special residential production
unit to focus on refinancing loans within its residential servicing portfolio.
This new group, the Servicing Retention Unit, promptly reacts to customer
activities that may indicate a possibility of prepayment and proactively
solicits borrowers that have an identified possibility of refinance. The
Servicing Retention Unit's objective is to extend the life of the existing
portfolio by reducing gross prepayments.
MORTGAGE SERVICING GROUP
At September 30, 1997, the Company's single family mortgage servicing
portfolio totalled $24.5 billion or 249,600 loans, including $4.0 billion of
loans serviced for the Company's own account. Mortgage loan servicing activities
include collecting and accounting for payments from borrowers, remitting
payments to investors, collecting funds for and paying mortgage-related expenses
such as taxes and insurance, inspecting the collateral as required, collecting
from and, if necessary, foreclosing on delinquent borrowers, disposing of
properties received in foreclosures, and generally administering the loans.
Mortgage servicing operations are technology
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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. The Mortgage Servicing Group also offers insurance
and other ancillary products and services to its loan customers.
SERVICING FOR OTHERS
The Company enters into agreements to service loans for other loan
investors, in exchange for servicing fees, primarily through the purchase of
servicing rights, and to a lesser extent, through the sale of loans it has
originated while retaining the right to service the loans. The Mortgage
Servicing Group services loans owned by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"),
the Federal Home Loan Mortgage Corporation ("FHLMC"), private mortgage
investors, and the Company.
Servicing fees are withheld from the monthly payments made to investors,
are usually based on the principal balance of the loan being serviced, 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 that have been securitized into 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.
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.
VALUATION
Mortgage servicing portfolio levels are influenced by market interest
rates. 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.
The weighted average interest rate in the single family servicing portfolio
has decreased from 9.57% at September 30, 1991 to 8.10% at September 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 mortgage servicing rights ("MSRs") on loans
originated by others at lower rates. At September 30, 1997, the weighted average
contractual maturity (remaining years to maturity) of the loans in the single
family mortgage loan servicing portfolio was approximately 23 years.
The following table presents the percentage of loans in the single family
servicing portfolio at September 30, 1997 in each interest rate category.
<TABLE>
<CAPTION>
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........................... 4.7% 12.3% 9.2% 3.0% 0.7% 0.2% 0.1%
Conventional......................... 6.5 26.7 30.6 4.4 1.0 0.3 0.3
--------- --------- --------- ------ ------ ------ -------
Total........................... 11.2% 39.0% 39.8% 7.4% 1.7% 0.5% 0.4%
========= ========= ========= ====== ====== ====== =======
</TABLE>
7
<PAGE>
At September 30, 1997, the largest concentrations of the single family
servicing portfolio were in California (22.7%) and Texas (12.6%). The
performance of the loans in the servicing portfolio may be affected by changes
in the local economic and business conditions.
Of the loans serviced by the Mortgage Servicing Group at September 30,
1997, 5.11% were delinquent and an additional 0.77% were in foreclosure.
The factors discussed above are considered when determining the valuation
of the MSRs, along with market assumptions regarding expected prepayment speeds.
There was no MSR valuation allowance at September 30, 1997 or 1996.
LOAN SERVICING PORTFOLIO
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
ACTIVITY
Beginning balance.................... $ 13,246,848 $ 12,532,472 $ 8,920,760
Purchases(1)..................... 12,384,544 1,233,117 4,425,194
Servicing on originated loans.... 2,219,294 3,689,994 3,338,628
Prepayments...................... (1,870,400) (1,600,195) (937,509)
Sales(1)......................... (929,687) (2,130,004) (2,840,244)
Amortization..................... (436,541) (373,964) (294,567)
Foreclosures..................... (95,662) (104,572) (79,790)
------------ ------------ ------------
Ending balance....................... $ 24,518,396 $ 13,246,848 $ 12,532,472
============ ============ ============
BY TYPE
Conventional..................... $ 19,034,564 $ 9,663,715 $ 9,442,600
Government....................... 5,483,832 3,583,133 3,089,872
------------ ------------ ------------
$ 24,518,396 $ 13,246,848 $ 12,532,472
============ ============ ============
BY OWNER
Others........................... $ 20,521,294 $ 9,494,788 $ 8,521,772
Company.......................... 3,997,102 3,752,060 4,010,700
------------ ------------ ------------
$ 24,518,396 $ 13,246,848 $ 12,532,472
============ ============ ============
- ------------
(1) The actual release or transfer of servicing does not necessarily take place
during the same period as the related sale or purchase of MSRs.
During fiscal 1997 and 1996, the Company continued to be an active
purchaser of MSRs. MSRs increased $148.8 million, or 121%, during fiscal 1997,
reflecting the purchase of servicing rights associated with $12.6 billion of
single family mortgage loans at a premium of $166.5 million. The single family
servicing portfolio increased to $24.5 billion at September 30, 1997 compared to
$13.2 billion at September 30, 1996. The servicing portfolio at September 30,
1997 included $7.5 billion of loans for which the servicing rights had not yet
been transferred to the Company. Such rights were transferred during the first
quarter of fiscal 1998. These acquisitions also contributed to the increase in
servicing related receivables included in other assets. See Note 6 to the
Consolidated Financial Statements.
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 Company's strategy to reduce its reliance in its
single family mortgage lending, the Company evaluated its 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 during fiscal 1996.
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 Company retained its mortgage servicing
business, its retail
8
<PAGE>
mortgage origination capability in Texas through its community banking branches,
and its wholesale mortgage and other origination capabilities through its
Financial Markets Group. For the four months ending January 31, 1997 and fiscal
1996, the Mortgage Banking Group originated $638.4 million and $2.1 billion,
respectively, in retail mortgage loans and $614.5 million and $1.7 billion,
respectively, in mortgage loans through its wholesale operations. See
" -- Financial Markets Group -- Wholesale Mortgage Originations" and Note 17
to the Consolidated Financial Statements.
LOAN PORTFOLIO
The Company has focused in recent years on originating and servicing
commercial and consumer loans. However, the loan portfolio still reflects the
Bank's origins as a thrift institution, with single family mortgage fundings
constituting a majority of loans made. The following table shows loan funding
levels. Fundings include originations of new loans and increases in existing
loans, such as lines of credit (excluding increases in MBF loans). Commercial
loans include the following loan categories: single family construction,
multi-family, multi-family construction, commercial real estate, commercial real
estate construction, commercial syndications, healthcare, healthcare
construction, small business, and MBF lines of credit ("commercial"). A
summary of all of the activity in the loan portfolio is shown in "Management's
Discussion and Analysis -- Discussion of Changes in Financial Condition".
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
FUNDINGS
Single family........................ $ 2,188,273 $ 3,602,009 $ 3,226,324
Commercial........................... 1,492,931 891,306 547,117
Consumer............................. 152,665 125,596 99,249
------------ ------------ ------------
Total...................... $ 3,833,869 $ 4,618,911 $ 3,872,690
============ ============ ============
The following table shows the composition of the loan portfolio.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HELD FOR INVESTMENT
Single family................... $ 5,820,495 $ 6,152,504 $ 7,061,088 $ 4,203,614 $ 2,847,602
Single family construction...... 389,230 242,525 115,436 57,786 35,904
Multi-family.................... 661,774 479,833 356,587 256,362 94,120
Multi-family construction....... 107,215 31,355 35,430 20,437 17,935
Commercial real estate.......... 275,694 10,538 27,393 61,919 49,510
Commerical real estate
construction.................. 29,088 21,551 3,613 -- --
Commercial syndications......... 72,981 -- -- -- --
Healthcare...................... 65,886 8,750 -- -- --
Healthcare construction......... 30,091 -- -- -- --
Small business.................. 45,350 22,798 6,495 -- --
Mortgage banker finance lines of
credit........................ 464,189 139,872 109,339 147,754 385,548
Consumer........................ 305,545 173,518 123,096 108,179 57,902
------------ ------------ ------------ ------------ ------------
8,267,538 7,283,244 7,838,477 4,856,051 3,488,521
Allowance for credit losses..... (39,172) (39,633) (36,763) (23,378) (27,970)
Accretable unearned discounts
and net deferred loan
origination fees.............. (6,740) (16,458) (38,038) (52,345) (26,111)
------------ ------------ ------------ ------------ ------------
8,221,626 7,227,153 7,763,676 4,780,328 3,434,440
------------ ------------ ------------ ------------ ------------
HELD FOR SALE, PRIMARILY
SINGLE FAMILY...................... 773,603 292,335 496,564 265,846 1,427,939
------------ ------------ ------------ ------------ ------------
Total loans................ $ 8,995,229 $ 7,519,488 $ 8,260,240 $ 5,046,174 $ 4,862,379
============ ============ ============ ============ ============
</TABLE>
9
<PAGE>
The Company's 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 materially adverse effect
on the Company's financial condition, results of operations or liquidity. See
Note 5 to the Consolidated Financial Statements for a geographic distribution of
the loan portfolio.
INVESTMENT PORTFOLIO
AT SEPTEMBER 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Securities purchased under agreements
to resell and federal funds sold... $ 349,209 $ 674,249 $ 471,052
Securities
U.S. government and agency...... 66,596 64,544 116,013
Other........................... 11,213 1,149 1,081
Mortgage-backed securities
U.S. government and agency...... 651,292 556,853 802,729
Other........................... 918,413 1,101,055 1,595,534
------------ ------------ ------------
Total...................... $ 1,996,723 $ 2,397,850 $ 2,986,409
============ ============ ============
The Company maintains an investment portfolio for investment and liquidity
purposes. The investment portfolio consists primarily of MBS. MBS were acquired
as a means of investing in housing-related mortgage instruments while incurring
less credit risk than that which arises in holding a portfolio of
non-securitized loans. Additionally, MBS include securities created through the
securitization of the Company's single family loans. The MBS in the investment
portfolio include FNMA, FHLMC, and GNMA certificates ("agency securities"),
privately issued and credit enhanced MBS ("non-agency securities"), and
certain types of collateralized mortgage obligations ("CMOs").
FNMA, FHLMC, and GNMA certificates are modified pass-through MBS that
represent undivided interests in underlying pools of fixed-rate or certain types
of adjustable-rate, single family loans issued by the GNMA, a governmental
agency, and by the FNMA and the FHLMC, government-sponsored enterprises. The
non-agency securities acquired by the Company have been pooled and sold by
private issuers and were generally underwritten by large investment banking
firms. These securities provide for the timely payments of principal and
interest either through insurance issued by a reputable insurer or by
subordinating certain payments under other securities secured by the same
mortgage pool in a manner that is sufficient to have the senior MBS earn one of
the two highest credit ratings from one or more of the nationally recognized
statistical rating agencies. As of September 30, 1997, all of the non-agency MBS
had a credit rating of AA/Aa or higher as defined by the Standard & Poor's
Corporation or Moody's Investor Services, Inc.
See Notes 1 through 4 to the Consolidated Financial Statements for
additional information related to the assets in the investment portfolio.
10
<PAGE>
DEPOSITS
The Company attracts a majority of its deposits through its 71-branch
community banking network located primarily in the Houston area and the
Dallas/Ft. Worth metroplex. Over the past few years, the Company's management
has pursued a strategy designed to increase the level of lower cost transaction
and commercial deposit accounts. During fiscal 1997 the outstanding balances of
transaction accounts increased to 45% of total deposits up from 39% at September
30, 1996. The number of consumer and commercial checking accounts increased to
over 163,000 at September 30, 1997, up from 135,000 at September 30, 1996. The
composition of the Company's deposits by business unit, type of customer, and
type of account was as follows:
AT SEPTEMBER 30,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
BUSINESS UNIT
Community Banking.................... $4,201,898 $4,051,055 $3,946,433
Commercial Banking................... 973,123 889,039 919,417
Financial Markets.................... 72,647 207,851 316,370
---------- ---------- ----------
$5,247,668 $5,147,945 $5,182,220
========== ========== ==========
TYPE OF CUSTOMER
Consumer............................. $4,071,214 $3,939,631 $3,868,498
Commercial........................... 1,103,807 1,000,463 997,352
Wholesale............................ 72,647 207,851 316,370
---------- ---------- ----------
$5,247,668 $5,147,945 $5,182,220
========== ========== ==========
TYPE OF ACCOUNT
Time (CDs)........................... $2,878,952 $3,122,200 $3,382,274
Transaction.......................... 2,368,716 2,025,745 1,799,946
---------- ---------- ----------
$5,247,668 $5,147,945 $5,182,220
========== ========== ==========
Currently, the principal methods used by the Community Banking Group 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, as well as
offering treasury management services to small business customers. 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 by region at
September 30, 1997.
AVERAGE
DEPOSITS
NUMBER OF DEPOSITS PER
LOCATION BRANCHES OUTSTANDING BRANCH
- ------------------------------------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
Houston area......................... 37 $ 2,534,803 $ 68,508
Dallas/Ft. Worth metroplex........... 29 1,426,023 49,173
Other................................ 5 241,072 48,214
--
------------
Total........................... 71 $ 4,201,898 59,182
== ============
In October 1997 the Company signed an agreement to purchase 18 branches and
related deposits from Guardian Savings and Loan Association. The branches, six
in the Houston area and 12 in the Dallas/Ft. Worth Metroplex, have combined
deposits of $1.44 billion. Final closing of this transaction is expected in
January 1998. In September 1997, the Company agreed to purchase three branches
in the Dallas area, with $66 million in deposits from California Federal Savings
Bank, FSB. This transaction closed in December 1997. After considering these
transactions, the Company was ranked third in terms of deposits in both Houston
and the Dallas/Ft. Worth metroplex based on a consumer deposit report for
December 1996.
11
<PAGE>
The Commercial Banking Group also gathers deposits by offering cash
management services to its MBF customers. These commercial deposit accounts are
comprised of operating accounts of MBF customers, escrow deposits, and principal
and interest payments on the loans serviced by MBF customers. While the Company
does not generally solicit brokered deposits, the Financial Markets Group from
time to time accepts brokered deposits when permitted by regulation and
available at favorable rates. Wholesale deposits are raised from time to time by
the Financial Markets Group from institutional investors. 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 markets rates. See "Management's
Discussion and Analysis -- Capital Resources and Liquidity -- Deposits" and
Note 7 to the Consolidated Financial Statements.
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, warehouse
loans and commitments to originate loans ("mortgage pipeline"), and the
maturities of investments and borrowings. Additionally, the ALCO reviews
liquidity, cash flow flexibility, maturities of deposits, and consumer and
commercial deposit activity.
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, it 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 manages its exposure to interest rates by entering into certain
financial instruments with off-balance-sheet risk in the ordinary course of
business. The Company does not enter into instruments such as leveraged
derivatives or structured notes for the purposes of reducing interest rate risk.
The financial instruments used 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 instrument is normally offset by
other on or off-balance-sheet transactions. See Note 11 to the Consolidated
Financial Statements.
12
<PAGE>
The following table presents an analysis of the sensitivity inherent in the
Company's net interest income and market value of portfolio equity (market value
of assets, less liabilities, adjusted for the market value of MSRs and
off-balance-sheet instruments). The interest rate scenarios presented in the
table include interest rates at September 30, 1997 and as adjusted by
instantaneous parallel rate changes upward and downward of up to 200 basis
points. Each rate scenario reflects unique prepayment and repricing assumptions.
Since there are limitations inherent in any methodology used to estimate
the exposure to changes in market interest rates, this analysis is not intended
to be a forecast of the actual effect of a change in market interest rates on
the Company. The net interest income variability reflects the Company's negative
interest rate sensitivity gap (defined below) and does not include the decrease
in earnings from an increase in amortization of servicing intangible assets that
may be caused by higher prepayments when rates decline. The market value of
portfolio equity is significantly impacted by the estimated effect of
prepayments on the value of single family loans, MBS and servicing as rates
decline. Further, this analysis is based on the Company's assets, liabilities,
MSRs and off-balance sheet instruments at September 30, 1997 and does not
contemplate any actions the Company might undertake in response to changes in
market interest rates, such as the creation of additional servicing value by
refinancing the single family loan portfolio. This action could minimize the
decrease in market value of portfolio equity in the downward rate scenarios.
CHANGE IN NET INTEREST MARKET VALUE OF
INTEREST RATES INCOME PORTFOLIO EQUITY
-------------- ------------ ----------------
+200 (9.92)% (8.56)%
+100 (3.01) (0.57)
0 0.00 0.00
-100 1.23 (7.78)
-200 3.56 (12.01)
The interest rate sensitivity gap ("gap") is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. During a period of rising interest rates,
a positive gap (where the amount of maturing and repricing assets exceeds
liabilities) would tend to have a positive impact on net interest income while a
negative gap (where the amount of maturing and repricing liabilities exceeds
assets) would tend to have a detrimental impact. During a period of declining
interest rates, a negative gap would tend to have a positive impact on net
interest income while a positive gap would tend to have a detrimental impact.
The Company's one-year cumulative gap position at September 30, 1997 was
negative $579.5 million or 4.84% of assets. This is a one-day position that is
continually changing and is not indicative of the Company's position at any
other time. While the gap position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management, it is
difficult to predict the effect of changing interest rates solely on that
measure, without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. For example, the gap position reflects only the prepayment
assumptions pertaining to the current rate environment. Assets tend to prepay
more rapidly during periods of declining interest rates than during periods of
rising interest rates. Because of this and other risk factors not contemplated
by the gap position, an institution could have a matched gap position in the
current rate environment and still have its net interest income exposed to
interest rate risk.
13
<PAGE>
The following table sets forth the expected maturity and repricing
characteristics of the Company's consolidated assets, liabilities and
off-balance sheet contracts at September 30, 1997.
<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 TOTAL
---------- ----------- ----------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS(1)
Cash and investment
securities(2).................... $ 649,954 $ -- $ -- $ 25,140 $ 40,127 $ -- $ 715,221
Adjustable-rate loans and
mortgage-backed securities....... 4,489,324 1,582,057 1,235,265 1,006,269 62,770 -- 8,375,685
Fixed-rate loans and
mortgage-backed securities....... 303,004 95,165 191,554 825,376 697,293 -- 2,112,392
Other assets....................... -- -- -- -- -- 763,774 763,774
---------- ----------- ----------- ---------- --------- --------- -----------
Total assets................... $5,442,282 $1,677,222 $1,426,819 $1,856,785 $800,190 $ 763,774 $11,967,072
========== =========== =========== ========== ========= ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Certificates of deposit............ $ 485,015 $ 454,055 $ 798,845 $1,140,068 $ 969 $ -- $2,878,952
Checking and savings(3)............ 2,368,716 -- -- -- -- -- 2,368,716
---------- ----------- ----------- ----------- --------- --------- -----------
Total deposits................. 2,853,731 454,055 798,845 1,140,068 969 -- 5,247,668
Notes payable...................... -- -- 500 -- 219,699 -- 220,199
FHLB advances and other
borrowings....................... 4,537,635 632,079 110,000 21,245 -- -- 5,300,959
Other liabilities.................. -- -- -- -- -- 414,267 414,267
Minority interest.................. -- -- -- -- -- 185,500 185,500
Stockholders' equity............... -- -- -- -- -- 598,479 598,479
---------- ----------- ----------- ----------- ---------- --------- -----------
Total liabilities, minority
interest, and stockholders'
equity....................... $7,391,366 $1,086,134 $ 909,345 $1,161,313 $220,668 $1,198,246 $11,967,072
========== =========== =========== ========== ========= ========== ===========
Gap before off-balance-sheet
financial instruments.............. $(1,949,084) $ 591,088 $ 517,474 $ 695,472 $579,522 $(434,472)
OFF-BALANCE-SHEET(4)
Interest rate swap
agreements -- pay fixed.......... 261,000 -- -- (225,500) (35,500) --
----------- ------------ ----------- ---------- ---------- ---------
Gap.................................. $(1,688,084) $ 591,088 $ 517,474 $ 469,972 $544,022 $(434,472)
=========== ============ =========== ========== ========== =========
Cumulative gap....................... $(1,688,084) $(1,096,996) $(579,522)
=========== ============ ===========
Cumulative gap as a percentage of
total assets....................... (14.11)% (9.17)% (4.84)%
=========== =========== ===========
</TABLE>
- ------------
(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 securities purchased under agreements to
resell ("repurchase agreements"), federal funds sold, 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.
14
<PAGE>
COMPETITION
The Company competes primarily with certain commercial banks and thrift
institutions, some of which have a substantial presence in the same markets as
the Company. Competitors for deposits include thrift institutions, commercial
banks, credit unions, full service and discount broker dealers, and other
investment alternatives, such as mutual funds, money market funds, savings bonds
and other government securities. The Company and its peers compete primarily on
the price at which products are offered and on customer service.
The Company competes for 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
In December 1996 the Company formed a wholly owned Delaware subsidiary,
Holdings. After acquiring the common stock of Holdings, the Company contributed
its common stock investment in the Bank to Holdings, and Holdings assumed the
obligations of the Company. As a result of these transactions, at September 30,
1997, Holdings became the sole direct subsidiary of the Company and the Bank
became the sole direct subsidiary of Holdings.
The Bank is permitted to invest in the capital stock, obligations, and
other securities of its service corporations in an aggregate amount not to
exceed 2% of the Bank's assets, plus an additional 1% of assets if such
investment is used for community development or inner city development purposes.
In addition, if the Bank meets minimum regulatory capital requirements, it may
make certain conforming loans in an amount not exceeding 50% of the Bank's
regulatory capital to service corporations of which the Bank owns more than 10%
of the stock. At September 30, 1997, the Bank was authorized to have a maximum
investment of approximately $358.2 million in its subsidiaries. The subsidiaries
of the Bank whose operations are ongoing include Bank United Securities Corp.,
United Agency Corporation, and United Mortgage Securities Corporation.
BANK UNITED SECURITIES CORP.
The Bank is the sole shareholder of Bank United Securities Corp. ("BUS"),
a Texas corporation, which acts as a full-service broker-dealer. BUS, through
its institutional division, sells various securities products and whole loans
and engages in the deposit referral business with institutional and
sophisticated retail customers. Through its retail division, BUS markets
annuities and securities, including mutual funds, stocks, and bonds, to the
Bank's community banking customers. BUS is a broker-dealer registered with the
Securities and Exchange Commission ("SEC") and a member of the National
Association of Securities Dealers, Inc. ("NASD"). BUS changed its name from
United Financial Markets, Inc.,
effective April 1, 1997.
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 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.
PERSONNEL
As of September 30, 1997, the Company employed 1,408 full-time employees
and 255 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 12 to the Consolidated Financial Statements.
15
<PAGE>
FEDERAL FINANCIAL ASSISTANCE
In connection with the acquisition of United Savings Association of Texas
(the "Acquisition"), the Bank, the Company, and certain of their direct and
indirect parent entities entered into an overall agreement with the Federal
Savings and Loan Insurance Corporation ("FSLIC") and the Federal Home Loan
Bank Board ("FHLBB") that was evidenced by several written agreements (the
"Agreements"). The principal contract relating to the Acquisition was an
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 ("Assistance Agreement"). All of the Agreements have
terminated except one provision of the Assistance Agreement granting certain
indemnities to the Bank, the Company, Hyperion Holdings, Inc., a Delaware
corporation ("Hyperion Holdings"), Hyperion Partners L.P., a Delaware limited
partnership ("Hyperion Partners"), a forebearance letter (the "Forebearance
Agreement"), and the tax benefits agreement, dated December 28, 1993 ("Tax
Benefits Agreement"), among the Bank, the Company, Hyperion Holdings, and
Hyperion Partners, which governs the sharing of tax benefits with the FDIC as
manager of the FSLIC Resolution Fund (the "FRF"), ("FDIC-FRF"). See
"-- Taxation -- FSLIC Assistance".
On December 23, 1993, the Company and the Bank, along with certain of their
direct and indirect parent entities, entered into an agreement with the FDIC to
settle 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
and, 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".
WARRANT AGREEMENT
Concurrent with the execution of the Assistance Agreement, the Bank and the
FSLIC entered into an agreement, pursuant to which the FSLIC was granted a
warrant to purchase up to 158,823 shares of common stock of the Bank at an
exercise price of $0.01 per share ("Warrant"). Pursuant to the Settlement
Agreement, the parties agreed that the Bank was to make payments in lieu of
dividends to the holder of the Warrant upon any payment of dividends on the
common stock of the Bank (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 in lieu of such dividends to the FDIC-FRF of $5.9 million in
connection with the declaration of a $100 million dividend on the common stock
of the Bank.
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 common stock
of the Bank, and immediately exchanged the shares of common stock of the Bank
issued upon exercise of the Warrant for 1,503,560 shares of Class B common stock
of the Company. As part of the Company's offering in August 1997, the FDIC-FRF
sold all of such shares of Class B common stock of the Company. Following the
consummation of this 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 of the Company.
FORBEARANCE
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
the Financial Institutions Reform Recovery and Enforcement Act of 1989
("FIRREA"), the OTS took the position that the capital standards set forth in
FIRREA applied to all savings institutions, including those institutions that
had been operating under previously granted capital and accounting forbearances,
and that FIRREA eliminated those forbearances. While the Bank has not had to
rely on such forbearances or waivers in order to remain in compliance with
existing capital requirements as interpreted by the OTS, the position of the OTS
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
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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.
On July 25, 1995, the Bank, the Company, and Hyperion Partners filed suit
against the United States in the Court of Federal Claims in connection with
claims relating to the forebearances. See "Legal Proceedings --
WINSTAR -- based Claims."
REGULATION
GENERAL
The Company is a savings and loan holding company that is regulated and
subject to examination by the Office of Thrift Supervision ("OTS"). The Bank
is a federally chartered savings bank and is subject to the regulations,
examinations, and reporting requirements of the OTS. The Bank's deposits are
insured by the FDIC through the SAIF. As the administrator of the SAIF, the FDIC
has certain regulatory and full examination authority over OTS regulated savings
associations. The FDIC may terminate deposit insurance under certain
circumstances involving violations of law or unsafe or unsound practices.
The Bank is a member of the FHLB Dallas, which is one of twelve 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
greater fraction as established by the FHLB) of its advances (I.E., borrowings)
from the FHLB. The regional FHLBs have authority to periodically conduct
Community Support reviews of member institutions.
The descriptions of the statutes and regulations applicable to savings and
loan holding companies and savings associations set forth below is not a
complete description of the statutes and regulations or all such statutes and
regulations and their effects on the Company and the Bank.
HOLDING COMPANY ACQUISITIONS
The Company is a savings and loan holding company within the meaning of the
Home Owner's Loan Act, as amended (the "HOLA"). The HOLA and OTS regulations
generally prohibit a savings and loan holding company, without prior OTS
approval, from acquiring, directly or indirectly, the ownership or control of
any other savings association or savings and loan holding company, or all, or
substantially all, of the assets or more than 5% of the voting shares thereof.
These provisions also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control of
any savings association not a subsidiary of such savings and loan holding
company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES
The Company currently operates as a unitary savings and loan holding
company. Generally, there are few restrictions on the activities of a unitary
savings and loan holding company and its non-savings association subsidiaries
provided that the savings association subsidiary is a qualified thrift lender.
See "Investment Authority -- QTL Test." If the Company ceases to be a unitary
savings and loan holding company, the activities of the Company and its
non-savings association subsidiaries would thereafter be subject to substantial
restrictions.
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The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock or else such dividend will be invalid. See "-- Capital
Distributions."
TRANSACTIONS WITH AFFILIATES
Pursuant to Section 11 of the HOLA, transactions between a savings
association and its affiliates ("Covered Transactions") are subject to
quantitative and qualitative restrictions substantially similar to those imposed
upon member banks under Sections 23A and 23B of the Federal Reserve Act
("FRA"). Savings associations are also prohibited from extending credit to any
affiliate engaged in an activity not permissible for a bank holding company.
The term "affiliate" includes any company that controls or is controlled
by a company that controls the Bank, or a bank or savings association subsidiary
of the Bank. The term "affiliate" also includes any company controlled by
controlling stockholders of the Bank or the Company and any company sponsored
and advised on a contractual basis by the Bank or any subsidiary or affiliate of
the Bank. The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the director of the OTS decides to treat such
subsidiaries as affiliates. The Company is an affiliate of the Bank.
Section 23A of the FRA limits Covered Transactions with any one affiliate
to 10% of an association's capital stock and surplus (as defined therein) and
limits aggregate affiliate transactions to 20% of the Bank's capital stock and
surplus. A Covered Transaction is defined generally as a loan to an affiliate,
the purchase of securities issued by an affiliate, the purchase of assets from
an affiliate, the acceptance of securities issued by an affiliate as collateral
for a loan, or the issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate. In addition, the Bank generally may not purchase
securities issued or underwritten by an affiliate, or low quality assets from an
affiliate. Sections 23A and 23B of the FRA provide that a loan transaction with
an affiliate generally must be collateralized (but may not be collateralized by
a low quality asset or securities issued by an affiliate) and that all Covered
Transactions, as well as the sale of assets, the payment of money, or the
provision of services by the Bank to an affiliate, must be on terms and
conditions that are substantially the same, or at least as favorable to the
Bank, as those prevailing for comparable nonaffiliate transactions.
The OTS generally requires savings associations, such as the Bank, to
attribute to an affiliate the amounts of all transactions conducted with
subsidiaries of that affiliate, requires savings associations to make and retain
records that reflect affiliate transactions in reasonable detail, and provides
that certain classes of savings associations may be required to give the OTS
prior notice of affiliate transactions.
INSURANCE ASSESSMENTS
The FDIC establishes premium assessment rates for SAIF deposit insurance.
There is no statutory limit on the maximum assessment and the percent of
increase in the assessment that the FDIC may impose in any one year, provided,
however, that the FDIC may not collect more than is necessary to reach or
maintain the SAIF's designated reserve ratio ("DRR") and must rebate any
excess collected. Under the FDIC's risk-based insurance system, SAIF-assessable
deposits are now subject to premiums of between 0 to 27 cents per $100 of
deposits, depending upon the institution's capital position and other
supervisory factors.
To arrive at a risk-based assessment for each bank and thrift, the FDIC
places it in one of nine risk categories using a two-step process based first on
capital ratios and then on relevant supervisory information. Each institution is
assigned to one of three groups (well-capitalized, adequately capitalized, or
undercapitalized) based on its capital ratios. A "well-capitalized"
institution is one that has at least a 10% "total risk-based capital" ratio
(the ratio of total capital to risk-weighted assets), a 6% "tier 1 risk-based
capital" ratio (the ratio of tier 1 (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.
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The FDIC also assigns each institution to one of three supervisory
subgroups based on an evaluation of the risk posed by the institution. These
supervisory evaluations modify premium rates within each of the three capital
groups. The nine risk categories and the corresponding SAIF assessment rates are
as follows:
SUPERVISORY SUBGROUP
-------------------------------
A B C
-- -- --
Meets numerical standards for:
Well-capitalized................ 0 3 17
Adequately capitalized.......... 3 10 24
Undercapitalized................ 10 24 27
For purposes of assessments of FDIC insurance premiums, the Company
believes that the Bank is a "well-capitalized" institution as of September 30,
1997. FDIC regulations prohibit disclosure of the supervisory subgroup to which
an insured institution is assigned. The Bank's insurance assessments for fiscal
1997 and 1996 were $4.8 million and $12.0 million, respectively.
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 Bank's special
assessment was $33.7 million, $20.7 million net of tax.
ASSESSMENTS TO PAY FICO BONDS. The 1996 Act also obligates banks, for the
first time, to pay assessments to be used to service the bonds issued by the
Financing Corporation ("FICO") to resolve the thrift failures during the late
1980s and early 1990s. Under the 1996 Act, during the period beginning January
1, 1997 through December 31, 1999, SAIF-insured institutions 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 at an estimated rate of approximately 2.4 basis points.
AUDIT REQUIREMENTS. In May 1993, the FDIC adopted rules implementing
statutory annual independent audit and financial reporting requirements for all
depository institutions with assets of more than $500 million, and for their
management, and their independent auditors. The rules also establish
requirements for the composition, duties, and authority of such institutions'
audit committees and boards of directors. Among other things, all depository
institutions with assets in excess of $500 million are required to prepare and
make available to the public annual reports on their financial condition and
management, including statements of management's responsibility for preparing
the institution's financial statements, for establishing and maintaining an
internal control structure and procedures for financial reporting, and for
complying with specified laws and regulations relating to safety and soundness,
and an assessment of the effectiveness of such internal controls and procedures
and the institution's compliance with laws and regulations designated by the
FDIC. The institution's independent auditors are required to attest to these
management assertions, except the procedures employed by management to detect
and report violations of designated laws. Each such institution also is required
to have an audit committee composed of directors who are independent of
management of the institution. Audit committees of large institutions
(institutions with assets exceeding $3.0 billion) must: (1) include members with
banking or related financial management expertise; (2) have the ability to
engage their own independent legal counsel; and (3) must not include any
individuals designated as "large customers" of the institution.
RESERVE REQUIREMENTS. The Federal Reserve Board ("FRB") requires all
depository institutions (including savings associations) to maintain reserves
against their deposit accounts (primarily transaction accounts and nonpersonal
time deposits) and Eurocurrency liabilities. At September 30, 1997, reserves of
3% were required to be maintained against net transaction accounts of $49.3
million or less. In addition, if net transaction accounts exceeded $49.3
million, institutions were required to maintain reserves equal to 10% on the
excess. Effective December 16, 1997, the FRB decreased the amount of transaction
accounts subject to the three percent reserve requirement ratio to $47.8
million. The reserve requirement for nonpersonal time deposits and Eurocurrency
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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"
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 14 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.
Certain MSRs are not deducted in computing core and tangible capital.
Generally, the lower of 90% of the fair market value of readily marketable MSRs,
or the current unamortized book value as determined under GAAP may be included
in core and tangible capital up to a maximum of 50% of core capital computed
before the deduction of any disallowed qualifying intangible assets. At
September 30, 1997, the Bank's core capital included $256.7 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 September 30, 1997, the Bank's
tangible capital ratio was 7.72%.
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 and mandatory convertible subordinated debt and maturing
capital instruments meeting specified requirements; and general loan and lease
loss allowances, up to a maximum of 1.25% of risk-weighted assets. At September
30, 1997, the Bank's core capital and total capital ratios were 7.77% and
13.18%, respectively.
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In determining the amount of risk-weighted assets, savings associations
must assign balance sheet assets to one of four risk-weight categories,
reflecting the relative credit risk inherent in the asset. Off-balance-sheet
items are assigned to one of the four risk-weight categories after a "credit
conversion factor" is applied.
INTEREST RATE RISK ("IRR") COMPONENT. OTS regulations add an IRR
component to the 8% risk-based capital requirement discussed above. Only savings
associations with more than a "normal" level of IRR are subject to IRR
requirements. Specifically, savings associations with IRR exposure in excess of
2% (measured in accordance with an OTS Model and Guidelines) must deduct an IRR
component from total capital prior to calculating their risk-based capital
ratios. The IRR component is calculated as one-half of the difference between
the institution's measured IRR and 2%, multiplied by the market value of the
institution's assets. This deduction will have the effect of requiring savings
associations with IRR exposures of more than 2% to hold more capital than those
with IRR exposure of 2% or less. On August 21, 1995, the OTS adopted and
approved an appeal process, but delayed the IRR capital deduction indefinitely.
CAPITAL DISTRIBUTIONS
Limitations are imposed upon all "capital distributions" by savings
associations, including cash dividends, payments by an institution in a cash-out
merger, and other distributions 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.
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.
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".
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
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lending regulations eliminating many of their specific requirements in favor of
a more general standard of safety and soundness.
Federally chartered savings associations may invest, without limitation, in
the following assets: (1) obligations of the United States government or certain
agencies 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 general lending limits, a savings
association may make loans to one borrower for any purpose of up to $500,000; or
to develop domestic residential housing units, up to the lesser of $30 million
or 30% of the savings association's unimpaired capital and unimpaired surplus,
if certain conditions are satisfied. The OTS may also impose more stringent
limits on an association's loans to one borrower, if it determines that such
limits are necessary to protect the safety and soundness of the association.
SERVICE CORPORATIONS. The HOLA authorizes federally chartered savings
associations, such as the Bank, to invest in the capital stock, obligations or
other securities of service corporations. The HOLA authorizes a savings
association to invest up to a total of 3% of its assets in service corporations.
The last 1% of the 3% statutory investment limit applicable to service
corporations must be primarily invested in community development investments
drawn from a broad list of permissible investments that include, among 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
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requirements: (1) it engages only in activities that a federal savings
association is permitted to engage in directly; (2) the parent savings
association owns, directly or indirectly, more than 50% of the subsidiary's
voting stock; and (3) no person or entity other than the parent thrift may
exercise effective operating control over the subsidiary. While a savings
association's investment in its service corporations is generally limited to an
amount that does not exceed 3% of the parent savings association's total assets,
OTS regulations do not limit the amount that a parent savings association may
invest in its operating subsidiaries. Operating subsidiaries may be incorporated
and operated in any geographical location where its parent may operate. An
operating subsidiary that is a depository institution may accept deposits in any
location, provided that the subsidiary has federal deposit insurance.
QUALIFIED THRIFT LENDER ("QTL") TEST. All savings associations are
required to meet a QTL test for, among other things, future eligibility for FHLB
advances. A savings association that fails to satisfy the QTL test is subject to
substantial restrictions on its activities and to other significant penalties. A
savings association is a QTL if it either meets the 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 investments in, low cost one-to four-family housing; (4)
200% of loans for residential real property, churches, nursing homes, schools
and small businesses in areas where the credit needs of low- and moderate-income
families are not met; (5) other loans for churches, schools, nursing homes and
hospitals; and (6) personal, family, or household loans (other than education,
small business, or credit card loans).
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies. A savings association may
requalify the next time it meets the requirement in nine of the preceding 12
months, but it may requalify only one time. If an institution that fails the QTL
test has not yet requalified and has not converted to a national bank, its new
investments and activities are limited to those permissible for a national bank,
it is immediately ineligible to receive any new FHLB advances, 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 FRB requirements, and specified
government, state or federal agency obligations) equal to a certain percentage
of net withdrawable deposit accounts and borrowings payable in one year or less.
The liquidity requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At September 30, 1997, OTS regulations required 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. Effective November 24,
1997, the OTS lowered the requirement to 4% of net withdrawable accounts and
borrowings payable in one year or less, and eliminated the short-term liquidity
requirement.
MERGERS AND ACQUISITIONS
Insured depository institutions are authorized to merge or engage in
purchase and assumption transactions with other insured depository institutions
with the prior approval of the federal banking regulator of the resulting
entity. The Change in 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
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any person or company acquiring control of a savings association or a savings
and loan holding company. Under OTS regulations, "control" is conclusively
presumed to exist if an individual or company acquires more than 25% of any
class of voting stock of a savings association or holding company. There is a
rebuttable presumption of control if a person or company acquires more than 10%
of any class of voting stock (or more than 25% of any class of non-voting stock)
and is subject to any of several "control factors". The control factors
relate, among other matters, to the relative ownership position of a person or
company, the percentage of debt and/or equity of the association or holding
company controlled by the person or company, agreements giving the person or
company influence over a material aspect of the operations of the association or
holding company, and the number of seats on the board of directors thereof held
by the person or company, or his designees. The regulations provide a procedure
for challenge of the rebuttable control presumption. Certain restrictions
applicable to the operations of savings and loan holding companies and certain
conditions imposed by the OTS in connection with its approval of companies to
become savings and loan holding companies may deter companies from seeking to
obtain control of the Bank.
BRANCHING. Subject to certain statutory restrictions in the HOLA and the
Federal Deposit Insurance Act (the "FDIA"), the Bank is authorized to branch
on a nationwide basis. Branching by savings associations is also subject to
other regulatory requirements, including compliance with the Community
Reinvestment Act (the "CRA") and its implementing regulations.
OFFICERS, DIRECTORS, AND CONTROLLING SHAREHOLDERS
INSIDER LOANS. Loans to an executive officer or director of a savings
association, or to any person who directly or indirectly, or acting through or
in concert with one or more persons, owns, controls, or has the power to vote
more than 10% of any class of voting securities of such institution ("Principal
Shareholder"); to any related interests of such persons (I.E., any company
controlled by such executive officer, director, or Principal Shareholder); or to
any political or campaign committee, the funds or services of which will benefit
such executive officer, director or Principal Shareholder, or which is
controlled by such executive officer, director or Principal Shareholder, are
subject to Sections 22(g) and 22(h) of the FRA and the regulations promulgated
thereunder. Among other things, such loans must be made on terms substantially
the same as those prevailing on comparable transactions made to unaffiliated
individuals, and may not involve more than the normal risk of repayment or
present other unfavorable features. Certain extensions of credit to such persons
must first be approved in advance by a disinterested majority of a savings
association's entire board of directors. Section 22(h) of the FRA prohibits
loans to any such individuals where the aggregate amount exceeds an amount equal
to 15% of an insured institution's unimpaired capital and surplus, plus an
additional 10% of unimpaired capital and surplus (as defined) in the case of
loans that are fully secured by readily marketable collateral, or when the
aggregate amount on all such extensions of credit outstanding to all such
persons would exceed the Bank's unimpaired capital and unimpaired surplus.
Section 22(g) establishes additional limitations on loans to executive officers.
CHANGES IN DIRECTORS AND SENIOR EXECUTIVE OFFICERS. Section 32 of the
FDIA, as amended by the 1996 Act, requires a depository institution or holding
company thereof to give 30 days' prior written notice to its primary federal
regulator of any proposed appointment of a director or senior executive officer
if the institution is not in compliance with the minimum capital requirements or
otherwise is in a troubled condition. The regulator then has the opportunity to
disapprove any such appointment.
ENFORCEMENT
PROMPT CORRECTIVE ACTION. The OTS is required by statute to take certain
actions against savings associations that fail to meet certain capital-based
requirements. Each of the federal banking agencies, including the OTS, is
required to establish five levels of insured depository institutions based on
leverage limit and risk-based capital requirements established for institutions
subject to their jurisdiction plus, in each agency's discretion, individual
additional capital requirements for such institutions.
Under the rules that have been adopted by each of the federal banking
agencies, an institution will be designated well-capitalized if the institution
has a total risk-based capital ratio of 10% or greater, a 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
24
<PAGE>
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 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".
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CONSUMER PROTECTION REGULATIONS
The Bank is subject to many federal consumer protection statutes and
regulations including, but not limited to, the following:
THE TRUTH IN LENDING ACT ("TILA"). The TILA, enacted into law in 1968,
is designed to ensure that credit terms are disclosed in a meaningful way so
that consumers may compare credit terms more readily and knowledgeably. As a
result of the TILA, all creditors must use the same credit terminology and
expressions of rates, the annual percentage rate, the finance charge, the amount
financed, the total of payments, and the payment schedule.
THE FAIR HOUSING ACT ("FH ACT"). The FH Act, enacted into law in 1968,
regulates many practices, including making it unlawful for any lender to
discriminate in its housing-related lending activities against any person
because of race, color, religion, national origin, sex, handicap, or familial
status.
THE EQUAL CREDIT OPPORTUNITY ACT ("ECOA"). The ECOA, enacted into law in
1974, prohibits discrimination in any credit transaction, whether for consumer
or business purposes, on the basis of race, color, religion, national origin,
sex, marital status, age (except in limited circumstances), receipt of income
from public assistance programs, or good faith exercise of any rights under the
Consumer Credit Protection Act.
THE REAL ESTATE SETTLEMENT PROCEDURES ACT ("RESPA"). The RESPA, enacted
into law in 1974, requires lenders to provide borrowers with disclosures
regarding the nature and cost of real estate settlements. RESPA is applicable to
all federally related mortgage loans. A "federally related mortgage loan"
includes any loan secured by a first or subordinate lien on residential real
property designed for occupancy by one to four families, including a refinancing
of an existing loan secured by the same property, if: (1) the loan is made by
any lender, the deposits of which are federally insured or any lender that is
regulated by a federal agency; 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.
THE HOME MORTGAGE DISCLOSURE ACT ("HMDA"). The HMDA, enacted into law in
1975, is intended to provide public information that can be used to help
determine whether financial institutions are serving the housing credit needs of
the neighborhoods and communities in which they are located and to assist in
identifying possible discriminatory lending patterns.
THE COMMUNITY REINVESTMENT ACT ("CRA"). The CRA, enacted into law in
1977, is intended to encourage insured depository institutions, while operating
safely and soundly, to help meet the credit needs of their communities. The CRA
specifically directs the federal regulatory agencies, in examining insured
depository institutions, to assess 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. To evaluate most large retail institutions, such as
the Bank, the agencies apply three tests, the lending, investment, and service
tests, to determine an overall CRA rating for the financial institution. The
ratings range from a high of "outstanding" to a low of "substantial
noncompliance".
The Bank 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".
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 Money Laundering Prosecution Improvements Act requires financial
institutions, typically banks, to verify and record the identity of the
purchaser upon the issuance or sale of bank checks or drafts, cashier's
26
<PAGE>
checks, traveler's checks, or money orders involving $3,000 or more in cash.
Institutions must also verify and record the identity of the originator and
beneficiary of certain funds transfers.
ELECTRONIC FUND TRANSFER ACT (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.
THE EXPEDITED FUNDS AVAILABILITY ACT ("EXPEDITED FUNDS ACT"). The
Expedited Funds Act, enacted into law in 1987, seeks to insure prompt
availability of funds deposited into a customer's account and to expedite the
return of checks.
THE TRUTH IN SAVINGS ACT ("TISA"). The TISA, enacted into law in 1991,
is principally a disclosure law, the purpose of which is to encourage
comparative shopping for deposit products. The common denominator used by the
TISA to facilitate comparison shopping of interest payable on deposit accounts
is the Annual Percentage Yield (the "APY").
THE AMERICANS WITH DISABILITIES ACT ("ADA"). The ADA, enacted into law
in 1990, prohibits private employers, state and local governments, employment
agencies, and labor unions from discriminating against qualified individuals
with disabilities in connection with job application procedures, hiring, firing,
advancement, compensation, job training, and other terms, conditions, and
privileges of employment. Section 302 of Title 3 of the ADA, which covers banks,
thrifts, credit unions, and finance companies, provides that "no individual
shall be discriminated against on the basis of disability in the full and equal
enjoyment of the goods, services, or facilities, privileges, advantages, or
accommodations of any place of public accommodation". An individual with a
disability is a person who: (1) has a physical or mental impairment that
substantially limits one or more major life activities; (2) has a record of such
an impairment; or (3) is regarded as having such an impairment.
The Bank attempts in good faith to assure compliance with the requirements
of the consumer protection statutes to which it is subject, as well as the
regulations that implement the statutory provisions. The requirements are
complex, however, and even inadvertent non-compliance could result in civil and,
in some cases, criminal liability. During the past several years, numerous
individual claims and purported consumer class action claims have been commenced
against financial institutions, their subsidiaries, and other lending
institutions alleging violations of one or more of the consumer protection
statutes and seeking civil damages, court costs, and attorney's fees. Based on
the Bank's history of claims under the consumer protection statutes and
regulations to which it is subject, management does not believe that claims are
likely to be asserted that will have a material adverse effect on the Bank's or
the Company's financial condition, results of operations, or liquidity.
LEGISLATION
Federal legislation and regulation have significantly affected the
operations of federally insured savings associations, such as the Bank, and
other federally regulated financial institutions in the past several years and
have increased competition among savings associations, commercial banks, and
other financial institutions. Congress has been considering legislation in
various forms that would require federal thrifts, such as the Bank, to convert
their charters to national or state bank charters. The Bank cannot determine
whether, or in what form, such legislation may eventually be enacted and there
can be no assurance of the effect that any legislation that is enacted would
have on the Bank and its affiliates. 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.
TAXATION
FEDERAL TAXATION
The Parent Company, Holdings, and the Bank are subject to the Internal
Revenue Code of 1986, as amended, (the "Code"), in the same manner, with
certain exceptions, as other corporations. The Parent
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<PAGE>
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. 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
13 to the Consolidated Financial Statements.
ENACTED LEGISLATION
The Taxpayer Relief Act of 1997 ("Relief Act") was signed into law during
August 1997. The Relief Act contains provisions shortening net operating loss
("NOL") and general business carrybacks. The Relief Act will not affect the
Company's utilization of NOLs generated before the enactment of this legislation
and should have no material effect on the Company's Consolidated Financial
Statements.
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 " -- Federal
Financial Assistance". 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 United Savings
Association of Texas ("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 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.
The aforementioned tax relief provided savings on the amount of taxes
required to be paid. The estimated tax savings, by year, were as follows (in
millions):
FOR THE YEAR ENDED
SEPTEMBER 30, SAVINGS
-------------------------------- -------
1995............................ $31.4
1996............................ 19.8
1997............................ 26.7
NET OPERATING LOSS LIMITATIONS
The Company's total NOLs at September 30, 1997 were $702 million. See Note
13 to the Consolidated Financial Statement. In the event of an Ownership Change
("Ownership Change", as defined below), 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 5.45% for September 1997). Any unused annual limitation may be
carried over to later years, and the
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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 $76 million based on the closing market price at
September 30, 1997.
The Company would undergo an Ownership Change if, among other things, the
stockholders who own or have owned (directly or indirectly) 5% or more of the
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"), 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 Company's
August 1996 public offering is considered to be acquired by a new 5% Stockholder
even if no person acquiring the stock in fact owns as much as 5% of the issuer's
stock. While the application of Section 382 of the Code is highly complex and
uncertain in some respects, the Company does not believe that its fiscal 1997
and 1996 capital related transactions caused 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 Company's Restated Certificate of Incorporation
(the "Certificate of Incorporation") and the By-Laws limit stock 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 of
Incorporation, the Company is authorized not to recognize any transferee of such
a Transfer as a stockholder to the extent of such transfer, these restrictions
may not be entirely effective because the Company may not, consistent with
National Association of Securities Dealers, Inc. Automated Quotations System
("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 offerings in fiscal 1997 and 1996, 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. Management
believes that the Bank's issuance of its preferred stock met the requirements of
Section 1504(a)(4) of the Code and, therefore, did not result in an Ownership
Change.
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.
STATE TAXATION
The Parent Company, Holdings, and the Bank file unitary and combined state
returns with certain subsidiaries as well as separate state returns. The
location of branches and offices, loan solicitations, or real property securing
loans creates jurisdiction for taxation in certain states, which results in the
filing of state income tax returns. Amounts for state tax liabilities are
included in the Statements of Operations for fiscal 1997, 1996, and 1995. See
Note 13 to the Consolidated Financial Statements.
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<PAGE>
ITEM 2. PROPERTIES
Effective December 1996, the headquarters of the Company were relocated to
leased premises in Houston, Texas, in conjunction with the formation of
Holdings. See "Business -- General".
The leases for the Company's headquarters and support facilities in effect
at September 30, 1997 had terms from two to three years, with annual rental
payments of $4.8 million, subject to increases under certain circumstances. On
November 21, 1997, the Bank executed a new ten year lease on its corporate
headquarters building. As of November 21, 1997, the leases for the Company's
headquarters and support facilities have terms from two to ten years, with
annual rental payments of $4.7 million. A majority of leases outstanding at
September 30, 1997, relate to branches and expire within five years or less. The
following table sets forth the number and location of the community banking,
commercial banking, and mortgage origination offices of the Company as of
September 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 23 1 1 39
Dallas/Ft. Worth Area................ 12 17 1 - 30
Other Texas.......................... - 4 - - 4
California........................... - - 2 2 4
Other U.S............................ - 1 7 3 11
----- ------ -- -- -----
Total........................... 26 45 11 6 88
===== ====== == == =====
</TABLE>
Net investment in premises and equipment totalled $46.9 million at
September 30, 1997.
ITEM 3. LEGAL PROCEEDINGS
WINSTAR-BASED CLAIMS
On July 25, 1995, the Bank, the Parent Company, and Hyperion Partners L.P.
(collectively, the "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 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.
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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 trial of one of these two cases is in progress and
the trial of the other case has not yet begun. 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 will exceed
$200 million and that they could range as high as $1 billion or more, 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.
Plaintiffs expect that the government may argue that no breach by the government
has occurred and that damages to Plaintiffs, in any event, would approach zero.
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 calendar
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
31
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company has two classes of common stock, Class A common stock and Class
B common stock. The Class A and Class B 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.
In August 1996 the Company filed a registration statement with the SEC
pursuant to which 12,075,000 shares of the Company's Class A common stock were
sold to the public. Prior to this offering, the Company's common stock was
privately held and not listed on any public exchange or actively traded. The
Company's Class A common stock is listed on the NASDAQ National Market System
under the symbol "BNKU". The Company had a total 31,595,596 shares of common
stock outstanding at September 30, 1997. At December 17, 1997, there were 72
shareholders of record for the Company's Class A common stock and 2 shareholders
of record for the Company's Class B common stock. A majority of the Company's
common stock is held in "street name" by nominees for the beneficial owners.
The last reported sales price of common stock on December 17, 1997 was $44.75
per share.
The high and low common stock prices by quarter for the year ended
September 30, were as follows:
HIGH LOW
--------- ---------
1996
Fourth quarter..................... $ 24.875 $ 22.000
1997
First quarter...................... 28.750 23.375
Second quarter..................... 33.500 24.250
Third quarter...................... 39.000 28.125
Fourth quarter..................... 44.500 35.375
The cash dividends paid by quarter were as follows:
1997
First quarter...................... $ 0.14
Second quarter..................... 0.14
Third quarter...................... 0.14
Fourth quarter..................... 0.14
1998
First quarter...................... 0.16
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 Company's
common stock on a quarterly basis. OTS regulations impose restrictions on the
payment of dividends by savings institutions. See "Regulation -- Capital
Distributions" for a discussion of these restrictions.
32
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for each of the years in
the five-year period ended September 30, 1997 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, 1997 and 1996 and the Consolidated Statements of Operations
for each of the years in the three-year period ended September 30, 1997 and the
report thereon of Deloitte & Touche LLP are included elsewhere in this document.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION
ASSETS
Cash and cash equivalents............ $ 121,000 $ 119,523 $ 112,931 $ 76,938 $ 65,388
Securities purchased under agreements
to resell and federal funds sold... 349,209 674,249 471,052 358,710 547,988
Securities........................... 77,809 65,693 117,094 115,126 44,436
Mortgage-backed securities, net...... 1,569,705 1,657,908 2,398,263 2,828,903 2,175,925
Loans, net...........................
Single family.................... 6,492,589 6,369,974 7,406,866 4,398,097 4,240,616
Commercial....................... 2,201,880 981,001 735,876 546,794 565,929
Consumer......................... 300,760 168,513 117,498 101,283 55,834
Covered assets and related
assets(1).......................... -- -- -- -- 392,511
Other assets......................... 854,120 675,516 623,954 484,310 351,929
------------- ------------- ------------- ------------- -------------
Total assets................ $ 11,967,072 $ 10,712,377 $ 11,983,534 $ 8,910,161 $ 8,440,556
============= ============= ============= ============= =============
LIABILITIES, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY
Deposits............................. $ 5,247,668 $ 5,147,945 $ 5,182,220 $ 4,764,204 $ 4,839,388
Federal Home Loan Bank advances...... 3,992,344 3,490,386 4,383,895 2,620,329 2,185,445
Securities sold under agreements to
repurchase......................... 1,308,600 832,286 1,172,533 553,000 310,000
Notes payable........................ 220,199 115,000 115,000 115,000 115,000
Other liabilities.................... 414,282 410,217 448,283 320,766 516,020
------------- ------------- ------------- ------------- -------------
Total liabilities........... 11,183,093 9,995,834 11,301,931 8,373,299 7,965,853
------------- ------------- ------------- ------------- -------------
Minority interest -- Bank preferred
stock.............................. 185,500 185,500 185,500 85,500 85,500
Total stockholders'
equity.................... 598,479 531,043 496,103 451,362 389,203
------------- ------------- ------------- ------------- -------------
Total liabilities, minority
interest, and
stockholders' equity...... $ 11,967,072 $ 10,712,377 $ 11,983,534 $ 8,910,161 $ 8,440,556
============= ============= ============= ============= =============
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income...................... $ 810,708 $ 812,312 $ 746,759 $ 494,706 $ 482,490
Interest expense..................... 546,064 584,778 552,760 320,924 300,831
--------- --------- --------- --------- ---------
Net interest income.............. 264,644 227,534 193,999 173,782 181,659
Provision for credit losses.......... 18,107 16,469 24,293 6,997 4,083
--------- --------- --------- --------- ---------
Net interest income after
provision for credit losses.... 246,537 211,065 169,706 166,785 177,576
Non-interest income
Net gains (losses)
Sales of single family
servicing rights and
single family warehouse
loans..................... 21,182 43,074 60,495 63,286 67,403
Securities and
mortgage-backed
securities................ 2,841 4,002 26 10,404 43,702
Other loans................. 1,128 3,189 (1,210) 163 1,496
Sale of mortgage
offices(9)................ 4,748 -- -- -- --
Loan servicing, net of related
amortization................... 32,381 30,383 32,677 26,813 15,619
Other............................ 21,152 15,541 12,162 13,295 12,310
--------- --------- --------- --------- ---------
Total non-interest income........ 83,432 96,189 104,150 113,961 140,530
--------- --------- --------- --------- ---------
Non-interest expense
Compensation and benefits........ 75,016 87,640 83,520 86,504 81,472
SAIF deposit insurance
premiums....................... 4,797 45,690 11,428 11,329 10,162
Restructuring charges(9)......... -- 10,681 -- -- --
Other............................ 92,323 95,407 88,797 96,832 104,169
--------- --------- --------- --------- ---------
Total non-interest expense....... 172,136 239,418 183,745 194,665 195,803
--------- --------- --------- --------- ---------
Income before income taxes,
minority interest, and
extraordinary loss............. 157,833 67,836 90,111 86,081 122,303
Income tax expense (benefit)......... 60,686 (75,765) 37,415 (31,899) (26,153)
--------- --------- --------- --------- ---------
Income before minority interest
and extraordinary loss......... 97,147 143,601 52,696 117,980 148,456
Minority interest
Bank preferred stock dividends... 18,253 18,253 10,600 8,653 6,537
Payments in lieu of
dividends(2)................... -- 6,413 377 357 --
--------- --------- --------- --------- ---------
Income before extraordinary
loss........................... 78,894 118,935 41,719 108,970 141,919
Extraordinary loss -- early
extinguishment of debt(3).......... 2,323 -- -- -- 14,549
--------- --------- --------- --------- ---------
Net income(4).................... $ 76,571 $ 118,935 $ 41,719 $ 108,970 $ 127,370
========= ========= ========= ========= =========
Net income applicable to common
shares......................... $ 76,571 $ 113,327 $ 38,824 $ 102,519 $ 118,640
========= ========= ========= ========= =========
Earnings per common share
Income before extraordinary
loss........................... $ 2.49 $ 3.87 $ 1.35 $ 3.55 $ 4.61
Extraordinary loss -- early
extinguishment of debt......... 0.07 -- -- -- 0.50
--------- --------- --------- --------- ---------
Net income....................... $ 2.42 $ 3.87 $ 1.35 $ 3.55 $ 4.11
========= ========= ========= ========= =========
CERTAIN RATIOS AND OTHER DATA
Book value per common share.......... $ 18.94 $ 16.81 $ 17.19 $ 15.64 $ 13.48
Dividends per common share........... 0.56 3.46 -- -- --
Average number of common shares
outstanding........................ 31,596 29,260 28,863 28,863 28,863
Regulatory capital ratios of the Bank
Tangible capital................. 7.72% 6.57% 6.20% 6.01% 6.17%
Core capital..................... 7.77 6.64 6.29 6.17 6.43
Total risk-based capital......... 13.18 13.09 13.45 14.02 14.87
Return on average assets(5).......... 0.85 1.28 0.50 1.42 1.83
Return on average common equity...... 13.50 23.06 8.80 26.32 44.87
Stockholders' equity to assets....... 5.00 4.96 4.14 5.07 4.61
Tangible stockholders' equity to
tangible assets.................... 4.89 4.81 3.93 4.68 4.14
Net yield on interest-earning
assets............................. 2.52 2.10 1.92 2.20 2.61
Interest rate spread................. 2.26 1.78 1.61 1.95 2.41
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
CERTAIN RATIOS AND OTHER DATA --
CONTINUED
Average interest-earning assets to
average interest-bearing
liabilities........................ 1.05 1.06 1.06 1.06 1.04
Non-interest expense to average total
assets............................. 1.55% 2.13% 1.76% 2.35% 2.68%
Net operating expense ratio(6)....... 0.80 1.28 0.76 0.97 0.76
Efficiency ratio(7).................. 49.78 73.87 58.03 65.78 64.33
Nonperforming assets to total
assets............................. 0.63 1.12 0.84 1.09 0.72
Net nonaccrual loans to total
loans.............................. 0.60 1.19 0.91 1.51 0.85
Allowance for credit losses to net
nonaccrual loans(8)................ 72.61 44.24 48.74 30.73 71.71
Allowance for credit losses to
nonperforming assets............... 52.24 32.95 36.65 24.18 49.28
Allowance for credit losses to total
loans.............................. 0.43 0.52 0.44 0.46 0.61
Net loan charge-offs to average
loans(8)........................... 0.23 0.17 0.16 0.30 0.05
Full-time equivalent employees....... 1,541 2,310 2,663 2,894 3,122
Number of community banking
branches........................... 71 70 65 62 62
Number of commercial banking
origination offices................ 11 9 9 5 3
Number of mortgage origination
offices(9)......................... 6 85 122 145 109
Single family servicing
portfolio(10)...................... $ 24,518,396 $ 13,246,848 $ 12,532,472 $ 8,920,760 $ 8,073,226
Single family originations........... 2,188,273 3,602,009 3,226,324 5,424,550 6,645,096
Loans purchased for held to maturity
portfolio.......................... 1,086,249 148,510 2,658,093 1,406,275 1,212,103
CERTAIN RATIOS AND OTHER DATA --
EXCLUDING NON-RECURRING ITEMS(11)
Net income........................... $ 75,970 $ 56,392 $ 41,719 $ 50,804 $ 97,736
Net income applicable to common
shares............................. 75,970 53,295 38,824 47,585 91,461
Earnings per common share............ 2.40 1.82 1.35 1.65 3.17
Operating earnings(12)............... 149,116 114,659 91,295 75,514 77,105
Return on average assets(5).......... 0.85% 0.67% 0.50% 0.72% 1.42%
Return on average common equity...... 13.41 11.47 8.80 12.27 34.43
Efficiency ratio(7).................. 49.78 57.06 58.03 65.78 64.33
</TABLE>
- ------------
(1) Covered assets were assets governed under the Assistance Agreement between
the Bank and the FRF. See "Business -- Federal Financial Assistance".
(2) In connection with its Acquisition, the Bank issued to the FDIC-FRF a
warrant to acquire 158,823 shares of common stock of the Bank. Payments in
lieu of dividends related to the Warrant, which was redeemed in August
1996. See "Business -- Federal Financial Assistance -- Warrant
Agreement".
(3) The fiscal 1997 extraordinary loss represents costs and charges associated
with the repurchase and retirement of a majority of the Company's senior
notes. See Note 10 to the Consolidated Financial Statements. The fiscal
1993 extraordinary loss represents costs and charges associated with the
repayment of the note payable to related party and long-term debt.
(4) Net income for fiscal 1994 and 1993 included $23.1 million and $9.3
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 -- Federal Financial Assistance".
(5) Return on average assets is net income without deduction of minority
interest, divided by average total assets.
(6) Net operating expense ratio is total non-interest expense less total
non-interest income as a percentage of average assets for each period.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
35
<PAGE>
(7) 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.
(8) 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 72.61% at September 30, 1997, from 44.24% at September 30,
1996. Excluding the charge-offs related to this sale of nonperforming
assets, net loan charge-offs to average loans would have been 0.17% for
fiscal 1997.
(9) 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
September 30, 1997 are wholesale mortgage origination offices, which are
currently part of the Financial Markets Group. See Note 17 to the
Consolidated Financial Statements.
(10) Includes purchased servicing rights of $7.5 billion at September 30, 1997,
which had not been transferred as of period end.
(11) Non-recurring items, deemed not to be part of the routine core business
operations of the Company, are composed of the following for fiscal 1997,
1996, 1994, and 1993:
-- 1997 (increased earnings per share ("EPS") $0.02) -- (1) the gain on
the sale of mortgage offices of $4,748 (2,924 net of tax) and (2) an
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) -- a tax benefit of $58,166
-- 1993 (increased EPS $0.94) -- (1) a tax benefit of $44,183 and (2) an
extraordinary loss on extinguishment of debt of $14,549
(12) Operating earnings consist 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 loss and excludes
net gains (losses) on securities, MBS, other loans, and non-recurring items
("operating earnings"). Management believes operating earnings
facilitates trend analysis because 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 or as an indicator of the Company's operating performance or to cash
flow as a measure of liquidity. See note 11 above.
36
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCUSSION OF RESULTS OF OPERATIONS
OVERVIEW
1997 COMPARED TO 1996. Net income was $76.6 million ($2.42 per share) for
fiscal 1997 compared to $118.9 million ($3.87 per share) for fiscal 1996.
Excluding non-recurring items in both years, net income increased 35% to $76
million in fiscal 1997 compared to $56.4 million in the prior year. The
non-recurring items recorded in fiscal 1997 related to the gain on sale of
mortgage origination offices of $4.7 million, before tax, and the extraordinary
loss on extinguishment of debt of $3.6 million, before tax. Excluding
non-recurring items, earnings per share increased 32% ($2.40 compared to $1.82
from the prior year) as compared to a 35% increase in net income, which reflects
the dilutive effect of higher average shares outstanding in fiscal 1997 and the
effect of warrants outstanding during fiscal 1996. Operating earnings were
$149.1 million in fiscal 1997 compared to $114.7 million in fiscal 1996. The
increase in earnings was principally the result of an improved interest rate
margin and lower non-interest expenses offset by lower gains on sales of single
family warehouse loans.
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 recorded in fiscal 1996 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 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. Operating earnings were $114.7 million for fiscal
1996, compared to $91.3 million for fiscal 1995, a 26% increase. Higher levels
of interest-earning assets and an increase in the net yield on interest-earning
assets ("net yield") contributed to the increase in earnings, partially offset
by lower gains on sales of single family MSRs and single family warehouse loans,
and increased expenses attributable to minority interests.
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 ($7.7 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 Company's August 1996 public
offering, and (4) a $5.9 million contractual payment ($0.20 per share) to
previous minority interests. See Notes 12, 14, and 17 to the Consolidated
Financial Statements.
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 $4.7 million before tax, $2.9
million after tax, or $0.09 per share. See "Business -- Mortgage Banking
Group" and Note 17 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 effects of
periodic caps on the Company's adjustable-rate loan and MBS portfolios, and the
interest rate sensitivity position or gap. See "Business -- General",
"Business -- Asset and Liability Management", and Note 11 to the Consolidated
Financial Statements.
37
<PAGE>
The Company's average balances, interest, and average yields were as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- --------- ------ ---------- --------- ------ ---------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Short-term interest-earning
assets............................ $ 566,964 $ 36,240 6.39% $ 668,657 $ 39,302 5.88% $ 466,276 $ 29,675 6.36%
Securities.......................... 81,422 5,371 6.60 77,791 3,984 5.12 118,013 5,955 5.05
Mortgage-backed securities.......... 1,548,285 104,891 6.77 1,968,230 128,143 6.51 2,618,990 173,155 6.61
Loans............................... 8,093,413 652,886 8.07 7,889,828 627,940 7.96 6,707,868 526,528 7.85
FHLB stock.......................... 191,465 11,320 5.91 213,242 12,943 6.07 180,416 11,446 6.34
----------- --------- ------ ---------- --------- ------ ---------- --------- ------
TOTAL INTEREST-EARNING ASSETS... 10,481,549 810,708 7.73 10,817,748 812,312 7.51 10,091,563 746,759 7.40
Non-interest-earning assets......... 621,596 411,683 345,500
----------- --------- ------ ----------- --------- ------ ----------- --------- ------
Total assets.................... $11,103,145 $11,229,431 $10,437,063
=========== =========== ===========
INTEREST-BEARING LIABILITIES
Deposits
Checking accounts............... $ 215,070 2,300 1.07 $ 218,859 2,593 1.18 $ 225,799 3,384 1.50
Money market accounts........... 1,653,398 83,592 5.06 1,464,577 69,100 4.72 1,032,873 57,848 5.60
Savings accounts................ 124,596 3,058 2.45 138,007 3,598 2.61 171,308 4,715 2.75
Certificates of deposit......... 3,134,128 173,811 5.55 3,244,291 196,929 6.07 3,560,420 198,419 5.57
----------- --------- ------ ----------- --------- ------ ----------- --------- ------
Total deposits................ 5,127,192 262,761 5.12 5,065,734 272,220 5.37 4,990,400 264,366 5.30
----------- --------- ------ ----------- --------- ------ ----------- --------- ------
FHLB advances....................... 3,705,072 212,558 5.74 4,073,297 247,093 6.07 3,560,844 224,767 6.31
Reverse repurchase agreements....... 1,002,165 57,335 5.72 955,708 55,112 5.77 888,453 53,220 5.99
Notes payable....................... 157,565 13,410 8.51 115,000 10,353 9.00 115,000 10,407 9.05
----------- --------- ------ ----------- --------- ------ ----------- --------- ------
TOTAL INTEREST-BEARING
LIABILITIES................... 9,991,994 546,064 5.47 10,209,739 584,778 5.73 9,554,697 552,760 5.79
Non-interest-bearing liabilities and
stockholders' equity.............. 1,111,151 1,019,692 882,366
----------- --------- ------ ----------- --------- ------ ----------- --------- ------
Total liabilities and
stockholders' equity.......... $11,103,145 $11,229,431 $10,437,063
=========== =========== ===========
Net interest income/interest rate
spread................................ $ 264,644 2.26% $ 227,534 1.78% $ 193,999 1.61%
========= ====== ========= ====== ========= ======
Net yield on interest-earning assets.... 2.52% 2.10% 1.92%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing
liabilities........................... 1.05 1.06 1.06
=========== ========== ==========
</TABLE>
38
<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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------------- ---------------------------------
VOLUME RATE NET VOLUME RATE NET
---------- ---------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Short-term interest-earning
assets.......................... $ (6,293) $ 3,231 $ (3,062) $ 12,015 $ (2,388) $ 9,627
Securities......................... 193 1,194 1,387 (2,053) 82 (1,971)
Mortgage-backed securities......... (28,206) 4,954 (23,252) (42,429) (2,583) (45,012)
Loans.............................. 16,245 8,701 24,946 93,941 7,471 101,412
FHLB stock......................... (1,290) (333) (1,623) 2,002 (505) 1,497
---------- ---------- ---------- ---------- --------- ----------
Total...................... (19,351) 17,747 (1,604) 63,476 2,077 65,553
---------- ---------- ---------- ---------- --------- ----------
INTEREST EXPENSE
Deposits........................... 3,280 (12,739) (9,459) 4,189 3,665 7,854
FHLB advances...................... (21,565) (12,970) (34,535) 31,178 (8,852) 22,326
Reverse repurchase agreements...... 2,697 (474) 2,223 3,906 (2,014) 1,892
Notes payable...................... 3,649 (592) 3,057 -- (54) (54)
---------- ---------- ---------- ---------- --------- ----------
Total...................... (11,939) (26,775) (38,714) 39,273 (7,255) 32,018
---------- ---------- ---------- ---------- --------- ----------
Net change in net interest
income................... $ (7,412) $ 44,522 $ 37,110 $ 24,203 $ 9,332 $ 33,535
========== ========== ========== ========== ========= ==========
</TABLE>
1997 COMPARED TO 1996. Net interest income was $264.6 million for fiscal
1997, compared to $227.5 million for fiscal 1996, reflecting a $37.1 million, or
16% increase. This increase was attributable to a 42 basis point increase in the
net yield, partially offset by a $336.2 million decrease in average
interest-earning assets.
The yield on interest-earning assets increased 22 basis points in fiscal
1997, in comparison to the prior year, 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 MBS.
The cost of funds decreased 26 basis points during fiscal 1997, in
comparison to the prior year, primarily due to a decrease in FHLB advance rates
and lower deposit rates, reflecting turnover 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 an 18 basis
point increase in the net yield.
The increase in average interest-earning assets during fiscal 1996 can be
principally attributed to two single family mortgage loan purchases during the
second half of fiscal 1995, approximating $1.9 billion. The increase in average
interest-earning assets was funded primarily with FHLB advances and reverse
repurchase agreements.
Approximately 78% of the Company's interest-earning assets at September 30,
1996 were adjustable-rate assets, a portion of which are tied to indices that
normally lag the changes in market interest rates. Substantially all of the
Company's adjustable-rate assets are subject to periodic and/or lifetime
interest rate caps. Periodic caps limit the amount by which the interest rate on
a particular mortgage loan may increase at its next interest rate reset date. In
a rising-rate environment, the interest rate spread may be negatively impacted
when the repricing of interest-earning assets is limited by caps on periodic
interest rate adjustments, compared to market interest rate movements.
39
<PAGE>
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 borrowings 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.
PROVISION FOR CREDIT LOSSES
1997 COMPARED TO 1996. The provision for credit losses increased $1.6
million during fiscal 1997 compared to the prior year. The primary items
contributing to this increase were charge-offs of $5.0 million taken in
conjunction with a bulk sale of $31.3 million of nonperforming single family
mortgage loans during April 1997, increased commercial and small business
portfolios, and the addition of new product lines, including healthcare loans
and commercial loan syndications. The unsecured consumer line of credit product,
which carries the highest level of reserves in the loan portfolio, experienced a
decline in provisions from fiscal 1996 to 1997, which somewhat offset the
increases explained above. This decline relates to a decrease in that product's
total portfolio balance from $51.2 million at September 30, 1996 to $42.1
million at September 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.
NON-INTEREST INCOME
1997 COMPARED TO 1996. Non-interest income decreased $12.8 million or 13%
during fiscal 1997 compared to fiscal 1996. This decrease primarily reflects
lower 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". Loan servicing
income, which primarily consists of loan servicing fee revenue, net of
amortization of MSRs, remained relatively unchanged during fiscal 1997 as
compared to a year ago. Gross servicing fee revenue increased $19.6 million and
was partially offset by a $17.6 million increase in MSR amortization. These
increases reflect a larger portfolio of single family loans serviced for others
at September 30, 1997, as compared to September 30, 1996 ($20.5 billion versus
$9.5 billion), due primarily to purchases of servicing rights totalling $12.6
billion during fiscal 1997. Gross servicing fee revenue for 1997 does not
reflect the full revenue effect of the servicing rights purchased during fiscal
1997, which was reduced by costs incurred to have the loans subserviced on the
Company's behalf until such loans were transferred to the Company's portfolio.
Other non-interest income increased $5.6 million, or 36%, during fiscal 1997 as
compared to the prior year, reflecting an increase in the number of checking
accounts maintained by the Company for which certain fees are assessed and due
to an increase in annuity sales volume.
1996 COMPARED TO 1995. Non-interest income was $96.2 million for fiscal
1996 compared to $104.2 million for fiscal 1995, resulting in a decrease of $8.0
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. 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.
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 mortgage
40
<PAGE>
loans held by the Financial Markets Group for a gain of $608,000 and $178.4
million of multi-family loans for a gain of $2.7 million. See " -- Discussion
of Changes in Financial Condition".
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.
NON-INTEREST EXPENSE
1997 COMPARED TO 1996. Total non-interest expense was $172.1 million for
fiscal 1997 and $187.3 million for fiscal 1996 (excluding the non-recurring
items from fiscal 1996 discussed below) or 1.55% and 1.67%, respectively, of
average total assets. This 8% reduction in expenses is principally attributable
to lower SAIF premiums and the effect of the sale of certain of the Company's
mortgage origination offices. Effective January 1, 1997, the SAIF deposit
insurance assessment was reduced from 23 to 6.48 basis points, which lowered the
amount of premiums paid in 1997 by $7.2 million. As a result of the sale of
certain of the Company's mortgage origination offices (down from 85 offices at
September 30, 1996 to six at September 30, 1997), decreases in compensation,
occupancy, data processing, furniture and equipment, and other non-interest
expenses were also realized. Offsetting these declines were increased legal
expenses of $2.2 million for costs associated with the forbearance litigation.
See "Legal Proceedings".
1996 COMPARED TO 1995. Non-interest expense was $239.4 million for fiscal
1996 and $183.7 million for fiscal 1995, or 2.13% and 1.76%, 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 $187.3 million for fiscal 1996 compared to $183.7 million for fiscal 1995,
or 1.67% and 1.76%, 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 Company's
August 1996 public 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 12 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
is a result of the change in the number of average full-time equivalent
employees from 2,729 in 1995 to 2,548 in 1996, a decline which is consistent
with the change in the number of mortgage origination offices (down from 122 at
September 30, 1995 to 85 at September 30, 1996). 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 "Business -- Regulation -- 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.
INCOME TAXES
The provision for income taxes, excluding taxes on the extraordinary loss,
was an expense of $60.7 million for fiscal 1997, a net benefit of $75.8 million
for fiscal 1996, and an expense of $37.4 million for fiscal 1995. In June 1996
the 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 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
Parent Company's NOLs by the Bank. As a result of the tax sharing agreement and
the restatement of the Certificate of Incorporation and By-laws, a total tax
benefit of
41
<PAGE>
$101.7 million was recognized in fiscal 1996 as a reduction of income tax
expense and an increase in the net deferred tax asset. See
"Business -- Taxation" and Note 13 to the Consolidated Financial Statements.
MINORITY INTEREST
Dividends paid on the Bank's preferred stock increased to $18.3 million for
both fiscal 1997 and 1996 from $10.6 million for fiscal 1995, due to the Bank's
issuance of its 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 because of 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 -- Federal
Financial Assistance -- Warrant Agreement" and Note 15 to the Consolidated
Financial Statements.
EXTRAORDINARY LOSS
In May 1997 the Company issued $220 million of subordinated notes and used
a portion of the net proceeds to retire $114.5 million of the Company's senior
notes. The costs associated with retiring the Senior Notes are reflected as an
extraordinary loss of $3.6 million, or $2.3 million after tax ($0.07 per share).
See Note 10 to the Consolidated Financial Statements.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION
1997 ACTIVITY. Total assets increased during fiscal 1997 by $1.3 billion,
or 12%, to $12.0 billion. This increase principally reflects growth in the
commercial and consumer loan portfolios and the result of MSR purchases, funded
primarily with FHLB advances and reverse repurchase agreements. The composition
of the Company's balance sheet at September 30, 1997 reflects less of a reliance
on single family mortgage loans and MBS in favor of higher margin commercial and
consumer loans. The composition of the Company's deposit base also changed
during fiscal 1997, reflecting an increase in lower cost transaction accounts
and a reduction in higher costing CDs. See "Business -- Deposits."
The following table reflects activity in the loan portfolio.
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
(IN THOUSANDS)
Beginning balance................. $ 7,519,488 $ 8,260,240 $ 5,046,174
Fundings
Single family................ 2,188,273 3,602,009 3,226,324
Commercial................... 1,492,931 891,306 547,117
Consumer..................... 152,665 125,596 99,249
Purchases
Single family................ 795,827 226,298 2,705,858
Commercial................... 639,852 65,521 56,093
Consumer..................... 95,613 -- 68
Net change in mortgage banker
finance line of credit....... 324,087 30,481 (38,124)
Repayments...................... (2,555,898) (2,314,496) (1,192,156)
Securitized loans sold or
transferred.................. (1,290,220) (2,669,406) (1,864,313)
Sales........................... (319,707) (646,979) (308,612)
Other........................... (47,682) (51,082) (17,438)
------------- ------------- -------------
Ending balance.................... $ 8,995,229 $ 7,519,488 $ 8,260,240
============= ============= =============
Single family loans remained relatively flat during fiscal 1997. Increases
due to purchases and originations of these loans during the year were offset by
principal repayments. Although single family loans comprise 72% of the Company's
total loan portfolio, the Company continues to reduce its reliance on these
loans as evidenced by the sale of certain of its retail and wholesale mortgage
origination offices during the second quarter of fiscal 1997. The remaining
offices were restructured or closed. See "Business -- Mortgage Banking Group."
Single family loans held for sale increased $440.8 million during fiscal 1997 up
from $256.6 million at September 30,
42
<PAGE>
1996 to $697.4 million at September 30, 1997, reflecting loans originated by the
Company that may be sold or securitized in the future.
At September 30, 1997, commercial and consumer loans comprised 28% of the
total loan portfolio, compared to 15% at September 30, 1996. Commercial loans
increased $1.2 billion, or 124%, during fiscal 1997, compared to an increase of
$245.1 million, or 33%, during fiscal 1996, reflecting higher purchases and
originations during the current year as compared to the prior year. Consumer
loans increased $132.2 million, or 78%, during fiscal 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.
During fiscal 1997, the Company purchased $406.3 million of SBA loans, a
portion of which were pooled into securities totalling $341.5 million.
Securities created from these SBA loans totalling $335.1 million were sold
during fiscal 1997.
MSRs increased $148.8 million, or 121%, during fiscal 1997 reflecting the
purchase of servicing rights associated with $12.6 billion of single family
mortgage loans at a premium of $166.5 million. Accordingly, the single family
servicing portfolio increased to $24.5 billion at September 30, 1997 compared to
$13.2 billion at September 30, 1996 ($4.0 billion and $3.7 billion at September
1997 and 1996, respectively, were serviced for the Company's own account). At
September 30, 1997, $7.5 billion of the recently acquired servicing rights had
not yet been transferred to the Company but were transferred during the first
quarter of fiscal 1998. These acquisitions also contributed to the increase in
servicing related receivables included in other assets.
Deposits increased $99.7 million, or 2%, during fiscal 1997. Although total
deposits were relatively unchanged, the composition changed. Higher cost
brokered deposits and CDs were allowed to runoff and were replaced with lower
cost transaction accounts. In the aggregate, FHLB advances and reverse
repurchase agreements increased $978.3 million during fiscal 1997 primarily to
fund loan purchases and originations. In September and October 1997, the Company
signed agreements to purchase twenty-one branches with deposits totalling $1.5
billion. See "Business -- Deposits."
During fiscal 1997, the Company issued $220 million of subordinated notes.
Net proceeds 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. See Note 10 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.
Securities decreased by $51.5 million during fiscal 1996, reflecting the
purchase of $22.4 million and the sale of $96.5 million in securities. During
fiscal 1996, $58.0 million of 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 by $740.4 million during fiscal 1996, primarily because of
sales and repayments. During fiscal 1996, the Company sold $293.0 million in MBS
for a gain of $2.7 million, compared to $77.6 million in sales for a gain of
$16,000 during fiscal 1995. The increase in repayments resulted from a decline
in market interest rates.
In November 1995 the Financial Accounting Standards Board ("FASB") issued
"A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities". This implementation guide provided
the Company the opportunity to reassess the appropriateness of the
classification of its securities and provided that reclassifications of
securities from the held to maturity category resulting from this one-time
reassessment would not call into question the intent to hold other securities to
maturity in the future. During the first quarter of fiscal 1996, the Company
reassessed its securities portfolios and reclassified $1.2 billion in MBS from
the held to maturity portfolio to the available for sale portfolio. An
unrealized gain of $4.2 million before tax, or $2.6 million after tax, was
recorded in stockholders' equity as a result of this transfer.
The increase in single family mortgage 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%
43
<PAGE>
of total single family mortgage loan originations during fiscal 1996 and 1995,
respectively. Multi-family, commercial real estate, and SBA loan originations
increased $29.4 million during fiscal 1996 as compared to fiscal 1995. The
increase in multi-family, commercial real estate, and SBA loan originations, as
well as the increase in residential construction loan originations during fiscal
1996, as compared to fiscal 1995, reflects the geographic expansion of the
offering of these products. Increased consumer loan originations during fiscal
1996 as compared to fiscal 1995 are primarily due to increased home improvement
loan originations resulting from increased marketing efforts.
As a result of the decline in market interest rates during fiscal 1996, the
MBF line of credit portfolio increased $30.5 million to $139.9 million at
September 30, 1996.
Single family mortgage 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 mortgage loans at
a premium of $23.5 million.
In the aggregate, FHLB advances and reverse repurchase agreements 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.
ASSET QUALITY
The Company is exposed to certain credit risks related to the value of
collateral that secures loans held in its portfolio and the ability of borrowers
to repay their loans 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 an Asset Review Department,
which provides to the Board of Directors an independent ongoing review and
evaluation of the quality of assets. Selected asset quality ratios were as
follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for credit losses to net
nonaccrual loans
Single family................... 47.37% 32.46% 39.74% 22.70% 39.69%
Total........................... 72.61 44.24 48.74 30.73 71.71
Allowance for credit losses to
nonperforming assets............... 52.24 32.95 36.65 24.18 49.28
Allowance for credit losses and
non-accretable discounts
to net nonaccrual loans............ 74.13 48.47 60.88 50.89 126.18
Allowance for credit losses to total
loans.............................. 0.43 0.52 0.44 0.46 0.61
Nonperforming assets to total
assets............................. 0.63 1.12 0.84 1.09 0.72
Net nonaccrual loans to total
loans.............................. 0.60 1.19 0.91 1.51 0.85
Nonperforming assets to total loans
and REO............................ 0.83 1.59 1.21 1.91 1.23
Net loan charge-offs to average loans
Single family................... 0.18(1) 0.12 0.08 0.04 0.05
Total........................... 0.23(1) 0.17 0.16 0.30 0.05
</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 0.11%
and the total charge-off ratio would have been 0.17%.
44
<PAGE>
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NONACCRUAL LOANS
Single family................... $ 51,742 $ 92,187 $ 83,954 $ 85,722 $ 61,451
Commercial...................... 1,995 494 718 6,144 3,233
Consumer........................ 974 1,039 563 506 427
---------- ---------- ---------- ---------- ----------
54,711 93,720 85,235 92,372 65,111
---------- ---------- ---------- ---------- ----------
DISCOUNTS............................ (759) (4,077) (9,727) (16,053) (23,465)
---------- ---------- ---------- ---------- ----------
Net nonaccrual loans....... 53,952 89,643 75,508 76,319 41,646
REO, primarily single family
properties......................... 21,038 30,730 24,904 20,684 18,954
---------- ---------- ---------- ---------- ----------
Total nonperforming
assets................... $ 74,990 $ 120,373 $ 100,412 $ 97,003 $ 60,600
========== ========== ========== ========== ==========
</TABLE>
A loan is usually placed on nonaccrual status when the loan is past due 90
days or more or the ability of a borrower to pay principal and interest is in
doubt. Nonaccrual loans outstanding at September 30, 1997 were primarily
concentrated in California (48.75%) and Texas (9.31%), which is generally
reflective of the geographic makeup of the Company's loan portfolio.
The Company's nonperforming assets decreased 38%, or $45.4 million to $75
million at September 30, 1997, as compared to $120.4 million at September 30,
1996. This decrease is primarily attributable to the sale in April 1997 of $31.3
million of nonperforming single family mortgage loans and a higher sales volume
of REO properties in fiscal 1997.
Nonperforming assets were at their highest level in fiscal 1996, increasing
by $20 million from $100.4 million at September 30, 1995 to $120.4 million at
September 30, 1996. This increase was the result of significant loan purchases,
which occurred in the fourth quarter of fiscal 1995 that subsequently produced
an increased level of delinquent loans and foreclosures.
The level of nonperforming assets for fiscal 1995 and 1994 remained
relatively constant at $100.4 million and $97 million, respectively. However, in
fiscal 1994, the Company's nonperforming assets increased 60%. This increase was
the result of the purchase, at substantial discounts, of single family loans
that were delinquent at acquisition.
Historically, the Company purchased large portfolios of loans, portions of
which were acquired at substantial discounts generally due to the loans'
delinquent status. These purchase discounts reflected the potential credit risk
associated with the delinquent loans and as a result were not accreted to income
("non-accretable discounts"). These discounts were recognized into income at
the time a loan was sufficiently seasoned and its delinquency status had been
cured, at loan pay-off, or at the time the related loan or REO property was
sold.
45
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established based on management's
periodic evaluation of the loan portfolio and considers such factors as
historical loss experience, delinquency status, identification of adverse
situations that may affect the ability of 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 activity
in and the allocation of the allowance for credit losses was as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ACTIVITY
Beginning balance....................... $ 39,660 $ 36,801 $ 23,454 $ 29,864 $ 28,214
Provision.......................... 18,107 16,469 24,293 6,997 4,083
Charge-offs........................ (19,036) (13,785) (11,078) (13,465) (2,458)
Recoveries......................... 443 175 132 58 25
---------- --------- --------- --------- ---------
Ending balance.......................... $ 39,174 $ 39,660 $ 36,801 $ 23,454 $ 29,864
========== ========= ========= ========= =========
ALLOCATION
Single family........................... $ 24,538 $ 28,672 $ 29,632 $ 15,981 $ 15,403
Commercial(1)........................... 8,766 5,769 3,922 5,651 14,106
Consumer................................ 5,870 5,219 3,247 1,822 355
---------- --------- --------- --------- ---------
Total.............................. $ 39,174 $ 39,660 $ 36,801 $ 23,454 $ 29,864
========== ========= ========= ========= =========
</TABLE>
(1) Includes $2.2 million, $925,000, $560,000, $526,000, and $414,000
related to construction loans as of September 30, 1997, 1996, 1995,
1994, and 1993, respectively.
The allowance for credit losses remained relatively constant from September
30, 1996 to September 30, 1997, however, the composition of the allowance
changed. The single family mortgage allowance decreased $4.1 million during
fiscal 1997, reflecting the April 1997 sale of $31.3 million of nonperforming
single family loans with related charge-offs of $5.0 million. This decrease was
offset by increased reserves in the commercial and consumer loan portfolios,
which were necessitated by growth in those portfolios.
The allowance for credit losses increased to $39.7 million at September 30,
1996 from $36.8 million at September 30, 1995. The single family allowance for
credit losses decreased during fiscal 1996, because of a reduced level of single
family mortgage loans as repayments exceeded originations. The consumer
allowance for credit losses increased during fiscal 1996, reflecting the
increased losses related to the unsecured line of credit portfolio. The
commercial allowance for credit losses increased during fiscal 1996 primarily
from growth in the commercial loan portfolio.
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 during fiscal 1995, because of purchases of $2.7 billion
and additional originations retained for portfolio of $1.0 billion. The consumer
allowance for credit losses increased as a result of increased losses related to
the unsecured consumer line of credit portfolio.
46
<PAGE>
CHARGE-OFFS
The Company charges off loans, other than consumer loans, when all attempts
have been exhausted to resolve any outstanding loan or legal issues. For
consumer loans, all loans are charged off when the loan becomes contractually
120 days delinquent. Loan charge-offs and recoveries were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CHARGE-OFFS
Single family................... $ (11,886) $ (7,751) $ (4,842) $ (1,722) $ (2,315)
Commercial...................... (570) (39) (3,389) (10,378) (71)
Consumer........................ (6,580) (5,995) (2,847) (1,365) (72)
---------- ---------- ---------- ---------- ----------
Total charge-offs.......... (19,036) (13,785) (11,078) (13,465) (2,458)
---------- ---------- ---------- ---------- ----------
RECOVERIES
Single family................... 63 31 36 20 6
Commercial...................... 3 -- 2 -- --
Consumer........................ 377 144 94 38 19
---------- ---------- ---------- ---------- ----------
Total recoveries........... 443 175 132 58 25
---------- ---------- ---------- ---------- ----------
Total net charge-offs...... $ (18,593) $ (13,610) $ (10,946) $ (13,407) $ (2,433)
========== ========== ========== ========== ==========
Net loan charge-offs to
average loans............ 0.23% 0.17% 0.16% 0.30% 0.05%
</TABLE>
Net loan charge-offs increased 37% to $18.6 million for fiscal 1997 from
$13.6 million for fiscal 1996. This increase is the result of the April 1997
sale of $31.3 nonperforming single family loans with related charge-offs of $5.0
million. The ratio for net charge-offs as a percentage of average single family
mortgage loans reflects the increased charge-offs and was 0.18% for fiscal 1997,
versus 0.12% for fiscal 1996. Adjusted for the loan sale mentioned above, the
single family mortgage loan charge-off ratio would have been 0.11% and the total
charge-off ratio would have been 0.17% for fiscal 1997.
Net loan charge-offs increased to $13.6 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
historically have been significant because of discounts attributable to the
original loan purchases. Net charge-offs on the consumer loan portfolio
increased to $5.9 million for fiscal 1996 from $2.8 million for fiscal 1995
because of the unsecured consumer line of credit portfolio.
Net loan charge-offs decreased to $10.9 million for fiscal 1995 compared to
$13.4 million for fiscal 1994. Net charge-offs on the commercial portfolio
decreased to $3.4 million for fiscal 1995 compared to $10.4 million for fiscal
1994. Commercial charge-offs in fiscal 1995 and 1994 resulted primarily from
charge-offs related to a single commercial real estate loan, which was
ultimately sold. Excluding the commercial real estate loan charge-offs, net
charge-offs to average loans outstanding would have been $7.5 million and $3.3
million, or 0.11% and 0.07%, respectively, for fiscal 1995 compared to fiscal
1994. Net charge-offs on the single family portfolio increased to $4.8 million
for fiscal 1995 compared to $1.7 million for fiscal 1994. This resulted in net
charge-offs as a percentage of single family mortgage 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
47
<PAGE>
this portfolio, the underwriting, approval, and collection processes were
modified and the percentage of reserves required for this product was increased.
At September 30, 1997, this product had loans outstanding of $42.1 million with
a related allowance of $4.3 million, compared to an outstanding balance of $51.2
million and related allowance of $4.4 million at September 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
September 1997 were as follows:
ACTUAL REQUIREMENT
------- ------------
Average daily liquidity.............. 5.86% 5.00%
Average short-term liquidity......... 3.31% 1.00%
The primary sources of funds consist of deposits, advances from the FHLB,
reverse repurchase agreements, principal repayments on loans and MBS, and
proceeds from the issuance of debt and stock. Liquidity may also be provided
from other sources including investments in short-term high credit quality
instruments. At September 30, 1997, these instruments generally comprised
repurchase agreements, federal funds sold, and MBS and securities available for
sale. These instruments totalled $1.5 billion, $1.8 billion, and $933.2 million
at September 30, 1997, 1996, and 1995, 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 7, 8, 9, and 11 to the Consolidated Financial
Statements.
In December 1996, the Parent Company contributed all of the outstanding
stock of its subsidiary, the Bank, to Holdings, and Holdings assumed the
obligations of the Parent Company. The Parent Company's and Holdings' ability to
pay dividends on their common stock and to meet their other cash obligations is
dependent on 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 in May 1997, the Company obtained consents from
Senior Notes holders which effectively eliminated substantially all of the
restrictive covenants, including limitations on dividends. See Note 10 to the
Consolidated Financial Statements.
Total aggregate annual dividend requirements on the preferred stock of the
Bank are $18.25 million. While the preferred stock of the Bank is noncumulative,
common stock dividends may not be paid by the Bank if full dividends on the
preferred stock of the Bank have not been paid for the four most recent
quarterly dividend periods. 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 and to pay dividends to
the holders of the Company's common stock, subject to applicable regulatory
restrictions, no assurance can be given that circumstances which would limit or
preclude the declaration of such dividends will not exist in the future. At
September 30, 1997, the Bank had $201.0 million of available capacity for the
payment of dividends on its capital stock without prior approval of the OTS. See
"Regulation -- Capital Distributions" and Notes 10, 14 and 15 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 fiscal
1997, 45% of average total assets for fiscal 1996, and 48% for fiscal 1995. The
relationship of the Company's deposits to its average assets has decreased since
fiscal 1995, while overall deposit levels have remained constant. The Company
historically utilized CDs to compete for consumer deposits. Beginning in 1995,
the Company's strategy has been to increase transaction 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 "Business --
Deposits."
48
<PAGE>
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 fiscal 1997, 45% for
fiscal 1996, and 43% for fiscal 1995. 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 September 30, 1997, these limitations were 65%
and 45%, respectively. Effective November 15, 1997, the FHLB Dallas raised the
borrowing limitation on fully disbursed single family loans to 75%. The
Company's ability to borrow on reverse repurchase agreements is limited to the
market value of available collateral to collateralize reverse repurchase
agreements. At September 30, 1997, the Company had $1.3 billion in such
collateral, $1.2 billion of which was collateralizing reverse repurchase
agreements. See Notes 8 and 9 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% (the "Senior Notes") and repaid long-term debt and a note
payable to a related party. The Senior Notes mature on May 15, 1998. 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 10 to
the Consolidated Financial Statements.
COMMITMENTS
At September 30, 1997, the Company had $1.7 billion of outstanding
commitments to extend credit. Because such commitments may expire without being
drawn upon, the commitments do not necessarily represent future cash
requirements. Scheduled maturities of CDs and borrowings (including advances
from the FHLB and reverse repurchase agreements) during the twelve months
following September 30, 1997 total $1.7 billion and $2.5 billion, respectively.
At September 30, 1997, the Company had $396.8 million of outstanding commitments
to purchase loans. 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 connection with several
capital transactions that occurred in June 1996 between the Company, Hyperion
Holdings, and Hyperion Partners, the Company's stock was distributed to the
limited and general partners of Hyperion Partners. Following this restructuring,
the Company had a 1,800-to-one stock conversion.
In August 1996 the Company filed a registration statement with the
Commission and 12,075,000 shares of the Class A common stock of the Company 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 from this offering of
$14.0 million was contributed to the capital of the Bank for general corporate
purposes.
In August 1996 the FDIC surrendered a portion of the Warrant for a cash
payment 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, which were sold in the offering discussed
above.
49
<PAGE>
REGULATORY MATTERS
The Bank is subject to regulatory capital requirements as defined in the
OTS capital regulations. The Bank's capital level at September 30, 1997, 1996,
and 1995 qualified it as "well-capitalized", the highest of five tiers under
applicable regulatory definitions. See "Regulation -- Capital Requirements,"
and Note 14 to the Consolidated Financial Statements.
CONTINGENCIES AND UNCERTAINTIES
YEAR 2000
The Company formally initiated a project in October 1996 to ensure that its
operational and financial systems will not be adversely affected by year 2000
software problems. A year 2000 project team has been formed with representatives
from all areas of the Company. Executive management is supporting all compliance
efforts and is allocating the necessary resources to complete the project. An
inventory of all systems and products that could be affected by the year 2000
date change has been developed, verified, and categorized as to its importance
to the Company. The software for the Company's systems is primarily provided
through service bureaus and software vendors. The Company is requiring its
software providers to demonstrate and represent that the products provided are
or will be year 2000 compliant and has planned a program of testing for
compliance. Management does not expect the costs of bringing the Company's
systems into year 2000 compliance to have a materially adverse effect on the
Company's financial condition, results of operations, or liquidity.
RECENT ACCOUNTING STANDARDS
A discussion of recently issued accounting pronouncements and their impact
on the Consolidated Financial Statements is provided in Note 1 to the
Consolidated Financial Statements.
FORWARD-LOOKING INFORMATION
Statements and financial discussion and analysis by management contained
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; the Company's ability to make acquisitions of
other depository institutions, their assets or their liabilities and the
Company's successful integration of any such acquistions; transactions in the
common stock of the Company 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" in the prospectus dated April 29, 1997, relating to the public
offering of the Company's Subordinated Notes filed with the SEC (File No.
333-19861), and in the prospectus dated January 27, 1997, relating to the
registration of 10,208,610 shares of the Company's Class A common stock, filed
with the SEC (File No. 333-19237).
50
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Business -- Asset and Liability Management". The Company's
principal market risk exposure is to interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included on page 58 and the Consolidated Financial Statements
which begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on directors and executive officers of the Company contained
under the caption "Election of Directors" in the Company's definitive Proxy
Statement relating to the 1997 Annual Meeting of Shareholders is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation contained under the caption
"Executive Compensation" in the Company's definitive Proxy Statement relating
to the 1997 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information on beneficial ownership of the Company's voting securities by
each director and all officers and directors as a group, and by any person known
to beneficially own more than 5% of voting security of the Company contained
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement relating to the 1997
Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions contained
under the caption "Certain Relationships and Related Transactions" of the
Company's definitive Proxy Statement relating to the 1997 Annual Meeting of
Shareholders is incorporated herein by reference.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
EXHIBITS
Exhibits followed by a parenthetical reference are incorporated by
reference herein from the document described in such parenthetical
reference.
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 -- Form of Letter Agreement, by and among the general and
limited partners of Hyperion Partners, L.P., dated as of June
17, 1996, relating to certain transactions consumated prior to
the Offering. (Incorporated by reference to Exhibit 2.1 to Form
S-1, Registration No. 333-06229)
2.2 -- Merger Agreement, dated as of June 17, 1996, by and between
the Company and Hyperion Holdings related to the Merger.
(Incorporated by reference to Exhibit 2.2 to Form S-1,
Registration No. 333-06229)
3.1 -- Form of Restated Certificate of Incorporation of the
Registrant, as amended. (Incorporat- ed by reference to Exhibit
3.1 to Form S-1, Registration No. 333-06229)
3.2 -- Form of By-Laws of the Registrant. (Incorporated by reference
to Exhibit 3.2 to Form S-1, Registration No. 333-06229)
4.1 -- 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. (Incorporated by reference
to Exhibit 4.1 to Form S-1, Registration No. 333-06229)
4.2 -- Form of 8.05% Senior Note due May 15, 1998 (included in the
Indenture filed as Exhibit 4.1 hereto). (Incorporated by
reference to Exhibit 4.2 to Form S-1, Registration No.
333-06229)
4.3 -- Exchange and Registration Rights relating to Registrant's
8.05% Senior Notes due May 15, 1998. (Incorporated by reference
to Exhibit 4.3 to Form S-1, Registration No. 333-06229)
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.
(Incorporated by reference to Exhibit 4.4 to Form S-1,
Registration No. 333-06229)
4.5 -- Form of Class A common stock Certificate. (Incorporated by
reference to Exhibit 4.5 to Form S-1, Registration No.
333-06229)
4.6 -- Indenture, dated as of May 7, 1997, between the Registrant
and The Bank of New York, as Trustee, relating to the
Registrant's 8.875% Subordinated Notes due May 1, 2007
(Incorporated by reference to Exhibit 4.2 to Form S-1,
Registration No. 333-19861)
4.7 -- Form of 8.875% Subordinated Notes due May 1, 2007 (included
in the Indenture filed as Exhibit 4.6 hereto) (Incorporated by
reference to Exhibit 4.3 to Form S-1, Registration No.
333-19861)
4.8 -- 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 (Incorporated by reference to Exhibit 4.7 to Form S-1,
Registration No. 333-19861)
4.9 -- 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
(Incorporated by reference to Exhibit 4.8 to Form S-1,
Registration No. 333-19861)
10.1 -- Assistance Agreement, dated December 30, 1988, among the
Bank, the Registrant, Hyperion Holdings, Hyperion Partners, and
the FSLIC. (Incorporated by reference to Exhibit 10.1 to Form
S-1, Registration No. 333-06229)
10.1a -- Settlement and Termination Agreement, dated as of December
23, 1993, among the Bank, the Registrant, Hyperion Holdings,
Hyperion Partners and the FDIC. (Incorporated by reference to
Exhibit 10.1a to Form S-1, Registration No. 333-06229)
52
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1b -- Tax Benefits Agreement, dated December 28, 1993, among the
Bank, the Registrant, Hyperion Holdings, Hyperion Partners and
the FDIC. (Incorporated by reference to Exhibit 10.1b to Form
S-1, Registration No. 333-06229)
10.2 -- Acquisition Agreement, dated December 30, 1988, between the
Bank and the FSLIC. (Incorporated by reference to Exhibit 10.2
to Form S-1, Registration No. 333-06229)
10.3 -- Warrant Agreement, dated December 30, 1988, between the Bank
and the FSLIC. (Incorporated by reference to Exhibit 10.3 to
Form S-1, Registration No. 333-06229)
10.3a -- Amended and Restated Warrant Agreement dated December 28,
1993, between the Bank and the FDIC. (Incorporated by reference
to Exhibit 10.3a to Form S-1, Registration No. 333-06229)
10.4 -- Regulatory Capital Maintenance Agreement, dated December 30,
1988 among the Bank, the Registrant, Hyperion Holdings, Hyperion
Partners, and the FSLIC (terminated). (Exhibit 10.4 to Form S-1
filed on June 18, 1996)
10.5 -- Federal Stock Charter of the Bank and First Amendment to
charter approved on August 26, 1992. (Incorporated by reference
to Exhibit 10.5 to Form S-1, Registration No. 333-06229)
10.6 -- Amended and Restated Federal Stock Charter of the Bank and
Second Amendment approved on October 30, 1992. (Incorporated by
reference to Exhibit 10.6 to Form S-1, Registration No.
333-06229)
10.6a -- Third Amendment to the Federal Stock Charter of the Bank
approved on April 23, 1996. (Incorporated by reference to
Exhibit 10.6a to Form S-1, Registration No. 333-06229)
10.6b -- Amended and Restated Bylaws of the Bank. (Incorporated by
reference to Exhibit 10.6b to Form S-1, Registration No.
333-06229)
10.7 -- Specimen Preferred Stock, Series A, certificate, $25.00 per
share stated value of the Bank. (Incorporated by reference to
Exhibit 10.7 to Form S-1, Registration No. 333-06229)
10.7a -- Certificate of Designation of Noncumulative Preferred Stock,
Series A, of the Bank. (Incorporated by reference to Exhibit
10.7a to Form S-1, Registration No. 333-06229)
10.7b -- Specimen Preferred Stock, Series B, certificate, $25.00 per
share stated value, of the Bank. (Incorporated by reference to
Exhibit 10.7b to Form S-1, Registration No. 333-06229)
10.7c -- Certificate of Designation of Noncumulative Preferred Stock,
Series B, of the Bank. (Incorporated by reference to Exhibit
10.7c to Form S-1, Registration No. 333-06229)
10.8 -- Data Processing Agreement, dated January 1, 1992, between the
Bank and Systematics Financial Services, Inc., and First
Amendment (dated October 28, 1992) and Second Amendment (dated
September 1, 1992). (Incorporated by reference to Exhibit 10.8
to Form S-1, Registration No. 333-06229)
10.8a -- Third Amendment, dated December 17, 1993, to the Data
Processing Agreement, dated January 1, 1992, between the Bank
and Systematics Financial Services, Inc. (Incorporated by
reference to Exhibit 10.8a to Form S-1, Registration No.
333-06229)
10.8b -- Fourth Amendment, dated March 28, 1994, to the Data
Processing Agreement, dated January 1, 1992, between the Bank
and Systematics Financial Services, Inc. (Incorporated by
reference to Exhibit 10.8b to Form S-1, Registration No.
333-06229)
10.8c -- Fifth Amendment, dated April 1, 1994 to the Data Processing
Agreement, dated January 1, 1992, between the Bank and
Systematics Financial Services, Inc. (Incorporated by reference
to Exhibit 10.8c to Form S-1, Registration No. 333-06229)
10.8d -- Sixth Amendment, dated February 26, 1996 to the Data
Processing Agreement, dated January 1, 1992, between the Bank
and Systematics Financial Services, Inc. (Incorporated by
reference to Exhibit 10.8d to Form S-1, Registration No.
333-06229)
10.9 -- Management and Consulting Services Agreement, dated January
1, 1992, between the Bank and Systematics Financial Services,
Inc., and First Amendment (dated March 18, 1992) and Second
Amendment (dated September 1, 1992). (Incorporated by reference
to Exhibit 10.9 to Form S-1, Registration No. 333-06229)
53
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
10.10 -- Lease Agreement, dated April 1, 1989, between the Bank and
Homart Development Co. (Leased premises at 3200 Southwest
Freeway) and First Amendment thereto dated January 31, 1990.
(Incorporated by reference to Exhibit 10.10 to Form S-1,
Registration No. 333-06229)
10.10a -- Second Amendment, dated November 14, 1994 to Lease Agreement
dated April 1, 1989, between the Bank and Homart Development Co.
(assigned to HD Delaware Properties, Inc.). (Incorporated by
reference to Exhibit 10.10a to Form S-1, Registration No.
333-06229)
10.10b -- Third Amendment, dated January 8, 1996 to Lease Agreement
dated April 1, 1989 between the Bank and Homart Development Co.
(predecessor in interest of HMS Office, L.P.). (Incorporated by
reference to Exhibit 10.10b to Form S-1, Registration No.
333-06229)
10.11 -- Lease Agreement, dated November 20, 1990, between the Bank
and Greenway Plaza, LTD. (Leased premises at 3800 Buffalo
Speedway). (Incorporated by reference to Exhibit 10.11 to Form
S-1, Registration No. 333-06229)
10.12 -- Employment Agreement, dated March 18, 1991, between the Bank
and Barry C. Burkholder. (Incorporated by reference to Exhibit
10.12 to Form S-1, Registration No. 333-06229)
10.12a -- Amendment, dated April 10, 1996, to the Employment Agreement
between the Bank and Barry C. Burkholder. (Incorporated by
reference to Exhibit 10.12a to Form S-1, Registration No.
333-06229)
10.13 -- Letter Agreement Related to Employment, dated April 4, 1990,
between the Bank and Anthony J. Nocella. (Incorporated by
reference to Exhibit 10.13 to Form S-1, Registration No.
333-06229)
10.14 -- Letter Agreement Related to Employment, dated June 18, 1990
between the Bank and George R. Bender. (Incorporated by
reference to Exhibit 10.14 to Form S-1, Registration No.
333-06229)
10.15 -- Letter Agreement Related to Employment, dated April 6, 1990,
between the Bank and Jonathon K. Heffron. (Incorporated by
reference to Exhibit 10.15 to Form S-1, Registration No.
333-06229)
10.16 -- Letter Agreement Related to Employment, dated May 10, 1991,
between the Bank and Leslie H. Green. (Incorporated by reference
to Exhibit 10.16 to Form S-1, Registration No. 333-06229)
10.17 -- Management Incentive Plan, dated April 20, 1992.
(Incorporated by reference to Exhibit 10.17 to Form S-1,
Registration No. 333-06229)
10.18 -- Letter Agreement, dated January 5, 1990, between Hyperion
Partners and certain shareholders of the Registrant with respect
to the provision of managerial assistance to the Registrant.
(Incorporated by reference to Exhibit 10.18 to Form S-1,
Registration No. 333-06229)
10.22 -- Supplemental Executive Savings Plan of the Bank.
(Incorporated by reference to Exhibit 10.22 to Form S-1,
Registration No. 333-06229)
10.23 -- Directors Supplemental Savings Plan of the Bank.
(Incorporated by reference to Exhibit 10.23 to Form S-1,
Registration No. 333-06229)
10.24 -- Warrant Purchase and Exchange Agreement, dated July 23, 1996,
by and among the Company, the Bank and the 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. (Incorporated by reference to Exhibit
10.25 to Form 10-K for the fiscal year ended September 30, 1996)
10.26 -- Form of The Company's 1996 Stock Incentive Plan.
(Incorporated by reference to Exhibit 10.26 to Form S-1,
Registration No. 333-06229)
10.27 -- Form of The Company's Director Stock Plan. (Incorporated by
reference to Exhibit 10.27 to Form S-1, Registration No.
333-06229)
10.28 -- Employment Agreement, dated August 1, 1996, between the
Company and Barry C. Burkholder. (Incorporated by reference to
Exhibit 10.28 to Form 10-K for the fiscal year ended September
30, 1996)
54
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
10.29 -- Employment Agreement, dated August 1, 1996, between the
Company and Anthony J. Nocella. (Incorporated by reference to
Exhibit 10.29 to Form 10-K for the fiscal year ended September
30, 1996)
10.30 -- Employment Agreement, dated August 1, 1996, between the
Company and Jonathon K. Heffron. (Incorporated by reference to
Exhibit 10.30 to Form 10-K for the fiscal year ended September
30, 1996)
10.31 -- Employment Agreement, dated August 1, 1996, between the
Company and Ronald D. Coben. (Incorporated by reference to
Exhibit 10.31 to Form 10-K for the fiscal year ended September
30, 1996)
10.32 -- Form of Nontransferable Stock Agreement. (Incorporated by
reference to Exhibit 10.32 to Form S-1, Registration No.
333-06229)
10.33 -- Form of Stock Option Agreement. (Incorporated by reference to
Exhibit 10.33 to Form S-1, Registration No. 333-06229)
10.34 -- Consulting Agreement. (Incorporated by reference to Exhibit
10.23 to Form 10-K for the fiscal year ended September 30, 1996)
10.35 -- Recovery Agreement. (Incorporated by reference to Exhibit
10.24 to Form 10-K for the fiscal year ended September 30, 1996)
10.36 -- Stock Purchase Agreement, dated January 15, 1993, between
Hyperion Partners and Hyperion Holdings. (Incorporated by
reference to Exhibit 10.36 to Form S-1, Registration No.
333-06229)
10.37 -- Asset Purchase and Sale Agreement, dated January 17, 1997,
between the Bank and National City Mortgage Co. (Incorporated by
reference to Exhibit 10.38 to Form 10-Q for the quarter ended
December 31, 1996)
*10.38 -- Lease Agreement, dated November 21, 1997, between the Bank
and Utah State Retirement Fund. (Leased premises at 3200
Southwest Freeway).
21 -- Subsidiaries of the Registrant. (Incorporated by reference to
Exhibit 21 to Form S-1, Registration No. 333-06229)
*23.1 -- Consent of Deloitte & Touche LLP, independent auditors.
*27 -- Financial Data Schedule.
- ------------
* Filed herewith.
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
See Index to the Consolidated Financial Statements on page 58. All
supplemental schedules are omitted as inapplicable or because the required
information is included in the Consolidated Financial Statements or Notes
thereto.
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the last quarter of fiscal
1997.
55
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECTION 13, OR 15(d) OF THE SECURITIES
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN HOUSTON, STATE OF
TEXAS, ON DECEMBER 19, 1997.
BANK UNITED CORP.
By: /s/ BARRY C. BURKHOLDER
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATES INDICATED BELOW.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
(1) Principal Executive Officer:
/s/BARRY C. BURKHOLDER President and December 19, 1997
BARRY C. BURKHOLDER Chief Executive Officer
(2) Principal Financial and Accounting Officer:
/s/ANTHONY J. NOCELLA Vice Chairman and December 19, 1997
ANTHONY J. NOCELLA Chief Financial Officer
(3) Directors:
* Chairman and Director December 19, 1997
LEWIS S. RANIERI
Director December 19, 1997
BARRY C. BURKHOLDER
* Director December 19, 1997
LAWRENCE CHIMERINE, PH.D.
* Director December 19, 1997
DAVID M. GOLUSH
* Director December 19, 1997
PAUL M. HORVITZ, PH.D.
* Director December 19, 1997
ALAN E. MASTER
Director December 19, 1997
ANTHONY J. NOCELLA
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* Director December 19, 1997
SALVATORE A. RANIERI
* Director December 19, 1997
SCOTT A. SHAY
* Director December 19, 1997
PATRICIA A. SLOAN
* Director December 19, 1997
MICHAEL S. STEVENS
* Director December 19, 1997
KENDRICK R. WILSON III
</TABLE>
- ------------
* Signed through Power of Attorney
granted to Jonathon K. Heffron,
Attorney-in-fact
57
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report......... F-1
Consolidated Statements of Financial
Condition as of September 30, 1997
and 1996........................... F-2
Consolidated Statements of Operations
for the Year Ended September 30,
1997, 1996, and 1995............... F-3
Consolidated Statements of
Stockholders' Equity for the Year
Ended September 30, 1997, 1996, and
1995............................... F-4
Consolidated Statements of Cash Flows
for the Year Ended September 30,
1997, 1996, and 1995............... F-5
Notes to Consolidated Financial
Statements......................... F-7
58
<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 subsidiaries (collectively known as the
"Company") as of September 30, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
September 30, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
October 24, 1997
F-1
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
AT SEPTEMBER 30,
----------------------------
NOTES 1997 1996
----------- ------------- -------------
ASSETS
Cash and cash equivalents............ 1 $ 121,000 $ 119,523
Securities purchased under agreements
to resell and federal funds sold... 2 349,209 674,249
Securities........................... 3, 4 77,809 65,693
Mortgage-backed securities 4, 9
Held to maturity, at amortized
cost (fair value of $528.9
million in 1997 and $609.2
million in 1996)............... 543,361 630,048
Available for sale, at fair
value.......................... 1,026,344 1,027,860
Loans 5, 8
Held for investment (net of the
allowance for credit losses of
$39.2 million in 1997 and $39.7
million in 1996)............... 8,221,626 7,227,153
Held for sale................... 773,603 292,335
Federal Home Loan Bank stock......... 205,011 179,643
Premises and equipment............... 46,921 40,209
Mortgage servicing rights............ 6 272,214 123,392
Real estate owned (net of the
allowance for losses of $1.2
million in 1997 and $986 thousand
in 1996)........................... 19,833 29,744
Deferred tax asset................... 13 120,936 168,323
Other assets......................... 189,205 134,205
------------- -------------
TOTAL ASSETS......................... $ 11,967,072 $ 10,712,377
============= =============
LIABILITIES, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY
LIABILITIES
Deposits............................. 7 $ 5,247,668 $ 5,147,945
Federal Home Loan Bank advances...... 5, 8 3,992,344 3,490,386
Securities sold under agreements to
repurchase......................... 4, 9 1,308,600 832,286
Notes payable........................ 10 220,199 115,000
Advances from borrowers for taxes and
insurance.......................... 173,294 146,634
Other liabilities.................... 240,988 263,583
------------- -------------
Total liabilities.......... 11,183,093 9,995,834
------------- -------------
MINORITY INTEREST
Preferred stock issued by
consolidated subsidiary............ 15 185,500 185,500
------------- -------------
STOCKHOLDERS' EQUITY 14, 15
Common stock......................... 316 316
Paid-in capital...................... 129,286 129,286
Retained earnings.................... 462,551 403,674
Unrealized gains (losses) on
securities available for sale, net
of tax............................. 6,326 (2,233)
------------- -------------
Total stockholders'
equity................... 598,479 531,043
------------- -------------
TOTAL LIABILITIES, MINORITY INTEREST,
AND STOCKHOLDERS' EQUITY........... $ 11,967,072 $ 10,712,377
============= =============
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
NOTES 1997 1996 1995
------- ---------- ---------- ----------
INTEREST INCOME
Short-term interest-earning assets... $ 36,240 $ 39,302 $ 29,675
Securities........................... 5,371 3,984 5,955
Mortgage-backed securities........... 104,891 128,143 173,155
Loans................................ 652,886 627,940 526,528
Federal Home Loan Bank stock......... 11,320 12,943 11,446
---------- ---------- ----------
Total interest income...... 810,708 812,312 746,759
---------- ---------- ----------
INTEREST EXPENSE
Deposits............................. 262,761 272,220 264,366
Federal Home Loan Bank advances...... 212,558 247,093 224,767
Securities sold under agreements to
repurchase......................... 57,335 55,112 53,220
Notes payable........................ 13,410 10,353 10,407
---------- ---------- ----------
Total interest expense..... 546,064 584,778 552,760
---------- ---------- ----------
Net interest income........ 264,644 227,534 193,999
PROVISION FOR CREDIT LOSSES.......... 5 18,107 16,469 24,293
---------- ---------- ----------
Net interest income after
provision for credit
losses................... 246,537 211,065 169,706
---------- ---------- ----------
NON-INTEREST INCOME
Net gains (losses)
Sales of single family servicing
rights and single family
warehouse loans............... 21,182 43,074 60,495
Securities and mortgage-backed
securities.................... 2,841 4,002 26
Other loans..................... 1,128 3,189 (1,210)
Sale of mortgage offices........ 17 4,748 -- --
Loan servicing, net of related
amortization....................... 32,381 30,383 32,677
Other................................ 21,152 15,541 12,162
---------- ---------- ----------
Total non-interest
income................... 83,432 96,189 104,150
---------- ---------- ----------
NON-INTEREST EXPENSE
Compensation and benefits............ 12 75,016 87,640 83,520
Occupancy............................ 14,943 18,415 18,713
Data processing...................... 13,712 16,196 16,360
Advertising and marketing............ 7,147 8,025 9,262
Amortization of intangibles.......... 4,118 6,585 11,025
SAIF deposit insurance premiums...... 14 4,797 45,690 11,428
Furniture and equipment.............. 4,074 6,121 6,428
Restructuring charges................ 17 -- 10,681 --
Other................................ 48,329 40,065 27,009
---------- ---------- ----------
Total non-interest
expense.................. 172,136 239,418 183,745
---------- ---------- ----------
Income before income taxes,
minority interest,
and extraordinary loss... 157,833 67,836 90,111
INCOME TAX EXPENSE (BENEFIT)......... 13 60,686 (75,765) 37,415
---------- ---------- ----------
Income before minority
interest and
extraordinary loss....... 97,147 143,601 52,696
MINORITY INTEREST 15
Subsidiary preferred stock
dividends..................... 18,253 18,253 10,600
Payments in lieu of dividends... -- 6,413 377
---------- ---------- ----------
Income before extraordinary
loss..................... 78,894 118,935 41,719
EXTRAORDINARY LOSS -- early
extinguishment of debt............. 10 2,323 -- --
---------- ---------- ----------
NET INCOME................. $ 76,571 $ 118,935 $ 41,719
========== ========== ==========
EARNINGS PER COMMON SHARE 15
Income before extraordinary loss..... $ 2.49 $ 3.87 $ 1.35
Extraordinary loss -- early
extinguishment of debt............. 0.07 -- --
---------- ---------- ----------
Net income................. $ 2.42 $ 3.87 $ 1.35
========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-3
<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>
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 12).......... -- -- 318,342 3 -- -- 3,706
Conversion of warrant...................... -- -- 1,503,560 15 -- -- (6,099)
Conversion of common stock................. 2,996,840 29 2,037,760 21 (5,034,600) (50) --
Common stock offering (Note 15)............ 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
Net income................................. -- -- -- -- -- -- --
Dividends declared: common stock ($0.56 per
share)................................... -- -- -- -- -- -- --
Conversion of common stock................. 618,342 7 (618,342) (7) -- -- --
Change in unrealized gains (losses)........ -- -- -- -- -- -- --
----------- ------ --------- ------ ----------- ------ ---------
BALANCE AT SEPTEMBER 30, 1997.................. 28,354,276 $284 3,241,320 $ 32 -- $ -- $ 129,286
=========== ====== ========= ====== =========== ====== =========
UNREALIZED TOTAL
RETAINED GAINS STOCKHOLDERS'
EARNINGS (LOSSES) EQUITY
--------- ---------- -------------
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 12).......... -- -- 3,709
Conversion of warrant...................... -- -- (6,084)
Conversion of common stock................. -- -- --
Common stock offering (Note 15)............ -- -- 13,966
Change in unrealized gains (losses)........ -- 4,414 4,414
--------- ---------- -------------
BALANCE AT SEPTEMBER 30, 1996.................. 403,674 (2,233) 531,043
Net income................................. 76,571 -- 76,571
Dividends declared: common stock ($0.56 per
share)................................... (17,694) -- (17,694)
Conversion of common stock................. -- -- --
Change in unrealized gains (losses)........ -- 8,559 8,559
--------- ---------- -------------
BALANCE AT SEPTEMBER 30, 1997.................. $ 462,551 $ 6,326 $ 598,479
========= ========== =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 76,571 $ 118,935 $ 41,719
Adjustments to reconcile net income to
net cash (used) provided by operating
activities:
Provision for credit losses........ 18,107 16,469 24,293
Deferred tax expense (benefit)..... 42,251 (93,402) 16,615
Net gains on sales of assets....... (30,631) (53,491) (72,918)
Depreciation and amortization...... 41,303 8,338 (27,479)
Federal Home Loan Bank stock
dividends........................ (11,320) (12,943) (11,446)
Fundings and purchases of loans
held for sale.................... (1,995,816) (3,015,616) (2,378,984)
Proceeds from the sale of loans
held for sale.................... 1,198,295 3,321,599 2,164,407
Change in loans held for sale...... 32,638 17,991 5,661
Change in interest receivable...... (9,052) 25,957 (37,778)
Change in other assets............. (64,632) 18,866 (3,128)
Change in other liabilities........ (22,284) (3,274) 89,056
Management restricted stock
award............................ -- 3,709 --
------------- ------------- -------------
Net cash (used) provided by
operating activities........ (724,570) 353,138 (189,982)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in securities purchased
under agreements to resell and
federal funds sold............... 325,040 (203,197) (117,342)
Fundings of loans held for
investment....................... (2,283,096) (1,746,604) (1,597,632)
Proceeds from principal repayments
and maturities of
Loans held for investment..... 2,517,782 2,298,915 1,188,489
Securities held to maturity... -- 7,715 3,472
Securities available for
sale........................ 134,165 395 --
Mortgage-backed securities
held to maturity............ 80,657 178,926 390,364
Mortgage-backed securities
available for sale.......... 263,659 272,059 16,346
Proceeds from the sale of
Securities available for
sale........................ 337,848 96,815 --
Mortgage-backed securities
available for sale.......... 6,965 295,702 77,626
Mortgage servicing rights..... 7,982 33,187 48,237
Federal Home Loan Bank
stock....................... 18,160 59,252 18,500
Real estate owned acquired
through foreclosure......... 59,010 42,741 34,137
Purchases of
Loans held for investment..... (1,086,249) (148,510) (2,658,093)
Securities held to maturity... -- (6,327) (2,920)
Securities available for
sale........................ (131,296) (16,029) --
Mortgage-backed securities
held to maturity............ (2,134) (3,841) (38,515)
Mortgage-backed securities
available for sale.......... (246,363) -- (230)
Mortgage servicing rights..... (166,494) (23,535) (12,546)
Federal Home Loan Bank
stock....................... (32,208) -- (100,190)
Change in loans held for
investment....................... (237,312) (39,068) 61,457
Change in mortgage servicing
rights........................... (13,790) (38,607) (16,705)
Net purchases of premises and
equipment........................ (14,419) (9,394) (6,132)
------------- ------------- -------------
Net cash (used) provided by
investing activities........ (462,093) 1,050,595 (2,711,677)
------------- ------------- -------------
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
F-5
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits.......... $ 99,723 $ (34,378) $ 419,738
Proceeds from Federal Home Loan
Bank advances................. 3,296,067 1,498,700 3,821,754
Repayment of Federal Home Loan
Bank advances................. (2,794,109) (2,391,764) (2,058,200)
Net change in securities sold
under agreements to
repurchase.................... 476,314 (340,247) 619,533
Change in advances from
borrowers for taxes and
insurance..................... 26,660 (37,334) 38,585
Proceeds from issuance of the
Bank's preferred stock........ -- -- 96,242
Proceeds from issuance of common
stock......................... -- 13,966 --
Cost of converting Bank common
stock warrant................. -- (6,084) --
Payment of common stock
dividends..................... (17,694) (100,000) --
Repayment of Senior Notes....... (114,500) -- --
Proceeds from issuance of
Subordinated Notes............ 219,691 -- --
Payment of issuance costs of
Subordinated Notes............ (4,012) -- --
----------- ----------- -----------
Net cash provided (used) by
financing activities..... 1,188,140 (1,397,141) 2,937,652
----------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 1,477 6,592 35,993
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 119,523 112,931 76,938
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 121,000 $ 119,523 $ 112,931
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest.......... $ 537,216 $ 606,911 $ 523,250
Cash paid for income taxes...... 9,634 3,953 9,863
Cash paid in lieu of taxes...... -- 12,096 157
NONCASH INVESTING ACTIVITIES
Real estate owned acquired
through foreclosure........... 61,889 70,843 49,403
Sales of real estate owned
financed by the Bank.......... 20,117 452 30
Securitization of loans......... 346,401 33,167 --
Transfer of loans from (to) held
for investment................ 43,412 104,235 (805)
Transfer of mortgage-backed
securities from (to) held to
maturity...................... 6,843 1,244,945 --
Change in unrealized gains
(losses) on securities
available for sale, net of
tax........................... 8,559 4,414 6,780
See accompanying Notes to Consolidated Financial Statements.
F-6
<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") 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 wholly owned
Delaware subsidiary, BNKU Holdings, Inc. ("Holdings"). After acquiring the
common stock of Holdings, the Parent Company contributed its common stock
investment in the Bank to Holdings, and Holdings assumed the Parent Company's
obligations. As a result of these transactions, Holdings became the sole
subsidiary of the Parent Company and the Bank became 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
and transactions 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.
The Company is a broad-based financial services provider to consumers and
businesses in Texas and selected regional markets throughout the United States.
At September 30, 1997, the Company operated a 71-branch community banking
network serving approximately 211,000 households, as well as 11 commercial
banking offices in nine states across the country.
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.
USE OF ESTIMATES
The preparation of the Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results could differ from these estimates and assumptions.
SHORT-TERM INTEREST-EARNING ASSETS
Short-term interest-earning assets are comprised of cash, cash equivalents,
securities purchased under agreements to resell ("repurchase agreements"), and
federal funds sold. Generally, 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 considered to be cash equivalents.
Cash and cash equivalents consist primarily of interest-earning and
non-interest-earning deposits in other banks.
The regulations of the Federal Reserve Board require average cash reserve
balances based on deposit liabilities to be maintained by the Bank with the
Federal Reserve Bank. The required reserve balance totalled $59.4 million for
the period including September 30, 1997. The Bank was in compliance with these
requirements.
SECURITIES
Debt and equity securities, including mortgage-backed securities ("MBS"),
are classified into one of three categories: held to maturity, available for
sale, or trading. Securities and MBS that the Company has the positive intent
and ability to hold to maturity are classified as held to maturity and carried
at amortized cost, adjusted for the amortization of premiums and the accretion
of discounts. Under certain circumstances (including the deterioration of the
issuer's creditworthiness or a change in tax law, statutory requirements, or
regulatory requirements), securities 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. Any unrealized holding gains or losses are excluded from
earnings and reported net of tax
F-7
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as a separate component of stockholders' equity until realized. Trading account
assets are carried at fair value with any realized or unrealized gains and
losses recognized in current operations. Trading account assets are generally
comprised of assets that are actively and frequently bought and sold with the
objective of generating income on short-term changes in price. The Company held
no trading account assets at September 30, 1997.
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 declines for reasons other than
temporary market conditions, the carrying value will be written down to current
fair value by a charge to operations.
Net gains or losses on sales of 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 for the
foreseeable future are classified as held for investment and are carried at
unpaid principal balances, adjusted for unamortized purchase premiums or
discounts, the allowance for credit losses, and any deferred loan origination
fees or costs ("Book Value"). Loans held for sale, excluding single family
warehouse loans, are carried at the lower of Book Value or fair value on an
aggregate basis, as determined by discounting contractual cash flows (adjusted
for anticipated prepayments) using discount rates based on secondary market
sources. Single family warehouse loans held for sale are carried at the lower of
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 through a valuation allowance by a charge
to current operations.
Interest income on loans, including impaired loans, is recognized
principally using the level-yield method. Based on management's periodic
evaluation or at the time a loan is 90 days past due ("nonperforming"), the
related accrued interest is generally reversed by a charge to operations and the
loan is simultaneously placed on nonaccrual. Once a loan becomes current and the
borrower demonstrates the ability to repay the loan, the loan is returned to
accrual status.
Premiums, discounts, and loan fees (net of certain direct loan origination
costs) on 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.
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. 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.
F-8
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LOAN SERVICING
Statement of Financial Accounting Standard ("SFAS") No. 122, "Accounting
for Mortgage Servicing Rights, an amendment of Financial Accounting Standards
Board Statement No. 65," 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 mortgage servicing right
("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, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," which
supersedes 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.
MSRs are periodically evaluated for impairment based on the fair value of
these rights. The fair value of MSRs is determined by discounting the estimated
future cash flows using a discount rate commensurate with the risks involved.
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 deducted from the related servicing fee revenue in the Consolidated
Statements of Operations. See Note 6.
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. Single family warehouse loans are generally
packaged into pools and sold as MBS. Accordingly, gains or losses on loan sales
include both gains from sales of MBS created from single family 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 are sold, provided the failure is 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.
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 core deposit premiums paid and goodwill. The
core deposit premiums are amortized using an accelerated method over the
estimated lives of the deposit relationships acquired. Goodwill, resulting from
thrift related acquisitions, is amortized at a constant rate applied
F-9
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. These assets 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 reduced by
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. A majority of the Company's REO is single family properties held by
the Banking Segment. The historical average holding period for REO is six
months.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company enters into traditional off-balance-sheet financial instruments
such as interest rate exchange agreements ("swaps"), interest rate caps 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: the hedged asset or liability must be
interest rate sensitive and the off-balance-sheet financial instrument must be
designated and be effective as a hedge of the asset or liability.
Hedge of Anticipated Transactions: the transaction to be hedged must be interest
rate sensitive, the off-balance-sheet financial instrument must be designated
and be effective as a hedge of the transaction, significant characteristics and
terms of the transaction must be identified, and it must be 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
interest 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 while the
contracts are open and subsequently 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
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.
F-10
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER OFF-BALANCE-SHEET INSTRUMENTS. The Company has entered into other
off-balance-sheet financial instruments consisting of commitments to extend
credit or to purchase loans. Such financial instruments are recorded in the
financial statements when they are funded or purchased.
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 costs 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 using the
intrinsic value-based method and is disclosing pro forma fair value information
as prescribed by SFAS No. 123. See Note 12.
FEDERAL INCOME TAXES
The Parent Company, Holdings, and the Bank file a consolidated tax return.
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 valuation allowance reduces the
net deferred tax asset to an amount management believes will more likely than
not be realized. See Note 13.
RECENT ACCOUNTING STANDARDS
SFAS No. 127, "Deferral of Certain Provisions of FASB Statement No. 125,"
requires that certain provisions of SFAS No. 125 are not effective until January
1, 1998. The deferred provisions relate to secured borrowings and collateral for
all transactions and 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.
SFAS No. 128, "Earnings per Share," 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 as well as 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.
FOR THE YEAR ENDED SEPTEMBER
30,
-------------------------------
1997 1996 1995
--------- --------- ---------
EPS as reported...................... $ 2.42 $ 3.87 $ 1.35
Pro forma EPS under SFAS No. 128
Basic........................... 2.42 4.06 1.45
Diluted......................... 2.40 3.87 1.35
SFAS No. 130, "Reporting Comprehensive Income" 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 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. The
implementation of SFAS No. 130 should have no material impact on the Company's
Consolidated Financial Statements.
F-11
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information" 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 (as defined in Note
15) 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.
See Note 15.
2. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND
FEDERAL FUNDS SOLD
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
REPURCHASE AGREEMENTS
Balance outstanding at
period-end.................... $ 301,209 $ 649,249 $ 428,052
Fair value of collateral at
period-end.................... 310,066 693,306 449,152
Maximum outstanding at any
month-end..................... 582,336 785,178 602,274
Daily average balance........... 512,957 608,102 420,355
Average interest rate........... 5.92% 5.83% 6.28%
FEDERAL FUNDS SOLD
Balance outstanding at
period-end.................... $ 48,000 $ 25,000 $ 43,000
Maximum outstanding at any
month-end..................... 85,000 110,000 75,000
Daily average balance........... 44,661 50,418 37,493
Average interest rate........... 5.34% 5.36% 5.68%
The repurchase agreements outstanding at September 30, 1997 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 September 30, 1997 matured on
or before October 9, 1997. The repurchase agreements provide for the same loans
and MBS to be resold at maturity. At September 30, 1997, $105.5 million in
repurchase agreements and federal funds sold were held by Donaldson, Lufkin, and
Jenrette Mortgage Capital, Inc., as counterparty.
F-12
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SECURITIES
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------
GROSS GROSS |
AMORTIZED UNREALIZED UNREALIZED FAIR | CARRYING
COST GAINS LOSSES VALUE | VALUE
---------- ---------- ---------- ---------- | ----------
(IN THOUSANDS) |
<S> <C> <C> <C> <C> <C>
1997 |
HELD TO MATURITY |
U.S. government and agency |
securities.................... $ 160 $ 5 $ -- $ 165 | $ 160
========== ========== |
AVAILABLE FOR SALE |
U.S. government and agency |
securities.................... 65,858 $ 578 $ -- 66,436 |
Corporate securities............ 9,987 -- 2 9,985 |
Other securities................ 1,229 -- 1 1,228 |
---------- ---------- ---------- ---------- |
77,074 $ 578 $ 3 77,649 | 77,649
---------- ========== ========== ---------- | ----------
Total...................... $ 77,234 $ 77,814 | $ 77,809
========== ========== | ==========
1996 |
HELD TO MATURITY |
U.S. government and agency |
securities.................... $ 168 $ 1 $ -- $ 169 | $ 168
========== ========== |
AVAILABLE FOR SALE |
U.S. government and agency |
securities.................... 64,626 $ -- $ 250 64,376 | 64,376
========== ========== |
TRADING |
Other securities................ 1,149 $ -- $ -- 1,149 | 1,149
---------- ========== ========== ---------- | ----------
Total...................... $ 65,943 $ 65,694 | $ 65,693
========== ========== | ==========
</TABLE>
Securities outstanding at September 30, 1997 were scheduled to 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........................ $ -- $ -- $ 11,215 $ 11,213
Due in one to five years....................... 160 165 24,956 25,235
Due in five to ten years....................... -- -- 355 350
Due in more than ten years..................... -- -- 40,548 40,851
---------- --------- ---------- ---------
$ 160 $ 165 $ 77,074 $ 77,649
========== ========= ========== =========
</TABLE>
F-13
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. MORTGAGE-BACKED SECURITIES
The MBS portfolio includes securities issued by U.S. government
corporations and agencies ("agency securities"), privately issued and
credit-enhanced MBS ("non-agency securities"), and collateralized mortgage
obligations ("CMOs").
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------
GROSS GROSS |
AMORTIZED UNREALIZED UNREALIZED FAIR | CARRYING
COST GAINS LOSSES VALUE | VALUE
------------ ---------- ---------- ------------ | ------------
(IN THOUSANDS) |
<S> <C> <C> <C> <C>
1997 |
HELD TO MATURITY |
Agency |
Fixed-rate.................... $ 2,123 $ -- $ -- $ 2,123 |
Non-agency |
Adjustable-rate............... 447,718 824 13,937 434,605 |
CMOs -- fixed-rate............ 93,349 -- 1,436 91,913 |
Other........................... 171 53 -- 224 |
------------ ---------- ---------- ------------ |
Held to maturity........... 543,361 $ 877 $ 15,373 528,865 | $ 543,361
------------ ========== ========== ------------ | ============
AVAILABLE FOR SALE |
Agency |
Adjustable-rate............... 232,542 $ 3,556 $ -- 236,098 |
CMOs -- fixed-rate............ 41,964 61 12 42,013 |
CMOs -- adjustable-rate....... 369,424 1,976 342 371,058 |
Non-agency |
Fixed-rate.................... 43,243 1,347 -- 44,590 |
Adjustable-rate............... 276,901 2,282 397 278,786 |
CMOs -- fixed-rate............ 10,642 6,413 108 16,947 |
CMOs -- adjustable-rate....... 35,058 363 -- 35,421 |
Other........................... 1,184 247 -- 1,431 |
------------ ---------- ---------- ------------ |
Available for sale......... 1,010,958 $ 16,245 $ 859 1,026,344 | $ 1,026,344
------------ ========== ========== ------------ | ============
Total mortgage-backed |
securities............... $ 1,554,319 $ 1,555,209 |
============ ============ |
1996 |
HELD TO MATURITY |
Agency |
CMOs -- fixed-rate............ $ 1,548 $ 5 $ -- $ 1,553 |
Non-agency |
Fixed-rate.................... 7,042 1,753 126 8,669 |
Adjustable-rate............... 521,280 401 17,634 504,047 |
CMOs -- fixed-rate............ 99,966 -- 5,277 94,689 |
Other........................... 212 55 -- 267 |
------------ ---------- ---------- ------------ |
Held to maturity........... 630,048 $ 2,214 $ 23,037 609,225 | $ 630,048
------------ ========== ========== ------------ | ============
AVAILABLE FOR SALE |
Agency |
Adjustable-rate............... 326,338 $ 1,860 $ 13 328,185 |
CMOs -- fixed-rate............ 1,818 -- 1 1,817 |
CMOs -- adjustable-rate....... 224,081 1,414 192 225,303 |
Non-agency |
Fixed-rate.................... 61,893 2,253 -- 64,146 |
Adjustable-rate............... 373,876 1,119 1,702 373,293 |
CMOs -- adjustable-rate....... 34,017 -- 862 33,155 |
Other........................... 1,961 -- -- 1,961 |
------------ ---------- ---------- ------------ |
Available for sale......... 1,023,984 $ 6,646 $ 2,770 1,027,860 | $ 1,027,860
========== ========== | ============
------------ ------------ |
Total mortgage-backed |
securities............... $ 1,654,032 $ 1,637,085 |
============ ============
</TABLE>
F-14
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 1, 1997, the Company adopted SFAS No. 125. This statement
requires, among other things, 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 its recorded investment. As a result of the
implementation of SFAS No. 125, the Company reclassified $6.8 million of MBS
held to maturity and $15.5 million of 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.
At September 30, 1997, MBS, with carrying values totalling $1.36 billion
and fair values totalling $1.35 billion, were used to collateralize securities
sold under agreements to repurchase ("reverse repurchase agreements").
5. LOANS
AT SEPTEMBER 30,
-------------------------
1997 1996
------------ ----------
(IN THOUSANDS)
HELD FOR INVESTMENT
Single family................... $ 5,820,495 $ 6,152,504
Commercial...................... 2,141,498 957,222
Consumer........................ 305,545 173,518
------------ ------------
8,267,538 7,283,244
Allowance for credit losses..... (39,172) (39,633)
Net deferred loan fees,
premiums, and discounts........ (6,740) (16,458)
------------ ------------
8,221,626 7,227,153
------------ ------------
HELD FOR SALE........................ 773,603 292,335
------------ ------------
Total loans................ $ 8,995,229 $ 7,519,488
============ ============
The following table sets forth the geographic distribution of loans by
states with concentrations of 5% of loans or greater at September 30, 1997.
<TABLE>
<CAPTION>
TOTAL NON-REAL
SINGLE REAL ESTATE ESTATE % OF
STATE FAMILY COMMERCIAL CONSUMER LOANS LOANS TOTAL TOTAL
----- ---------- ---------- -------- ---------- -------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
California........................... $3,323,578 $ 228,301 $ 1,176 $3,553,055 $ 86 $3,553,141 39.36%
Texas................................ 742,787 634,699 115,665 1,493,151 100,080 1,593,231 17.65%
Florida.............................. 350,329 135,008 6,326 491,663 79 491,742 5.45%
Other................................ 2,090,290 1,215,183 82,275 3,387,748 187 3,387,935 37.54%
---------- ---------- -------- ---------- -------- ---------- ------
Total.............................. $6,506,984 $2,213,191 $205,442 $8,925,617 $100,432 $9,026,049 100.00%
========== ========== ======== ========== ======== ========== ======
</TABLE>
F-15
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans held for investment as of September 30, 1997, had principal payments
contractually due in years ended September 30 as follows:
1998 1999-2002 THEREAFTER TOTAL
------------ ------------ ------------ ------------
(IN THOUSANDS)
TYPE OF LOAN
Single family........... $ 81,838 $ 398,342 $ 5,340,315 $ 5,820,495
Commercial.............. 1,085,465 635,577 420,456 2,141,498
Consumer................ 55,858 72,273 177,414 305,545
------------ ------------ ------------ ------------
Total.............. $ 1,223,161 $ 1,106,192 $ 5,938,185 $ 8,267,538
============ ============ ============ ============
TYPE OF INTEREST
Fixed-rate.............. $ 64,450 $ 279,394 $ 1,456,541 $ 1,800,385
Adjustable-rate......... 1,158,711 826,798 4,481,644 6,467,153
------------ ------------ ------------ ------------
Total.............. $ 1,223,161 $ 1,106,192 $ 5,938,185 $ 8,267,538
============ ============ ============ ============
The performing single family loans are pledged, under a blanket lien, as
collateral securing advances from the Federal Home Loan Bank ("FHLB") at
September 30, 1997.
The activity in the allowance for credit losses was as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
---------- ---------- --------------
(IN THOUSANDS)
Beginning balance.................... $ 39,660 $ 36,801 $ 23,454
Provision....................... 18,107 16,469 24,293
Charge-offs..................... (19,036) (13,785) (11,078)
Recoveries...................... 443 175 132
---------- ---------- --------------
Ending balance....................... $ 39,174 $ 39,660 $ 36,801
========== ========== ==============
Nonaccrual loans, net of related discounts, totalled $54.0 million at
September 30, 1997 and $89.6 million at September 30, 1996. At September 30,
1997, there were loans totalling $534,000 that were 90 days delinquent, subject
to government guaranty, upon which interest continued to accrue. At September
30, 1996, there were no loans that were 90 days delinquent upon which interest
continued to accrue. If the nonaccrual loans as of September 30, 1997 had been
performing in accordance with their original terms throughout fiscal 1997,
interest income recognized would have been $4.2 million. The actual interest
income recognized on these loans for fiscal 1997 was $1.6 million. No
commitments exist to lend additional funds to borrowers whose loans were on
nonaccrual status at September 30, 1997.
At September 30, 1997 and 1996, the recorded investment in impaired loans
pursuant to SFAS No. 114, "Accounting by Creditors for Impairment of a Loan"
totalled $3.6 million and $3.9 million and the average outstanding balance for
fiscal 1997 and 1996 was $3.6 million and $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 $324,000 and $393,000 was recognized on
impaired loans during fiscal 1997 and 1996, of which $280,000 and $355,000 was
collected in cash.
F-16
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LOAN SERVICING
The activity in the Company's MSRs was as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
(IN THOUSANDS)
Balance at beginning of period....... $ 123,392 $ 75,097 $ 56,677
Additions....................... 181,687 71,947 41,240
Amortization.................... (31,462) (13,847) (10,831)
Sales........................... (52) (7,665) (4,816)
Deferred hedging gains(1)....... (1,351) (2,140) (7,173)
----------- ---------- ----------
Balance at end of period............. $ 272,214 $ 123,392 $ 75,097
=========== ========== ==========
- ------------
(1) Includes $1.3 million, $2.1 million, and $817,000 of interest received on
interest rate floor agreements during fiscal 1997, 1996, and 1995,
respectively.
The single family servicing portfolio at September 30, 1997, 1996, and 1995
totalled $24.5 billion, $13.2 billion, and $12.5 billion, respectively. Loans
serviced for others at September 30, 1997, 1996, and 1995 totalled $20.5
billion, $9.5 billion, and $8.5 billion, respectively. The servicing portfolio
at September 30, 1997, included $7.5 billion of loans for which the servicing
rights had not yet been transferred to the Company. Such rights were transferred
to the Company in the first quarter of fiscal 1998.
7. DEPOSITS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------
1997 1996
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NON-INTEREST BEARING DEPOSITS........ $ 357,988 -- % $ 284,304 -- %
INTEREST-BEARING DEPOSITS
Checking accounts............... 200,485 1.05 211,976 1.00
Money market accounts........... 1,687,567 4.98 1,399,328 4.90
Savings accounts................ 122,676 2.33 130,137 2.48
Certificates of deposit......... 2,878,952 5.81 3,122,200 6.01
------------ ------------
Total interest-bearing
deposits................. 4,889,680 5.24 4,863,641 5.38
------------ ------------
Total deposits............. $ 5,247,668 4.88% $ 5,147,945 5.08%
============ ============
</TABLE>
Scheduled maturities of certificates of deposit ("CDs") at September 30,
1997 were as follows:
YEARS ENDING SEPTEMBER 30,
- --------------------------
(IN THOUSANDS)
---------------
1998............................ $1,734,637
1999............................ 819,117
2000............................ 118,267
2001............................ 94,152
2002 and thereafter............. 112,779
---------------
$2,878,952
===============
F-17
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of CDs of $100,000 or more outstanding at September
30, 1997 were as follows:
NUMBER OF DEPOSIT
ACCOUNTS AMOUNT
--------- --------
(DOLLARS IN
THOUSANDS)
Three months or less................. 3 $ 307
Over three to six months............. 739 80,920
Over six to twelve months............ 1,133 120,292
Over twelve months................... 2,637 278,358
--------- --------
Total...................... 4,512 $479,877
========= ========
In October, 1997 the Company signed an agreement to purchase 18 branches
and related deposits from Guardian Savings and Loan Association. The branches,
six in the Houston area and 12 in the Dallas/Ft. Worth Metroplex, have combined
deposits of $1.44 billion. Final closing of this transaction is expected in
January 1998. In September 1997 the Company agreed to purchase three branches in
the Dallas area, with $66 million in deposits from California Federal Savings
Bank, FSB. This transaction closed in December 1997.
8. FEDERAL HOME LOAN BANK ADVANCES
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Maximum outstanding at any
month-end.......................... $ 3,992,344 $ 4,384,798 $ 4,386,605
Daily average balance................ 3,705,072 4,073,297 3,560,844
Average interest rate................ 5.74% 6.07% 6.31%
The aggregate amounts of principal maturities for FHLB advances outstanding
at September 30, 1997 were as follows:
WEIGHTED
AVERAGE
AMOUNT RATE
------------ --------
(DOLLARS IN THOUSANDS)
1998................................. $ 1,181,243 5.76%
1999................................. 1,114,556 5.68
2000................................. 1,008,200 5.65
2001................................. 179,645 5.74
2002 and thereafter.................. 508,700 5.60
------------
Total...................... $ 3,992,344 5.69%
============
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Balance outstanding at
period-end.................... $ 1,308,600 $ 832,286 $ 1,172,533
Fair value of collateral at
period-end.................... 1,349,062 1,020,405 1,239,527
Maximum outstanding at any
month-end..................... 1,308,600 1,096,508 1,355,540
Daily average balance........... 1,002,165 955,708 888,453
Average interest rate........... 5.72% 5.77% 5.99%
F-18
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of reverse repurchase agreements outstanding at
September 30, 1997 were as follows: $874.5 million in October 1997, $69.2
million in December 1997, and $364.9 million in March 1998.
The counterparties to all reverse repurchase agreements at September 30,
1997 have agreed to resell the same securities upon maturity of such agreements.
The securities collateralizing the reverse repurchase agreements have been
delivered to the counterparty or its agent. At September 30, 1997, the reverse
repurchase agreements were outstanding with the following counterparties:
CARRYING VALUE
--------------
(IN THOUSANDS)
Morgan Stanley & Co. Incorporated.... $ 412,259
Donaldson, Lufkin, & Jenrette
Securities Corporation............. 303,488
Goldman, Sachs & Co.................. 215,333
Credit Suisse First Boston
Corporation........................ 154,254
PaineWebber, Inc..................... 149,298
Federal Home Loan Bank of Dallas..... 50,000
Merrill Lynch Government Securities
Inc. .............................. 23,968
--------------
$1,308,600
==============
10. NOTES PAYABLE
AT SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Subordinated Notes ($220 million, net
of unamortized discount)........... $ 219,699 $ --
Senior Notes......................... 500 115,000
---------- ----------
$ 220,199 $ 115,000
========== ==========
In May 1993 the Parent Company issued $115 million of 8.05% senior notes
due May 15, 1998 ("Senior Notes"). 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 of issuing the Subordinated
Notes totalled $4.0 million. 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 fiscal 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.
11. FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. The fair
value estimates presented herein are based on relevant information available to
management as of September 30, 1997 and 1996. Management is not aware of any
factors that would significantly affect these estimated fair value amounts.
Since the reporting requirements exclude certain financial instruments and all
non-financial instruments, the aggregate fair value amounts presented herein do
not represent management's estimate of the underlying value of the Company. The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument for which it is practicable to estimate that
value.
F-19
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHORT-TERM INTEREST-EARNING ASSETS. The carrying amount approximates fair
value.
SECURITIES AND MORTGAGE-BACKED SECURITIES. The fair values of securities
and MBS are estimated based on published bid prices or bid quotations received
from securities dealers.
LOANS. Fair values are estimated for portfolios of loans with similar
characteristics and include the value of related servicing rights, if
appropriate. Loans are segregated by type, by rate, and by performing and
nonperforming categories. Because adjustable-rate loans (excluding single
family) reprice frequently, their carrying value approximates their fair value.
For fixed-rate loans and single family mortgage 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 Book Value, which is net of any related allowance for credit
losses.
FHLB STOCK. The carrying amount approximates fair value because it is
redeemable at its par value.
DEPOSITS. The estimated fair value of deposits with no stated maturity,
which includes demand deposits, money market, and other savings accounts, is
equal to the amount payable on demand or the carrying value. Although market
premiums paid for depository institutions 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 NOTES PAYABLE. Fair
values are estimated based on the discounted value of contractual cash flows
using rates currently available to the Company for borrowings with similar terms
and remaining maturities.
OTHER ASSETS AND LIABILITIES. The carrying amount of financial instruments
in these classifications is considered a reasonable estimate of their fair value
due to the short-term nature of the instruments.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK. The fair values of
financial instruments with off-balance-sheet risk are based on current market
prices.
SERVICING PORTFOLIO. See Note 1 for a description of the method used to
value the single family servicing portfolio.
F-20
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS NO. 107 FAIR VALUES
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------
1997 1996
---------------------- ----------------------
CARRYING SFAS NO. CARRYING SFAS NO.
VALUE 107 VALUE VALUE 107 VALUE
---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Short-term interest-earning
assets......................... $ 470,209 $ 470,209 $ 793,772 $ 793,772
Securities....................... 77,809 77,814 65,693 65,694
Mortgage-backed securities....... 1,569,705 1,555,209 1,657,908 1,637,085
Loans............................ 8,995,229 9,147,333 7,519,488 7,657,483
FHLB stock....................... 205,011 205,011 179,643 179,643
Other assets..................... 169,711 169,711 110,441 115,658
NON-FINANCIAL ASSETS
Mortgage servicing rights........ 272,214 304,024 123,392 168,971
Other............................ 207,184 N/A 262,040 N/A
----------- ========= ----------- =========
Total assets................. $11,967,072 $10,712,377
=========== ===========
FINANCIAL LIABILITIES
Deposits......................... $5,247,668 $5,264,137 $5,147,945 $5,164,988
FHLB advances.................... 3,992,344 3,986,627 3,490,386 3,493,086
Reverse repurchase agreements.... 1,308,600 1,308,643 832,286 832,328
Notes payable.................... 220,199 230,242 115,000 118,396
Other liabilities................ 118,702 118,702 170,870 170,870
NON-FINANCIAL LIABILITIES, MINORITY
INTEREST, AND STOCKHOLDERS'
EQUITY............................. 1,079,559 N/A 955,890 N/A
----------- ========= ----------- =========
Total liabilities, minority
interest, and stockholders'
equity..................... $11,967,072 $10,712,377
=========== ===========
OTHER FINANCIAL INSTRUMENTS FAIR
VALUES -- GAIN (LOSS)
Interest rate swaps............ $ (437) $ (66)
Interest rate caps............. 165 1,057
Interest rate floors........... 11,043 2,515
Forward delivery contracts..... (474) (176)
Commitments to extend credit... 1,493 2,238
</TABLE>
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company manages its exposure to interest rates by entering into certain
financial instruments with off-balance-sheet risk in the ordinary course of
business. 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, 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.
F-21
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Notional principal amounts indicated in the following table do not
represent the Company's exposure to credit loss, but represent the extent of the
Company's involvement in particular classes of financial instruments and
generally exceed the expected future cash requirements relating to the
instruments. Financial instruments with off-balance-sheet risk outstanding at
September 30, 1997, were scheduled to mature as follows:
<TABLE>
<CAPTION>
MATURING IN THE YEAR ENDING SEPTEMBER 30, AT SEPTEMBER 30,
---------------------------------------------------- --------------------------
1998 1999 2000 THEREAFTER 1997 1996
------------ ---------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest rate swaps.................. $ -- $ 166,000 $ 59,500 $ 35,500 $ 261,000 $ 50,000
Interest rate caps................... 421,000 58,000 243,000 -- 722,000 659,000
Interest rate floors................. 250,000 532,000 756,500 1,040,000 2,578,500 688,500
Forward delivery contracts........... 96,000 -- -- -- 96,000 321,923
Commitments to extend credit......... 888,307 172,528 186,642 424,496 1,671,973 988,120
------------ ---------- ------------ ------------ ------------ ------------
Total...................... $ 1,655,307 $ 928,528 $ 1,245,642 $ 1,499,996 $ 5,329,473 $ 2,707,543
============ ========== ============ ============ ============ ============
</TABLE>
INTEREST RATE SWAPS. The Company entered into the following interest rate
swaps in an effort to more closely match the repricing of its liabilities with
its assets. During fiscal 1997 and 1996, interest rate swap contracts of $50.0
million and $565.0 million, respectively, expired.
<TABLE>
<CAPTION>
AVERAGE AVERAGE
NOTIONAL FIXED FLOATING HEDGED
AMOUNT RATE RATE(1) ITEM
---------- ------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AT SEPTEMBER 30, 1997
Receive Floating/Pay Fixed........... $ 261,000 6.18% 5.72% FHLB advances
AT SEPTEMBER 30, 1996
Receive Fixed/Pay Floating........... $ 50,000 5.30 5.60 Consumer deposits
</TABLE>
(1) Based on the one or three month London InterBank Offered Rate ("LIBOR").
INTEREST RATE CAPS. During fiscal 1997, interest rate caps with notional
principal amounts totalling $300.0 million were entered into in an effort to
hedge FHLB advances. 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, caps
totalling $750.0 million 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 fiscal 1995, amortizing interest rate caps with
original notional principal amounts totalling $565.0 million were entered into
in an effort to hedge certain adjustable-rate loans. These amortizing caps
totalled $372.0 million and $459.0 million at September 30, 1997 and 1996,
respectively.
AVERAGE
NOTIONAL INDEX CONTRACTED
AMOUNT RATE(1) RATE
-------- ------- ----------
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 1997.......... buy $372,000 5.84% 7.86%
350,000 5.72 6.30
sell 372,000 5.84 8.57
AT SEPTEMBER 30, 1996.......... buy 459,000 5.93 7.86
200,000 5.66 6.19
sell 459,000 5.93 8.57
(1) Based on the three or six month LIBOR.
F-22
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE FLOORS. Floor contracts were entered into in an effort to
hedge the MSRs against declines in value as a result of prepayments.
AVERAGE AVERAGE
NOTIONAL INDEX FLOOR
AMOUNT RATE(1) RATE
--------- --------- -------
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 1997................ $2,578,500 6.27% 5.69%
AT SEPTEMBER 30, 1996................ $ 688,500 6.73 6.06
(1) Based on the five or ten year Constant Maturity Treasury index ("CMT").
During fiscal 1997, 1996, and 1995, interest received on interest rate
floor agreements totalled $1.3 million, $2.1 million, and $817,000,
respectively. During fiscal 1995, an interest rate floor agreement with a
notional principal amount of $530.0 million was sold prior to its original
maturity, resulting in a gain of $6.4 million. These amounts were capitalized
and included with MSRs on the statements of financial condition and are being
accreted to operations as a component of loan servicing income. At September 30,
1997 and 1996, the remaining deferred gain, net of interest received, was $8.4
million and $7.4 million, respectively. The unamortized costs to enter the floor
agreements were $7.7 million and $2.1 million at September 30, 1997 and 1996,
respectively.
FINANCIAL OPTIONS. At September 30, 1997 and 1996, no financial options
were outstanding. During fiscal 1996, the Company entered into various financial
options including Treasury call options, Treasury put options, and Eurodollar
put options, with notional principal amounts totalling $2.1 billion. Of this
total, $50.0 million in Treasury call options were acquired as a trading
activity. The remaining options were entered into for purposes of hedging
certain MBS, certain loans, and MSRs. During fiscal 1996, all options expired or
were sold.
FINANCIAL FUTURES CONTRACTS. At September 30, 1997 and 1996, there were no
futures contracts outstanding. Treasury futures were entered into during fiscal
1996 and 1995 in an effort to hedge certain loans, but were closed or expired
since the loans being hedged were sold or included in the held for investment
loan portfolio.
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 September
30, 1997, all forward delivery contracts outstanding were with U.S. government
corporations and agencies.
AT SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
TYPE OF INTEREST
Fixed................................ $ 96,000 $ 252,587
Variable............................. -- 69,336
---------- ----------
Total...................... $ 96,000 $ 321,923
========== ==========
LOANS AVAILABLE TO FILL COMMITMENTS
Single family warehouse.............. $ 149,128 $ 260,745
Mortgage pipeline (estimated)........ 116,322 174,883
---------- ----------
Total...................... $ 265,450 $ 435,628
========== ==========
COMMITMENTS TO EXTEND CREDIT. The Company's exposure to credit loss for
commitments to extend credit is represented by the contractual amount of these
agreements. The Company uses the same credit policies in making funding
commitments as it does for on-balance-sheet instruments. These commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee to the Company. Because commitments may expire
without being drawn upon, the total contract amounts do not necessarily
F-23
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
represent future cash requirements. Commitments to extend credit outstanding at
September 30, 1997 and 1996 were $1.7 billion and $988.1 million, respectively.
Included in these commitments are $373.7 million and $262.1 million representing
the undisbursed portion of loans in process and letters of credit totalling
$37.0 million and $8.8 million as of September 30, 1997 and 1996, respectively.
COMMITMENTS TO PURCHASE LOANS. The Company's outstanding commitments to
purchase loans at September 30, 1997 and 1996 were $396.8 million and $185.4
million, respectively.
RECOURSE OBLIGATIONS. The Company serviced loans totalling approximately
$34.2 million and $20.8 million at September 30, 1997 and 1996, respectively,
for which certain recourse obligations apply. Management believes that it has
adequately provided reserves for its recourse obligations related to this
servicing.
12. EMPLOYEE BENEFITS
SAVINGS PLAN
The Company has an employee tax-deferred savings plan available to all
eligible employees, which qualifies as a 401(k) plan under the Internal Revenue
Code of 1986, as amended (the "Code"). 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 employee contribution percentage is
15 percent of an employee's earnings, subject to Internal Revenue Service
maximum contributions limitations. The Company's contributions to the plan were
approximately $1.1 million, $1.5 million, and $1.5 million for fiscal 1997,
1996, and 1995, respectively.
1996 STOCK INCENTIVE PLAN
In fiscal 1997, the Company granted 490,250 options to purchase 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, with 147,500 options expiring if not exercised within
ten years of the date of grant and the remaining 342,750 options expiring if not
exercised within five years of the date of grant. The maximum number of options
available for grant under this plan is 1,600,000.
Effective October 1, 1997, the Company's Board of Directors granted
performance units to executive officers and other key officers and employees
under the 1996 Stock Incentive Plan. These units, which equate to shares of the
Company's common stock on a one-for-one basis, will be distributed based on the
achievement of certain corporate performance goals over a performance period
beginning October 1, 1997 and ending September 30, 2000. The maximum award is
195,000 units in the aggregate. Upon completion of the performance period, the
Company's Compensation Committee will determine the number of units to be issued
based on the Company's performance. Cash will be distributed to the participants
equal to the number of performance units multiplied by the fair value of the
Company's common stock.
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) an award of 318,342 shares of
Company Class B common stock (which had a fair value of $11.65 per share, and
restrictions on transferability for a period of three years from 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 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
F-24
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock award. Compensation expense was not recognized for the stock options,
since 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 the Company's common stock when first elected to the Company's
Board of Directors and following each annual stockholders' meeting thereafter.
The exercise price of the options is 115% of the fair value of the Company's
common stock at the date of grant. The Company granted 10,000 options under the
director stock plan during fiscal 1996 and 1997. These options vest and become
exercisable if and when the fair value of the Company's common stock equals or
exceeds the exercise price of the option on any day during the 30-day period
commencing on the first anniversary of the date of the grant ("vesting
window"). If these stock options do not vest during the vesting window, they
will be cancelled. Vested options will expire if not exercised within ten years
of the date of grant. The options issued to directors in fiscal 1996 became
fully vested and exercisable during fiscal 1997. The maximum number of options
available for grant under this plan is 250,000.
SUMMARY OF STOCK-BASED COMPENSATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
NUMBER OF WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........ 1,164,520 $20.15 -- $ --
Granted............................ 500,250 34.72 1,164,520 20.15
Exercised.......................... -- -- -- --
Forfeited.......................... (11,750) 30.92 -- --
Expired............................ -- -- -- --
---------- ----------
Outstanding at end of year.............. 1,653,020 24.49 1,164,520 20.15
========== ==========
Exercisable at end of year.............. 10,500 24.26 -- --
Vested at end of year................... 417,819 20.23 -- --
</TABLE>
The weighted-average grant date fair value of stock options granted during
1997 and 1996 was $11.31 and $6.46, respectively. The weighted-average remaining
contractual life of options outstanding at September 30, 1997 was 7.98 years and
the exercise prices for options outstanding ranged from $20.125 to $38.063. 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 1997 and 1996, respectively: estimated volatility of 27.78% and 27.00%;
risk-free interest rate of 6.75% and 6.55%; dividend yield of 1.68% and 3.00%;
and an expected life of five years for 342,750 of the options issued in fiscal
1997, ten years for 157,500 of the options issued in fiscal 1997 and ten years
for all options issued in fiscal 1996. The Company granted no options prior to
fiscal 1996.
F-25
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
would have been $73.5 million and $118.3 million and EPS would have been $2.33
and $3.85 for fiscal 1997 and 1996, respectively.
13. INCOME TAXES
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
--------- ----------- ----------
(IN THOUSANDS)
CURRENT TAX EXPENSE
Federal and state............... $ 6,091 $ 6,109 $ 5,539
Payments due in lieu of taxes... 12,344 11,528 15,261
DEFERRED TAX EXPENSE (BENEFIT)
Federal and state............... 42,251 10,298 16,615
Change in valuation
allowance -- utilization of
NOLs.......................... -- (101,700) --
Change in valuation
allowance -- reduction of
NOLs.......................... -- (2,000) --
--------- ----------- ----------
Total income tax expense
(benefit) before
extraordinary loss....... $ 60,686 $ (75,765) $ 37,415
========= =========== ==========
In June 1996, the Parent Company's certificate of incorporation and bylaws
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 net operating
losses ("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. Tax NOLs outstanding at September 30,
1997 were as follows:
ALTERNATIVE EXPIRATION
YEAR GENERATED REGULAR TAX MINIMUM TAX DATE
- ------------------------------------- ----------- ----------- ----------
(IN MILLIONS)
September 30, 1989................... $ 247 $ 103 2004
September 30, 1990................... 296 141 2005
September 30, 1991................... 119 56 2006
September 30, 1992................... 33 7 2007
September 30, 1994................... 7 -- 2009
The Parent Company, Holdings, and the Bank are subject to regular income
tax and alternative minimum tax ("AMT"). For fiscal 1997, 1996, and 1995, the
current federal tax expense was 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").
F-26
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax and related payments differ from the amount computed by applying
the federal income tax statutory rate on income as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------
1997 1996 1995
--------- ----------- ---------
(IN THOUSANDS)
TAXES, CALCULATED BEFORE
EXTRAORDINARY LOSS................. $ 55,242 $ 23,743 $ 31,539
INCREASE (DECREASE) FROM
Reduction in valuation allowance
for the utilization of NOLs... -- (101,700) --
Reduction in valuation allowance
for reduction of NOLs......... -- (2,000) --
State income tax -- current..... 3,791 3,097 2,080
Other........................... 1,653 1,095 3,796
--------- ----------- ---------
Income tax expense
(benefit)................ $ 60,686 $ (75,765) $ 37,415
========= =========== =========
The deferred tax assets and liabilities outstanding at September 30, 1997
and 1996 were as follows:
AT SEPTEMBER 30,
------------------------
1997 1996
----------- -----------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Net operating losses............ $ 169,492 $ 196,326
Purchase accounting............. 5,391 6,252
Tax mark to market.............. 5,209 3,654
Unrealized losses on securities
available for sale............. -- 1,340
Real estate mortgage investment
conduits....................... 3,006 6,830
AMT credit...................... 6,464 4,065
Depreciation -- premises and
equipment...................... 3,340 2,975
Savings Association Insurance
Fund assessment................ -- 11,780
Other........................... 13,291 14,633
----------- -----------
Total deferred tax
assets................... 206,193 247,855
----------- -----------
DEFERRED TAX LIABILITIES
Bad debt reserve................ 10,931 18,199
FHLB stock...................... 16,159 12,196
Originated mortgage servicing
rights......................... 24,229 19,958
Unrealized gains on securities
available for sale............. 3,796 --
Other........................... 2,642 1,679
----------- -----------
Total deferred tax
liabilities.............. 57,757 52,032
----------- -----------
Net deferred tax asset before
valuation allowance............ 148,436 195,823
Valuation allowance............. (27,500) (27,500)
----------- -----------
Net deferred tax assets.... $ 120,936 $ 168,323
=========== ===========
As of September 30, 1997, future taxable income of $518 million would fully
utilize the net deferred tax assets.
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 legislation enacted in fiscal 1996, the
Bank's post-1987 tax bad debt reserve of $89 million at September 30, 1996 is
being recaptured over a six-taxable-year period. At September 30, 1997, the Bank
had approximately $74 million of post-1987 tax bad debt reserves remaining.
There will be no financial
F-27
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statement impact from this recapture because a deferred tax liability has
already been provided for on the Bank's post-1987 tax bad debt reserves. The
current tax liability resulting from recapture of these reserves will be reduced
by NOLs available to offset this income.
No deferred taxes have been provided on approximately $52 million of
pre-1988 tax bad debt reserves. This tax reserve for bad debts is included in
taxable income in later years if certain circumstances occur, such as, a
distribution in redemption of stock of the Bank (with certain exceptions for
preferred stock); partial or complete liquidation of the Bank following a merger
or liquidation; or a dividend distribution in excess of certain earnings and
profits. However, if a thrift with a pre-1988 reserve is merged, liquidated on a
tax-free basis, or acquired by another depository institution, the remaining
institution will inherit the thrift's pre-1988 reserve and post-1951 earnings
and profits. Because management believes the circumstances requiring recapture
of the reserve are not likely to occur, deferred income taxes of approximately
$18 million have not been provided.
Concurrent with the Bank's incorporation on December 30, 1988, the Parent
Company, the Bank, and certain of their direct and indirect parent entities
entered into an agreement with the Federal Savings and Loan Insurance
Corporation ("FSLIC") providing financial assistance to the Bank, among other
things, (the "Assistance Agreement"). On December 23, 1993, the Parent
Company, the Bank, 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 for the termination of the Assistance
Agreement. 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 the FRF 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.
14. REGULATORY MATTERS
The Bank is subject to regulatory capital requirements of the Office of
Thrift Supervision ("OTS"). 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 of September 30, 1997 and 1996, the Bank met all capital adequacy
requirements.
As of September 30, 1997 and 1996, 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 of September 30, 1997, there had been
no conditions or events since the OTS notification that management believes
would change the institution's category.
F-28
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables show the Bank's compliance with the regulatory capital
requirements:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------
CAPITAL ADEQUACY WELL-CAPITALIZED
ACTUAL REQUIREMENTS REQUIREMENTS
-------------------- -------------------- --------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1997
Tangible capital...................... 7.72% $ 917,019 1.50% $ 178,143
Core capital.......................... 7.77 923,062 3.00 356,468 5.00% $ 594,114
Tier 1 capital........................ 12.65 923,062 6.00 437,963
Total risk-based capital.............. 13.18 962,289 8.00 583,951 10.00 729,939
1996
Tangible capital...................... 6.57 695,821 1.50 158,943
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
Total risk-based capital.............. 13.09 743,623 8.00 454,312 10.00 567,890
</TABLE>
The Bank meets its fully phased-in capital requirements. OTS regulations
generally allow dividends to be paid without prior OTS approval under certain
conditions provided that the level of regulatory capital, following the payment
of such dividends, meets the fully phased-in capital requirements. At September
30, 1997, there was an aggregate of approximately $201 million available for the
payment of dividends under these requirements.
The Bank's net income and stockholders' equity figures, as presented in the
Consolidated Statements of Financial Condition and Operations in the Bank's
Annual Report on Form 10-K, agree with the information included in the Bank's
Thrift Financial Report filed with the OTS as of September 30, 1997.
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 L.P. (collectively, the
"Plaintiffs") filed suit against the United States of America in the United
States Court of Federal Claims for alleged failures of the United States (1) to
abide by a capital forbearance 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 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.
F-29
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 trial of one of these two cases is in progress and
the trial of the other has not yet begun. 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 will exceed
$200 million and that they could range as high as $1 billion or more, 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.
Plaintiffs expect that the government may argue that no breach by the government
has occurred and that damages to Plaintiffs, in any event, would approach zero.
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 calendar
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 L.P. acknowledging the relative value, as among the parties, of their
claims in the pending litigation. The agreement confirms that the Company and
the Bank are entitled to receive 85% of the amount, if any, recovered as a
result of any settlement of or a judgment on such claims, and that Hyperion
Partners 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-30
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. 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"). 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
Concurrent with the execution of the Assistance Agreement, 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, 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.
In August 1996 the Company filed a registration statement with the
Securities and Exchange 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
certain stockholders sold 11,164,306 shares. The net proceeds to the Company
from this offering of $14.0 million were contributed to the capital of the Bank
in the first quarter of fiscal 1997 for general corporate purposes.
The authorized stock of the Company consists of the following (par value
$0.01): Class A common stock (voting) -- 40,000,000 shares, Class B common stock
(nonvoting) -- 40,000,000 shares, and preferred stock -- 10,000,000 shares.
Class B common stock may be converted to Class A common stock subject to certain
restrictions.
F-31
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 for fiscal 1996 and 1995 were restated to reflect an
1,800-to-one stock conversion in June 1996.
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1997 1996 1995
--------- ---------- ---------
Net income before extraordinary
loss............................... $ 78,894 $ 118,935 $ 41,719
Less: Bank's net income attributable
to common stock equivalents on the
Warrant............................ -- (5,608) (2,895)
--------- ---------- ---------
Net income applicable to common
shares before extraordinary loss... 78,894 113,327 38,824
Extraordinary loss................... 2,323 -- --
--------- ---------- ---------
Net income applicable to common
shares........................ $ 76,571 $ 113,327 $ 38,824
========= ========== =========
Average number of common shares
outstanding........................ 31,596 29,260 28,863
========= ========== =========
Earnings per share before
extraordinary loss................. $ 2.49 $ 3.87 $ 1.35
Extraordinary loss................... 0.07 -- --
--------- ---------- ---------
Earnings per common share....... $ 2.42 $ 3.87 $ 1.35
========= ========== =========
16. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Bank is involved in legal proceedings occurring in the ordinary course
of business that management believes, after consultation with legal counsel, are
not, in the aggregate, material to the financial condition, results of
operations, or liquidity of the Bank or the Company.
FACILITIES OPERATIONS
Total data processing and rental expense for fiscal 1997, 1996, and 1995,
after consideration of certain credits and rental income, was $20.7 million,
$22.4 million and $22.9 million, respectively. Future minimum commitments on
data processing agreements and significant operating leases in effect at
September 30, 1997 were as follows (in thousands):
YEARS ENDING
SEPTEMBER 30, AMOUNT
- ------------------------------------- ---------
1998.............................. $ 15,033
1999.............................. 9,595
2000.............................. 3,027
2001.............................. 2,308
2002.............................. 2,269
Thereafter........................ 12,640
---------
$ 44,872
=========
F-32
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. FINANCIAL HIGHLIGHTS BY PRINCIPAL BUSINESS OPERATION
The Company conducts its business through the Community Banking, Financial
Markets, and Commercial Banking Groups, which comprise the Banking Segment, and
the Mortgage Banking Segment. Summarized financial information by business
segment and for the Parent Company and Holdings for the periods indicated, was
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
PARENT
MORTGAGE COMPANY
BANKING BANKING(1) AND HOLDINGS ELIMINATIONS COMBINED
------------- ----------- ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
Revenues................................ $ 301,327 $ 60,159 $ 4,628 $ (18,038) $ 348,076
Earnings before income taxes, minority
interest, and extraordinary loss...... 154,967 19,087 1,817 (18,038) 157,833
Depreciation and amortization of
intangibles........................... 9,084 1,446 902 -- 11,432
Capital expenditures.................... 16,080 412 -- -- 16,492
Average identifiable assets............. 10,742,500 423,589 27,774 (90,718) 11,103,145
Loan transfers to (from)................ 200,133 (200,133) -- -- --
Interest income (expense) on single
family warehouse outstanding loan
balance............................... 5,104 (5,104) -- -- --
Servicing (expense) income on Banking
Segment's loans....................... (7,008) 7,008 -- -- --
</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 related gain on the
disposition of those offices. Revenues for the Mortgage Banking Segment for
fiscal 1997 included $18.6 million related to the mortgage origination
business. Earnings before income taxes, minority interest, and extraordinary
loss for the same period includes $2.6 million related to the mortgage
origination business.
F-33
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
PARENT
MORTGAGE COMPANY
BANKING BANKING AND HOLDINGS ELIMINATIONS COMBINED
------------- ------------- ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
Revenues................................ $ 248,814 $ 85,206 $ 98,714 $ (109,011) $ 323,723
Earnings before income taxes and
minority interest..................... 82,449 (3,120) 97,518 (109,011) 67,836
Depreciation and amortization of
intangibles........................... 9,060 5,200 1,000 -- 15,260
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....................... (9,461) 9,461 -- -- --
1995
Revenues................................ $ 202,953 $ 105,515 $ (3,910) $ (6,409) $ 298,149
Earnings before income taxes and
minority interest..................... 82,163 19,357 (5,000) (6,409) 90,111
Depreciation and amortization of
intangibles........................... 12,143 6,879 976 -- 19,998
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....................... (9,255) 9,255 -- -- --
</TABLE>
Revenues are comprised of net interest income (before the provision for
credit losses), non-interest income and dividends received from the Bank and
Holdings. Interest costs incurred by the Parent Company and Holdings are
deducted from its revenues since they relate to long-term debt and are not
directly attributable to a specific segment. Earnings before income taxes,
minority interest, and extraordinary loss equal revenues, 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 dividends received by the Parent Company and Holdings from the
Bank and 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. The
amortization of this capitalized amount approximated $890,000 for the four
months ending January 31, 1997, $2.3 million for fiscal 1996 and $2.4 million
for fiscal 1995 and is reflected in the Mortgage Banking Segment figures above.
F-34
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 for the
four months ending January 31, 1997, $1.9 million for fiscal 1996, and $1.0
million for fiscal 1995.
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 $4.7 million before tax,
$2.9 million after tax, or $0.09 per share. 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 September 30, 1997, the unpaid liability relating to the sale, the two
restructurings, and the branch closures was estimated to be $4.1 million, and is
expected to be paid in full by fiscal 1999. The Company has maintained its
mortgage servicing business, its retail mortgage origination capability in Texas
through its community banking branches, and its wholesale and other mortgage
origination capability through its Financial Markets Group.
Effective February 1, 1997, the Company no longer had a mortgage
origination business within its Mortgage Banking Segment. Activity associated
with the Company's mortgage origination business prior to its sale and the costs
associated with restructuring or closing of the remaining offices have been
included with the Mortgage Banking Segment activity for fiscal 1997. The
wholesale mortgage origination offices and other mortgage origination activities
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-35
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents summarized data for each of the quarters in
fiscal 1997 and 1996 (in thousands, except earnings per share).
<TABLE>
<CAPTION>
1997 1996
------------------------------------------ ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $ 210,774 $ 202,903 $ 197,928 $ 199,103 $ 191,893 $ 199,198 $ 203,436 $ 217,785
Interest expense..................... 145,039 136,283 131,424 133,318 136,752 138,737 148,548 160,741
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income.............. 65,735 66,620 66,504 65,785 55,141 60,461 54,888 57,044
Provision for credit losses.......... 3,463 3,425 4,305 6,914 6,314 4,305 3,181 2,669
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for credit losses.................. 62,272 63,195 62,199 58,871 48,827 56,156 51,707 54,375
Non-interest income.................. 17,130 17,314 23,831 25,157 27,986 19,981 24,353 23,869
Non-interest expense................. 39,726 41,257 42,584 48,569 81,304 65,197 46,678 46,239
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes,
minority interest, and
extraordinary loss................. 39,676 39,252 43,446 35,459 (4,491) 10,940 29,382 32,005
Income tax expense (benefit)......... 15,187 15,086 16,780 13,633 (2,121) (98,922) 12,144 13,134
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) before minority
interest and extraordinary loss.... 24,489 24,166 26,666 21,826 (2,370) 109,862 17,238 18,871
Minority interest
Subsidiary preferred stock
dividends...................... 4,564 4,563 4,563 4,563 4,564 4,563 4,563 4,563
Payments in lieu of dividends.... -- -- -- -- -- 6,189 -- 224
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) before
extraordinary loss................. 19,925 19,603 22,103 17,263 (6,934) 99,110 12,675 14,084
Extraordinary loss................... -- 2,323 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 19,925 $ 17,280 $ 22,103 $ 17,263 $ (6,934) $ 99,110 $ 12,675 $ 14,084
========= ========= ========= ========= ========= ========= ========= =========
Net income (loss) applicable to
common shares...................... $ 19,925 $ 17,280 $ 22,103 $ 17,263 $ (6,934) $ 94,143 $ 11,824 $ 13,144
========= ========= ========= ========= ========= ========= ========= =========
Earnings per common share
Income before extraordinary
loss........................... $ 0.63 $ 0.61 $ 0.70 $ 0.55 $ (0.23) $ 3.26 $ 0.41 $ 0.46
Extraordinary loss............... -- 0.07 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 0.63 $ 0.54 $ 0.70 $ 0.55 $ (0.23) $ 3.26 $ 0.41 $ 0.46
========= ========= ========= ========= ========= ========= ========= =========
Average common shares outstanding.... 31,596 31,596 31,596 31,596 30,441 28,863 28,863 28,863
</TABLE>
F-36
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
PARENT COMPANY
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
ASSETS
Cash and cash equivalents............ $ 1,789 $ 18,790
Investment in subsidiary............. 798,174 608,027
Intangible assets.................... 3,848 2,055
Deferred tax asset................... 22,589 19,527
Other assets......................... 70 5,281
---------- ----------
TOTAL ASSETS......................... $ 826,470 $ 653,680
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable........................ $ 219,699 $ 115,000
Other liabilities.................... 8,292 7,637
---------- ----------
Total liabilities.......... 227,991 122,637
---------- ----------
STOCKHOLDERS' EQUITY
Common stock......................... 316 316
Paid-in capital...................... 129,286 129,286
Retained earnings.................... 462,551 403,674
Unrealized gains (losses) on
subsidiary's securities available
for sale, net of tax............... 6,326 (2,233)
---------- ----------
Total stockholders'
equity.................... 598,479 531,043
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $ 826,470 $ 653,680
========== ==========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-37
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1997 1996 1995
--------- ---------- ---------
INCOME
Dividends from subsidiary............ $ 17,993 $ 109,011 $ 6,409
Short-term interest-earning assets... -- 56 88
--------- ---------- ---------
Total income............... 17,993 109,067 6,497
--------- ---------- ---------
EXPENSE
Interest expense -- notes payable.... 9,731 10,353 10,407
Amortization of intangibles.......... 426 1,000 976
Other................................ 1,892 196 114
--------- ---------- ---------
Total expense.............. 12,049 11,549 11,497
--------- ---------- ---------
INCOME (LOSS) BEFORE UNDISTRIBUTED
INCOME OF SUBSIDIARY AND INCOME
TAXES.............................. 5,944 97,518 (5,000)
Equity in undistributed income of
subsidiary......................... 65,955 519 45,322
--------- ---------- ---------
INCOME BEFORE INCOME TAXES........... 71,899 98,037 40,322
Income tax benefit................... (4,672) (20,898) (1,397)
--------- ---------- ---------
NET INCOME........................... $ 76,571 $ 118,935 $ 41,719
========= ========== =========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-38
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 76,571 $ 118,935 $ 41,719
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income
of subsidiary................. (65,955) (519) (45,322)
Deferred tax benefit............ (3,062) (19,527) --
Amortization of intangibles..... 434 1,000 976
Change in other assets.......... 5,206 (4,486) 4,111
Change in other liabilities..... (5,246) 3,590 (73)
Management Restricted Stock
award......................... -- 3,709 --
----------- ---------- ----------
Net cash provided by
operating activities..... 7,948 102,702 1,411
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in securities
purchased under agreements to
resell........................ -- 2,121 (1,411)
Capital contributions to
subsidiary.................... (108,434) -- --
----------- ---------- ----------
Net cash (used) provided by
investing activities..... (108,434) 2,121 (1,411)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common
stock......................... -- 13,966 --
Repayment of Senior Notes....... (114,500) -- --
Proceeds from issuance of
Subordinated Notes............ 219,691 -- --
Payment of issuance costs of
Subordinated Notes............ (4,012) -- --
Payment of common stock
dividends..................... (17,694) (100,000) --
----------- ---------- ----------
Net cash provided (used) by
financing activities..... 83,485 (86,034) --
----------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................... (17,001) 18,789 --
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 18,790 1 1
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 1,789 $ 18,790 $ 1
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest............. 9,436 10,409 10,407
NONCASH INVESTING ACTIVITIES
Net transfer of investment in Bank
and Senior Notes to Holdings
(Note 1)........................ 525,751 -- --
Capital contributed to Holdings.... 121,186 -- --
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-39
EXHIBIT 10.38
PHOENIX TOWER
OFFICE SPACE LEASE AGREEMENT
BY AND BETWEEN
UTAH STATE RETIREMENT INVESTMENT FUND, AS LANDLORD
AND
BANK UNITED, AS TENANT
DATED AS OF NOVEMBER 21, 1997
<PAGE>
TABLE OF CONTENTS
I......................................................................1
1.1 Leased Premises............................................1
1.2 Term.......................................................4
1.3 Use........................................................5
1.4 ATM Machines...............................................5
1.5 Use of Lobby...............................................7
1.6 Renewal Option.............................................7
1.7 Preferential Right to Lease................................7
1.8 Right to Terminate.........................................7
1.9 Right to Contract..........................................7
1.10 Exclusive Retail Banking Operation.........................7
II.....................................................................8
2.1 Rental Payments. ..........................................8
2.2 Payment....................................................9
2.3 Tenant's Additional Rental.................................9
2.4 Operating Expenses........................................10
2.5 Tax Protests..............................................18
2.6 Termination of Old Lease and ATM Agreement................18
III...................................................................18
3.1 Services..................................................18
3.2 Keys and Locks............................................23
3.3 Tenant's Access Control Equipment.........................23
3.4 Signage/Graphics; Identity................................23
3.5 Parking...................................................26
IV....................................................................29
4.1 Care of the Leased Premises...............................29
4.2 Entry for Repairs and Inspection..........................29
4.3 No Nuisance...............................................30
4.4 Laws and Regulations; Building Rules and Regulations......30
4.5 Americans With Disabilities Act; Clean Air Act; Texas
Architectural Barriers Act................................30
4.6 Legal Use and Violations of Insurance Coverage............31
4.7 Environmental Matters.....................................31
4.8 Window Coverings..........................................32
4.9 NO WARRANTIES.............................................32
-i-
<PAGE>
V.....................................................................33
5.1 Leasehold Improvements....................................33
5.2 Repairs by Landlord.......................................34
5.3 Repairs by Tenant.........................................35
5.4 Allowances................................................35
VI....................................................................37
6.1 Condemnation..............................................37
6.2 Damages from Certain Causes...............................37
6.3 Fire or Other Casualty....................................38
6.4 Casualty Insurance........................................39
6.5 Liability Insurance.......................................40
6.6 Hold Harmless.............................................40
6.7 Waiver of Subrogation Rights..............................40
VII...................................................................41
7.1 Default by Tenant.........................................41
7.2 Non-Waiver................................................44
7.3 Holding Over..............................................45
7.4 Attorneys' Fees...........................................45
7.5 Default by Landlord.......................................45
VIII..................................................................46
8.1 Assignment or Sublease by Tenant..........................46
8.2 Assignment by Landlord....................................50
8.3 Peaceful Enjoyment........................................50
8.4 Limitation of Landlord's Liability........................50
8.5 Limitation of Tenant's Liability..........................51
IX....................................................................51
9.1 Notices...................................................51
9.2 Miscellaneous.............................................51
9.3 Subordination.............................................53
9.4 Estoppel Certificate or Three-Party Agreement.............53
9.5 Brokerage Fees............................................53
9.7 No Partnership............................................54
9.8 No Press Release..........................................54
9.9 Communications Equipment..................................54
-ii-
<PAGE>
Exhibits:
Schedule I - Building Net Rentable Area
Exhibit A - Floor Plans
Exhibit A-1 - Land
Exhibit B - Options
Exhibit C - Air Conditioning and Heating Services
Schedule II - Overtime HVAC Rate
Exhibit D - Building Rules and Regulations
Exhibit E - Construction of Leasehold Improvements
Exhibit F - Janitorial Specifications
Exhibit G - Tenant's Electrical Generator
Exhibit H - Building Standard Items
Exhibit I - Contractor Rules and Regulations
Exhibit J - Termination Payment
-iii-
<PAGE>
LEASE AGREEMENT
STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
THIS LEASE AGREEMENT (this "LEASE") is made and entered into as
of November ____, 1997, provided that the Commencement Date (as hereinafter
defined) shall be March 1, 1998, as provided below, by and between Utah State
Retirement Investment Fund, an independent agency of the State of Utah
("LANDLORD"), whose address is c/o Westmark Realty Advisors, L.L.C., 865 South
Figueroa Street, Suite 3500, Los Angeles, California 90017-2543, Attention:
Director of Asset Management, and Bank United, a federal savings bank
("TENANT"), whose address is that of the Building (as defined below), which is
3200 Southwest Freeway, Houston, Texas 77027, Attention: Jonathon K. Heffron,
Executive Vice President, General Counsel, and Chief Operating Officer, with
additional copies to Barry C. Burkholder, President and Chief Executive Officer,
and Ronald D. Coben, Executive Vice President of Community Banking.
WITNESSETH:
I.
1.1 LEASED PREMISES.
1.1.1 DEFINITION OF LEASED PREMISES. Subject to and upon the
terms, provisions and conditions hereinafter set forth, and each in
consideration of the duties, covenants and obligations of the other hereunder,
Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlord
approximately 216,937 square feet of Net Rentable Area (as defined below) in the
building known as Phoenix Tower (the "BUILDING"), located at 3200 Southwest
Freeway, in Houston, Harris County, Texas, the land upon which the Building is
located being described by metes and bounds on EXHIBIT A-1 attached hereto (the
"LAND"), consisting of the following amounts of square feet of Net Rentable Area
on the following floors:
-1-
<PAGE>
SQUARE FEET OF
NET RENTABLE AREA FLOOR
----------------- -----
8,055 9
11,101 10
24,977 13
24,314 14
25,594 15
24,314 16
24,977 17
24,314 18
24,977 19
24,314 20
The Building, together with the Land, the parking garage within the Building
(the "PARKING GARAGE"), all other improvements now or hereafter situated on the
Land or directly benefitting the Building shall collectively be referred to
herein as the "PROJECT." The area leased in the Building under this Lease is
hereinafter called the "LEASED PREMISES" and is shown on the floor plan(s)
contained in EXHIBIT A. Tenant shall also have the nonexclusive right to use the
Parking Garage, Building lobby, elevators and other common areas of the Project
for their intended purposes, subject to the further provisions hereof.
1.1.2 NET RENTABLE AREA. "NET RENTABLE AREA" refers to the square
footage area or areas within the Building determined by adding the following:
(i) the Usable Area (as defined below) of the area being
measured;
(ii) the portion of the Building-Shared Areas (as defined below)
allocable to the area being measured; and
(iii) the portion of the Floor-Shared Areas (as defined below)
allocable to the area being measured.
1.1.3 USABLE AREA. "USABLE AREA" means the square footage of the
areas within the Building measured from the inside surface of the outer glass,
finished column or exterior wall of the Building enclosing the Leased Premises
to the inside surface of the opposite outer glass, finished column or exterior
wall, or to the mid-point of the demising walls separating the Leased Premises
from
(i) areas leased to or held for lease to other tenants,
(ii) Building-Shared Areas,
-2-
<PAGE>
(iii) Floor-Shared Areas, and
(iv) Service Areas (as defined below), as the case may be.
No deductions from Usable Area shall be made for columns or projections
necessary to the Building.
1.1.4 SERVICE AREAS. "SERVICE AREAS" means the square footage of
the areas within (and measured from the mid-point of the walls enclosing) the
Building stairs, fire towers, elevator shafts, flues, vents, stacks, pipe
shafts, vertical ducts, risers, and chases, and other vertical penetrations.
Areas for the specific use of Tenant and installed at the request of Tenant such
as special stairs or elevators are not included within the definition of Service
Areas (I.E., such areas will be included in the Usable Area leased of the space
being measured).
1.1.5 BUILDING-SHARED AREAS. "BUILDING-SHARED AREAS" means the
square footage of the areas within (and measured from the mid-point of the walls
enclosing) the Building elevator machine rooms, main mechanical and electrical
rooms, public lobbies, and other areas not leased or held for lease within the
Building but which are necessary or desirable for the proper utilization of the
Building or to provide customary services to the Building; provided, however, in
no event shall Building Shared-Areas include any Service Areas, Floor-Shared
Areas, areas leased or held for lease to other tenants of the Project, food
service facilities, Parking Garage areas, management and/or leasing offices for
the Project, or any space that is not devoted exclusively to the operation of
the Project for the benefit of all tenants therein. The allocation to the Leased
Premises of the Building-Shared Areas shall be equal to the total
Building-Shared Areas within the Building multiplied by a fraction, the
numerator of which is the Usable Area of the Leased Premises and the denominator
of which is the Usable Area leased or held for lease in the Building.
1.1.6 FLOOR-SHARED AREAS. "FLOOR-SHARED AREAS" means the square
footage of the areas within (and measured from the mid-point of the walls
enclosing) public corridors, elevator foyers, rest rooms, mechanical rooms,
janitor closets, telephone and equipment rooms, and other similar facilities for
the use of all tenants on the floor on which the Leased Premises are located. In
the case of a floor leased to more than one tenant, the allocation to the Leased
Premises of the Floor-Shared Areas on said floor shall be equal to the total
Floor-Shared Areas on said floor multiplied by a fraction, the numerator of
which is the Usable Area of the Leased Premises located on said floor and the
denominator of which is the Usable Area of said floor.
1.1.7 AMOUNT OF NET RENTABLE AREA. Landlord and Tenant hereby
agree that (a) the Net Rentable Area of the Leased Premises calculated on the
basis of the foregoing definitions is 216,937 square feet, (b) the Net Rentable
Area of the Building calculated on the basis of the foregoing definitions is
618,578 square feet, and (c) the current Net Rentable Area of each Building
floor calculated on the basis of the foregoing definitions is as reflected by
Schedule I attached hereto and incorporated herein.
-3-
<PAGE>
1.1.8 NO MODIFICATION OF NET RENTABLE AREA. The calculation of
Net Rentable Area of the Leased Premises and the Building has been confirmed
prior to the execution of this Lease by both Landlord and Tenant. No
modification of Net Rentable Area of the Leased Premises (except incident to
additions thereto pursuant to the terms hereof) or the Building shall be made
for purposes of this Lease except upon the mutual agreement of Landlord and
Tenant.
1.1.9 LIMITATION ON USE OF AREAS. The foregoing determination of
the Leased Premises does not allow, and Tenant shall not be permitted to use
Service Areas, Building-Shared Areas or Floor-Shared Areas for storage or any
other purpose other than as expressly permitted by Landlord in writing.
Notwithstanding the foregoing, Tenant shall have the non-exclusive right to use
the Building's existing risers and chases which are designed for the purpose of
routing telecommunications cable as well as the electrical and mechanical rooms
on floors of the Building leased entirely by Tenant for cabling and computer
wiring provided (a) there is space available in such risers, chases, or rooms
for Tenant's intended use, (b) Tenant's use of such risers, chases, or rooms
will not interfere with Landlord's or other tenant's use of the Building or
their premises, (c) Tenant pays all costs and expenses incurred in connection
with the installation and use of such cabling and wiring, including all costs
incurred by Landlord, (d) Landlord reviews and approves, in its sole discretion,
plans and specifications for such wiring and cabling, (e) the installation of
such wiring and cabling is performed either by Landlord's contractor or a
contractor selected by Tenant and approved by Landlord and under the supervision
of a representative of Landlord, (f) all installations must be made in
accordance with applicable law, (g) all such installations must be designed,
installed, utilized and operated so as not to adversely affect or impact the
structural, mechanical, electrical, elevator, communications or other systems of
or serving the Building, (h) such installation and operation will not, in
Landlord's judgment, be likely to cause injury to persons or property, (i) no
agent, employee or representative of Tenant shall enter into or upon any Service
Area, Building-Shared Area or Floor-Shared Area for any purpose without
Landlord's consent and only with a representative of Landlord present, (j)
Landlord shall not be obligated to maintain any such installations, (k) Landlord
shall not be obligated to construct or install or allow Tenant to construct or
install any additional risers, chases, electrical rooms or mechanical rooms and
(i) this Lease does not authorize Tenant to connect such cabling or wiring to
any facilities in the Building or to any facilities outside the Building except
for connections between Tenant's equipment in the Building and except for
connections to telephone lines made available in the Building with Landlord's
approval for access outside the Building. Landlord hereby approves of the
location of Tenant's existing equipment, wiring, and cabling.
1.2 TERM. Subject to and upon the terms and conditions set forth herein,
the term of this Lease (the "TERM") shall be ten (10) years commencing upon
March 1, 1998 (the "COMMENCEMENT DATE") and expiring on February 29, 2008.
Tenant's obligation to pay Base Rental and Tenant's Additional Rental shall
commence on the date ("RENT COMMENCEMENT DATE") that is (a) the Commencement
Date as to the portion of the Leased Premises located on floors 9 (as to 3,369
square feet of Net Rentable Area as shown on the floor plans attached hereto as
EXHIBIT A), 13, 14, 16, 17, 18, 19, and 20, (b) as to each of floors 9 (as to
4,686 square feet of Net Rentable Area as shown on
-4-
<PAGE>
the floor plans attached hereto as EXHIBIT A) and 10 the earlier of the date (i)
sixty (60) days after Landlord makes the portion of the Leased Premises located
on each such floor available to Tenant, or (ii) Tenant occupies such portion of
the Leased Premises for the conduct of its business, and (c) as to floor 15, the
earlier of the date (i) sixty (60) days after Landlord makes floor 15 available
to Tenant, or (ii) Tenant occupies floor 15 for the conduct of its business.
Landlord shall make the portions of the Leased Premises not leased by Tenant
under the Old Lease and located on floor 9 and floor 10 available to Tenant on
January 2, 1998. Landlord shall make floor 15 available to Tenant as soon as
reasonably possible after the existing tenant of such floor vacates such floor.
Landlord will not contractually agree with such existing tenant of floor 15 to
extend the term of such tenant's lease as to floor 15. If Landlord does not make
floor 15 of the Building available to Tenant by January 1, 1999, then Tenant, as
its sole and exclusive remedy, shall have the right to terminate this Lease as
to floor 15 only and permanently exclude floor 15 from the Leased Premises.
Landlord will notify Tenant as soon as is reasonably possible of the date
Landlord expects that it will be able to deliver the portions of the Leased
Premises described in clauses (b) and (c) above to Tenant.
1.3 USE. The Leased Premises shall be used and occupied by Tenant (and
its permitted assignees and subtenants) solely for general office purposes and
for other legally permitted uses consistent with the character of first-class
office buildings in the Greenway Plaza and Galleria areas in Houston, and for no
other purpose. Included within permitted uses of the Leased Premises are the
customary and reasonable activities of a bank, savings bank, savings and loan
holding company, their successors or affiliates, or any similar financial
institution. The Leased Premises shall not be used for any purpose which would
increase the rate of fire or liability or other insurance coverage on the
Project or its contents, lower the quality or character of the Project, create
unreasonable elevator loads, cause odors perceptible outside the Leased
Premises, nor for a travel agency, nor, for as long as the existing lease with
Dean Witter & Co. continues, for the retail or discount sale of stocks or bonds
if such activities constitute fifteen percent (15%) or more of the revenue
generated by the business activities conducted in the Leased Premises. Any use
of the Leased Premises for other than general office purposes shall be subject
to the further limitation that such use may not consume a disproportionate share
of standard Building services or otherwise interfere with standard Building
operations. Landlord has no current actual knowledge that the uses made by
Tenant of the Leased Premises as of the date hereof violate either the Old Lease
(hereinafter defined) or this Lease, provided that Landlord is in no way waiving
any failure of Tenant to comply with the provisions of this Lease or the Old
Lease. In addition, Tenant may use a portion of the Leased Premises for purposes
of a health or fitness center, cafeteria, and/or executive dining room provided
(a) that such facilities are made available primarily to Tenant's employees and
their invitees and not to the public generally, (b) all improvements necessary
to such uses are approved by Landlord in its reasonable discretion, provided
that Landlord's approval, in its sole discretion, shall be required for the
installation and use of all kitchen and related facilities and equipment, are
installed by contractors approved by Landlord in accordance with the terms of
this Lease, and the cost of such improvements, including Landlord's review and
approval thereof, is paid by Tenant, and (c) Tenant's installation and use
complies in all respects with all applicable laws.
-5-
<PAGE>
1.4 ATM MACHINES. For as long as (a) Tenant, a Permitted Assignee (as
hereinafter defined) or their Permitted Affiliates together are leasing at least
150,000 square feet of Net Rentable Area in the Building, (b) Tenant, a
Permitted Assignee, or a Permitted Affiliate is operating a retail banking
facility open to the public on the ninth (9th) floor of the Building in
accordance with this Lease, and (c) there is no uncured Event of Default under
this Lease, then Tenant, a Permitted Assignee, or a Permitted Affiliate shall
have the exclusive right to install, operate and maintain in a first class
manner, and to receive revenues from, one or more automatic teller machines
(each an "ATM"), one of which shall be located in the current location of the
existing ATM on the ninth (9th) floor of the Building and the other ATMs to be
located either on the ninth (9th) floor or at other locations in the Building
approved by Landlord, which approval shall not be unreasonably withheld as to
locations within the Leased Premises and which approval may be withheld by
Landlord in its sole discretion as to locations outside of the Leased Premises.
If Landlord permits Tenant, a Permitted Assignee, or a Permitted Affiliate to
operate an ATM (other than the existing ATM) outside of the Leased Premises,
this Lease shall be amended to include the portion of the Building in which the
ATM is located at a Base Rent to be mutually agreed upon by Landlord and Tenant.
As long as Tenant, a Permitted Assignee, or a Permitted Affiliate is operating
at least one ATM that is available to the public, then Landlord will not grant
to any other tenant or party the right to install and operate an ATM in the
Project that is available to the public. Landlord hereby approves the current
location of the ATM and all signage pertaining thereto. Any and all changes to
an ATM, its location or operation, or any signage pertaining to any ATM shall be
approved by Landlord in its sole discretion. Tenant, a Permitted Assignee, or a
Permitted Affiliate shall use such ATM in compliance with all applicable laws.
Tenant, a Permitted Assignee, or a Permitted Affiliate shall pay all costs and
expenses pertaining to the installation, use, and operation of its ATM. Tenant,
a Permitted Assignee, or a Permitted Affiliate will charge tenants and visitors
who use the ATM no more than the same charges charged by Tenant, a Permitted
Assignee, or a Permitted Affiliate to its other ATM users. Tenant shall promptly
make any repairs and perform any maintenance to the ATM as is necessary to
maintain the ATM in an operating condition consistent with and comparable to
ATMs located in other Class A buildings in the Greenway Plaza and Galleria areas
in Houston. Tenant shall properly repair any damage existing in the surrounding
area either directly or indirectly caused by the existence and operation of the
ATM. Tenant shall indemnify and hold Landlord harmless from and against any and
all claims, actions, damages or liens resulting from Tenant's ownership,
operation or maintenance of the ATM, including any reasonable attorneys' fees
incurred by Landlord. Landlord shall have the right to terminate the right
granted herein to install and operate ATMs (outside of the Leased Premises) and
Landlord may grant the right to install and operate ATMs to another party if (x)
any of the conditions set forth in (a), (b) and (c) above are not satisfied or
do not continue to be satisfied, provided that the condition set forth in (b)
above shall not be deemed to be unsatisfied until Landlord gives Tenant notice
of such failure and Tenant does not cure such failure within thirty (30) days
after Tenant's receipt of such notice, (y) the transaction fee charged by Tenant
exceeds that charged by Tenant, a Permitted Assignee, or a Permitted Affiliate
to its other ATM users, or (z) either (i) the ATM becomes and remains
non-functional or malfunctions for any five (5) consecutive business days or for
any two (2) consecutive business days more than six (6) times in any twelve (12)
months period and Tenant, a Permitted Assignee, or a
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Permitted Affiliate fails to correct the cause of such non-function or
malfunction within five (5) days after Landlord notifies Tenant thereof, or (ii)
Tenant, a Permitted Assignee, or a Permitted Affiliate fails for any reason to
operate an ATM that is available to the public in the Building for a period of
sixty (60) consecutive days. Immediately upon termination of Tenant's rights
under this Section, Tenant shall remove the ATM and all related attachments from
outside the Leased Premises, and shall restore the affected space to its
original condition. Tenant's rights under this Section may be assigned only to a
Permitted Assignee or a Permitted Affiliate only for as long as the conditions
of clauses (a), (b) and (c) above continue to be satisfied. All ATMs operated in
the Project must be operated by, and under the name of, only one entity so that
only Tenant, one Permitted Assignee or one Permitted Affiliate shall be entitled
to exercise such rights at any one time. No other assignment or sublease of such
rights shall be permitted hereunder.
1.5 USE OF LOBBY. During the term, and only on weekends, Holidays (as
hereafter defined) and between the hours of 6:00 p.m. and 7:00 a.m. on weekdays
(other than Holidays), Tenant shall have the right to use the Building lobbies
located on the ground floor and the ninth (9th) floor, without charge, for any
Tenant sponsored special event, provided (a) Tenant gives Landlord reasonable
prior written notice of the date, time, and nature of the event, (b) the date
and time of the event do not conflict with another previously scheduled event,
(c) Tenant reimburses Landlord for all out-of-pocket expenses Landlord incurs in
connection with the event, (d) Tenant indemnifies and holds Landlord harmless
from and against any and all claims, actions, damages or liens resulting from
Tenant's use of the lobbies, including any reasonable attorneys' fees incurred
by Landlord, (e) Tenant complies in all respects with applicable law, (f)
Landlord approves, in its sole discretion, all aspects of Tenant's intended use
of the Building lobbies, and (g) Tenant shall not use the Building lobbies for
such events for more than twelve (12) days in any calendar year.
1.6 RENEWAL OPTION. Tenant shall have the right and option to renew the
Term of this Lease as set forth in Article I of EXHIBIT B hereto.
1.7 PREFERENTIAL RIGHT TO LEASE. Tenant shall have the preferential
right to lease certain space as set forth in Article II of EXHIBIT B hereto.
1.8 RIGHT TO TERMINATE. Tenant shall have the one time right to
terminate this Lease as set forth in Article IV of EXHIBIT B hereto.
1.9 RIGHT TO CONTRACT. Tenant shall have the one time right to contract
the Leased Premises as set forth in Article V of EXHIBIT B hereto.
1.10 EXCLUSIVE RETAIL BANKING OPERATION. For as long as (a) Tenant, a
Permitted Assignee satisfying the requirements of the second to last sentence of
this Section, or their Permitted Affiliates, together are leasing and occupying
at least 150,000 square feet of Net Rentable Area in the Building, (b) Tenant, a
Permitted Assignee, or a Permitted Affiliate is operating a retail banking
facility open to the public on the ninth (9th) floor of the Building in
accordance with the terms of
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this Lease, (c) there is no uncured Event of Default under this Lease, and (d)
Tenant, a Permitted Assignee, or a Permitted Affiliate is permitted under
applicable law to operate a retail banking facility and complies in all respects
with applicable laws, then Tenant, a Permitted Assignee, or a Permitted
Affiliate satisfying the requirements of this Section shall have the exclusive
right to offer retail banking services to the public from the Project. Such
retail banking services shall be operated by, and under the name of, only one
entity so that only Tenant, one Permitted Assignee, or one Permitted Affiliate
shall be entitled to operate such retail banking facility at any one time. The
foregoing shall not prohibit the operation of, or the provision of services by,
credit unions, commercial banks, or any other bank, savings and loan, or other
financial institutions in the Building, except the provision of retail banking
services open to the public. In addition, the foregoing exclusive shall not
apply to the lease executed with Centeq Investments Company or any affiliates
thereof or successors thereto. Landlord shall have the right to grant to another
party the right to provide retail banking services to the public in the Building
if any of the conditions set forth in (a), (b), (c), or (d) above are not
satisfied or do not continue to be satisfied, provided that the conditions set
forth in (b) and (d) above shall not be deemed to be unsatisfied until Landlord
gives Tenant notice of such failure and Tenant does not cure such failure within
thirty (30) days after Tenant's receipt of such notice. Tenant's rights under
this Section may only be assigned to a Permitted Assignee or a Permitted
Affiliate that is a savings and loan association, federal or state chartered
lending institution, national or state banking institution or federal savings
bank, or other business permitted under applicable law to offer retail banking
services and only so long as the conditions of clauses (a), (b), (c), and (d)
above continue to be satisfied. No other assignment or sublease of such rights
shall be permitted hereunder.
II.
2.1 RENTAL PAYMENTS. Throughout the Term, Tenant shall pay a base annual
rental ("BASE RENTAL") equal to the product of (i) the Base Rate set forth below
multiplied by (ii) the Net Rentable Area of the Leased Premises. The "BASE RATE"
is as follows:
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Rental Period Base Rate
(DATES) (PER SQ. FT.)
Commencement Date until the third
(3rd) anniversary of the Commencement Date $15.50
Third (3rd) anniversary of the Commencement Date until
the fifth (5th) anniversary of the Commencement Date $16.00
Fifth (5th) anniversary of the Commencement Date until
the eighth (8th) anniversary of the Commencement Date $18.00
Eighth (8th) anniversary of the Commencement Date until
the tenth (10th) anniversary of the Commencement Date $19.00
The Base Rate is quoted per square foot of Net Rentable Area within the Leased
Premises. In addition to Base Rental, Tenant shall also pay, as additional
rental, all of Tenant's Additional Rental (as hereinafter defined) and all such
other sums as may become due from and payable by Tenant to Landlord under this
Lease. Landlord shall have the same remedies for default in the payment of
Tenant's Additional Rental and other Rent as are available to Landlord in the
case of default in payment of Base Rental. (Base Rental, Tenant's Additional
Rental and all such other sums due hereunder being herein collectively called
"Rent").
2.2 PAYMENT. The Base Rental for each year, together with any Tenant's
Forecast Additional Rental provided for in Section 2.3 below, shall be due and
payable in twelve (12) equal installments on the first day of each calendar
month during the Term, and any extensions or renewals thereof, and Tenant agrees
to pay the same to Landlord at Landlord's address (or such other address as may
be designated by Landlord from time to time) monthly in advance.
2.2.1 PRORATION. If the Rent Commencement Date as to a portion of
the Leased Premises is other than the first day of a calendar month or if this
Lease terminates on other than the last day of a calendar month, then the Base
Rental and Additional Rental for such month or months shall be prorated and paid
in advance. The payment for such prorated month shall be calculated by
multiplying the Base Rental and Additional Rental, as appropriate, by a
fraction, the numerator of which shall be the number of days of the Term
occurring during said commencement or termination month, as the case may be, and
the denominator of which shall be three hundred sixty-five (365).
2.2.2 NO OFFSET. Tenant shall pay all Rent that becomes payable
by Tenant to Landlord under this Lease at the times and in the manner provided
in this Lease without demand, set-off or counterclaim except as otherwise
expressly provided herein. All Rent owed by Tenant to Landlord under this Lease
shall bear interest from the date due until paid at a rate (the "APPLICABLE
RATE") equal to the lesser of (i) two percent (2%) above the per annum "base
rate" (or if the "base
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rate" is discontinued, the rate announced as that being charged to the most
creditworthy commercial borrowers for ninety (90) day unsecured loans) announced
by Citibank, N.A. (or its successor), from time to time, or (ii) the maximum
lawful rate per annum, provided that, the first late payment of Rent made by
Tenant during any twelve (12) month period shall not begin to accrue interest at
the Applicable Rate until ten (10) days after the date when such payment of Rent
is due if such payment is not made within said ten (10) day period.
2.3 TENANT'S ADDITIONAL RENTAL.
2.3.1 TENANT'S FORECAST ADDITIONAL RENTAL. Commencing with the
calendar year 1999 and continuing thereafter for each calendar year during the
Term, Landlord shall not later than thirty (30) days after the beginning of each
calendar year, provide to Tenant a statement setting forth in reasonable detail
Landlord's good faith estimate of Tenant's Additional Rental ("TENANT'S FORECAST
ADDITIONAL RENTAL") for such calendar year (or portion thereof). Commencing with
the calendar year 1999, Tenant shall pay Tenant's Forecast Additional Rental for
such year in the manner and at the times set forth in Section 2.2 above.
2.3.2 TENANT'S ADDITIONAL RENTAL. "TENANT'S ADDITIONAL RENTAL"
for each calendar year means the Operating Expenses Increase for such year
multiplied by the Net Rentable Area within the Leased Premises. "OPERATING
EXPENSES INCREASE" means the positive difference, if any, between the Operating
Expenses Amount (as defined below) and the Base Operating Expenses Amount (as
defined below). "OPERATING EXPENSES AMOUNT" means an amount equal to the amount
of Operating Expenses (as defined below) for such year divided by the greater of
ninety-five percent (95%) of the total Net Rentable Area of the Building or the
total Net Rentable Area of space actually leased in the Building for the
applicable year. "BASE OPERATING EXPENSES AMOUNT" means the Operating Expenses
Amount for the calendar year 1998.
2.3.3 STATEMENT TO TENANT. Within one hundred fifty (150) days,
or as soon thereafter as practical, after the end of each calendar year during
the Term and after the termination of this Lease (Landlord and Tenant agreeing
that the provisions of this Section 2.3.3 shall survive the termination of this
Lease), Landlord shall provide Tenant a statement showing the actual Operating
Expenses for said calendar year, as prepared by a certified public accounting
firm, and a statement prepared by Landlord comparing Tenant's Forecast
Additional Rental with Tenant's Additional Rental. If Tenant's Forecast
Additional Rental exceeds Tenant's Additional Rental for said calendar year,
Landlord shall refund to Tenant the excess paid by Tenant within thirty (30)
days after providing Tenant the statement. If Tenant's Additional Rental exceeds
Tenant's Forecast Additional Rental for said calendar year, Tenant shall pay to
Landlord within thirty (30) days of receipt of the statement an amount equal to
such difference. Notwithstanding anything in this Lease to the contrary,
Landlord acknowledges and agrees that in no event shall any Operating Expenses
be billed or chargeable to Tenant after the date which is three (3) years
following the calendar year end in which such Operating Expenses were incurred
by Landlord. In the event Landlord (or any successor to Landlord in the event
the Building is conveyed to a new owner during the Term of this
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Lease, as the Term may be renewed as provided herein) fails to bill any such
Operating Expenses to Tenant within the aforementioned three (3) year period,
Tenant shall have no obligation to pay any such Operating Expenses. For purposes
of this Section 2.3.3, third-party expenses shall be deemed to have been
incurred by Landlord on the date that Landlord receives an invoice for such
third-party expense. Additionally, the aforementioned three (3) year limitation
shall not apply with respect to amortization or depreciation included in
Operating Expenses so long as the expense to which the amortization or
depreciation charge relates was included on Landlord's statement of Operating
Expenses within the required three (3) year period.
2.3.4 INCREASES IN OPERATING EXPENSES. All increases in Operating
Expenses shall be paid by Tenant in the proportion that the Net Rentable Area of
the Leased Premises bears to the greater of ninety-five percent (95%) of the
total Net Rentable Area in the Building or the total Net Rentable Area of space
actually leased in the Building.
2.3.5 NO REDUCTION. Nothing contained in this Section 2.3 shall
be construed at any time so as to reduce the annual Base Rental payable
hereunder.
2.4 OPERATING EXPENSES.
2.4.1 DEFINITION. "OPERATING EXPENSES" means all reasonable
expenses, costs and disbursements of every kind and nature relating to or
incurred or paid in connection with the ownership and operation of the Project,
computed on an accrual basis and determined in accordance with generally
accepted accounting principles consistently applied, including, but not limited
to, the following:
(i) wages and salaries of all persons directly engaged in the
operation, maintenance or access control of the Project, including all
taxes, insurance, and reasonable benefits relating thereto; wages and
salaries of executive personnel not primarily engaged in the management
of the Project shall not be included in Operating Expenses; provided
that a reasonable allocation of wages, salaries and other compensation
and benefits of central accounting, risk management, and payroll
personnel may be included in Operating Expenses which accurately
reflects their involvement with respect to the Property; and if any such
persons engaged in the operation, maintenance or access control of the
Project work on other projects, an equitable allocation of the wages,
salaries and other compensation and benefits of such personnel shall be
made among all such projects in proportion to their time spent in
performing services other than for the Project;
(ii) market rental and other normal office expenses for
Landlord's on-site management office (but only to the extent that
Landlord's on-site management office does not exceed 2,700 square feet
of Net Rentable Area);
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(iii) the cost of all supplies, tools, equipment, and materials
directly used in the operation and maintenance of the Project;
(iv) the cost of all utilities for the Project, including, but
not limited to, steam, sewer, waste disposal, gas, electricity, the cost
of water and power for heating, lighting, air conditioning, and
ventilating the Project (excluding those costs billed to specific
tenants);
(v) the cost of all maintenance and service agreements for the
Project and the equipment therein, including, but not limited to, access
control, window cleaning, elevator maintenance, traffic control, and
janitorial service;
(vi) the cost of repairs and general maintenance, excluding (a)
repairs and general maintenance paid by proceeds of insurance, by Tenant
or by other third parties, (b) alterations attributable solely to
tenants of the Project and (c) repairs and general maintenance required
to be paid by other tenants or which would have been paid by insurance
required to be maintained by Landlord under this Lease;
(vii) amortization (together with reasonable financing charges)
of the cost of capital investment items that (a) are installed primarily
for the purpose of reducing Operating Expenses, but only to the extent
of the actual savings achieved thereby, as reasonably estimated by
Landlord, (b) are installed primarily for the purpose of promoting
safety, or (c) are required by law, including all accessibility or
hazardous substances laws (Landlord and Tenant acknowledging that
Operating Expenses, including the Base Operating Expenses Amount, will
include costs incurred by Landlord as part of its ongoing program to
cause the Building to comply with applicable accessibility laws);
(viii) the cost of all insurance relating to the Project,
including, but not limited to, the cost of casualty, rental loss and
liability insurance applicable to the Project and Landlord's personal
property used in connection therewith and the cost of deductibles paid
on claims made by Landlord; provided, however, with respect to rental
loss insurance, Operating Expenses shall not include any additional
premiums associated with covering rental loss for a period in excess of
twelve (12) months;
(ix) all taxes, assessments, and governmental charges, whether
directly paid by Landlord, whether federal, state, county, municipal or
otherwise, and whether imposed by taxing districts or authorities
presently taxing the Project or by others subsequently created or
otherwise, including improvement district or associations, and any other
taxes and assessments attributable to the Project or its operation
(including leasehold improvements unless a separate allocation is made
therefor by the applicable taxing authority), excluding, however,
federal and state taxes on
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income, death taxes, franchise taxes, and any taxes imposed or measured
on or by the income of Landlord from the operation of the Project
(excluding ad valorem taxes on the Project determined by reference to
Landlord's income from the Project) or imposed in connection with any
change of ownership of the Project; provided, however, that if at any
time during the Term, the present method of taxation or assessment shall
be so changed that the whole or any part of the taxes, assessments,
levies, impositions or charges now levied, assessed or imposed on real
estate and the improvements thereof shall be changed and as a substitute
therefor, or in lieu of an addition thereto, taxes, assessments, levies,
impositions, or charges shall be levied, assessed, or imposed wholly or
partially as a capital levy or otherwise on the rents received from the
Project or the Rent reserved herein or any part thereof, then such
substitute or additional taxes, assessments, levies, impositions or
charges, to the extent so levied, assessed, or imposed, shall be deemed
to be included within the Operating Expenses to the extent that such
substitute or additional tax would be payable if the Project were the
only property of the Landlord subject to such tax; consultation,
accounting and legal fees and other fees and costs resulting from any
challenge of tax assessments as reasonably allocated by Landlord also
shall be included in Operating Expenses; and all taxes, assessments and
governmental charges shall be included in Operating Expenses in the
calendar year in which such taxes, assessments or governmental charges
are levied, assessed or imposed without regard to when such taxes,
assessments or governmental charges are payable;
(x) all landscape maintenance costs for the Project;
(xi) any lease payments made by Landlord for any equipment used
in the operation or maintenance of the Project, excluding, however, any
part of such lease payments that constitutes capital expenditures under
generally accepted accounting principles, except as provided in clause
(vii) of this Section 2.4.1;
(xii) Landlord's (or Landlord's managing agent's) accounting and
audit costs and attorneys' fees applicable to the Project;
(xiii) costs of licenses, permits and inspection fees related to
the Project; and
(xiv) a net management fee payable to the property manager for
the management of the Project of three percent (3%) of the gross
revenues of the Project for such calendar year; provided, however, in
lieu thereof, Landlord may charge Tenant separately, and not as a part
of Operating Expenses, for a management fee contribution of three
percent (3%) of the Base Rental and Tenant's Additional Rental
(exclusive of the management fee payable under this Section 2.4.1(xiv))
payable by Tenant for such calendar year; provided that revenue from
visitor parking shall not
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be included in gross revenue from the Project for purposes of
determining such management fee.
2.4.2 EXCLUSIONS. (a) Notwithstanding the foregoing, in addition
to any exclusions set forth in Section 2.4.1 above, Operating Expenses shall not
include any of the following:
(1) Costs of repairs, replacements or other work occasioned by
casualties covered by fire and extended coverage insurance required to
be maintained hereunder, or by the exercise by governmental authorities
of the right of eminent domain.
(2) Leasing commissions, attorney's fees, costs, disbursements
and other expenses incurred by Landlord or its agents in connection with
the solicitation of, advertising for, negotiating with or entering into
leases or other prospective tenancy arrangements for space in the
Building, or in connection with negotiations or disputes with and/or
enforcement of agreements with such prospective tenants, tenants or
other occupants of the Project, marketing or leasing consultants,
management agents, purchasers, ground lessors, prior owners or
mortgagees of the Project including leasing commissions and fees of
attorneys or of marketing or leasing consultants.
(3) "Tenant allowances", "tenant concessions", workletters, and
other costs or expenses (including permit, license and inspection fees)
incurred in completing, fixturing, furnishing, renovating or otherwise
improving, decorating or redecorating space for tenants or other
occupants of the Building, or vacant, leasable space in the Building,
including space planning/interior design fees for same.
(4) Depreciation or other "non-cash" expense items or
amortization, except for amortization charges as provided for in Section
2.4.1(vii) above.
(5) Costs of a capital nature, except as provided for in Section
2.4.1(vii) above, including, but not limited to, capital additions,
capital improvements, capital repairs, capital maintenance, capital
alterations, capital replacements, capital equipment and capital tools,
and/or capital redesign, all in accordance with generally accepted
accounting principles, consistently applied.
(6) Costs in connection with services (including electricity),
items or other benefits of a type which are not standard for the
Building and which are not available to Tenant without specific charge
therefor, but which are provided to another tenant or occupant of the
Building, whether or not such other tenant or occupant is specifically
charged therefor by Landlord.
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(7) Services, items and benefits for which Tenant or any other
tenant or occupant of the Building specifically reimburses Landlord or
for which Tenant or any other tenant or occupant of the Building pays
third persons.
(8) Costs or expenses (including fines, penalties and legal fees)
incurred due to the violation by Landlord, its employees, agents and/or
contractors, any tenant (other than Tenant) or other occupant of the
Building, of any terms and conditions (other than by Tenant) of this
Lease or of the leases of other tenants in the Building, and/or of any
valid, applicable laws, rules, regulations and codes of any federal,
state, county, municipal or other governmental authority having
jurisdiction over the Building that would not have been incurred but for
such violation by Landlord, its employees, agents and/or contractors,
tenants or other occupants of the Building, it being intended that each
party shall be responsible for the costs resulting from its own
violation of such leases and laws, rules, regulations and codes as same
shall pertain to the Building.
(9) Penalties for late payment, including, without limitation,
penalties for late payment of taxes, equipment leases, etc.
(10) Payments to any subsidiary or Affiliate of Landlord for
services (other than the management fee) on or to the Building and/or
the Land, or for goods, supplies or other materials, to the extent that
the costs of such services, goods, supplies and/or materials exceed the
costs that would have been paid had the services, goods, supplies or
materials been provided by parties unaffiliated with Landlord.
(11) Payments of principal, finance charges or interest on debt
or amortization on any mortgage, deed of trust or other debt, and rental
payments (or increases in same) under any ground or underlying lease or
leases (except to the extent the same may be made to pay or reimburse,
or may be measured by, real estate taxes or insurance otherwise included
in Operating Expenses).
(12) To the extent that a separate allocation has been made
therefor by the applicable taxing authority, real estate taxes allocable
to the leasehold improvements of Tenant or any other tenants in the
Building (in excess of Building standard); should a separate allocation
be made, taxes attributable to leasehold improvements of Tenant (in
excess of Building standard) shall be payable directly by Tenant in
accordance with Section 5.1.4 hereof.
(13) Wages, salaries, benefits and expenses attributable to
Landlord's or its property management company's executive personnel
above the level of building manager or central office administrative
personnel, provided that Operating Expenses
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may include an allocation for central accounting, risk management, and
payroll personnel in accordance with the provisions of Section 2.4.1(i).
(14) Compensation paid to clerks, attendants or other persons in
commercial concessions (such as a snack bar, restaurant or newsstand),
if any, operated by Landlord or any subsidiary or Affiliate of Landlord.
(15) Rentals and other related expenses, if any, incurred in
leasing air conditioning systems, elevators or other equipment
ordinarily considered to be of a capital nature, except equipment which
is used in providing janitorial services and which is not affixed to the
Building and security equipment.
(16) Advertising and promotional expenses.
(17) Costs or expenses incurred with respect to the purchase,
ownership, leasing, showing, promotion and/or repairs of sculptures,
paintings or other works of art; maintenance (as opposed to repairs) of
any such sculptures, paintings or other works of art shall be included
in Operating Expenses.
(18) Costs for which Landlord is compensated through or
reimbursed by insurance or other means of recovery.
(19) Costs of correcting or repairing defects, including latent
defects, in the construction of the Building (and/or any associated
parking facilities, and/or equipment or the replacement of defective
equipment, to the extent such costs are covered by warranties of
manufacturers, suppliers or contractors, or are otherwise borne by
parties other than Landlord).
(20) Contributions to operating expense reserves.
(21) Contributions to charitable organizations.
(22) Costs incurred in removing the property of former tenants
and/or other occupants of the Building.
(23) Rental and any other expenses, including wages, salaries and
benefits, and adjustments thereto, for Landlord's on-site leasing office
or on-site management office (except to the extent permitted under
Section 2.4.1(ii) above).
(24) Consulting costs and expenses incurred by Landlord except to
the extent same relate exclusively to the improved management or
operation of the Building.
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(25) The costs of any "tap fees" or one-time lump sum sewer or
water connection fees for the Building.
(26) Costs or fees relating to the defense of Landlord's title to
or interest in the Building and/or the Land, or any part thereof.
(27) Premiums for rental loss insurance except to the extent
permitted under Section 2.4.1(viii).
(28) Unless Tenant's prior written approval has first been
obtained, costs incurred in installing, operating, maintaining and/or
owning any specialty facilities or specialty services not customarily
installed, operated and/or maintained in first-class office buildings in
the Greenway Plaza and Galleria areas in Houston, such as an
observatory, beacon(s), broadcasting facilities (other than the
Building's music system, life support and security systems), luncheon
club, athletic or recreational club, helicopter pad, child care center,
or similar facilities or services.
(b) The term "AFFILIATE" shall mean and refer to any person or entity
controlling, controlled by, or under common control with another such person or
entity. "CONTROL", as used herein, shall mean the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of such controlled person or entity; the ownership, directly or
indirectly, of at least fifty-one percent (51%) of the voting securities of, or
possession of the right to vote, in the ordinary direction of its affairs, at
least fifty-one percent (51%) of the voting interest in, any person or entity
shall be presumed to constitute such control. In the case of Landlord, the term
Affiliate shall include any person or entity controlling or controlled by or
under common control with any general partner of Landlord or any general partner
of Landlord's general partner.
2.4.3 ADJUSTMENTS. Notwithstanding any other provision herein to
the contrary, if less than ninety-five percent (95%) of the Net Rentable Area
leased or held for lease in the Building is not occupied and fully provided with
Building standard services during any partial year or any full calendar year, an
adjustment shall be made in computing each component of Operating Expenses for
such year so that Operating Expenses shall be computed for such year as though
ninety-five percent (95%) of the Net Rentable Area leased or held for lease in
the Building had been occupied and fully provided with Building standard
services during such partial or full year. The provisions of this Section 2.4.3
shall also be applicable to the calculation of the Operating Expenses Amount for
the calendar year 1998 in determining the Base Operating Expenses Amount.
2.4.4 APPLICATION OF REVENUE. Landlord shall apply to the payment
of Operating Expenses the net revenue received by Landlord from the provision of
after hours heating, ventilation and air-conditioning, and from metered above
building standard electrical service.
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2.4.5 AUDIT. Landlord shall maintain or cause to be maintained
complete and accurate records of all Operating Expenses. Tenant, at its sole
expense, except as provided below, shall have the right once per calendar year
during the Term to audit Landlord's books and records relating to the Operating
Expenses for the immediately preceding two (2) calendar years for the sole
purpose of determining whether Operating Expense calculations were accurate and
whether generally accepted accounting principles have been followed and
consistently applied. This audit must take place on mutually agreeable dates
during reasonable business hours at Landlord's office at the address stated
above, or, at Tenant's request, Landlord's management office located in the
Building, and only after Tenant has given Landlord at least thirty (30) days'
prior written notice of the dates and times Tenant desires to conduct such
audit. Any such audit must be conducted by a big six (6) accounting firm or
other nationally or locally recognized public accounting firm having expertise
in accounting for office buildings that charges fees on an hourly or other fixed
cost basis, but not on a contingency fee basis. No person or entity in the
business of auditing building operating expenses in exchange for a percentage of
the savings shall be permitted to conduct such audit. If Tenant elects to
exercise this right, Tenant must undertake and complete such audit within two
(2) years following the year end to which such Operating Expense statement to be
audited relates or Tenant shall be deemed to have accepted the Operating
Expenses as presented by Landlord in such statement. If Tenant's audit
determines that Tenant's Additional Rental for any year or years is less than
previously determined, Landlord shall, unless Landlord contests such audit, pay
the difference to Tenant within thirty (30) days after such determination is
made. In addition, if an audit that Landlord does not contest reflects that
Operating Expenses for any year shall have been overstated by three percent (3%)
or more, Landlord shall reimburse Tenant for its reasonable out-of-pocket
expenses in conducting the audit, but in no event shall any fee payable to any
auditor utilized by Tenant be calculated upon a contingency based upon the
extent of any such overstatement. As a condition to such audit by Tenant, Tenant
and any auditor selected by Tenant shall sign a reasonable confidentiality
agreement as required by Landlord concerning non-disclosure of any and all
information related to such audit. The foregoing audit rights shall survive
termination of this Lease.
2.5 TAX PROTESTS. Tenant hereby waives any and all rights under
applicable law to an administrative or judicial review of any determination of
the appraised value of the Project, including without limitation, any rights
available under the Texas Tax Code (as amended). At Tenant's request, provided
Tenant can demonstrate to Landlord's reasonable satisfaction that the assessed
valuation of the Project is higher than it should be and that Landlord has a
reasonable possibility of success in obtaining a reduction in such assessed
valuation, Landlord will institute and pursue a protest of the assessed value of
the Project ("TAX PROTEST"). Any information Landlord makes available to Tenant
in connection with any Tax Protest shall not be disclosed by Tenant to any third
party without Landlord's consent and Tenant shall cooperate with Landlord to
keep any such information from becoming discoverable by any applicable
authorities in any Tax Protest except that Tenant may disclose such information
to the extent legally required to do so. If Landlord is successful in connection
with any such Tax Protest, Tenant shall receive its share of any such reduction
after Landlord has been paid all costs and expenses incurred by Landlord. If
Landlord is
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unsuccessful in connection with a Tax Protest initiated at Tenant's request, the
expenses incurred by Landlord in connection with any such Tax Protest shall be
Operating Expenses.
2.6 TERMINATION OF OLD LEASE AND ATM AGREEMENT. The lease between
Landlord's predecessor in interest in the Project, Homart Development Co., and
Tenant's predecessor in interest, United Savings Association of Texas FSB, dated
April 1, 1989, as amended (the "OLD LEASE"), and the License Agreement, dated
February 24, 1992 concerning the use of an automatic teller machine ("ATM
AGREEMENT") will automatically terminate effective as of the Commencement Date,
except for those obligations of Tenant that expressly survive any termination
thereof. All work required to be performed and all amounts required to be paid,
including all tenant improvement or refurbishment allowances, by Landlord under
the Old Lease and ATM Agreement have been performed and paid in full.
Notwithstanding anything in the Old Lease or in this Lease to the contrary,
Section 18 of the Old Lease shall not survive the termination of the Old Lease.
The Old Lease and the ATM Agreement shall, however, remain in effect and shall
govern the relationship of Landlord and Tenant as to the Leased Premises subject
to the Old Lease and the ATM Agreement until the Commencement Date.
III.
3.1 SERVICES.
3.1.1 DESCRIPTION. Landlord shall operate and maintain the
Project in accordance with the standards customarily followed in the operation
and maintenance of first-class office buildings in the Greenway Plaza and
Galleria areas in Houston, and Landlord shall furnish to Tenant and its
permitted sublessees and assigns, while Tenant and its permitted sublessees and
assigns are occupying the Leased Premises, the following services, which
services shall be in keeping with the services customarily provided in
first-class office buildings in the Greenway Plaza and Galleria areas in
Houston:
(i) hot and cold domestic water at those points of supply
provided for general use of tenants in the Building;
(ii) central heat and air conditioning in season, subject to
curtailment as required by governmental laws, rules, or regulations, in
such amounts as are necessary for reasonable comfort under load
conditions which do not exceed occupancy of one person per 200 square
feet of Net Rentable Area, all as more particularly described on EXHIBIT
C;
(iii) electric lighting service for all public areas and special
service areas of the Project;
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(iv) janitorial service on a five (5) day-week basis (exclusive
of Holidays, as defined in EXHIBIT C), and generally in accordance with
the janitorial specifications set forth in EXHIBIT F attached hereto and
made a part hereof for all purposes; provided, however, if Tenant's
floor coverings or other improvements are other than Building standard
(as hereinafter defined), Tenant shall pay the additional cleaning cost,
if incurred, attributable thereto, plus a charge equal to seven percent
(7%) of such additional costs for administrative cost recovery;
(v) security equipment, personnel, procedures and systems
(commensurate with that provided for first-class office buildings in the
Greenway Plaza and Galleria areas in Houston); PROVIDED, HOWEVER,
LANDLORD SHALL HAVE NO RESPONSIBILITY TO PREVENT, AND SHALL NOT BE
LIABLE TO TENANT FOR AND SHALL BE INDEMNIFIED BY TENANT AGAINST,
LIABILITY OR LOSS TO TENANT, ITS AGENTS, CONTRACTORS, CUSTOMERS,
EMPLOYEES, INVITEES, LICENSEES, SERVANTS AND VISITORS ARISING OUT OF
LOSSES DUE TO THEFT OR BURGLARY IN THE LEASED PREMISES, OR DAMAGE OR
INJURY TO PERSONS OR PROPERTY OCCURRING WITHIN THE LEASED PREMISES
CAUSED BY PERSONS GAINING ACCESS TO THE LEASED PREMISES, AND TENANT
HEREBY RELEASES LANDLORD FROM ALL LIABILITY RELATING THERETO, REGARDLESS
OF WHETHER SUCH LOSS, DAMAGE OR INJURY IS THE RESULT IN WHOLE OR IN PART
OF THE NEGLIGENCE OF LANDLORD, OR LANDLORD'S AGENTS, CONTRACTORS OR
EMPLOYEES; LIKEWISE, TENANT SHALL HAVE NO RESPONSIBILITY TO PREVENT, AND
SHALL NOT BE LIABLE TO LANDLORD FOR, AND SHALL BE INDEMNIFIED BY
LANDLORD AGAINST, LIABILITY OR LOSS TO LANDLORD, ITS AGENTS,
CONTRACTORS, CUSTOMERS, EMPLOYEES, INVITEES, LICENSEES, SERVANTS, AND
VISITORS ARISING OUT OF LOSSES DUE TO THEFT OR BURGLARY IN THE COMMON
AREAS OF THE BUILDING, OR DAMAGE OR INJURY TO PERSONS OR PROPERTY
OCCURRING WITHIN THE COMMON AREAS OF THE BUILDING CAUSED BY PERSONS
GAINING ACCESS TO THE COMMON AREAS OF THE BUILDING, AND LANDLORD HEREBY
RELEASES TENANT FROM ALL LIABILITY RELATING THERETO, REGARDLESS OF
WHETHER SUCH LOSS, DAMAGE OR INJURY IS THE RESULT IN WHOLE OR IN PART OF
THE NEGLIGENCE OF TENANT, OR TENANT'S AGENTS, CONTRACTORS OR EMPLOYEES;
(vi) sufficient electrical capacity transformed to a panel box
located in the core of each floor of the Leased Premises for (A)
machines of low electrical consumption at standard voltage (120 volts,
single-phase) to the extent that the total demand load at 100% capacity
of said machines of low electrical consumption does
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not exceed two (2) watts per square foot of Usable Area, and (B)
lighting and equipment at high voltage (277 volts, single-phase) to the
extent that the total demand load at 100% capacity of said lighting and
equipment does not exceed two (2) watts per square foot of Usable Area
(each such rated electrical design load to be hereinafter referred to as
the "BUILDING STANDARD RATED ELECTRICAL DESIGN LOAD").
Should Tenant's non-linear electrical load (created by
equipment such as personal computers, television sets, laser printers,
copiers or other electronic devices connected to the power system)
result in harmonic distortion conditions which cause any adverse effects
in the Project, including but not limited to, deration of any
transformer, distribution stepdown transformer failures, overheating or
melting of neutral conductors, or malfunctioning of various electronic
components, Tenant acknowledges that Tenant, at Tenant's sole cost,
shall be obligated to eliminate such harmonic distortion conditions and
to repair any damage which results from such harmonic distortion within
thirty (30) days of Landlord's request. If Tenant fails to eliminate
such harmonic distortion and repair such damage caused thereby within
such thirty (30) day period, Landlord, at its option, may make such
corrections deemed necessary by Landlord to eliminate such harmonic
distortion and make such repairs, and Tenant shall pay to Landlord on
demand Landlord's cost thereof plus a charge equal to seven percent (7%)
of such costs for administrative cost recovery.
Tenant shall cause Tenant's electrical system serving any
equipment producing non-linear electrical loads to be designed to
accommodate such non-linear electrical loads, including but not limited
to, over-sizing neutral conductors, derating transformers and/or
providing power line filters.
If Tenant's electrical equipment and lighting require
electrical circuits, transformers or other additional equipment in
excess of what is currently in the Leased Premises (which additional
equipment shall be hereinafter referred to as the "ADDITIONAL ELECTRICAL
EQUIPMENT"), Tenant may (at Tenant's cost, including the cost to design,
install, maintain and replace the Additional Electrical Equipment
[including the meters]) install the same, provided such installation is
compatible with existing Building systems, will not compromise
Landlord's ability to provide services to Tenant or other tenants of the
Building and will not be burdensome to the Project or to Landlord, in
Landlord's reasonable opinion, and Tenant shall pay all operating costs
related to that requirement (including, without limitation, the cost of
electricity, water or other services consumed through, or in connection
with, the Additional Electrical Equipment).
The method of design and installation of any Additional
Electrical Equipment (including any related meter) required by Tenant
shall be subject to the prior written approval of Landlord and shall be
performed by Landlord at Tenant's sole cost (including a charge equal to
seven percent (7%) of such cost for the review and installation of such
Additional Electrical Equipment for administrative cost recovery).
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Tenant shall pay to Landlord the cost of electricity
consumed in excess of the Building Standard Rated Electrical Design Load
as determined by meter, or if not metered, as otherwise reasonably
estimated by Landlord, plus any actual accounting expenses incurred by
Landlord in connection with the metering thereof. Landlord may cause the
entire Leased Premises to be separately metered (at Tenant's expense,
including, without limitation, the cost of installing, maintaining,
repairing and replacing such meters to the extent necessary), in which
event Tenant shall pay the actual cost of electricity consumed by
Tenant, in which case such amounts will not be included in Operating
Expenses.
(vii) all Building standard fluorescent bulb and ballast
replacement in all areas and all incandescent bulb replacement in public
areas, toilet and restroom areas and stairwells. At Tenant's expense,
Landlord shall provide non-Building standard bulb replacement in the
Leased Premises;
(viii) nonexclusive passenger elevator service to the Leased
Premises twenty-four (24) hours per day, nonexclusive freight elevator
service during normal business hours, and subject to advance scheduling,
nonexclusive freight elevator service after normal business hours; and
(ix) extermination services as shall be reasonably appropriate.
Except as otherwise provided above or in EXHIBITS C OR F, and subject in any
event to the limitation of remedies set forth in Section 3.1.3 below for the
failure to provide such services, Building services required above shall be
provided twenty-four (24) hours a day, seven (7) days a week. The cost of
Building services shall, to the extent permitted in Section 2.4, be included in
Operating Expenses.
3.1.2 REASONABLE EFFORTS TO PROVIDE UTILITIES. To the extent the
services described in Section 3.1.1 require electricity, gas, and water supplied
by public utilities, Landlord's covenants thereunder shall only impose on
Landlord the obligation to use reasonable and good faith efforts to cause the
applicable public utilities to furnish the same. Landlord does not warrant that
such utilities will be free from any irregularity or stoppage of service by such
public utilities or other causes beyond Landlord's control.
3.1.3 INTERRUPTION OF SERVICES. If any of the services described
in Section 3.1.1 or any of the machinery or equipment in the Project should
cease to function properly or in accordance with the requirements therefor
described in Section 3.1.1, break down or be intentionally turned off for
testing or maintenance purposes (provided such services shall not be
intentionally turned off for testing or maintenance purposes except in the case
of any situation Landlord reasonably determines to be an emergency without
reasonable prior notice to Tenant, and, in the case of electricity, such
electricity shall not be intentionally turned off without seventy-two (72) hours
prior notice), Tenant shall have no claim for abatement or reduction of Rent or
damages, nor shall Tenant be relieved of
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its obligations under this Lease, nor shall such condition be construed as an
eviction of Tenant; provided, however, if:
(i) there occurs an interruption in the HVAC, electricity, water
or elevator services (the "ESSENTIAL SERVICES") to the Building or
Leased Premises;
(ii) such interruption renders more than an Insignificant Portion
(hereinafter defined) of the Leased Premises Untenantable (hereinafter
defined); and
(iii) such interruption continues to render more than an
Insignificant Portion of the Leased Premises Untenantable for three (3)
consecutive days,
then, the Rent (including charges for a pro rata portion of the parking permits
applicable to Tenant) shall abate as to that portion of the Leased Premises that
is rendered Untenantable, and in the event that more than fifty percent (50%) of
the Leased Premises is rendered Untenantable, such abatement shall apply as to
the entirety of the Leased Premises (as well as to the entirety of the parking
permits). The abatement shall commence upon the expiration of the third (3rd)
day and continue for so long as the interruption exists; provided, however, if
the interruption continues to render more than an Insignificant Portion of the
Leased Premises Untenantable for ninety (90) consecutive days, Tenant shall have
the right thereafter to terminate this Lease during the period such interruption
shall continue to exist, in which event Tenant will be relieved of all
obligations arising after such date hereunder. In addition to and
notwithstanding the foregoing, in the event there occurs an interruption in
Essential Services that renders more than an Insignificant Portion of the Leased
Premises Untenantable on any seven (7) days (in the aggregate, whether
consecutively or otherwise) during a calendar year, then the Rent shall abate
(as provided above) on each day thereafter during such calendar year that more
than an Insignificant Portion of the Leased Premises is rendered Untenantable.
For purposes of this Section 3.1.3, "INSIGNIFICANT PORTION" shall mean ten
thousand (10,000) square feet of Net Rentable Area, except for purposes of
abatement of Rent only (not termination of this Lease), "INSIGNIFICANT PORTION"
for interruption in electrical services shall mean one thousand (1,000) square
feet of Net Rentable Area.
In consideration of the terms of this Section 3.1.3, Tenant
waives all rights Tenant may have at law or in equity, including any rights
Tenant may have arising from implied warranties of suitability, to abate Rent or
terminate this Lease under circumstances other than as provided by this Section
3.1.3; and Landlord agrees to use diligent efforts to restore the services
described in Section 3.1.1 and to promptly repair said equipment or machinery.
3.2 KEYS AND LOCKS. Pursuant to the terms of the Old Lease, Landlord has
previously furnished Tenant with keys for the Building standard corridor doors
serving the Leased Premises as well as keys or security cards to permit Tenant
and its employees access to the Project. After the date hereof, additional keys
and/or security cards will be furnished by Landlord upon an order signed by
Tenant and at Tenant's expense. In the event that Landlord changes the keys or
security devices
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with regard to access to the Project (as opposed to the Leased Premises),
Landlord will furnish without cost to Tenant one access device (e.g., key,
security card) for each of Tenant's employees. Thereafter, additional keys
and/or security cards will be furnished by Landlord upon an order signed by
Tenant and at Tenant's expense. All keys and security cards furnished to Tenant
by Landlord shall remain the property of Landlord. Subject to Section 3.3 and
the following sentence, no additional locks shall be allowed on any door of the
Leased Premises and Tenant shall not make or permit to be made any duplicate
keys except those furnished by Landlord. Notwithstanding the foregoing, Tenant,
at Tenant's sole cost and expense, shall have the right to change or replace any
locks within the Leased Premises or place additional locks within the Leased
Premises provided such locks conform to the Building key system and Landlord is
provided keys therefor. Upon termination of this Lease, Tenant shall surrender
to Landlord all keys to any locks on doors entering or within the Leased
Premises and shall give to Landlord the combination for all safes, safe cabinets
and vault doors, if any, in the Leased Premises.
3.3 TENANT'S ACCESS CONTROL EQUIPMENT. Tenant shall have the right to
install, at Tenant's sole risk and expense, and provided the same are compatible
with the access control equipment and systems for the Building, (i) access
control equipment to limit and monitor normal business and after hours elevator
bank and Leased Premises access to any floor in the Building that Tenant fully
occupies, and (ii) access control equipment to limit and monitor normal business
and after hours stairwell access to any floor in the Building on which Tenant
occupies space. Such equipment shall be subject to the approval of Landlord,
which shall not be unreasonably withheld, delayed or conditioned.
3.4 SIGNAGE/GRAPHICS; IDENTITY.
3.4.1 LEASED PREMISES' GRAPHICS AND DIRECTORY BOARD. Tenant shall
have the right, at Tenant's sole cost and expense, to install appropriate
signage, letters or numerals on the walls of the elevator bank lobbies (only
applicable to Building floors wholly leased by Tenant and no other tenants) and
on the entrance doors to the Leased Premises, subject to Landlord's approval,
which approval shall not be unreasonably withheld or delayed, provided
Landlord's approval as to signage on the ninth (9th) and tenth (10th) floors of
the Building may be given or withheld in its sole discretion. In any event, all
signage must be consistent with the Building's design, signage and graphics
program. Tenant shall have the right to its proportionate share of any directory
board or other Building directory mechanism maintained by Landlord. In no event
may Tenant install any graphics which may be visible from the exterior of the
Building or which are illuminated except as provided in Sections 3.4.2 and
3.4.3.
3.4.2 BUILDING GRAPHICS. For so long as (a) Tenant, a Permitted
Assignee or their Permitted Affiliates together lease and occupy more than (i)
200,000 square feet of Net Rentable Area in the Leased Premises pursuant to this
Lease for as long as the existing lease with Midcon Corp. for space in the
Building is in effect or (ii) 150,000 square feet of Net Rentable Area in the
Leased Premises pursuant to this Lease after the termination of the lease with
Midcon Corp., and
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(b) there is no uncured Event of Default under this Lease, Tenant, a Permitted
Assignee or a Permitted Affiliate shall have the non-exclusive right, at
Tenant's, such Permitted Assignee's, or such Permitted Affiliate's sole cost and
expense, to install and maintain such entity's name, logo, or symbol on up to
two (2) signs on the top portion of the exterior of the Building; provided if
Tenant, a Permitted Assignee, or a Permitted Affiliate cannot place, or is
prohibited from placing, its signs on the top of the Building, Tenant, a
Permitted Assignee, or a Permitted Affiliate may place its signs on top of the
Parking Garage in a location approved by Landlord in its sole discretion
provided such signage complies with, and is permitted by, all local laws and
restrictions, including any applicable scenic district; and provided further,
that, after the termination of the lease with Midcon Corp., if Tenant, a
Permitted Assignee, or their Permitted Affiliates, together are leasing and
occupying more than 150,000 but less than 200,000 square feet of Net Rentable
Area, Landlord shall have the right, in its sole discretion, at any time and
from time to time, to terminate Tenant's right to maintain the signage on the
top of the Building and/or Parking Garage in order to grant such top of the
Building or Parking Garage signage rights to any other tenant or prospective
tenant of the Building that is leasing, or has agreed to lease, more space in
the Building than Tenant, a Permitted Assignee, or a Permitted Affiliate
together are then leasing. Landlord makes no warranties as to whether any such
signage is permitted or will be permitted by applicable law, restrictions, or
the rights of associations or districts. In addition, for as long as Tenant, a
Permitted Assignee, or their Permitted Affiliates together lease and occupy not
less than 150,000 square feet of Net Rentable Area in the Leased Premises under
this Lease and there is no uncured Event of Default under this Lease, Tenant, a
Permitted Assignee or a Permitted Affiliate shall have the right to maintain the
existing monument ("Monument") signage located at the Southeast corner of the
Land. The location, design, method of attachment, size, materials, coloring,
lettering and lighting of all such top of the Building or the Parking Garage and
Monument signage shall be subject to Landlord's approval, in its sole
discretion, and further subject to all other approvals as may be required
including without limitation the City of Houston, City of Houston Scenic
District, and Greenway Improvement Association, and in any event to be
consistent with the Building's design, signage and graphics program. If at any
time it is necessary to remove the signage due to the requirements of applicable
laws or restrictive covenants, Landlord shall be entitled to replace the signage
with another sign on or about the Building which provides substantially the same
exposure. Landlord shall at all times be entitled to make such changes in the
signage as may be required by applicable laws as a condition of the continued
use of the top of the Building or Parking Garage and/or the Monument. Landlord
currently approves the size, location, and materials used for the names
currently appearing on the Monument. Any change in the names displayed on the
top of the Building or Parking Garage or the Monument (i) shall be made by
Landlord at Tenant's, such Permitted Assignee's, or such Permitted Affiliate's
sole cost and expense, (ii) shall utilize the materials, colors, method of
illumination and lettering type currently utilized, and (iii) must be approved
by Landlord in its sole discretion. In the event Tenant's, a Permitted
Assignee's, or a Permitted Affiliate's name is changed, Landlord will not
unreasonably withhold approval of a change to the name displayed on the top of
the Building or Parking Garage or the Monument. Only the name, logo, and/or
symbol of one entity, whether such name, logo, and/or symbol is Tenant's, a
Permitted Assignee's or a Permitted Affiliate's, shall appear on all exterior
signage on the Monument, the Building, or the Parking Garage at any one time.
Neither
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Tenant, a Permitted Assignee, nor any Permitted Affiliate shall have any right
to request or install signage identifying more than one entity. Upon the
expiration or earlier termination of this Lease (as concerns all signage), or in
the event the conditions of this Section no longer are satisfied, Tenant, a
Permitted Assignee, or a Permitted Affiliate, at its expense, shall remove all
such signage for which such conditions are no longer satisfied and make all
necessary repairs to the Building and/or Monument so as to return the Building
and Monument to their respective original condition. Tenant, its Permitted
Assignees and Permitted Affiliates shall have no right to install any signage on
the concrete apron of the Building or in any other location except as expressly
set forth in this Lease. Tenant's rights under this Section may only be assigned
to a Permitted Assignee or a Permitted Affiliate only for as long as the
conditions of this Section continue to be satisfied. No other assignment or
sublease of such rights shall be permitted hereunder.
3.4.3 RETAIL SIGNAGE. As long as Tenant, a Permitted Assignee,
and their Permitted Affiliates continue to satisfy the conditions set forth in
Section 1.10, Tenant, a Permitted Assignee, or Permitted Affiliate satisfying
the requirements of this Section shall have the right to have exclusive signage
for a retail banking facility, which signage shall be located on the ninth (9th)
floor and which signage shall be approved by Landlord in its sole discretion.
Only the name, logo, and/or symbol of one entity, whether such name, logo,
and/or symbol is Tenant's, a Permitted Assignee's or a Permitted Affiliate's,
shall appear on all retail signage at any one time. Neither Tenant, a Permitted
Assignee or any Permitted Affiliate shall have any right to request or install
signage identifying more than one entity. If any of the conditions set forth in
Section 1.10 is not satisfied or does not continue to be satisfied, then
Landlord shall have the right to grant to another tenant the right to have
exclusive signage on the ninth (9th) floor of the Building for retail banking
purposes. Tenant's rights under this Section may be assigned only to a Permitted
Assignee or Permitted Affiliate that is a savings and loan association, federal
or state chartered lending institution, national or state banking institution or
federal savings bank, or other business permitted under applicable law to offer
retail banking services. No other assignment or sublease of such rights shall be
permitted hereunder.
3.4.4 LIMITATIONS ON SIGNAGE AND BUILDING NAMES. As long as (a)
Tenant, a Permitted Assignee satisfying the requirements of this Section, or
their Permitted Affiliates together are leasing and occupying more than 200,000
square feet of Net Rentable Area in the Building and (b) there is no uncured
Event of Default under this Lease, Landlord shall not (a) grant to any other
savings and loan association, federal or state chartered lending institution,
national or state banking institution or federal savings bank any right to place
exterior signage on the top of the Building or Parking Garage or on any monument
sign or elsewhere on the exterior of the Project, or (b) change the name of the
Building to a name that includes the name of a savings and loan association,
federal or state chartered lending institution, national or state banking
institution or federal savings bank. In no event shall Tenant, any Permitted
Assignee, or any Permitted Affiliate have any right to require that the Building
be named for any Building tenant including a Building tenant whose business is
primarily that of natural gas transmission. Landlord shall have no obligation to
name or rename the Building and Landlord shall have the right to change the name
of the Building from time to time as
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it desires except as limited in this Section 3.4.4. The foregoing restriction
shall terminate if any of the foregoing conditions are not satisfied or do not
continue to be satisfied. The foregoing restriction will run only to the benefit
of a Permitted Assignee that is a savings and loan association, federal or state
chartered lending institution, national or state banking institution or federal
savings bank, or other business permitted under applicable law to offer retail
banking services.
3.4.5 GENERAL SIGNAGE REQUIREMENTS. Upon termination or
expiration of this Lease, an Event of Default under this Lease, or the
occurrence of any event that results in the termination of the signage rights
hereunder, Tenant, its Permitted Assignee and their Permitted Affiliates shall
lose its signage rights and Tenant, its Permitted Assignees and their Permitted
Affiliates shall, at its sole cost and expense, remove all such signage and
restore the Building, Parking Garage, and Monument to its original condition. If
Tenant, its Permitted Assignee and their Permitted Affiliates fail to do so
within thirty (30) days after Landlord's request, Landlord then shall have the
right to remove all such signage and restore the Building, Parking Garage, and
the Monument, in which case Tenant, its Permitted Assignee and their Permitted
Affiliates shall reimburse Landlord for all costs incurred plus an amount equal
to seven percent (7%) of such costs for Landlord's overhead. If any signage
requires utilities, such as electrical lighting, Landlord must first approve the
design, installation and use of such utilities in Landlord's sole discretion and
Tenant, its Permitted Assignee and their Permitted Affiliates shall pay, at its
sole cost and expense, all costs and expenses associated with the design,
installation and use of any such utilities.
3.5 PARKING.
3.5.1 UNASSIGNED PERMITS. Landlord agrees to make available to
Tenant throughout the Term, and Tenant agrees to take and lease, two and
eight-tenths (2.8) permits to park passenger vehicles (excluding buses) for
every one thousand (1,000) square feet of Net Rentable Area within the Leased
Premises (rounded down to the nearest whole number) on an unassigned basis in
the Parking Garage ("UNASSIGNED PERMITS"). Each Unassigned Permit shall be made
available at no cost to Tenant until the fifth (5th) anniversary of the
Commencement Date; thereafter through the remainder of the initial Term, each
such Permit shall be available for a cost to Tenant of Thirty-Five and No/100
Dollars ($35.00) plus any applicable sales tax per Permit per month; and during
any Renewal Term, each such Unassigned Permit shall be available for a cost to
Tenant equal to the then market monthly rate for unreserved contract parking in
the Parking Garage plus any applicable sales tax. At Tenant's option, and at
Tenant's cost, up to five (5) of the Unassigned Permits may be allocated to five
(5) spaces located in the Parking Garage (as determined by Landlord) and
designated as "Bank United Visitor Parking", in which event, Tenant shall
continue to pay the applicable monthly rate plus sales tax, and Landlord shall
provide Tenant with One Hundred Twenty-Five and No/100 Dollars ($125.00) per
month in parking validation coupons for use by Tenant's visitors utilizing such
spaces for the initial Term of this Lease. Additional Unassigned Permits in the
Parking Garage may be available to Tenant on an as available basis ("ADDITIONAL
UNASSIGNED PERMITS") at a cost to Tenant of Twenty-Five and No/100 Dollars
($25.00) plus any applicable sales tax per Permit per month from the
Commencement Date until the fifth (5th)
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anniversary of the Commencement Date, thereafter through the remainder of the
initial Term at a cost to Tenant of Thirty-Five and No/100 Dollars ($35.00) plus
any applicable sales tax per Permit per month; and during any Renewal Term at a
cost to Tenant equal to the then market monthly rate for unreserved contract
parking in the Parking Garage plus any applicable sales tax. Additional
Unassigned Permits shall be made available on a month-to-month basis and may be
terminated by Landlord at any time for any reason. No specific spaces are to be
assigned to Tenant for the Unassigned Permits, but Landlord may designate the
area in which vehicles with Unassigned Permits may be parked, which designations
may change from time to time. Any Unassigned Permits may be utilized by Tenant
for double shift parking (i.e., use by a second employee after 5:30 p.m. and
until 6:30 a.m. the next morning) at no cost to Tenant except for the cost of
the additional access card as provided below; and except that Tenant shall bear
all increased costs to Landlord resulting from such double shift parking
including without limitation increased security or other personnel,
modifications to maintenance, repair or janitorial services, and other costs of
operating the Parking Garage and the Building.
3.5.2 ASSIGNED PERMITS. Landlord agrees to make available to
Tenant, and Tenant agrees to take and lease, throughout the Term, and in
addition to the Unassigned Permits provided pursuant to Section 3.5.1, permits
to park one passenger vehicle (excluding buses) for every five thousand (5,000)
square feet of Net Rentable Area within the Leased Premises in reserved spaces
designated by Landlord from time to time in the Parking Garage ("ASSIGNED
PERMITS"). Each such Assigned Permit shall be made available at no cost to
Tenant until the first (1st) anniversary of the Commencement Date; thereafter
through the remainder of the initial Term, each such Assigned Permit shall for a
cost to Tenant of Fifty and No/100 Dollars ($50.00) plus any applicable sales
tax per Permit per month; and during any Renewal Term, each such Assigned Permit
shall be available for a cost to Tenant equal to the then market monthly rate
for reserved contract parking in the Parking Garage plus any applicable sales
tax. Landlord will designate a specific space in the Parking Garage for each
Assigned Permit, issued by Landlord to Tenant, which designated space may be
changed by Landlord from time to time. Landlord shall have the right, from time
to time, to relocate the areas in the Parking Garage in which the holders of
Assigned Permits park, provided that all of the areas in which holders of
Assigned Permits park shall be located within two (2) floors of the Parking
Garage, and provided that in all events ten (10) spaces will be assigned to
Tenant for the holders of Assigned Permits to park on the level of the Parking
Garage where the holders of Assigned Permits currently park. In addition,
Landlord shall have the right to relocate the specific spaces assigned to Tenant
for its Assigned Permits if necessary to create space for the generator to which
Tenant is entitled under EXHIBIT G to this Lease. Notwithstanding the foregoing,
Landlord will not relocate the specific spaces assigned to Tenant for its
Assigned Permits solely to accommodate another tenant of the Building by giving
such specific spaces to such other tenant to use for parking.
3.5.3 SURFACE VISITOR PARKING. Landlord agrees to make available
to Tenant, so long as such spaces are available to Landlord, and at a cost to
Tenant equal to Landlord's cost for such spaces (which shall be equal to
Landlord's cost of all surface parking spaces multiplied by a
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fraction, the numerator of which is the number of Surface Spaces (defined
below), and the denominator of which is the total number of surface parking
spaces), up to ten (10) passenger vehicle spaces (excluding buses) ("SURFACE
SPACES") located on the surface parking area on the west side of the Building,
to be used by Tenant as visitor parking. The Surface Spaces shall be designated
as visitor parking for Tenant by the installation of signage paid for by Tenant
and approved by Landlord in its sole discretion. Landlord's rights to such
spaces are derived from a month-to-month lease terminable at any time by the
lessor thereunder. Any termination of such month-to-month lease shall
automatically terminate Tenant's rights to use such Surface Spaces hereunder
without any cost or liability to Landlord. Tenant may, after completion of its
initial construction pursuant to EXHIBIT E, terminate its right to use the
Surface Space at any time effective on the first day of a calendar month after
at least thirty (30) days prior written notice.
3.5.4 BASIC TERMS. All such parking permits shall be made
available to Tenant on the following terms and conditions:
(a) Tenant shall pay to Landlord or the operator of the Parking
Garage, as may be designated from time to time by Landlord, monthly in
advance, the above stated monthly rate (or in the case of the surface
parking, Landlord's cost) for Unassigned Permits, Assigned Permits
and/or Surface Spaces, a pro rata portion of which shall be payable for
any partial month during the Term.
(b) Tenant shall pay to Landlord Landlord's then applicable
charge for the issuance of any parking card or sticker, including any
replacements therefor, for each Parking Garage access card provided by
Landlord to Tenant.
(c) Tenant's obligation to pay parking rental hereunder shall be
considered an obligation to pay Rent for all purposes hereunder and
shall be secured in like manner as in Tenant's obligation to pay Rent.
(d) The market monthly rent for Unassigned Permits or Assigned
Permits in the Parking Garage shall be the rate charged for comparable
parking in the Greenway Plaza and Galleria areas taking into account all
relevant factors.
3.5.5 PARKING SPACES WITH ADDITIONS OR REDUCTIONS TO LEASED
PREMISES. Should additional space be added to the Leased Premises (whether
through the exercise of Tenant's Preferential Rights or otherwise), Landlord
agrees to make available to Tenant throughout the remainder of the Term, and
Tenant agrees to take and lease, two and eight-tenths (2.8) Additional
Unassigned Permits to park passenger vehicles (excluding buses) for every one
thousand (1,000) square feet of Net Rentable Area within the additional space
added to the Leased Premises (rounded down to the nearest whole number) on an
unassigned basis in the Parking Garage at a cost to Tenant equal to the then
market monthly rate for unreserved contract parking in the Parking Garage plus
any applicable sales tax. No additional Assigned Permits will be available to
Tenant. In addition, should
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space be deleted from the Leased Premises pursuant to Tenant's exercise of its
Contraction Option set forth in Article V of EXHIBIT B, then Landlord shall no
longer be obligated to make available to Tenant, and Tenant shall no longer have
any right or obligation to lease, the Permits allocable to such space under
Sections 3.5.1 and 3.5.2 hereof.
3.5.6 TENANT'S RIGHT TO REDUCE AND INCREASE PERMITS. Tenant shall
have the right, from time to time, to elect to lease fewer Permits than the
amount to which Tenant is entitled, such election to be effective as of the
first day of a calendar month after at least thirty (30) days prior written
notice from Tenant making such election. Permits that Tenant has elected not to
lease may be leased by Landlord to other tenants of the Building or to other
third parties. Tenant shall have the right to request in writing that Landlord
lease to Tenant those Permits to which Tenant is entitled under this Lease, but
which Tenant had previously elected not to lease provided (a) in no event shall
Tenant be entitled to lease more Permits (or a different ratio of Assigned
Permits or Unassigned Permits) than provided in Sections 3.5.1 and 3.5.2, (b)
Tenant must deliver to Landlord written notice of its request to lease any such
Permits, and (c) Landlord shall have twelve (12) months following receipt of
Tenant's written notice to make such Permits available to Tenant.
IV.
4.1 CARE OF THE LEASED PREMISES. Tenant shall not commit and shall use
reasonable efforts to prevent any party under Tenant's reasonable control from
committing any waste or damage to any portion of the Leased Premises or the
Project, and at the termination of this Lease, by lapse of time or otherwise,
Tenant shall deliver up the Leased Premises to Landlord in as good condition as
existed on the date of possession by Tenant, excepting only ordinary wear and
tear, alterations and additions permitted to be made and removed under the terms
of this Lease, and damage or destruction from casualty or condemnation for which
Tenant is not obligated repair. Upon such termination of this Lease, Landlord
shall have the right to reenter and resume possession of the Leased Premises.
4.2 ENTRY FOR REPAIRS AND INSPECTION. Landlord and its contractors,
agents, or representatives shall have the right to enter into and upon any part
of the Leased Premises at all reasonable hours to inspect, maintain or clean the
same, make repairs, alterations or additions thereto, to show the same to
mortgagees or prospective purchasers, and unless Tenant has elected (deemed or
otherwise) to renew or extend the Term of this Lease, to show the Leased
Premises to prospective tenants during the final twelve (12) months of the Term
of this Lease (or, if Tenant has elected to renew the Term under Article I of
EXHIBIT B, then during the final twelve (12) months of such Renewal Term), and
Tenant shall not be entitled to any abatement or reduction of Rent by reason
thereof. In exercising this right, Landlord agrees to use reasonable efforts not
to interfere with the conduct of Tenant's business in the Leased Premises.
Except in the event of an emergency, all repairs, alterations, or additions that
would interfere in any material respect with Tenant's use and enjoyment of the
Leased Premises shall, to the extent reasonably possible under the
circumstances, be made after normal business hours. Unless otherwise requested
by Tenant in writing, Landlord
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shall not enter into any areas previously designated in writing by Tenant as
high security areas unless (a) Landlord shows cause therefor and provides Tenant
with not less than twenty-four (24) hours advance written notice thereof, or (b)
in the event of an emergency, in which event Landlord shall use reasonable
efforts to notify Tenant's emergency response team (which Tenant shall supply to
Landlord in the event that Tenant designates any high security areas) and in
either such case, in no event shall Landlord enter into any such high security
areas without notifying and being accompanied by one of Tenant's on-site
security personnel. Landlord's obligations under this Lease shall be reduced to
the extent of Tenant's refusal to grant access to such portions of the Leased
Premises.
4.3 NO NUISANCE. Tenant shall conduct its business and control its
agents, contractors, customers, employees, invitees, licensees, servants and
visitors in such manner so as not to create any nuisance or unreasonably
interfere with, annoy or disturb any other tenant or Landlord in its operation
of the Project.
4.4 LAWS AND REGULATIONS; BUILDING RULES AND REGULATIONS. Tenant shall
comply with, and Tenant shall cause its agents, contractors, customers and
employees to comply with, all laws, ordinances, orders, rules and regulations
(state, federal, municipal and other agencies or bodies having any jurisdiction
thereof) relating to the use, condition or occupancy of the Leased Premises or
the conduct of Tenant's business therein, and with the Building Rules and
Regulations set forth on EXHIBIT D and such other rules and regulations as are
reasonably adopted by Landlord from time to time, for the safety, care or
cleanliness of the Leased Premises, the Building and the Project, or for
preservation of good order therein, all of which will be sent by Landlord to
Tenant in writing and shall be thereafter consistently applied by Landlord and
carried out and observed by Tenant, its agents, contractors, customers and
employees. In the event of a conflict between the Building Rules and Regulations
and the provisions of this Lease, the provisions of this Lease shall control,
subject to applicable governmental requirements.
4.5 AMERICANS WITH DISABILITIES ACT; CLEAN AIR ACT; TEXAS ARCHITECTURAL
BARRIERS ACT. Landlord shall be responsible, as an Operating Expense (including
all consultation, architectural and engineering fees and expenses), for making
any alterations, additions and improvements and/or renovations, if any, required
to cause the base Building, Building systems and the common areas of the Project
(excluding core restrooms located within the existing Leased Premises) to comply
with the provisions of the Americans With Disabilities Act ("ADA"), the Texas
Architectural Barriers Act ("TABA") and Section 604 of the Clean Air Act
Amendments of 1990 (codified at 42 U.S.C. ss. 7671c) (the "CLEAN AIR ACT
AMENDMENTS"). Tenant shall be responsible, at Tenant's sole cost and expense
(including all consultation, architectural and engineering expenses), for making
any alterations, additions, improvements and/or renovations, if any, to cause
the Leased Premises, including core restrooms and elevator lobbies located in
the Leased Premises, to comply with the ADA, TABA and Clean Air Act Amendments.
If any multi-tenant floor in the Building on which Tenant hereafter leases space
together with other tenants is not in compliance with the provisions of the ADA,
TABA and Clean Air Act Amendments, Landlord shall cause the Floor-Shared Areas
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on such floor (including, core restrooms, elevator lobbies and multi-tenant
corridors) to so comply. Capital costs incurred by Landlord pursuant to this
Section 4.5 shall be included in Operating Expenses under Section 2.4.1 (vii),
and maintenance (or other similar non-capital costs) shall be included in
Operating Expenses under Section 2.4.
4.6 LEGAL USE AND VIOLATIONS OF INSURANCE COVERAGE. Tenant shall not
occupy or use the Leased Premises, or permit any portion of the Leased Premises
to be occupied or used, for any business or purpose which is unlawful,
disreputable or deemed to be hazardous on account of fire or other hazards, or
permit anything to be done which would in any way increase the rate of fire or
liability or any other insurance coverage on the Project or its contents. In
addition, Landlord shall comply with all laws, ordinances, orders, covenants,
and restrictions running with the Land, all rules and regulations (state,
federal and municipal and other agencies or bodies having jurisdiction thereof)
relating to the ownership and operation of the Project.
4.7 ENVIRONMENTAL MATTERS.
4.7.1 DEFINITIONS. For purposes of this Lease, "HAZARDOUS
MATERIALS" shall mean those elements, materials, compounds, mixtures or
substances, including, but not limited to asbestos, which are contained in the
list of hazardous substances adopted by the United States Environmental
Protection Agency (the "EPA") or which are defined as hazardous, toxic,
pollutant, infectious, flammable or radioactive by any Environmental Law. For
purposes of this Lease, "ENVIRONMENTAL LAW" shall mean any Federal, State, or
local statute, law, ordinance, code, rule, regulation, order, or decree
regulating, relating to, or imposing liability or standards of conduct
concerning, any hazardous, toxic, or dangerous waste, substance, element,
compound, mixture or material, as now or at any time hereafter in effect
including, without limitation, the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or rules and regulations of
the EPA or any other state or federal department, board or agency, or other
governmental department, board or agency.
4.7.2 LANDLORD OBLIGATIONS; INDEMNITY. Landlord hereby represents
to Tenant that, to the best of Landlord's knowledge, (i) Landlord has not used
or knowingly permitted the Project to be used in violation of any Environmental
Laws and (ii) the Project does not contain material amounts of Hazardous
Materials in violation of any applicable Environmental Laws. Notwithstanding the
foregoing, Landlord makes no representations or warranties respecting any
portion of the Project leased or occupied by Tenant pursuant to the Old Lease or
any portion of the Leased Premises leased to Tenant hereunder. Landlord shall
not use or knowingly permit the use of any Hazardous Materials in violation of
applicable Environmental Laws in the operation, maintenance or use of the
Project (other than the Leased Premises). Landlord shall indemnify, defend and
hold Tenant harmless, from and against all claims, liens, losses, damages and
expenses, including without limitation attorneys' fees and court costs
(collectively, "LOSSES"), arising out of, directly or indirectly, a breach of
Landlord's representations or obligations set forth in this Section 4.7.2 as an
Operating Expense. In addition to and without limiting the foregoing, in the
event any
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Hazardous Materials are discovered at or in the Project (other than the Leased
Premises) in violation of any applicable Environmental Laws, and the presence of
the same was caused by Landlord, Landlord agrees to undertake, as an Operating
Expense, all reasonable actions necessary to effect compliance with such
applicable Environmental Laws relating thereto.
4.7.3 TENANT OBLIGATIONS; INDEMNITY. Tenant hereby represents to
Landlord that, (i) to Tenant's actual knowledge, Tenant has not used or
knowingly permitted the Leased Premises to be used in violation of any
Environmental Laws and (ii) Tenant has not placed on the Leased Premises any
Hazardous Materials in violation of any applicable Environmental Laws. Tenant
shall not cause or knowingly permit any Hazardous Materials to be brought upon,
kept, used or installed in the Leased Premises in violation of applicable
Environmental Laws. Tenant shall indemnify, defend and hold Landlord harmless,
from and against all Losses arising out of, directly or indirectly, Tenant's
breach of its representations or obligations under this Section 4.7.3. In
addition to and without limiting the foregoing, in the event any Hazardous
Materials are discovered at or in the Project in violation of any applicable
Environmental Laws, and the presence of the same was caused by Tenant, or
Hazardous Materials are discovered in the Leased Premises in violation of any
applicable Environmental Laws, Tenant agrees to undertake, at Tenant's sole cost
and expense, all reasonable actions necessary to effect compliance with such
applicable Environmental Laws relating thereto.
4.8 WINDOW COVERINGS. Tenant agrees to use the Building standard window
coverings on all exterior windows of the Building. Tenant shall not place or
maintain any window coverings, blinds or drapes on any exterior window without
Landlord's prior written approval which Landlord shall have the right to grant
or withhold in its absolute and sole discretion. Tenant acknowledges that breach
of this covenant will directly and adversely affect the exterior appearance of
the Project and the operation of the heating, ventilating and air conditioning
systems. Landlord approves Tenant's existing window coverings.
4.9 NO WARRANTIES. LANDLORD'S DUTIES AND WARRANTIES ARE LIMITED
TO THOSE EXPRESSLY STATED IN THIS LEASE AND SHALL NOT INCLUDE ANY IMPLIED DUTIES
OR IMPLIED WARRANTIES, NOW OR IN THE FUTURE. NO REPRESENTATIONS OR WARRANTIES
HAVE BEEN MADE BY LANDLORD OTHER THAN THOSE CONTAINED IN THIS LEASE. EXCEPT AS
EXPRESSLY SET FORTH HEREIN TENANT HEREBY WAIVES ANY AND ALL WARRANTIES, EXPRESS
OR IMPLIED, WITH RESPECT TO THE LEASED PREMISES WHICH MAY EXIST BY OPERATION OF
LAW OR IN EQUITY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF HABITABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
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V.
5.1 LEASEHOLD IMPROVEMENTS.
5.1.1 AS-IS. Tenant has made a complete inspection of the Leased
Premises and agrees it will accept the Leased Premises in its existing condition
on the date hereof. The foregoing shall not, however, be interpreted to diminish
Landlord's repair obligations under Section 5.2 hereof, and in connection
therewith, Landlord represents and warrants to Tenant that to the best of
Landlord's knowledge all of the Building's HVAC, mechanical, electrical,
plumbing and structural systems are in good working order and repair, taking
into consideration the age of the Building.
5.1.2 ALTERATIONS. Provided that Tenant has notified Landlord in
writing at least ten (10) days prior to the commencement of any such work within
the Leased Premises, Tenant shall have the right to make non-structural
alterations or physical additions (including fixtures) to the Leased Premises
subject to the following limitations: (i) such alterations and additions will
not impair the structural integrity of the Building, (ii) such alterations and
additions will not affect the mechanical, electrical, plumbing, heating,
air-conditioning, or ventilation systems of the Leased Premises, (iii) such
alterations and additions will not in the aggregate cost more than $50,000
(excluding carpet and paint), (iv) such alterations and additions are
accomplished in a good and workmanlike manner and in accordance with all
applicable governmental requirements (including Houston Building Code
requirements), (v) such alterations are not visible from outside the Leased
Premises, and (vi) Tenant obtains all applicable governmental permits and
approvals required in connection with such alterations or additions. Subject to
(i) through (vi) immediately above, and further subject to Landlord's prior
reasonable approval of all plans and specifications therefor, Tenant, at
Tenant's sole expense, shall be permitted to install internal stairwells between
any two floors which Tenant occupies exclusively pursuant to this Lease provided
that upon expiration or earlier termination of this Lease, Tenant shall, at
Landlord's sole discretion and Tenant's sole expense, remove such stairwells and
restore the Leased Premises to its original condition. Except as expressly
provided above, Tenant shall not make or allow to be made any alterations or
physical additions (including fixtures) in or to the Leased Premises or place
safes, vaults, filing cabinets, libraries or other heavy furniture or equipment
within the Leased Premises without first obtaining the written consent of
Landlord, not to be unreasonably withheld or delayed. Any alterations or
physical additions in or to the Leased Premises shall be subject to any
reasonable terms or conditions Landlord may require to ensure that the
alterations or additions are in conformity with the standards of the Building
and will not impair the structural, mechanical, electrical, plumbing, heating,
air-conditioning, or ventilation integrity of the Building.
5.1.3 PROPERTY OF LANDLORD. All alterations, physical additions
and improvements in or to the Leased Premises (including fixtures) shall, when
made, become the property of Landlord (provided that alterations or improvements
paid for by Tenant and not from allowances provided by Landlord shall be owned
for federal income tax purposes by Tenant during the Term and, upon the
expiration of the Term, shall become the property of Landlord) and shall be
surrendered to Landlord
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upon termination of this Lease, whether by lapse of time or otherwise; provided,
however, Tenant may remove or cause to be removed from the Leased Premises not
later than ten (10) days following the expiration or termination of this Lease
trade fixtures, movable equipment and furniture owned or leased by Tenant and
Tenant's built-in desks, cabinets, shelves and filing systems. Tenant shall
repair all damage to the Leased Premises and the Project resulting from Tenant's
removal of property (excluding, however, and Tenant shall not be required to (i)
repair leasehold improvements that Landlord intends to demolish in connection
with the build out of the Leased Premises for a new tenant, (ii) repair damage
to the Leased Premises occasioned by the installation and removal of Tenant's
built-in desks, cabinets, shelves and filing systems provided that the damage is
of the type that would reasonably be expected to result from detaching such
built-in components from the Leased Premises or (iii) remove the steel rods
supporting the aforementioned built-in components). Any property of Tenant not
removed from the Leased Premises not later than ten (10) days following
termination or expiration of this Lease shall, at Landlord's option, be deemed
the property of Landlord.
5.1.4 TAXES. Tenant shall be responsible for ad valorem taxes on
its personal property. In addition, Tenant shall be responsible for all ad
valorem taxes attributable to, and separately assessed on, the value of Tenant's
above Building standard leasehold improvements in the Leased Premises only if
the applicable taxing authority makes a separate allocation with respect to such
leasehold improvements.
5.2 REPAIRS BY LANDLORD.
5.2.1 REPAIRS. Landlord shall, at Landlord's sole cost and
expense (but which may be included in Operating Expenses to the extent permitted
hereunder), keep and maintain in good working order and repair, and shall make
such improvements, repairs or replacements as are necessary or appropriate to,
the exterior walls, all structural components and elements of the Project,
lobbies, stairs, elevators (including without limitation, cabs and doors),
corridors and corridor walls and wall treatments, carpeting, public restrooms,
roofs, plate glass, parking areas, paved areas, walkways and drives,
landscaping, base Building improvements, and all facilities, systems and
equipments relating to the furnishing of services (including mechanical,
electrical, water, heating, ventilating and air conditioning, life safety and
elevators) required to be provided by Landlord pursuant to this Lease, all at
such times, in such manner and to such extent as is reasonably necessary or
appropriate to maintain the Project in good order and condition consistent with
a first-class office building located in the Greenway Plaza and Galleria areas
in Houston. All repairs, alterations or additions that affect the Project's
structural components or major mechanical, electrical or plumbing systems shall
be made by Landlord or its contractors only, and, subject to Section 6.7, in the
case of any damage to such components or systems caused by Tenant or Tenant's
agents, employees, construction contractors, or cleaning contractors, shall be
paid for by Tenant in an amount equal to Landlord's costs plus seven percent
(7%) for overhead, which shall be payable within thirty (30) days after demand.
Notwithstanding anything to the contrary contained in this Section 5.2.1,
Landlord shall not be required to make any improvements to or repairs of any
kind or character to the
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leasehold improvements within the Leased Premises during the Term, except (i)
subject to Section 6.7, repairs to leasehold improvements to the extent they
have been damaged as a result of the negligence of Landlord, or Landlord's
agents, employees, construction contractors, or cleaning contractors, and (ii)
repairs to Building standard improvements as may be necessary for normal
maintenance; provided, however, non-Building standard leasehold improvements
shall, at Tenant's written request, be maintained, repaired or replaced by
Landlord at Tenant's expense, at a cost equal to Landlord's costs plus seven
percent (7%) overhead, which shall be payable within thirty (30) days after
demand. Landlord shall, as a part of Operating Expenses, replace the flooring in
the elevators serving the Leased Premises at least every three (3) years during
the Term, such replacement flooring to be of a quality in keeping with a
first-class office building located in the Greenway Plaza and Galleria areas in
Houston.
5.2.2 OVERHEAD CHARGES. Except as provided above in Section 3.1,
Section 3.4, Section 5.2.1, this Section 5.2.2, Section 5.3, EXHIBIT E, and
EXHIBIT G, Landlord shall not charge to Tenant any profit, overhead or
supervision fee, or general condition costs (whether for improvements,
alterations, additions, renovations and/or refurbishments or any services).
Landlord may, however, charge a market fee of up to seven percent (7%) on
non-Building standard services provided at Tenant's request other than the
provision of overtime heating, ventilation, and air-conditioning or additional
electrical usage that does not involve the installation or use of additional
equipment or facilities.
5.3 REPAIRS BY TENANT. Subject to Sections 5.2 and 6.7, Tenant shall, at
its own cost and expense, repair or replace any damage or injury done to its
leasehold improvements or any part thereof caused by Tenant or Tenant's agents,
contractors, customers, employees, invitees, licensees, servants or visitors. If
Tenant fails to make such repairs or replacements to its leasehold improvements
promptly, Landlord may, at its option, make such repairs or replacements and
Tenant shall repay Landlord's cost plus seven percent (7%) for overhead, which
shall be payable on demand.
5.4 ALLOWANCES.
5.4.1 INITIAL ALLOWANCE. Landlord shall pay to Tenant an
allowance ("INITIAL ALLOWANCE") equal to $15.00 per square foot of Net Rentable
Area contained in the initial Leased Premises (provided the portion of the
Initial Allowance applicable to any portion of the Leased Premises for which the
Rent Commencement Date is not March 1, 1998 shall be proportionately reduced by
multiplying such Initial Allowance by a fraction, the numerator of which is the
number of days in the Term after the Rent Commencement Date for such portion of
the Leased Premises and the denominator of which is the number of days in the
Term Commencing March 1, 1998) to be used for Tenant's relocation costs, space
planning and design costs and the cost of any leasehold improvements within the
initial Leased Premises, signage, generator, and any lobby improvements,
including, but not limited to, repainting, recarpeting, repairs or
refurbishments of existing leasehold improvements, installation of additional
leasehold improvements, and telephone and/or computer cabling and installation,
all work to be performed and the payment of the Initial Allowance to be
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paid in accordance with the terms of this Lease. Up to $5.00 per square foot of
Net Rentable Area of said allowance may be applied at Tenant's request to the
first accruing Base Rental hereunder. Any Initial Allowance not so used by
Tenant shall be forfeited. Such allowance shall be either: (i) paid monthly as
work progresses directly by Landlord to Landlord or any contractors/vendors
retained by Landlord in connection with the completion of any work undertaken on
behalf of Tenant at Tenant's request as provided herein (which may include a
construction management fee paid to Landlord equal to three percent [3%] of the
cost of construction); or (2) in the event Tenant or any contractors/vendors
perform such work, then paid directly to such contractors/vendors monthly as
work progresses upon completion of work/delivery of materials for which payment
is requested and submission to Landlord of satisfactory invoices, building and
other permits, certificates of occupancy, and lien waivers therefor and a
certification by Tenant and/or Tenant's architect that all such work for which
payment is requested has been completed and all such materials for which payment
is requested have been delivered on-site at the Building or have been
incorporated into such work (in which event, Landlord shall be paid a
construction supervision fee from such allowance equal to one percent [1%] of
the cost of construction, but in no such event shall such fee exceed
$20,000.00). Tenant may become entitled to receive portions of the foregoing
allowance prior to the Commencement Date, but Landlord shall have no obligation
to make any payment to, or on account of, Tenant prior to January 1, 1998.
Landlord will not provide construction management services, but will merely
provide supervision and an oversight for Landlord's benefit if Tenant elects to
perform such work.
5.4.2 ADDITIONAL ALLOWANCE DURING INITIAL TERM. On or after the
fifth (5th) anniversary of the Commencement Date and before the sixth (6th)
anniversary of the Commencement Date, and within sixty (60) days after the
written request of Tenant, Landlord shall pay to Tenant an allowance
("ADDITIONAL ALLOWANCE") equal to $3.00 per square foot of Net Rentable Area as
then contained in the Leased Premises. Upon Tenant's written notice to Landlord
on or before the Commencement Date, Tenant shall have the option to cause
Landlord to pay to Tenant as an addition to the Initial Allowance an amount
equal to $1.82 per square foot of Net Rentable Area contained within the initial
Leased Premises in lieu of said Additional Allowance. Such Additional Allowance
shall be used for Tenant's space planning and design costs and the cost of any
leasehold improvements within the Leased Premises, signage, generator, and any
lobby improvements as otherwise provided and permitted herein. Such allowance
shall be either: (i) paid monthly as work progresses directly by Landlord to
Landlord or any contractors/vendors retained by Landlord in connection with the
completion of any work undertaken on behalf of Tenant at Tenant's request as
provided herein (which may include a construction management fee paid to
Landlord equal to three percent [3%] of the cost of construction); or (2) in the
event Tenant or any contractors/vendors perform such work, then paid directly to
such contractors/vendors monthly as work progresses upon completion of
work/delivery of materials for which payment is requested and submission to
Landlord of satisfactory invoices, building and other permits, certificates of
occupancy, and lien waivers therefor and a certification by Tenant and/or
Tenant's architect that all such work for which payment is requested has been
completed and all such materials for which payment is requested have been
delivered on-site at the Building or have been incorporated into such
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work (in which event, Landlord shall be paid a construction supervision fee from
such allowance equal to one percent [1%] of the cost of construction, except
that if Tenant elects to have the Initial Allowance increased in lieu of
receiving the Additional Allowance, then the $20,000 limit set forth in Section
5.4.1 also shall apply in connection with such increase in the Initial Allowance
so that Landlord's construction supervision fee for both the Initial Allowance
and the increase in the Initial Allowance permitted under this Section 5.4.2
shall not exceed $20,000). Tenant may become entitled to receive portions of the
foregoing allowance prior to the Commencement Date, but Landlord shall have no
obligation to make any payment to, or on account of, Tenant prior to January 1,
1998. Landlord will not provide construction management services, but will
merely provide supervision and an oversight for Landlord's benefit if Tenant
elects to perform such work.
VI.
6.1 CONDEMNATION.
6.1.1 OPTION TO TERMINATE. If the Leased Premises shall be taken
or condemned for any public purpose to such an extent as to render twenty-five
percent (25%) or more of the Leased Premises Untenantable, this Lease shall, at
the option of either party, cease and terminate as of the date of such taking or
condemnation. Each party shall notify the other of its election to terminate
within thirty (30) days after receipt of notice of such taking or condemnation.
If less than twenty-five percent (25%) of the Leased Premises is rendered
Untenantable as a result of such taking, this Lease shall continue in full force
and effect but all Rent shall abate with respect to the portion so taken. As
used in this Lease, the term "UNTENANTABLE" shall mean the condition whereby
Tenant's use and enjoyment of the Leased Premises or any portion thereof is
interrupted or interfered with in any material respect.
6.1.2 DISTRIBUTION OF PROCEEDS. All proceeds from any taking or
condemnation affecting the Project or the Leased Premises shall be distributed
to and belong to Landlord, except that, in the event of a taking of the Leased
Premises, (i) Tenant shall be entitled to the unamortized value of any
improvements, alterations or additions to the Leased Premises made after the
Commencement Date and paid for by Tenant (excluding, however, any improvements,
alterations or additions paid for with the proceeds of any
improvements/refurbishment allowance) and not removable by Tenant at the
expiration of the Term, and (ii) Tenant shall be entitled to prosecute a
separate claim for Tenant's relocation and moving expenses. Amortization of any
improvements, alterations or additions made to the Leased Premises during the
primary Term shall be calculated on a straight-line method over the remainder of
the primary Term. Amortization of any improvements, alterations or additions
made to the Leased Premises during a Renewal Term shall be calculated on a
straight-line method over the remainder of such Renewal Term. In no event shall
Tenant be entitled to any condemnation award unless the same does not reduce the
value of Landlord's award.
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6.2 DAMAGES FROM CERTAIN CAUSES. Neither Landlord nor any mortgagee(s)
shall be liable or responsible to Tenant for any loss or damage to any property
or person occasioned by act of God, public enemy, injunction, riot, strike,
insurrection, war, court order, requisition or order of governmental body or
authority or any cause beyond Landlord's control or for any inconvenience which
may arise through repair or alteration of any part of the Project resulting from
the aforementioned causes. All goods, property or personal effects placed by
Tenant in or about the Project shall be at the sole risk of Tenant.
6.3 FIRE OR OTHER CASUALTY.
6.3.1 NOTICE. In the event of a fire or other casualty in the
Leased Premises, Tenant shall immediately give notice thereof to Landlord.
6.3.2 RESTORATION ESTIMATE. Within forty-five (45) days following
any damage or destruction to the Project or the Leased Premises, Landlord shall
obtain from a responsible contractor selected by Landlord, an estimate (the
"RESTORATION ESTIMATE") of the time required to complete the applicable
restoration or rebuilding.
6.3.3 OBLIGATION TO REBUILD. Subject to the rights of Landlord
and Tenant to terminate this Lease as set forth in Section 6.3.4 below, Landlord
shall commence and prosecute any repair work promptly and with reasonable
diligence but shall only be obligated to restore or rebuild the Leased Premises
to a Building standard condition; provided however, Tenant may cause Landlord to
rebuild or restore the Leased Premises to the condition they were in prior to
such damage or destruction if Tenant bears the cost (including rentals which are
lost due to any excess construction time and not covered by rental loss
insurance proceeds) of such restoration or rebuilding to the extent the same
exceeds the costs Landlord would have incurred had only Building standard
improvements been constructed). Building standard shall mean the scope and
quality of items set forth in EXHIBIT H attached hereto.
6.3.4 LANDLORD AND TENANT TERMINATION RIGHTS. Landlord and Tenant
shall each have the right to terminate this Lease if the Leased Premises or any
portion thereof is damaged or destroyed and the Restoration Estimate provides
that the repair or restoration of the Leased Premises with Building standard
improvements cannot reasonably be completed within one hundred eighty (180) days
following the commencement thereof; provided however, the rights of termination
granted under this sentence shall be available to Landlord only if one of the
following conditions is also satisfied: (x) the damage or destruction occurs
during the last two (2) years of this Lease and there is no Renewal Option then
remaining, or if there is a remaining Renewal Option, Tenant does not exercise
the same by written notice to Landlord delivered within thirty (30) days
following receipt of Landlord's termination notice, which renewal notice shall
include the same information as contained in a renewal notice delivered pursuant
to Section 1.2 of EXHIBIT B hereto, or (y) the damage or destruction does not
occur during the last two (2) years of this Lease, but Landlord is terminating
this Lease simultaneously with the termination of all other leases in the
Building.
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Landlord and Tenant shall each have the right to terminate this Lease if the
Building or any portion thereof is damaged or destroyed and the Restoration
Estimate provides that the repair or restoration to the Building cannot
reasonably be completed within three hundred sixty-five (365) days following the
commencement thereof. In the event either Landlord or Tenant elect to terminate
this Lease based upon the provisions of this Section 6.3.4, such party must make
such election and notify the other party of such election within thirty (30)
days following the date Tenant receives the Restoration Estimate from Landlord;
otherwise, such party shall be deemed to have elected not to terminate this
Lease as a result of such damage or destruction. In the event this Lease is
terminated by either party pursuant to this Section 6.3.4, Tenant shall vacate
the Leased Premises as soon as reasonably practicable, but in no event later
than one hundred twenty (120) days following the election by either party to
terminate this Lease, Tenant shall pay all Rent owed up to the time of such
damage or destruction, and Tenant shall pay a pro rata share of Rent on those
portions of the Leased Premises occupied (or deemed occupied) by Tenant
following such damage or destruction from the date of such damage or destruction
until Tenant vacates such portion or portions, as the case may be, of the Leased
Premises. For purposes of calculating Rent under the preceding sentence, if
Tenant continues to occupy any portion of a floor that Tenant leased as a full
floor prior to the damage or destruction, Tenant shall be deemed in occupancy of
all space on such floor that is reasonably occupiable, regardless of whether
Tenant is actually using the space.
6.3.5 RENTAL ABATEMENT FOLLOWING CASUALTY. Unless this Lease is
terminated as provided in Section 6.3.4 hereof, this Lease shall continue in
effect following a fire or other casualty on the same terms and conditions set
forth herein except that the Rent provided for herein shall abate as to the
portion of the Leased Premises rendered Untenantable until such time as the
Leased Premises (or portion thereof) are no longer Untenantable.
6.4 CASUALTY INSURANCE. Landlord shall maintain standard fire and
extended coverage insurance on the Project (excluding leasehold improvements)
and on all Building standard leasehold improvements, in the amount not less than
one hundred percent (100%) of their full replacement cost. Said insurance shall
be issued by and binding upon an insurance company authorized to do business in
Texas with a Best's rating of not less than A-, XI, in amounts which are
reasonable and customary for landlords of similar first-class office projects in
the Greenway Plaza and Galleria areas, and at the expense of Landlord (but with
the same to be included in the Operating Expenses, subject to any limitations
set forth in Section 2.4) and payments for losses thereunder shall be made
solely to Landlord. Tenant shall maintain at its expense standard fire and
extended coverage (including water damage and sprinkler leakage) insurance on
all of its personal property, including removable trade fixtures, located in the
Leased Premises and on its non-Building standard leasehold improvements and all
other additions and improvements (including fixtures) made by Tenant and not
required to be insured by Landlord above, in the amount not less than one
hundred percent (100%) of their full replacement cost. Said insurance shall be
issued by and binding upon an insurance company authorized to do business in
Texas with a Best's rating of not less than A-, XI, and provide that
contemporaneous notice of cancellation or nonrenewal shall be given to Landlord.
Said insurance shall name Landlord as additional insured. Tenant shall provide
Landlord a
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certificate of such insurance prior to the Commencement Date. If the annual
premiums to be paid by Landlord shall exceed the standard rates because of
Tenant's operations or contents within the Leased Premises or because the
improvements to the Leased Premises are above Building standard, Tenant shall
promptly pay the excess amount of the premiums upon request by Landlord (and, if
necessary, Landlord may allocate the insurance costs of the Project to give
effect to this sentence). Landlord acknowledges and agrees that Tenant's current
operations, contents and improvements within the Leased Premises do not require
the payment by Landlord of an additional insurance premium.
6.5 LIABILITY INSURANCE. Landlord (with respect to the Project) and
Tenant (with respect to the Leased Premises) shall each, at their respective
expense, maintain a policy or policies of comprehensive general liability
insurance with the premiums thereon fully paid on or before the due dates,
issued by and binding upon an insurance company authorized to do business in
Texas with a Best's rating of not less than A-, XI, and, in the case of Tenant's
liability insurance, providing that contemporaneous notice of cancellation or
nonrenewal shall be given to Landlord. Landlord's liability insurance shall
afford minimum protection (which may be effected by primary and excess coverage)
of not less than five million dollars ($5,000,000) combined single limit bodily
injury or property damage in any one occurrence, and Tenant's liability
insurance shall afford minimum protection (which may be effected by primary and
excess coverage) of not less than two million five hundred thousand dollars
($2,500,000) combined single limit bodily injury or property damage in any one
occurrence. Said insurance shall name Landlord, Landlord's advisors and
consultants and the Building manager as additional insureds. Tenant shall
provide Landlord a certificate of such insurance prior to the Commencement Date.
6.6 HOLD HARMLESS. Subject to any express provisions of Section 3.1.1(v)
to the contrary, Tenant shall not be liable to Landlord or to Landlord's agents,
contractors, customers, employees, invitees, licensees, servants or visitors for
any damage to person or property caused by any act, omission or neglect of
Landlord, its agents, contractors, customers, employees, invitees, licensees,
servants or visitors and Landlord agrees to, subject to Section 6.7, indemnify
and hold Tenant harmless from all liability and claims for such damage. Subject
to any express provisions of Section 3.1.1(v) to the contrary, neither Landlord
nor any mortgagee(s) shall be liable to Tenant, its agents, contractors,
customers, employees, invitees, licensees, servants or visitors for any damage
to person or property caused by any act, omission or neglect of Tenant, its
agents, contractors, customers, employees, invitees, licensees, servants or
visitors and Tenant agrees to, subject to Section 6.7, indemnify and hold
Landlord and any mortgagee(s) harmless from all liability and claims for any
such damage. Notwithstanding anything contained in this Lease to the contrary,
the provisions of this Section 6.6 shall survive the termination of this Lease.
6.7 WAIVER OF SUBROGATION RIGHTS. Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant hereby waive any and all rights of
recovery, claim, action or cause of action against the other, its agents,
employees, officers, partners, servants or shareholders for any loss or damage
that may occur to the Leased Premises or the Project, or any improvements
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thereto, or any personal property of such party therein by reason of fire, the
elements or any other cause which is required to be insured against under the
terms of the fire and extended coverage insurance policies required to be
obtained pursuant to this Lease, regardless of cause or origin, including
negligence of the other party hereto, its agents, employees, officers, partners,
servants or shareholders, and each party covenants that no insurer shall hold
any right of subrogation against such other party.
VII.
7.1 DEFAULT BY TENANT.
7.1.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events shall constitute an "EVENT OF DEFAULT" under this Lease:
(i) the failure by Tenant to pay when due any sum of money to be
paid by Tenant under this Lease, such failure continuing for a period of
ten (10) days after written notice thereof;
(ii) the failure by Tenant to comply with or perform in any
material respect any of the other terms, provisions, covenants or
conditions which Tenant is required to observe and to perform; or, if
Tenant is a partnership or other entity, if Tenant is dissolved or
otherwise liquidated; and any of the above-mentioned failures or actions
continue for a period of thirty (30) days after notice thereof;
provided, however, if the nature of the default is such that it cannot
be cured with the exercise of Tenant's reasonable and good faith efforts
within the thirty (30) day period, Tenant shall have up to one hundred
fifty (150) days from the date of Landlord's notice to cure such
default, provided Tenant undertakes such curative action within the
thirty (30) day period and diligently and continuously proceeds with
such curative action using Tenant's reasonable and good faith efforts;
(iii) a general assignment by Tenant for the benefit of
creditors;
(iv) the filing of any voluntary petition in bankruptcy by Tenant
or the filing of an involuntary petition by Tenant's creditors, which
involuntary petition remains undischarged or unstayed for a period of
sixty (60) days; provided, that in the event that under applicable law
the trustee in bankruptcy or Tenant has the right to affirm this Lease
and continue to perform the obligations of Tenant hereunder, such
trustee or Tenant shall, in such time period as may be permitted by the
bankruptcy court having jurisdiction, cure all defaults of Tenant
hereunder outstanding as of the date of the affirmance of this Lease and
provide to Landlord such adequate assurances as may be necessary to
ensure Landlord of the continued performance of Tenant's obligations
under this Lease;
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(v) the admission by Tenant in writing of its inability to pay
its debts as they become due, the filing by Tenant of a petition seeking
any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law
or regulation, the filing by Tenant of an answer admitting or failing
timely to contest a material allegation of a petition filed against
Tenant in any such proceeding or, if within sixty (60) days after the
commencement of any proceeding against Tenant seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law
or regulation, such proceeding shall not have been stayed or dismissed;
(vi) the attachment, execution or other judicial seizure of all
or substantially all of Tenant's assets or the Leased Premises, if such
attachment or other seizure remains undismissed or undischarged for a
period of sixty (60) days after the levy thereof; and
(vii) the employment of a receiver to take possession of
substantially all of Tenant's assets or the Leased Premises, if such
receivership remains undissolved for a period of sixty (60) days after
creation thereof.
7.1.2 TERMINATION. If Tenant suffers an Event of Default under
this Lease, Landlord may (i) terminate this Lease, or (ii) terminate Tenant's
right of possession to the Leased Premises without terminating this Lease. In
addition to these remedies, Landlord shall continue to have all of the rights
and remedies provided Landlord at law or in equity.
7.1.3 SURRENDER OF POSSESSION. Upon any termination of this
Lease, whether by lapse of time or otherwise, or upon any termination of
Tenant's right of possession without termination of this Lease, Tenant shall,
subject to the provisions of Section 5.1.3, surrender possession and vacate the
Leased Premises immediately, and deliver possession thereof to Landlord. If
Tenant fails to surrender possession and vacate the Leased Premises, Landlord
shall have full and free license to enter into and upon the Leased Premises for
the purpose of repossessing the Leased Premises, expelling or removing Tenant
and any others who may be occupying or within the Leased Premises, and subject
to Section 5.1.3, removing any and all property therefrom and changing all door
locks of the Leased Premises. Landlord may take these actions without incurring
any liability for any damage resulting therefrom, including any liability
arising under Section 92.008 of the Texas Property Code, as amended ("TPC"), and
without relinquishing Landlord's right to Rent or any other right given to
Landlord hereunder or by operation of law; Tenant hereby waiving any right to
claim damage for such reentry and expulsion, including any rights granted to
Tenant by Section 92.008 of the TPC.
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7.1.4 BENEFIT OF THE BARGAIN. If Landlord elects to terminate
this Lease or terminate Tenant's right of possession to the Leased Premises
without terminating this Lease, there shall immediately become due and payable
the amount by which:
(i) the present value determined using a discount rate of eight
percent (8%) per annum of the total Rent and other benefits which would
have accrued to Landlord under this Lease for the remainder of the Term
if the terms and provisions of this Lease had been fully complied with
by Tenant, exceeds
(ii) the total fair market rental value [determined using a
discount rate of eight percent (8%) per annum] of the Leased Premises
for the balance of the Term (it being the agreement of both parties
hereto that Landlord shall receive the benefit of its bargain).
In the event that Landlord elects to terminate Tenant's right of possession to
the Leased Premises without terminating this Lease, and thereafter Landlord
recovers from Tenant all sums payable under this Section 7.1.4, this Lease shall
be deemed terminated as of the date of such recovery. For purposes of this
Section 7.1.4, the fair market rental value of the Leased Premises shall be the
prevailing Market Rate for similar space in similar high-rise office buildings
in the Greenway Plaza and Galleria areas for a lease term equal to the remaining
Term (without regard to any renewal options). In addition, there shall be
recoverable from Tenant:
(i) the reasonable cost of restoring the Leased Premises to
Building standard condition, normal wear and tear and damage due to
casualty or condemnation excepted;
(ii) all accrued, unpaid sums, plus interest at the Applicable
Rate for past due sums up to the date of termination;
(iii) Landlord's reasonable cost of recovering possession of the
Leased Premises;
(iv) Rent accruing subsequent to the date of termination pursuant
to the holdover provisions of Section 7.3, if any; and
(v) any other sum of money or damages owed by Tenant to Landlord
pursuant to this Lease.
7.1.5 RIGHT TO RELET. If Landlord elects to terminate Tenant's
right to possession of the Leased Premises without terminating this Lease, but
elects not to pursue the remedies set forth in Section 7.1.4, Tenant shall
continue to be liable for all Rent and Landlord agrees to use reasonable and
good faith efforts to relet the Leased Premises, or any part thereof, to a
substitute tenant or
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tenants, which reletting may be for a period of time equal to or lesser or
greater than the remainder of the Term on whatever terms and conditions
Landlord, in Landlord's commercially reasonable judgment, deems advisable.
Notwithstanding anything herein to the contrary, reasonable and good faith
efforts to relet the Leased Premises shall not (i) require Landlord to give
priority to the Leased Premises over other premises owned or managed by Landlord
or its Affiliates; (ii) require Landlord to relet for less than market rent; or
(iii) require Landlord to relet to a tenant (or for a use) which is not in
keeping with the standards of first class office buildings in the Greenway Plaza
and Galleria areas. Tenant shall be given a credit against the Rent due from
Tenant to Landlord during the remainder of the Term in the net amount of rent
received from the new tenant; however, the net amount of such rent received from
the new tenant shall first be applied to:
(i) a reasonable and appropriate pro rata share of the costs
incurred by Landlord in reletting the Leased Premises (including,
without limitation, remodeling costs, brokerage fees, legal fees,
advertising costs and the like) [for example, if there is only three (3)
years remaining in the Term of this Lease and Landlord executes a ten
(10) year lease with the new tenant, Tenant shall only be responsible
for thirty percent (30%) of such costs];
(ii) the accrued sums, plus interest and late charges if in
arrears, under the terms of this Lease;
(iii) Landlord's reasonable cost of recovering possession of the
Leased Premises; and
(iv) the cost of storing (for a period not to exceed thirty (30)
days unless a longer period is mandated by law or judicial decree) any
of Tenant's property left on the Leased Premises after reentry.
Notwithstanding any such reletting without termination of this Lease, Landlord
may at any time thereafter elect to exercise its rights under Section 7.1.4 for
such previous breach. Notwithstanding any provision in this Section 7.1.5 to the
contrary, upon the default of any substitute tenant or upon the expiration of
the lease term of such substitute tenant before the expiration of the Term,
Landlord may, at Landlord's election, either relet to still another substitute
tenant or exercise its rights under Section 7.1.4.
7.1.6 STORAGE OF PROPERTY. Any and all property which may be
removed from the Leased Premises by Landlord pursuant to the authority of this
Lease or of law, to which Tenant is or may be entitled, may be handled, removed
and stored, as the case may be, by or at the direction of Landlord at the risk,
reasonable cost and expense of Tenant (subject to the same limitations specified
in Section 7.1.5(iv), and Landlord shall in no event be responsible for the
value, preservation or safekeeping thereof. Tenant shall pay to Landlord, upon
demand, any and all reasonable expenses incurred in such removal and all
reasonable storage charges (for a storage
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period not to exceed thirty (30) days unless a longer period is mandated by law
or judicial decree) against such property so long as the same shall be in
Landlord's possession or under Landlord's control. Any such property of Tenant
not retaken by Tenant from storage within thirty (30) days after removal from
the Leased Premises shall, at Landlord's option, be deemed conveyed by Tenant to
Landlord under this Lease as by a bill of sale without further payment or credit
by Landlord to Tenant.
7.2 NON-WAIVER. Neither acceptance of Rent by Landlord nor failure by
either party hereto to declare any default immediately upon occurrence thereof,
or delay in taking any action in connection therewith, shall waive such default,
but such non-defaulting party may (subject to the notice or curative rights
stated herein) declare any such default at any time and take such action as
might be lawful or authorized hereunder, either at law or in equity. Waiver by
either party of any right for any default by the other party shall not
constitute a waiver of any right for either a subsequent default of the same
obligation or any other default. Receipt by Landlord of Tenant's keys to the
Leased Premises shall not constitute an acceptance of surrender of the Leased
Premises.
7.3 HOLDING OVER. If Tenant holds over after expiration or termination
of this Lease without the written consent of Landlord, Tenant shall pay as rent
for the Leased Premises one hundred fifty percent (150%) the amount of Rent
(including all Base Rental and Additional Rental then payable as described in
Section 2.1) for the entire holdover period calculated and prorated on a daily
basis. No holding over by Tenant after the Term shall be construed to extend
this Lease. In the event of any unauthorized holding over by Tenant that
continues for more than thirty (30) days, Tenant shall, in addition to the
payment of holdover rent, indemnify Landlord (i) against all claims for damages
by any other tenant to whom Landlord may have leased all or any part of the
Leased Premises effective upon the termination of this Lease, and (ii) for all
other losses, costs, and expenses, including reasonable attorneys' fees,
incurred by reason of such holding over. Any holding over with the written
consent of Landlord in writing shall thereafter constitute a lease from month to
month. Notwithstanding the foregoing, the obligation of Tenant to pay rent
during any holdover period shall apply only with respect to the floors on which
Tenant actually holds over provided that, for purposes of Tenant's obligation to
pay such rent, Tenant shall be deemed (a) to occupy all of the Leased Premises
on a floor if Tenant occupies any portion of such floor and (b) to occupy all
floors within the Leased Premises leased to a new tenant if Tenant occupies any
portion of the space leased to such new tenant.
7.4 ATTORNEYS' FEES. If either party defaults in the performance of any
of the terms, agreements or conditions contained in this Lease and the other
party places the enforcement of this Lease, or any part thereof, or the
collection of any Rent due or to become due hereunder or recovery of the
possession of the Leased Premises, in the hands of an attorney who files suit
upon the same and should such non-defaulting party prevail in such suit, the
defaulting party agrees to pay the other party's reasonable attorneys' fees.
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7.5 DEFAULT BY LANDLORD. Except where the provisions of this Lease grant
Tenant an express, exclusive remedy, or expressly deny Tenant a remedy, if:
(i) Landlord fails to pay any amount payable by Landlord hereunder and
such failure to pay continues and remains unremedied for a period of ten
(10) days after written notice thereof given by Tenant to Landlord; or
(ii) Landlord fails to perform or observe any covenant, term, provision
or condition of this Lease that interferes in any material respect with
Tenant's use and enjoyment of the Leased Premises, and such failure
continues for a period of thirty (30) days after written notice thereof
given by Tenant to Landlord; provided, however, if the nature of the
default is such that it cannot be cured with the exercise of Landlord's
reasonable and good faith efforts within the thirty (30) day period,
Landlord shall have up to one hundred fifty (150) days from the date of
Tenant's notice to cure such default, provided Landlord undertakes such
curative action within the thirty (30) day period and diligently and
continuously proceeds with such curative action using Landlord's
reasonable and good faith efforts;
then, Tenant may deliver a second notice to Landlord, and if such default shall
continue uncured by Landlord and/or its mortgagee for an additional thirty (30)
days after the delivery of such second notice, Tenant shall have the right to
exercise one or more of the following options, but not (A) and (B)
simultaneously: (A) Tenant may cure the default which, in the case of a monetary
default, may be effected by the withholding of or offsetting against Rent, and
Landlord shall reimburse Tenant (which reimbursement may be effected through the
withholding of or offsetting against Rent) for all reasonable sums expended in
so curing said default, (B) Tenant may terminate this Lease, and (C) Tenant may
pursue all other remedies at law or in equity to which Tenant may be entitled.
No notice to Landlord under this Section 7.5 shall be effective until a copy
thereof is delivered to each Landlord mortgagee for which Tenant has received a
notice address in writing from Landlord or its mortgagee. The rights of Tenant
pursuant to this Section 7.5 shall be subject to the express provisions of this
Lease providing for remedies different from, or in exclusion of, the remedies
above-described. Without limiting the immediately preceding sentence, the
provisions of this Section 7.5 shall not apply to a default of Landlord under,
or the failure of Landlord to provide the services described in, Section 3.1.3
of this Lease. Tenant may not terminate this Lease because of Landlord's default
unless specifically permitted pursuant to this Section 7.5 or unless otherwise
specifically provided in this Lease. Tenant specifically agrees that the cure of
any default by any Landlord mortgagee shall be deemed a cure by Landlord under
this Lease.
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VIII.
8.1 ASSIGNMENT OR SUBLEASE BY TENANT.
8.1.1 ASSIGNMENT AND SUBLET PROHIBITED. Except as provided
herein, Tenant shall not, without Landlord's prior written consent (which may be
withheld in Landlord's absolute discretion), (i) assign, convey, mortgage,
pledge, encumber, or otherwise transfer this Lease or any interest hereunder;
(ii) allow any lien to be placed upon Tenant's interest hereunder; (iii) sublet
the Leased Premises or any part thereof; or (iv) permit the use or occupancy of
the Leased Premises or any part thereof by any one other than Tenant.
8.1.2 PERMITTED ASSIGNMENTS AND SUBLETS TO AFFILIATES.
Notwithstanding the foregoing, Tenant shall have the right to assign this Lease
and sublease the Leased Premises without the consent of Landlord if the
assignment or subletting is to an Affiliate of Tenant so long as (1) the
assignee or sublessee is engaged in a business customarily acceptable for a
tenant in a first class office building in the Greenway Plaza and Galleria areas
in Houston, (2) any assignee shall assume all of the obligations of Tenant under
this Lease, (3) at the time of such assignment or subletting, this Lease is in
full force and effect and there is no uncured Event of Default, and (4) the
assignee's or sublessee's proposed use of the Leased Premises is not in
violation of this Lease (such Affiliate of Tenant complying with clauses (1),
(2), (3) and (4), hereinafter a "PERMITTED AFFILIATE"). A Permitted Affiliate of
Tenant also shall include any entity that acquires all or substantially all of
the stock or assets of Tenant, except any regulatory or insuring agency, board,
or governmental entity. At least ten (10) days prior to the effective date of
any such assignment or sublease to a Permitted Affiliate, Tenant agrees to
furnish Landlord with notice of such assignment or sublease and copies of the
instruments effecting any such assignment or sublease. Notwithstanding anything
to the contrary set forth in this Lease, the rights granted to Tenant under this
paragraph as to assignments and subleases to Permitted Affiliates shall not be
assignable by Tenant, except to a Permitted Assignee, and except that a
sublessee that is a Permitted Affiliate of Tenant or a Permitted Assignee may
further sublease in accordance with this Section 8.1.2 to a Permitted Affiliate
of Tenant or the same Permitted Assignee.
8.1.3 APPROVAL. Notwithstanding the provisions of Section 8.1.1
above, Tenant shall be permitted to sublease the Leased Premises or assign its
interest in this Lease after Tenant initially occupies the Leased Premises
subject to the provisions of this Section 8.1.3. If Tenant should desire to
assign this Lease or sublet the Leased Premises or any part thereof, Tenant
shall give Landlord written notice (which shall specify the proposed economic
terms and duration of the proposed sublease or assignment and shall contain
information concerning the business, reputation and creditworthiness of the
proposed sublessee or assignee as shall be sufficient to allow Landlord to form
a judgment with respect thereto) of Tenant's desire to sublease or assign at
least thirty (30) days in advance of the date on which Tenant desires to make
such sublease or assignment (the "NOTICE"). Landlord then shall have thirty (30)
days following receipt of such Notice (but only fifteen (15) days as to a
Non-Terminable Sublease Proposal, as hereinafter defined) within which
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to notify Tenant in writing that Landlord elects, in its sole and absolute
discretion, to either (i) permit Tenant to assign this Lease or sublet such
space subject to Landlord's approval of the assignee or sublessee, or (ii)
terminate this Lease as to the space so affected as of the date so specified by
Tenant (and as to option (ii) only, Tenant will be relieved of all further
obligations hereunder as to such terminated space). If the term of a proposed
sublease will extend into the last three (3) years of the initial Term or any
renewal Term of this Lease ("TERMINABLE SUBLEASE PROPOSAL"), Landlord's exercise
of its termination right set forth in clause (ii) shall be a complete
termination of this Lease as to the affected portion of the Leased Premises. If
the term of a proposed sublease will not extend into the last three (3) years of
the initial Term of this Lease ("NON-TERMINABLE SUBLEASE"), Landlord's exercise
of its termination right set forth in clause (ii) shall be a termination of this
Lease as to the affected portion of the Leased Premises only for the term of the
proposed sublease, in which case the affected portion of the Leased Premises
shall once again become subject to the provisions of this Lease upon the
expiration of what would have been the term of such proposed sublease. If
Landlord fails to either elect option (i) or option (ii), of if Landlord elects
option (i) and fails to approve or disapprove any such sublessee or assignee,
within the aforesaid thirty (30), or fifteen (15) day, period, then Landlord
shall be deemed to have elected option (i) and such sublessee or assignee and
the proposed sublease or assignment shall be deemed disapproved. Notwithstanding
the foregoing, Landlord will not unreasonably withhold its approval of an
assignment of this Lease or a sublease of a portion of the Leased Premises if
the following conditions are satisfied:
(a) the conditions of Section 8.1.2 (1) through (4) are
satisfied;
(b) the requirements of Sections 8.1.4 and 8.1.5 are satisfied,
complied with, and applicable;
(c) the assignee or sublessee is creditworthy and of a kind and
type customarily found in or compatible with first-class office buildings in the
Greenway Plaza and Galleria areas in Houston;
(d) the assignee or sublessee shall not use the Leased Premises
or the Building in a manner that adversely interferes with, burdens the use of,
or otherwise increases the use of the public areas of the Project, any Building
system, or the use of the elevators or any Building system;
(e) such assignee or sublessee shall not occupy the Leased
Premises or applicable portion thereof more densely than three (3) people per
1,000 square feet of Net Rentable Area; and
(f) in no event shall any of the following be considered as
suitable assignees or sublessees and Landlord shall not be required to approve
or accept any of the following: any governmental body, agency or bureau (of the
United States, any state, county, municipality or any subdivision thereof); any
foreign government or subdivision thereof; any health care professional or
health care service organization; schools or similar organizations; employment
agencies; radio,
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television or other communication stations; restaurants; and retailers offering
retail services from the Leased Premises.
8.1.4 ASSIGNMENTS AND SUBLETS. Whether or not requiring
Landlord's approval or consent, (a) each approved sublessee or assignee shall
fully observe all covenants of this Lease, (b) no consent by Landlord to an
assignment or sublease shall be deemed in any manner to be (i) consent to a use
not permitted hereunder, or (ii) an assignment by Tenant of any rights which are
otherwise not assignable pursuant to other provisions of this Lease, (c) any
assignment or subletting shall be subject to all the terms, covenants and
conditions of this Lease, (d) any assignee must assume in writing all the rights
and obligations of the assignor hereunder, (e) no assignment or subletting by
Tenant shall relieve Tenant or any guarantor, if any, of this Lease of any
obligations or covenants under this Lease or any such guaranty, if any, and
Tenant and any guarantor, if any, of this Lease shall remain fully liable
hereunder or thereunder (as applicable), (f) if the aggregate rental, bonus or
other consideration paid by the assignee or sublessee (to the extent in excess
of the third party out-of-pocket costs incurred by Tenant in connection with
such sublease or assignment for leasing commissions, tenant improvements, tenant
allowances and similar or related out-of-pocket third party costs) exceeds the
Base Rental payable to Landlord for such space during the applicable period,
then (i) fifty percent (50%) of such excess as to the first 75,000 square feet
of Net Rentable Area in the aggregate subleased or assigned, and (ii) one
hundred percent (100%) of such excess for all Net Rentable Area subleased or
assigned in excess of 75,000 square feet of Net Rentable Area in the aggregate,
shall be paid to Landlord within thirty (30) days after receipt by Tenant,
together with an accounting prepared and certified to by Tenant of its
determination of the sums owed to Landlord hereunder, (h) a copy of the original
sublease or assignment (and all amendments thereto) shall be delivered to
Landlord within fifteen (15) days from the effective date thereof, and (i) if
the proposed sublessee or assignee is approved by Landlord and Tenant fails to
enter into the sublease or assignment with the approved sublessee or assignee
within one hundred eighty (180) days after the date Tenant submitted its
proposal to Landlord, then Landlord's approval of the proposed sublease or
assignment shall be deemed null and void and Tenant must comply again with all
of the conditions of this Section.
8.1.5 EFFECT OF SUBLEASE OR ASSIGNMENT. If, in accordance with
this Section, the Leased Premises or any part thereof is sublet or occupied by
other than Tenant or this Lease is assigned, whether or not such assignment or
sublease requires Landlord's approval or consent, Landlord, during the
continuance of an uncured Event of Default under this Lease on the part of
Tenant, if any, may collect rent from the subtenant, assignee or occupant, and
apply the net amount collected to Rent due by Tenant to Landlord under this
Lease, and Tenant hereby authorizes and directs any such assignee or sublessee
to make such payments of rent direct to Landlord upon receipt of notice from
Landlord. No subletting, assignment, occupancy, or collection shall be deemed
(i) a waiver of any of Tenant's covenants contained in this Lease, (ii) a
release of any guarantor of this Lease from further performance of its covenants
under such guaranty, (iii) a release of Tenant from further performance by
Tenant of its covenants under this Lease, or (iv) a waiver of any of Landlord's
other rights hereunder.
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8.1.6 PERMITTED ASSIGNEE'S RIGHTS. Notwithstanding the giving by
Landlord of its consent to any sublease or assignment with respect to the Leased
Premises, no sublessee or assignee may exercise any renewal options,
preferential rights, rights of first offer, contraction rights, signage rights,
exclusives, or similar rights under this Lease except as provided otherwise in
this Lease. Tenant may not exercise any renewal options, rights of first offer
or similar rights under this Lease if Tenant has assigned all of its interest in
this Lease. An assignee, but not a sublessee, that is a Permitted Affiliate and
is the assignee of Tenant's entire interest under this Lease is a "Permitted
Assignee." Provided the applicable conditions of this Lease are satisfied, (a) a
Permitted Assignee shall have the right to exercise the Renewal Option set forth
in Article I of EXHIBIT B, and the Preferential Right set forth in Article II of
EXHIBIT B, (b) a Permitted Assignee, or a Permitted Affiliate of Tenant or a
Permitted Assignee, that is a savings and loan association, federal or state
chartered lending institution, national or state banking institution, or federal
savings bank, or other business permitted under applicable law to offer retail
banking services, shall be entitled to exercise or benefit from the exclusive
retail banking rights set forth in Section 1.10, the signage rights set forth in
Section 3.4.3, and the restriction set forth in Section 3.4.4, and (c) a
Permitted Assignee or a Permitted Affiliate of Tenant or a Permitted Assignee
shall be entitled to exercise the signage rights set forth in Section 3.4.2, and
the ATM rights set forth in Section 1.4. The foregoing rights are exercisable by
a Permitted Assignee only if the entirety of such rights are assigned to such
Permitted Assignee and Tenant (or other assignor) has not retained any portion
thereof so that only one party will be exercising any such rights. Tenant shall
remain fully liable for all obligations of Tenant under this Lease including all
additional obligations resulting from the exercise of such rights by such
Permitted Assignee or Permitted Affiliate. Tenant, or a Permitted Assignee, may
exercise the Renewal Option notwithstanding the fact that a sublessee may be in
occupancy of a portion of the Leased Premises as long as Tenant and such
Permitted Assignee remain fully liable for all obligations of Tenant under this
Lease including all additional obligations resulting from the exercise of such
rights. Neither Tenant, a Permitted Assignee, nor a Permitted Affiliate may
exercise the Preferential Right if Tenant or a Permitted Assignee has subleased
any portion of the Leased Premises. No sublessee, whether or not a Permitted
Affiliate, may exercise the Renewal Option or the Preferential Right.
8.1.7 LIMITATIONS ON APPROVALS. Any attempted assignment or
sublease by Tenant in violation of the terms and covenants hereof shall be void
and shall be an Event of Default under this Lease. Any consent by Landlord to a
particular assignment or sublease shall not constitute Landlord's consent to any
other or subsequent assignment or sublease, and any proposed sublease or
assignment by a sublessee of Tenant shall be subject to the provisions hereof as
if it were a proposed sublease or assignment by Tenant.
8.1.8 TENANT IMPROVEMENTS. Any improvements, additions, or
alterations to the Building or the Project that are required by applicable law,
or are reasonably deemed necessary by Landlord, as a result of any subletting or
assignment hereunder, shall be installed and provided without cost or expense to
Landlord.
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8.2 ASSIGNMENT BY LANDLORD. Landlord shall have the right to transfer
and assign, in whole or in part, all its rights and obligations hereunder and in
the Project and all other property referred to herein, and in such event and
upon such transfer (any such transferee to have the benefit of, and be subject
to, the provisions of Sections 8.3 and 8.4) no further liability or obligation
shall thereafter accrue against Landlord hereunder, provided such successor in
interest has agreed to assume (subject to the limitations of Section 8.4) all of
Landlord's obligations accruing under this Lease after the date of such
assignment.
8.3 PEACEFUL ENJOYMENT. Landlord covenants that Tenant shall and may
peacefully have, hold and enjoy the Leased Premises subject to the other terms
hereof, provided that no Event of Default exists under this Lease. It is
understood and agreed that this covenant and any and all other covenants of
Landlord contained in this Lease shall be binding upon Landlord and its
successors and assigns only with respect to breaches occurring during its and
their respective ownership of the Landlord's interest hereunder.
8.4 LIMITATION OF LANDLORD'S LIABILITY. Except as provided in the
following sentence of this Section 8.4, Tenant shall look solely to Landlord's
interest in the Project for the recovery of any judgment against Landlord, it
being agreed that neither Landlord (and its partners, officers, directors and
shareholders) nor any mortgagee shall ever be personally liable for any such
judgment. In the event of a transfer by Landlord of its interest in the Project,
Tenant may proceed against the net sales proceeds received from such transfer
for the recovery of any claim that accrued prior to such transfer so long as
Tenant has given Landlord written notice of the claim and Tenant commences an
action to recover on such claim within six (6) months after consummation of the
transfer. In the event that the sale proceeds from any such transfer have been
distributed to the owners (E.G., partners, shareholders, members) of the
transferring Landlord prior to the commencement of Tenant's claim, the liability
of each owner for such claim shall be limited to that portion of the sale
proceeds actually received by such owner. In addition, Tenant also agrees that
Tenant shall not be entitled to recover from Landlord nor any of its agents,
employees, officers, partners, servants or shareholders any indirect, special or
consequential damages Tenant may incur as a result of a default under this Lease
or other action by Landlord, its agents, employees, officers, partners, servants
or shareholders. The provisions contained in the foregoing sentences are not
intended to, and shall not, limit any right that Tenant might otherwise have to
(i) obtain injunctive relief against Landlord or Landlord's successors in
interest, or (ii) any suit or action in connection with enforcement or
collection of amounts which may become owing or payable under or on account of
insurance maintained by Landlord, or (iii) any other action which does not
require Landlord to be personally liable for damages from assets other than the
Project.
8.5 LIMITATION OF TENANT'S LIABILITY. Landlord agrees that, except in
connection with an unauthorized holding over by Tenant, Landlord shall not be
entitled to recover from Tenant nor any of its agents, employees, officers,
partners, servants or shareholders any indirect, special or consequential
damages Landlord may incur as a result of a default under this Lease or other
action by Tenant, its agents, employees, officers, partners, servants or
shareholders.
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IX.
9.1 NOTICES. Any notices or other communications to Landlord or Tenant
required or permitted to be given under this Lease must be in writing and shall
be effectively given if delivered to the addresses for Landlord and Tenant
stated above or if sent by United States Mail, certified or registered, return
receipt requested, to said addresses. Any notice mailed shall be deemed to have
been given on the third (3rd) regular business day next following the date of
deposit of such item in a depository of the United States Postal Service in
Houston, Texas. Notice effected other than by mail shall be deemed to have been
given at the time of actual delivery. Either party shall have the right to
change its address to which notices shall thereafter be sent by giving the other
party ten (10) days written notice thereof.
9.2 MISCELLANEOUS.
9.2.1 SUCCESSORS AND ASSIGNS. This Lease shall be binding upon
and inure to the benefit of the successors and assigns of Landlord and shall be
binding upon and inure to the benefit of Tenant, its successors and, to the
extent assignment is permitted or may be approved by Landlord hereunder,
Tenant's assigns.
9.2.2 GENDER, PLURALS. The pronouns of any gender shall include
the other gender and either the singular or the plural shall include the other.
9.2.3 REMEDIES CUMULATIVE. All rights and remedies of the parties
under this Lease shall be cumulative and none shall exclude any other rights or
remedies allowed by law; this Lease is declared to be a Texas contract and all
of the terms thereof shall be construed according to the laws of the State of
Texas; and venue shall lie exclusively in Harris County, Texas.
9.2.4 AMENDMENTS. This Lease may not be altered, changed or
amended, except by an instrument in writing executed by all parties hereto.
Further, the terms and provisions of this Lease shall not be construed against
or in favor of a party hereto merely because such party is the "Landlord" or the
"Tenant" hereunder or such party or its counsel is the draftsman of this Lease.
9.2.5 EXHIBITS AND SCHEDULES. The terms and provisions of
Exhibits A through J and Schedules I and II, inclusive, attached hereto are
hereby made a part hereof for all purposes.
9.2.6 AUTHORIZATION. Each party represents and warrants that all
consents or approvals required of third parties (including, but not limited to,
its Board of Directors or partners) for the execution, delivery and performance
of this Lease have been obtained and that each party has the right and authority
to enter into and perform its covenants contained in this Lease.
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9.2.7 REASONABLE EFFORTS. Whenever in this Lease there is imposed
upon either party the obligation to use its reasonable efforts or diligence,
such party shall be required to do so only to the extent the same will not
impose upon such party excessive financial burdens.
9.2.8 INVALIDITY. If any term or provision of this Lease, or the
application thereof to any person or circumstance, shall to any extent be
invalid or unenforceable, the remainder of this Lease, or the application of
such provision to persons or circumstances other than those as to which it is
invalid or unenforceable, shall not be affected thereby, and each provision of
this Lease shall be valid and shall be enforceable to the extent permitted by
law.
9.2.9 ENTIRETY. This Lease and any attached exhibits and
schedules constitute the entire agreement between Landlord and Tenant. No prior
or contemporaneous promises, inducements, representations or agreements, oral or
otherwise, between the parties hereto not embodied herein shall be binding or
have any force or effect. Tenant will make no claim on account of any
representation whatsoever, whether made by a renting agent, broker, officer or
other representative of Landlord or which may be contained in any circular,
prospectus or advertisement relating to the Leased Premises or the Project, or
otherwise, unless the same is specifically set forth in the Lease.
9.2.10 DAYS. All references to days in this Lease and any
exhibits or schedules hereto mean calendar days, not working or business days,
unless otherwise stated.
9.2.11 CAPTIONS. Captions and headings herein are for Landlord's
and Tenant's convenience only and neither limit nor amplify the provisions of
this Lease.
9.2.12 TIME OF ESSENCE. In all instances where either party
hereto is required hereunder to pay any sum or do any act at a particular time
or within any indicated period, it is understood that time is of the essence.
9.2.13 CONSENT. In all cases where consent or approval shall be
required or requested of either Tenant or Landlord pursuant to this Lease, the
giving of consent or approval shall not be unreasonably withheld, conditioned or
delayed by the party from whom such consent is required or requested.
9.3 SUBORDINATION. As of the date hereof there is no mortgage or deed of
trust lien against the Project. This Lease shall be subject and subordinate to
all mortgages, deeds of trust and related security instruments which may
hereafter encumber the Project and to all renewals, modifications,
consolidations, replacements and extensions thereof and to each advance made or
hereafter to be made thereunder provided Tenant has received from the holder
thereof an agreement that Tenant will not be disturbed in its possession of the
Leased Premises, or have its rights under the Lease modified or terminated,
except pursuant to the terms of this Lease. In the event of the enforcement by
the trustee or the beneficiary under any such mortgage or deed of trust of the
remedies provided for by
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law or by any such mortgage or deed of trust, Tenant will, upon request of any
person or party succeeding to the interest of said trustee or beneficiary as a
result of such enforcement (and subject to the aforesaid recognition of Tenant's
rights under the Lease), automatically become the tenant of, and attorn to, such
successor in interest without change in the terms or provisions of this Lease;
provided, however, that such successor in interest shall not be bound by:
(i) any payment of Rent for more than one month in advance except
prepayments in the nature of security for the performance by Tenant of
its obligations under this Lease; or
(ii) any amendment or modification of this Lease made without the
written consent of such trustee or such beneficiary or such successor in
interest. Upon request by such successor in interest, Tenant shall
execute and deliver an instrument or instruments confirming the
attornment herein provided for.
9.4 ESTOPPEL CERTIFICATE OR THREE-PARTY AGREEMENT. Within ten (10) days
of receipt of Landlord's request, Tenant will execute either an estoppel
certificate or a three-party agreement among Landlord, Tenant and any third
party dealing with Landlord certifying to such facts (if true) and agreeing to
such notice provisions and other matters as such third party may reasonably
require in connection with the business dealings of Landlord and such third
party. Notwithstanding anything to the contrary herein, in the event of Tenant's
failure to execute and deliver any such certificate of agreement within ten (10)
days after Landlord's second request therefor shall constitute an Event of
Default, and no additional notice or cure periods shall apply.
9.5 BROKERAGE FEES. Landlord shall pay all brokerage fees and
commissions earned by Cushman Realty Corporation (Mr. Tim D. Relyea) and
Colliers Appelt Womack (Mr. Robert S. Parsley) (together "AGENT") in connection
with this Lease pursuant to separate agreement between Landlord and Agent.
Landlord and Tenant represent each to the other that except for Agent, there is
no other broker or agent involved in this transaction for which the other party
would be responsible to pay a fee or commission. Landlord and Tenant shall each
indemnify and hold the other harmless against any party claiming under the
indemnifying party for any such fees, including without limitation, reasonable
attorneys' fees and court costs. Landlord acknowledges that Agent is
representing Tenant and not Landlord.
9.6 RECORDING AND DISCLOSURE. Tenant agrees not to record this Lease,
but Landlord and Tenant shall execute and record a memorandum of this Lease.
Additionally, Tenant shall not disclose the terms of this Lease to any third
party except (i) legal counsel to Tenant, (ii) any assignee of Tenant's interest
in this Lease or sublessee of Tenant, (iii) as required by Legal Requirements,
or (iv) for financial reporting purposes.
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9.7 NO PARTNERSHIP. This Lease shall not be deemed or construed to
create or establish any relationship (other than that of Landlord and Tenant) or
partnership or joint venture or similar relationship or agreement between
Landlord and Tenant hereunder.
9.8 NO PRESS RELEASE. Neither Landlord nor Tenant shall issue a press
release regarding this Lease without the approval of the other, which approval
shall not be unreasonably withheld.
9.9 COMMUNICATIONS EQUIPMENT.
(a) For so long as Tenant is conducting business in and from the
Leased Premises, Tenant, at Tenant's sole cost and expense, shall have the right
to install no more than two (2) satellite communication dishes (the "SATELLITE
DISHES") with a diameter of not more than eighteen inches (18") in a location on
the roof of the Building designated by Landlord in its sole discretion with an
available base area of one (1) square foot; provided, however, the Satellite
Dishes must be utilized by Tenant in the conduct of its business.
(b) Landlord reserves the right to require Tenant from time to
time to relocate the Satellite Dishes to a new location or locations in the
Project designated by Landlord (each a "NEW SITE") by furnishing at least ninety
(90) days prior written notice (unless such location is legally required, in
which event such notice may be thirty (30) days), provided that any New Site
does not materially and adversely affect the operation of the Satellite Dishes.
(c) Any costs incurred by Landlord associated with Tenant's
installation, operation, utilization, replacement, maintenance and/or removal of
the Satellite Dishes shall be at Tenant's expense. The Satellite Dishes must be
(i) designed, installed and operated in complete compliance with all legal
requirements, and (ii) installed and operated so as not to adversely affect or
impact structural, mechanical, electrical, elevator, or other systems of or
serving the Building or Project or customary telephone service for the Building
or Project and so as not to cause injury to persons or property.
(d) Tenant shall be permitted to undertake the installation of
its Satellite Dishes, subject to the provisions of Article V of this Lease
(including without limitation Landlord's approval of the qualifications of
Tenant's contractors). Any such work conducted in connection with the
installation of the Satellite Dish must be done in accordance with Article V of
this Lease and EXHIBIT D attached hereto or any other reasonable regulations
promulgated by Landlord pertaining to construction in or on the Building by all
third party contractors of the same or similar trades.
(e) Subject to EXHIBIT D attached hereto and other reasonable
rules relating to Building security and safety that may be promulgated by
Landlord pertaining to access by tenants to the roof of the Building and
provided Tenant does not unreasonably disturb any other tenants of the Building,
Tenant and Tenant's contractors shall have reasonable access to the Satellite
Dishes for purposes of operating, servicing, repairing or otherwise maintaining
said equipment.
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(f) TENANT HEREBY INDEMNIFIES AND HOLDS LANDLORD HARMLESS FROM
ALL COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES AND COSTS OF SUIT),
LOSSES, DAMAGES OR LIABILITIES ARISING OUT OF THE DESIGN, INSTALLATION,
OPERATION, MAINTENANCE, USE, AND REMOVAL BY TENANT OF THE SATELLITE DISHES AND
THE ADDITIONAL EQUIPMENT, EVEN TO THE EXTENT CAUSED BY LANDLORD'S NEGLIGENCE
(BUT NOT TO THE EXTENT CAUSED BY LANDLORD'S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT).
(g) Nothing contained in this Section 9.9 shall be deemed to
prohibit or restrict any other individual or entity, including without
limitation Landlord or any other tenant of the Building, from installing
communications equipment on the roof of the Building or to use the roof for any
other purpose.
(h) Tenant agrees to reimburse Landlord for all out-of-pocket
costs and expenses incurred by Landlord pursuant to this Section 9.9 within
thirty (30) days after receipt by Tenant of an invoice therefor from Landlord.
(i) Tenant agrees that the installation, operation and
maintenance of the Satellite Dishes at all times, and at Tenant's expense, shall
comply with such technical standards (including, without limitation, technical
standards relating to frequency compatibility, radio interference protection,
antenna type and location, and physical installation) required by Landlord from
time to time. Additionally, the access to, and installation, maintenance and
operation of, the Satellite Dishes must at all times be in strict compliance
with all legal requirements and with EXHIBIT D attached hereto.
(j) If, in the reasonable judgment of Landlord, any electrical,
electromagnetic, radio frequency or other interference shall result from the
operation of the Satellite Dishes, Tenant agrees to shut down Tenant's equipment
upon thirty (30) days prior notice to Tenant; provided, however if an emergency
situation exists which could result in injury to persons or material damage to
property, as determined by Landlord in its reasonable discretion, Landlord may
shut down Tenant's equipment immediately and shall give Tenant notice thereof as
soon as possible thereafter. Tenant shall indemnify and hold harmless Landlord
from all expenses, costs, damages, loss, claims or other liabilities arising out
of said shutdown. Tenant agrees to cease operations (except for intermittent
testing on a schedule approved by Landlord) until the interference has been
corrected to the satisfaction of Landlord. If such interference has not been
corrected within sixty (60) days, Landlord, at its sole option, either may
terminate Tenant's rights under this Section 9.9 forthwith, or may require that
Tenant immediately remove the Satellite Dishes causing such interference.
(k) At Tenant's own cost and expense, and by use of a contractor
or contractors approved in writing by Landlord, Tenant shall keep the Satellite
Dishes in a good condition and shall perform all repairs and improvements to the
Satellite Dishes legally required. If Tenant fails to
-57-
<PAGE>
commence any such repairs or improvements to the Satellite Dishes within ten
(10) days after written notice from Landlord, and thereafter diligently proceed
with such repair until completion, Landlord, at its option, may make such repair
or any replacement reasonably deemed necessary by Landlord, and Tenant shall pay
to Landlord the actual cost thereof, plus a charge equal to seven percent (7%)
for administrative cost recovery, within thirty (30) days after receipt of an
invoice therefor. Landlord shall have no obligation to license, maintain,
operate or safeguard the Satellite Dishes.
IN TESTIMONY WHEREOF, the parties hereto have executed this Lease
as of the date aforesaid. This Lease may be executed in multiple counterparts,
all of which when taken together shall constitute one and the same instrument.
LANDLORD:
UTAH STATE RETIREMENT INVESTMENT FUND,
an independent agency of the State of Utah
By: Westmark Realty Advisors, L.L.C.,
its Agent
By:/s/ MATTHEW C. HURLBUT
Name: MATTHEW C. HURLBUT
Title: AUTHORIZED SIGNATORY
By:/s/ JOSEPH W. MARKLING
Name: JOSEPH W. MARKLING
Title: AUTHORIZED SIGNATORY
TENANT:
BANK UNITED, a federal savings bank
By:/s/ JONATHON K. HEFFRON
Name: JONATHON K. HEFFRON
Title: EXECUTIVE VICE PRESIDENT
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<PAGE>
SCHEDULE I
NET RENTABLE AREA
Chart Showing Net Rentable Area
59
<PAGE>
EXHIBIT A
FLOOR PLANS
Map Showing Floor Plans
A-1
<PAGE>
EXHIBIT A-1
LAND
DESCRIPTION OF LAND
(PHOENIX TOWER)
Description of a 2.1840 acre tract of land (95,134 square feet) being out of Lot
Eight (8) of the J.B. Sydnor Addition and a portion of a called 30,416 square
foot tract as recorded in Volume 6327, Page 144 of the Harris County Deed
Records and a portion of a called 66,983 square foot tract as recorded in Volume
6327, Page 156 of the Harris County Deed Records, situated in the A.C. Reynolds
Survey, Abstract No. 61, in the City of Houston, Harris County, Texas, said
2.1840 acre tract of land being more particularly described by metes and bounds
as follows with bearings being referenced to the Texas State Plan Coordinate
System, South Central Zone:
BEGINNING at a 60 penny nail found in the Northerly right-of-way line of U.S.
Highway 59 (Southwest Freeway, 360 feet wide) and at the Southeast corner of a
called 32,745 square foot tract as recorded in Volume 8315, Page 142 of the
Harris County Deed Records, said point also being the Southwest corner of said
66,983 square foot tract and the herein described tract;
THENCE N 12 deg. 18 min. 43 sec. W, along the East line of said 32,745 square
foot and the West line of said 66,983 square foot tract, a distance of 370.00
feet to an "X" cut in concrete found in the South line of the Partial Replat of
Greenway Plaza, Section One (1) as recorded in Volume 180, Page 1 of the Harris
County Map Records, said point being the Northwest corner of the herein
described tract;
THENCE N 77 deg. 41 min. 17 sec. E, along the South line of said Partial Replat
of Greenway Plaza, Section One (1), a distance of 256.35 feet to an "X" cut in
concrete found in the arc of a curve to the right, said point being in the
Westernly right-of-way line of Buffalo Speedway (107 feet wide), and being the
Northeast corner of the herein described tract;
THENCE Southeasterly along the Westerly right-of-way line of said Buffalo
Speedway and the arc of said curve to the right having a radius of 5,672.65
feet, a central angle of 03 deg. 18 min. 11 sec., a chord bearing S 12 deg. 55
min. 12 sec. E, 326.99 feet, a total arc distance of 327.04 feet to an "X" cut
in concerete found marking the Northeast cut back corner for the intersection of
the Westerly right-of-way line of said Buffalo Speedway and the Northerly
right-of-way line of said U.S.
Highway 59;
THENCE S 33 deg. 17 min. 52 sec. W, along the cut back line, a distance of 61.50
feet to a 5/8 inch iron rod found in the Northerly right-of-way of said U.S.
Highway 59 and marking the Southwest cut back corner of said intersection;
A-1 -1
<PAGE>
THENCE S 77 deg. 41 min. 10 sec. W, along the Northerly right-of-way of said
U.S. Highway 59, a distance of 215.87 feet to the POINT OF BEGINNING and
containing 2.1840 acres of land.
A-1 -2
<PAGE>
EXHIBIT B
OPTIONS
I. RENEWAL OPTION
1.1 OPTION. As long as there is then no uncured Event of Default, Tenant
has not assigned this Lease or sublet the Leased Premises except as permitted in
Section 8.1.6, and Tenant, a Permitted Assignee, and their Permitted Affiliates
together lease and occupy at least 150,000 square feet of Net Rentable Area of
the Leased Premises, Tenant or such Permitted Assignee is hereby granted the
option ("RENEWAL OPTION") to renew the Term of this Lease with respect to at
least 150,000 square feet of Net Rentable Area, but not to exceed the then
existing Leased Premises, for a period of up to ten (10) years following the
expiration of the initial Term on the terms and conditions hereinafter set
forth. The Renewal Option may be exercised in two (2) five (5) year or one (1)
ten (10) year increments, at Tenant's option (each increment being hereinafter
referred to as a "RENEWAL TERM"), to commence at the expiration of the initial
Term or applicable Renewal Term, as the case may be.
1.2 MANNER OF EXERCISE. If Tenant is considering exercising a Renewal
Option, Tenant shall notify Landlord of such interest by delivering written
notice to Landlord on a date not more than eighteen (18) months nor less than
twelve (12) months prior to the expiration of the Initial Term or the
immediately preceding Renewal Term, as the case may be (hereinafter referred to
as the "RENEWAL OPTION NOTICE DATE"), designating the length or lengths of
Renewal Terms being considered by Tenant. On or before the date thirty (30) days
following receipt of the Renewal Option Notice Date, Landlord shall deliver to
Tenant a notice ("LANDLORD'S RENEWAL NOTICE") of Landlord's reasonable good
faith estimate of the Market Rate for the Leased Premises for such Renewal
Terms. Tenant shall then have until the date twelve (12) months prior to the
expiration of the Initial Term or of the immediately preceding Renewal Term, as
the case may be, but in no event less than thirty (30) days following Tenant's
receipt of Landlord's Renewal Notice (the "RENEWAL OPTION EXERCISE DATE"),
within which to elect to exercise any such Renewal Option, by giving written
notice thereof to Landlord. If Tenant fails to timely exercise any Renewal
Option, all of Tenant's rights with respect to such Renewal Options, and any
future Renewal Options shall expire.
1.3 BASIC TERMS. The renewal of this Lease shall be upon the same terms
and conditions as set forth in this Lease with respect to the initial Term,
except that (a) Base Rental shall be the prevailing Market Rate (defined below),
(b) Tenant shall have no option to renew this Lease beyond the expiration of the
ten (10) year period set forth herein, (c) Tenant shall not have the right to
assign its renewal rights to any assignee of the Lease or sublessee of the
Leased Premises except as permitted in Section 8.1.6, and (d) the Leased
Premises will be provided in their then existing condition (on an "AS IS" basis)
at the time the Renewal Term commences, without any obligation on the part of
Landlord to furnish, install or alter any leasehold improvements.
B-1
<PAGE>
II. PREFERENTIAL RIGHT TO LEASE
2.1 SPACE. As long as there is then no uncured Event of Default,
Tenant has not assigned this Lease or sublet the Leased Premises except as
permitted in Section 8.1.6, and Tenant, a Permitted Assignee, and/or such
Permitted Affiliates then occupy and lease not less than 200,000 square feet of
Net Rentable Area in the Building pursuant to this Lease, and subject to all
prior rights of existing tenants or others who may possess any renewal,
expansion, preferential or other rights to lease any space in the Building as of
the date of this Lease, Tenant or such Permitted Assignee shall have during the
initial Term a continuing and recurring preferential right ("PREFERENTIAL
RIGHT") to lease all or any portion of FLOORS 9 THROUGH 20 of the Building
("PREFERENTIAL SPACE"), subject to the terms and conditions hereinafter set
forth.
2.2 EXERCISE. Landlord shall notify Tenant in writing of the
availability of any such Preferential Space. Landlord's notice shall include the
relevant information and business terms (including, without limitation, the
floor, availability date, calculations of Usable Area and Net Rentable Area and
space plans with respect thereto) and Landlord's good faith determination of the
Market Rate therefor. Tenant shall have ten (10) days following receipt of such
notice to give Landlord notice of the exercise of its Preferential Right as to
such space. If Landlord has a bona fide offer for such space, Tenant must make
its election as to all of such space included in such third-party offer. If
Tenant elects not to, or fails to, exercise its Preferential Rights within the
ten (10) day period specified above, Landlord shall have the right to lease all
or any portion of such Preferential Space to another tenant or tenants provided
the effective rental rate for such lease shall not be less than ninety-five
percent (95%) of the effective rental rate that was offered to Tenant. If a
lease to another tenant is not consummated within one-hundred eighty (180) days
immediately following the elapse of the applicable ten (10) day notice period,
then Tenant's Preferential Right to such space shall be reinstated, and Landlord
shall again comply with the applicable provisions of this Article.
2.3 BASIC TERMS. Tenant's leasing of any Preferential Space shall
be upon the same terms and conditions as set forth in this Lease, except that
(a) Base Rental shall be the prevailing Market Rate as of the proposed
commencement date of the Preferential Space, (b) payment of Base Rental and
Additional Rental shall commence with respect to the Preferential Space on the
earlier to occur of Tenant's occupancy of such Preferential Space for the
conduct of its business or ninety (90) days after the date Landlord tenders
possession of the Preferential Space to Tenant, and (c) the Preferential Space
shall be added to the Leased Premises in its then-existing condition (on an "AS
IS" basis, excluding latent defects in the base Building and Building systems)
without any obligation on the part of Landlord to furnish, install or alter any
leasehold improvements. Notwithstanding the foregoing, Landlord agrees to
deliver the Preferential Space to Tenant in a vacuumed and broom-cleaned
condition with all of the prior tenant's personal property removed. The term for
the leasing of any Preferential Space shall terminate when the Term of the Lease
for the initial Leased Premises described in Section 1.2 terminates. In no event
shall this Lease continue in force and effect as to any Preferential Space
beyond the expiration or termination of the
B-2
<PAGE>
Lease as to the initial Leased Premises, unless included in the Renewal Option.
The ninety (90) day period described above shall be taken into account in
determining Market Rate.
2.4 MISCELLANEOUS. Tenant shall not have the right to assign its
Preferential Rights to any assignee of the Lease or sublessee of the Leased
Premises, except as permitted in Section 8.1.6. No Preferential Rights may be
exercised by Tenant during the last twenty-four (24) months of the Term (or any
Renewal Term) unless Tenant shall exercise its Renewal Option for the next
succeeding Renewal Term.
III. MARKET RATE
3.1 DEFINITION. For the purposes of this Lease, "MARKET RATE"
shall be that rate (determined on a "gross" lease basis) charged for space of
comparable size and condition in comparable, first-class office buildings in the
Greenway Plaza and Galleria areas in Houston, Texas, further taking into
consideration the following: (i) location, quality and age of the building; (ii)
use, location, size and/or floor level(s) of the space in question; (iii) the
definition of "rentable area"; (iv) extent of leasehold improvements to be
provided; (v) abatements (including with respect to base rental, operating
expenses and real estate taxes and parking charges); (vi) inclusion or exclusion
of parking charges in rental; (vii) lease takeovers/assumptions; (viii)
relocation/moving allowances; (i) space planning allowances; (x) refurbishment
and repainting allowances; (xi) club memberships; (xii) any other concessions or
inducements; (xiii) extent of service provided or to be provided; (xix)
distinction between "gross" and "net" lease; (xv) base year or dollar amount for
escalation purposes (both operating expenses and real estate taxes) in the case
of a "gross" lease; (xvi) any other adjustments (including by way of indexes) to
base rental; (xvii) credit standing and financial stature of the tenant; (xviii)
term or length of lease; (xix) the time the particular rental rate under
consideration was agreed upon and became or is to become effective; (xx) the
payment of a leasing commission and/or fee or bonus in lieu thereof; and (xxi)
any other relevant term or condition in making such Market Rate determination.
3.2 DETERMINATION. Such Market Rate shall be agreed upon by
Landlord and Tenant no later than thirty (30) days after delivery by Landlord to
Tenant of Landlord's good faith determination of Market Rate, each party
agreeing to use reasonable efforts to reach such agreement. However, if Landlord
and Tenant are unable within such period and by such time to reach such
agreement, then Market Rate shall be determined pursuant to the below
provisions, in which event the Market Rate determined by such procedure shall be
binding upon both Landlord and Tenant, and Tenant shall be entitled to exercise
an option subject to final determination of the Market Rate pursuant to this
Section. Landlord and Tenant shall promptly attempt to agree upon an arbitrator
meeting the qualifications hereinafter set forth (the "ARBITRATOR"). The
Arbitrator selected shall be a licensed real estate broker, with not less than
ten (10) years experience in negotiating office leases in the Greenway Plaza and
Galleria areas. As a condition to selection, the Arbitrator must also have
negotiated at least three (3) major office leases (50,000 square feet or more)
in the Greenway Plaza and Galleria areas during the thirty-six (36) months
preceding his or her selection as the Arbitrator.
B-3
<PAGE>
The Arbitrator selected shall determine the Market Rate by selecting Landlord's
or Tenant's proposed rental rate, whichever in the Arbitrator's judgment most
closely resembles the prevailing Market Rate. If Landlord and Tenant are unable
to agree upon the Arbitrator within fifteen (15) days after submission of the
determination to arbitration, then the Arbitrator shall be selected by the
managing officer of the local office of the American Arbitration Association,
but if such officer fails to act within ten (10) days, then the Arbitrator shall
be selected by the Chief Judge of the United States District Court for the
Southern District of Texas, Houston, Division, acting in such judge's
individual, and not judicial, capacity. The determination of the Arbitrator
shall be final and binding on Landlord and Tenant. Until the Market Rate has
been finally determined, Tenant shall pay Base Rental based upon Landlord's good
faith determination thereof, and an appropriate refund shall be made to or by
Tenant within ten (10) days after a final determination of the Market Rate is
made. The fees and expenses of the Arbitrator and all other expenses, if any,
incurred in connection with arbitration of the Market Rate shall be borne
equally by Landlord and Tenant.
IV. RIGHT TO TERMINATE
4.1 ONE-TIME RIGHT TO TERMINATE.
(a) Provided there is then no uncured Event of Default under this
Lease and Tenant has experienced a Change in Control (as hereinafter defined),
Tenant shall have the right to terminate this Lease (the "TERMINATION OPTION")
in its entirety effective as of February 28, 2003 (the "TERMINATION DATE"), by
(a) furnishing written notice (the "TERMINATION NOTICE") to Landlord no later
than February 28, 2002 ("TERMINATION EXERCISE DATE") and (b) paying to Landlord
(i) one-half of the Termination Payment (defined below), such one-half
discounted back from the Termination Date to the date of payment using a
discount rate of ten (10%) per annum, with the Termination Notice, and (ii) the
remaining one-half of the Termination Payment on the Termination Date, both
amounts to be paid by cash or certified check. If Tenant fails to timely
exercise the Termination Option, the Termination Option shall terminate
automatically and Tenant shall have waived forever its right to exercise the
Termination Option. If Tenant timely exercises the Termination Option but fails
to timely pay the Termination Payment at the times described above, the exercise
of the Termination Option by Tenant shall be null and void and the Lease shall
remain in full force and effect after the Termination Date. A "Change of
Control" shall occur if the assets or stock of Tenant have been acquired by any
entity permitted by law to own a banking institution such that the Office of
Thrift Supervision or its successor as Tenant's primary regulatory agency
considers such transfer to have caused a change of control and such entity
elects to move the primary executive offices of Tenant to a location different
from the Building.
(b) For purposes of this Lease, the "TERMINATION PAYMENT" as to
the Leased Premises shall be the sum of (i) amount remaining unpaid ("UNPAID
AMOUNT") as of the Termination Date with respect to a hypothetical loan
("ASSUMED LOAN") with a term equal to the Applicable Term (defined below) and an
initial principal balance equal to the Upfront Amount (defined below), bearing
interest at ten percent (10%) per annum, amortized over the term of the Assumed
Loan and
B-4
<PAGE>
payable in equal monthly installments of principal and interest over such term
of the Assumed Loan, with the first such payment due and payable one (1) month
following the date of the commencement of the Applicable Term, plus (i) the
difference in rent between the Old Lease and this Lease for what would have been
the portion of the Leased Premises subject to the Old Lease from March 1, 1998
through March 31, 1999, plus (ii) the difference between the average Base Rent
payable under this Lease and the Base Rent payable under this Lease through the
Termination Date.
(c) As used herein, "APPLICABLE TERM" shall mean the term
commencing on the Commencement Date and continuing through the end of the
initial ten (10) year Term.
(d) As used herein, "UPFRONT AMOUNT" shall mean the aggregate
amount of (i) any brokerage or lease commissions paid by Landlord with respect
to the Leased Premises, including any expansions or additions thereto plus (ii)
all tenant improvement allowances or other monetary inducements (including
rental abatements) or monetary concessions (if any) paid by Landlord with
respect to the Leased Premises, including any expansions or additions thereto.
(e) As used herein, "MONTHLY PAYMENTS" shall mean the
hypothetical monthly principal payments that would have been owing from and
after the Termination Date through the remainder of the term of the Assumed Loan
as to each portion of the Premises.
(f) Attached hereto as EXHIBIT J is an example of the calculation
of the Termination Payment based on the assumptions (some of which reflect the
actual facts) set forth in EXHIBIT J. The actual calculation of the Termination
Payment will vary as the Leased Premises may be expanded, allowances,
inducements, and commissions may increase, and the commencement dates of the
payment of Rent may vary.
V. CONTRACTION OPTION
5.1 CONTRACTION OPTION. Tenant shall have the option ("CONTRACTION
OPTION"), provided there is then no uncured Event of Default under this Lease,
to reduce the size of the Leased Premises by one (1) full floor, which floor
shall, at Tenant's option, be either floor 13 or the lowest full floor of the
Leased Premises (excluding floors 9 and 10), such reduction to be effective on a
date ("Contraction Date") during the sixth Lease Year (between March 1, 2003 and
February 28, 2004) provided (a) Tenant delivers to Landlord at least twelve (12)
months prior written notice ("CONTRACTION NOTICE") of its election to exercise
the Contraction Option and the Contraction Date, and (b) Tenant pays to Landlord
at the time of the delivery of its Contraction Notice a reduction fee equal to
the Termination Payment that would have been payable as of the Contraction Date
under Article IV of this EXHIBIT B as if the Termination Date had been the
Contraction Date provided such fee shall be the amount of the Termination
Payment allocable to the floor eliminated from the Leased Premises based on its
relative number of square feet of Net Rentable Area and such reduction fee shall
be discounted back from the Contraction Date to the date of payment using a
discount rate of ten percent (10%) per annum. If Tenant fails to timely exercise
the Contraction Option (by
B-5
<PAGE>
delivering written notice by February 28, 2003) the Contraction Option shall
terminate automatically and Tenant shall have waived forever its right to
exercise the Contraction Option. If Tenant timely exercises the Contraction
Option but fails to timely pay the Termination Payment allocable to such floor
simultaneously with the delivery of its Contraction Notice, the exercise of the
Contraction Option by Tenant shall be null and void and the Lease shall remain
in full force and effect for all of the Leased Premises.
B-6
<PAGE>
EXHIBIT C
AIR CONDITIONING AND HEATING SERVICES
Subject to the provisions of Section 3.1.1 (ii) of the Lease,
Landlord will furnish Building standard air conditioning and heating (as
specified below) between 7:00 a.m. and 6:00 p.m. from Monday through Friday
(without request), and 8:00 a.m. and 1:00 p.m. on Saturdays (upon request made
in accordance with the rules and regulations for the Building), excluding
Holidays, . Upon request of Tenant, made in accordance with the rules and
regulations for the Building, Landlord will furnish air conditioning and heating
at other times (that is, at times other than the times specified above) in which
event Tenant shall reimburse Landlord for the cost of furnishing such services
at the rates set forth on SCHEDULE II attached hereto and incorporated herein.
The following dates shall constitute "HOLIDAYS" as said term is
used in this Lease:
1. New Year's Day;
2. Good Friday;
3. Memorial Day;
4. Independence Day;
5. Labor Day;
6. Thanksgiving Day; and
7. Christmas Day.
If, in the case of any holiday set forth in 1 through 7 above, a different day
shall be observed other than the day set forth above, then that day which
constitutes the day observed by national banks in Houston, Texas on account of
such holiday shall constitute the holiday under this Lease.
Building standard air conditioning and heating shall consist of
the following:
1. Outside design conditions are as follows: Dry Bulb
(degree)F
---------
Summer Outside Air Temperature.................. 97
Winter Outside Air Temperature.................. 15
2. Cooling inside design conditions are as follows: Dry Bulb
(degree)F
---------
Inside Temperatures (Offices & Lobbies)......... 72-78
3. Heating inside design conditions are as follows: Dry Bulb
(degree)F
---------
Inside Temperatures (Offices & Lobbies)......... 70-75
C-1
<PAGE>
SCHEDULE II
OVERTIME HVAC RATE
A graduated rate scale based on the number of simultaneous air handling unit
hours requested by Tenant:
$35 per air handling unit hour when only one (1) air handling unit is
requested and operated on Tenant floors
$32 per air handling unit hour when only two (2) air handling units are
requested and operated at the same time on Tenant floors
$30 per air handling unit hour when only three (3) air handling units
are requested and operated at the same time on Tenant floors
$29 per air handling unit hour when only four (4) air handling units are
requested and operated at the same time on Tenant floors
$28 per air handling unit hour when only five (5) air handling units are
requested and operated at the same time on Tenant floors
The rate may be indexed to the kilowatt hour rate for electricity as of the
commencement date (the "BASE RATE"), and if the Kilowatt Hour Rate increases
over the base rate, the graduated rates listed above shall, at the Landlord's
election, be increased proportionately.
The Base Rate is hereby stipulated to be $.061 per kilowatt hour; based on the
cost of electrical service in the building as invoiced by Houston Lighting and
Power on 7/30/97 (Current Bill Amount/Metered Kilowatt Hours (KWH)).
<PAGE>
EXHIBIT D
BUILDING RULES AND REGULATIONS
1. Sidewalks, doorways, vestibules, halls, stairways, elevator
lobbies and other similar areas in the common areas of the Building shall not be
used for the storage of materials or disposal of trash, be obstructed by tenants
or Landlord, or be used by tenants or Landlord for any purpose other than
entrance to and exit from the tenant's leased areas and the Building and for
going from one part of the Building to another part of the Building.
2. Plumbing fixtures shall be used only for the purposes for
which they are designed, and no sweepings, rubbish, rags or other unsuitable
materials shall be disposed into them. Damage resulting to any such fixtures
proven to result from misuse by a tenant, and not by Landlord's cleaning
contractors responsible for cleaning the tenant's leased area and the Building,
shall be the liability of said tenant.
3. Signs, advertisements, graphics or notices visible in or from
public corridors, any common area or public areas of the Building or from
outside the Building shall be subject to Landlord's (or Landlord's property
manager's) prior written approval. No part of the Project may be defaced by
tenants.
4. Significant movement in or out of the Building of furniture,
office equipment, or any other bulky or heavy materials shall be restricted to
such hours as Landlord (or Landlord's property manager) shall reasonably
designate. Landlord (or Landlord's property manager) will determine the method
and routing of the movement of said items so as to ensure the safety of all
persons and property concerned and Tenant shall be responsible for all costs and
expenses associated therewith. Advance written notice of intent to move such
items must be made to the Landlord (or Landlord's property manager) at least
twenty-four (24) hours before the time of such move. For nonsignificant movement
in or out of the Building of portable items which do not require use of dollies
or other moving equipment, notice to Landlord (or Landlord's property manager)
shall not be required.
5. All deliveries (including messenger deliveries but excluding
deliveries of small hand carried parcels) to a tenant's leased premises shall be
made through the freight elevators. Passenger elevators are to be used only for
the movement of persons. Delivery vehicles shall be permitted only in such areas
as are designated by Landlord, from time to time, for deliveries to the
Building. Absolutely no carts or dollies are allowed through the main entrances
of the Building or on passenger elevators without the prior written consent of
Landlord (or Landlord's property manager). Tenants may obtain the prior written
consent of Landlord (or Landlord's property manager) for any exception to the
provisions of this Paragraph 5.
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After-hours removal of hand carried items must be accompanied by
an "Equipment Removal Form" or "Property Pass" [to be provided by Landlord (or
Landlord's property manager)]. A letter signed by an authorized representative
of a tenant on such tenant's letterhead will also be acceptable. A list of
persons authorized to sign the Equipment Removal Form or Property Pass (and any
amendments thereto) will be furnished by each tenant to Landlord and Landlord
shall be entitled to rely thereon. Each tenant shall have the right to amend
such list from time to time upon written notice to Landlord (or Landlord's
property manager).
6. Landlord (or Landlord's property manager) shall have the
authority to approve the proposed weight and location of any safes and heavy
furniture and equipment, which shall in all cases stand on supporting devices
approved by Landlord in order to distribute the weight.
7. Corridor doors which lead to common areas of the Building
(other than doors opening into the elevator lobby on floors leased entirely to a
tenant) shall be kept closed at all times.
8. Each tenant shall cooperate with Landlord (and Landlord's
property manager) in keeping its leased area neat and clean. No tenant shall
employ any person for the purpose of such cleaning other than the Building's
cleaning and maintenance personnel without prior approval of Landlord (or
Landlord's property manager).
9. All freight elevator lobbies are to be kept neat and clean.
The disposal of trash or storage of materials in these areas is prohibited.
10. No vehicles, bicycles, motorcycles, birds, fish or other
animals shall be brought into or kept in, on or about the Building (except for
Seeing Eye dogs).
11. Tenants shall not tamper with or attempt to adjust
temperature control thermostats in their leased premises and shall not use any
additional methods of heating or air-conditioning. Landlord shall promptly
respond to each tenant's notices as to, and Landlord (or Landlord's property
manager) shall adjust thermostats as required to maintain, the Building standard
temperature. Each tenant shall use reasonable efforts to keep all window blinds
down and tilted at a 45 degree angle toward the street to help maintain
comfortable room temperatures and conserve energy.
12. Each tenant will comply with all access control procedures
necessary both during business hours and after hours and on weekends. Landlord
will provide each tenant with prior notice of such access control procedures and
any changes thereto promptly.
13. Tenants are requested to lock all office doors leading to
corridors and to turn out all lights at the close of their working day;
provided, however, that no tenant shall be responsible to ensure that Landlord's
cleaning contractor locks doors and turns out lights after cleaning the tenant's
leased premises.
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14. All requests for overtime air conditioning or heating must be
submitted in writing to Landlord (or Landlord's property manager) by an
authorized representative of the tenant. A list of persons authorized to request
such overtime services (and any amendments thereto) will be furnished by the
tenant to Landlord and Landlord shall be entitled to rely thereon. Any such
request must be made by 2:00 p.m. on the day desired for weekday requests, by
2:00 p.m. Friday for weekend requests and by 2:00 p.m. on the preceding Business
Day for holiday requests. Requests made after that time may result in an
additional charge to such tenant, if acted upon by Landlord, but Landlord is in
no event obligated to act on untimely requests.
15. No flammable or explosive fluids or materials shall be kept
or used within the Building except in areas approved by Landlord, and each
tenant shall comply with all applicable building and fire codes relating
thereto.
16. Tenants may not make any modifications, alterations,
additions or repairs to their leased premises and may not install any furniture,
fixtures or equipment in their leased premises which is in violation of any
applicable building and/or fire code governing their leased premises or the
Project. The tenant must obtain prior approval from Landlord (or Landlord's
property manager) of any such alterations, modifications and additions and shall
deliver "as built" plans therefor to Landlord (or Landlord's property manager),
upon completion, except as otherwise permitted in the tenant's lease. Such
alterations include, but are not limited to, any communication equipment and
associated wiring which must meet fire code. The Contractor conducting the
modifications and additions must be a licensed contractor, is subject to all
rules and regulations of Landlord (and Landlord's property manager) while
performing work in the Building and must obtain all necessary permits and
approvals prior to commencing the modifications and additions.
17. No vending machines of any type shall be allowed in tenant
space without the prior written consent of Landlord (or Landlord's property
manager).
18. All locks for doors in each tenant's leased areas shall be
Building Standard except as otherwise permitted by Landlord and no tenant shall
place any additional lock or locks on any door in its leased area without
Landlord's (or Landlord's property manager's) written consent except as
otherwise permitted in such tenant's lease. All requests for duplicate keys
shall be made to Landlord (or Landlord's property manager).
19. No tenant shall interfere in any way with other tenants' (or
their visitors') quiet enjoyment of their leased premises.
20. Landlord (or Landlord's property manager) will not be liable
or responsible for lost or stolen money, jewelry or other personal property from
any tenant's leased area or public areas of the Building or Project.
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21. No machinery of any kind other than normal office equipment
shall be operated by any tenant in its leased area without the prior written
consent of Landlord (or Landlord's property manager).
22. Canvassing, peddling, soliciting and distribution of hand
bills in the Building (except for activities within a tenant's leased premises
which involve only such tenant's employees) is prohibited. Each tenant is
requested to notify Landlord (or Landlord's property manager) if such activities
occur.
23. A "Tenant Contractor Entrance Authorization" form [to be
supplied by Landlord (or Landlord's property manager)] will be required for the
following:
a) Access to Building mechanical, telephone or electrical
rooms (e.g., GTE or Southwestern Bell Telephone employees).
b) After-hours freight elevator use.
c) After-hours building access by tenant's contractors.
Please note that the tenant will be responsible for contacting
Landlord's property manager in advance for clearance of such tenant
contractors.
All tenants will refer all contractors, contractors'
representatives and installation technicians tendering any service to them to
Landlord for Landlord's supervision, approval and control before the performance
of any contractual services. This provision shall apply to all work performed in
the Building (other than work under contract for installation or maintenance of
security equipment or banking equipment), including, but not limited to,
installations of telephones, telegraph equipment, electrical devices and
attachments, and any and all installations of every nature affecting floors,
walls, woodwork, trim, windows, ceilings, equipment and any other physical
portion of the Building.
24. Per City of Houston Code of Ordinances Section 21 - 239, the
public places within the Building are to be smoke free. This includes but is not
limited to the lobbies, elevators, stairwells, restroom facilities and plaza and
breezeway entrances. In addition, the Building shall be a non-smoking building,
with no smoking in the Leased Premises or in any other area of the Building,
including the exterior portions thereof, provided that Landlord may provide for
a smoking area, in which case Tenant shall ensure that its employees smoke only
in such smoking area.
25. Each tenant and their contractors are responsible for removal
of trash resulting from large deliveries or move-ins. Such trash must be removed
from the Building and Building facilities may not be used for dumping. If such
trash is not promptly removed, Landlord (or Landlord's property manager) may
cause such trash to be removed at the tenant's sole cost and
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expense plus a reasonable additional charge to be determined by Landlord to
cover Landlord's administrative costs in connection with such removal.
26. Tenants may not install, leave or store equipment, supplies,
furniture or trash in the common areas of the Building (i.e., outside their
leased premises).
27. Each tenant shall provide Landlord's property manager with
names and telephone numbers of individuals who should be contacted in an
emergency.
28. Tenants shall comply with the Building life safety program
established by Landlord (or by Landlord's property manager), including without
limitation fire drills, training programs and fire warden staffing procedures,
and shall exercise all reasonable efforts to cause all tenant employees,
invitees and guests to comply with such program.
29. To insure orderly operation of the Building, no ice, mineral
or other water, towels, newspapers, etc., shall be delivered to any leased area
except by persons appointed or approved by Landlord in writing.
30. Should a tenant require telegraphic, telephonic, annunciator
or other communication service, Landlord will direct the electricians where and
how wires are to be introduced and placed and none shall be introduced or placed
except as Landlord shall approve. Electric current shall not be used for space
heaters, cooking or heating devices or similar appliances without Landlord's
prior written permission.
31. Nothing shall be swept or thrown into the corridors, halls,
elevator shafts or stairways.
32. No portion of any tenant's leased area shall at any time be
used or occupied as sleeping or lodging quarters, nor shall personnel occupancy
loads exceed limits reasonably established by Landlord for the Building.
33. The carrying of firearms of any kind in any leased premises,
the building in which such premises are situated, any related garage, or any
related complex of buildings of which the foregoing are a part, or any
sidewalks, drives, or other common areas related to any of the foregoing, is
prohibited except in the case of unconcealed firearms carried by licensed
security personnel hired or contracted for by tenants for security of their
premises as permitted by such tenants' leases or otherwise consented to by
Landlord in writing.
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EXHIBIT E
LEASEHOLD IMPROVEMENTS
I. TENANT'S WORK.
A. SPACE PLAN FOR TENANT WORK. Tenant intends to undertake remodeling of
the Leased Premises. Except as otherwise provided in Section 5.1.2 of the Lease,
prior to commencement of any remodeling work ("TENANT WORK"), Tenant will
deliver to Landlord a detailed space plan, together with other relevant
information and written instructions relating thereto (said space plan and other
information and instructions being herein called the "TENANT SPACE PLAN").
Landlord will review the Tenant Space Plan to confirm that the Tenant Work
contemplated thereby (i) conforms with or exceeds the standards of the Project,
(ii) will not impair the structural, mechanical, electrical, plumbing, heating,
air condition or ventilation integrity of the Project, and (iii) will comply
with all applicable governmental requirements (provided Landlord's approval
shall not constitute a representation by Landlord that the Tenant Space Plan
provides for construction of improvements that comply with applicable
governmental requirements). If the requirements of (i) through (iii) above are
satisfied to Landlord's reasonable satisfaction, Landlord shall not unreasonably
withhold approval of the Tenant Space Plan. Landlord shall either approve or
disapprove the Tenant Space Plan within five (5) business days after the date
Landlord receives the Tenant Space Plan. If Landlord does not approve the Tenant
Space Plan, Landlord will inform Tenant in writing of its objections.
B. TENANT WORKING DRAWINGS. After the Tenant Space Plan has been
approved by Landlord, Tenant shall cause working drawings (the "TENANT WORKING
DRAWINGS") of the Tenant Work to be prepared and shall deliver the same to
Landlord for its approval, which approval shall not be unreasonably withheld.
The Tenant Working Drawings shall consist of complete sets of plans and
specifications, including detailed architectural, structural, mechanical,
electrical, plumbing, heating, air condition and ventilation plans for the
Tenant Work. The Tenant Working Drawings shall be substantially consistent with
the Tenant Space Plan without any material changes. The Tenant Working Drawings
shall be prepared at Tenant's expense by architects and engineers selected by
Tenant and approved by Landlord. The approval process for the Tenant Working
Drawings shall be identical to the approval process for the Tenant Space Plan
described in Paragraph A of this EXHIBIT E.
C. BID LETTING. Tenant shall promptly submit the approved Tenant Working
Drawings to any reputable contractor(s) selected by Tenant and reasonably
approved by Landlord (the "TENANT CONTRACTOR(S)") for pricing.
D. SELECTION OF CONTRACTOR. Tenant agrees to notify Landlord of its
decision as to selection of a contractor.
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E. TENANT CONTRACTOR - CONSTRUCTION COORDINATION.
(a) If Tenant accepts a Tenant Contractor's bid, then the Tenant
Contractor shall (and its contract shall so provide):
(i) conduct its work in such a manner so as not to
unreasonably interfere with other tenants, Project
operations, or any other construction occurring on or in
the Project or the Leased Premises;
(ii) execute a set of and comply with the Contractor Rules and
Regulations attached hereto as EXHIBIT I and comply with
all additional rules and regulations relating to
construction activities in or on the Project as may be
reasonably promulgated from time to time and uniformly
enforced by Landlord or its agents;
(iii) maintain such insurance and bonds in force and effect as
may be reasonably requested by Landlord or as required by
applicable law (but in any event said bonds shall be in
amounts equal to the full value or cost of the work being
done by the applicable subcontractors); and
(iv) be responsible for reaching an agreement with Landlord and
its agents as to the terms and conditions for all
contractor items relating to the conducting of its work
including, but not limited to, those matters relating to
hoisting, systems interfacing, use of temporary utilities,
storage of materials, access to the Leased Premises and
the Project and the purchase and return of Building
standard as well as other reusable materials.
(b) Landlord shall have the right to approve all subcontractors
to be used by the Tenant Contractor. Tenant may from time to time submit
lists of subcontractors requesting Landlord's approval of such list of
subcontractors.
(c) As a condition precedent to Landlord permitting the Tenant
Contractor to commence the Tenant Work, Tenant and the Tenant Contractor
shall deliver to Landlord such assurances or instruments as may be
reasonably requested by Landlord to evidence the Tenant Contractor's and
its subcontractor's compliance or agreement to comply with the
provisions of this Paragraph E.
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F. TENANT CONTRACTOR - HOLD HARMLESS. Tenant shall indemnify and hold
harmless Landlord, its agents, contractors (including Building Contractor) and
any mortgagee of Landlord from and against any and all losses, damages, costs
(including costs of suit and attorneys' fees), liabilities or causes of action
for injury to, or death of, any person, for damage to any property and for
mechanic's, materialmen's or other liens or claims arising out of or in
connection with the work done by Tenant Contractor (and Tenant Contractor's
subcontractors and sub-subcontractors) under its contract with Tenant.
G. TENANT CONTRACTOR - MECHANIC'S AND MATERIALMEN'S LIENS. Tenant shall
notify in writing all materialmen, contractors, artisans, mechanics, laborers
and other parties hereafter contracting with Tenant for the furnishing of any
labor, services, materials, supplies or equipment with respect to any portion of
the Leased Premises that they must look solely to Tenant for payment for same
and shall simultaneously send copies of all such notifications to Landlord for
its review. Should any mechanic's or other liens be filed against any portion of
the Project, including the Leased Premises, by reason of Tenant's or Tenant
Contractor's acts or omissions or because of a claim against Tenant or Tenant
Contractor, Tenant shall inform Landlord of such lien immediately and cause the
same to be canceled or discharged of record by bond or otherwise within twenty
(20) days after receipt of notice by Tenant. If Tenant fails to cancel or
discharge the lien within said twenty (20) day period, Landlord may, at its sole
option, cancel or discharge the same and upon Landlord's demand, Tenant shall
promptly reimburse Landlord for all costs (including attorneys' fees) incurred
in canceling or discharging such liens.
H. DEFAULT. The failure by Tenant to comply with the provisions of
EXHIBIT E shall constitute a default by Tenant under terms of Section 7.1.1(ii)
of the Lease in the event Tenant fails to remedy such failure within the cure
period provided therein, and upon such default Landlord shall have the benefit
of all remedies provided for in the Lease.
I. CHANGE ORDERS. Tenant may authorize changes in the Tenant Work;
provided that any changes must meet the criteria set forth in Paragraph A of
this EXHIBIT E.
J. AS-BUILT PLANS. Upon completion of the Tenant Work, Tenant shall
deliver to Landlord a copy of the final, revised plans and specifications for
the Tenant Work within thirty (30) days of completing the same. Upon receipt,
Landlord will transfer such plans to Landlord's Master Plans at a cost to be
borne by Landlord.
K. FREIGHT ELEVATOR. Tenant shall have the non-exclusive right, together
with Landlord and other tenants of the Building, to use the freight elevator
serving the Building subject to all applicable Building rules and regulations.
Without limiting the foregoing, the freight elevator shall be used to the extent
possible to avoid interfering with other tenants of the Building.
L. DUMPSTER. Tenant shall have the right to place a dumpster in a
location approved by Landlord for purposes of disposing of refuse arising from
Tenant's work. Tenant shall be responsible
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for maintaining such dumpster in a neat and attractive condition and causing
such dumpster to be emptied on a regular basis.
M. CONTRACTOR PARKING. Tenant's contractors shall be permitted to park
in the Surface Spaces during construction at no charge in addition to the
charges paid by Tenant hereunder. Tenant's contractors shall not be permitted to
park anywhere else in the Project. If Tenant exercises its rights under Section
3.5.3 to terminate its right to use the Surface Spaces, Tenant's contractors
shall not be permitted to park in the Surface Spaces.
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EXHIBIT F
JANITORIAL SPECIFICATIONS
A. OFFICE AREAS
1. Empty, clean and damp dust all waste receptacles and remove waste
paper and rubbish from the premises nightly; wash receptacles as
necessary.
2. Empty and clean all ash trays, screen all sand urns nightly and
supply and replace sand as necessary.
3. Vacuum all rugs and carpeted areas in offices, lobbies and
corridors nightly.
4. Hand dust and wipe clean with damp or treated cloth all office
furniture, files, fixtures, paneling, window sills and all other
horizontal surfaces nightly and Building Standard window blinds
once per month; wash window sills when necessary.
5. Damp wipe and polish all glass furniture tops nightly.
6. Remove all finger marks and smudges from vertical surfaces,
including doors, door frames, around light switches, private
entrance glass and partitions nightly.
7. Wash clean all water coolers nightly.
8. Sweep all stairways nightly, vacuum if carpeted.
9. Monitor all stairwells throughout the entire building daily and
keep in clean condition.
10. Damp mop spillage in office and public areas as required.
11. Damp dust all telephones as necessary.
B. WASH ROOMS
1. Mop, rinse and dry floors nightly.
2. Scrub floors as necessary.
3. Clean all mirrors, bright work and enameled surfaces nightly.
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4. Wash and disinfect all basins, urinals and bowls nightly, using
non-abrasive cleaners to remove stains and clean undersides of
rim of urinals and bowls.
5. Wash both sides of all toilet seats with soap and water and
disinfect nightly.
6. Damp wipe nightly, wash all partitions, tile walls and outside
surface of all dispensers and receptacles.
7. Empty and sanitize all receptacles and sanitary disposals
nightly; thoroughly clean and wash at least once per week.
8. Fill toilet tissue, soap, towel and sanitary napkins dispensers
nightly.
9. Clean flushometers, piping, toilet seat hinges and other metal
work nightly.
10. Wash and polish all walls, partitions, tile walls and enamel
surfaces from trim to floor monthly.
11. Apply finish to tile floor when necessary as instructed by the
Project manager.
12. Vacuum all louvers, ventilating grills, and dust light fixtures
monthly. NOTE: It is the intention to keep the washrooms
thoroughly cleaned and NOT to use a disinfectant or deodorant to
kill odor. If a disinfectant is necessary, an odorless product
will be used with Landlord's permission.
C. FLOORS
1. Ceramic tile, marble and terrazzo floors to be swept and buffed
nightly and washed or scrubbed as necessary.
2. Vinyl asbestos, asphalt, vinyl, rubber or other composition
floors and bases to be swept nightly; such floors in public areas
on multiple tenancy floors to be waxed and buffed as needed.
3. Tile floors in office areas will be waxed and buffed monthly.
4. All floors stripped and rewaxed as necessary.
5. All carpeted areas and rugs to be vacuumed clean nightly.
6. Carpet shampooing will be performed at Tenant's request and
billed by Landlord.
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D. GLASS
1. Clean glass entrance doors and adjacent glass panels nightly.
E. HIGH DUSTING (Quarterly)
1. Dust and wipe clean all closet shelving when empty and carpet
sweep or dry mop all floors in closets if such are empty.
2. Dust all picture frames, charts, graphs and similar wall
hangings.
3. Dust clean all vertical surfaces such as walls, partitions,
doors, door backs and other surfaces above shoulder height.
4. Damp dust all ceiling air conditioning diffusers, wall grilles,
registers and other ventilating louvers.
5. Dust the exterior surfaces of lighting fixtures, including glass
and plastic enclosures.
F. DAY SERVICE
1. At least once, and more as deemed necessary during the day, check
men's washrooms for toilet tissue replacements.
2. At least once, and more as deemed necessary during the day, check
ladies' washrooms and toilet tissue and sanitary napkin
replacements.
3. Supply toilet tissue, soap and towels in men's and ladies'
washrooms and sanitary napkins in ladies' washrooms.
4. As needed, vacuuming of elevator cabs will be performed.
5. There will be a surveillance of public areas to ensure
cleanliness.
6. Clean ash urns as necessary in elevator lobbies.
7. Clean building glass entrance doors and panels as needed.
G. GENERAL
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1. Wipe all interior metal window frames, mullions, and other
unpainted interior metal surfaces of the perimeter walls of the
building each time the interior of the windows is washed (as
requested by the Project manager).
2. Keep janitorial closets in a clean, neat and orderly condition.
3. Wipe clean and polish all metal hardware fixtures and other
bright work nightly.
4. Dust and/or wash all directory boards as required, remove
fingerprints and smudges nightly.
5. Maintain building lobby, corridors and other public areas in a
clean condition.
6. Dust fire extinguishers and cabinets nightly (interior and
exterior); wash as necessary.
7. All baseboards (resilient flooring and carpeting areas) will be
washed and wiped clean as necessary.
8. Vacuum entrance mats nightly.
9. Hose and scrub plaza area and sidewalks as necessary.
10. Perform special cleaning needs of individual tenants as
authorized and directed by the Project manager.
11. Properly maintain exterior of building at ground level by
ensuring that curtain wall, glass, marble, etc., is kept in a
clean condition. Exterior stainless steel is to be cleaned or
polished weekly.
12. Polish standpipes and sprinkler Siamese connections as
necessary.
NOTE: Upon completion of nightly duties, floor supervisors will
ensure that all vacant offices have been cleaned and left in a
neat and orderly condition, all lights have been turned off and
all exterior doors locked.
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EXHIBIT G
TENANT'S ELECTRICAL GENERATOR
Tenant shall be permitted, at its sole expense, to install and
maintain a back-up electrical generator in the reserved parking area of the
Parking Garage in the location shown attached hereto as EXHIBIT G-1. The
installation of said generator shall be subject to all conditions and
requirements as provided for Tenant Work pursuant to EXHIBIT E. The
installation, maintenance, repair, replacement, removal and repair of any damage
relating thereto, and all related costs, shall be the sole responsibility of
Tenant, subject to Landlord's direction and control, provided, however, that
upon Tenant's election, Landlord shall maintain said generator whereupon Tenant
shall reimburse Landlord for any costs incurred therewith, together with a fee
to Landlord equal to seven percent (7%) of any such costs, within ten (10) days
of invoice therefore. Tenant shall not be charged for the space occupied by the
generator and any related equipment, provided, however, that the number of
parking spaces so occupied shall be credited against the number of Assigned
Permits Tenant is entitled to under the Lease. Tenant shall indemnify and hold
Landlord, its employees, agents and contractors harmless from and against all
claims and liabilities of every kind or nature stemming from the existence and
operation of such generator unless such claim or liability is the result of
Landlord's or its employees', agents' or contractors' gross negligence or
willful misconduct.
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EXHIBIT G-1
LOCATION OF GENERATOR
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EXHIBIT H
BUILDING STANDARD ITEMS
"BUILDING STANDARD IMPROVEMENTS" shall mean the following
leasehold improvements:
Partitions One (1) lineal foot of Building Standard type II
partition per twelve (12) square feet of Net
Rentable Area leased outside the core area in the
case of a full floor tenant and the Usable Area for
a tenant on a partial floor. All required
partitions will be 5/8" gypsum board, painted with
Building Standard colors to be provided by
Landlord.
Ceilings A random fissured, mineral fiber, 2_ x 2_ lay-in
tile supported by an exposed "fine line" grid
throughout the Leased Premises.
Lighting Fixtures One (1) 2' x 4' recessed 3 tube fluorescent
lighting fixture with anodized aluminum 18 cell
parabolic shaped louvers, including initial
lamping, per one hundred (100) square feet of Net
Rentable Area.
Duplex Electric Outlets One (1) duplex wall-mounted convenience outlet for
each one hundred twenty (120) square feet of Net
Rentable Area.
Telephone Outlets One (1) telephone wall outlet for each two hundred
ten (210) square feet of Net Rentable Area.
Floor Covering Building Standard commercial grade carpeting
throughout the Leased Premises.
Doors One (1) full height, solid core door with a metal
frame and lever handle latch set hardware per three
hundred (300) square feet of Net Rentable Area.
Light Switches One (1) single pole light switch for each three
hundred (300) square feet of Net Rentable Area.
Group switching will be provided in open areas.
Window Coverings One inch (1") horizontal aluminum slat mini-blinds
for exterior windows throughout the Leased
Premises.
Fire Sprinkler Heads Ceiling mounted fire sprinkler heads throughout
the Leased Premises to conform with light hazard
occupancy fire protection system design criteria
up to one sprinkler per 125 square feet of Net
Rentable Area.
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EXHIBIT I
CONTRACTOR RULES AND REGULATIONS
1. WORK APPROVAL
All drawings, subcontractors and material must be approved through the
Management Office prior to the start of construction.
2. PERMITS
Permits and licenses necessary for the completion of the work shall be
secured and paid for by Contractor. A copy of all permits shall be
posted in a readily accessible area at the construction site and given
to Property Management after final inspection.
3. INSURANCE
The Contractor shall maintain insurance and/or bonds as reasonably
requested by the Management Office and shall produce evidence of such
insurance on request, including the insurance required in the attachment
to this EXHIBIT I.
4. BUILDING USE
The Contractor shall confine his use of the premises to the designated
construction area(s) so as not to disturb other tenants in the building.
The Contractor will be responsible for protecting the finishes in any
common areas used such as corridors and elevators as well as any
existing finishes in the construction area which are to remain.
5. WORKING HOURS
There are certain operations that must be performed outside of normal
hours to prevent the interruption of normal business operations. These
are:
a. Drilling or cutting of the concrete floor slab or any concrete
structural member.
b. Any work in which machine noise or vibration (such as framing
and hanging sheetrock, removal of glue down carpet or tile
flooring or the laying of carpet tack strips) may disrupt normal
office procedures.
c. Material stocking, demolition and trash removal.
d. Any work requiring access to the ceiling of the floor below
construction.
e. Application or use of any product that will affect indoor air
quality or produce strong odors.
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All work performed outside normal hours (7:30 a.m. through 5:30 p.m.;
weekdays) must be scheduled and approved by the Management Office.
Failure to observe requirements outlined above will cause the job to be
shut-down.
6. WORKMAN CONDUCT
No loud radios will be tolerated. No use of foul language. Shirts must
be worn at all times.
7. ELEVATORS
The Contractor will only use the specific elevator designated by the
Management Office. Hours of use will also be designated by the
Management Office. Construction materials, tools, trash and employees
are to be transferred to and from the construction area via this
elevator. It will be the contractor's responsibility to protect all
elevator finishes, interior and exterior.
8. COMMON AND TENANT AREAS
The Contractors shall carefully protect a walls, carpets, floors,
furniture and fixtures. All work will be done with minimum disruption to
the normal operation of the office tower. Contractor shall repair or
replace damage to property without cost to Landlord.
9. WATER/ELECTRICITY DURING CONSTRUCTION
Sources of water and electricity will be furnished to Contractor without
cost to him, in reasonable quantities for use in fighting, for portable
power tools, drinking water, water for testing and other such common
usage during construction. Contractor shall make all connections,
furnish any necessary extensions, and remove same upon completion of
work.
10. SANITARY FACILITIES
The Contractor shall use only those facilities specifically designated
by the Management Office.
11. DUSTY WORK
Contractor shall notify the Management Office prior to commencement of
extremely dusty work (sheetrock cutting, sanding, extensive brooming,
etc.) as this work may affect HVAC equipment and fire safety equipment.
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12. ASBESTOS
Contractor will ensure that all materials used in the construction or
remodeling of a space are free of asbestos containing materials ACM
(e.g. suspect ACM types of materials include: wallboard and ceiling
board, ceiling texture, wallboard joint compound, plaster, floor tile,
floor tile mastic, baseboard mastic, carpet mastics, caulking/mastics,
etc.). MSDS sheets for all materials used in construction and remodeling
must be supplied by the contractor to the property management office.
Contractor will provide a letter certifying that all such materials are
free of ACM to the property manager.
13. CEILING TILE
Please replace any ceiling tile you remove. If any are broken during
removal or installation, notify building management office. We will
provide you the brand and type of tiles used so that you can purchase
and re-install the correct tiles.
14. ELECTRICAL PANEL CHANGES
All additional electrical circuits, panels and associated metering will
be appropriately marked as to the area and/or equipment serviced by the
circuit(s) in question. Noncompliance with this regulation will result
in possible barring of the Contractor from future activities in the
Building.
All electrical panels, junction boxes or pull boxes which have covers or
doors removed so as to allow the addition of new circuits or any new
electrical panels which are installed shall be fully covered, closed or
replaced.
15. HVAC
The mechanical contractor shall deliver to Landlord an air balance
report which will verify air flow delivery per the construction drawing
and be able to demonstrate to Landlord that all thermostats function
correctly and are properly calibrated. All flex ducts must be externally
insulated. Duct tape cut-outs not used shall be covered with a duct
plate and insulation.
16. METERING
All additional electrical panels and air conditioning units must be
metered.
17. FLOOR PENETRATIONS
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All floor penetrations shall be scheduled with the Management Office.
Upon completion, they will be caulked, cemented or filled with materials
which are fire-rated, free of ACM, and match building specifications.
Supply MSDS sheet to property management office.
18. WELDING/CUTTING TORCH USE
At no time is any welding or cutting torch to be used in the Building
without approval of the Management Office. If approval is granted, the
Contractor must coordinate the time with the Management Office. A fire
extinguisher must be present in the work area at all times while the
equipment is being used. Contractor shall be responsible for posting a
fire watch during times the fire detection system is disabled.
19. ODOROUS OR NOXIOUS MATERIALS
No odorous or noxious materials or any other substances which could
affect indoor air quality will be used in the building without prior
approval of the Management Office. Such use will be scheduled after
normal office hours. The contractor will provide MSDS sheets on
materials used to the property management office.
20. DRAINING OF SPRINKLER LINES
Any work which will involve the draining of a sprinkler line or
otherwise affect the building's sprinkler system must be approved by the
Management Office. In all instances where this is done, the system will
not be left inoperable overnight.
21. FIRE ALARM SYSTEM
Any work which could interfere with the fire safety system such as
welding, use of a cutting torch, dusty work, covering of smoke detector
heads, or sprinkler modification must be scheduled with the Management
Office.
22. LIGHT BULBS AND BALLASTS
Contractor is responsible for insuring that all light fixtures in the
work area are working properly and are fully lit and cleaned upon job
completion. This includes replacement of tubes and ballasts as required
in light fixtures that are replaced, added or repositioned. Contact
Management Office for proper color and style of bulbs.
23. LOCKS
Only building standard locks are to be installed in the leased premises.
I-4
<PAGE>
24. DELIVERIES
All deliveries and/or pickups made by contractors or vendors must be
made through the loading dock.
25. AIR HANDLER ROOMS
The following is a listing of the Do's and Don'ts in the AHU rooms:
a. No trash facilities are provided in AHU rooms. All trash brought
in or created while in an AHU room must be brought out and
disposed of properly (See clean-up, item 29).
b. There are no provisions for ashtrays in AHU rooms. Smoking is
prohibited in the building.
c. Any wiring done (low voltage or otherwise) must be run in an
orderly fashion and in accordance to applicable codes.
d. If you turn on lights, remember to turn them off before you
leave the AHU room.
e. Bring all tools, ladders etc. necessary to complete your work.
No tools can or will be loaned out.
26. FLAMMABLES CONTROLS
Dispose of solvent rags and used paint brushes - used with oil-based
paints and thinners properly. To reduce possible fire hazards, approved
metal waste containers must be provided wherever rags or waste are
impregnated with spray paint material. All rags or waste must be
deposited in these containers immediately after use. The contents of the
containers must be properly disposed of at least daily or at the end of
each shift. Remember, MSDS sheet on all materials must be supplied to
the property management office.
27. COMMUNICATION CABLING
The building is equipped with communication cabling. The communication
cabling is routed through mechanical areas, telephone/electrical
closets, and above the ceiling. Caution should be used during
construction not to cut or damage these cables. Such damage will be at
the contractor's expense.
28. DISPOSITION OF MATERIALS
Any and all existing materials removed and not reused in the
construction, except as directed by the Management Office shall be
disposed of by the Contractor as waste or unwanted material.
I-5
<PAGE>
29. CLEAN-UP
Contractor shall at all times keep the site free from accumulation of
waste material debris or rubbish caused by his employees or work. At the
completion of the work, he shall remove from the site all his tools,
scaffolding, surplus materials, debris, and shall leave the site "broom
clean". The Building's restroom facilities are not to be used for the
cleaning of tools or paint materials. Any costs incurred by the
Management Office to clean the construction area will be the
responsibility of the contractor.
30. MSDS INFORMATION SHEET
An MSDS Information Sheet must be posted in the work area listing the
type of chemicals, sprays, paints, thinners, stains, floor finishes,
latex caulks, floor adhesives, etc. being used in the work
area/buildout. Upon completion of the job, a copy of the MSDS
Information Sheet must be provided to the Property Manager.
31. CERTIFICATE OF OCCUPANCY
Upon completion of job, a Certificate of Occupancy must be submitted to
the Property Management Office.
32. POSTING OF RULES AND REGULATIONS
A copy of these rules and regulations, acknowledged and accepted by the
General Contractor, must be posted on the job site in a manner allowing
easy access by all workers. It is the General Contractor's
responsibility to instruct his and all subcontractor workers to
familiarize themselves with these rules.
33. ENFORCEMENT
In order to preserve the lease rights of the landlord and tenants, and
to provide the working environment expected by the landlord and tenants,
property management reserves the right to ask any person(s) that are
violating any of these rules to immediately leave the Premises, if they
refuse to correct the situation or have repeat offenses.
Acknowledged and Accepted by Contractor Date
Job Name and Floor/Suite
I-6
<PAGE>
UTAH STATE RETIREMENT INVESTMENT FUND
WESTMARK REALTY ADVISORS
HINES
PHOENIX TOWER
INSURANCE REQUIREMENTS FOR CONTRACTORS/VENDORS AT PHOENIX TOWER
1. Workers Compensation Statutory limits
2. Employers Liability $500,000 each accident
$500,000 disease - policy limit
$500,000 disease - each employee
2. Commercial General Liability
Insuring against Bodily Injury,
Property Damage, Personal Injury,
and Advertising Injury $1,000,000 each occurrence
$2,000,000 general aggregate
$2,000,000 products/completed
operations aggregate
Any general aggregate shall apply on a "Per project" basis for
contractors. Coverage is to be provided on an "occurrence" rather than a "claims
made" basis.
4. Business Auto Liability $1,000,000 each accident
5. All insurance certificates should name as ADDITIONAL INSUREDS:
Westmark Realty Advisors
Utah State Retirement Investment Fund
Hines
6. All policies should have a 30 DAY CANCELLATION NOTICE.
7. Certificate Holder:
Hines
3200 Southwest Freeway, Suite 100
Houston, Texas 77027
I-7
<PAGE>
EXHIBIT J
TERMINATION PAYMENT
<TABLE>
<CAPTION>
TERMINATION PAYMENT
<S> <C> <C> <C>
1. Unpaid Amount of Assumed Loan $ 3,449,798.44
2. Difference in Rent Between Old Lease & Portion of New Lease 278,664.66
3. Yield Maintenance (Average Base Rent over 10 yrs. vs. Base Rent Payable) for First 5 Years 1,452,037.37
--------------
TOTAL $ 5,180,500.47
--------------
1. UNPAID AMOUNT OF ASSUMED LOAN
$ 3,449,798.44
==============
Lease Commissions $ 1,922,748.35
Tenant Improvement Allowance 3,623,798.22
---------------
Upfront Amount $ 5,546,546.57
(see attached Schedule 1)
Remaining Principal Balance of an Assumed
Loan to amortize Upfront Amount with the
following terms at the end of sixty (60)
months (termination date): $ 3,449,798.44
Initial Principal Balance: $ 5,546,546.57
Term: 10 years
Interest Rate: 10% per annum
Payments: Monthly, in arrears,
commencing April 1,
1998
(see attached Schedule 4)
2. DIFFERENCE IN RENT BETWEEN OLD LEASE &
PORTION OF NEW LEASE $ 278,664.66
==============
(Between Old Lease & Portion of New Lease:
3/1/98 - 3/31/99)
Total Remaining Base Rent and Escalations
Under Old Lease (175,556 sf.): $ 3,689,986.04
(see attached Schedule 2)
New Lease
Part 1 191,343 x $15.50/sf. x 1.083 yrs = 3,212,967.88
Part 2 25,594 x 15.50 sf. x .5 yrs. = 198,353.50
-----------------
Difference: $ 278,664.66
3. YIELD MAINTENANCE (AVERAGE BASE RENT OVER 10 YRS. VS.
BASE RENT PAYABLE) FOR FIRST 5 YEARS $ 1,452,037.37
==============
Average Base Rental Rate over 10 Years $ 17.05/sf.
(Part 1 Commencing 3/1/98 for 191,343 sf.)
Base Rental Rate Payable (Avg. over First 5 Years 15.70/sf.
-----------------
(Part 1 Commencing 3/1/98 for 191,343 sf.)
Rental Rate Difference $ 1.35/sf.
SF. x 191,343
Years x 5.0
------------
Difference = $ 1,291,565.25
-----------------
</TABLE>
J-1
<PAGE>
Average Base Rental Rate over 9.4167 Years $ 17.15/sf.
(Part 2 Commencing 10/1/98 for 25,594 sf.)
Base Rental Rate Payable (Avg.) over First 15.73sf.
-----------
4.4167 Years
(Part 2 Commencing 10/1/98 for 25,594 sf.)
Rental Rate Difference $ 1.42/sf
SF. x 25,594
Years x 4,417
-----------
Difference = 160,472.12
--------------
(see attached Schedule 3) YIELD MAINTENANCE (TOTAL DIFFERENCE) $ 1,452,037.37
J-2
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-42765 of Bank United Corp. on Form S-8 of our report dated October 24,
1997, appearing in this Annual Report on Form 10-K of Bank United Corp. for the
year ended September 30, 1997.
DELOITTE & TOUCHE LLP
Houston, Texas
December 19, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 113,805
<INT-BEARING-DEPOSITS> 7,195
<FED-FUNDS-SOLD> 349,209
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,103,993
<INVESTMENTS-CARRYING> 543,521
<INVESTMENTS-MARKET> 529,030
<LOANS> 8,995,229
<ALLOWANCE> 39,174
<TOTAL-ASSETS> 11,967,072
<DEPOSITS> 5,247,668
<SHORT-TERM> 5,300,944
<LIABILITIES-OTHER> 414,282
<LONG-TERM> 220,199
0
0
<COMMON> 316
<OTHER-SE> 598,163
<TOTAL-LIABILITIES-AND-EQUITY> 11,967,072
<INTEREST-LOAN> 652,886
<INTEREST-INVEST> 146,502
<INTEREST-OTHER> 11,320
<INTEREST-TOTAL> 810,708
<INTEREST-DEPOSIT> 262,761
<INTEREST-EXPENSE> 546,064
<INTEREST-INCOME-NET> 264,644
<LOAN-LOSSES> 18,107
<SECURITIES-GAINS> 2,841
<EXPENSE-OTHER> 172,136
<INCOME-PRETAX> 157,833
<INCOME-PRE-EXTRAORDINARY> 78,894
<EXTRAORDINARY> 2,323
<CHANGES> 0
<NET-INCOME> 76,571
<EPS-PRIMARY> 2.42
<EPS-DILUTED> 2.42
<YIELD-ACTUAL> 2.52
<LOANS-NON> 54,711
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 39,660
<CHARGE-OFFS> 19,036
<RECOVERIES> 443
<ALLOWANCE-CLOSE> 39,174
<ALLOWANCE-DOMESTIC> 39,174
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
