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, 1998.
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) 543-6500
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 nonaffiliates of the
registrant, as of December 15, 1998, was $1,048,604,659.
The number of shares outstanding as of the registrant's $0.01 par value
common stock, as of December 15, 1998, was as follows:
TITLE OF EACH CLASS NUMBER OF SHARES
------------------- ----------------
Class A 28,324,076
Class B 3,241,320
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's 1998 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.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.................................................... 1
General................................................ 1
Commercial Banking Group............................... 2
Financial Markets Group................................ 3
Mortgage Servicing Group............................... 5
Community Banking Group................................ 7
Mortgage Banking Group................................. 8
Loan Portfolio......................................... 9
Investment Portfolio................................... 10
Deposits............................................... 11
Market Risk Analysis................................... 12
Competition............................................ 15
Subsidiaries........................................... 15
Personnel.............................................. 15
Federal Financial Assistance........................... 15
Regulation............................................. 17
Taxation............................................... 27
ITEM 2. PROPERTIES.................................................. 29
ITEM 3. LEGAL PROCEEDINGS........................................... 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 30
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 31
ITEM 6. SELECTED FINANCIAL DATA..................................... 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 36
Discussion of Results of Operations.................... 36
Discussion of Changes in Financial Condition........... 41
Asset Quality.......................................... 44
Capital Resources and Liquidity........................ 48
Contingencies and Uncertainties........................ 50
Recent Accounting Standards............................ 51
Forward-Looking Information............................ 51
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 53
(i)
<PAGE>
PAGE
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 53
ITEM 11. EXECUTIVE COMPENSATION...................................... 53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 54
SIGNATURES 58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 60
(ii)
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Bank United Corp. (the "Parent Company") became the holding company for
Bank United (the "Bank") upon the Bank's formation in December 1988. The Bank
is a federally chartered savings bank, and its deposits 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"), which is now the parent company of the Bank. 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 markets throughout the United States. At
September 30, 1998, the Company operated an 84-branch community banking network
serving nearly 265,000 households, 21 commercial banking offices in 18 states
and eight wholesale mortgage origination offices in seven states. As of
September 30, 1998, the Company was the largest publicly traded depository
institution headquartered in Texas, with $13.7 billion in assets, $6.3 billion
in deposits and $684.4 million in stockholders' equity. The Company's address is
3200 Southwest Freeway, Houston, Texas 77027, and its telephone number is (713)
543-6500.
Historically, the Company's operating strategy emphasized traditional
single family mortgage lending and deposit gathering activities. Over the past
few years, management has pursued a strategy designed to reduce the Company's
reliance on single family mortgage lending by developing higher margin
commercial and consumer lending and fee producing lines of business. During
fiscal 1997, the Company sold certain of its mortgage origination offices, but
retained its mortgage servicing business, its retail mortgage origination
capability in Texas through its community banking branches, and its wholesale
mortgage capabilities. During fiscal 1998, the Company continued to increase its
commercial and consumer loan portfolios, its mortgage servicing portfolio and
the level of lower cost transaction and commercial deposit accounts.
While pursuing this strategy entails risks different from those present in
single family mortgage lending, the Company believes it has taken appropriate
measures to manage these risks. The Company has developed a comprehensive credit
approval process and formalized underwriting policies and procedures. The
Company has hired experienced commercial banking professionals, trained other
personnel to manage and staff these businesses, developed effective loan
administration functions, and closely monitors the performance of the
businesses.
The Company's operations are subject to various material business risks.
For example, changes in prevailing interest rates can have significant effects
on the Company's profitability. The Company's business risks may become more
acute in periods of economic slowdown or recession. During such periods, payment
delinquencies, loan collection proceedings, 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 decline in demand for
the Company's products and services.
The Company has traditionally managed its business to limit overall
exposure to changes in interest rates. However, management has latitude to
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 than they have had historically. See "-- Market
Risk Analysis."
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 while negatively impacting the Company's cost of funds. A
decrease in interest rates may affect the Company through, among other things,
increased prepayments on its loan and servicing portfolios and increased
competition for deposits. Accordingly,
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changes in market interest rates affect the Company's net interest spread, loan
origination volume, loan and servicing portfolios, and overall operating
results.
The Company's business is conducted through the Commercial Banking,
Financial Markets, and Community Banking Groups, which comprise the Banking
Segment, and the Mortgage Servicing Segment. See Note 17 to the Consolidated
Financial Statements for summarized financial information by business segment.
COMMERCIAL BANKING GROUP
The Commercial Banking Group provides credit and a variety of cash
management and other services primarily to real estate related commercial
businesses. Other products and industry specialties of this group include
healthcare lending, commercial syndications, and other commercial and industrial
loan products. Business is solicited in Texas and in targeted markets throughout
the United States. At September 30, 1998, the commercial banking network
consisted of 21 offices in 18 states, compared to 11 offices in nine states at
September 30, 1997. A majority of the $3.5 billion of commercial loans
outstanding at September 30, 1998, was managed and serviced by the Commercial
Banking Group. During fiscal 1998, the commercial loan portfolio increased by
$1.3 billion or 58%. See "-- Loan Portfolio."
MORTGAGE BANKER FINANCE ("MBF")
The Commercial Banking Group provides small- and medium-sized mortgage
companies with credit facilities, including warehouse lines of credit,
securities purchased under agreements to resell ("repurchase agreements"),
term loans secured by mortgage servicing rights ("MSRs"), and working capital
credit lines. The credit facilities provided to these mortgage companies usually
are secured by single family mortgages or related servicing rights. The Company
advances funds to approved borrowers based on a percentage of the market value
of the collateral security. MBF loans and lines of credit are subject to the
risk of collateral value changes with changing interest rates. The loans also
are subject to the risk that the collateral may be documented fraudulently or
improperly. MBF customers usually have higher leverage than other commercial
borrowers. At September 30, 1998, this business line had $787.7 million of loans
outstanding, $123.5 million of repurchase agreements outstanding, and $501.6
million in unfunded commitments. The Commercial Banking Group also offers
commercial banking services, including cash management, document custody, and
deposit services to its mortgage banking customers. Deposits related to MBF
activities totalled $1.1 billion at September 30, 1998, and had an average cost
of funds to the Company of 5.48% for fiscal 1998. See "-- Deposits."
MULTI-FAMILY LENDING
The Commercial Banking Group provides financing for operating multi-family
properties, real estate investment trusts, and selected construction,
acquisition, and rehabilitation projects. These loans are solicited directly in
Texas and in targeted markets throughout the United States through regional
offices and preapproved multi-family mortgage banking correspondents.
Multi-family lending is subject to the risk that the borrower may not complete
construction 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 the appraised value of the
collateral, verifies historical cash flows, and assesses general economic
conditions and the financial condition of the borrower. At September 30, 1998,
this business line had $875.5 million of loans outstanding and $227.8 million of
unfunded commitments ($684.0 million in permanent loans, $172.4 million in
construction loans, and $19.1 million of loans held for sale).
RESIDENTIAL CONSTRUCTION LENDING
The Commercial Banking Group provides financing to builders for the
construction of single family properties, including loans for the acquisition
and development of improved residential lots. These loans are made on a
commitment term that generally is for a period of one to three years.
Residential construction loans are subject to the risk that a general downturn
in the builder's local economy could prevent the builder 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
2
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reviewing the builder's experience, reputation, general financial condition, and
speculative inventory levels. Additionally, construction status is reviewed by
on-site inspections and the builder's 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. During fiscal 1998, the Company expanded
into the Las Vegas market and opened offices in Charlotte, Nashville, and
Seattle. Current markets in Texas include Houston, Dallas, Austin, and San
Antonio. At September 30, 1998, this business line had $779.5 million of loans
outstanding and $592.4 million in unfunded commitments.
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. Commercial real estate loans are
typically made to single purpose business entities with limited secondary
sources of repayment other than 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. At September 30, 1998, this business line had $510.8 million of
loans outstanding and $129.4 million of unfunded commitments ($411.4 million in
permanent loans, $91.6 million in construction loans, and $7.8 million of loans
held for sale).
HEALTHCARE LENDING
In fiscal 1996, the Commercial Banking Group began funding construction and
permanent loans to experienced operators of senior housing and long-term care
facilities. In addition, the Commercial Banking Group makes construction and
permanent loans for medical offices. Such loans are subject to risks specific to
the industry, such as occupancy and competition. The Company applies competitive
marketplace underwriting guidelines in evaluating the creditworthiness of these
loans. At September 30, 1998, this business line had $267.8 million of loans
outstanding and $257.2 million in unfunded commitments ($122.7 million in
permanent loans and $145.1 million in construction loans).
SBA SECURITIZATIONS
In May 1996, the Commercial Banking Group began purchasing the
government-guaranteed portion of Small Business Administration ("SBA") loans
through Bank United Securities Corp., the Bank's broker-dealer subsidiary. These
loans are pooled, securitized, and usually sold. During fiscal 1998 and 1997,
the Commercial Banking Group purchased $495.4 million and $406.3 million of SBA
loans, of which $506.1 million and $341.5 million were pooled into securities
and $494.8 million and $335.1 million were sold. The Company was the second
largest SBA pool assembler in the United States as of September 30, 1998, up
from fourth at September 30, 1997. The SBA interest-only strips related to these
securitizations were retained by the Company and totalled $71.6 million at
September 30, 1998. See "-- Investment Portfolio." At September 30 1998, the
Commercial Banking Group held $37.8 million of SBA loans for sale.
COMMERCIAL SYNDICATIONS
As part of the Company's strategy to increase its commercial lines of
business, the Company began purchasing participation interests in syndicated
commercial loans in fiscal 1996. The underlying loans in these syndications are
made to companies in a broad range of industries, are underwritten using prudent
cash flow projections, and are usually further secured by tangible collateral.
The Company regularly monitors general economic conditions, developments in the
borrower's industry, and the borrower's financial condition. When entering into
these participations, the Company seeks to avoid geographic concentrations and
industries that are cyclical. At September 30, 1998, this business line had
$174.5 million of loans outstanding, $23.4 million of letters of credit, and
$61.8 million in unfunded loan commitments.
FINANCIAL MARKETS GROUP
The Financial Markets Group manages the Company's asset portfolio
activities, including the acquisition, securitization and sale of loans. In
February 1997, the Financial Markets Group assumed management of the
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Company's wholesale mortgage origination business. The Financial Markets Group
also manages the Company's single family loan portfolio, which totalled $6.7
billion at September 30, 1998. Additionally, under the supervision of the Asset
and Liability 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 "-- Loan Portfolio" and "-- Market Risk Analysis."
LOAN ACQUISITIONS
The Financial Markets Group acquires loans, primarily single family loans,
through traditional secondary market sources (mortgage companies, financial
institutions, and investment banks). In fiscal 1998, 1997, and 1996, the Company
purchased approximately $1.1 billion, $795.8 million, and $226.3 million of
single family loans. While the Company intends to continue to pursue this
strategy on a selective basis, there can be no assurance of the continued
availability of portfolio acquisition opportunities or the Company's ability to
obtain such portfolios on favorable terms.
WHOLESALE MORTGAGE BANKING
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 $3.6
billion and $1.5 billion of loans in fiscal 1998 and 1997. During fiscal 1998,
$1.9 billion of single family mortgage loans were sold in the secondary market.
At September 30, 1998, this business line had $477.1 million in unfunded
commitments.
WHOLESALE FUNDINGS
The Financial Markets Group arranges funding sources other than consumer
and commercial deposits for the Company. Wholesale funding sources include
advances from the 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, 1998, wholesale activities
provided $5.6 billion in funding. See "Management's Discussion and
Analysis -- Capital Resources and Liquidity" and Notes 8 and 9 to the
Consolidated Financial Statements.
INVESTMENT PORTFOLIO MANAGEMENT
The Financial Markets Group manages the Company's investment portfolio,
which totalled approximately $1.5 billion at September 30, 1998. The Financial
Markets Group seeks to maintain a portfolio of assets that provides for
liquidity needs, maintains an interest rate spread over matched funded
liabilities, and maximizes utilization of the Bank's risk-based capital. See
"-- Investment Portfolio," "-- Market Risk Analysis," and Notes 2, 3, and 4
to the Consolidated Financial Statements.
SECURITIZATION
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 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 noninvestment 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.
FHLB OF CHICAGO PROGRAM
During fiscal 1998, the Company sold $83.1 million of single family loans
through the FHLB of Chicago's Mortgage Partnership Finance program ("MPF").
The Company is the first FHLB-system member outside of the FHLB of Chicago's
district to participate in the MPF program. This program has been established as
an alternative to selling loans into the traditional secondary market.
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To cover its risk of loss on the loans purchased through this program, the
FHLB of Chicago determines the total loss profile for the loans. A portion of
the loan coupon remitted each month is retained by the FHLB of Chicago to fund a
spread account set up to absorb normal and expected losses from such loans. Over
time, if losses are greater than the accumulated amount of the spread account,
the second level of loss protection is provided by the Company. This coverage is
provided in the form of recourse, which is limited to the credit enhancement
guarantee provided by the Company. If losses become greater than the recourse
coverage, all further losses are borne solely by the FHLB of Chicago.
SERVICING RETENTION UNIT
In September 1997, the Company established a Servicing Retention Unit to
focus on refinancing loans within its servicing portfolio. This group seeks to
solicit borrowers that have an identified possibility of refinance. The
Servicing Retention Unit's objective is to extend the life of the existing
servicing portfolio.
MORTGAGE SERVICING GROUP
At September 30, 1998, the Company's single family mortgage servicing
portfolio totalled $27.9 billion or 292,000 loans, including $4.4 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 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.
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 secondarily 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, and
generally range from 0.25% to 0.55% annually of the outstanding principal amount
of the loan. Minimum servicing fees for substantially all loans serviced that
have been securitized into 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 can
be terminated 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.
MORTGAGE SERVICING RIGHTS
Mortgage servicing portfolio levels are influenced by market interest
rates. As interest rates rise, prepayments generally decrease, resulting in an
increase in the value of the servicing portfolio. Lower market interest rates
prompt an increase in prepayments as consumers refinance their mortgages at
lower rates of interest. As
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prepayments increase, the life of the servicing portfolio is reduced, decreasing
the servicing fee revenue that will be earned over the life of that portfolio
and the price third-party purchasers are willing to pay. Increased prepayment
activity also impacts earnings through higher amortization of MSRs and any MSR
impairment valuations, which are deducted from servicing fee revenue. The
Company actively seeks to mitigate the negative effect of prepayments on the
servicing portfolio by entering into interest rate floor agreements
("floors"). The Company pays a one-time premium to enter into the floor
agreement and if rates fall below an agreed rate, the Company will receive
payments equal to the difference between the market rate and the agreed rate
multiplied by the notional amount. The Company is not exposed to loss with a
floor agreement beyond the initial premium paid. See Note 11 to the Consolidated
Financial Statements.
During fiscal 1998, a MSR valuation allowance totalling $4.8 million was
established due to the effect of a decline in long-term market interest rates.
There was no MSR valuation allowance at September 30, 1997 or 1996. When
determining the value of MSRs, the Company estimates future prepayment rates
based on current interest rate levels, market forecasts, and other economic
conditions, as well as relevant characteristics of the servicing portfolio, such
as recent prepayment experience, delinquency rates, and interest rate
stratification. The weighted average interest rate in the servicing portfolio
has decreased from 9.57% at September 30, 1991 to 7.78% at September 30, 1998,
principally as a result of the origination of mortgage loans with increasingly
lower rates from fiscal 1991 to 1998, the prepayment and refinancing of higher
rate mortgages, and purchases of MSRs on loans originated by others at lower
rates. At September 30, 1998, the weighted-average contractual maturity
(remaining years to maturity) of the loans in the servicing portfolio was
approximately 24 years.
The performance of the loans in the servicing portfolio may be affected by
changes in local economic and business conditions. At September 30, 1998, the
largest concentrations of the servicing portfolio were in California (31.0%) and
Texas (9.7%). At September 30, 1998, 5.09% of the loans serviced by the Mortgage
Servicing Group were delinquent and an additional 1.12% were in foreclosure. The
following table presents the servicing portfolio at September 30, 1998, by
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........................... 3.1% 23.5% 6.6% 1.6% 0.3% 0.1% 0.1%
Conventional......................... 10.6 30.5 20.9 2.0 0.5 0.1 0.1
--------- --------- --------- ------ ------ ------ -------
Total........................... 13.7% 54.0% 27.5% 3.6% 0.8% 0.2% 0.2%
========= ========= ========= ====== ====== ====== =======
</TABLE>
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The following table shows activity in the single family loan servicing
portfolio.
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
ACTIVITY
Beginning balance.................... $ 24,518,396 $ 13,246,848 $ 12,532,472
Purchases(1)..................... 8,050,799 12,384,544 1,233,117
Servicing on originated loans.... 3,899,903 2,219,294 3,689,994
Prepayments...................... (7,447,519) (1,870,400) (1,600,195)
Sales(1)......................... (154,709) (929,687) (2,130,004)
Amortization..................... (850,081) (436,541) (373,964)
Foreclosures..................... (81,489) (95,662) (104,572)
------------ ------------ ------------
Ending balance....................... $ 27,935,300 $ 24,518,396 $ 13,246,848
============ ============ ============
BY TYPE
Conventional..................... $ 18,125,325 $ 19,034,564 $ 9,663,715
Government....................... 9,809,975 5,483,832 3,583,133
------------ ------------ ------------
$ 27,935,300 $ 24,518,396 $ 13,246,848
============ ============ ============
BY OWNER
Others........................... $ 23,491,960 $ 20,521,294 $ 9,494,788
Company.......................... 4,443,340 3,997,102 3,752,060
------------ ------------ ------------
$ 27,935,300 $ 24,518,396 $ 13,246,848
============ ============ ============
- ------------
(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 1998 and 1997, the Company continued to be an active
opportunistic purchaser of MSRs. MSRs increased by $138.7 million, or 51%,
during fiscal 1998 due to purchases of servicing rights associated with $8.1
billion of single family mortgage loans at a cost of $166.5 million. These
acquisitions also contributed to the increase in servicing related receivables
and payables included in other assets and other liabilities. See Note 6 to the
Consolidated Financial Statements.
INSURANCE PRODUCT SALES
Commonwealth Insurance Services, Inc., an affiliate of the Bank, markets
and sells insurance products to the Company's consumer customer base. A broad
range of insurance products, including life, credit life, accidental death,
disability services, disaster mortgage protection, and other select insurance
products are offered. The primary methods of marketing are direct mail,
telemarketing, and agent sales. In fiscal 1998, the Bank began offering auto and
homeowners insurance to its employees, mortgage customers, and community bank
customers.
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 operates an 84-branch community banking
network, a 24-hour telephone banking center, and an 81-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 43 branches in
the greater Houston area, 37 branches in the Dallas / Ft. Worth metropolitan
area, and two branches each in Austin and San Antonio. Through this branch
network, the Company maintains approximately 624,000 accounts for approximately
265,000 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, 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 the primary financial services provider to
its customers by emphasizing high levels of customer service and innovative
products. At September 30, 1998, the Community Banking Group maintained nearly
397,000 deposit accounts with $5.2 billion in deposits. See " -- Deposits."
7
<PAGE>
CONSUMER LENDING
The Community Banking Group offers a variety of consumer loan products,
including home equity loans, 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. At September 30, 1998, consumer loans outstanding totalled $493.5
million, up by $187.9 milion, or 62%, from the prior year and there were $44.9
million in unfunded commitments.
Consumer loans generally have higher risk of loss than single family
residential loans. For example, credit card loans are easily accessible to
consumers, which contributes to an increased level of risk, fraud in particular.
Credit card loans also 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'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. It provides a broad range
of credit services to its small business customers, including lines of credit,
working capital loans, equipment loans, owner-occupied real estate loans, SBA
loans and cash and treasury management services. These loans are offered with
both fixed and adjustable-rates on a term basis and adjustable-rates on a
revolving basis with maturities of up to 10 years for term loans and one year
for revolving loans. These loans are underwritten on the financial strength of
the guarantor, the value of pledged collateral, and the projected cash flows of
the borrower. Additionally, borrowers are contractually required to provide
periodic financial information for review. At September 30, 1998, the Community
Banking Group had 1,020 small business loans outstanding, totalling $82.5
million, $36.1 million in unfunded commitments, and $72.3 million in pending
applications. Small business loans outstanding increased by $33.1 million, or
67%, during fiscal 1998.
RETAIL MORTGAGE ORIGINATIONS
In fiscal 1997, the Company began offering mortgages through its community
banking branch network. The types of loans offered through the community banking
branch network were primarily 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
from a Bank United checking account. For fiscal 1998 and 1997, the Community
Banking Group originated $167.1 million and $38.2 million of retail mortgage
loans.
INVESTMENT PRODUCT SALES
Bank United Securities Corp., a subsidiary of the Bank, markets investment
products to the Company's consumer customer base. A broad range of investment
products, including stocks, bonds, mutual funds, annuities, securities, and
certain other insurance policies is offered by commissioned Series 7 and Group I
licensed, registered representatives. As of September 30, 1998, there were 41
such representatives operating out of certain offices located in the community
banking branches. Each representative will typically be responsible for
investment product sales at two to three community banking branches.
MORTGAGE BANKING GROUP
The Mortgage Banking Group's principal activities were comprised of retail
and wholesale mortgage originations, and mortgage servicing. During February
1997, the Company sold certain of its mortgage origination offices. In
connection with this sale, the remaining offices were restructured or closed.
The Company retained its mortgage servicing business, its retail 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 ended January 31, 1997 and fiscal 1996, the
Mortgage Banking Group originated $638.4 million and $2.1 billion in retail
mortgage loans and $614.5 million and $1.7 billion in mortgage loans through its
wholesale operations. See " -- Financial Markets Group -- Wholesale Mortgage
Originations" and Note 17 to the Consolidated Financial Statements.
8
<PAGE>
LOAN PORTFOLIO
The Company has focused in recent years on originating and servicing
commercial and consumer loans. However, the loan portfolio still shows the
impact of substantial single family mortgage loan fundings. The following table
shows loan funding levels. Fundings include originations of new loans and
increases in existing loans, such as lines of credit. 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 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,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
FUNDINGS
Single family........................ $ 3,789,389 $ 2,188,273 $ 3,602,009
Commercial........................... 2,876,328 1,492,931 891,306
Consumer............................. 367,097 152,665 125,596
------------ ------------ ------------
Total...................... $ 7,032,814 $ 3,833,869 $ 4,618,911
============ ============ ============
The following table shows the composition of the loan portfolio.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HELD FOR INVESTMENT
Single family................... $ 4,694,628 $ 5,820,495 $ 6,152,504 $ 7,061,088 $ 4,203,614
Mortgage banker finance lines of
credit........................ 787,736 464,189 139,872 109,339 147,754
Single family construction...... 779,542 389,230 242,525 115,436 57,786
Multi-family.................... 684,000 661,774 479,833 356,587 256,362
Consumer........................ 493,457 305,545 173,518 123,096 108,179
Commercial real estate.......... 411,396 275,694 10,538 27,393 61,919
Commercial syndications......... 174,522 72,981 -- -- --
Multi-family construction....... 172,422 107,215 31,355 35,430 20,437
Healthcare construction......... 145,095 30,091 -- -- --
Healthcare...................... 122,665 65,886 8,750 -- --
Commercial real estate
construction.................. 91,649 29,088 21,551 3,613 --
Small business.................. 59,106 45,350 22,798 6,495 --
------------- ------------ ------------ ------------ ------------
8,616,218 8,267,538 7,283,244 7,838,477 4,856,051
Allowance for credit losses..... (47,027) (39,172) (39,633) (36,763) (23,378)
Accretable unearned discounts
and net deferred loan
origination fees.............. (2,479) (6,740) (16,458) (38,038) (52,345)
------------- ------------ ------------ ------------ ------------
8,566,712 8,221,626 7,227,153 7,763,676 4,780,328
------------- ------------ ------------ ------------ ------------
HELD FOR SALE
Single family................... 2,048,483 697,410 256,656 406,563 253,310
SBA............................. 37,765 65,872 32,543 -- --
Small business.................. 23,422 4,121 3,136 825 --
Multi-family.................... 19,067 6,200 -- 89,176 12,536
Commercial real estate.......... 7,769 -- -- -- --
------------- ------------ ------------ ------------ ------------
2,136,506 773,603 292,335 496,564 265,846
------------- ------------ ------------ ------------ ------------
Total loans................ $ 10,703,218 $ 8,995,229 $ 7,519,488 $ 8,260,240 $ 5,046,174
============= ============ ============ ============ ============
</TABLE>
The Company's loan portfolio is concentrated in certain geographical
regions, particularly California and Texas. The performance of such loans may be
affected by changes in local economic and business conditions. Unfavorable or
worsened economic conditions throughout California could have a materially
adverse effect on
9
<PAGE>
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Asset Quality."
INVESTMENT PORTFOLIO
AT SEPTEMBER 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
Securities purchased under agreements
to resell and federal funds sold... $ 474,483 $ 349,209 $ 674,249
Securities and other investments
U.S. government and agency...... 18,425 29,085 64,544
SBA interest-only strips........ 71,561 37,511 --
Other........................... 1,364 11,213 1,149
Mortgage-backed securities
U.S. government and agency...... 277,975 651,292 556,853
Other........................... 654,083 918,413 1,101,055
------------ ------------ ------------
Total...................... $ 1,497,891 $ 1,996,723 $ 2,397,850
============ ============ ============
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 holding a portfolio of non-securitized loans.
Additionally, MBS include securities created through the securitization of the
Company's single family loans. The MBS in the investment portfolio have
different credit quality quarantees and structures and include FNMA, FHLMC, and
GNMA certificates ("agency securities"), privately issued and credit enhanced
MBS ("non-agency securities"), and certain types of collateralized mortgage
obligations ("CMOs"). Agency pass-through securities guarantee the timely
payment of principal and interest, whether collected or not, and pay-off if the
mortgagor defaults. GNMA is an agency of the federal government that guarantees
GNMA MBS. GNMA MBS are backed by the full faith and credit of the United States.
FNMA and FHLMC are government-sponsored enterprises, and their MBS only carry
the guarantee of the issuing agency. However, these agencies have lines of
credit with the Treasury, which provide a large measure of security and
certainty.
The Company also invests in securities sponsored by private issuers with no
explicit or implicit government guarantee. There are a variety of structuring
techniques used to protect investors against default risk and delays in payment
of principal and interest. The forms of credit enhancements include insurance,
letters of credit, and subordination within the MBS structure. As of September
30, 1998, all of the non-agency MBS had a credit rating of AA/Aa or higher as
defined by Standard & Poor's Corporation or Moody's Investor Services, Inc.
The Company holds SBA interest-only strips in its securities and other
investments portfolio. These SBA interest-only strips were created in connection
with the Company's securitization of SBA loans. These investments represent the
contractual right to receive a portion of the interest due on the underlying SBA
loans. If actual prepayment speeds remain at higher levels than originally
anticipated in the securitization process, the value of the recorded investment
may be permanently impaired. SBA loans are generally less sensitive to changes
in interest rates, which reduces the likelihood of prepayments.
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 84-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 1998, the outstanding balances of
transaction accounts increased to 46% of total deposits, from 45% at September
30, 1997. The number of consumer and commercial checking accounts increased to
over 176,000 at September 30, 1998, up by 8% from 163,000 at September 30, 1997.
The composition of the Company's deposits by business unit, type of customer,
and type of account was as follows:
AT SEPTEMBER 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
BUSINESS UNIT
Community Banking.................... $ 5,188,523 $ 4,201,898 $ 4,051,055
Commercial Banking................... 1,100,313 973,123 889,039
Financial Markets.................... 31,640 72,647 207,851
------------ ------------ ------------
$ 6,320,476 $ 5,247,668 $ 5,147,945
============ ============ ============
TYPE OF CUSTOMER
Consumer............................. $ 5,015,524 $ 4,071,214 $ 3,939,631
Commercial........................... 1,273,312 1,103,807 1,000,463
Wholesale............................ 31,640 72,647 207,851
------------ ------------ ------------
$ 6,320,476 $ 5,247,668 $ 5,147,945
============ ============ ============
TYPE OF ACCOUNT
Time (CDs)........................... $ 3,382,882 $ 2,878,952 $ 3,122,200
Transaction.......................... 2,937,594 2,368,716 2,025,745
------------ ------------ ------------
$ 6,320,476 $ 5,247,668 $ 5,147,945
============ ============ ============
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 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 traditional
deposit products including 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, 1998.
AVERAGE
DEPOSITS
NUMBER OF DEPOSITS PER
LOCATION BRANCHES OUTSTANDING BRANCH
- ------------------------------------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
Houston area......................... 43 $ 2,884,069 $ 67,071
Dallas/Ft. Worth metroplex........... 37 2,082,321 56,279
Other................................ 4 222,133 55,533
--
------------
Total........................... 84 $ 5,188,523 61,768
== ============
The Company also obtains deposits through acquisitions. In January 1998,
the Company purchased 18 branches and related deposits from Guardian Savings and
Loan Association. The branches, six in the Houston area and 12 in the Dallas/Ft.
Worth Metroplex, had combined deposits of $1.44 billion. In December 1997, the
Company purchased three branches in the Dallas area, having $66 million in
deposits, from California Federal Savings Bank, FSB.
In September 1998, the Company signed an agreement to purchase Midland
American Bank, a commercial bank operating five branches in Midland, Texas,
having assets of $225 million and deposits of $203 million. Closing of this
transaction is expected early in 1999.
11
<PAGE>
The Commercial Banking Group obtains deposits by offering cash management
services to its MBF customers. These commercial deposit accounts include
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 Note 7 to the
Consolidated Financial Statements.
MARKET RISK ANALYSIS
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's principal market risk exposure is to changes in
interest rates. Interest rate risk arises primarily from differences in the
duration or repricing of the Company's assets, liabilities, and financial
instruments with off-balance-sheet risk. The Company is most affected by changes
in U.S. Treasury rates and London InterBank Offered Rates ("LIBOR") because
many of the Company's financial instruments reprice based on these indices.
Substantial changes in these indices may adversely impact the Company's
earnings. To that end, management actively monitors and manages its interest
rate risk exposure. This effort is accomplished through structuring the balance
sheet and off-balance-sheet portfolios by seeking to maximize net interest
income while maintaining an acceptable level of risk to changes in market
interest rates. The achievement of this goal requires a balance between
profitability, liquidity, and interest rate risk.
ASSET AND LIABILITY MANAGEMENT
Interest rate risk is managed by the ALCO, which is composed of senior
officers of the Company, in accordance with policies approved by the Company's
Board of Directors. The ALCO formulates strategies based on appropriate levels
of interest rate risk. In determining the appropriate level of interest rate
risk, the ALCO considers the impact on earnings and capital of the current
outlook on interest rates, potential changes in interest rates, regional
economies, liquidity, business strategies, and other factors. The ALCO meets
regularly to review, among other things, the sensitivity of assets and
liabilities to interest rate changes, the book and fair values of assets and
liabilities, unrealized gains and losses, purchase and sale activity, loans held
for sale and commitments to originate loans ("mortgage pipeline"), and the
maturities of investments, borrowings and time deposits. Additionally, the ALCO
reviews liquidity, cash flow flexibility, and consumer and commercial deposit
activity.
To effectively measure and manage interest rate risk, the Company uses
sensitivity analysis to determine the impact on net interest income of various
interest rate scenarios, balance sheet trends, and strategies. From these
simulations, interest rate risk is quantified and appropriate strategies are
developed and implemented. Additionally, duration and market value sensitivity
measures are utilized when they provide added value to the overall interest rate
risk management process. The overall interest rate risk position and strategies
are reviewed by executive management and the Company's Board of Directors on an
ongoing basis. The Company has traditionally managed its business to reduce its
overall exposure to changes in interest rates. However, management has latitude
to increase the Company's interest rate sensitivity position within certain
limits if, in management's judgment, it will enhance profitability. As a result,
changes in market interest rates may have a greater impact on the Company's
financial performance than they have had historically.
The Company manages its exposure to interest rates by entering into certain
financial instruments with on and off-balance-sheet risk in the ordinary course
of business. The Company does not enter into instruments such as leveraged
derivatives or structured notes for the purposes of reducing interest rate risk.
The financial instruments used to manage interest rate risk may include interest
rate swaps, caps, floors, locks, short sales, financial options, financial
futures contracts, and forward delivery contracts. A hedge is an attempt to
reduce risk by creating a relationship whereby any 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>
SENSITIVITY ANALYSIS
The following table presents an analysis of the changes inherent in the
Company's net interest income over a 12 month period and market value of
portfolio equity arising from hypothetical changes in market interest rates
("MVE"). MVE is the market value of assets, less the market value of
liabilities, adjusted for the market value of MSRs and off-balance-sheet
instruments. The interest rate scenarios presented in the table include interest
rates at September 30, 1998 and 1997 and as adjusted by instantaneous parallel
rate changes upward and downward of up to 200 basis points. The fiscal 1998 and
1997 scenarios are not comparable due to differences in the interest rate
environments, including the absolute level of rates and the shape of the yield
curve.
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ---------------------------------
CHANGE IN NET INTEREST MARKET VALUE OF NET INTEREST MARKET VALUE OF
INTEREST RATES INCOME PORTFOLIO EQUITY INCOME PORTFOLIO EQUITY
-------------- ------------ ---------------- ------------ ----------------
<S> <C> <C> <C> <C>
+200 (2.92)% (4.63)% (9.92)% (8.56)%
+100 (0.48) (2.63) (3.01) (0.57)
0 0.00 0.00 0.00 0.00
-100 1.13 (3.86) 1.23 (7.78)
-200 2.39 1.68 3.56 (12.01)
</TABLE>
The MVE is negatively impacted by the estimated effect of prepayments on
the value of single family loans, MBS, and MSRs as rates decline. Further, this
analysis is based on the Company's interest rate exposure at September 30, 1998
and 1997 and does not contemplate any actions the Company might undertake in
response to changes in market interest rates, which could impact MVE.
Each rate scenario shows unique prepayment, repricing, and reinvestment
assumptions. Management derived these assumptions considering published market
prepayment expectations, the repricing characteristics of individual instruments
or groups of similar instruments, the Company's historical experience, and the
Company's asset and liability management strategy. Further, this analysis
assumes that certain of the Company's instruments would not be affected by the
changes in interest rates or would be partially affected due to the
characteristics of the instruments.
There are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates. It is not possible to fully model
the market risk in instruments with leverage, option, or prepayment risks. Also,
the Company is affected by basis risk, which is the difference in repricing
characteristics of similar term rate indices. As such, this analysis is not
intended to be a forecast of the effect of a change in market interest rates on
the Company.
GAP ANALYSIS
The interest rate sensitivity gap ("gap") is defined as the difference
between interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. During a period of rising interest rates,
a positive gap (where the amount of maturing and repricing assets exceeds
liabilities) would tend to have a positive impact on net interest income, while
a negative gap (where the amount of maturing and repricing liabilities exceeds
assets) would tend to have a detrimental impact. During a period of declining
interest rates, a negative gap would tend to have a positive impact on net
interest income, while a positive gap would tend to have a detrimental impact.
The Company's one-year cumulative gap position at September 30, 1998 was
negative $1.5 billion or 10.91% of assets. This is a one-day position that
changes frequently and is not indicative of the Company's position at any other
time. While the gap position is a useful tool in measuring interest rate risk
and contributes toward effective asset and liability management, it is difficult
to predict the effect of changing interest rates solely on that measure without
accounting for alterations in the maturity or repricing characteristics of the
balance sheet that occur during changes in market interest rates. For example,
the gap position shows only the prepayment assumptions pertaining to the current
rate environment. Assets tend to prepay more rapidly during periods of declining
interest rates than during periods of rising interest rates. Because of this and
other risk factors not contemplated by the gap position, an institution could
have a matched gap position in the current rate environment and still have its
net interest income exposed to interest rate risk.
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, 1998:
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING IN
--------------------------------------------------------------------
AFTER
THREE AFTER AFTER
LESS THAN MONTHS SIX MONTHS ONE YEAR
THREE BUT WITHIN BUT WITHIN BUT WITHIN AFTER NON-
MONTHS SIX MONTHS ONE YEAR FIVE YEARS FIVE YEARS REPRICING
---------- ----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS(1)
Cash and investment
securities(2).................... $1,035,294 $ -- $ -- $ -- $ 30,000 $ --
Adjustable-rate loans.............. 4,820,633 1,154,610 887,018 819,903 26,334 --
Fixed-rate loans................... 296,494 167,029 291,729 1,405,931 885,706 --
Adjustable-rate mortgage-backed
securities....................... 508,243 186,682 72,119 -- -- --
Fixed-rate mortgage-backed
securities....................... 15,588 15,589 31,178 62,357 -- --
Other assets....................... -- -- -- -- -- 952,555
---------- ----------- ----------- ---------- ---------- ----------
Total assets................... $6,676,252 $1,523,910 $1,282,044 $2,288,191 $942,040 $ 952,555
========== =========== =========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Certificates of deposit............ $ 762,678 $ 764,988 $1,286,209 $ 568,392 $ 615 $ --
Checking and savings(3)............ 2,937,594 -- -- -- -- --
---------- ----------- ----------- ---------- ---------- ----------
Total deposits................. 3,700,272 764,988 1,286,209 568,392 615 --
Notes payable...................... -- -- -- -- 220,000 --
FHLB advances and other
borrowings....................... 4,425,445 637,046 470,000 62,545 -- --
Other liabilities.................. -- -- -- -- -- 659,568
Minority interest.................. -- -- -- -- -- 185,500
Stockholders' equity............... -- -- -- -- -- 684,412
---------- ----------- ----------- ---------- ---------- ----------
Total liabilities, minority
interest, and stockholders'
equity....................... $8,125,717 $1,402,034 $1,756,209 $ 630,937 $220,615 $1,529,480
========== =========== =========== ========== ========== ==========
Gap before off-balance-sheet
financial instruments.............. $(1,449,465) $ 121,876 $ (474,165 ) $1,657,254 $721,425 $ (576,925)
OFF-BALANCE-SHEET(4)
Interest rate swap
agreements -- pay fixed.......... 376,000 (65,000 ) -- (275,500 ) (35,500) --
---------- ----------- ----------- ---------- ---------- ----------
Gap.................................. $(1,073,465) $ 56,876 $ (474,165 ) $1,381,754 $685,925 $ (576,925)
========== =========== =========== ========== ========== ==========
Cumulative gap....................... $(1,073,465) $(1,016,588) $(1,490,753)
========== =========== ===========
Cumulative gap as a percentage of
total assets....................... (7.86)% (7.44 )% (10.91 )%
========== =========== ===========
</TABLE>
TOTAL
----------
ASSETS(1)
Cash and investment
securities(2).................... $1,065,294
Adjustable-rate loans.............. 7,708,498
Fixed-rate loans................... 3,046,889
Adjustable-rate mortgage-backed
securities....................... 767,044
Fixed-rate mortgage-backed
securities....................... 124,712
Other assets....................... 952,555
----------
Total assets................... $13,664,992
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Certificates of deposit............ $3,382,882
Checking and savings(3)............ 2,937,594
----------
Total deposits................. 6,320,476
Notes payable...................... 220,000
FHLB advances and other
borrowings....................... 5,595,036
Other liabilities.................. 659,568
Minority interest.................. 185,500
Stockholders' equity............... 684,412
----------
Total liabilities, minority
interest, and stockholders'
equity....................... $13,664,992
==========
Gap before off-balance-sheet
financial instruments..............
OFF-BALANCE-SHEET(4)
Interest rate swap
agreements -- pay fixed..........
Gap..................................
Cumulative gap.......................
Cumulative gap as a percentage of
total assets.......................
- ------------
(1) Fixed-rate loans and MBS are distributed based on contractual maturity
adjusted for anticipated prepayments. Adjustable-rate loans and MBS are
distributed based on the interest rate reset date and contractual maturity
adjusted for anticipated prepayments. Loans and MBS runoff and repricing
assume a constant prepayment rate based on coupon rate and maturity. The
weighted-average annual projected prepayment rate was 20%.
(2) Investment securities include repurchase agreements, federal funds sold,
securities, and FHLB stock.
(3) Checking and savings deposits are presented in the earliest repricing period
because amounts in these accounts are subject to withdrawal upon demand.
(4) The above table includes only those off-balance-sheet financial instruments
that impact the gap in all interest rate environments. The Company also has
certain off-balance-sheet financial instruments that hedge specific interest
rate risks.
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 commercial banks, thrift
institutions, credit unions, full service and discount broker dealers, and other
investment alternatives, such as mutual funds, money market funds, savings
bonds, and other government securities. The Company and its peers compete
primarily on the price at which products are offered and on customer service.
The Company competes for loan originations with mortgage companies, banks,
thrift institutions, and insurance companies. Primary competitive factors
include service quality, relationships with builders and real estate brokers,
and rates and fees. Many of the Company's competitors are, or are affiliated
with, organizations with substantially larger asset and capital bases (including
regional and multi-national banks and bank holding companies) and with lower
funding costs.
SUBSIDIARIES
In December 1996, the Parent Company formed a wholly owned Delaware
subsidiary, Holdings. The Bank is a 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 when the Bank owns more than 10% of
the stock. At September 30, 1998, the Bank was authorized to have a maximum
investment of approximately $409.0 million in its subsidiaries. Only one of the
Bank's subsidiaries, Bank United Securities Corp. ("BUS"), is material.
BANK UNITED SECURITIES CORP.
The Bank is the sole shareholder of BUS, a Texas corporation, which acts as
a full-service broker-dealer. BUS, through its institutional division, sells
various securities products and whole loans and engages in the deposit referral
business with institutional and sophisticated retail customers. Through its
retail division, BUS markets annuities and securities, including mutual funds,
stocks, and bonds, to the Bank's community banking customers. BUS is a
broker-dealer registered with the Securities and Exchange Commission and a
member of the National Association of Securities Dealers, Inc.
PERSONNEL
At September 30, 1998, the Company employed 1,793 full-time employees and
251 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.
FEDERAL FINANCIAL ASSISTANCE
In December 1988, in connection with the acquisition of United Savings
Association of Texas (the "Acquisition"), the Company, the Bank, and certain
related entities entered into several agreements with the Federal Savings and
Loan Insurance Corporation ("FSLIC") and the Federal Home Loan Bank Board
("FHLBB"). The principal agreement was the assistance agreement that, among
other things, provided significant financial assistance to the Bank from the
FSLIC Resolution Fund ("FRF") (the "Assistance Agreement").
In December 1993, the Parent Company, the Bank, and certain related
entities entered into a settlement agreement with the FDIC to settle certain
disputes that had arisen over the years relating to these agreements (the
"Settlement Agreement"). Simultaneously, the Assistance Agreement and all
other original Acquisition related agreements were terminated, except one
provision of the Assistance Agreement granting certain indemnities to the Parent
Company, the Bank, and certain related entities, a forbearance letter
("Forbearance Agreement"), and the tax benefits agreement ("Tax Benefits
Agreement"). The Tax Benefits Agreement governs the sharing of tax benefits
with the FDIC as manager of the FRF. See "-- Taxation -- FSLIC Assistance."
The Settlement
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Agreement also provided for the continuation of certain Parent Company and Bank
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 that granted the FSLIC 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"). The Settlement Agreement provided that the Bank 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 were made) beginning December 28, 1993. 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 Bank common stock for
1,503,560 shares of Class B common stock of the Company. As part of the
Company's public offering in August 1996, the FDIC-FRF sold all such shares of
Class B common stock of the Company. Following the consummation of this
offering, all rights and obligations under the Warrant 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 Parent
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 Office of Thrift Supervision ("OTS")
took the position that the capital standards set forth in FIRREA applied to all
savings institutions, including those institutions that had been operating under
previously granted capital and accounting forbearances, and that FIRREA
eliminated those forbearances. While the Bank has not had to rely on such
forbearances or waivers in order to remain in compliance with existing capital
requirements as interpreted by the OTS, the position of the OTS adversely
affected the Bank by curtailing the growth and reducing the leverage
contemplated by the terms of the Forbearance Agreement. The Bank has been and
continues to be in compliance with regulatory capital provisions and,
accordingly, has not had to rely on the waivers or forbearances provided in the
Acquisition.
On July 25, 1995, the Bank, the Parent Company, and Hyperion Partners filed
suit against the United States in the Court of Federal Claims in connection with
claims relating to the forbearances. See "Legal Proceedings -- WINSTAR-based
Claims."
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REGULATION
GENERAL
The Parent Company is a savings and loan holding company that is regulated
and subject to examination by the 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 12 regional FHLBs,
each subject to supervision and regulation by the Federal Housing Finance Board.
The FHLBs provide a central credit facility primarily for member thrift
institutions as well as for qualified commercial banks and other entities
involved in home mortgage finance. The Bank, as a member of the FHLB Dallas, is
required to purchase and hold shares of the capital stock in that FHLB in an
amount at least equal to the greater of: (1) 1% of the aggregate principal
amount of its unpaid mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year; (2) 0.3% of its assets; or (3) 5% (or
greater fraction as established by the FHLB) of its advances (I.E., borrowings)
from the FHLB. The regional FHLBs have authority to periodically conduct
Community Support reviews of member institutions.
The descriptions of the statutes and regulations applicable to savings and
loan holding companies and savings associations set forth below is not a
complete description of the statutes and regulations or all such statutes and
regulations and their effects on the Parent Company and the Bank.
HOLDING COMPANY ACQUISITIONS
The Parent Company is a savings and loan holding company within the meaning
of the Home Owner's Loan Act, as amended (the "HOLA"). HOLA and OTS
regulations generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring, directly or indirectly, the ownership or control
of any other savings association or savings and loan holding company, or all, or
substantially all, of the assets or more than 5% of the voting shares thereof.
These provisions also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control of
any savings association that is not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES
The Parent Company currently operates as a unitary savings and loan holding
company. Generally, there are few restrictions on the activities of a unitary
savings and loan holding company and its non-savings association subsidiaries
provided that the savings association subsidiary is a qualified thrift lender.
See "Investment Authority -- QTL Test." If the Company ceases to be a unitary
savings and loan holding company, the activities of the Company and its
non-savings association subsidiaries would thereafter be subject to substantial
restrictions.
The HOLA requires that every savings association subsidiary of a savings
and loan holding company give the OTS at least 30 days advance notice of any
proposed dividends to be made on its guaranty, permanent, or other
non-withdrawable stock or such dividend will be invalid. See "-- Capital
Distributions."
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
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controlled by controlling stockholders of the Bank or the Parent Company and any
company sponsored and advised on a contractual basis by the Bank or any
subsidiary or affiliate of the Bank. The OTS regulation generally excludes all
non-bank and non-savings association subsidiaries of savings associations from
treatment as affiliates, except to the extent that the director of the OTS
decides to treat such subsidiaries as affiliates. The Parent Company is an
affiliate of the Bank.
Section 23A of the FRA limits Covered Transactions with any one affiliate
to 10% of an association's capital stock and surplus (as defined therein) and
limits aggregate affiliate transactions to 20% of the Bank's capital stock and
surplus. A Covered Transaction is defined generally as a loan to an affiliate,
the purchase of securities issued by an affiliate, the purchase of assets from
an affiliate, the acceptance of securities issued by an affiliate as collateral
for a loan, or the issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate. In addition, the Bank generally may not purchase
securities issued or underwritten by an affiliate, or low quality assets from an
affiliate. Sections 23A and 23B of the FRA provide that a loan transaction with
an affiliate generally must be collateralized (but may not be collateralized by
a low quality asset or securities issued by an affiliate) and that all Covered
Transactions, as well as the sale of assets, the payment of money, or the
provision of services by the Bank to an affiliate, must be on terms and
conditions that are substantially the same, or at least as favorable to the
Bank, as those prevailing for comparable nonaffiliate transactions.
The OTS generally requires savings associations, such as the Bank, to
attribute to an affiliate the amounts of all transactions conducted with
subsidiaries of that affiliate, requires savings associations to make and retain
records that show affiliate transactions in reasonable detail, and provides that
certain classes of savings associations may be required to give the OTS prior
notice of affiliate transactions.
INSURANCE ASSESSMENTS
The FDIC establishes premium assessment rates for SAIF deposit insurance.
There is no statutory limit on the maximum assessment and the percent of
increase in the assessment that the FDIC may impose in any one year, provided,
however, that the FDIC may not collect more than is necessary to reach or
maintain the SAIF's designated reserve ratio and must rebate any excess
collected. Under the FDIC's risk-based insurance system, SAIF-assessable
deposits are now subject to premiums of between 0 to 27 cents per $100 of
deposits, depending upon the institution's capital position and other
supervisory factors.
To arrive at a risk-based assessment for each bank and thrift, the FDIC
places it in one of nine risk categories using a two-step process based first on
capital ratios and then on relevant supervisory information. Each institution is
assigned to one of three groups (well-capitalized, adequately capitalized, or
undercapitalized) based on its capital ratios. A "well-capitalized"
institution is one that has at least a 10% "total risk-based capital" ratio
(the ratio of total capital to risk-weighted assets), a 6% "tier 1 risk-based
capital" ratio (the ratio of tier 1 (core) capital to risk-weighted assets),
and a 5% "leverage capital" ratio (the ratio of core capital to adjusted total
assets). An "adequately capitalized" institution has at least an 8% total
risk-based capital ratio, a 4% tier 1 (core) risk-based capital ratio, and a 4%
leverage capital ratio. An "undercapitalized" institution is one that does not
meet either the definition of well-capitalized or adequately capitalized.
The FDIC also assigns each institution to one of three supervisory
subgroups based on an evaluation of the risk posed by the institution. These
supervisory evaluations modify premium rates within each of the three capital
groups. The nine risk categories and the corresponding SAIF assessment rates are
as follows:
SUPERVISORY SUBGROUP
-------------------------------
A B C
--------- -------- --------
Meets numerical standards for:
Well-capitalized................ 0 3 17
Adequately capitalized.......... 3 10 24
Undercapitalized................ 10 24 27
For purposes of assessments of FDIC insurance premiums, the Company
believes that the Bank is a "well-capitalized" institution as of September 30,
1998. FDIC regulations prohibit disclosure of the supervisory
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subgroup to which an insured institution is assigned. The Bank's insurance
assessments for fiscal 1998 and 1997 were $4.2 million and $4.8 million.
The Economic Growth and Paperwork Reduction Act of 1996 (the "1996 Act")
was signed into law on September 30, 1996, and required the FDIC to impose a
one-time assessment on institutions holding SAIF deposits in an amount
sufficient to increase the SAIF's net worth to 1.25% of SAIF-insured deposits.
The special assessment was 65.7 basis points times the amount of deposits held
by an institution as of March 31, 1995. The Bank's special assessment was $33.7
million, or $20.7 million net of tax.
ASSESSMENTS TO PAY FICO BONDS. The 1996 Act also obligates banks, for the
first time, to pay assessments to be used to service the bonds issued by the
Financing Corporation ("FICO") to resolve the thrift failures during the late
1980s and early 1990s. Under the 1996 Act, during the period beginning January
1, 1997 through December 31, 1999, SAIF-insured institutions will pay 6.48 basis
points toward FICO bonds and Bank Insurance Fund ("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. Reserves of 3% are required to be
maintained against net transaction accounts of $47.8 million or less. In
addition, if net transaction accounts exceed $47.8 million, institutions are
required to maintain reserves equal to 10% of the excess. The reserve
requirement for nonpersonal time deposits and Eurocurrency liabilities is 0%.
Reserve requirements are subject to adjustment by the FRB, and must be adjusted
at least annually. The balances maintained to meet the reserve requirements
imposed by the FRB may be used to satisfy liquidity requirements imposed by the
OTS. See " -- Investment Authority -- Liquidity"
CAPITAL REQUIREMENTS
REQUIREMENTS AND STANDARDS. The OTS capital regulations have three
components: a leverage limit, a tangible capital requirement, and a risk-based
capital requirement. See Note 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
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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. Prior
to August 10, 1998, generally, the lower of 90% of the fair market value of
readily marketable MSRs, or the current unamortized book value as determined
under GAAP could be included in core and tangible capital up to a maximum of 50%
of core capital computed before the deduction of any disallowed qualifying
intangible assets. Effective August 10, 1998, the OTS increased the maximum
amount of MSRs that are includable in regulatory capital from 50% to 100% of
core capital. At September 30, 1998, the Bank's core capital included $323.9
million of MSRs.
In determining core capital, all investments in and loans to subsidiaries
engaged in activities not permissible for national banks, which are generally
more limited than activities permissible for savings associations and their
subsidiaries, must be deducted. Certain exceptions are provided, including
exceptions for mortgage banking subsidiaries and subsidiaries engaged in agency
activities for customers (unless determined otherwise by the FDIC on safety and
soundness grounds). Generally, all subsidiaries engaged in activities
permissible for national banks are required to be consolidated for purposes of
calculating capital compliance by the parent savings association.
TANGIBLE CAPITAL REQUIREMENT. The tangible capital requirement mandates
that a savings association maintain tangible capital of at least 1.5% of
adjusted total assets. For purposes of this requirement, adjusted total assets
are calculated on the same basis as for the leverage limit. "Tangible capital"
is defined in the same manner as core capital, except that all intangible assets
must be deducted. At September 30, 1998, the Bank's tangible capital ratio was
6.75%.
RISK-BASED CAPITAL REQUIREMENT. The risk-based requirement promulgated by
the OTS is required by the HOLA to track the standard applicable to national
banks, except that the OTS may determine to reflect interest rate and other
risks not specifically included in the national bank standard. However, such
deviations from the national bank standard may not result in a materially lower
risk-based requirement for savings associations than for national banks. The
risk-based standard adopted by the OTS is similar to the Office of the
Comptroller of the Currency standard for national banks.
The risk-based standards of the OTS require maintenance of 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, 1998, the Bank's core capital and total capital ratios were 6.77% and
10.48%.
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
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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 loan-to-value
ratio, percentage-of-assets limits, and loans to one borrower limits. In
September 1996, the OTS substantially revised its investment and lending
regulations eliminating many of their specific requirements in favor of a more
general standard of safety and soundness.
Federally chartered savings associations may invest, without limitation, in
the following assets: (1) obligations of the United States government or certain
agencies thereof; (2) stock issued or loans made by the FHLBs or the FNMA; (3)
obligations issued or guaranteed by the FNMA, the Student Loan Marketing
Association, the GNMA, or any agency of the United States government; (4)
certain mortgages, obligations, or other securities that have been sold by the
FHLMC; (5) stock issued by a national housing partnership corporation; (6)
demand, time, or savings deposits, shares, or accounts of any insured depository
institution; (7) certain "liquidity" investments approved by the OTS to meet
liquidity requirements; (8) shares of registered investment companies the
portfolios of which are limited to investments that a federal association is
otherwise authorized to make; (9) certain MBS; (10) general obligations of any
state of the United States or any political subdivision or municipality thereof,
PROVIDED that not more than 10% of a savings association's capital may be
invested in the general obligations of any one issuer; (11) loans secured by
residential real property; (12) credit card loans; and (13) education loans.
Federally chartered savings associations may invest in secured or unsecured
loans for commercial, corporate, business, or agricultural purposes, up to 20%
of assets, provided that the last 10% is 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
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aggregate limitation, if the OTS determines that exceeding the limitation would
pose no significant risk to the safe and sound operations of the association and
would be consistent with prudent operating practices. Federally chartered
savings associations are also authorized by the HOLA to make investments in
consumer loans, business development credit corporations, certain commercial
paper and corporate debt securities, service corporations, and small business
investment companies, all of which investments are subject to
percentage-of-assets and various other limitations.
LENDING LIMITS. Generally, savings associations, such as the Bank, are
subject to the same loans to one borrower limits that apply to national banks.
Generally, a savings association may lend to a single borrower or group of
related borrowers, on an unsecured basis, in an amount not greater than 15% of
its unimpaired capital and unimpaired surplus. An additional amount, not greater
than 10% of the savings association's unimpaired capital and unimpaired surplus,
may be loaned if the loan is secured by readily marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. Notwithstanding the general lending limits, a savings
association may make loans to one borrower for any purpose of up to $500,000; or
to develop domestic residential housing units, up to the lesser of $30 million
or 30% of the savings association's unimpaired capital and unimpaired surplus,
if certain conditions are satisfied. The OTS may also impose more stringent
limits on an association's loans to one borrower, if it determines that such
limits are necessary to protect the safety and soundness of the association.
SERVICE CORPORATIONS. The HOLA authorizes federally chartered savings
associations, such as the Bank, to invest in the capital stock, obligations, or
other securities of service corporations. The HOLA authorizes a savings
association to invest up to a total of 3% of its assets in service corporations.
The last 1% of the 3% statutory investment limit applicable to service
corporations must be primarily invested in community development investments
drawn from a broad list of permissible investments that include, among other
things: government guaranteed loans; loans for investment in small businesses;
investments in revitalization and rehabilitation projects; and investments in
low- and moderate-income housing developments.
Service corporations are authorized to engage in a variety of preapproved
activities, some of which (E.G.,securities brokerage and real estate
development) are ineligible activities for the parent savings association. The
OTS regulations implementing the service corporation authority contained in the
HOLA also provide that activities reasonably related to the activities of a
federally chartered savings association may be approved on a case-by-case basis
by the Director of the OTS.
OPERATING SUBSIDIARIES. All federal savings associations are authorized to
establish or acquire one or more operating subsidiaries. Operating subsidiaries
are subject to examination and supervision by the OTS to the same extent as the
parent thrift. An "operating subsidiary" is a corporation that meets all of
the following requirements: (1) it engages only in activities that a federal
savings association is permitted to engage in directly; (2) the parent savings
association owns, directly or indirectly, more than 50% of the subsidiary's
voting stock; and (3) no person or entity other than the parent thrift may
exercise effective operating control over the subsidiary. While a savings
association's investment in its service corporations is generally limited to an
amount that does not exceed 3% of the parent savings association's total assets,
OTS regulations do not limit the amount that a parent savings association may
invest in its operating subsidiaries. Operating subsidiaries may be incorporated
and operated in any geographical location where its parent may operate. An
operating subsidiary that is a depository institution may accept deposits in any
location, provided that the subsidiary has federal deposit insurance.
QUALIFIED THRIFT LENDER ("QTL") TEST. All savings associations are
required to meet a QTL test for, among other things, future eligibility for FHLB
advances. A savings association that fails to satisfy the QTL test is subject to
substantial restrictions on its activities and to other significant penalties. A
savings association is a QTL if it either meets the test for being a domestic
building and loan association, as that term is defined in Section 7701(a)(19) of
the Internal Revenue Code of 1986, as amended; or has invested at least 65% of
its portfolio assets in qualified thrift investments and maintains this level of
qualified thrift investments on a monthly average basis in nine of every 12
months.
The term "portfolio assets" is defined as total assets less intangibles,
properties used to conduct business and liquid assets (up to 20% of total
assets). The following assets may be included as qualified thrift investments
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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, 1998, OTS regulations required a savings
association, such as the Bank, to maintain liquid assets equal to not less than
4% of its net withdrawable deposit accounts and borrowings payable in one year
or less.
MERGERS AND ACQUISITIONS
Insured depository institutions are authorized to merge or engage in
purchase and assumption transactions with other insured depository institutions
with the prior approval of the federal banking regulator of the resulting
entity. The Change in Bank Control Act and the savings and loan holding company
provisions of the HOLA, together with the regulations of the OTS under such
Acts, require that the consent of the OTS be obtained prior to any person or
company acquiring control of a savings association or a savings and loan holding
company. Under OTS regulations, "control" is conclusively presumed to exist if
an individual or company acquires more than 25% of any class of voting stock of
a savings association or holding company. There is a rebuttable presumption of
control if a person or company acquires more than 10% of any class of voting
stock (or more than 25% of any class of non-voting stock) and is subject to any
of several "control factors". The control factors relate, among other matters,
to the relative ownership position of a person or company, the percentage of
debt and/or equity of the association or holding company controlled by the
person or company, agreements giving the person or company influence over a
material aspect of the operations of the association or holding company, and the
number of seats on the board of directors thereof held by the person or company,
or his designees. The regulations provide a procedure for challenge of the
rebuttable control presumption. Certain restrictions applicable to the
operations of savings and loan holding companies and certain conditions imposed
by the OTS in connection with its approval of companies to become savings and
loan holding companies may deter companies from seeking to obtain control of the
Bank.
BRANCHING. Subject to certain statutory restrictions in the HOLA and the
Federal Deposit Insurance Act (the "FDIA"), the Bank is authorized to branch
on a nationwide basis. Branching by savings associations is also subject to
other regulatory requirements, including compliance with the Community
Reinvestment Act (the "CRA") and its implementing regulations.
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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 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.
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Significantly or critically undercapitalized institutions and
undercapitalized institutions that have not submitted or complied with
acceptable capital restoration plans are subject to regulatory sanctions. A
forced sale of shares or merger, restrictions on affiliate transactions, and
restrictions on rates paid on deposits are required to be imposed unless the
supervisory agency has determined that such restrictions would not further
capital improvement. The agency may impose other specified regulatory sanctions
at its option. Generally, the appropriate federal banking agency is required to
authorize the appointment of a conservator or receiver within 90 days after an
institution becomes critically undercapitalized.
The federal banking agencies have adopted uniform procedures for the
issuance of directives by the appropriate federal banking agency. Under these
procedures, an institution will generally be provided advance notice when the
appropriate federal banking agency proposes to impose one or more of the
sanctions set forth above. These procedures provide an opportunity for the
institution to respond to the proposed agency action or, where circumstances
warrant immediate agency action, an opportunity for administrative review of the
agency's action.
ADMINISTRATIVE ENFORCEMENT AUTHORITY. The OTS exercises extensive
enforcement authority over all savings associations and their
"institution-affiliated parties" (I.E., officers, directors, controlling
shareholders, employees, as well as attorneys, appraisers, or accountants if
such consultants or contractors knowingly or recklessly participate in a
wrongful action likely to have adverse effect on an insured institution). This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal and prohibition orders,
and to initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. The OTS may use written agreements to correct compliance deficiencies
with respect to applicable laws and regulations and to ensure safe and sound
practices. Except under certain narrow circumstances, public disclosure of final
enforcement actions by the federal banking agencies, including the OTS, is
required.
The OTS has the authority, when statutorily prescribed grounds exist, to
appoint a conservator or receiver for a savings association. Grounds for such
appointment include: insolvency; substantial dissipation of assets or earnings;
existence of an unsafe or unsound condition to transact business; likelihood
that the association will be unable to pay its obligations in the normal course
of business; undercapitalization where the association (1) has no reasonable
prospect of becoming adequately capitalized, (2) fails to become adequately
capitalized when required to do so, (3) fails to timely submit an acceptable
capital restoration plan, or (4) materially fails to implement a capital
restoration plan; or where the association is "critically undercapitalized" or
"otherwise has substantially insufficient capital".
CONSUMER PROTECTION REGULATIONS
The Bank is subject to many federal consumer protection statutes and
regulations including, but not limited to, the following:
THE TRUTH IN LENDING ACT ("TILA"). The TILA, enacted into law in 1968,
is designed to ensure that credit terms are disclosed in a meaningful way so
that consumers may compare credit terms more readily and knowledgeably. As a
result of the TILA, all creditors must use the same credit terminology and
expressions of rates, the annual percentage rate, the finance charge, the amount
financed, the total of payments, and the payment schedule.
THE FAIR HOUSING ACT ("FH ACT"). The FH Act, enacted into law in 1968,
regulates many practices, including making it unlawful for any lender to
discriminate in its housing-related lending activities against any person
because of race, color, religion, national origin, sex, handicap, or familial
status.
THE EQUAL CREDIT OPPORTUNITY ACT ("ECOA"). The ECOA, enacted into law in
1974, prohibits discrimination in any credit transaction, whether for consumer
or business purposes, on the basis of race, color, religion, national origin,
sex, marital status, age (except in limited circumstances), receipt of income
from public assistance programs, or good faith exercise of any rights under the
Consumer Credit Protection Act.
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
25
<PAGE>
by a first or subordinate lien on residential real property designed for
occupancy by one to four families, including a refinancing of an existing loan
secured by the same property, if: (1) the loan is made by any lender, the
deposits of which are federally insured or any lender that is regulated by a
federal agency, (2) the loan is insured, guaranteed or supplemented by a federal
agency, (3) the loan is intended to be sold to the FNMA, the GNMA, or the FHLMC,
or (4) the loan is made by any creditor who makes or invests in residential real
estate loans aggregating more than $1 million per year.
THE HOME MORTGAGE DISCLOSURE ACT ("HMDA"). The HMDA, enacted into law in
1975, is intended to provide public information that can be used to help
determine whether financial institutions are serving the housing credit needs of
the neighborhoods and communities in which they are located and to assist in
identifying possible discriminatory lending patterns.
THE COMMUNITY REINVESTMENT ACT ("CRA"). The CRA, enacted into law in
1977, is intended to encourage insured depository institutions, while operating
safely and soundly, to help meet the credit needs of their communities. The CRA
specifically directs the federal regulatory agencies, in examining insured
depository institutions, to assess 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 for each
transaction in currency of more than $10,000 not exempted by the Treasury
Department.
The Money Laundering Prosecution Improvements Act requires financial
institutions, typically banks, to verify and record the identity of the
purchaser upon the issuance or sale of bank checks or drafts, cashier's checks,
traveler's checks, or money orders involving $3,000 or more in cash.
Institutions must also verify and record the identity of the originator and
beneficiary of certain funds transfers.
ELECTRONIC FUND TRANSFER ACT ("EFTA"). The EFTA, enacted into law in
1978, provides a basic framework establishing the rights, liabilities, and
responsibilities of participants in "electronic fund transfer systems",
defined to include automated teller machine transfers, telephone bill-payment
services, point-of-sale terminal transfers, and preauthorized transfers from or
to a consumer's account (E.G., direct deposit of Social Security payments). Its
primary objective is to protect the rights of individuals using these systems.
The EFTA limits a consumer's liability for certain unauthorized electronic fund
transfers and requires certain error resolution procedures.
THE EXPEDITED FUNDS AVAILABILITY ACT ("EXPEDITED FUNDS ACT"). The
Expedited Funds Act, enacted into law in 1987, seeks to insure prompt
availability of funds deposited into a customer's account and to expedite the
return of checks.
THE TRUTH IN SAVINGS ACT ("TISA"). The TISA, enacted into law in 1991,
is principally a disclosure law, the purpose of which is to encourage
comparative shopping for deposit products. The common denominator used by the
TISA to facilitate comparison shopping of interest payable on deposit accounts
is the Annual Percentage Yield.
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
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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 Company and its
subsidiaries participate in the filing of a consolidated federal income tax
return with their "affiliated group", as defined by the Code. For financial
reporting purposes, however, each entity computes its tax on a separate-company
basis. In addition to federal income taxes, the Bank is required to make
payments in lieu of federal income taxes. See "-- Federal Financial
Assistance" and Note 13 to the Consolidated Financial Statements.
FSLIC ASSISTANCE
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 as defined
by the Assistance Agreement ("Net Tax Benefits"). The Net Tax Benefits are
equal to the excess of any of the federal income tax liability, which would have
been incurred if the tax benefit item had not been deducted or excluded from
income, over the federal income tax liability actually incurred. The Net Tax
Benefits items are the tax savings resulting from (1) the utilization of the
deduction by the Bank of any amount of net operating losses ("NOLs"), capital
loss carryforwards, and certain other carryforwards obtained in the Acquisition,
(2) the exclusion from gross income 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. The obligation to share tax benefit utilization will
continue through September 30, 2003.
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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
- ------------------------------------- -------
1996............................ $19.8
1997............................ 26.7
1998............................ 38.1
NET OPERATING LOSS LIMITATIONS
The Bank succeeded to substantial NOLs as a result of the Acquisition. The
Company's total NOLs at September 30, 1998 were $524 million. 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 is determined by multiplying the value of the
Company's stock (both common stock and preferred stock) at the time of the
Ownership Change by the applicable long-term tax exempt rate (which was 5.02%
for September 1998). Any unused annual limitation may be carried over to later
years, and the limitation may under certain circumstances be increased by the
built-in gains in assets held by the Company at the time of the change. Under
current conditions, if an Ownership Change were to occur, the Company's annual
NOL utilization would be limited to a maximum of approximately $57 million,
based on the closing market price at September 30, 1998.
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 ("5% Stockholders")
increase their aggregate percentage ownership by more than 50% over the lowest
percentage owned at any time during the Testing Period (generally the preceding
three years). 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 1998, 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 not initiated by
the Company, the Company's Restated Certificate of Incorporation (the
"Certificate of Incorporation") and the By-Laws limit stock transfers that
would either cause a person or entity to become a 5% Stockholder or increase a
5% Stockholder's percentage ownership interest during the three years following
the Company's August 1996 stock offering. Transfers are deemed prohibited by the
Certificate of Incorporation, and the Company is authorized to not recognize any
such transferee as a stockholder to the extent of such transfer. However, these
restrictions may not be entirely effective because the Company may not,
consistent with the requirements of the Nasdaq Stock Market, Inc. ("NASDAQ"),
prevent the settlement of transactions through NASDAQ. 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 1998, 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
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<PAGE>
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 1998, 1997, and 1996. See
Note 13 to the Consolidated Financial Statements.
ITEM 2. PROPERTIES
The leases for the Company's headquarters and support facilities in effect
at September 30, 1998 had terms from six months to ten years, with annual rental
payments of $6.3 million. A majority of leases outstanding at September 30, 1998
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 wholesale mortgage origination offices of the Company as of September 30,
1998.
<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 29 1 1 45
Dallas/Ft. Worth Area................ 18 19 1 - 38
Other Texas.......................... - 4 - - 4
California........................... - - 3 2 5
Other U.S............................ - - 16 5 21
-- --
----- ------ -----
Total........................... 32 52 21 8 113
===== ====== == == =====
</TABLE>
Net investment in premises and equipment totalled $59.9 million at
September 30, 1998.
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
other claims. 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 United Savings
Association of Texas, 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 other relief.
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 the UNITED STATES
V. WINSTAR CORP., an action by three other thrifts raising similar
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<PAGE>
issues (the "WINSTAR cases"). Since the Supreme Court ruling, the Chief Judge
of the Court of Federal Claims has established 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.
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 damage trial of one
of the three WINSTAR cases has been completed, and the other two cases have been
settled. Trials in the remaining cases subject to the Omnibus Case Management
Plan are scheduled to begin in January 1999. 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 and the Company's case is
currently set to begin on February 1, 1999.
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 alternative damage theories against the
Government, including claims for lost profits. While the Plaintiffs' damage
model currently projects an ultimate damage claim in excess of $560 million, the
Company is unable to predict the outcome of Plaintiffs' suit against the United
States and the amount of judgment for damages, if any, that may be awarded.
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 Government, on
December 8, 1998, moved for partial summary judgment on the issue of lost
profits, seeking a ruling from the Court that Plaintiffs are not entitled to
recover lost profits. Lost profits constitute the largest portion of Plaintiffs'
total damage claim. Plaintiffs have opposed the Government's motion.
Despite the current trial setting of February 1, 1999 for Plaintiffs' case,
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 and now expects the trial of its case to
commence during the second or third quarters 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 other Plaintiffs participated with the Government in a
non-binding alternative dispute resolution ("ADR") process that culminated in
a settlement conference on October 19, 1998. The Company had not changed its
assessment of the merits of its claims and agreed to participate in the ADR
process solely in an effort to resolve its claims on favorable terms without the
expense and uncertainty of a trial. No settlement was reached, and the Company
is preparing to try the case on the original trial schedule.
The Company and the Bank have entered into an agreement with Hyperion
Partners L.P. acknowledging the relative value, as among the parties, of their
claims in the pending litigation. The agreement confirms that the Company and
the Bank are entitled to receive 85% of the amount, if any, recovered as a
result of any settlement of or a judgment on such claims, and that Hyperion
Partners L.P. is entitled to receive 15% of such amount. The agreement was
approved by the disinterested directors of the Company. Plaintiffs will continue
to cooperate in good faith and will use their best efforts to maximize the total
amount, if any, that they may recover.
The 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.
30
<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. The
Company's Class A common stock is listed on the NASDAQ National Market System
under the symbol "BNKU". At December 15, 1998, there were approximately 80
shareholders of record for the Company's Class A common stock and approximately
3 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 Company estimates the actual number of shareholders to be
7,583. The last reported sales price of common stock on December 15, 1998, was
$40.625 per share.
The high and low common stock prices by quarter for the year ended
September 30 were as follows:
HIGH LOW
--------- ---------
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
1998
First quarter...................... 49.875 40.000
Second quarter..................... 50.000 37.250
Third quarter...................... 56.500 44.500
Fourth quarter..................... 49.750 30.000
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
Second quarter..................... 0.16
Third quarter...................... 0.16
Fourth quarter..................... 0.16
The Parent Company intends, subject to its financial results, contractual,
legal, and regulatory restrictions, and other factors that its Board of
Directors may deem relevant, to declare and pay a quarterly cash dividend on the
Parent Company's common stock. The principal source of the funds to pay any
dividends on the Parent Company's common stock would be a dividend from the
Bank. OTS regulations impose restrictions on the payment of dividends by savings
institutions. See "Regulation -- Capital Distributions" for a discussion of
these restrictions.
31
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data 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, 1998 and 1997 and the Consolidated Statements of Operations
for each of the years in the three-year period ended September 30, 1998 and the
report thereon of Deloitte & Touche LLP are included elsewhere in this document.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION
ASSETS
Cash and cash equivalents............ $ 228,674 $ 121,000 $ 119,523 $ 112,931 $ 76,938
Securities purchased under agreements
to resell and federal funds sold... 474,483 349,209 674,249 471,052 358,710
Securities and other investments..... 91,350 77,809 65,693 117,094 115,126
Mortgage-backed securities, net...... 932,058 1,569,705 1,657,908 2,398,263 2,828,903
Loans, net
Single family - held for
investment..................... 4,686,600 5,795,179 6,113,318 7,000,303 4,144,787
Single family - held for sale.... 2,048,483 697,410 256,656 406,563 253,310
Commercial....................... 3,472,579 2,201,880 981,001 735,876 546,794
Consumer......................... 495,556 300,760 168,513 117,498 101,283
Mortgage servicing rights............ 410,868 272,214 123,392 75,097 56,677
Other assets......................... 824,341 581,906 552,124 548,857 427,633
------------ ------------ ------------ ------------ ------------
Total assets................ $ 13,664,992 $ 11,967,072 $ 10,712,377 $ 11,983,534 $ 8,910,161
============ ============ ============ ============ ============
LIABILITIES, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY
Deposits............................. $ 6,320,476 $ 5,247,668 $ 5,147,945 $ 5,182,220 $ 4,764,204
Federal Home Loan Bank advances...... 4,783,294 3,992,344 3,490,386 4,383,895 2,620,329
Securities sold under agreements to
repurchase
and federal funds purchased........ 811,742 1,308,600 832,286 1,172,533 553,000
Notes payable........................ 219,720 220,199 115,000 115,000 115,000
Other liabilities.................... 659,848 414,282 410,217 448,283 320,766
------------ ------------ ------------ ------------ ------------
Total liabilities........... 12,795,080 11,183,093 9,995,834 11,301,931 8,373,299
------------ ------------ ------------ ------------ ------------
Minority interest -- Bank preferred
stock.............................. 185,500 185,500 185,500 185,500 85,500
Stockholders' equity................. 684,412 598,479 531,043 496,103 451,362
------------ ------------ ------------ ------------ ------------
Total liabilities, minority
interest, and
stockholders' equity...... $ 13,664,992 $ 11,967,072 $ 10,712,377 $ 11,983,534 $ 8,910,161
============ ============ ============ ============ ============
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income...................... $ 898,746 $ 810,708 $ 812,312 $ 746,759 $ 494,706
Interest expense..................... 612,665 546,064 584,778 552,760 320,924
--------- --------- --------- --------- ---------
Net interest income.............. 286,081 264,644 227,534 193,999 173,782
Provision for credit losses.......... 20,123 18,107 16,469 24,293 6,997
--------- --------- --------- --------- ---------
Net interest income after
provision for credit losses.... 265,958 246,537 211,065 169,706 166,785
Non-interest income
Net gains (losses)
Sales of single family
servicing rights and
single family loans....... 11,124 21,182 43,074 60,495 63,286
Securities and
mortgage-backed
securities................ 2,761 2,841 4,002 26 10,404
Other loans................. 651 1,128 3,189 (1,210) 163
Sale of mortgage
offices(1)................ -- 4,748 -- -- --
Loan servicing, net of related
amortization................... 35,975 32,381 30,383 32,677 26,813
Other............................ 30,426 21,152 15,541 12,162 13,295
--------- --------- --------- --------- ---------
Total non-interest income........ 80,937 83,432 96,189 104,150 113,961
--------- --------- --------- --------- ---------
Non-interest expense
Compensation and benefits........ 86,725 75,016 87,640 83,520 86,504
SAIF deposit insurance
premiums....................... 4,160 4,797 45,690 11,428 11,329
Restructuring charges(1)......... -- -- 10,681 -- --
Other............................ 97,657 92,323 95,407 88,797 96,832
--------- --------- --------- --------- ---------
Total non-interest expense....... 188,542 172,136 239,418 183,745 194,665
--------- --------- --------- --------- ---------
Income before income taxes,
minority interest, and
extraordinary loss............. 158,353 157,833 67,836 90,111 86,081
Income tax expense (benefit)......... 25,722 60,686 (75,765) 37,415 (31,899)
--------- --------- --------- --------- ---------
Income before minority interest
and extraordinary loss......... 132,631 97,147 143,601 52,696 117,980
Minority interest
Bank preferred stock dividends... 18,253 18,253 18,253 10,600 8,653
Payments in lieu of
dividends(2)................... -- -- 6,413 377 357
--------- --------- --------- --------- ---------
Income before extraordinary
loss........................... 114,378 78,894 118,935 41,719 108,970
Extraordinary loss -- early
extinguishment of debt(3).......... -- 2,323 -- -- --
--------- --------- --------- --------- ---------
Net income....................... $ 114,378 $ 76,571 $ 118,935 $ 41,719 $ 108,970
========= ========= ========= ========= =========
Net income applicable to diluted
earnings per common share...... $ 114,378 $ 76,571 $ 113,327 $ 38,824 $ 102,519
========= ========= ========= ========= =========
Earnings per common share(4)
Basic............................ $ 3.62 $ 2.42 $ 4.06 $ 1.45 $ 3.78
Diluted.......................... 3.54 2.40 3.87 1.35 3.55
CERTAIN RATIOS AND OTHER DATA
Book value per common share.......... $ 21.67 $ 18.94 $ 16.81 $ 17.19 $ 15.64
Dividends per common share........... 0.64 0.56 3.46 -- --
Average common shares outstanding.... 31,595 31,596 29,260 28,863 28,863
Average common shares and equivalents
outstanding........................ 32,337 31,881 29,287 28,863 28,863
Regulatory capital ratios of the Bank
Tangible capital................. 6.75% 7.72% 6.57% 6.20% 6.01%
Core capital..................... 6.77 7.77 6.64 6.29 6.17
Total risk-based capital......... 10.48 13.18 13.09 13.45 14.02
Return on average assets(5).......... 1.04 0.85 1.28 0.50 1.42
Return on average common equity...... 17.78 13.50 23.06 8.80 26.32
Stockholders' equity to assets....... 5.01 5.00 4.96 4.14 5.07
Tangible stockholders' equity to
tangible assets.................... 4.59 4.89 4.81 3.93 4.68
Net yield on interest-earning
assets............................. 2.42 2.52 2.10 1.92 2.20
Interest rate spread................. 2.21 2.26 1.78 1.61 1.95
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CERTAIN RATIOS AND OTHER DATA --
CONTINUED
Average interest-earning assets to
average interest-bearing
liabilities........................ 1.04 1.05 1.06 1.06 1.06
Single family servicing portfolio.... $ 27,935,300 $ 24,518,396 $ 13,246,848 $ 12,532,472 $ 8,920,760
Fundings:
Single family.................... 3,789,389 2,188,273 3,602,009 3,226,324 5,424,550
Commercial....................... 2,876,328 1,492,931 891,306 547,117 364,604
Consumer......................... 367,097 152,665 125,596 99,249 94,153
------------ ------------ ------------ ------------ ------------
Total fundings....................... 7,032,814 3,833,869 4,618,911 3,872,690 5,883,307
------------ ------------ ------------ ------------ ------------
Loans purchased for held to maturity
portfolio.......................... 1,158,270 1,086,249 148,510 2,658,093 1,406,275
Non-interest expense to average total
assets............................. 1.48% 1.55% 2.13% 1.76% 2.35%
Net operating expense ratio(6)....... 0.84 0.80 1.28 0.76 0.97
Efficiency ratio(7).................. 50.35 49.78 73.87 58.03 65.78
Nonperforming assets to total
assets............................. 0.59 0.63 1.12 0.84 1.09
Net nonaccrual loans to total
loans.............................. 0.58 0.60 1.19 0.91 1.51
Allowance for credit losses to net
nonaccrual loans................... 75.91 72.61 44.24 48.74 30.73
Allowance for credit losses to
nonperforming assets............... 57.84 52.24 32.95 36.65 24.18
Allowance for credit losses to total
loans.............................. 0.44 0.43 0.52 0.44 0.46
Net loan charge-offs to average
loans.............................. 0.13 0.23 0.17 0.16 0.30
Full-time equivalent employees....... 1,927 1,541 2,310 2,663 2,894
Number of community banking
branches........................... 84 71 70 65 62
Number of commercial banking
origination offices................ 21 11 9 9 5
Number of mortgage origination
offices(1)......................... 8 6 85 122 145
CERTAIN RATIOS AND OTHER DATA --
EXCLUDING ADJUSTING ITEMS(8)
Net income........................... $ 89,944 $ 75,970 $ 56,392 $ 41,719 $ 50,804
Net income applicable to common
shares............................. 89,944 75,970 53,295 38,824 47,585
Earnings per diluted share........... 2.78 2.38 1.82 1.35 1.65
Return on average assets............. 0.85% 0.85% 0.67% 0.50% 0.72%
Return on average common equity...... 14.28 13.41 11.47 8.80 12.27
Efficiency ratio..................... 49.43 49.78 57.06 58.03 65.78
</TABLE>
- ------------
(1) 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, 1998 and 1997 are wholesale mortgage origination offices, which are
currently part of the Financial Markets Group. See Note 17 to the
Consolidated Financial Statements.
(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.
(4) Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share
("EPS"). It requires dual presentation of basic and diluted EPS for
entities with complex capital structures. All prior period EPS data were
restated to comply with SFAS No. 128, but are not materially different.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
34
<PAGE>
(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.
(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) Adjusting items are composed of the following for fiscal 1998, 1997, 1996,
and 1994:
-- 1998 (increased EPS $0.76) -- (1) two positive income tax adjustments
totalling $33.5 million, (2) an increase in the commercial loan allowance
of $7.8 million ($4.9 million net of tax), and (3) provisions for the
impact of higher prepayments on the single family loan and servicing
portfolios totalling $6.7 million ($4.2 million net of tax);
-- 1997 (increased EPS $0.02) -- (1) the gain on the sale of mortgage
offices of $4.7 million ($2.9 million net of tax) and (2) an
extraordinary loss on extinguishment of debt of $3.6 million ($2.3
million net of tax);
-- 1996 (increased EPS $2.05) -- (1) a one-time SAIF assessment charge of
$33.7 million($20.7 million net of tax), (2) compensation expense of
$7.8 million ($4.8 million net of tax), (3) charges totalling $12.5
million ($7.7 million net of tax) related to the restructuring of and
items associated with the mortgage origination business, (4) a
contractual payment to previous minority interests of $5.9 million, and
(5) an income tax benefit of $101.7 million;
-- 1994 (increased EPS $1.90) -- an income tax benefit of $58.2 million.
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCUSSION OF RESULTS OF OPERATIONS
OVERVIEW
1998 COMPARED TO 1997. Net income was $114.4 million ($3.54 per diluted
share) for fiscal 1998, compared to $76.6 million ($2.40 per diluted share) for
fiscal 1997. The increase in net income was primarily caused by two positive
income tax adjustments that were recorded in fiscal 1998, increased net interest
income and increased loan servicing, community banking and commercial banking
related fees. These increases were partially offset by lower gains on sales of
single family loans and higher non-interest expenses.
1997 COMPARED TO 1996. Net income was $76.6 million ($2.40 per diluted
share) for fiscal 1997, compared to $118.9 million ($3.87 per diluted share) for
fiscal 1996. The decrease in net income was primarily due to a positive income
tax adjustment recorded during fiscal 1996, an extraordinary loss on the
extinguishment of debt recognized during fiscal 1997, and lower gains on sales
of single family loans. These decreases were partially offset by the gain on
sale of certain mortgage origination offices recognized during fiscal 1997, an
improved interest rate margin, and lower non-interest expenses.
NET INTEREST INCOME
Net interest income is based on the levels of interest-earning assets and
interest-bearing liabilities and the spread between the yields earned on assets
and rates paid on liabilities. The net interest-rate spread is affected by
changes in general market interest rates, including changes in the relationship
between short- and long-term interest rates, the effects of periodic caps on the
Company's adjustable-rate loan and MBS portfolios, and the interest rate
sensitivity position or gap. See "Business -- General," "Business -- Market
Risk Analysis," and Note 11 to the Consolidated Financial Statements.
36
<PAGE>
The Company's average balances, interest, and average yields were as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ------------------------------ -------------------------------
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......................... $ 515,311 $ 37,962 7.37% $ 566,964 $ 36,240 6.39% $ 668,657 $ 39,302 5.88%
Securities and other investments. 135,496 9,093 6.71 81,422 5,371 6.60 77,791 3,984 5.12
Mortgage-backed securities....... 1,233,707 82,170 6.66 1,548,285 104,891 6.77 1,968,230 128,143 6.51
Loans:
Single family - held for
investment................. 4,835,796 370,446 7.66 6,108,397 477,332 7.81 6,580,059 508,651 7.73
Single family - held for sale 1,667,629 111,143 6.66 325,237 24,782 7.62 376,098 28,189 7.50
Commercial................... 2,819,209 242,435 8.60 1,416,693 126,844 8.95 794,529 73,258 9.22
Consumer..................... 385,718 32,866 8.52 243,086 23,928 9.84 139,142 17,842 12.82
---------- --------- ------ ---------- --------- ------ ---------- --------- -----
Total loans................ 9,708,352 756,890 7.80 8,093,413 652,886 8.07 7,889,828 627,940 7.96
---------- --------- ------ ---------- --------- ------ ---------- --------- -----
FHLB stock....................... 210,773 12,631 5.99 191,465 11,320 5.91 213,242 12,943 6.07
---------- --------- ------ ---------- --------- ------ ---------- --------- -----
Total interest-earning assets 11,803,639 898,746 7.61 10,481,549 810,708 7.73 10,817,748 812,312 7.51
Non-interest-earning assets...... 956,758 621,596 411,683
---------- --------- ------ ---------- --------- ------ ---------- --------- -----
Total assets................. $12,760,397 $11,103,145 $11,229,431
========== ========== ==========
Interest-bearing liabilities
Deposits
Checking accounts............ $ 638,557 2,368 0.37 $ 534,820 2,300 0.43 $ 470,826 2,593 0.55
Money market accounts........ 1,898,366 106,432 5.61 1,510,135 83,305 5.52 1,234,299 68,841 5.58
Savings accounts............. 127,022 3,710 2.92 127,494 3,345 2.62 138,007 3,857 2.79
Certificates of deposit...... 3,391,938 188,250 5.55 2,954,743 173,811 5.88 3,222,602 196,929 6.11
---------- --------- ------ ---------- --------- ------ ---------- --------- -----
Total deposits............. 6,055,883 300,760 4.97 5,127,192 262,761 5.12 5,065,734 272,220 5.37
---------- --------- ------ ---------- --------- ------ ---------- --------- -----
FHLB advances.................... 4,090,359 236,252 5.78 3,705,072 212,558 5.74 4,073,297 247,093 6.07
Reverse repurchase agreements and
federal funds purchased........ 971,546 56,082 5.77 1,002,165 57,335 5.72 955,708 55,112 5.77
Notes payable.................... 220,019 19,571 8.90 157,565 13,410 8.51 115,000 10,353 9.00
---------- --------- ------ ---------- --------- ------ ---------- --------- -----
Total interest-bearing
liabilities................ 11,337,807 612,665 5.40 9,991,994 546,064 5.47 10,209,739 584,778 5.73
Non-interest-bearing liabilities,
minority interest, and
stockholders' equity........... 1,422,590 1,111,151 1,019,692
---------- --------- ------ ---------- --------- ------ ---------- --------- -----
Total liabilities, minority
interest, and stockholders'
equity..................... $12,760,397 $11,103,145 $11,229,431
========== ========== ==========
Net interest income/interest rate
spread............................. $ 286,081 2.21% $ 264,644 2.26% $ 227,534 1.78%
========= ====== ========= ====== ========= =====
Net yield on interest-earning assets. 2.42% 2.52% 2.10%
====== ====== =====
Ratio of average interest-earning
assets to average interest-
bearing liabilities................ 1.04 1.05 1.06
========== ========== ==========
</TABLE>
37
<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 shows the extent to which changes in the interest
income and interest expense are due to changes in volume (changes in volume
multiplied by prior year rate) and changes in rate (changes in rate multiplied
by prior year volume).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
---------------------------------- ---------------------------------
VOLUME RATE NET VOLUME RATE NET
---------- ---------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Short-term interest-earning
assets.......................... $ (3,500) $ 5,222 $ 1,722 $ (6,293) $ 3,231 $ (3,062)
Securities and other investments... 3,630 92 3,722 193 1,194 1,387
Mortgage-backed securities......... (21,039) (1,682) (22,721) (28,206) 4,954 (23,252)
Loans.............................. 138,671 (34,667) 104,004 16,245 8,701 24,946
FHLB stock......................... 1,156 155 1,311 (1,290) (333) (1,623)
---------- ---------- ---------- ---------- --------- ----------
Total...................... 118,918 (30,880) 88,038 (19,351) 17,747 (1,604)
---------- ---------- ---------- ---------- --------- ----------
INTEREST EXPENSE
Deposits........................... 45,949 (7,950) 37,999 3,280 (12,739) (9,459)
FHLB advances...................... 22,206 1,488 23,694 (21,565) (12,970) (34,535)
Reverse repurchase agreements and
federal funds purchased......... (1,753) 500 (1,253) 2,697 (474) 2,223
Notes payable...................... 5,522 639 6,161 3,649 (592) 3,057
---------- ---------- ---------- ---------- --------- ----------
Total...................... 71,924 (5,323) 66,601 (11,939) (26,775) (38,714)
---------- ---------- ---------- ---------- --------- ----------
Net change in net interest
income................... $ 46,994 $ (25,557) $ 21,437 $ (7,412) $ 44,522 $ 37,110
========== ========== ========== ========== ========= ==========
</TABLE>
1998 COMPARED TO 1997. Net interest income was $286.1 million for fiscal
1998, compared to $264.6 million for fiscal 1997, for a $21.5 million, or 8%,
increase. This increase was caused by a $1.3 billion, or 13%, increase in
average interest-earning assets and a change in the composition of assets and
deposits, partially offset by a 10 basis point decrease in the net yield on
interest-earning assets ("net yield").
The increase in average interest-earning assets came from growth in
originations and purchases of commercial loans. As a result of this growth, the
composition of the Company's assets has changed during the year. During fiscal
1998, commercial loans comprised 24% of average interest-earning assets and
single family loans comprised 55%. During fiscal 1997, commercial loans
comprised 14% and single family loans comprised 61%. Average deposits increased
$928.7 million, or 18%, during fiscal 1998. This increase is primarily due to an
increase in lower costing transaction accounts and CDs.
The net yield was 2.42% for fiscal 1998, compared to 2.52% for fiscal 1997.
The net yield decreased due to a decline in long-term market interest rates, and
the resulting prepayments of higher yielding single family loans. As new loans
are originated at the lower current market interest rates, they are generally
included in the Company's held for sale portfolio. Excluding the single family
held for sale portfolio, the net yield would have been 2.68% for the year ended
September 30, 1998, compared to 2.55% for the year ended September 30, 1997. The
resulting 13 basis point increase was due to increased levels of higher yielding
commercial loans and lower deposit rates. The decline in deposit rates resulted
from deposits acquired in recent branch acquisitions and maturities of higher
rate brokered deposits.
1997 COMPARED TO 1996. Net interest income was $264.6 million for fiscal
1997, compared to $227.5 million for fiscal 1996, for a $37.1 million, or 16%,
increase. This increase was caused by 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 in 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.
38
<PAGE>
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, caused by an increase in the number of lower cost
transaction accounts.
PROVISION FOR CREDIT LOSSES
1998 COMPARED TO 1997. The provision for credit losses increased $2.0
million, to $20.1 million for fiscal 1998. This increase principally resulted
from an increase in the allowance established for the commercial loan portfolio,
which was partially offset by a reduction in the allowance for the single family
loan held for investment portfolio. The commercial loan portfolio increased $1.3
billion, or 58%, during fiscal 1998. Due to this growth, the Company increased
this portfolio's allowance levels to approximately one percent. The single
family loan held for investment portfolio decreased $1.1 billion, or 19%, during
fiscal 1998. The Company determined that its allowance for single family loans
held for investment could be reduced, based on the portfolio's historical
losses, as well as the reduction in the outstanding portfolio balance.
Accordingly, the allowance for single family loans held for investment was
reduced to approximately 27 basis points. The consumer loan provision decreased
from the year ago period due to the sale of the consumer line of credit
portfolio, totalling $37.6 million, in fiscal 1998. Charge-offs of $4.9 million
related to this sale were recorded during fiscal 1998.
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 recorded in
conjunction with a bulk sale of $31.3 million of nonperforming single family
loans during fiscal 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 carried
the highest level of reserves in the loan portfolio, experienced a decline in
provisions from fiscal 1996 to 1997, due 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.
MORTGAGE BANKING RESTRUCTURINGS AND SALE OF OFFICES
In fiscal 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. In
fiscal 1997, the Company sold certain of its mortgage origination offices. In
connection with this sale, the remaining offices were restructured or closed.
The net gain on the sale of these offices, reduced by 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.
NON-INTEREST INCOME
1998 COMPARED TO 1997. Non-interest income decreased $2.5 million, or 3%,
during fiscal 1998, compared to fiscal 1997. This decrease was largely the
result of lower gains on sales of single family loans, partially offset by
increased loan servicing, community banking and commercial banking related fees.
Fiscal 1997 results include a $4.7 million gain related to the sale of certain
mortgage origination offices.
Despite an increase in the volume of single family loans sold ($1.9 billion
for fiscal 1998, compared to $1.2 billion for fiscal 1997), gains on sales of
such loans declined $10.1 million, or 47%. Loans sold during fiscal 1998 were
originated through the Company's wholesale network. Loans sold in fiscal 1997
were principally originated through the Company's retail network, which was sold
during the second quarter of fiscal 1997. While loans originated through a
wholesale network typically have a higher cost basis and therefore reduced gains
upon sale, non-interest expenses associated with such loans are generally lower.
Changes in the mix of products sold and, to a lesser extent, competitive market
pressures also contributed to lower gains during the current period.
Loan servicing income, which consists of loan servicing fee revenue, net of
the amortization of MSRs, increased $3.6 million during fiscal 1998. Loan
servicing income for fiscal 1998 was reduced by a valuation allowance of $4.8
million, which was established due to the effect of a decline in long-term
market interest rates. Excluding this valuation allowance, loan servicing income
increased $8.4 million, or 26%, during fiscal 1998.
39
<PAGE>
Gross servicing fee revenue increased $31.6 million, and the related
amortization of MSRs increased $23.2 million. These increases resulted from a
larger portfolio of single family loans serviced for others, which averaged
$21.4 billion for fiscal 1998, compared to $14.5 billion for fiscal 1997. Gross
servicing fee revenue did not include the full year effect of the servicing
rights purchased during fiscal 1998, as it 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 $9.3 million, or 44%, during fiscal
1998, due to higher volumes of activity in several areas. Checking account and
ATM fee revenue grew by $3.2 million, stemming from growth in the number of
checking accounts from 163,000 at September 30, 1997 to 176,000 at September 30,
1998, as well as a higher volume of insufficient funds charges. Broker and
annuity fees increased $2.7 million as a result of greater sales volumes, which
increased $21.3 million, or 14%, from the prior year. Debit cards, introduced in
March 1997, had an increase in income of $1.1 million over the prior year.
Commercial banking related fees increased $1.3 million due primarily to growth
in the warehouse line of credit product, which almost doubled from $464.2
million to $787.7 million during fiscal 1998.
1997 COMPARED TO 1996. Non-interest income decreased $12.8 million, or
13%, during fiscal 1997 compared to fiscal 1996. This decrease was caused by
lower gains on sales of single family loans due to the sale of certain of the
Company's mortgage origination offices during fiscal 1997, partially offset by
the gain recorded on that sale. See " -- Mortgage Banking Restructurings and
Sale of Offices". Loan servicing income remained relatively unchanged during
fiscal 1997, as compared to the previous year. Gross servicing fee revenue
increased $19.6 million and was partially offset by a $17.6 million increase in
MSR amortization. These increases were caused by a larger average portfolio of
single family loans serviced for others for fiscal 1997, as compared to fiscal
1996 ($14.5 billion versus $8.4 billion), due primarily to purchases of
servicing rights totalling $12.6 billion during fiscal 1997. Gross servicing fee
revenue for fiscal 1997 did not include the full year effect of the servicing
rights purchased during fiscal 1997 as it 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, due to an increase in
the number of checking accounts maintained by the Company for which certain fees
are assessed and an increase in annuity sales volume.
NON-INTEREST EXPENSE
1998 COMPARED TO 1997. Non-interest expense was $188.5 million for fiscal
1998, up 9.5% from $172.1 million for fiscal 1997. Despite the increase in
expenses, the ratio of non-interest expense to average total assets decreased
from 1.55% for fiscal 1997 to 1.48% for fiscal 1998, while the efficiency ratio
remained at approximately 50% for both periods. The expense increase was
principally the result of growth in the servicing portfolio, higher levels of
loan activity, and recent branch acquisitions. Start-up costs incurred in
conjunction with the Company's program of offering home equity loans in Texas
also caused an increase in non-interest expenses. Non-interest expenses for
fiscal 1998 included $1.8 million of costs associated with the forbearance
litigation. See "Legal Proceedings." Non-interest expense for fiscal 1997
included costs associated with the retail mortgage origination network, which
was sold in the second quarter of fiscal 1997.
1997 COMPARED TO 1996. Total non-interest expense was $172.1 million for
fiscal 1997 and $239.4 million for fiscal 1996. Non-interest expense for fiscal
1996 included several adjusting items, including $7.8 million of compensation
expenses, $33.7 million in SAIF deposit insurance premiums, and a $10.7 million
restructuring charge. See Notes 12, 14, and 17 to the Consolidated Financial
Statements. Excluding these adjusting items, non-interest expense was $172.1
million for fiscal 1997 compared to $187.3 million for fiscal 1996 or 1.55% and
1.67% of average total assets. Expenses were reduced 8% principally due 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 fiscal 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 also
were realized.
40
<PAGE>
Offsetting these declines were increased legal expenses of $2.2 million for
costs associated with the forbearance litigation. See "Legal Proceedings."
INCOME TAXES
The provision for income taxes, excluding taxes on the extraordinary loss,
was an expense of $25.7 million for fiscal 1998, an expense of $60.7 million for
fiscal 1997, and a net benefit of $75.8 million for fiscal 1996. During fiscal
1998, the Company successfully resolved an outstanding tax benefit lawsuit with
the FDIC as manager of the FRF, which resulted in a positive income tax
adjustment of approximately $6.0 million. Additionally, the Company recognized a
positive income tax adjustment of $27.5 million resulting from the anticipated
use of additional NOLs against future taxable income.
In fiscal 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 these tax attributes allowed
the recognition of tax benefits for the expected utilization of NOLs against
future taxable income. Also in fiscal 1996, the Parent Company and the Bank
entered into a tax sharing agreement resulting 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 $101.7 million was
recognized in fiscal 1996. See "Business -- Taxation" and Note 13 to the
Consolidated Financial Statements.
MINORITY INTEREST
Dividends paid on the Bank's preferred stock were $18.3 million for fiscal
1998, 1997, and 1996. These shares are not owned by the Company and,
accordingly, are shown 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 shown 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
1998 ACTIVITY. Total assets increased during fiscal 1998 by $1.7 billion,
or 14%, to $13.7 billion. This increase primarily occurred in the loan
portfolio. During the year, the Company acquired 21 branches having deposits
totalling $1.5 billion. The cash acquired in these transactions, along with
principal repayments on loans and MBS, were used to fund the growth in the
Company's loan portfolio.
Repurchase Agreements and federal funds sold increased $125.3 million
during fiscal 1998. This increase primarily resulted from the Company's ability
to borrow funds and invest those funds at a positive spread on a short-term
basis.
Securities and other investments increased $13.5 million, or 17%, during
fiscal 1998. During this period, $357.3 million of investments, primarily
commercial paper, were purchased and $344.5 million of commercial paper matured.
Additionally, $506.1 million of securities were created through the
securitization of SBA loans and $494.8 million of these types of securities were
sold. The SBA interest-only strips related to these securitizations
approximating $45.8 million were retained by the Company. See
"Business -- Investment Portfolio."
MBS declined $637.6 million during fiscal 1998 due to principal repayments
and sales. Principal repayments increased 61%, totalling $539.5 million during
fiscal 1998, compared to $335.0 million for fiscal 1997, as a result of
increased refinancing activity. Sales of MBS totalled $99.5 million during
fiscal 1998, compared to $6.9 million during fiscal 1997.
41
<PAGE>
The following table shows activity in the loan portfolio.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.................... $ 8,995,229 $ 7,519,488 $ 8,260,240
Fundings
Single family................... 3,789,389 2,188,273 3,602,009
Commercial...................... 2,876,328 1,492,931 891,306
Consumer........................ 367,097 152,665 125,596
Purchases
Single family................... 1,094,729 795,827 226,298
Commercial...................... 653,170 639,852 65,521
Consumer........................ 172 95,613 --
Net change in mortgage banker
finance line of credit.......... 321,897 324,087 30,481
Repayments
Single family................... (2,662,080) (1,581,897) (1,694,676)
Commercial...................... (2,036,509) (864,745) (529,233)
Consumer........................ (134,550) (109,256) (90,587)
Securitized loans sold or
transferred..................... (1,439,138) (1,290,220) (2,669,406)
Sales.............................. (1,078,258) (319,707) (646,979)
Other.............................. (44,258) (47,682) (51,082)
------------- ------------- -------------
Ending balance....................... $ 10,703,218 $ 8,995,229 $ 7,519,488
============= ============= =============
</TABLE>
Total loans increased $1.7 billion, or 19%, during the fiscal 1998, to
$10.7 billion. Additionally, the composition of the loan portfolio changed as
the Company continued to expand its commercial and consumer lending lines of
business. At September 30, 1998, commercial and consumer loans totalled 37% of
the Company's total loan portfolio, compared to 28% at September 30, 1997.
The commercial loan portfolio increased $1.3 billion, or 58%, since
September 1997, as a result of originations and purchases. Commercial loan
originations, primarily related to residential construction and multi-family
loans, totalled $2.9 billion during fiscal 1998, an increase of $1.4 billion, or
93%, over fiscal 1997. During fiscal 1998, the Company purchased commercial real
estate loans with principal balances totalling $157.8 million. These loans were
primarily secured by apartment buildings, office buildings, and retail centers.
Additionally, $495.4 million of SBA loans were purchased during fiscal 1998, of
which $506.1 million were securitized. During fiscal 1998, the commercial loan
portfolio increased as follows: single family construction ($390.3 million or
100%), multi-family ($100.3 million or 13%), commercial real estate ($307.6
million or 81%), healthcare ($171.8 million or 179%), mortgage banker finance
lines of credit ($323.5 million or 70%), and SBA ($4.9 million or 4%).
Consumer loans increased $187.9 million, or 62%, to $493.5 million at
September 30, 1998. This increase was due to a 60% increase in the home
improvement loan portfolio and the implementation of the Company's home equity
lending program in Texas. Since the program began in January 1998, following an
amendment to the Texas constitution permitting such lending in the state, the
Company has funded $201.0 million of such loans.
Total single family loans increased $225.2 million, or 3%, during fiscal
1998. Single family loans held for sale increased $1.3 billion, which was
partially offset by a $1.1 billion decrease in single family loans held for
investment.
Single family loans held for sale increased as a result of higher
originations despite the sale of certain mortgage origination offices during
fiscal 1997. The Company continues to originate loans through its wholesale
origination network. Single family loan originations increased to $3.8 billion
during fiscal 1998, compared to $2.2 billion during fiscal 1997. The increase in
originations is due to increased refinancing activity resulting from lower
long-term market interest rates. Refinancings approximated $2.5 billion and
$941.0 million, or 67% and 43% of total single family loan originations during
fiscal 1998 and 1997. Sales of single family loans were $1.9 billion for fiscal
1998, compared to $1.2 billion for the prior year.
42
<PAGE>
During September 1998, the Company purchased $867.8 million of
adjustable-rate single family loans for the held for investment portfolio.
Despite this purchase, the single family loan held for investment portfolio
declined, primarily due to principal repayments. The outstanding balance of this
portfolio decreased as the Company continues to build its commercial and
consumer loan portfolios and designate a greater portion of its single family
originations as held for sale.
MSRs increased $138.7 million to $410.9 million at September 30, 1998.
During fiscal 1998, the Company purchased servicing rights associated with $8.1
billion in loans increasing the servicing portfolio to $27.9 billion at
September 30, 1998, compared to $24.5 billion at September 30, 1997. In an
effort to mitigate the effect of a decline in the value of the servicing
portfolio that may result from a decline in market interest rates and increased
prepayments, the Company enters into interest rate floor agreements. See
"Business -- Mortgage Servicing Group -- Mortgage Servicing Rights" and Note 11
to the Consolidated Financial Statements. A $4.8 million valuation allowance
related to this portfolio was established due to the effect of a decline in
long-term market interest rates.
Deposits increased $1.1 billion, or 20%, to $6.3 billion at September 30,
1998. Transaction accounts, including checking, savings, and money market
accounts, increased $568.9 million, or 24%, as a result of successful marketing
efforts. Commercial deposits increased during the year by $169.5 million, or
15%. During fiscal 1998, the Company purchased 21 branches with deposits,
primarily CDs, totalling $1.5 billion and associated goodwill of $51.7 million.
The Company has closed 13 of the 21 branches and has continued to operate the
remaining eight locations. Cash from higher deposit levels provided a majority
of the funds for asset purchases and originations during fiscal 1998.
Historically, the Company has relied more on higher cost FHLB borrowings and
reverse repurchase agreements. In September 1998, the Company signed an
agreement to purchase a commercial bank operating five branches, having assets
of $225 million and deposits of $203 million. Closing of this transaction is
expected early in 1999.
Increases in other assets and other liabilities were primarily a result of
the growth in the Company's servicing portfolio.
The Company has entered into other financial instruments for the purposes
of reducing interest rate risk in addition to the interest rate floor agreements
hedging the servicing portfolio. See Note 11 to the Consolidated Financial
Statements.
1997 ACTIVITY. Total assets increased during fiscal 1997 by $1.3 billion,
or 12%, to $12.0 billion. This increase was caused by growth in the commercial
and consumer loan portfolios and MSR purchases, funded primarily with FHLB
advances and reverse repurchase agreements. The composition of the Company's
balance sheet at September 30, 1997 showed less 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,
due to an increase in lower cost transaction accounts and a reduction in higher
costing CDs. See "Business -- Deposits."
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 were 72% of the Company's
total loan portfolio at September 30, 1997, the Company continued to reduce its
reliance on these loans as evidenced by the sale of certain of its mortgage
origination offices during fiscal 1997. 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, 1996, to $697.4 million at
September 30, 1997.
At September 30, 1997, commercial and consumer loans were 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, due to higher purchases and
originations. Consumer loans increased $132.2 million, or 78%, during fiscal
1997. This increase was caused by 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.
43
<PAGE>
During fiscal 1997, $406.3 million of SBA loans were purchased and a
portion 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, as a result of
the purchase of servicing rights associated with $12.6 billion of single family
mortgage loans at a cost 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 ($4.0 billion and $3.7 billion at September 1997
and 1996 were serviced for the Company's own account). At September 30, 1997,
$7.5 billion of 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.
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.
ASSET QUALITY
The Company is exposed to certain credit risks related to the value of
collateral that secures loans held in its portfolio and the ability of borrowers
to repay their loans according to the terms thereof. The Company has a Credit
Committee comprised of senior officers that regularly monitors the loan and real
estate owned ("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 an independent ongoing review and
evaluation of the quality of assets to the Board of Directors. Selected asset
quality ratios were as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for credit losses to net
nonaccrual loans
Single family................... 22.36% 47.37% 32.46% 39.74% 22.70%
Total........................... 75.91 72.61 44.24 48.74 30.73
Allowance for credit losses to
nonperforming assets............... 57.84 52.24 32.95 36.65 24.18
Allowance for credit losses and
non-accretable discounts
to net nonaccrual loans............ 75.93 74.13 48.47 60.88 50.89
Allowance for credit losses to total
loans.............................. 0.44 0.43 0.52 0.44 0.46
Nonperforming assets to total
assets............................. 0.59 0.63 1.12 0.84 1.09
Net nonaccrual loans to total
loans.............................. 0.58 0.60 1.19 0.91 1.51
Nonperforming assets to total loans
and REO............................ 0.75 0.83 1.59 1.21 1.91
Net loan charge-offs to average loans
Single family................... 0.06 0.18(1) 0.12 0.08 0.04
Total........................... 0.13(2) 0.23(1) 0.17 0.16 0.30
</TABLE>
- ------------
(1) Excluding charge-offs totalling $5.0 million related to a nonperforming loan
sale in fiscal 1997, the single family charge-off ratio would have been
0.11% and the total charge-off ratio would have been 0.17%.
(2) Excluding charge-offs in fiscal 1998 totalling $4.9 million related to the
sale of the consumer line of credit portfolio, the total charge-off ratio
would have been 0.08%.
44
<PAGE>
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
--------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Single family................... $ 55,800 $ 51,742 $ 92,187 $ 83,954 $ 85,722
Commercial...................... 5,344 1,995 494 718 6,144
Consumer........................ 688 974 1,039 563 506
--------- ---------- ---------- ---------- ----------
61,832 54,711 93,720 85,235 92,372
--------- ---------- ---------- ---------- ----------
Premiums (discounts)................. 116 (759) (4,077) (9,727) (16,053)
--------- ---------- ---------- ---------- ----------
Net nonaccrual loans....... 61,948 53,952 89,643 75,508 76,319
REO, primarily single family
properties......................... 19,357 21,038 30,730 24,904 20,684
--------- ---------- ---------- ---------- ----------
Total nonperforming
assets................... $ 81,305 $ 74,990 $ 120,373 $ 100,412 $ 97,003
========= ========== ========== ========== ==========
</TABLE>
Nonperforming assets have increased 8%, or $6.3 million, during fiscal
1998. This increase is primarily the result of purchases of commercial loans
during fiscal 1998 and a higher rate of single family loans 90 days or more
delinquent. Although the balance of delinquencies has risen, net nonaccrual
loans as a percentage of the total loan balance decreased from 0.60% at
September 30, 1997 to 0.58% at September 30, 1998.
A loan is generally placed on nonaccrual status when the loan is past due
90 days or more or the ability of a borrower to repay principal and interest is
in doubt. Nonaccrual loans outstanding at September 30, 1998 were primarily
concentrated in California (36.76%) and Texas (14.13%), which is generally
consistent with the geographic makeup of the Company's loan portfolio.
The Company's nonperforming assets decreased 38% during fiscal 1997. This
decrease was primarily caused by the sale of $31.3 million of nonperforming
single family loans in fiscal 1997 and a higher sales volume of REO properties
in fiscal 1997.
Nonperforming assets were at their highest level in fiscal 1996, resulting
from significant loan purchases in the fourth quarter of fiscal 1995, that
subsequently produced an increased level of delinquent loans and foreclosures.
The level of nonperforming assets at September 30, 1995 and 1994 remained
relatively constant at $100.4 million and $97 million.
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 borrowers to repay, known and inherent
risks in the portfolio, assessment of economic conditions, regulatory policies,
and the estimated value of the underlying collateral, if any. Although the
Company has historically had a very low loss experience, there can be no
assurance that such results will continue in the future. The activity in, and
the allocation of the allowance for, credit losses was as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ACTIVITY
Beginning balance....................... $ 39,174 $ 39,660 $ 36,801 $ 23,454 $ 29,864
Provision.......................... 20,123 18,107 16,469 24,293 6,997
Charge-offs........................ (12,943) (19,036) (13,785) (11,078) (13,465)
Recoveries......................... 673 443 175 132 58
---------- --------- --------- --------- ---------
Ending balance.......................... $ 47,027 $ 39,174 $ 39,660 $ 36,801 $ 23,454
========== ========= ========= ========= =========
ALLOCATION
Single family........................... $ 12,503 $ 24,538 $ 28,672 $ 29,632 $ 15,981
Commercial(1)........................... 32,269 8,766 5,769 3,922 5,651
Consumer................................ 2,255 5,870 5,219 3,247 1,822
---------- --------- --------- --------- ---------
Total.............................. $ 47,027 $ 39,174 $ 39,660 $ 36,801 $ 23,454
========== ========= ========= ========= =========
</TABLE>
(1) Includes $5.0 million, $2.2 million, $925,000, $560,000, and $526,000
related to construction loans as of September 30, 1998, 1997, 1996,
1995, and 1994.
The allowance for credit losses increased $7.9 million during fiscal 1998.
This change resulted from an increase in the allowance established for the
commercial loan portfolio, which was partially offset by a reduction in the
allowance for the single family loan held for investment portfolio. The
commercial loan portfolio increased $1.3 billion, or 58%, during fiscal 1998.
Due to this growth, the Company increased this portfolio's allowance levels to
approximately one percent. The single family loan held for investment portfolio
decreased $1.1 billion, or 19%, during fiscal 1998. The Company determined that
its allowance for single family loans held for investment could be reduced,
based on the portfolio's historical losses, as well as the reduction in the
outstanding portfolio balance. Accordingly, the allowance for single family
loans held for investment was reduced to approximately 27 basis points. The
consumer loan allowance decreased from the year ago period due to the sale of
the consumer line of credit portfolio, totalling $37.6 million, in fiscal 1998.
The allowance for credit losses remained relatively unchanged during fiscal
1997, however, the composition of the allowance changed. The single family loan
allowance decreased $4.1 million during fiscal 1997, due to the 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 loan allowance
decreased during fiscal 1996, due to reduced levels of single family loans
outstanding as repayments exceeded originations. The consumer allowance for
credit losses increased during fiscal 1996 due to increased losses related to
the unsecured line of credit portfolio. The commercial allowance for credit
losses increased during fiscal 1996 primarily from growth in the commercial loan
portfolio.
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 loan allowance
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. Consumer
loans are charged off when the loan becomes contractually 120 days delinquent.
Loan charge-offs and recoveries have been as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CHARGE-OFFS
Single family................... $ (3,933) $ (11,886) $ (7,751) $ (4,842) $ (1,722)
Commercial...................... (728) (570) (39) (3,389) (10,378)
Consumer........................ (8,282) (6,580) (5,995) (2,847) (1,365)
---------- ---------- ---------- ---------- ----------
Total charge-offs.......... (12,943) (19,036) (13,785) (11,078) (13,465)
---------- ---------- ---------- ---------- ----------
RECOVERIES
Single family................... 241 63 31 36 20
Commercial...................... 126 3 -- 2 --
Consumer........................ 306 377 144 94 38
---------- ---------- ---------- ---------- ----------
Total recoveries........... 673 443 175 132 58
---------- ---------- ---------- ---------- ----------
Total net charge-offs...... $ (12,270) $ (18,593) $ (13,610) $ (10,946) $ (13,407)
========== ========== ========== ========== ==========
Net loan charge-offs to
average loans............ 0.13% 0.23% 0.17% 0.16% 0.30%
</TABLE>
Net loan charge-offs decreased $6.3 million during fiscal 1998, due
primarily to lower single family charge-offs during fiscal 1998. During fiscal
1997, $5.0 million in charge-offs were recorded in connection with the sale of
$31.3 million of nonperforming loans. Net charge-offs for the consumer loan
portfolio increased during fiscal 1998, primarily due to the fiscal 1998 sale of
the consumer line of credit portfolio. This portfolio totalled $37.6 million and
charge-offs of $4.9 million were recognized at the time of the sale. The Company
had historically experienced high rates of charge-offs related to this product,
which are included in prior period numbers. The ratio of net loan charge-offs to
average total loans decreased from 0.23% for fiscal 1997 to 0.13% for fiscal
1998 due to lower charge-offs combined with a higher average loan balance.
Adjusting for the loan sales in fiscal 1998 and 1997 discussed above, the ratio
of net loan charge-offs to average total loans would have been 0.08% for fiscal
1998 and 0.17% for fiscal 1997.
Net loan charge-offs increased 37% during fiscal 1997. This increase was
the result of the fiscal 1997 sale of $31.3 nonperforming single family loans
with related charge-offs of $5.0 million. The ratio for net charge-offs as a
percentage of average single family loans includes the increased charge-offs and
was 0.18% for fiscal 1997 versus 0.12% for fiscal 1996. Adjusting for the loan
sale mentioned above, the single family loan charge-off ratio would have been
0.11% and the total charge-off ratio would have been 0.17% for fiscal 1997.
Net loan charge-offs increased to $13.6 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% 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 commercial real estate loan charge-offs,
47
<PAGE>
net charge-offs to average loans outstanding would have been $7.5 million and
$3.3 million, or 0.11% and 0.07%, 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%
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.
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 liquidity ratio of 4.00%. The Bank's average daily liquidity ratio
for September 1998 was 5.54%.
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, 1998, these instruments generally included
repurchase agreements, federal funds sold, and MBS and securities available for
sale. These instruments totalled $1.1 billion, $1.5 billion, and $1.8 billion at
September 30, 1998, 1997, and 1996. 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.
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, and applicable regulatory
requirements.
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
quarters. 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 that would limit or preclude the
declaration of such dividends will not exist in the future. At September 30,
1998, the Bank had $235.8 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 14 and 15 to the Consolidated
Financial Statements.
DEPOSITS
Deposits have provided the Company with a source of relatively stable and
low cost funds. The Company's strategy is 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 offers
traditional deposit products, such as savings accounts and CDs. See
"Business -- Deposits" and Note 7 to the Consolidated Financial Statements."
Average deposits were the primary source of funds for the recent growth in
assets and funded 47% of average total assets for fiscal 1998, 46% of average
total assets for fiscal 1997, and 45% for fiscal 1996. During fiscal 1998, the
Company purchased 21 branches with deposits totalling $1.5 billion. In September
1998, the Company signed an agreement to purchase a commercial bank with five
branches, having assets of $225 million and deposits of $203 million. Closing of
this transaction is expected early in 1999. The Company intends to continue to
pursue additional expansion opportunities, including acquisitions, while
maintaining adequate capitalization.
BORROWINGS
The Company relies upon borrowings, primarily collateralized borrowings
such as advances from the FHLB and reverse repurchase agreements, to fund its
assets. Historically, borrowings were the primary source of funds
48
<PAGE>
and accounted for 40% of the funding of average assets for fiscal 1998, 42% for
fiscal 1997, and 45% for fiscal 1996. 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, 1998, these limitations were 75%
and 45%, respectively. The Company's ability to borrow on reverse repurchase
agreements is limited to the market value of collateral available to
collateralize reverse repurchase agreements. At September 30, 1998, the Company
had $926.9 million in such collateral and $623.6 million 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% due May 15, 1998 (the "Senior Notes") and repaid long-term debt
and a note payable to a related party. 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. The remaining portion of the
Senior Notes matured and was repaid in May 1998. See Note 10 to the Consolidated
Financial Statements.
COMMITMENTS
At September 30, 1998, the Company had $2.4 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 12 months following
September 30, 1998, total $2.8 billion and $3.1 billion. At September 30, 1998,
the Company had $16.0 million in outstanding commitments to purchase loans.
Management believes that the Company has adequate resources to fund all of its
commitments. See Note 11 to the Consolidated Financial Statements.
CAPITAL
In August 1996, the Company filed a registration statement with the
Securities and Exchange 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 were 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.
During August 1998, the Company's Board of Directors authorized the
repurchase of up to $50 million of the Company's common stock. The purchases
will be made in the open market or in privately negotiated transactions at
prevailing prices. The timing and volume of purchases under the program will
depend on market conditions. As of September 30, 1998, the Company had
repurchased 14,200 shares under this new program.
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, 1998, 1997,
and 1996 qualified it as "well-capitalized", the highest of five tiers under
applicable regulatory definitions.
AT SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
Tangible capital..................... 6.75% 7.72%
Core capital......................... 6.77 7.77
Tier 1 capital....................... 9.97 12.65
Total risk-based capital............. 10.48 13.18
49
<PAGE>
The Bank's capital ratios declined during fiscal 1998 due to increased
asset levels, a higher proportion of commercial loans, deposit acquisitions, and
the devaluation of the MSR portfolio for regulatory purposes. See
"Regulation -- Capital Requirements," and Note 14 to the Consolidated
Financial Statements.
CONTINGENCIES AND UNCERTAINTIES
YEAR 2000
GENERAL. This section contains forward-looking statements that have been
prepared on the basis of the Company's best judgments and currently available
information. These forward-looking statements are inherently subject to
significant business, third-party, and regulatory uncertainties and other
contingencies, many of which are beyond the control of the Company. In addition,
these forward-looking statements are based upon the Company's current internal
assessments and remediation plans, incorporating certain representations of
third-party servicers, and are subject to change. Accordingly, there can be no
assurance that the Company's results of operations will not be adversely
affected by difficulties or delays in the Company's or third parties' Year 2000
readiness efforts. See "Risks" below for a discussion of factors that may
cause such forward-looking statements to differ from actual results.
The Year 2000 problem involves the risk that computer programs and computer
systems may not be able to perform without interruption into the Year 2000. If
computer systems do not correctly recognize the date change from December 31,
1999 to January 1, 2000, computer applications that rely on the date field could
fail or create erroneous results. Such erroneous results could affect interest
payments or due dates and could cause the temporary inability to process
transactions and to engage in ordinary business activities. The failure of the
Company, its suppliers, and its borrowers to address the Year 2000 problem could
have a material adverse effect on the Company's financial condition, results of
operations, or liquidity.
STATE OF READINESS. Bank United Corp. has implemented a company-wide
program to renovate, test, and document the readiness ("Year 2000 readiness")
of its electronic systems, programs, processes ("Computer Systems"), and
facilities to properly recognize dates to and through the year 2000 (the "Year
2000 Project"). While the Company is in various stages of modification and
testing of individual Year 2000 Project components, the Year 2000 Project is
proceeding on schedule.
The Company has assigned its Executive Vice President and Chief Information
Officer to oversee the Year 2000 Project, set up a Year 2000 Project Office,
charged a senior management team representing all significant operational areas
of the Company to act as the Year 2000 Project Team, and established Year 2000
Credit and Legal/Compliance Committees. The Company has dedicated a substantial
amount of management and staff time on the Year 2000 Project. Regular progress
reports have been and will continue to be made to the Company's Board of
Directors. The Board's Audit Committee reviews Year 2000 Project progress on
a regular basis.
The Company has divided its Year 2000 Project into the following general
phases, consistent with guidance issued by the Federal Financial Institutions
Examinations Council (the "FFIEC"): (1) inventory and assessment; (2)
renovation, which includes repair or replacement; (3) validation, which includes
testing of Computer Systems and the Company's connections with other computer
systems; (4) due diligence of third-party servicers; and (5) development of
contingency plans. The Year 2000 Project is divided into four categories:
mainframe systems, non-mainframe systems, third-party servicers, and facilities.
The inventory and assessment phases are complete, and each Computer System,
facility, and third party service that has been identified has been assigned a
priority rating corresponding to its significance. The rating has allowed the
Company to direct its attention to those Computer Systems, third-party
servicers, and facilities that it deems more critical to its ongoing business
and the maintenance of good customer relationships.
The Company is currently in the process of repairing or replacing and
testing the most significant internal components of its Computer Systems and
facilities, and it expects to be substantially complete with this phase by
December 31, 1998. The Company expects to complete testing of third party
servicers Computer Systems by March 31, 1999.
COSTS TO ADDRESS YEAR 2000 ISSUES. While the Company does not believe that
the process of making its Computer Systems Year 2000 ready will result in an
adverse material impact on its operations or liquidity, a
50
<PAGE>
substantial amount of management and staff time has been and will continue to be
devoted to the Year 2000 Project. The Company's total Year 2000 project cost
includes estimated costs and time associated with managing the impact of the
Year 2000 issue and the costs of direct internal and external professional
labor. Direct Year 2000 costs have been and will continue to be funded through
operating cash flows and are expensed as incurred. The Company spent a combined
total of $500,000 during fiscal years 1996 and 1997 and approximately $3.0
million during fiscal year 1998 on its Year 2000 Project. The Company currently
expects to spend an additional $2.3 million to complete its Year 2000 Project.
The Company has not accelerated the replacement of any Computer Systems because
of the Year 2000 Project. To date, Year 2000 costs have been within the budget
and have had no unforecasted impact on earnings. The Company did not materially
increase the number of its employees, or incur material professional fees or
costs associated with its Computer Systems to implement the Year 2000 Project.
Instead, certain of the Company's personnel resources were redeployed from other
developmental projects. Upon completion of the Year 2000 project, these
personnel resources will resume working on other developmental projects. For
this reason, a substantial portion of the costs identified as related to the
Year 2000 Project will continue.
RISKS OF THIRD PARTY YEAR 2000 ISSUES. The Company continues to assess its
risk from other environmental factors over which it has little direct control,
such as electrical power supply, and voice and data transmission. Because of the
nature of these external factors, however, the Company is not actively engaged
in any repair, replacement, or testing efforts for these services, except for
sharing date format and data transmission protocols. Based on its current
assessments and remediation plans, which are based in part on certain
representations of third-party servicers, the Company does not expect that it
will experience a significant disruption of its operations as a result of the
change to the new millennium. Although the Company has no reason to conclude
that a failure will occur, the most reasonably likely worst-case Year 2000
scenario would entail a disruption or failure of the Company's power suppliers'
or voice and data transmission suppliers' capability to provide power or data
transmission services to a Computer System, a third-party servicer, or a
facility. If such a failure were to occur, the Company would implement a
contingency plan. While it is impossible to quantify the impact of such a
scenario, the most reasonably likely worst-case scenario would entail a
diminishment of service levels, some customer inconvenience, and additional, as
yet undetermined, costs associated with the implementation of the contingency
plan.
CONTINGENCY PLANS. For the Computer Systems and facilities that it has
determined to be most critical, the Company expects to complete development,
test, and adopt business contingency plans by June 30, 1999. These plans will
conform to recently issued guidance from the FFIEC on business contingency
planning for Year 2000 readiness. Contingency plans will include, among other
actions, manual workarounds and identification of resource requirements and
alternative solutions for resuming critical business processes in the event of a
year 2000 related failure. While the Company will have contingency plans in
place to address a temporary disruption in these services, there can be no
assurance that any disruption or failure will be only temporary, that the
Company's contingency plans will function as anticipated, or that the results of
operations, financial condition, or liquidity of the Company will not be
adversely affected in the event of a prolonged disruption or failure.
Additionally, there can be no assurance that the FFIEC or other federal
regulators will not issue new regulatory requirements that require additional
work by the Company and, if issued, that new regulatory requirements will not
increase the cost or delay the completion of Bank United Corp.'s Year 2000
Project.
RECENT ACCOUNTING STANDARDS
A discussion of recently issued accounting pronouncements and their impact
on the Consolidated Financial Statements is provided in Note 1 to the
Consolidated Financial Statements.
FORWARD-LOOKING INFORMATION
Statements and financial discussion and analysis by management contained
throughout this Annual Report on Form 10-K that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve a number
51
<PAGE>
of risks and uncertainties. The important factors that could cause actual
results to differ materially from the forward-looking statements include,
without limitation:
INTEREST RATES AND ECONOMY
o changes in interest rates and economic conditions;
o changes in the levels of loan prepayments and the resulting effects on
the value of the loan and servicing portfolios and the related hedging
instruments;
o changes in local economic and business conditions adversely affecting the
Company's borrowers and their ability to repay their loans according to
their terms or impacting the value of the related collateral;
o changes in local economic and business conditions adversely affecting the
Company's customers other than borrowers and their ability to transact
profitable business with the Company;
COMPETITION AND PRODUCT AVAILABILITY
o increased competition for deposits and loans adversely affecting rates
and terms;
o changes in availability of loans originated by other financial
institutions or the Company's ability to purchase such loans on favorable
terms;
o changes in availability of single family servicing rights in the
marketplace and the Company's ability to purchase such assets on
favorable terms;
o the Company's ability to make acquisitions of other depository
institutions, their assets or their liabilities on terms favorable to the
Company, and the Company's successful integration of any such
acquisitions;
CHANGE IN COMPANY'S ASSET MIX
o increased credit risk in the Company's assets and increased operating
risk caused by an increase in commercial and consumer loans and a
decrease in single family mortgage loans;
LIQUIDITY AND CAPITAL
o changes in availability of funds increasing costs or reducing liquidity;
o changes in the ability of the Company to pay dividends on its common
stock;
o increased asset levels and changes in the composition of assets and the
resulting impact on the Bank's capital levels and regulatory capital
ratios;
SYSTEMS
o the Company's ability to acquire, operate, and maintain cost effective
and efficient systems;
o the Company's ability to complete its Year 2000 Project on time.
PERSONNEL
o the loss of senior management or operating personnel and the potential
inability to hire qualified personnel at reasonable compensation levels;
REGULATORY, COMPLIANCE, AND LEGAL
o changes in applicable statutes and government regulations or their
interpretations;
o claims of noncompliance by the Company with statutory and regulatory
requirements;
o claims with respect to representations and warranties made by the Company
to purchasers and insurers of mortgage loans and to purchasers of MSRs;
o changes in the status of litigation to which the Company is a party.
For further information regarding these factors, see "Risk Factors" in
the prospectus dated April 29, 1997, relating to the public offering of the
Company's subordinated notes due 2007 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).
52
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the market risk of the Company's financial
instruments, see "Business -- Market Risk Analysis". The Company's principal
market risk exposure is to interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included on page 60 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 1998 Annual Meeting of Shareholders, to be filed not
later than 120 days after the close of the Company's fiscal year, is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation contained under the caption
"Executive Compensation" in the Company's definitive Proxy Statement relating
to the 1998 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 1998
Annual Meeting of Shareholders, to be filed not later than 120 days after the
close of the Company's fiscal year, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on certain relationships and related transactions contained
under the caption "Certain Relationships and Related Transactions" of the
Company's definitive Proxy Statement relating to the 1998 Annual Meeting of
Shareholders, to be filed not later than 120 days after the close of the
Company's fiscal year, is incorporated herein by reference.
53
<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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
2.1 -- Form of Letter Agreement, by and among the general and limited partners of Hyperion
Partners, L.P., dated as of June 17, 1996, relating to certain transactions consumated
prior to the Offering. (Incorporated by reference to Exhibit 2.1 to Form S-1, Registration
No. 333-06229)
2.2 -- Merger Agreement, dated as of June 17, 1996, by and between the Company and Hyperion
Holdings related to the Merger. (Incorporated by reference to Exhibit 2.2 to Form S-1,
Registration No. 333-06229)
3.1 -- Form of Restated Certificate of Incorporation of the Registrant, as amended. (Incorporat-
ed by reference to Exhibit 3.1 to Form S-1, Registration No. 333-06229)
3.2 -- Form of By-Laws of the Registrant. (Incorporated by reference to Exhibit 3.2 to Form S-1,
Registration No. 333-06229)
4.5 -- Form of Class A common stock Certificate. (Incorporated by reference to Exhibit 4.5 to
Form S-1, Registration No. 333-06229)
4.6 -- Indenture, dated as of May 7, 1997, between the Registrant and The Bank of New York, as
Trustee, relating to the Registrant's 8.875% Subordinated Notes due May 1, 2007
(Incorporated by reference to Exhibit 4.2 to Form S-1, Registration No. 333-19861)
4.7 -- Form of 8.875% Subordinated Notes due May 1, 2007 (included in the Indenture filed as
Exhibit 4.6 hereto) (Incorporated by reference to Exhibit 4.3 to Form S-1, Registration
No. 333-19861)
10.1 -- Assistance Agreement, dated December 30, 1988, among the Bank, the Registrant, Hyperion
Holdings, Hyperion Partners, and the FSLIC. (Incorporated by reference to Exhibit 10.1 to
Form S-1, Registration No. 333-06229)
10.1a -- Settlement and Termination Agreement, dated as of December 23, 1993, among the Bank, the
Registrant, Hyperion Holdings, Hyperion Partners and the FDIC. (Incorporated by reference
to Exhibit 10.1a to Form S-1, Registration No. 333-06229)
10.1b -- Tax Benefits Agreement, dated December 28, 1993, among the Bank, the Registrant, Hyperion
Holdings, Hyperion Partners and the FDIC. (Incorporated by reference to Exhibit 10.1b to
Form S-1, Registration No. 333-06229)
10.2 -- Acquisition Agreement, dated December 30, 1988, between the Bank and the FSLIC.
(Incorporated by reference to Exhibit 10.2 to Form S-1, Registration No. 333-06229)
10.3 -- Warrant Agreement, dated December 30, 1988, between the Bank and the FSLIC. (Incorporated
by reference to Exhibit 10.3 to Form S-1, Registration No. 333-06229)
10.3a -- Amended and Restated Warrant Agreement dated December 28, 1993, between the Bank and the
FDIC. (Incorporated by reference to Exhibit 10.3a to Form S-1, Registration No. 333-06229)
10.4 -- Regulatory Capital Maintenance Agreement, dated December 30, 1988, among the Bank, the
Registrant, Hyperion Holdings, Hyperion Partners, and the FSLIC (terminated). (Exhibit
10.4 to Form S-1 filed on June 18, 1996)
10.5 -- Federal Stock Charter of the Bank and First Amendment to charter approved on August 26,
1992. (Incorporated by reference to Exhibit 10.5 to Form S-1, Registration No. 333-06229)
10.6 -- Amended and Restated Federal Stock Charter of the Bank and Second Amendment approved on
October 30, 1992. (Incorporated by reference to Exhibit 10.6 to Form S-1, Registration No.
333-06229)
10.6a -- Third Amendment to the Federal Stock Charter of the Bank approved on April 23, 1996.
(Incorporated by reference to Exhibit 10.6a to Form S-1, Registration No. 333-06229)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
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)
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)
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
10.13 -- Letter Agreement Related to Employment, dated April 4, 1990, between the Bank and Anthony
J. Nocella. (Incorporated by reference to Exhibit 10.13 to Form S-1, Registration No.
333-06229)
10.15 -- Letter Agreement Related to Employment, dated April 6, 1990, between the Bank and Jonathon
K. Heffron. (Incorporated by reference to Exhibit 10.15 to Form S-1, Registration No.
333-06229)
10.17 -- Management Incentive Plan, dated April 20, 1992. (Incorporated by reference to Exhibit
10.17 to Form S-1, Registration No. 333-06229)
10.18 -- Letter Agreement, dated January 5, 1990, between Hyperion Partners and certain
shareholders of the Registrant with respect to the provision of managerial assistance to
the Registrant. (Incorporated by reference to Exhibit 10.18 to Form S-1, Registration No.
333-06229)
10.22 -- Supplemental Executive Savings Plan of the Bank. (Incorporated by reference to Exhibit
10.22 to Form S-1, Registration No. 333-06229)
10.23 -- Directors Supplemental Savings Plan of the Bank. (Incorporated by reference to Exhibit
10.23 to Form S-1, Registration No. 333-06229)
10.24 -- Warrant Purchase and Exchange Agreement, dated July 23, 1996, by and among the Company,
the Bank and the FDIC. (Exhibit 10.24 to Form S-1 filed on July 25, 1996)
10.25 -- Tax Sharing Agreement dated as of May 1, 1996, by and between the Company and the Bank.
(Incorporated by reference to Exhibit 10.25 to Form 10-K for the fiscal year ended
September 30, 1996)
10.26 -- Form of the Company's 1996 Stock Incentive Plan. (Incorporated by reference to Exhibit
10.26 to Form S-1, Registration No. 333-06229)
10.27 -- Form of the Company's Director Stock Plan. (Incorporated by reference to Exhibit 10.27 to
Form S-1, Registration No. 333-06229)
10.28 -- Employment Agreement, dated August 1, 1996, between the Company and Barry C. Burkholder.
(Incorporated by reference to Exhibit 10.28 to Form 10-K for the fiscal year ended
September 30, 1996)
10.29 -- Employment Agreement, dated August 1, 1996, between the Company and Anthony J. Nocella.
(Incorporated by reference to Exhibit 10.29 to Form 10-K for the fiscal year ended
September 30, 1996)
10.30 -- 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). (Incorporated by reference to Exhibit 10.38
to Form 10-K for the fiscal year ended September 30, 1997)
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
*10.39 -- First Amendment, dated June 30, 1998, to Lease Agreement dated November 21, 1997, between
the Bank and Utah State Retirement Fund. (Leased premises at 3200 Southwest Freeway.)
*21 -- Subsidiaries of the Registrant.
*23.1 -- Consent of Deloitte & Touche LLP, independent auditors.
*24 -- Power of Attorney.
*27 -- Financial Data Schedule.
</TABLE>
- ------------
* Filed herewith.
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
See Index to the Consolidated Financial Statements on page 60. 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
1998.
57
<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 18, 1998.
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 18, 1998
BARRY C. BURKHOLDER Chief Executive Officer
(2) Principal Financial and Accounting Officer:
/s/ANTHONY J. NOCELLA Vice Chairman and December 18, 1998
ANTHONY J. NOCELLA Chief Financial Officer
(3) Directors:
* Chairman and Director December 18, 1998
LEWIS S. RANIERI
/s/BARRY C. BURKHOLDER Director December 18, 1998
BARRY C. BURKHOLDER
* Director December 18, 1998
LAWRENCE CHIMERINE, PH.D.
* Director December 18, 1998
DAVID M. GOLUSH
* Director December 18, 1998
PAUL M. HORVITZ, PH.D.
* Director December 18, 1998
ALAN E. MASTER
/s/ANTHONY J. NOCELLA Director December 18, 1998
ANTHONY J. NOCELLA
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------------ --------------------------------- -------------------
<S> <C> <C>
* Director December 18, 1998
SALVATORE A. RANIERI
* Director December 18, 1998
SCOTT A. SHAY
* Director December 18, 1998
PATRICIA A. SLOAN
* Director December 18, 1998
MICHAEL S. STEVENS
* Director December 18, 1998
KENDRICK R. WILSON III
/s/JONATHON K. HEFFRON
JONATHON K. HEFFRON
ATTORNEY-IN-FACT
</TABLE>
- ------------
* Signed through Power of Attorney
granted to Jonathon K. Heffron,
Attorney-in-Fact.
59
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report......... F-1
Consolidated Statements of Financial
Condition as of September 30, 1998
and 1997........................... F-2
Consolidated Statements of Operations
for the Year Ended September 30,
1998, 1997, and 1996............... F-3
Consolidated Statements of
Stockholders' Equity for the Year
Ended September 30, 1998, 1997, and
1996............................... F-4
Consolidated Statements of Cash Flows
for the Year Ended September 30,
1998, 1997, and 1996............... F-5
Notes to Consolidated Financial
Statements......................... F-7
60
<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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
September 30, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
October 21, 1998
F-1
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------
NOTES 1998 1997
----------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............ 1 $ 228,674 $ 121,000
Securities purchased under agreements
to resell and federal funds sold... 2 474,483 349,209
Securities and other investments..... 3, 4 91,350 77,809
Mortgage-backed securities 4, 9
Held to maturity, at amortized
cost (fair value of $438.7
million in 1998 and $528.9
million in 1997)............... 443,886 543,361
Available for sale, at fair
value.......................... 488,172 1,026,344
Loans 5, 8, 11
Held for investment (net of the
allowance for credit losses of
$47.0 million in 1998 and $39.2
million in 1997)............... 8,566,712 8,221,626
Held for sale................... 2,136,506 773,603
Federal Home Loan Bank stock......... 242,883 205,011
Mortgage servicing rights............ 6, 11 410,868 272,214
Deferred tax asset................... 13 113,581 120,936
Premises and equipment............... 59,889 46,921
Intangible assets.................... 59,591 13,605
Real estate owned.................... 18,790 19,833
Other assets......................... 329,607 175,600
------------- -------------
TOTAL ASSETS......................... $ 13,664,992 $ 11,967,072
============= =============
LIABILITIES, MINORITY INTEREST, AND
STOCKHOLDERS' EQUITY
LIABILITIES
Deposits............................. 7 $ 6,320,476 $ 5,247,668
Federal Home Loan Bank advances...... 5, 8, 11 4,783,294 3,992,344
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 4, 9 811,742 1,308,600
Notes payable........................ 10 219,720 220,199
Advances from borrowers for taxes and
insurance.......................... 270,135 173,294
Other liabilities.................... 389,713 240,988
------------- -------------
Total liabilities.......... 12,795,080 11,183,093
------------- -------------
MINORITY INTEREST
Preferred stock issued by
consolidated subsidiary............ 15 185,500 185,500
------------- -------------
STOCKHOLDERS' EQUITY 14, 15
Common stock......................... 316 316
Paid-in capital...................... 129,343 129,286
Retained earnings.................... 556,708 462,551
Accumulated other comprehensive
income -- unrealized gains (losses)
on securities available for sale,
net of tax......................... (1,454) 6,326
Treasury stock, at cost.............. (501) --
------------- -------------
Total stockholders'
equity................... 684,412 598,479
------------- -------------
TOTAL LIABILITIES, MINORITY INTEREST,
AND
STOCKHOLDERS' EQUITY............... $ 13,664,992 $ 11,967,072
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
NOTES 1998 1997 1996
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Short-term interest-earning assets... $ 37,962 $ 36,240 $ 39,302
Securities and other investments..... 9,093 5,371 3,984
Mortgage-backed securities........... 82,170 104,891 128,143
Loans................................ 756,890 652,886 627,940
Federal Home Loan Bank stock......... 12,631 11,320 12,943
---------- ---------- ----------
Total interest income...... 898,746 810,708 812,312
---------- ---------- ----------
INTEREST EXPENSE
Deposits............................. 300,760 262,761 272,220
Federal Home Loan Bank advances...... 236,252 212,558 247,093
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 56,082 57,335 55,112
Notes payable........................ 19,571 13,410 10,353
---------- ---------- ----------
Total interest expense..... 612,665 546,064 584,778
---------- ---------- ----------
Net interest income........ 286,081 264,644 227,534
PROVISION FOR CREDIT LOSSES.......... 5 20,123 18,107 16,469
---------- ---------- ----------
Net interest income after
provision for credit
losses................... 265,958 246,537 211,065
---------- ---------- ----------
NON-INTEREST INCOME
Net gains (losses)
Sales of single family loans.... 11,124 21,182 43,074
Securities and mortgage-backed
securities.................... 2,761 2,841 4,002
Other loans..................... 651 1,128 3,189
Sale of mortgage offices........ 17 -- 4,748 --
Loan servicing, net of related
amortization....................... 35,975 32,381 30,383
Other................................ 30,426 21,152 15,541
---------- ---------- ----------
Total non-interest
income................... 80,937 83,432 96,189
---------- ---------- ----------
NON-INTEREST EXPENSE
Compensation and benefits............ 12 86,725 75,016 87,640
Occupancy............................ 15,497 14,943 18,415
Data processing...................... 16,591 13,712 16,196
Advertising and marketing............ 8,299 7,147 8,025
Amortization of intangibles.......... 5,864 4,118 6,585
SAIF deposit insurance premiums...... 14 4,160 4,797 45,690
Furniture and equipment.............. 3,686 4,074 6,121
Restructuring charges................ 17 -- -- 10,681
Other................................ 47,720 48,329 40,065
---------- ---------- ----------
Total non-interest
expense.................. 188,542 172,136 239,418
---------- ---------- ----------
Income before income taxes,
minority interest,
and extraordinary loss... 158,353 157,833 67,836
INCOME TAX EXPENSE (BENEFIT)......... 13 25,722 60,686 (75,765)
---------- ---------- ----------
Income before minority
interest and
extraordinary loss....... 132,631 97,147 143,601
MINORITY INTEREST 15
Subsidiary preferred stock
dividends..................... 18,253 18,253 18,253
Payments in lieu of dividends... -- -- 6,413
---------- ---------- ----------
Income before extraordinary
loss..................... 114,378 78,894 118,935
EXTRAORDINARY LOSS -- early
extinguishment of debt............. 10 -- 2,323 --
---------- ---------- ----------
NET INCOME................. $ 114,378 $ 76,571 $ 118,935
========== ========== ==========
EARNINGS PER COMMON SHARE 15
Basic........................... $ 3.62 $ 2.42 $ 4.06
Diluted......................... 3.54 2.40 3.87
</TABLE>
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 RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
--------- ------ --------- ------ --------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1995...... 23,828,400 $239 -- $-- 5,034,600 $ 50 $ 117,722 $ 384,739
Net income..................... -- -- -- -- -- -- -- 118,935
Change in unrealized gains
(losses), net of tax expense
of $2.7 million.............. -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ --------- ---------
Total comprehensive
income................... -- -- -- -- -- -- -- 118,935
--------- ------ --------- ------ --------- ------ --------- ---------
Dividends declared: common
stock ($3.46 per share)...... -- -- -- -- -- -- -- (100,000)
Restricted stock issued (Note
12).......................... -- -- 318,342 3 -- -- 3,706 --
Conversion of warrant (Note
15).......................... -- -- 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 --
--------- ------ --------- ------ --------- ------ --------- ---------
BALANCE AT SEPTEMBER 30, 1996...... 27,735,934 277 3,859,662 39 -- -- 129,286 403,674
Net income..................... -- -- -- -- -- -- -- 76,571
Change in unrealized gains
(losses), net of tax expense
of $5.1 million.............. -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ --------- ---------
Total comprehensive
income................... -- -- -- -- -- -- -- 76,571
--------- ------ --------- ------ --------- ------ --------- ---------
Dividends declared: common
stock ($0.56 per share)...... -- -- -- -- -- -- -- (17,694)
Conversion of common stock..... 618,342 7 (618,342) (7) -- -- -- --
--------- ------ --------- ------ --------- ------ --------- ---------
BALANCE AT SEPTEMBER 30, 1997...... 28,354,276 284 3,241,320 32 -- -- 129,286 462,551
Net income..................... -- -- -- -- -- -- -- 114,378
Change in unrealized gains
(losses), net of tax benefit
of $4.7 million.............. -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ --------- ---------
Total comprehensive income... -- -- -- -- -- -- -- 114,378
--------- ------ --------- ------ --------- ------ --------- ---------
Dividends declared: common
stock ($0.64 per share)...... -- -- -- -- -- -- -- (20,221)
Stock options exercised........ 1,500 -- -- -- -- -- 57 --
Stock repurchased.............. -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ --------- ---------
BALANCE AT SEPTEMBER 30, 1998...... 28,355,776 $284 3,241,320 $ 32 -- -- $ 129,343 $ 556,708
========= ====== ========= ====== ========= ====== ========= =========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME --
UNREALIZED TREASURY STOCK TOTAL
GAINS ------------------- STOCKHOLDERS'
(LOSSES) SHARES AMOUNT EQUITY
------------- --------- ------- -------------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1995...... $ (6,647) -- $ -- $ 496,103
Net income..................... -- -- -- 118,935
Change in unrealized gains
(losses), net of tax expense
of $2.7 million.............. 4,414 -- -- 4,414
------------- --------- ------- -------------
Total comprehensive
income................... 4,414 -- -- 123,349
------------- --------- ------- -------------
Dividends declared: common
stock ($3.46 per share)...... -- -- -- (100,000)
Restricted stock issued (Note
12).......................... -- -- -- 3,709
Conversion of warrant (Note
15).......................... -- -- -- (6,084)
Conversion of common stock..... -- -- -- --
Common stock offering (Note
15).......................... -- -- -- 13,966
------------- --------- ------- -------------
BALANCE AT SEPTEMBER 30, 1996...... (2,233) -- -- 531,043
Net income..................... -- -- -- 76,571
Change in unrealized gains
(losses), net of tax expense
of $5.1 million.............. 8,559 8,559
------------- --------- ------- -------------
Total comprehensive
income................... 8,559 -- -- 85,130
------------- --------- ------- -------------
Dividends declared: common
stock ($0.56 per share)...... -- -- -- (17,694)
Conversion of common stock..... -- -- -- --
------------- --------- ------- -------------
BALANCE AT SEPTEMBER 30, 1997...... 6,326 -- -- 598,479
Net income..................... -- -- -- 114,378
Change in unrealized gains
(losses), net of tax benefit
of $4.7 million.............. (7,780) -- -- (7,780)
------------- --------- ------- -------------
Total comprehensive income... (7,780) -- -- 106,598
------------- --------- ------- -------------
Dividends declared: common
stock ($0.64 per share)...... -- -- -- (20,221)
Stock options exercised........ -- -- -- 57
Stock repurchased.............. -- (14,200) (501 ) (501)
------------- --------- ------- -------------
BALANCE AT SEPTEMBER 30, 1998...... $ (1,454) (14,200) $ (501 ) $ 684,412
============= ========= ======= =============
</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,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 114,378 $ 76,571 $ 118,935
Adjustments to reconcile net income to
net cash (used) provided by operating
activities:
Provision for credit losses and
mortgage servicing rights
valuation allowance.............. 24,890 18,107 16,469
Deferred tax expense (benefit)..... 12,023 42,251 (93,402)
Net gains on sales of assets....... (19,753) (30,631) (53,491)
Depreciation and amortization...... 80,127 41,303 8,338
Federal Home Loan Bank stock
dividends........................ (12,631) (11,320) (12,943)
Fundings and purchases of loans
held for sale.................... (3,768,039) (1,995,816) (3,015,616)
Proceeds from the sale of loans
held for sale.................... 1,903,991 1,198,295 3,321,599
Change in loans held for sale...... 670,197 32,638 17,991
Change in interest receivable...... (4,748) (9,052) 25,957
Change in other assets............. (139,506) (64,632) 18,866
Change in other liabilities........ 130,921 (22,284) (3,274)
Management restricted stock
award............................ -- -- 3,709
------------- ------------- -------------
Net cash (used) provided by
operating activities........ (1,008,150) (724,570) 353,138
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase price of acquisitions..... (51,850) -- --
Net change in securities purchased
under agreements to resell and
federal funds sold............... (125,274) 325,040 (203,197)
Fundings of loans held for
investment....................... (3,854,576) (2,283,096) (1,746,604)
Proceeds from principal repayments
and maturities of
Loans held for investment..... 4,162,942 2,517,782 2,298,915
Securities held to maturity... -- -- 7,715
Securities available for
sale........................ 345,215 134,165 395
Mortgage-backed securities
held to maturity............ 98,488 80,657 178,926
Mortgage-backed securities
available for sale.......... 465,195 263,659 272,059
Proceeds from the sale of
Securities available for
sale........................ 497,053 337,848 96,815
Mortgage-backed securities
available for sale.......... 93,131 6,965 295,702
Mortgage servicing rights..... -- 7,982 33,187
Federal Home Loan Bank
stock....................... 64,325 18,160 59,252
Real estate owned acquired
through foreclosure......... 37,031 59,010 42,741
Purchases of
Loans held for investment..... (1,158,270) (1,086,249) (148,510)
Securities held to maturity... (2,213) -- (6,327)
Securities available for
sale........................ (355,112) (131,296) (16,029)
Mortgage-backed securities
held to maturity............ -- (2,134) (3,841)
Mortgage-backed securities
available for sale.......... (21,084) (246,363) --
Mortgage servicing rights..... (177,201) (166,494) (23,535)
Federal Home Loan Bank
stock....................... (89,565) (32,208) --
Other changes in loans held for
investment....................... (234,899) (237,312) (39,068)
Other changes in mortgage servicing
rights........................... 6,093 (13,790) (38,607)
Net purchases of premises and
equipment........................ (26,181) (14,419) (9,394)
------------- ------------- -------------
Net cash (used) provided by
investing activities........ (326,752) (462,093) 1,050,595
------------- ------------- -------------
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
F-5
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits.......... $ (436,880) $ 99,723 $ (34,378)
Proceeds from deposits
purchased..................... 1,509,688 -- --
Proceeds from Federal Home Loan
Bank advances................. 3,130,583 3,296,067 1,498,700
Repayment of Federal Home Loan
Bank advances................. (2,339,633) (2,794,109) (2,391,764)
Net change in securities sold
under agreements to repurchase
and federal funds purchased... (496,858) 476,314 (340,247)
Net change in advances from
borrowers for taxes and
insurance..................... 96,841 26,660 (37,334)
Proceeds from issuance of common
stock......................... -- -- 13,966
Cost of converting Bank common
stock warrant................. -- -- (6,084)
Payment of common stock
dividends..................... (20,221) (17,694) (100,000)
Stock repurchased............... (501) -- --
Stock options exercised......... 57 -- --
Repayment of Senior Notes....... (500) (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..... 1,442,576 1,188,140 (1,397,141)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 107,674 1,477 6,592
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 121,000 119,523 112,931
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 228,674 $ 121,000 $ 119,523
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest.......... $ 612,297 $ 537,216 $ 606,911
Cash paid for income taxes...... 20,061 9,634 3,953
Cash paid in lieu of taxes...... -- -- 12,096
NONCASH INVESTING ACTIVITIES
Real estate owned acquired
through foreclosure........... 34,738 61,889 70,843
Sales of real estate owned
financed by the Bank.......... 553 20,117 452
Securitization of loans......... 506,110 346,401 33,167
Net transfer of loans from held
for investment to available
for sale...................... 671,704 43,412 104,235
Transfer of mortgage-backed
securities from held to
maturity to available for
sale.......................... -- 6,843 1,244,945
Change in unrealized gains
(losses) on securities
available for sale, net of
tax........................... 7,780 8,559 4,414
</TABLE>
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 in
December 1988. In December 1996, the Parent Company formed a wholly owned
Delaware subsidiary, BNKU Holdings, Inc. ("Holdings"), which is now the parent
company of the Bank.
The accompanying Consolidated Financial Statements include the accounts of
the Parent Company, Holdings, the Bank, and 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 markets throughout the United States. At
September 30, 1998, the Company operated an 84-branch community banking network
serving approximately 265,000 households, 21 commercial banking offices in 18
states and eight wholesale mortgage origination offices in seven states.
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. Short-term instruments with original maturities of three
months or less (measured from their acquisition date) and highly liquid
instruments readily convertible to cash are generally considered to be cash
equivalents. Cash and cash equivalents consist of interest-earning and
non-interest-earning deposits in other banks.
The regulations of the Federal Reserve Board require average cash reserve
balances based on deposit liabilities to be maintained by the Bank at the
Federal Reserve Bank. The required reserve balance totalled $94.3 million for
the period including September 30, 1998. The Bank was in compliance with these
requirements.
SECURITIES
Debt and equity securities, including mortgage-backed securities ("MBS"),
are classified into one of three categories: held to maturity, available for
sale, or trading. Securities that the Company has the positive intent and
ability to hold to maturity are classified as held to maturity and carried at
amortized cost, adjusted for the amortization of premiums and the accretion of
discounts. Under certain circumstances (including the deterioration of the
issuer's creditworthiness or a change in tax law, statutory requirements, or
regulatory requirements), securities held to maturity may be sold or transferred
to another portfolio. Securities that the Company intends to hold for indefinite
periods of time are classified as available for sale and are recorded at fair
value. Any unrealized gains or losses are excluded from earnings and reported
net of tax as other comprehensive income in stockholders' equity until realized.
Trading account assets are carried at fair value with any realized or unrealized
gains and losses recognized in current operations. Trading account assets are
generally comprised of assets that
F-7
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 or 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 declines for reasons other than temporary
market conditions, the carrying value will be written down to current fair value
by a charge to operations.
Net gains or losses on sales of securities are computed on the specific
identification method.
LOANS
Loans that the Company has the intent and ability to hold for the
foreseeable future are classified as held for investment and are carried at
unpaid principal balance, adjusted for unamortized purchase premiums or
discounts, the allowance for credit losses, and any deferred loan origination
fees or costs ("Book Value"). Loans held for sale are carried at the lower of
Book Value or fair value. Fair value is determined based on quoted market prices
and considers the fair value of the related financial instruments utilized as
hedges. Any net unrealized losses on loans held for sale are charged to current
operations and a valuation allowance established.
Interest income on loans is recognized principally using the level-yield
method. Based on management's periodic evaluation or at the time a loan is 90
days past due, the related accrued interest is generally reversed by a charge to
operations and the loan is simultaneously placed on nonaccrual. Once a loan
becomes current and the borrower demonstrates the ability to repay the loan, the
loan is returned to accrual status.
Premiums, discounts, and loan fees (net of certain direct loan origination
costs) on loans held for sale are recognized in income when the related loans
are sold or repaid. Premiums, discounts, and loan fees (net of certain direct
loan origination costs) associated with loans held for investment, for which
collection is probable and estimable, are recognized in income over the loans'
estimated remaining lives using the level-yield method or when such loans are
sold.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at levels management deems
adequate to cover probable 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 probable to
occur. Cash recoveries are credited to the allowance for credit losses.
MORTGAGE SERVICING RIGHTS ("MSRS")
MSRs are periodically evaluated for impairment based on the fair value of
these rights. The fair value of MSRs is determined by discounting the estimated
future cash flows using a discount rate commensurate with the risks involved and
considers the fair value of the related financial instruments utilized as
hedges. This method of valuation incorporates assumptions that market
participants would use in their estimates of future servicing income and
expense, including assumptions about prepayment, default, and interest rates.
The fair value of the MSRs at September 30, 1998 was determined using discount
rates ranging from 9% to 10.5% and an annual constant prepayment rate of 21%.
For purposes of measuring impairment, the loans underlying the MSRs are
stratified on the basis of interest rate and type (conventional or government).
Impairment is measured by the
F-8
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amount the book value of the MSRs, exceeds the fair value of the MSRs.
Impairment, if any, is recognized through a valuation allowance and a charge to
current operations.
MSRs, net of valuation allowances, are amortized in proportion to, and over
the period of, the estimated net servicing revenue of the underlying mortgages,
which are collateralized by single family properties. The amortization expense
is deducted from the related servicing fee revenue in the Consolidated
Statements of Operations.
SALES OF SINGLE FAMILY LOANS AND SERVICING RIGHTS
Gains or losses on loan sales and servicing rights are recognized at the
time of sale and determined using the specific identification method. Certain
loans and servicing rights are sold with general representations and warranties
included in the sales agreement. Repurchases of these assets may be required
when a loan fails to meet certain conditions specified in the sales agreement
that are covered by the general representations and warranties. An accrual is
determined for the probable future costs of such obligations and is maintained
at a level management believes is adequate to cover probable losses. This
accrual is included in other liabilities on the Consolidated Statements of
Financial Condition, and the related expense is included 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 on an accelerated basis over the estimated
lives of the deposit relationships acquired. Goodwill is amortized on a
straight-line basis over 15 years. Debt issuance costs are amortized over the
life of the notes on a straight-line basis. These assets are evaluated
periodically to determine whether events and circumstances have developed that
warrant revision of the estimated lives of the related assets or their
write-off.
REAL ESTATE OWNED ("REO")
At the time of foreclosure, REO is recorded at fair value reduced by
estimated costs to sell. The resulting loss, if any, is charged to the allowance
for credit losses. Declines in a property's fair value subsequent to foreclosure
are charged to current operations. Revenues, expenses, gains or losses on sales,
and increases or decreases in the allowance for REO losses are charged to
operations as incurred and included in non-interest expense on the Consolidated
Statement of Operations. The Company's REO is primarily comprised of single
family properties held by the Banking Segment. The historical average holding
period for REO is seven months.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company enters into traditional off-balance-sheet financial instruments
such as interest rate exchange agreements ("swaps"), interest rate caps,
locks, and floors, and forward delivery contracts in the normal course of
business in an effort to reduce its exposure to changes in interest rates. The
Company does not utilize instruments such as leveraged derivatives or structured
notes. The off-balance-sheet financial instruments utilized by the Company are
typically classified as hedges of existing assets, liabilities, or anticipated
transactions. 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.
F-9
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 SWAPS, CAPS, AND FLOORS. Amounts receivable and payable on
these contracts are offset against income or expense on the hedged items. Fees
paid to enter into the financial contracts are capitalized and amortized over
the lives of the contracts as a component of the income or expense on the asset
or liability hedged.
FORWARD DELIVERY CONTRACTS AND INTEREST RATE LOCKS. Changes in the market
value of these types of instruments are included in the valuation of the items
being hedged to determine if a lower of cost or market valuation allowance is
required. 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.
OTHER OFF-BALANCE-SHEET INSTRUMENTS. The Company has entered into other
off-balance-sheet financial instruments consisting of commitments to extend
credit or to purchase loans. Such financial instruments are recorded in the
financial statements when they are funded or purchased.
FEDERAL INCOME TAXES
The Parent Company and its subsidiaries file a consolidated tax return.
Each entity within the consolidated group computes its tax on a separate-company
basis, and the results are combined for purposes of preparing the Consolidated
Financial Statements. Deferred tax assets and liabilities are recognized for the
estimated tax consequences due to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
EARNINGS PER COMMON SHARE
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per Share," which
establishes standards for computing and presenting earnings per share ("EPS").
It requires dual presentation of basic and diluted EPS for entities with complex
capital structures. Basic EPS is computed by dividing net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted EPS is computed by dividing net income available to
common stockholders, less income due to outstanding Bank warrants, by the
weighted-average number of common shares and equivalents outstanding during the
period. Common stock equivalents are computed using the treasury stock method.
All prior period EPS data were restated to comply with SFAS No. 128, but are not
materially different.
RECENT ACCOUNTING STANDARDS
As of October 1, 1997, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires that all components of comprehensive
income and total comprehensive income be reported on one of the following: the
statement of operations, the statement of stockholders' equity, or a separate
statement of comprehensive income. The Company is disclosing this information on
its statement of stockholders' equity. The components of comprehensive income
are 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 did
F-10
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not change the current accounting treatment for components of comprehensive
income (i.e. changes in unrealized gains or losses on securities and MBS
available for sale).
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. SFAS No. 131, which the Company
plans to implement effective October 1, 1998, should have no material effect on
the Consolidated Financial Statements.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," requires companies to recognize all derivatives as either assets
or liabililties in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 requires that changes in fair value of a
derivative be recognized currently in earnings unless specific hedge accounting
criteria are met. Upon implementation of SFAS No. 133, hedging relationships may
be redesignated and securities held to maturity may be transferred to available
for sale or trading. This statement is effective for fiscal years beginning
after June 15, 1999. The Company is evaluating the impact, if any, this
statement may have on its future Consolidated Financial Statements.
2. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND
FEDERAL FUNDS SOLD
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
REPURCHASE AGREEMENTS
Balance outstanding at
period-end.................... $ 414,483 $ 301,209 $ 649,249
Fair value of collateral at
period-end.................... 423,772 310,066 693,306
Maximum outstanding at any
month-end..................... 819,604 582,336 785,178
Daily average balance........... 446,913 512,957 608,102
Average interest rate........... 6.14% 5.92% 5.83%
FEDERAL FUNDS SOLD
Balance outstanding at
period-end.................... $ 60,000 $ 48,000 $ 25,000
Maximum outstanding at any
month-end..................... 200,000 85,000 110,000
Daily average balance........... 53,227 44,661 50,418
Average interest rate........... 5.49% 5.34% 5.36%
The repurchase agreements outstanding at September 30, 1998, were
collateralized by single family, multi-family and commercial real estate loans,
and MBS, pledged by others. These loans and MBS were held by the counterparty in
safekeeping for the account of the Company or by a third-party custodian for the
benefit of the Company. The repurchase agreements and federal funds sold
outstanding at September 30, 1998, matured during October 1998. The repurchase
agreements provide for the same loans and MBS to be resold at maturity. At
September 30, 1998, $114.0 million and $112.8 million in repurchase agreements
and federal funds sold were held by PaineWebber, Inc., and Lehman Brothers as
counterparties.
F-11
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SECURITIES AND OTHER INVESTMENTS
<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>
1998
HELD TO MATURITY
U.S. government and agency
securities.................... $ 2,412 $ 2 $-- $ 2,414 $ 2,412
========== ==========
AVAILABLE FOR SALE
U.S. government and agency
securities.................... 15,930 $ 83 $-- 16,013
Corporate securities............ 1,365 -- 1 1,364
SBA interest-only strips........ 73,802 -- 2,241 71,561
--------- ---------- ---------- ---------
91,097 $ 83 $2,242 88,938 88,938
========== ==========
--------- ---------
---------
Total...................... $93,509 $ 91,352 $ 91,350
========= ========= =========
1997
HELD TO MATURITY
U.S. government and agency
securities.................... $ 160 $ 5 $-- $ 165 $ 160
========== ==========
AVAILABLE FOR SALE
U.S. government and agency
securities.................... 28,640 $ 285 $-- 28,925
Corporate securities............ 9,987 -- 2 9,985
SBA interest-only strips........ 37,218 293 -- 37,511
Other securities................ 1,229 -- 1 1,228
--------- ---------- ---------- ---------
77,074 $ 578 $ 3 77,649 77,649
========== ==========
--------- ---------
---------
Total...................... $77,234 $ 77,814 $ 77,809
========= ========= =========
</TABLE>
Small Business Administration ("SBA") interest-only strips were created
in connection with the Company's securitization of SBA loans and represent the
contractual right to receive a portion of the interest on the underlying SBA
loans.
Securities outstanding at September 30, 1998, 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....................... $2,260 $ 2,260 $ 1,365 $ 1,364
Due in one to five years...................... 152 154 -- --
Due in more than ten years.................... -- -- 89,732 87,574
---------- --------- ---------- ---------
$2,412 $ 2,414 $ 91,097 $ 88,938
========== ========= ========== =========
</TABLE>
F-12
<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> <C>
1998
HELD TO MATURITY
Agency
Fixed-rate.................... $ 2,106 $ -- $ -- $ 2,106
Non-agency
Adjustable-rate............... 351,237 1,970 6,410 346,797
CMOs -- fixed-rate............ 87,639 235 1,051 86,823
Other........................... 2,904 50 -- 2,954
------------ ---------- ---------- ------------
Held to maturity........... 443,886 $ 2,255 $ 7,461 438,680 $ 443,886
------------ ========== ========== ------------ ============
AVAILABLE FOR SALE
Agency
Fixed-rate.................... 19,417 $ 150 $ -- 19,567
Adjustable-rate............... 42,924 365 -- 43,289
CMOs -- fixed-rate............ 14,323 34 55 14,302
CMOs -- adjustable-rate....... 197,455 1,277 21 198,711
Non-agency
Fixed-rate.................... 19,703 591 -- 20,294
Adjustable-rate............... 146,274 189 1,123 145,340
CMOs -- fixed-rate............ 8,348 3,145 334 11,159
CMOs -- adjustable-rate....... 34,837 412 145 35,104
Other........................... 406 -- -- 406
------------ ---------- ---------- ------------
Available for sale......... 483,687 $ 6,163 $ 1,678 488,172 $ 488,172
------------ ========== ========== ------------ ============
Total mortgage-backed
securities............... $ 927,573 $ 926,852
============ ============
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
============ ============
</TABLE>
F-13
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 1998, MBS with carrying values totalling $623.6 million
and fair values totalling $617.0 million were used to collateralize securities
sold under agreements to repurchase ("reverse repurchase agreements").
5. LOANS
AT SEPTEMBER 30,
---------------------------
1998 1997
------------- ------------
(IN THOUSANDS)
HELD FOR INVESTMENT
Single family................... $ 4,694,628 $ 5,820,495
Commercial...................... 3,428,133 2,141,498
Consumer........................ 493,457 305,545
------------- ------------
8,616,218 8,267,538
Allowance for credit losses..... (47,027) (39,172)
Net deferred loan fees,
premiums, and discounts........ (2,479) (6,740)
------------- ------------
8,566,712 8,221,626
------------- ------------
HELD FOR SALE
Single family................... 2,048,483 697,410
Commercial...................... 88,023 76,193
------------- ------------
2,136,506 773,603
------------- ------------
Total loans................ $ 10,703,218 $ 8,995,229
============= ============
The following table sets forth the geographic distribution of loans by
state at September 30, 1998.
<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........................... $3,479,617 $ 405,828 $ 792 $3,886,237 $ 56 $3,886,293 36.23%
Texas................................ 765,287 1,037,969 358,819 2,162,075 60,618 2,222,693 20.72
Florida.............................. 279,880 206,491 4,744 491,115 65 491,180 4.58
Other................................ 2,194,401 1,863,286 67,564 4,125,251 1,129 4,126,380 38.47
--------- ------------ -------- ----------- -------- ---------- ---------
Total.............................. $6,719,185 $3,513,574 $431,919 $10,664,678 $61,868 $10,726,546 100.00%
========= ============ ======== =========== ======== ========== =========
</TABLE>
Loans held for investment at September 30, 1998, mature in years ended
September 30 as follows:
<TABLE>
<CAPTION>
1999 2000-2003 THEREAFTER TOTAL
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
TYPE OF LOAN
Single family........................ $ 112,008 $ 463,651 $ 4,118,969 $ 4,694,628
Commercial........................... 1,929,411 891,657 607,065 3,428,133
Consumer............................. 48,941 133,493 311,023 493,457
------------ ------------ ------------ ------------
Total........................... $ 2,090,360 $ 1,488,801 $ 5,037,057 $ 8,616,218
============ ============ ============ ============
TYPE OF INTEREST
Fixed-rate........................... $ 127,826 $ 523,331 $ 1,437,954 $ 2,089,111
Adjustable-rate...................... 1,962,534 965,470 3,599,103 6,527,107
------------ ------------ ------------ ------------
Total........................... $ 2,090,360 $ 1,488,801 $ 5,037,057 $ 8,616,218
============ ============ ============ ============
</TABLE>
At September 30, 1998, the performing single family loans were pledged,
under a blanket lien, as collateral securing advances from the Federal Home Loan
Bank ("FHLB").
F-14
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The activity in the allowance for credit losses was as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1998 1997 1996
---------- ---------- --------------
(IN THOUSANDS)
Beginning balance.................... $ 39,174 $ 39,660 $ 36,801
Provision....................... 20,123 18,107 16,469
Charge-offs..................... (12,943) (19,036) (13,785)
Recoveries...................... 673 443 175
---------- ---------- --------------
Ending balance....................... $ 47,027 $ 39,174 $ 39,660
========== ========== ==============
Nonaccrual loans, net of related premiums and discounts, totalled $61.9
million and $54.0 million at September 30, 1998 and 1997. If the nonaccrual
loans as of September 30, 1998, had been performing in accordance with their
original terms throughout fiscal 1998, interest income recognized would have
been $5.3 million. The actual interest income recognized on these loans for
fiscal 1998, was $1.7 million. No commitments exist to lend additional funds to
borrowers whose loans were on nonaccrual status at September 30, 1998.
Impaired loans as defined in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," totalled $3.6 million at both September 30, 1998 and
1997. The average outstanding balance of impaired loans for both fiscal 1998 and
1997, was $3.6 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 $320,000 and $324,000 was recognized on impaired loans during fiscal
1998 and 1997, of which $317,000 and $280,000 was collected in cash.
6. MORTGAGE SERVICING RIGHTS
The activity in the Company's MSRs was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period....... $ 272,214 $ 123,392 $ 75,097
Additions....................... 199,513 173,395 69,746
Amortization.................... (49,999) (29,165) (14,218)
Sales........................... -- (52) (7,665)
Deferred hedging gains.......... (8,828) (1,351) (2,140)
Other hedging activity.......... 2,735 5,995 2,572
Valuation allowance............. (4,767) -- --
------------- ------------- -------------
Balance at end of period............. $ 410,868 $ 272,214 $ 123,392
============= ============= =============
Loan servicing portfolio............. $ 27,935,300 $ 24,518,396 $ 13,246,848
Loans serviced for others............ 23,491,960 20,521,294 9,494,788
</TABLE>
During fiscal 1998, the Company established a valuation allowance for its
MSRs totalling $4.8 million.
F-15
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEPOSITS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------
1998 1997
------------------------ ------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------------ --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NON-INTEREST BEARING DEPOSITS........ $ 268,797 -- % $ 357,988 -- %
INTEREST-BEARING DEPOSITS
Checking accounts............... 405,058 1.42 200,485 1.05
Money market accounts........... 2,140,605 5.03 1,687,567 4.98
Savings accounts................ 123,134 2.08 122,676 2.33
Certificates of deposit......... 3,382,882 5.56 2,878,952 5.81
------------ --------- ------------ ---------
Total interest-bearing
deposits................. 6,051,679 5.02 4,889,680 5.24
------------ --------- ------------ ---------
Total deposits............. $ 6,320,476 4.81% $ 5,247,668 4.88%
============ ========= ============ =========
</TABLE>
Scheduled maturities of certificates of deposit ("CDs") outstanding at
September 30, 1998, were as follows:
YEARS ENDING SEPTEMBER 30,
- -------------------------------------
(IN THOUSANDS)
---------------
1999............................ $2,812,563
2000............................ 305,634
2001............................ 105,025
2002............................ 111,324
2003 and thereafter............. 48,336
---------------
$3,382,882
===============
Scheduled maturities of CDs of $100,000 or more outstanding at September
30, 1998, were as follows:
NUMBER OF DEPOSIT
ACCOUNTS AMOUNT
--------- --------
(DOLLARS IN
THOUSANDS)
Three months or less................. 1,286 $138,006
Over three to six months............. 1,306 139,220
Over six to twelve months............ 2,116 223,968
Over twelve months................... 987 106,671
--------- --------
Total...................... 5,695 $607,865
========= ========
In September 1998, the Company signed an agreement to purchase Midland
American Bank, a commercial bank with five branches in Midland, Texas, having
assets of $225 million and deposits of $203 million. Closing of this transaction
is expected early in 1999. In January 1998, the Company purchased 18 branches
and related deposits from Guardian Savings and Loan Association. The branches,
six in the Houston area and 12 in the Dallas/Ft. Worth Metroplex, had combined
deposits of $1.44 billion. In December 1997, the Company purchased three
branches in the Dallas area having $66 million in deposits, from California
Federal Savings Bank, FSB. These transactions were accounted for or will be
accounted for in accordance with the purchase method of accounting.
F-16
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. FEDERAL HOME LOAN BANK ADVANCES
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
Maximum outstanding at any
month-end.......................... $ 4,783,294 $ 3,992,344 $ 4,384,798
Daily average balance................ 4,090,359 3,705,072 4,073,297
Average interest rate................ 5.78% 5.74% 6.07%
Scheduled maturities for FHLB advances outstanding at September 30, 1998,
were as follows:
WEIGHTED-
AVERAGE
AMOUNT RATE
------------ ---------
(DOLLARS IN THOUSANDS)
1999................................. $ 2,303,256 5.46%
2000................................. 1,689,693 5.63
2001................................. 281,645 5.65
2002................................. 443,200 5.57
2003 and thereafter.................. 65,500 5.57
------------ ---------
Total...................... $ 4,783,294 5.54%
============ =========
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS PURCHASED
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
REVERSE REPURCHASE AGREEMENTS
Balance outstanding at
period-end.................... $ 586,742 $ 1,308,600 $ 832,286
Maximum outstanding at any
month-end..................... 1,222,267 1,308,600 1,096,508
Daily average balance........... 886,765 1,002,165 955,708
Average interest rate........... 5.78% 5.72% 5.77%
FEDERAL FUNDS PURCHASED
Balance outstanding at
period-end.................... $ 225,000 $ -- $ --
Maximum outstanding at any
month-end..................... 225,000 -- --
Daily average balance........... 84,781 1,025 27
Average interest rate........... 5.66% 5.85% 6.02%
F-17
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reverse repurchase agreements and federal funds purchased outstanding at
September 30, 1998, matured during October 1998.
The counterparties to all reverse repurchase agreements at September 30,
1998, 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, 1998, the
reverse repurchase agreements were outstanding with the following
counterparties:
CARRYING VALUE
--------------
(IN THOUSANDS)
Credit Suisse First Boston
Corporation........................ $ 300,550
PaineWebber, Inc..................... 184,691
Bear Stearns & Co. Inc. ............. 58,599
Morgan Stanley & Co. Incorporated.... 35,863
Goldman, Sachs & Co.................. 7,039
--------------
$ 586,742
==============
10. NOTES PAYABLE
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 shown as an extraordinary loss of $3.6 million, or $2.3 million
after tax, in fiscal 1997. The Subordinated Notes are subordinate to all
liabilities of the Company's subsidiaries, including preferred stock and deposit
liabilities. The remaining portion of the Senior Notes matured and was repaid in
May 1998.
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 are based on relevant information available to
management as of September 30, 1998 and 1997. Management is not aware of any
factors that would significantly affect these estimated fair value amounts.
Since the reporting requirements exclude certain financial instruments and all
non-financial instruments, the aggregate fair value amounts presented do not
represent management's estimate of the underlying value of the Company. The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument for which it is practicable to estimate that
value:
SHORT-TERM INTEREST-EARNING ASSETS. The carrying amount approximates fair
value due to the short-term nature of such assets.
SECURITIES, OTHER INVESTMENTS, AND MORTGAGE-BACKED SECURITIES. The fair
values of securities, other investments, and MBS are estimated based on
published bid prices or bid quotations received from securities dealers.
LOANS. Fair values are estimated for portfolios of loans with similar
characteristics and include the value of related servicing rights, if
appropriate. Loans are segregated by type, by rate, and by performing and
nonperforming categories. The fair values of loans held for sale are based on
quoted market prices. The fair values of loans held for investment are based on
contractual cash flows discounted at secondary market rates, adjusted for
F-18
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prepayments. The fair values of loans held for investment at September 30, 1998
were determined using discount rates ranging from 6.34% to 7.55%, annual
constant prepayment rates ranging from 12% to 38% for single family loans, and
an annual constant prepayment rate of 6% for consumer loans. No prepayments were
assumed for commerical loans due to prepayment penalties associated with these
loans. For adjustable-rate commercial and consumer loans held for investment
that reprice frequently, fair values are based on carrying values. The fair
value of nonperforming loans is estimated using the Book Value, which is net of
any related allowance for credit losses.
FHLB STOCK. The carrying amount approximates fair value because it is
redeemable at its par value.
MORTGAGE SERVICING RIGHTS. See Note 1 for a description of the method used
to value the single family servicing portfolio.
DEPOSITS. The estimated fair value of deposits with no stated maturity,
which includes demand deposits, money market, and other savings accounts, is
equal to the amount payable on demand or the carrying value. Although market
premiums paid for depository institutions include an additional value for these
deposits, SFAS No. 107 prohibits adjusting fair value for any value expected to
be derived from retaining those deposits for a future period of time or from the
benefit that results from the ability to fund interest-earning assets with these
deposit liabilities. The SFAS No. 107 fair value of fixed-maturity deposits is
estimated using a discounted cash flow model with rates currently offered by the
Company for deposits of similar remaining maturities. The SFAS No. 107 fair
value of fixed maturity deposits at September 30, 1998 was determined using
discount rates ranging from 2.97% to 5.05%.
FHLB ADVANCES, REVERSE REPURCHASE AGREEMENTS, FEDERAL FUNDS PURCHASED, AND
NOTES PAYABLE. Fair values are estimated based on the discounted value of
contractual cash flows using rates currently available to the Company for
borrowings with similar terms and remaining maturities. The fair values at
September 30, 1998 were determined using discount rates ranging from 4.85% to
6.86%.
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.
F-19
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS NO. 107 FAIR VALUES
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------
1998 1997
---------------------- ----------------------
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......................... $ 703,157 $ 703,157 $ 470,209 $ 470,209
Securities and other
investments.................... 91,350 91,352 77,809 77,814
Mortgage-backed securities....... 932,058 926,852 1,569,705 1,555,209
Loans............................ 10,703,218 10,897,121 8,995,229 9,147,333
FHLB stock....................... 242,883 242,883 205,011 205,011
Other assets..................... 324,904 324,904 169,711 169,711
NON-FINANCIAL ASSETS
Mortgage servicing rights........ 410,868 367,487 272,214 304,024
Other............................ 256,554 N/A 207,184 N/A
---------- ========= ---------- =========
Total assets................. $13,664,992 $11,967,072
========== ==========
FINANCIAL LIABILITIES
Deposits......................... $6,320,476 $6,345,916 $5,247,668 $5,264,137
FHLB advances.................... 4,783,294 4,790,008 3,992,344 3,986,627
Reverse repurchase agreements and
federal funds purchased........ 811,742 811,910 1,308,600 1,308,643
Notes payable.................... 219,720 248,478 220,199 230,242
Other liabilities................ 142,940 142,940 118,702 118,702
NON-FINANCIAL LIABILITIES, MINORITY
INTEREST, AND STOCKHOLDERS'
EQUITY............................. 1,386,820 N/A 1,079,559 N/A
---------- ========= ---------- =========
Total liabilities, minority
interest, and stockholders'
equity..................... $13,664,992 $11,967,072
========== ==========
OTHER FINANCIAL INSTRUMENTS FAIR VALUES
Interest rate swaps............ $ (5,998) $ (437)
Interest rate caps............. 1 165
Interest rate floors........... 54,287 11,043
Interest rate locks............ (2,126) --
Forward delivery contracts..... (2,133) (474)
Commitments to extend credit... 7,787 1,493
</TABLE>
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company manages its exposure to changes in interest rates by entering
into certain financial instruments with on and off-balance-sheet risk in the
ordinary course of business. A hedge is an attempt to reduce risk by creating a
relationship whereby any 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-20
<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, 1998, were scheduled to mature as follows:
<TABLE>
<CAPTION>
MATURING IN THE YEAR ENDING SEPTEMBER 30, AT SEPTEMBER 30,
------------------------------------------------------ --------------------------
1999 2000 2001 THEREAFTER 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest rate swaps.................. $ 166,000 $ 275,500 $ -- $ 35,500 $ 477,000 $ 261,000
Interest rate caps................... 58,000 243,000 -- -- 301,000 722,000
Interest rate floors................. 802,000 958,500 596,000 942,500 3,299,000 2,578,500
Interest rate locks.................. 24,450 -- -- -- 24,450 --
Forward delivery contracts........... 611,412 -- -- -- 611,412 96,000
Commitments to extend credit......... 1,671,640 229,165 180,893 301,308 2,383,006 1,671,973
Commitments to purchase loans........ 16,004 -- -- -- 16,004 21,965
------------ ------------ ------------ ------------ ------------ ------------
Total...................... $ 3,349,506 $ 1,706,165 $ 776,893 $ 1,279,308 $ 7,111,872 $ 5,351,438
============ ============ ============ ============ ============ ============
</TABLE>
INTEREST RATE SWAPS. The Company entered into interest rate swaps in an
effort to match the repricing of its liabilities with its assets. Swaps
totalling $216 million were entered into during fiscal 1998. During fiscal 1997,
interest rate swap contracts of $50.0 million expired.
<TABLE>
<CAPTION>
AVERAGE AVERAGE
NOTIONAL FIXED FLOATING HEDGED
AMOUNT RATE RATE(1) ITEM
---------- ------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AT SEPTEMBER 30, 1998
Receive Floating/Pay Fixed........... $ 477,000 5.98% 5.63% FHLB advances
AT SEPTEMBER 30, 1997
Receive Floating/Pay Fixed........... $ 261,000 6.18% 5.72% FHLB advances
</TABLE>
(1) Based on the one or three month London InterBank Offered Rate ("LIBOR").
INTEREST RATE CAPS. During fiscal 1996 and 1997, interest rate caps with
notional principal amounts totalling $350.0 million were entered into in an
effort to hedge FHLB advances. These contracts matured during fiscal 1998.
Amortizing interest rate caps were entered into in an effort to hedge certain
adjustable-rate single family loans that are subject to certain limitations
related to the amount that their interest rate can increase at each reset date.
These amortizing caps totalled $301.0 million and $372.0 million at September
30, 1998 and 1997.
<TABLE>
<CAPTION>
AVERAGE
NOTIONAL INDEX CONTRACTED
AMOUNT RATE(1) RATE
-------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AT SEPTEMBER 30, 1998................ buy $301,000 5.75% 7.86%
sell 301,000 5.75 8.57
AT SEPTEMBER 30, 1997................ buy 372,000 5.84 7.86
350,000 5.72 6.30
sell 372,000 5.84 8.57
</TABLE>
(1) Based on the three or six month LIBOR.
F-21
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE FLOORS. Floor contracts were entered into in an effort to
hedge MSRs against declines in value as a result of increased prepayments and to
hedge certain fixed-rate commercial loans available for sale against declines in
value due to changes in market interest rates.
<TABLE>
<CAPTION>
AVERAGE AVERAGE
NOTIONAL INDEX FLOOR
AMOUNT RATE(1) RATE HEDGED ITEM
--------- --------- ------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AT SEPTEMBER 30, 1998................ $3,189,000 4.82% 5.50% MSRs
110,000 5.03 4.75 Commercial loans
held for sale
AT SEPTEMBER 30, 1997................ $2,578,500 6.27 5.69 MSRs
</TABLE>
(1) Based on the five or ten year Constant Maturity Treasury index.
During fiscal 1998 and 1997, $1.8 billion and $2.0 billion of floors were
purchased and $250 million and $60.0 million matured. Also during fiscal 1998,
$858 million of floors were sold prior to their original maturity, resulting in
a gain of $3.2 million. Costs to enter the floor contracts and the gain on sale
were included as components of the MSR basis. During fiscal 1998 and 1997,
interest received on interest rate floor agreements totalled $5.5 million and
$1.3 million. At September 30, 1998 and 1997, the unamortized deferred gain and
interest received was $17.2 million and $8.4 million. The unamortized costs to
enter the floor agreements were $10.7 million and $7.7 million at September 30,
1998 and 1997.
INTEREST RATE LOCKS. During fiscal 1998, $35.2 million of interest rate
lock contracts were entered into in an effort to manage the risk that a change
in interest rates would decrease the value of certain commercial loans prior to
their sale or commitments to originate such loans. During the year, $9.5 million
of the rate locks were closed as the loans being hedged were transferred to the
held for investment portfolio. The resulting $653,000 loss was deferred and
included in the commercial loan basis.
FORWARD DELIVERY CONTRACTS. Forward delivery contracts were entered into
to sell single family loans and to manage the risk that a change in interest
rates would decrease the value of single family loans or commitments to
originate mortgage loans ("mortgage pipeline").
AT SEPTEMBER 30,
------------------------
1998 1997
------------ ----------
(IN THOUSANDS)
FIXED-RATE FORWARD DELIVERY
CONTRACTS.......................... $ 611,412 $ 96,000
============ ==========
LOANS AVAILABLE TO FILL COMMITMENTS
Single family........................ $ 2,024,535 $ 149,128
Mortgage pipeline (estimated)........ 477,106 116,322
------------ ----------
Total...................... $ 2,501,641 $ 265,450
============ ==========
SHORT SALES. During fiscal 1998, the Company sold $139.6 million of
Federal National Mortgage Association notes short in an effort to manage the
risk that a change in market interest rates would decrease the value of certain
single family loans prior to their sale. These loans were later sold for a gain
of $1.4 million, which was recognized in current operations. Upon sale of the
loans, the short positions were closed out at a loss of $701,000, which was
recorded as a realized loss on trading account assets.
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.
F-22
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Because commitments may expire without being drawn upon, the total contract
amounts do not necessarily represent future cash requirements. Commitments to
extend credit outstanding at September 30, 1998 and 1997 were $2.4 billion and
$1.7 billion. Included in these commitments are $908.2 million and $373.7
million representing the undisbursed portion of loans in process and letters of
credit totalling $54.6 million and $37.0 million as of September 30, 1998 and
1997.
COMMITMENTS TO PURCHASE LOANS. The Company's outstanding commitments to
purchase loans at September 30, 1998 and 1997, were $16.0 million and $22.0
million.
RECOURSE OBLIGATIONS. The Company serviced loans totalling approximately
$66.6 million and $34.2 million at September 30, 1998 and 1997, 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. The Company currently
contributes fifty cents for every dollar contributed up to 2% of the
participant's earnings, and dollar for dollar for contributions between 2% and
4% of the participant's earnings. The maximum employee contribution percentage
is 15% of an employee's earnings, subject to Internal Revenue Service maximum
contributions limitations. The Company's contributions to the plan were
approximately $1.1 million, $1.1 million, and $1.5 million for fiscal 1998,
1997, and 1996.
1996 STOCK INCENTIVE PLAN
In fiscal 1998 and 1997, the Company granted 539,700 and 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 equal to the
fair value of the Company's common stock at the date of grant. These options
will vest over three years, with 147,500 options expiring if not exercised
within ten years of the date of grant and the remaining 882,450 options expiring
if not exercised within five years of the date of grant. At September 30, 1998,
there were 977,200 options outstanding under this plan. The maximum number of
options available for grant under this plan is 1,600,000.
In fiscal 1998, the Company's Board of Directors granted performance units
to executive officers and other key officers and employees under the 1996 Stock
Incentive Plan. These units, which equate to shares of the Company's common
stock on a one-for-one basis, will be earned based on the achievement of certain
corporate performance goals over a performance period beginning October 1, 1997,
and ending September 30, 2000. Upon completion of the performance period, the
Company's Compensation Committee will determine the number of units that have
been earned based on the Company's performance. Cash will be distributed to the
participants equal to the number of performance units multiplied by the fair
value of the Company's common stock as of September 30, 2000. The maximum number
of performance units is 201,000 in the aggregate. Compensation expense totalling
$731,000 was recorded in fiscal 1998 relating to these units.
MANAGEMENT COMPENSATION PROGRAM
In connection with the Company's initial public offering in August 1996
(see Note 15), the Bank's and the Company's Boards of Directors approved a
management compensation program for the Bank's executive officers, other key
officers and employees, and certain directors 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), and
(3) the issuance of 1,154,520 options to purchase 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).
F-23
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 fiscal 1996, for the cash bonus and the restricted stock award.
Compensation expense was not recognized for the stock options because the
options had an exercise price equal to the fair value of the Company's common
stock at the date of grant. No further grants or compensation awards may be made
or awarded under this program.
DIRECTOR STOCK COMPENSATION PLAN
In fiscal 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. Each
eligible director is granted stock options to purchase 1,000 shares of the
Company's common stock when first elected to the Company's Board of Directors
and following each annual stockholders' meeting thereafter. The exercise price
of the options is 115% of the fair value of the Company's common stock at the
date of grant. The Company granted 10,000 options under the director stock plan
during fiscal 1998, 1997, and 1996. These options vest and become exercisable if
and when the fair value of the Company's common stock equals or exceeds the
exercise price of the option on any day during the 30-day period commencing on
the first anniversary of the date of the grant. If these stock options do not
vest during the this 30-day period, they will be cancelled. The options issued
to directors in fiscal 1997 and 1996 became fully vested and exercisable during
1998 and 1997. Vested options will expire if not exercised within ten years of
the date of grant. The maximum number of options available for grant under this
plan is 250,000.
SUMMARY OF STOCK-BASED COMPENSATION
Stock option activity was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
NUMBER WEIGHTED- NUMBER WEIGHTED- NUMBER WEIGHTED-
OF AVERAGE OF AVERAGE OF AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 1,653,020 $24.49 1,164,520 $20.15 -- $--
Granted............................. 549,700 44.67 500,250 34.72 1,164,520 20.15
Exercised........................... (1,500) 38.06 -- -- -- --
Forfeited........................... (39,500) 35.28 (11,750) 30.92 -- --
Expired............................. -- -- -- -- -- --
--------- -------------- --------- -------------- --------- --------------
Outstanding at end of year.............. 2,161,720 $29.41 1,653,020 $24.49 1,164,520 $20.15
========= ============== ========= ============== ========= ==============
Vested at end of year................... 828,096 $20.67 417,819 $20.23 -- $--
========= ============== ========= ============== ========= ==============
</TABLE>
The weighted-average grant date fair value of stock options granted during
fiscal 1998, 1997, and 1996, was $14.86, $11.31, and $6.46. 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 1998,
1997, and 1996: estimated volatility of 35.80%, 27.78%, and 27.00%; risk-free
interest rate of 5.50%, 6.75%, and 6.55%; dividend yield of 1.40%, 1.68%, and
3.00%; and an expected life of 5.1 years for the options issued in fiscal 1998,
6.6 years for the options issued in fiscal 1997, and 10.0 years for the options
issued in fiscal 1996.
F-24
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options outstanding and exercisable, by range of exercise price, were
as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
----------------------------------------------- -------------------------
NUMBER WEIGHTED- WEIGHTED-AVERAGE NUMBER WEIGHTED-
RANGE OF OF AVERAGE REMAINING OF AVERAGE
EXERCISE PRICES OPTIONS EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE
------------ ---------- -------------- ------------------ ------- ---------------
<S> <C> <C> <C> <C> <C>
$20.00-$25.00........................... 1,163,520 $20.15 7.75 year 9,000 $ 23.00
$25.01-$30.00........................... 128,500 26.85 3.13 3,500 27.02
$35.01-$40.00........................... 326,750 38.00 3.45 20,000 37.18
$40.01-$45.00........................... 519,450 44.37 4.83 -- --
$45.01-$50.00........................... 13,500 49.14 4.51 -- --
$55.01-$60.00........................... 10,000 56.35 9.47 -- --
---------- -------------- ----- ------- ---------------
2,161,720 $29.41 6.11 32,500 $ 32.16
========== ============== ===== ======= ===============
</TABLE>
The Company accounts for its stock-based employee compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." Under this method, no compensation expense is
recognized for stock options when the exercise price equals fair value at the
date of grant. If compensation expense had been recorded in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's net income
would have been $111.5 million, $73.5 million, and $118.3 million and diluted
EPS would have been $3.45, $2.31, and $3.85 for fiscal 1998, 1997, and 1996.
13. INCOME TAXES
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
---------- --------- -----------
(IN THOUSANDS)
CURRENT TAX EXPENSE
Federal and state............... $ 7,216 $ 6,091 $ 6,109
Payments due in lieu of taxes... 6,483 12,344 11,528
DEFERRED TAX EXPENSE (BENEFIT)
Federal and state............... 39,523 42,251 10,298
Change in valuation
allowance -- utilization and
reduction of NOLs............. (27,500) -- (103,700)
---------- --------- -----------
Total income tax expense
(benefit) before
extraordinary loss....... $ 25,722 $ 60,686 $ (75,765)
========== ========= ===========
During fiscal 1998, the Company successfully resolved an outstanding tax
benefit lawsuit with the Federal Deposit Insurance Corporation ("FDIC") as
manager of the FSLIC Resolution Fund ("FRF"), which resulted in a positive
income tax adjustment of approximately $6.0 million. Additionally, the Company
recognized a positive income tax adjustment of $27.5 million resulting from the
anticipated use of additional net operating losses ("NOLs") against future
taxable income.
In connection with the Company's initial public offering in August 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 these tax attributes allowed
the recognition of tax benefits of $85.2 million by the Bank in fiscal 1996, for
the expected utilization of $365 million of NOLs against future taxable income.
Also in fiscal 1996, the Parent Company and the Bank entered into a tax-sharing
agreement resulting in the recognition of a tax benefit of
F-25
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$16.5 million by the Parent Company for the expected utilization of its NOLs by
the Bank. Tax NOLs outstanding at September 30, 1998, were as follows:
ALTERNATIVE EXPIRATION
YEAR GENERATED REGULAR TAX MINIMUM TAX DATE
- ------------------------------------- ----------- ----------- ----------
(IN MILLIONS)
September 30, 1989................... $ 69 $ -- 2004
September 30, 1990................... 296 83 2005
September 30, 1991................... 119 56 2006
September 30, 1992................... 33 7 2007
September 30, 1994................... 7 -- 2009
The Parent Company and its subsidiaries are subject to regular income tax
and alternative minimum tax ("AMT"). For fiscal 1998, 1997, and 1996, the
current federal tax expense was the result of AMT. Even though the Parent
Company and the Bank have AMT net operating loss carryforwards, utilization of
AMT NOLs is limited to 90% of alternative minimum taxable income.
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,
----------------------------------
1998 1997 1996
---------- --------- -----------
(IN THOUSANDS)
TAXES, CALCULATED BEFORE
EXTRAORDINARY LOSS................. $ 55,424 $ 55,242 $ 23,743
INCREASE (DECREASE) FROM
Reduction in valuation allowance
for the utilization and
reduction of NOLs............. (27,500) -- (103,700)
State income tax -- current..... 3,949 3,791 3,097
Tax benefit lawsuit
resolution.................... (6,020) -- --
Other........................... (131) 1,653 1,095
---------- --------- -----------
Income tax expense
(benefit)................ $ 25,722 $ 60,686 $ (75,765)
========== ========= ===========
F-26
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax assets and liabilities outstanding at September 30, 1998
and 1997, were as follows:
AT SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Net operating losses............ $ 122,453 $ 169,492
Tax mark to market.............. 12,658 5,209
AMT credit...................... 10,033 6,464
Purchase accounting............. 3,393 5,391
Depreciation -- premises and
equipment...................... 3,327 3,340
Real estate mortgage investment
conduits....................... 2,696 3,006
Other........................... 21,893 13,291
---------- ----------
Total deferred tax
assets................... 176,453 206,193
---------- ----------
DEFERRED TAX LIABILITIES
Originated mortgage servicing
rights......................... 31,121 24,229
FHLB stock...................... 19,935 16,159
Bad debt reserve................ 3,694 10,931
Other........................... 8,122 6,438
---------- ----------
Total deferred tax
liabilities.............. 62,872 57,757
---------- ----------
Net deferred tax asset before
valuation allowance............ 113,581 148,436
Valuation allowance............. -- (27,500)
---------- ----------
Net deferred tax assets.... $ 113,581 $ 120,936
========== ==========
As of September 30, 1998, future taxable income of $487 million would fully
utilize the net deferred tax assets.
The Bank is permitted to deduct an annual addition to a reserve for bad
debts in determining taxable income, subject to certain limitations. In prior
years, this addition differs from the provision for credit losses for financial
reporting purposes. Due to legislation enacted in fiscal 1996, the Bank's
post-1987 tax bad debt reserve, is being recaptured over a six-taxable-year
period. At September 30, 1998, the Bank had approximately $60 million of
post-1987 tax bad debt reserves remaining. There will be no financial statement
impact from this recapture because a deferred tax liability has already been
provided on the Bank's post-1987 tax bad debt reserves. The current tax
liability resulting from recapture of these reserves will be reduced by NOLs
available to offset this income.
No deferred taxes have been provided on approximately $52 million of
pre-1988 tax bad debt reserves. This tax reserve for bad debts is included in
taxable income in later years if certain circumstances occur, such as, a
distribution in redemption of stock of the Bank (with certain exceptions for
preferred stock); partial or complete liquidation of the Bank following a merger
or liquidation; or a dividend distribution in excess of certain earnings and
profits. However, if a thrift with a pre-1988 reserve is merged, liquidated on a
tax-free basis, or acquired by another depository institution, the remaining
institution will inherit the thrift's pre-1988 reserve and post-1951 earnings
and profits. Because management believes the circumstances requiring recapture
of the reserve are not likely to occur, deferred income taxes of approximately
$18 million have not been provided.
Concurrent with the Bank's incorporation in December 1988, the Parent
Company, the Bank, and certain related entities entered into an agreement with
the Federal Savings and Loan Insurance Corporation ("FSLIC") providing
financial assistance to the Bank, among other things, (the "Assistance
Agreement"). In December 1993, the Assistance Agreement was terminated. As part
of the termination, the Bank agreed to pay the FRF one-third of certain tax
benefits that are utilized by the Bank through September 30, 2003. Amounts
reflected as
F-27
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payments due in lieu of taxes are based on estimated tax benefits utilized by
the Bank and may vary from amounts paid due to the actual utilization of tax
benefits reported in the federal income tax return.
14. REGULATORY MATTERS
The Bank is subject to regulatory capital requirements of the Office of
Thrift Supervision ("OTS"). Any savings association that fails these capital
requirements is subject to enforcement actions by the OTS, which could have a
material effect on its financial statements. To meet the capital adequacy
requirements, the Bank must maintain minimum amounts and ratios of tangible
capital, core capital, and total risk-based capital. As of September 30, 1998
and 1997, the Bank met all capital adequacy requirements.
As of September 30, 1998 and 1997, 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. There have been no conditions or events
since September 30, 1998, that management believes would change the
institution's category.
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>
1998
Stockholders' equity of the Bank.................. $ 1,059,287
Add: Net unrealized losses................... 1,454
Less: Intangible assets of the Bank........... (56,144)
Non-qualifying deferred tax assets...... (18,387)
Non-qualifying MSRs..................... (76,594)
-----------
TANGIBLE CAPITAL.................................. 6.75% 909,616 1.50 % $ 202,268 -- --
Add: Core deposit intangibles................ 3,498
-----------
CORE CAPITAL...................................... 6.77% $ 913,114 3.00 % 404,641 5.00% $ 674,401
===========
TIER 1 CAPITAL.................................... 9.97% $ 913,114 -- -- 6.00% 549,477
Add: Allowance for loan and MBS credit
losses................................ 47,076
-----------
TOTAL RISK-BASED CAPITAL.......................... 10.48% $ 960,190 8.00 % 732,636 10.00% 915,794
===========
1997
Stockholders' equity of the Bank.................. $ 981,466
Less: Net unrealized gains.................... (6,326)
Intangible assets of the Bank........... (9,757)
Non-qualifying deferred tax assets...... (40,484)
Non-qualifying MSRs..................... (7,880)
-----------
TANGIBLE CAPITAL.................................. 7.72% 917,019 1.50 % $ 178,143 -- --
Add: Core deposit intangibles................ 6,043
-----------
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
Add: Allowance for loan and MBS credit
losses................................ 39,227
-----------
TOTAL RISK-BASED CAPITAL.......................... 13.18% $ 962,289 8.00 % 583,951 10.00% 729,939
===========
</TABLE>
F-28
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank meets its capital adequacy requirements. OTS regulations generally
allow dividends to be paid without prior OTS approval provided that the level of
regulatory capital, following the payment of such dividends, meets the capital
adequacy requirements. At September 30, 1998, there was an aggregate of
approximately $235.8 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, 1998.
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
has established 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.
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 damage
trial of one of the three WINSTAR cases has been completed, and the other two
cases have been settled. Trials in the remaining cases subject to the Omnibus
Case Management Plan are scheduled to begin in December 1998. 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 and the Company's
case is currently set to begin on February 1, 1999.
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 alternative damage theories against the
Government including claims for lost profits. While Plaintiffs' damage model
currently projects an ultimate damage claim in excess of $560 million, the
Company is unable to predict the outcome of Plaintiffs' suit against the United
States and the amount of judgment for damages, if any, that may be awarded.
Plantiffs 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
F-29
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liability, and the Government opposed the motion. The Government, on December 8,
1998, moved for partial summary judgment on the issue of lost profits, seeking a
ruling from the Court that Plaintiffs are not entitled to recover lost profits.
Lost profits constitute the largest portion of Plaintiffs total damage claim.
Plaintiffs have opposed the Government's motion.
Despite the current trial setting of February 1, 1998, for Plaintiffs case,
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 and now expects the trial of its case to
commence during the second or third quarters of fiscal 1999. The Company is
unable to predict the outcome of its suit against the United States and the
amount of judgment for damages, if any, that may be awarded. Consequently, no
assurances can be given as to the results of this suit.
The Company and the other Plaintiffs participated with the Government in a
non-binding alternative dispute resolution ("ADR") process that culminated in
a settlement conference on October 19, 1998. The Company had not changed its
assessment of the merits of its claims and agreed to participate in the ADR
process solely in an effort to resolve its claims on favorable terms without the
expense and uncertainty of a trial. No settlement was reached, and the Company
is preparing to try the case on the original trial schedule.
The Parent 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
Parent Company and the Bank are entitled to receive 85% of the amount, if any,
recovered as a result of any settlement of or a judgment on such claims, and
that Hyperion Partners L.P. is entitled to receive 15% of such amount. The
agreement was approved by the disinterested directors of the Company. Plaintiffs
will continue to cooperate in good faith and will use their best efforts to
maximize the total amount, if any, that they may recover.
SAIF ASSESSMENT
Legislation 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.
15. MINORITY INTEREST AND STOCKHOLDERS' EQUITY
MINORITY INTEREST
The Bank is authorized 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.
F-30
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In August 1996, the FDIC
surrendered a portion of this warrant for a cash payment of $6.1 million and
exercised the remainder of this 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.
In connection with the termination of the Assistance Agreement, the Bank
agreed to make 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
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.
TREASURY STOCK
During August 1998, the Company's Board of Directors authorized the
repurchase of up to $50 million of the Company's common stock. The purchases
will be made in the open market or in privately negotiated transactions at
prevailing market prices. The timing and volume of purchases under the program
will depend on market conditions. As of September 30, 1998, the Company had
repurchased 14,200 shares under this new program.
F-31
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER COMMON SHARE
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 were restated for an 1,800-to-one stock conversion
in June 1996.
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------
1998 1997 1996
---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
INCOME
Net income applicable to basic EPS
before extraordinary loss.......... $ 114,378 $ 78,894 $ 118,935
Less: Bank's net income attributable
to common stock equivalents on its
warrant............................ -- -- 5,608
---------- --------- ----------
Net income applicable to diluted EPS
before extraordinary loss.......... 114,378 78,894 113,327
Extraordinary loss................... -- 2,323 --
---------- --------- ----------
Net income applicable to diluted
EPS................................ $ 114,378 $ 76,571 $ 113,327
========== ========= ==========
SHARES
Average common shares outstanding.... 31,595 31,596 29,260
Potential dilutive common shares from
options............................ 742 285 27
---------- --------- ----------
Average common shares and equivalents
outstanding........................ 32,337 31,881 29,287
========== ========= ==========
BASIC
Income before extraordinary loss..... $ 3.62 $ 2.49 $ 4.06
Extraordinary loss................... -- 0.07 --
---------- --------- ----------
Net income........................... $ 3.62 $ 2.42 $ 4.06
========== ========= ==========
DILUTED
Income before extraordinary loss..... $ 3.54 $ 2.47 $ 3.87
Extraordinary loss................... -- 0.07 --
---------- --------- ----------
Net income........................... $ 3.54 $ 2.40 $ 3.87
========== ========= ==========
F-32
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1998, 1997, and 1996,
after consideration of certain credits and rental income, was $16.1 million,
$20.7 million, and $22.4 million. Future minimum commitments on data processing
agreements and significant operating leases in effect at September 30, 1998,
were as follows:
YEARS ENDING
SEPTEMBER 30, AMOUNT
- ------------------------------------- --------------
(IN THOUSANDS)
1999.............................. $ 17,673
2000.............................. 10,287
2001.............................. 9,762
2002.............................. 9,204
2003.............................. 8,471
Thereafter........................ 35,088
17. FINANCIAL HIGHLIGHTS BY PRINCIPAL BUSINESS OPERATION
The Company conducts its business through the Commercial Banking, Financial
Markets, and Community Banking Groups, which comprise the Banking Segment, and
the Mortgage Servicing 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 SERVICING(1) AND HOLDINGS ELIMINATIONS COMBINED
------------- ------------ ------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1998
Revenues................................ $ 335,689 $ 50,886 $ 22,450 $ (42,007) $ 367,018
Income before income taxes, minority
interest, and extraordinary loss...... 163,415 16,070 20,875 (42,007) 158,353
Depreciation and amortization of
intangibles........................... 13,513 591 401 -- 14,505
Capital expenditures.................... 25,380 938 -- -- 26,318
Average identifiable assets............. 12,247,264 484,865 865,779 (837,511) 12,760,397
Servicing (expense) revenue on Banking
Segment's loans....................... (9,063) 9,063 -- -- --
</TABLE>
F-33
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
PARENT
MORTGAGE COMPANY
BANKING SERVICING(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
Income 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............. 10,742,500 423,589 680,156 (743,100) 11,103,145
Loan transfers to (from)................ 200,133 (200,133) -- -- --
Interest income (expense) on single
family loan balances.................. 5,104 (5,104) -- -- --
Servicing (expense) revenue on Banking
Segment's loans....................... (7,008) 7,008 -- -- --
1996
Revenues................................ $ 248,814 $ 85,206 $ 98,714 $ (109,011) $ 323,723
Income (loss) before income taxes,
minority interest, and extraordinary
loss.................................. 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............. 10,947,844 640,780 633,473 (992,666) 11,229,431
Loan transfers to (from)................ 818,563 (818,563) -- -- --
Interest income (expense) on single
family loan balances.................. 21,878 (21,878) -- -- --
Servicing (expense) revenue on Banking
Segment's loans....................... (9,461) 9,461 -- -- --
</TABLE>
- ------------
(1) Included 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 Servicing Segment
for fiscal 1997 included $18.6 million related to the mortgage origination
business. Income before income taxes, minority interest, and extraordinary
loss for the same period included $2.6 million related to the mortgage
origination business.
Revenues were 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 were
deducted from its revenues since they related to long-term debt and were not
directly related to a specific segment. Non-interest expenses of the Bank were
fully allocated to each segment of the Bank. Non-interest expenses incurred by
support departments that were directly related to a segment were 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, were also allocated to the two segments. Parent Company and Holdings
expenses were not allocated to the Bank's business segments. The elimination
amounts were for dividends received by the Parent Company and Holdings from the
Bank and single family 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 was segregated from the
original loan basis and was allocated to the Mortgage Servicing Segment. The
amortization of this capitalized amount approximated $890,000 for the four
months ended January 31, 1997, and $2.3 million for fiscal 1996.
F-34
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For loans transferred from the Mortgage Servicing 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
Servicing Segment at the time of transfer. The amount retained was amortized to
operations of the Mortgage Servicing Segment and approximated $1.9 million for
the four months ended January 31, 1997, and $1.9 million for fiscal 1996.
MORTGAGE BANKING RESTRUCTURINGS AND SALE OF OFFICES
In fiscal 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.
In fiscal 1997, the Company sold certain of its mortgage origination
offices. In connection with this sale, the remaining offices were restructured
or closed. The net gain on the sale of these offices, reduced by additional
restructuring costs, was $4.7 million before tax, $2.9 million after tax, or
$0.09 per share. At September 30, 1998, the unpaid liability relating to the
sale, the two restructurings, and the branch closures was estimated to be $1.4
million, and is expected to be paid in full by the end of 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 capabilities through its Financial
Markets Group.
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 Servicing 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 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $ 227,805 $ 228,360 $ 223,216 $ 219,365 $ 210,774 $ 202,903 $ 197,928 $ 199,103
Interest expense..................... 156,313 153,173 151,835 151,344 145,039 136,283 131,424 133,318
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income.............. 71,492 75,187 71,381 68,021 65,735 66,620 66,504 65,785
Provision for credit losses.......... 3,346 1,814 11,524 3,439 3,463 3,425 4,305 6,914
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for credit losses.................. 68,146 73,373 59,857 64,582 62,272 63,195 62,199 58,871
Non-interest income.................. 26,827 22,653 14,858 16,599 17,130 17,314 23,831 25,157
Non-interest expense................. 49,759 50,536 47,057 41,190 39,726 41,257 42,584 48,569
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes, minority
interest, and extraordinary loss... 45,214 45,490 27,658 39,991 39,676 39,252 43,446 35,459
Income tax expense (benefit)......... 16,917 17,014 (23,207) 14,998 15,187 15,086 16,780 13,633
--------- --------- --------- --------- --------- --------- --------- ---------
Income before minority interest and
extraordinary loss................. 28,297 28,476 50,865 24,993 24,489 24,166 26,666 21,826
Minority interest -- subsidiary
preferred stock dividends.......... 4,564 4,563 4,563 4,563 4,564 4,563 4,563 4,563
--------- --------- --------- --------- --------- --------- --------- ---------
Income before extraordinary loss..... 23,733 23,913 46,302 20,430 19,925 19,603 22,103 17,263
Extraordinary loss................... -- -- -- -- -- 2,323 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 23,733 $ 23,913 $ 46,302 $ 20,430 $ 19,925 $ 17,280 $ 22,103 $ 17,263
========= ========= ========= ========= ========= ========= ========= =========
Earnings per common share
Basic............................ $ 0.75 $ 0.76 $ 1.47 $ 0.65 $ 0.63 $ 0.55 $ 0.70 $ 0.55
Diluted.......................... 0.74 0.74 1.43 0.63 0.62 0.54 0.69 0.54
Average common shares outstanding.... 31,595 31,596 31,596 31,596 31,596 31,596 31,596 31,596
Average common shares and equivalents
outstanding........................ 32,252 32,442 32,317 32,325 32,168 32,081 31,960 31,820
</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)
AT SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
ASSETS
Cash and cash equivalents............ $ 3,144 $ 1,789
Investment in subsidiaries........... 877,357 798,174
Intangible assets.................... 3,447 3,848
Deferred tax asset................... 26,755 22,589
Other assets......................... 2,200 70
---------- ----------
TOTAL ASSETS......................... $ 912,903 $ 826,470
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable........................ $ 219,720 $ 219,699
Other liabilities.................... 8,771 8,292
---------- ----------
Total liabilities.......... 228,491 227,991
---------- ----------
STOCKHOLDERS' EQUITY
Common stock......................... 316 316
Paid-in capital...................... 129,343 129,286
Retained earnings.................... 556,708 462,551
Accumulated other comprehensive
income --unrealized gains (losses)
on subsidiary's securities
available for sale, net of tax..... (1,454) 6,326
Treasury stock, at cost.............. (501) --
---------- ----------
Total stockholders'
equity.................... 684,412 598,479
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $ 912,903 $ 826,470
========== ==========
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,
---------------------------------
1998 1997 1996
---------- --------- ----------
INCOME
Dividends from subsidiary............ $ 41,355 $ 17,993 $ 109,011
Other................................ -- -- 56
---------- --------- ----------
Total income............... 41,355 17,993 109,067
---------- --------- ----------
EXPENSE
Interest expense -- notes payable.... 19,546 9,731 10,353
Amortization of intangibles.......... 401 426 1,000
Other................................ 1,126 1,892 196
---------- --------- ----------
Total expense.............. 21,073 12,049 11,549
---------- --------- ----------
INCOME BEFORE UNDISTRIBUTED INCOME OF
SUBSIDIARY AND INCOME TAXES........ 20,282 5,944 97,518
Equity in undistributed income of
subsidiary......................... 86,213 65,955 519
---------- --------- ----------
INCOME BEFORE INCOME TAXES........... 106,495 71,899 98,037
Income tax benefit................... (7,883) (4,672) (20,898)
---------- --------- ----------
NET INCOME........................... $ 114,378 $ 76,571 $ 118,935
========== ========= ==========
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,
----------------------------------
1998 1997 1996
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 114,378 $ 76,571 $ 118,935
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income
of subsidiary................. (86,213) (65,955) (519)
Deferred tax benefit............ (4,166) (3,062) (19,527)
Amortization of intangibles..... 422 434 1,000
Change in other assets.......... (2,130) 5,206 (4,486)
Change in other liabilities..... 479 (5,246) 3,590
Management Restricted Stock
award......................... -- -- 3,709
---------- ---------- ----------
Net cash provided by
operating activities..... 22,770 7,948 102,702
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in securities
purchased under agreements to
resell........................ -- -- 2,121
Capital contributions to
subsidiary.................... (750) (108,434) --
---------- ---------- ----------
Net cash (used) provided by
investing activities..... (750) (108,434) 2,121
---------- ---------- ----------
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..................... (20,221) (17,694) (100,000)
Stock repurchased............... (501) -- --
Stock options exercised......... 57 -- --
---------- ---------- ----------
Net cash provided (used) by
financing activities..... (20,665) 83,485 (86,034)
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................... 1,355 (17,001) 18,789
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 1,789 18,790 1
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 3,144 $ 1,789 $ 18,790
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest............. 19,200 9,436 10,409
NONCASH INVESTING ACTIVITIES
Net transfer of investment in Bank
and Senior Notes to Holdings.... -- 525,751 --
Capital contributed to Holdings.... -- 121,186 --
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-39
EXHIBIT 10.39
FIRST AMENDMENT TO
LEASE AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "AMENDMENT") is made and
entered into as of the 30th day of June, 1998 (the "EFFECTIVE DATE"), by and
between UTAH STATE RETIREMENT INVESTMENT FUND, an independent agency of the
State of Utah ("LANDLORD"), and BANK UNITED, a federal savings bank ("TENANT").
WITNESSETH:
WHEREAS, Landlord and Tenant entered into that certain Lease Agreement dated
November 21, 1997 (the "LEASE"), with respect to the lease of 216,937 square
feet of Net Rentable Area (the "LEASED PREMISES") in the office building known
as Phoenix Tower, Houston, Texas (the "BUILDING"); and
WHEREAS, Landlord and Tenant now desire to amend the Lease to expand the Leased
Premises and to modify certain other provisions of the Lease as set forth herein
but not otherwise.
NOW, THEREFORE, for and in consideration of Ten and No/100 Dollars ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged and confessed, Landlord and Tenant, intending to be and
being legally bound, do hereby agree as follows:
1. DEFINED TERMS.
All capitalized terms used herein and not defined herein have the meanings set
forth in the Lease.
2. EXPANSION OF LEASED PREMISES.
Commencing on the date of the delivery of the applicable space to Tenant as
provided below, the Leased Premises shall be expanded to include the following
space (collectively, the "EXPANSION SPACE"):
(a) Approximately 6,127 square feet of Net Rentable Area located
on Floor 31 of the Building as shown on EXHIBIT A-1 hereto
(the "FIRST SPACE");
(b) Approximately 25,571 square feet of Net Rentable Area located
on Floor 24 of the Building as shown on EXHIBIT A-2 hereto
(the "SECOND SPACE");
(c) Approximately 143,355 square feet of Net Rentable Area located
on Floors 25 through 29 and a portion of Floor 31 of the
Building as shown on EXHIBIT A-3 hereto (the "THIRD SPACE");
and
-1-
<PAGE>
(d) If, and only if, Tenant has exercised the Fourth Space Option,
as defined below, approximately 16,356 square feet of Net
Rentable Area located on Floor 9 of the Building as shown on
EXHIBIT A-4 hereto (the "Fourth Space").
As used in this Amendment, "EXPANSION DATE" shall mean the date set forth below
for the applicable portion of the Expansion Space set forth below:
EXPANSION SPACE EXPANSION DATE
First Space Sixty (60) days after the date of delivery
of the First Space to Tenant after the
termination of the lease agreement as to the
First Space by and between Landlord and J.
Lindsey Short, Jr. & Associates (the "FIRST
SPACE DATE")
Second Space Sixty (60) days after delivery of the
Second Space to Tenant, which is intended to
be September 2, 1998, with the Expansion
Date intended to be November 1, 1998
Third Space Ninety (90) days after delivery of the
Third Space to Tenant, which is intended to
be December 16, 1998, with the Expansion
Date intended to be March 16, 1999
Fourth Space If, and only if, Tenant has exercised the
Fourth Space Option, as defined below, sixty
(60) days after the date of delivery of the
Fourth Space to Tenant after the termination
of the lease agreement as to the Fourth
Space by and between Landlord, or Landlord's
predecessor in interest, and Sprint
Communications Company, L.P. ("Sprint") (the
"Fourth Space Date").
As of the date of the delivery of the applicable Expansion Space to Tenant, the
Expansion Space shall be added to and become part of the Leased Premises for all
purposes of the Lease and shall be subject to all of the terms and conditions
contained in the Lease (including without limitation, the payment of Base Rental
and Tenant's Additional Rental in accordance with Sections 2.1 and 2.3 of the
Lease), subject to the modifications contained in this Amendment. Tenant
recognizes that the Expansion Space is presently occupied by other tenants of
the Building and Landlord shall not be obligated to deliver any portion of such
space to Tenant until the space is no longer leased and occupied by such other
tenants. In no event shall Landlord be liable to Tenant for any delays in
delivering any of such space to Tenant as the result of any holding over by any
such tenant and any such delay shall not be a default hereunder or impair the
validity of the Lease as to the remainder of
-2-
<PAGE>
the Leased Premises. If any lease or leases covering any portion of the
Expansion Space have terminated and the applicable tenant has not vacated such
space, Landlord shall, if necessary, institute appropriate legal action to cause
such tenant to vacate such space.
In addition, Tenant recognizes that the Fourth Space is subject to a lease in
favor of Sprint and that Landlord and Sprint have not entered into an agreement
terminating that lease. Consequently, Landlord's obligation to deliver the
Fourth Space to Tenant is subject to Landlord and Sprint entering into a
satisfactory termination agreement and/or the expiration of the term of such
lease. In no event shall Landlord be liable to Tenant for any delays in
delivering the Fourth Space to Tenant as a result of a failure to enter into any
such termination agreement or as a result of Sprint exercising its right to
extend the term of its lease as to the Fourth Space. In addition, Tenant has no
obligation to lease the Fourth Space, but shall have the option ("Fourth Space
Option") to lease the Fourth Space as hereinafter provided. Before or after the
expiration or termination of the lease with Sprint covering the Fourth Space,
but in any event prior to leasing the Fourth Space to any other tenant, and
provided Tenant is not in default under the Lease, Landlord shall deliver
written notice to Tenant requesting Tenant to elect whether Tenant will or will
not lease the Fourth Space upon such expiration or termination. Tenant shall
deliver written notice to Landlord within thirty (30) days after Tenant's
receipt of Landlord's notice indicating whether or not Tenant elects to lease
the Fourth Space. Tenant's failure to respond within such thirty (30) day period
shall be deemed as Tenant's election not to lease the Fourth Space. If Tenant
elects, or is deemed to have elected, not to lease the Fourth Space, then Tenant
shall have no further rights or obligations regarding the Fourth Space, the
Fourth Space shall not be part of the Expansion Space, and Landlord shall be
free to lease the Fourth Space to any other tenant on any other terms. If Tenant
elects to lease the Fourth Space, then the Fourth Space shall be part of the
Expansion Space and shall become part of the Leased Premises in the manner and
at the time described in this Amendment.
As set forth above, the applicable Expansion Date shall be the date sixty (60)
days after the date of delivery of the applicable Expansion Space to Tenant as
to the First Space, Second Space, and if the Fourth Space Option has been
exercised by Tenant, the Fourth Space and the date ninety (90) days after the
date of delivery to Tenant as to the Third Space. After the occurrence of the
last to occur of the dates of delivery of the Expansion Space, and, if the
Fourth Space Option has been exercised by Tenant, the Leased Premises shall
consist of 408,346 square feet of Net Rentable Area.
3. LEASE TERM FOR EXPANSION SPACE.
The lease term for the Expansion Space (the "EXPANSION TERM") shall commence as
to each portion thereof upon the applicable Expansion Date set forth in
Paragraph 2 above. The Expansion Term shall expire as to the Expansion Space on
the date set forth below (each a "TERMINATION DATE") for the applicable portion
of the Expansion Space set forth below:
EXPANSION SPACE TERMINATION DATE
First Space August 31, 2003
Second Space February 28, 2003
-3-
<PAGE>
Third Space August 31, 2003
Fourth Space (if the February 28, 2003
Fourth Space Option has
been exercised by Tenant)
4. BASE RENTAL.
Effective as of the applicable Expansion Date for each portion of the Expansion
Space and continuing through and until the applicable Termination Date for each
portion of the Expansion Space, Section 2.1 of the Lease shall be amended to
provide that in addition to (and not in lieu of) the Base Rental provided for
therein, Tenant shall be obligated to pay as the Base Rental as to the Expansion
Space an amount equal to the product of (x) the Base Rate set forth below for
the applicable time period set forth below, multiplied by (y) the square feet of
Net Rentable Area comprising the applicable portion of the Expansion Space. The
Base Rate set forth below shall be applicable during the applicable time period
set forth below notwithstanding the actual Expansion Date for the applicable
Expansion Space. For example, if the Fourth Space Option is exercised by Tenant
and the Fourth Space Date occurs after June 1, 1999, the Base Rate shall be
$23.00.
EXPANSION SPACE TIME PERIOD BASE RATE
First Space First Space Date - December 14, 1999 $19.00
December 15, 1999 - August 31, 2003 $23.00
Second Space November 1, 1998 - February 28, 2003 $23.00
Third Space March 16, 1999 - March 15, 2000 $13.33
March 16, 2000 - March 15, 2001 $13.83
March 16, 2001 - March 15, 2002 $14.08
March 16, 2002 - March 15, 2003 $14.33
March 16, 2003 - August 31, 2003 $14.83
Fourth Space Fourth Space Date - May 31, 1999 $19.00
(if the Fourth Space June 1, 1999 - February 28, 2003 $23.00
has been exercised
by Tenant)
All such Base Rental as to the Expansion Space shall be payable in accordance
with the provisions set forth in the Lease as to the remainder of the Leased
Premises.
5. TENANT'S ADDITIONAL RENTAL.
Tenant shall pay to Landlord Tenant's Additional Rental as to the Expansion
Space in accordance with the provisions of Section 2.3 of the Lease. As provided
in the Lease, the Base Operating
-4-
<PAGE>
Expenses Amount as to the Expansion Space shall be the Operating Expenses Amount
for the calendar year 1998.
6. CONDITION OF LEASED PREMISES; ALLOWANCE.
Tenant accepts the Expansion Space in its current condition, as-is (subject to
Landlord's obligation to provide the Allowance (defined below) as set forth
below in this Paragraph 6), without recourse to Landlord, and Landlord shall
have no obligation to complete any improvements to the Expansion Space.
ADDITIONALLY, LANDLORD SHALL MAKE NO WARRANTIES, EXPRESS OR IMPLIED, WITH
RESPECT TO THE LEASEHOLD IMPROVEMENTS IN THE EXPANSION SPACE. ALL IMPLIED
WARRANTIES WITH RESPECT THERETO, INCLUDING BUT NOT LIMITED TO THOSE OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE EXPRESSLY NEGATED AND
WAIVED. Landlord and Tenant shall each comply with the provisions of the Exhibit
E of the Lease with regard to leasehold improvements to be made to the Expansion
Space.
Provided an Event of Default under the Lease is not in existence, Landlord shall
pay to Tenant a tenant improvement allowance (the "ALLOWANCE") equal to the sum
of (A) (i) $0.20 per square foot of Net Rentable Area comprising the First Space
multiplied by (ii) the number of Lease Months (defined below) in the Expansion
Term as to the First Space, plus (B) (i) $0.20 per square foot of Net Rentable
Area comprising the Second Space multiplied by (ii) the number of Lease Months
in the Expansion Term as to the Second Space, plus (C)(i) if the Fourth Space
Option is exercised by Tenant, $0.20 per square foot of Net Rentable Area
comprising the Fourth Space multiplied by (ii) the number of Lease Months in the
Expansion Term as to the Fourth Space. The Allowance shall be paid in accordance
with, and subject to the conditions set forth in, Section 5.4.2, including the
payment to Landlord of a three percent (3%) construction management fee if
Landlord or contractors retained by Landlord perform the applicable work or a
one percent (1%) construction supervision fee if Tenant performs such work,
except that the $20,000 limit on the amount of any construction management or
construction supervision fees shall not apply. If the Allowance has not been
fully disbursed as of December 31, 1999, any remaining balance of the Allowance
shall become the property of Landlord and Tenant shall forever lose any right or
claim to such remaining balance, provided that up to $2.00 per square foot of
Net Rentable Area of said Allowance may be applied at Tenant's written request
to first accruing Base Rental under the Lease. Notwithstanding anything to the
contrary contained herein, in no event shall Landlord be obligated under this
Paragraph 6 for an amount in excess of the Allowance. Additionally, Landlord
shall be permitted to offset against the undisbursed Allowance any amounts past
due to Landlord by Tenant under this Lease.
As used herein, "LEASE MONTH" shall mean a period commencing on the Expansion
Date for the applicable Expansion Space and expiring on the day immediately
preceding the same day of the following calendar month and with each subsequent
Lease Month commencing upon the expiration of the prior Lease Month. In the
event that the Expansion Term as to the First Space, Second Space, or, if the
Fourth Space Option is exercised by Tenant, Fourth Space includes a portion of a
month, then the Allowance as to such month shall be prorated.
-5-
<PAGE>
7. GARAGE PARKING.
Effective as of the date each portion of the Expansion Space indicated below is
delivered to Tenant, and continuing through and until the Termination Date
applicable to each such portion of the Expansion Space, Section 3.5 of the Lease
shall be amended to provide that in addition to (and not in lieu of) the Parking
Permits leased pursuant to the Lease, but in lieu of any adjustment that would
have been made under Section 3.5.5, Landlord agrees to furnish to Tenant the
right to park the following number of additional vehicles in the Parking Garage
(the "ADDITIONAL PERMITS"):
EXPANSION SPACE ADDITIONAL PERMITS
First Space 17 Unassigned Permits
Second Space 70 Unassigned Permits
Third Space 401 Unassigned Permits and 29 Assigned
Permits (collectively, the "THIRD SPACE
PERMITS")
Fourth Space (if the Fourth 45 Unassigned Permits
Space Option is exercised
by Tenant)
No specific spaces in the Garage are to be assigned to Tenant for the Unassigned
Permits, but Landlord may designate the area in which the vehicles with the
Unassigned Permits may be parked, which designations may change from time to
time. As parking rental for the Additional Permits ("ADDITIONAL PERMIT RENTAL"),
during the Expansion Term, Tenant shall pay Landlord, from the date of delivery
of such Additional Permits (even if prior to the Expansion Date), as additional
rental under the Lease, an amount equal to the sum of (i) $40.00 plus any
applicable sales tax per Unassigned Permit per month, plus (ii) $75.00 plus any
applicable sales tax per Assigned Permit per month, which Additional Permit
Rental shall be payable in accordance with the provisions of Section 3.5 of the
Lease, subject to change upon renewal pursuant to Paragraph 9 below.
Notwithstanding the foregoing, provided an Event of Default is not in existence
under the Lease, the Additional Permit Rental as to the Third Space Permits
shall abate for the period commencing on March 1, 1999, until and including
August 31, 2003. Tenant hereby acknowledges that five (5) of the Third Space
Permits leased to Tenant as Assigned Permits shall be used for an electrical
generator owned by Tenant in lieu of the spaces assigned to Tenant for its
Assigned Permits to create space for a generator pursuant to Section 3.5.2 of
the Lease, which shall continue to be included as Assigned Permits for Tenant.
Section 3.5.5 of the Lease shall not apply to the addition of the Expansion
Space, or the addition of Unassigned Permits or Assigned Permits set forth
above. In addition, Tenant shall have no right to reduce the number of Permits
leased by Tenant pursuant to this Paragraph 7 under Section 3.5.6 of the Lease.
-6-
<PAGE>
8. CAMDEN PARKING.
Effective as of the Camden Parking Date (defined below) and continuing until and
including February 29, 2008 (the "LEASE TERMINATION DATE"), Landlord agrees to
furnish and Tenant agrees to pay for and lease parking rights for one hundred
fifty (150) spaces (the "CAMDEN PERMITS") on the Camden site directly east of
the Building, as described on EXHIBIT B attached hereto and made a part hereof
(the "CAMDEN SITE"). As used herein, "CAMDEN PARKING DATE" shall mean the date
on which the parking garage on the Camden Site is completed and available for
parking and the parking spaces thereon are made available to Landlord pursuant
to a parking lease entered into between Landlord and the owner of the Camden
Site (the "PARKING LEASE"). As parking rental for the Camden Permits, Tenant
shall pay Landlord's actual monthly cost for such spaces, including any
applicable sales tax. In addition, effective as of the Camden Parking Date,
Landlord agrees to furnish and Tenant agrees to pay for and lease parking rights
for an additional forty (40) spaces (the "ADDITIONAL CAMDEN PERMITS") on the
Camden Site on a month-to-month basis, terminable at Landlord's option at any
time; provided, however, that (i) during the first six (6) months after the
Camden Parking Date, Landlord must provide Tenant with thirty (30) days' prior
written notice of any such termination, and (ii) thereafter, Landlord must
provide Tenant with ninety (90) days' prior written notice of any such
termination. Landlord's obligation to provide the Camden Permits and the
Additional Camden Permits is subject to the terms of the Parking Lease. If the
Camden Permits, the Additional Camden Permits, or any parking spaces on the
Camden Site are unavailable for any reason whatsoever, including a failure of
such spaces to be made available under the Parking Lease, casualty, condemnation
or a failure to construct such spaces, then Landlord shall have no liability
hereunder, Landlord shall not be in default hereunder, and the Lease, as amended
hereby, shall continue in full force and effect, provided that Tenant shall not
be obligated to lease any such spaces that are unavailable, and provided that
Landlord shall use reasonable efforts to enforce its rights under the Parking
Lease. If the Camden Parking Date does not occur by September 1, 1999, Tenant
shall have the right by the delivery of written notice to Landlord prior to the
earlier to occur of September 10, 1999 or the Camden Parking Date to terminate
Tenant's obligations under this Paragraph 8, in which event the Camden Permits
and the Additional Camden Permits shall not be provided to Tenant. As parking
rental for the Additional Camden Permits, Tenant shall pay Landlord's actual
monthly cost for such spaces, including any applicable sales tax. Landlord's
initial rent payable under the Parking Lease is $65.00 per parking space per
month, plus all applicable taxes, subject to increases as provided in the
Parking Lease.
Landlord has delivered to Tenant a true, accurate and complete copy of the
Parking Lease. Tenant shall cause the users of the Camden Spaces and the
Additional Camden Spaces to enter into parking agreements required by the
landlord under the Parking Lease. Tenant shall comply in all respects with the
Parking Lease. Tenant shall have no right to reduce the number of Camden Permits
or Additional Camden Permits leased by Tenant under this Paragraph 8 under
Section 3.5.6 of the Lease; provided Tenant shall have the right, at any time
and from time to time, to reduce the number of Additional Camden Permits by up
to the lesser of forty (40) or the number then available to Tenant hereunder
with such reduction to be effective on the first day of the first calendar month
occurring at least ninety (90) days after the delivery of written notice of such
reduction by Tenant to Landlord. Permits Tenant elects not to lease may
thereafter be leased by Landlord to other tenants
-7-
<PAGE>
of the Building or third parties and Landlord shall have no obligation, under
any circumstances, to lease any such Permits to Tenant that Tenant has elected
not to lease.
Tenant agrees to indemnify, defend and hold harmless Landlord, its officers,
directors, trustees, partners and employees from and against all losses,
demands, actions, fines, penalties, expenses, or claims, including reasonable
attorneys' fees and court costs, asserted against Landlord and/or its officers,
directors, trustees, partners and employees, by any person, entity or
governmental agency resulting from (i) any injury to or death or any person
arising out of or connected with the use, occupancy and enjoyment of the Camden
Site by Tenant or its agents, employees, licensees or invitees, including any
death or injury occurring to Tenant, its agents, employees, licensees or
invitees as a result of travel between the Camden Site and the Building, or (ii)
any failure by Tenant or its agents, employees, licensees or invitees to comply
with the Parking Lease, all rules and regulations applicable to the use of the
Camden Site, and all applicable laws. Landlord shall have no liability or
responsibility for the acts or omissions of the landlord under the Parking
Lease.
Notwithstanding the foregoing, in the event Tenant elects to exercise the
Termination Option pursuant to Section IV of Exhibit B to the Lease, Tenant's
rights and obligations as to the Camden Permits and the Additional Camden
Permits as provided in this Paragraph 8 shall terminate on February 28, 2003.
9. OPTIONS TO RENEW.
As long as there is then no uncured Event of Default, Tenant has not assigned
the Lease or sublet the Leased Premises except as permitted in Section 8.1.6 of
the Lease, 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 (i) to renew the Term of the Lease with respect to all (but not part) of
the Second Space and, if the Fourth Space Option has been exercised by Tenant,
the Fourth Space for a period commencing on the Termination Date as to the
Second Space, and the Fourth Space and expiring on the Lease Termination Date
(the "Expansion Space Option #1"), and (ii) to renew the Term of the Lease with
respect to the First Space and the Third Space for a period commencing on the
Termination Date as to the First Space and the Third Space and expiring on the
Lease Termination Date (the "Expansion Space Option #2") (Expansion Space Option
#1 and Expansion Space Option #2 are hereinafter referred to as the "EXPANSION
SPACE RENEWAL OPTIONS", and the renewal terms therefor are hereinafter referred
to as the "EXPANSION RENEWAL TERMS"), on the terms and conditions hereinafter
set forth. Tenant shall have the right to exercise either or both of Expansion
Space Option #1 and/or Expansion Space Option #2.
Tenant shall exercise the Expansion Space Renewal Options in accordance with the
provisions of Section 1.2 of Exhibit B to the Lease. The renewal of the Lease as
to the First Space, Second Space, Third Space and, if the Fourth Space Option
has been exercised by Tenant, the Fourth Space shall be upon the same terms and
conditions as set forth in the Lease as amended by this Amendment with respect
to the Expansion Term, except that (a) Base Rental shall be the prevailing
Market Rate (defined in Section 3.1 of Exhibit B to the Lease), (b) 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
-8-
<PAGE>
in Section 8.1.6 of the Lease, (c) the applicable Expansion Space will be
provided in its then existing condition (on an "AS IS" basis) at the time the
applicable Expansion Renewal Term commences, without any obligation on the part
of Landlord to furnish, install or alter any leasehold improvements and (d) each
parking permit described in Paragraph 7 shall be leased by Tenant for a cost to
Tenant equal to the then market monthly rate for such parking in the Parking
Garage plus any applicable sales taxes.
Section 1.1 of Exhibit B to the Lease is hereby amended to provide that Tenant
must renew the Term of the Lease, if Tenant elects to exercise such renewal
option, with respect to at least the greater of 150,000 square feet of Net
Rentable Area or an amount equal to seventy percent (70%) of the number of
square feet of Net Rentable Area contained in the then existing Leased Premises
at the time Tenant exercises such right, but not to exceed the then existing
Leased Premises.
10. THIRD SPACE SUBLEASE.
If Tenant is able to occupy any portion of the Third Space prior to the date the
Third Space is delivered to Tenant hereunder, Tenant shall have the right to
enter into sublease agreements and/or agreements for the use of parking permits
to which the current tenant of the Third Space is entitled under its existing
lease of the Third Space, with the current tenant of the Third Space on terms
and conditions acceptable to Tenant through the date of termination of such
existing lease of such existing tenant covering the Third Space.
11. LEASE PROVISIONS.
Tenant's Termination Option, as set forth in Section 4.1 of Exhibit B to the
Lease, shall not apply to any portion of the Expansion Space.
The Initial Allowance, as set forth in Section 5.4.1 of the Lease, shall not
apply to any portion of the Expansion Space.
The Additional Allowance, as set forth in Section 5.4.2 of the Lease, also shall
apply to any portion of the Expansion Space only if Tenant has exercised the
Expansion Space Renewal Option as to such Expansion Space. Tenant shall not have
any right to increase the Initial Allowance by $1.82 per square foot of Net
Rentable Area contained in the Expansion Space. In addition, the $20,000
limitation set forth in Section 5.4.2 with respect to construction management or
supervision fees shall not apply to any Expansion Space.
12. GENERATOR.
EXHIBIT G to the Lease is hereby amended to provide that Tenant will
acquire the right to use the generator currently being used by the existing
tenant of the Third Space to be located a shown on EXHIBIT G-1 to this
Amendment, which shall replace EXHIBIT G-1 attached to the Lease, and Tenant
will not install the Generator provided for on EXHIBIT G to the Lease.
-9-
<PAGE>
13. BROKERAGE COMMISSIONS.
Landlord and Tenant hereby represent and warrant to each other that no
commission is due and payable to any broker or leasing agent other than Cushman
Realty Corporation and Colliers Appelt Womack (the "BROKERS") in connection with
this Amendment as a result of its own dealings with any such broker or leasing
agent, and Landlord and Tenant hereby agree to indemnify and hold each other
harmless from and against all loss, damage, cost and expense (including
reasonable attorneys' fees) suffered by the other party as a result of a breach
of the foregoing representation and warranty. All commissions owed to Brokers in
connection with this Amendment shall be paid (a) by Landlord pursuant to a
separate agreement as to the First Space, Second Space, and, if the Fourth Space
Option is exercised by Tenant, the Fourth Space, and (b) by the existing tenant
of the Third Space as to the Third Space. In no event shall Landlord be
obligated to pay any commissions pertaining to the transaction evidenced hereby
as to the Third Space.
14. FULL FORCE AND EFFECT.
In the event any of the terms of the Lease conflict with the terms of this
Amendment, the terms of this Amendment shall control. Except as amended hereby,
all terms and conditions of the Lease shall remain in full force and effect, and
Landlord and Tenant hereby ratify and confirm the Lease as amended hereby. The
Lease, as amended herein, constitutes the entire agreement between the parties
hereto and no further modification of the Lease shall be binding unless
evidenced by an agreement in writing signed by Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the
day and year set forth above.
LANDLORD: TENANT:
UTAH STATE RETIREMENT BANK UNITED, a federal savings bank
INVESTMENT FUND, an independent
agency of the State of Utah
By: Westmark Realty Advisors, By:/s/BARRY C. BURKHOLDER
its Agent Name: Barry C. Burkholder
Title: President & Chief Executive Officer
By:/s/MATTHEW C. HURLBUT
Name: Matthew C. Hurlbut
Title: Authorized Signatory
By:/s/VICTOR R. MOORE
Name: Victor R. Moore
Title: Authorized Signatory
-10-
<PAGE>
EXHIBIT A-1
FIRST SPACE - FLOOR PLAN
Map Showing Floor Plans
PHOENIX TOWER
Hines - Houston, Texas
A-1-1
<PAGE>
EXHIBIT A-2
SECOND SPACE - FLOOR PLAN
Map Showing Floor Plans
LEVEL 24
PHOENIX TOWER
A-2-1
<PAGE>
EXHIBIT A-3
THIRD SPACE - FLOOR PLAN
(SEE SIX (6) PAGES FOLLOWING THIS PAGE)
A-3-1
<PAGE>
EXHIBIT A-4
FOURTH SPACE - FLOOR PLAN
Map Showing Floor Plans
PHOENIX TOWER
Hines - Houston, Texas
A-3-2
<PAGE>
Map Showing Floor Plans
LEVEL 25
PHOENIX TOWER
Hines - Houston, Texas
<PAGE>
Map Showing Floor Plans
LEVEL 26
PHOENIX TOWER
Hines - Houston, Texas
A-3-4
<PAGE>
Map Showing Floor Plans
LEVEL 26
PHOENIX TOWER
Hines - Houston, Texas
<PAGE>
Map Showing Floor Plans
LEVEL 27
PHOENIX TOWER
Hines - Houston, Texas
<PAGE>
Map Showing Floor Plans
LEVEL 28
PHOENIX TOWER
Hines - Houston, Texas
<PAGE>
Map Showing Floor Plans
LEVEL 29
PHOENIX TOWER
Hines - Houston, Texas
A-3-8
<PAGE>
Map Showing Floor Plans
LEVEL 31
PHOENIX TOWER
<PAGE>
EXHIBIT B
CAMDEN SITE
Map Showing Floor Plans
CAMDEN GARAGE
Level 4 - North & South Decks
Located at
THE PARK AT GREENWAY
Apartment Community
B-1
<PAGE>
EXHIBIT G-1
LOCATION OF GENERATOR
Map Showing Floor Plans
PHOENIX TOWER
HOUSTON, TEXAS
B-2
EXHIBIT 21
BANK UNITED CORP.
SCHEDULE OF SUBSIDIARIES
BNKU Holdings, Inc.
Allecon Reinsurance Company
BNKU HOLDINGS, INC.
SCHEDULE OF SUBSIDIARIES
BUC Title Venture Corp.
Bank United
BANK UNITED
SCHEDULE OF SUBSIDIARIES
Bank United Securities Corp.
Commonwealth United Mortgage Company
Commonwealth General Services Agency, Inc.
United Agency Corporation
United Capital Management Corporation
United Mortgage Securities Corporation
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 333-19237 and 333-37645 of Bank United Corp. on Forms S-3 and Registration
Statement No. 333-42765 of Bank United Corp. on Form S-8 of our report dated
October 21, 1998, appearing in this Annual Report on Form 10-K of Bank United
Corp. for the year ended September 30, 1998.
DELOITTE & TOUCHE LLP
Houston, Texas
December 22, 1998
BANK UNITED CORP.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each Director of Bank United Corp.
whose signature appears below hereby constitutes and appoints Barry C.
Burkholder and Jonathon K. Heffron and each of them, with full power to act
without the other, his true and lawful attorney-in-fact and agent, with full and
several power of substitution, for him and in his name, place and stead, in any
and all capacities, to sign the Annual Report of Bank United Corp. on Form 10-K
for fiscal year 1998, and any or all amendments and supplements thereto and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as they or he might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute, may
lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
NAME TITLE SIGNATURE DATE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lewis S. Ranieri Director /s/ LEWIS S. RANIERI December 18, 1998
Salvatore A. Ranieri Director /s/ SALVATORE A. RANIERI December 18, 1998
Barry C. Burkholder Director /s/ BARRY C. BURKHOLDER December 18, 1998
Lawrence Chimerine, Ph.D. Director /s/LAWRENCE CHIMERINE, PH.D. December 18, 1998
David M. Golush Director /s/DAVID M. GOLUSH December 18, 1998
<PAGE>
BANK UNITED CORP.
POWER OF ATTORNEY
Page -2-
Paul M. Horvitz, Ph.D. Director /s/PAUL M. HORVITZ, PH. D. December 18, 1998
Alan E. Master Director /s/ALAN E. MASTER December 18, 1998
Anthony J. Nocella Director /s/ANTHONY J. NOCELLA December 18, 1998
Scott A. Shay Director /s/SCOTT A. SHAY December 18, 1998
Patricia A. Sloan Director /s/PATRICIA A. SLOAN December 18, 1998
Michael S. Stevens Director /s/MICHAEL S. STEVENS December 18, 1998
Kendrick R. Wilson III Director /s/KENDRICK R. WILSON III December 18, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 221,855
<INT-BEARING-DEPOSITS> 6,819
<FED-FUNDS-SOLD> 474,483
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 577,110
<INVESTMENTS-CARRYING> 446,298
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<LOANS> 10,703,218
<ALLOWANCE> 47,027
<TOTAL-ASSETS> 13,664,992
<DEPOSITS> 6,320,476
<SHORT-TERM> 3,114,998
<LIABILITIES-OTHER> 659,848
<LONG-TERM> 2,699,758
0
0
<COMMON> 316
<OTHER-SE> 684,096
<TOTAL-LIABILITIES-AND-EQUITY> 13,664,992
<INTEREST-LOAN> 756,890
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<INTEREST-TOTAL> 898,746
<INTEREST-DEPOSIT> 300,760
<INTEREST-EXPENSE> 612,665
<INTEREST-INCOME-NET> 286,081
<LOAN-LOSSES> 20,123
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<EXPENSE-OTHER> 188,542
<INCOME-PRETAX> 158,353
<INCOME-PRE-EXTRAORDINARY> 114,378
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,378
<EPS-PRIMARY> 3.62
<EPS-DILUTED> 3.54
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<LOANS-NON> 61,832
<LOANS-PAST> 0
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</TABLE>
