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, 2000.
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: 0-21017
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 2600
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:
PREMIUM INCOME EQUITY SECURITIES
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE
------------------------
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 common equity held by
nonaffiliates of the registrant, as of December 12, 2000, was $1,892,922,438.
The number of shares outstanding as of the registrant's $0.01 par value
common stock, as of December 12, 2000, was 32,737,509.
<PAGE>
BANK UNITED CORP.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.................................................... 1
General................................................ 1
Commercial Banking..................................... 1
Community Banking...................................... 2
Mortgage Servicing..................................... 4
Mortgage Production.................................... 6
Investment Portfolio................................... 6
Competition............................................ 7
Subsidiaries........................................... 7
Personnel.............................................. 7
Regulation............................................. 7
Taxation............................................... 18
ITEM 2. PROPERTIES.................................................. 19
ITEM 3. LEGAL PROCEEDINGS........................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 21
ITEM 6. SELECTED FINANCIAL DATA..................................... 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 26
Merger with Washington Mutual.......................... 26
Discussion of Results of Operations.................... 26
Discussion of Changes in Financial Condition........... 33
Asset Quality.......................................... 39
Capital Resources and Liquidity........................ 44
Contingencies and Uncertainties........................ 45
Recent Accounting Standards............................ 45
Forward-Looking Information............................ 45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 50
(i)
<PAGE>
PAGE
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 50
ITEM 11. EXECUTIVE COMPENSATION...................................... 57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................. 65
SIGNATURES 69
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS 71
(ii)
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Bank United Corp. (the "Parent Company") is the indirect holding company of
Bank United (the "Bank"), a federally chartered savings bank. The Parent
Company, the Bank, and subsidiaries of both the Parent Company and the Bank are
collectively known as the ("Company").
The Company is the largest publicly traded depository institution
headquartered in Texas, with $18.2 billion in assets, $8.7 billion in deposits,
and $864.2 million in stockholders' equity at September 30, 2000. The Company
provides consumers and businesses in Texas and selected markets throughout the
United States with a broad array of financial services. The Company serves over
343,000 Texas consumers and small businesses through a 157-branch community
banking network, has 16 Small Business Administration ("SBA") lending offices in
10 states, is a national middle market commercial bank with 23 regional offices
in 16 states, originates wholesale mortgage loans through 11 offices in 11
states, and operates a national mortgage servicing business serving
approximately 310,000 customers and an investment portfolio business. 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. Since the
Company's fiscal 1996 initial public offering, management has pursued a strategy
designed to transform its loan portfolio from a high concentration of single
family mortgages to a more balanced portfolio of commercial, consumer and single
family mortgage loans, increase its non-interest revenues, and lower its cost of
funds. To facilitate the transformation, the Company sold certain of its single
family mortgage origination offices in 1997, expanded its commercial and
consumer lending lines, grew its mortgage servicing portfolio, and focused on
obtaining lower cost transaction deposit accounts.
On August 18, 2000, the Company entered into a definitive agreement to
merge with and into Washington Mutual, Inc. ("Washington Mutual"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Merger with Washington Mutual" for additional information.
COMMERCIAL BANKING
Commercial Banking provides credit and a variety of cash management and
other services primarily to mortgage bankers, builders, developers, and
healthcare operators. Business is solicited in Texas and in targeted markets
throughout the United States. At September 30, 2000, the Commercial Banking
network consisted of 23 regional banking offices in 16 states. During fiscal
2000, the commercial loan portfolio increased by $1.6 billion or 29%, ending the
year with $7.0 billion in outstanding loans. A majority of the commercial loans
outstanding at September 30, 2000, was managed and serviced by Commercial
Banking.
RESIDENTIAL CONSTRUCTION LENDING
Commercial Banking 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 generally for a period of one to
three years. At September 30, 2000, this business line had $1.6 billion of loans
outstanding and $1.2 billion in unfunded commitments.
MORTGAGE BANKER FINANCE
Commercial Banking provides small- and medium-sized mortgage and consumer
finance companies with credit facilities, including secured lines of credit,
securities purchased under agreements to resell ("repurchase agreements") and
working capital credit lines. At September 30, 2000, this business line had $1.4
billion of loans outstanding, $276.0 million of repurchase agreements
outstanding, and $1.3 billion in unfunded commitments. Commercial Banking also
offers commercial banking services, including cash management, document custody,
and deposit services to its mortgage banking customers. Deposits related to
mortgage banker finance activities were $2.0 billion at September 30, 2000.
1
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COMMERCIAL REAL ESTATE LENDING
Commercial Banking is engaged in commercial real estate lending for
specific products, emphasizing permanent mortgages and construction loans on
income producing properties, such as retail shopping centers. At September 30,
2000, this business line had $1.2 billion of loans outstanding ($982.9 million
in permanent loans and $174.2 million in construction loans) and $225.3 million
of unfunded commitments.
MULTI-FAMILY LENDING
Commercial Banking 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 and
brokers. At September 30, 2000, this business line had $1.3 billion of loans
outstanding ($926.8 million in permanent loans and $334.3 million in
construction loans) and $280.1 million of unfunded commitments.
HEALTHCARE LENDING
Commercial Banking funds construction and permanent loans to experienced
operators of senior housing and long-term care facilities. In addition,
Commercial Banking makes construction and permanent loans for medical offices.
At September 30, 2000, this business line had $780.8 million of loans
outstanding ($461.8 million in permanent loans and $319.0 million in
construction loans) and $190.4 million in unfunded commitments. At September 30,
2000, $14.4 million of healthcare loans were underwritten with the Medicare
prospective pay system as their primary source of debt service.
OTHER
Other products and industry specialties of Commercial Banking include SBA
poolings, syndications, and energy lending. Commercial Banking purchases SBA
loans, pools these loans, and sells the resulting pools for the purpose of
generating gains. At September 30, 2000, Commercial Banking had $76.0 million of
SBA loans held for sale and had a commitment to purchase $14.7 million of such
loans. Commercial Banking has from time to time purchased participating
interests in syndicated commercial loans. At September 30, 2000, this business
line had $292.8 million of loans outstanding, $30.5 million of letters of
credit, and $134.4 million in unfunded commitments. Commercial Banking funds
loans to energy companies, primarily independent oil and gas producers in Texas.
At September 30, 2000, the Company had $84.8 million in energy loans outstanding
and $8.5 million in unfunded commitments.
COMMUNITY BANKING
Community Banking's activities include deposit gathering, consumer lending,
small business banking, and investment product sales. Community Banking operates
a 157-branch network, a 24-hour telephone banking center, a 161-unit ATM
network, and 16 SBA lending offices in 10 states, which together serve as the
platform for the Company's consumer and small business banking activities. The
Community Banking branch network includes 67 branches in the greater Houston
area, 78 branches in the Dallas / Ft. Worth metropolitan area, five branches in
Midland, four branches in Austin, and three branches in San Antonio. The
Community Banking branch network includes 74 7-Day Banking Centers located in
Kroger supermarkets. Through the Community Banking branch network, the Company
attracts a majority of its deposits and at September 30, 2000 maintained in
excess of 509,000 deposit accounts for over 343,000 households and businesses.
The Company also has online banking and online bill payment services available
through its website. Currently, approximately 9% of the Company's customers bank
online and 13% of those customers pay bills online. The number of consumer and
commercial checking accounts increased to approximately 276,000 at September 30,
2000, up by 18% from 233,000 at September 30, 1999.
DEPOSIT GATHERING
At September 30, 2000, Community Banking maintained in excess of 509,000
deposit accounts with $5.8 billion in deposits. Community Banking offers a
variety of traditional deposit products and services, including checking and
savings accounts, money market accounts, certificates of deposit ("CDs"), and
deposit products
2
<PAGE>
and services tailored specifically to consumer and small business needs.
Community Banking's strategy is to become the primary financial services
provider to its customers by emphasizing high levels of customer service and
innovative products. In order to promote this same strategy for the Hispanic
community, a Spanish language program has been implemented. This program
includes special Spanish advertisements, a package of special services called
"Cuenta Con Bank U" and all of the Bank's forms, disclosures and loan documents
are available in Spanish. In addition, bilingual bankers are employed in every
branch location and a 10% premium is paid to anyone in a customer contact
position who is fluent in Spanish.
Currently, the principal methods used by Community Banking to attract and
retain deposit accounts include offering 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. Deposit products are tailored to meet the needs of the
Company's consumer and small business banking customers. The following table
illustrates the levels of deposits held by the Company's Community Banking
network by region at September 30, 2000:
<TABLE>
<CAPTION>
AVERAGE
DEPOSITS
NUMBER OF DEPOSITS PER
LOCATION BRANCHES OUTSTANDING BRANCH
-------- --------- ----------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Houston Area......................... 67 $3,017,911 $45,043
Dallas/Ft. Worth Area................ 78 2,312,518 29,648
Other Texas.......................... 12 430,634 35,886
--- ---------- -------
Total........................... 157 $5,761,063 $36,695
=== ========== =======
</TABLE>
The Company expanded from 83 branches at September 30, 1998 to the current
level of 157 branches primarily by opening 48 branches located in Kroger
supermarket stores in the Houston and Dallas/Ft. Worth markets in April 1999.
These 7-Day Banking Centers, along with others added in newly opened Kroger
stores in the same markets, brought the total number of 7-Day Banking Centers to
74 at September 30, 2000. In addition to the 7-Day Banking Centers, traditional
branches have also been strategically added in order to improve the
distribution, especially in Austin.
The Company also obtained deposits through acquisitions. In August 1999,
the Company acquired Texas Central Bancshares, Inc. ("Texas Central"), a
commercial bank in Dallas, Texas. Texas Central had assets of $113.1 million and
deposits of $92.9 million at acquisition, and operated three branches located in
Dallas, Park Cities, and Plano. The operations of Texas Central Bank, the
principal subsidiary of Texas Central, were merged into the operations of the
Bank. In February 1999, the Company acquired Midland American Bank ("Midland"),
a commercial bank operating five branches in Midland, Texas, with assets of
$282.5 million and deposits of $232.8 million at acquisition. 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 at acquisition. In
December 1997, the Company purchased three branches in the Dallas area, having
$66 million in deposits at acquisition, from California Federal Savings Bank,
FSB.
SMALL BUSINESS BANKING
Community Banking expanded its SBA offices to 16 locations in 10 states,
from two offices in one state at September 30, 1998, and became the number one
SBA lender in Texas and the number four SBA lender in the nation. Community
Banking's conventional small business strategy is focused on offering loan
products and services tailored 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, franchise
loans, and cash and treasury management services. At September 30, 2000,
Community Banking had small business loans outstanding totaling $471.2 million,
$113.3 million in unfunded commitments, and $344.8 million in pending
applications.
3
<PAGE>
CONSUMER LENDING
Community Banking offers a variety of consumer loan products, including
home equity loans, home improvement loans, purchase-money second lien loans, and
automobile loans. Community Banking 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. At September 30, 2000,
consumer loans outstanding totaled $903.1 million, up by $237.4 million with
$34.5 million in unfunded commitments. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Discussion of Changes in
Financial Condition -- Loan Portfolio."
RETAIL MORTGAGE ORIGINATIONS
The Company also offers mortgages through its Community Banking branch
network, primarily limited to 15-and 30-year fixed-rate mortgage loans.
Community Banking 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.
INVESTMENT PRODUCT SALES
Bank United Securities Corp. ("BUSC"), 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, deposits, and certain other insurance policies is offered by
commissioned Series 7 and Group I licensed, registered representatives. As of
September 30, 2000, there were 43 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 SERVICING
The Company operates a residential mortgage loan servicing business, ranked
23rd in the United States, which generates substantial fee income. The servicing
portfolio includes a large amount of Government National Mortgage Association
("GNMA") adjustable-rate mortgage loans and private-label securities which
usually generate higher service fee rates than traditional Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC") fixed-rate mortgage loan servicing.
Mortgage servicing activities include collecting and applying loan payments
from borrowers, remitting payments to investors, collecting funds for and paying
mortgage-related expenses, 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 competitively positioned to service loans in an
efficient and cost effective manner relative to its peers.
At September 30, 2000, the Company's single family mortgage servicing
portfolio totaled $31.8 billion or 310,000 loans, including $5.0 billion of
loans serviced for the Company's own account. At September 30, 2000, the
Company's deposits included $304.6 million of advances from borrowers for taxes
and insurance ("escrow") and $150.0 million of principal and interest held on
behalf of investors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Discussion of Changes in Financial
Condition -- Mortgage Servicing Rights," and Note 7 to the Consolidated
Financial Statements.
4
<PAGE>
The following tables show the composition of the servicing portfolio by
type and by owner:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
BY TYPE
Conventional..................... $18,518,336 $17,697,787 $18,125,325
Government....................... 13,273,109 13,195,206 9,809,975
----------- ----------- -----------
$31,791,445 $30,892,993 $27,935,300
=========== =========== ===========
BY OWNER
Others........................... $26,760,882 $26,058,482 $23,491,960
Company.......................... 5,030,563 4,834,511 4,443,340
----------- ----------- -----------
$31,791,445 $30,892,993 $27,935,300
=========== =========== ===========
</TABLE>
The weighted-average interest rate of loans in the servicing portfolio was
7.67%, 7.50%, and 7.78% at September 30, 2000, 1999, and 1998. At September 30,
2000, the weighted-average contractual maturity (remaining years to maturity) of
the loans in the servicing portfolio was approximately 24 years. At
September 30, 2000, the largest concentrations of the servicing portfolio were
in California (24.9%) and Texas (9.4%). At September 30, 2000, 5.34% of the
loans serviced by Mortgage Servicing were delinquent and an additional .66% were
in foreclosure.
The following table presents the servicing portfolio at September 30, 2000,
by interest rate category:
<TABLE>
<CAPTION>
LESS
THAN 7.00- 8.01- 9.01- 10.01%
7.00% 8.00% 9.00% 10.00% ABOVE
----- ----- ----- ------ -------
<S> <C> <C> <C> <C> <C>
Conventional......................... 11.05% 26.18% 15.14% 4.62% 1.26%
Government........................... 6.64 21.32 12.99 0.64 0.16
----- ----- ----- ----- ----
Total........................... 17.69% 47.50% 28.13% 5.26% 1.42%
===== ===== ===== ===== ====
</TABLE>
The Company enters into agreements to service loans for 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. Mortgage Servicing services loans for GNMA, FNMA,
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 mortgage-backed securities ("MBS") are set from time
to time by the sponsoring agencies. As a servicer of loans securitized by GNMA,
FNMA, and FHLMC, the Company may be obligated to make timely payment of
principal and interest to security holders, whether or not such payments have
been received from 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 GNMA, FNMA, and 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 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 GNMA and FHLMC can only be
terminated for cause. Management believes that the Company is currently in
substantial compliance with all material rules, regulations, and contractual
obligations related to mortgage loan servicing.
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 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 mortgage servicing rights ("MSRs")
5
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and potential MSR impairment, 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 13 to the Consolidated Financial
Statements.
MORTGAGE PRODUCTION
Mortgage Production originates both fixed- and adjustable-rate single
family mortgage loans through 11 wholesale mortgage origination offices in 11
states. The types of loans originated include loans that meet the standard
underwriting policies and purchase limits established by FNMA and FHLMC
guidelines ("conforming conventional loans"), loans in amounts in excess of the
FNMA and FHLMC purchase limits ("jumbo loans"), loans insured or guaranteed
under FHA or VA programs, loans exclusively for sale to specific investors that
conform to the requirements of such investors, and loans with loan to value
ratios greater than 80% at origination that are covered by mortgage insurance.
Loans originated by the wholesale mortgage origination offices are retained
for the Company's portfolio or are sold into the secondary market. Loans sold
into the secondary market are typically fixed-rate loans, but may from time to
time include adjustable-rate loans. Conforming conventional loans sold into the
secondary market are typically pooled and exchanged for securities issued by
FNMA or FHLMC, which are sold to investment banking firms. Mortgage Production
may also sell conforming conventional loans as whole loans directly to FNMA or
FHLMC or to private investors. Jumbo loans produced for sale in the secondary
market are sold to private investors. FHA-insured and VA-guaranteed loans
produced for sale in the secondary market are pooled to form GNMA MBS, which are
sold to investment banking firms.
Mortgage Production originates loans through approximately 3,000 approved
mortgage brokers. A formal approval and monitoring process is in place to select
all brokers, assess their performance, and evaluate the credit quality of the
loans they originate. Mortgage brokers demonstrating unacceptable performance or
insufficient loan activity are removed from the Company's program.
Mortgage Production originated $2.8 billion and $3.7 billion of single
family loans in fiscal 2000 and 1999. During fiscal 2000 and 1999, $1.9 billion
and $2.8 billion of single family mortgage loans were sold in the secondary
market. At September 30, 2000, this business segment had $2.6 billion of single
family loans held for investment outstanding and $340.7 million in unfunded
commitments.
Prior to February 1997, the Company's Mortgage Banking segment originated
retail and wholesale mortgages and serviced mortgage loans. In February 1997,
the Company sold certain of its mortgage origination offices and the remaining
offices were restructured or closed. The Company retained its mortgage servicing
business, retail mortgage origination capability in Texas through the Community
Banking branches and its wholesale and other mortgage origination capabilities,
which became the current Mortgage Production segment.
INVESTMENT PORTFOLIO
The Investment Portfolio segment holds $4.5 billion of assets at September
30, 2000, which includes $3.5 billion of single family loans held for investment
and MBS totaling $868.2 million.
Investment Portfolio acquires single family loans through traditional
secondary market sources (mortgage origination companies, financial
institutions, and Wall Street dealers). In fiscal 2000, 1999, and 1998, the
Company purchased approximately $611.3 million, $1.8 billion, and $1.2 billion
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.
MBS are 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 Company's MBS have
various credit quality guarantees 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
6
<PAGE>
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 United States Treasury, which provide a large measure of
security and certainty.
The Company also invests in MBS 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, 2000, 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.
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, community 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 competitors
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. The 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 lower funding
costs.
SUBSIDIARIES
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 and lower tier entities in total. At
September 30, 2000, the Bank was authorized to have a maximum investment of
approximately $544.1 million in its service corporation subsidiaries. Only one
of the Bank's subsidiaries, BUSC, is significant.
BANK UNITED SECURITIES CORP.
The Bank is the sole shareholder of BUSC, a Texas corporation, which acts
as a full-service broker-dealer. BUSC markets investment products including
annuities, securities, mutual funds, stocks, bonds, deposits and insurance
products to the Bank's Community Banking customers. BUSC is a broker-dealer
registered with the Securities and Exchange Commission and is a member of the
National Association of Securities Dealers, Inc.
PERSONNEL
At September 30, 2000, the Company had 2,614 full-time equivalent
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 14 to the Consolidated Financial Statements.
REGULATION
GENERAL
The Parent Company is a savings and loan holding company that is regulated
and subject to examination by the Office of Thrift Supervision ("OTS"). The Bank
is a federally chartered savings bank and is subject to the regulations,
examinations, and reporting requirements of the OTS. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC") through the
Savings Association Insurance Fund ("SAIF"). As the administrator of the SAIF,
the FDIC has certain regulatory and full examination authority over OTS
7
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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 Federal Home Loan Bank ("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; or
(2) 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"). The HOLA and OTS
regulations generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring, directly or indirectly, the ownership or control
of any other savings association or savings and loan holding company, or all, or
substantially all, of the assets or more than 5% of the voting shares thereof.
These provisions also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control of
any savings association 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 -- Qualified Thrift Lender 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 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
8
<PAGE>
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. During fiscal 2000, SAIF-assessable deposits were subject to premiums
of between 0 to 27 cents per $100 of deposits, based 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 risk-based 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 risk-based capital ratio, and a 4% leverage capital
ratio (or a leverage ratio of 3% if the institution is rated Composite 1 in its
most recent report of examination). An "undercapitalized" institution is one
that does not meet either the definition of well-capitalized or adequately
capitalized. See "-- Capital Requirements."
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:
<TABLE>
<CAPTION>
SUPERVISORY
SUBGROUP
-----------------------
A B C
--- --- ---
<S> <C> <C> <C>
Meets numerical standards for:
Well-capitalized................ 0 3 17
Adequately capitalized.......... 3 10 24
Undercapitalized................ 10 24 27
</TABLE>
For purposes of assessments of FDIC insurance premiums, the Company
believes that the Bank is a well-capitalized institution as of September 30,
2000. FDIC regulations prohibit disclosure of the supervisory subgroup to which
an insured institution is assigned.
ASSESSMENTS TO PAY FICO BONDS. The FDIC is also authorized to collect
assessments against insured deposits 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. During the period beginning January 1, 1997 through
December 31, 1999, SAIF-insured institutions paid 6.48 basis points annually
toward FICO bonds and Bank Insurance Fund ("BIF") insured institutions paid
1.296 basis points. Starting in the year 2000, BIF and SAIF institutions began
sharing the FICO burden on a pro rata basis until termination of the FICO
obligation. As of September 30, 2000, the annualized rate was 2.02 basis points.
The Bank's insurance assessments for fiscal 2000 and 1999 were $2.1 million and
$4.0 million.
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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, for complying
with specified laws and regulations relating to safety and soundness, and an
assessment of the effectiveness of such internal controls and procedures and the
institution's compliance with laws and regulations designated by the FDIC. The
institution's independent auditors are required to attest to these management
assertions, except the procedures employed by management to detect and report
violations of designated laws. Each such institution also is required to have an
audit committee composed of directors who are independent of management of the
institution. Audit committees of large institutions (institutions with assets
exceeding $3.0 billion) must (1) include members with banking or related
financial management expertise; (2) have the ability to engage their own
independent legal counsel; and (3) must not include any individuals designated
as "large customers" of the institution.
RESERVE REQUIREMENTS. The Federal Reserve Board ("FRB") requires all
depository institutions (including savings associations) to maintain reserves
against their deposit accounts (primarily transaction accounts and nonpersonal
time deposits) and Eurocurrency liabilities. At October 30, 2000, reserves of 3%
were required to be maintained against net transaction accounts of $44.3 million
or less. In addition, if net transaction accounts exceeded $44.3 million,
institutions were 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 19 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 4% of its adjusted total assets (or a
leverage ratio of 3% if the institution is rated composite 1 in its most recent
report of examination ). 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 stockholders' equity and noncumulative perpetual
preferred stock minus intangibles, plus certain MSRs and certain goodwill
arising from prior regulatory accounting practices. At September 30, 2000, the
Bank's core capital ratio was 6.99%.
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 generally accepted accounting principles could be included in the core and
tangible capital calculations 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 calculations from 50% to 100% of core capital.
At September 30, 2000, $542.3 million of MSRs were included in the Bank's core
capital calculation.
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
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<PAGE>
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, except that all
intangible assets must be deducted. "Tangible capital" is defined in the same
manner as core capital, except that all intangible assets must be deducted. At
September 30, 2000, the Bank's tangible capital ratio was 6.98%.
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 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; general loan
and lease loss allowances, up to a maximum of 1.25% of risk-weighted assets; and
up to 45% of unrealized gains on available for sale equity securities. At
September 30, 2000, the Bank's total risk-based capital ratio was 11.04%.
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 of cash or property to shareholders on account
of their ownership interest.
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."
Under OTS regulations, most associations may make capital distributions
during a calendar year up to 100% of net income to date during the calendar
year, plus retained net income for the preceding two years. An association, such
as the Bank, that is a subsidiary of a savings and loan holding company must
give 30 days' written notice to the OTS before making any capital distribution.
The OTS may disapprove a capital distribution if: (1) following the
distribution, the association would be undercapitalized; (2) the OTS determines
that the proposed capital distribution raises safety or soundness concerns; or
(3) the distribution violates a provision contained in any statute, regulation,
or agreement between the savings association and the OTS or the FDIC, or
condition imposed on the association in an OTS-approved application or notice.
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<PAGE>
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 savings 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.
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 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
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<PAGE>
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. 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
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, 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. OTS regulations require 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,
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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.
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, 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 tier 1 risk-based
capital ratio of 6% or greater, and a leverage ratio of 5% or greater, and the
institution is not subject to an
14
<PAGE>
order, written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for any capital measure.
An institution will be designated adequately capitalized if the institution
has a total risk-based capital ratio of 8% or greater, a tier 1 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 tier 1 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 tier 1 risk-based capital ratio of
less than 3%, or a leverage ratio of less than 3%. An institution will be
designated critically undercapitalized if the institution has a ratio of
tangible equity to total assets equal to or less than 2%.
Undercapitalized institutions are required to submit capital restoration
plans to the appropriate federal banking agency and are subject to certain
operational restrictions. Moreover, companies controlling an undercapitalized
institution are required to guarantee the subsidiary institution's compliance
with the capital restoration plan subject to an aggregate limitation of the
lesser of 5% of the institution's assets or the amount of the capital deficiency
when the institution first failed to meet the plan.
Significantly or critically undercapitalized institutions and
undercapitalized institutions that have not submitted or complied with
acceptable capital restoration plans are subject to regulatory sanctions. A
forced sale of shares or merger, restrictions on affiliate transactions, and
restrictions on rates paid on deposits are required to be imposed unless the
supervisory agency has determined that such restrictions would not further
capital improvement. The agency may impose other specified regulatory sanctions
at its option. Generally, the appropriate federal banking agency is required to
authorize the appointment of a conservator or receiver within 90 days after an
institution becomes critically undercapitalized.
The federal banking agencies have adopted uniform procedures for the
issuance of directives by the appropriate federal banking agency. Under these
procedures, an institution will generally be provided advance notice when the
appropriate federal banking agency proposes to impose one or more of the
sanctions set forth above. These procedures provide an opportunity for the
institution to respond to the proposed agency action or, where circumstances
warrant immediate agency action, an opportunity for administrative review of the
agency's action.
ADMINISTRATIVE ENFORCEMENT AUTHORITY. The OTS has 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".
15
<PAGE>
CONSUMER PROTECTION REGULATIONS
The Bank is subject to many federal consumer protection statutes and
regulations including, but not limited to, the following:
THE TRUTH IN LENDING ACT ("TILA"). The TILA, enacted into law in 1968, is
designed to ensure that credit terms are disclosed in a meaningful way so that
consumers may compare credit terms more readily and knowledgeably. As a result
of the TILA, all creditors must use the same credit terminology and expressions
of rates, the annual percentage rate, the finance charge, the amount financed,
the total of payments, and the payment schedule.
THE FAIR HOUSING ACT ("FH ACT"). The FH Act, enacted into law in 1968,
regulates many practices, including making it unlawful for any lender to
discriminate in its housing-related lending activities against any person
because of race, color, religion, national origin, sex, handicap, or familial
status.
THE EQUAL CREDIT OPPORTUNITY ACT ("ECOA"). The ECOA, enacted into law in
1974, prohibits discrimination in any credit transaction, whether for consumer
or business purposes, on the basis of race, color, religion, national origin,
sex, marital status, age (except in limited circumstances), receipt of income
from public assistance programs, or good faith exercise of any rights under the
Consumer Credit Protection Act.
THE REAL ESTATE SETTLEMENT PROCEDURES ACT ("RESPA"). The RESPA, enacted
into law in 1974, requires lenders to provide borrowers with disclosures
regarding the nature and cost of real estate settlements. RESPA is applicable to
all federally related mortgage loans. A "federally related mortgage loan"
includes any loan secured by a first or subordinate lien on residential real
property designed for occupancy by one-to-four families, including a refinancing
of an existing loan secured by the same property, if: (1) the loan is made by
any lender, the deposits of which are federally insured or any lender that is
regulated by a federal agency, (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. 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 the institution's record of helping to meet
the credit needs of their entire community, including low-and moderate-income
neighborhoods, and 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's last public evaluation dated December 10, 1999, issued by its
primary regulator, the OTS, rated the Bank "outstanding". The Bank's previous
CRA assessment rating, as of December 2, 1996, 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.
16
<PAGE>
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 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.
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999 (the "1999 Act") into law. The
primary purpose of the 1999 Act is to eliminate barriers between investment
banking and commercial banking, permitting, with certain limitations, the
affiliation of banks, securities firms, insurance companies, and other financial
service providers. The 1999 Act prohibits the formation of any new unitary
savings and loan company, unless an application was pending with the OTS as of
May 4, 1999. Existing unitary savings and loan holding companies, such as the
Company, may continue to operate under current law as long as the company
continues to meet the definition of a unitary savings and loan holding company.
The 1999 Act also imposes new restrictions on the sharing of customer
information, repeals the SAIF special reserve, and revises the Federal Home Loan
Bank Act ("FHLB Act"). Changes to the FHLB Act included a change in the manner
of calculating the Resolution Funding Corporation obligations payable by the
FHLBs; an expansion in the purposes for when FHLB advances may be used; and a
removal of the requirement that Federal Savings Associations be FHLB members.
17
<PAGE>
TAXATION
FEDERAL TAXATION
The Parent Company 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 as discussed below. See Note 16 to the Consolidated Financial Statements.
NET OPERATING LOSS LIMITATIONS
The Bank succeeded to substantial net operating losses ("NOLs") as a result
of the original acquisition in 1988. The Company's total NOLs at September 30,
2000 were $321 million. Section 382 of the Internal Revenue Code imposes an
annual limitation on the amount of taxable income a corporation may offset with
NOLs. The limitation imposed by Section 382 is determined by multiplying the
value of the Company's stock (both common stock and preferred stock) at the time
of an Ownership Change (as defined by Section 382) by the applicable long-term
tax exempt rate. 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.
The Company's issuance of its Corporate Premium Income Equity Securities
("Corporate PIES") and cumulative redeemable preferred stock ("Redeemable
Preferred Stock Series A") in August 1999 caused an Ownership Change under
Internal Revenue Code 382. See Note 17 to the Consolidated Financial Statements.
This Ownership Change will extend the utilization period of the Company's NOLs,
with the result that the Company will no longer be required to share certain of
the tax benefits associated with these losses with a third party pursuant to a
contractual agreement entered into in connection with the acquisition of the
Bank. This extension resulted in the recognition of $3 million of tax benefits
during fiscal 2000 and $13.5 million during fiscal 1999. As a result of this
Ownership Change, the Company's annual NOL utilization is limited to
approximately $59.5 million, based on the closing market price at August 11,
1999, the date of the Ownership Change.
PAYMENTS IN LIEU OF FEDERAL INCOME TAXES
In connection with the original acquisition of the Bank by the Parent
Company in 1988, the Federal Home Loan Bank Board ("FHLBB") approved the Tax
Benefits Agreement. The Tax Benefits Agreement, as amended in December 1993,
requires the Bank to pay to the Federal Savings and Loan Insurance Corporation
("FSLIC") Resolution Fund an amount equal to one-third of the sum of federal and
state net tax benefits as defined in the original acquisition agreements ("Net
Tax Benefits"). 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. Net Tax Benefits items are tax savings resulting mainly from
the utilization of any amount of NOLs. The obligation to share tax benefit
utilization will continue through September 30, 2003. The estimated tax savings,
by year, were as follows (in millions):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30, SAVINGS
------------------ -------
<S> <C>
1998............................ $38.1
1999............................ 40.5
2000............................ 17.8
</TABLE>
The Ownership Change, caused by the issuance of the Corporate PIES and
Redeemable Preferred Stock Series A, deferred the utilization of the Company's
NOLs, with the result that the Company will no longer be required to share
certain of the tax benefits associated with these losses beyond fiscal 2003.
STATE TAXATION
The Parent Company 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
18
<PAGE>
creates jurisdiction for taxation in certain states, which results in the filing
of state income tax returns. Amounts for state franchise tax liabilities are
included as non-interest expense in the Consolidated Statements of Operations.
ITEM 2. PROPERTIES
The leases for the Company's headquarters and support facilities in effect
at September 30, 2000 had terms from three to eight years, with annual rental
payments of $7.8 million. A majority of leases outstanding at September 30, 2000
relate to Community Banking branches and expire within four years or less. The
following table sets forth the number and location of the Community Banking, SBA
lending, Commercial Banking, and wholesale mortgage origination offices of the
Company as of September 30, 2000:
<TABLE>
<CAPTION>
NUMBER OF OFFICES
------------------------------------------------------------------------------
COMMUNITY
BANKING WHOLESALE
BRANCHES COMMERCIAL MORTGAGE
--------------- SBA LENDING BANKING ORIGINATION
LOCATION OWNED LEASED OFFICES LEASED OFFICES LEASED OFFICES LEASED TOTAL
-------- ----- ------ -------------- -------------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Dallas/Ft. Worth Area................ 16 62 1 1 -- 80
Houston Area......................... 14 53 1 1 1 70
Other Texas.......................... 5 7 1 -- -- 13
California........................... -- -- 1 3 1 5
Other U.S............................ -- -- 12 18 9 39
--- --- --- --- --- ---
Total........................... 35 122 16 23 11 207
=== === === === === ===
</TABLE>
The Company's net investment in premises and equipment was $88.6 million at
September 30, 2000.
ITEM 3. LEGAL PROCEEDINGS
COURT OF CLAIMS LITIGATION
In connection with the original acquisition of the Bank by the Parent
Company in 1988, the FHLBB approved the Forbearance Agreement. Under the terms
of the Forbearance Agreement, the FSLIC agreed to waive or forbear from the
enforcement of certain regulatory provisions with respect to regulatory capital
requirements, liquidity requirements, accounting requirements, and other
matters. After the enactment of the Financial Institutions Reform Recovery and
Enforcement Act of 1989 ("FIRREA"), the OTS took the position that the capital
standards set forth in FIRREA applied to all savings institutions, including
those institutions that had been operating under previously granted capital and
accounting forbearances, and that FIRREA eliminated those forbearances. While
the Bank has not had to rely on such forbearances or waivers in order to remain
in compliance with existing capital requirements as interpreted by the OTS, the
position of the OTS 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 connection with the original acquisition.
On July 25, 1995 the Bank, the Parent Company, and Hyperion Partners LP
(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 that 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 that would have allowed the Bank to count as capital for regulatory
purposes, and to amortize over a period of 25 years, the $30.7 million
difference between certain FSLIC payment obligations to the Bank and the
discounted present value of those future FSLIC payments.
In March 1999, the United States Court of Federal Claims granted the
Company's motion for summary judgment on the issue of liability and held that
the United States was liable for claims in the case filed by the Plaintiffs. On
August 5, 1999, the Court denied a motion for summary judgment filed by the
United States of
19
<PAGE>
America on the issue of lost profits damages. The Company's case proceeded to
trial on the amount of damages on September 13, 1999, and the taking of evidence
by the Court concluded on October 21, 1999. The parties have submitted
post-trial briefs and presented final oral arguments. The Plaintiffs' seek and
offered evidence in support of damages of approximately $560 million. The
government argued that damages to Plaintiffs as a result of the breach, if any,
approached zero. 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. No assurances can be given on the outcome of this case.
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.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed on the NASDAQ National Market System
under the symbol "BNKU". At December 1, 2000, there were approximately 521
shareholders of record for the Company's common stock and 2 shareholders of
record for the Company's Corporate PIES. 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 for the Company's common
stock to be 5,521 and the actual number of shareholders for the Corporate PIES
to be 452. The last reported sales price of common stock on December 12, 2000,
was $62.50 per share.
The high and low common stock prices by quarter for the year ended
September 30 were as follows:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1999
First quarter...................... $45.500 $23.625
Second quarter..................... 43.313 38.250
Third quarter...................... 44.000 38.250
Fourth quarter..................... 40.188 29.250
2000
First quarter...................... $41.000 $26.375
Second quarter..................... 32.000 22.375
Third quarter...................... 40.000 27.688
Fourth quarter..................... 52.125 34.250
The cash dividends paid by quarter were as follows:
1999
First quarter...................................... $0.157
Second quarter..................................... 0.157
Third quarter...................................... 0.193
Fourth quarter..................................... 0.185
2000
First quarter...................................... $0.185
Second quarter..................................... 0.185
Third quarter...................................... 0.185
Fourth quarter..................................... 0.185
</TABLE>
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 "Business -- Regulation -- Capital Distributions" for a
discussion of these restrictions.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presented is derived from and should
be read in conjunction with the Company's Consolidated Financial Statements.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
SUMMARY OF FINANCIAL CONDITION
ASSETS
Cash and cash equivalents............ $ 193,996 $ 183,260 $ 236,588 $ 138,366 $ 124,987
Securities purchased under agreements
to resell and federal funds sold... 491,062 390,326 495,282 366,249 689,194
Securities and other investments..... 128,490 143,538 104,522 73,564 72,852
Mortgage-backed securities........... 881,272 1,004,002 938,528 1,570,399 1,658,967
Loans
Single family -- held for
investment..................... 6,132,916 6,451,606 4,696,201 5,802,722 6,120,191
Single family -- held for sale... 947,629 592,583 2,149,009 697,410 256,656
Commercial....................... 6,985,941 5,408,675 3,518,280 2,239,898 1,014,176
Consumer......................... 900,482 663,338 504,407 306,370 172,844
Mortgage servicing rights............ 579,880 534,694 410,868 272,214 123,392
Other assets......................... 918,555 872,657 727,370 587,176 556,593
----------- ----------- ----------- ----------- -----------
Total assets................ $18,160,223 $16,244,679 $13,781,055 $12,054,368 $10,789,852
=========== =========== =========== =========== ===========
LIABILITIES, MINORITY INTEREST,
REDEEMABLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY
Deposits............................. $ 8,714,791 $ 7,508,502 $ 6,894,227 $ 5,571,402 $ 5,404,385
Federal Home Loan Bank advances...... 6,921,300 6,443,470 4,783,498 3,992,581 3,490,654
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 699,454 516,900 824,043 1,312,301 834,286
Notes payable........................ 368,860 368,762 219,720 220,199 115,000
Other liabilities.................... 306,078 308,131 182,673 167,923 223,640
----------- ----------- ----------- ----------- -----------
Total liabilities........... 17,010,483 15,145,765 12,904,161 11,264,406 10,067,965
----------- ----------- ----------- ----------- -----------
Minority interest -- Bank preferred
stock.............................. 185,500 185,500 185,500 185,500 185,500
Redeemable preferred stock........... 100,000 160,000 -- -- --
Stockholders' equity................. 864,240 753,414 691,394 604,462 536,387
----------- ----------- ----------- ----------- -----------
Total liabilities, minority
interest, redeemable
preferred stock, and
stockholders' equity...... $18,160,223 $16,244,679 $13,781,055 $12,054,368 $10,789,852
=========== =========== =========== =========== ===========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SUMMARY OF OPERATIONS
Interest income...................... $1,287,061 $1,007,986 $905,800 $816,483 $816,900
Interest expense..................... 870,419 658,365 615,047 547,914 586,210
---------- ---------- -------- -------- --------
Net interest income.............. 416,642 349,621 290,753 268,569 230,690
Provision for credit losses.......... 40,669 38,368 20,123 18,107 16,489
---------- ---------- -------- -------- --------
Net interest income after
provision for credit losses.... 375,973 311,253 270,630 250,462 214,201
Non-interest income
Loan servicing fees, net......... 71,795 54,408 35,975 32,381 30,383
Deposit fees and charges......... 35,096 23,176 17,888 13,419 9,820
Net gains
Single family loans and
servicing rights.......... 12,611 18,909 11,124 21,182 43,074
Securities and
mortgage-backed
securities................ 3,587 1,290 2,761 2,718 4,001
Other loans................. 7,176 3,299 651 1,128 3,189
Sale of mortgage
offices(1)................ -- -- -- 4,748 --
---------- ---------- -------- -------- --------
Net gains................... 23,374 23,498 14,536 29,776 50,264
Other............................ 19,753 18,879 13,254 8,428 6,330
---------- ---------- -------- -------- --------
Total non-interest income........ 150,018 119,961 81,653 84,004 96,797
---------- ---------- -------- -------- --------
Non-interest expense
Compensation and benefits........ 139,560 109,944 88,890 76,836 89,205
SAIF deposit insurance
premiums....................... 2,136 3,974 4,167 4,797 45,690
Court of claims litigation....... 2,000 7,575 1,800 -- --
Merger-related and restructuring
costs(1)....................... -- 2,394 -- -- 10,681
Other............................ 148,821 125,758 97,621 93,755 96,573
---------- ---------- -------- -------- --------
Total non-interest expense....... 292,517 249,645 192,478 175,388 242,149
---------- ---------- -------- -------- --------
Income before income taxes,
minority interest, and
extraordinary loss............. 233,474 181,569 159,805 159,078 68,849
Income tax expense (benefit)......... 80,304 53,659 25,862 60,986 (75,487)
---------- ---------- -------- -------- --------
Income before minority interest
and extraordinary loss......... 153,170 127,910 133,943 98,092 144,336
Minority interest
Bank preferred stock dividends... 18,253 18,253 18,253 18,253 18,253
Payments in lieu of dividends(2). -- -- -- -- 6,413
---------- ---------- -------- -------- --------
Income before extraordinary
loss........................... 134,917 109,657 115,690 79,839 119,670
Extraordinary loss -- early
extinguishment of debt(3).......... -- -- -- 2,323 --
---------- ---------- -------- -------- --------
Net income....................... $ 134,917 $ 109,657 $115,690 $ 77,516 $119,670
========== ========== ======== ======== ========
Net income available to common
stockholders................... $ 125,948 $ 107,955 $115,690 $ 77,516 $119,670
========== ========== ======== ======== ========
Earnings per common share
Basic............................ $ 3.88 $ 3.34 $ 3.59 $ 2.41 $ 4.01
Diluted.......................... 3.80 3.28 3.51 2.38 3.81
CERTAIN RATIOS AND OTHER DATA
Book value per common share.......... $ 26.56 $ 23.22 $ 21.47 $ 18.77 $ 17.96
Dividends paid per common share...... 0.74 0.69 0.64 0.55 3.35
Average common shares outstanding.... 32,460 32,299 32,200 32,210 29,872
Average common shares and potential
dilutive common shares
outstanding........................ 33,103 32,941 32,976 32,536 29,927
Regulatory capital ratios of the Bank
Tangible capital................. 6.98% 7.14% 6.74% 7.71% 6.57%
Core capital..................... 6.99 7.15 6.76 7.76 6.64
Total risk-based capital......... 11.04 11.71 10.48 13.17 13.09
Return on average assets(4).......... 0.87 0.85 1.04 0.86 1.28
Return on average common equity...... 15.67 14.81 17.81 13.53 22.98
Efficiency ratio(5).................. 50.44 51.86 50.22 49.24 71.93
Stockholders' equity to assets....... 4.76 4.64 5.02 5.01 4.97
Tangible stockholders' equity to
tangible assets.................... 4.35 4.14 4.60 4.91 4.82
Net yield on interest-earning
assets............................. 2.54 2.53 2.45 2.55 2.12
Interest rate spread................. 2.49 2.54 2.42 2.41 1.91
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CERTAIN RATIOS AND OTHER DATA --
CONTINUED
Average interest-earning assets to
average interest-bearing
liabilities........................ 1.01 1.00 1.01 1.03 1.04
Single family servicing portfolio.... $31,791,445 $30,892,993 $27,935,300 $24,518,396 $13,246,848
Fundings
Single family.................... 2,815,923 3,680,202 3,791,447 2,188,943 3,603,371
Commercial....................... 6,342,774 4,479,385 2,883,938 1,497,779 900,977
Consumer......................... 447,594 318,409 370,338 153,944 125,992
----------- ----------- ----------- ----------- -----------
Total fundings....................... $ 9,606,291 $ 8,477,996 $ 7,045,723 $ 3,840,666 $ 4,630,340
=========== =========== =========== =========== ===========
Nonperforming assets to total
assets............................. 0.66% 0.67% 0.59% 0.62% 1.12%
Allowance for credit losses to
nonperforming loans................ 112.79 92.25 76.62 73.40 44.85
Allowance for credit losses to total
loans.............................. 0.74 0.63 0.44 0.44 0.53
Net charge-offs to average loans..... 0.08 0.05 0.13 0.23 0.17
Full-time equivalent employees....... 2,614 2,578 1,968 1,577 2,340
Number of Community Banking
branches........................... 157 150 83 71 70
Number of SBA lending offices........ 16 23 2 -- --
Number of Commercial Banking
offices............................ 23 20 19 11 9
Number of mortgage origination
offices(1)......................... 11 10 8 6 85
CERTAIN RATIOS AND OTHER DATA --
EXCLUDING ADJUSTING ITEMS(6)
Adjusted net income.................. $ 131,641 $ 110,830 $ 91,256 $ 76,915 $ 57,127
Adjusted net income available to
common stockholders................ 122,672 109,128 91,256 76,915 57,127
Earnings per diluted share........... 3.71 3.31 2.77 2.36 1.81
Return on average assets............. 0.85% 0.86% 0.85% 0.85% 0.67%
Return on average common equity...... 15.29 14.94 14.60 13.43 11.50
Efficiency ratio..................... 50.30 49.70 49.33 49.24 55.44
</TABLE>
------------
(1) During fiscal 1997, the Company sold certain of its mortgage origination
offices. During fiscal 1996 in anticipation of this sale, the offices not
sold were restructured or closed. The mortgage origination branches shown at
September 30, 2000, 1999, 1998, and 1997 are wholesale mortgage origination
offices. The merger-related and restructuring costs recorded in fiscal 1999
related to the Company's acquisition of Texas Central.
(2) In connection with its original acquisition of the Bank in 1988, the Bank
issued to the FDIC-FSLIC Resolution Fund 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.
(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.
(4) Return on average assets is net income without deduction of minority
interest, divided by average total assets.
(5) Efficiency ratio is non-interest expenses (excluding goodwill amortization),
divided by net interest income plus non-interest income, excluding the gain
on the sale of mortgage offices.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
24
<PAGE>
(6) Adjusting items are comprised of the following for fiscal 2000, 1999, 1998,
1997, and 1996:
-- 2000 (adjusting items decreased actual earnings per share ("EPS")
$0.09) -- (1) a positive income tax adjustment of $3.0 million,
(2) court of claims litigation expenses of $2.0 million ($1.3 million
net of tax), and (3) an improvement in the servicing portfolio valuation
of $2.4 million ($1.5 million net of tax);
-- 1999 (adjusting items decreased actual EPS $0.03) -- (1) a positive
income tax adjustment of $13.5 million, (2) court of claims litigation
expenses of $7.6 million ($4.7 million net of tax), (3) an additional
$13 million provision for credit losses associated with the increased
growth of certain types of single family and commercial loans
($8.1 million net of tax), and (4) $2.9 million of costs related to the
Texas Central acquisition ($1.8 million net of tax);
-- 1998 (adjusting items increased actual EPS $0.74) -- (1) two positive
income tax adjustments of $33.5 million, (2) an increase in the
commercial loan provision for credit losses 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 of $6.7
million ($4.2 million net of tax);
-- 1997 (adjusting items increased actual 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 (adjusting items increased actual EPS $2.00) -- (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 of $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.
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MERGER WITH WASHINGTON MUTUAL
On August 18, 2000, the Company and Washington Mutual entered into a
definitive agreement whereby the Company will merge into Washington Mutual. The
agreement provides that each share of Bank United Corp. common stock will be
converted into 1.3 shares of Washington Mutual common stock. In addition, Bank
United Corp.'s shareholders will receive contingent payment right certificates
representing the right to receive the proceeds, if any, relating to the
Company's pending forbearance claim, less related taxes and expenses. See "Legal
Proceedings." Also Bank United Corp.'s Corporate PIES will be converted into a
new series of Washington Mutual corporate premium income equity securities with
substantially the same terms. As an inducement and condition to Washington
Mutual entering into the merger agreement, the Company and Washington Mutual
entered into a stock option agreement, which granted Washington Mutual an option
to purchase 6,462,862 shares of Bank United Corp. common stock (approximately
19.9% of those outstanding) at a price of $42.375 per share under certain terms
and conditions set forth in that agreement. Additionally, the merger agreement
requires the Company to pay termination fees of up to $52 million to Washington
Mutual if the merger agreement terminates under a number of specified
circumstances. The transaction is subject to approval of the Company's
stockholders and the OTS and is expected to close during the quarter ending
March 31, 2001.
In connection with, but prior to the merger with Washington Mutual, the
Bank may exercise its right to call its preferred stock (Bank Preferred Stock
Series A and B). In the event the Bank decides to call the preferred stock, an
agreement will be entered into by Washington Mutual, the Bank, and the Company
providing that the Bank and the Company will be made financially whole for all
of their costs, expenses, and charges in connection with these transactions. The
agreement also will provide for the Bank to maintain existing regulatory capital
levels.
DISCUSSION OF RESULTS OF OPERATIONS
OVERVIEW
2000 COMPARED TO 1999. Net income was $134.9 million or $3.80 per diluted
share for fiscal 2000, compared to $109.7 million or $3.28 per diluted share for
fiscal 1999. Net interest income increased due to higher levels of
interest-earning assets, particularly commercial loans, and a special dividend
received from the FHLB. A larger average loan servicing portfolio, coupled with
the favorable impact of rising interest rates on that portfolio, contributed to
an increase in net loan servicing fees. Expansion of the Community Banking
business continued to produce an increase in deposit fees and charges. Higher
non-interest expenses included costs associated with the growth in the Community
and Commercial Banking businesses. The Company also recorded a $3.0 million
income tax benefit during the current year related to increased NOLs available
for future periods and a $13.5 million tax benefit was recorded during fiscal
1999.
1999 COMPARED TO 1998. Net income was $109.7 million or $3.28 per diluted
share for fiscal 1999, compared to $115.7 million or $3.51 per diluted share for
fiscal 1998. The decrease in net income was primarily due to two positive income
tax adjustments recorded during fiscal 1998 totaling $33.5 million. A
$13.5 million positive income tax adjustment was recorded in fiscal 1999. Net
interest income increased due to higher levels of interest-earning assets,
particularly commercial loans. Non-interest income increased due to higher net
servicing fee revenue and increased gains on sales of single family loans. The
increase in the provision for credit losses related to the growth in the single
family and commercial loan portfolios, as well as changes in the mix of those
portfolios. Non-interest expenses were up due to growth in the Community Banking
and Commercial Banking businesses.
SEGMENTS
The Company's business segments include Commercial Banking (comprised of
Residential Construction Lending, Mortgage Banker Finance, Commercial Real
Estate Lending, Multi-Family Lending, Healthcare Lending, and Other Commercial
Lending), Community Banking, Mortgage Banking, (comprised of Mortgage Servicing
and Mortgage Production) and Investment Portfolio. Financial information by
segment is reported on a basis consistent with how such information is presented
to management for purposes of making operating decisions and assessing
performance. See Note 21 to the Consolidated Financial Statements.
26
<PAGE>
Summarized financial information by business segment for fiscal 2000 and
1999 was as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------------
INCOME REVENUES ASSETS
-------- -------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
2000
Commercial Banking
Residential Construction
Lending........................ $ 32,989 $ 45,806 $ 1,590,238
Mortgage Banker Finance......... 26,768 40,474 1,682,357
Commercial Real Estate
Lending........................ 21,115 27,652 1,106,372
Multi-Family Lending............ 20,543 27,560 1,275,153
Healthcare Lending.............. 16,959 22,624 782,452
Other Commercial Lending........ 9,263 16,835 451,322
-------- -------- -----------
Total Commercial Banking... 127,637 180,951 6,887,894
Community Banking.................... 29,238 199,722 1,626,274
Mortgage Banking
Mortgage Servicing.............. 33,489 77,356 835,369
Mortgage Production............. 4,491 33,238 3,519,111
-------- -------- -----------
Total Mortgage Banking..... 37,980 110,594 4,354,480
Investment Portfolio................. 44,714 71,446 4,472,730
-------- -------- -----------
Reportable Segments............. 239,569 562,713 17,341,378
Other................................ (6,095) 3,947 818,845
-------- -------- -----------
Total........................... $233,474 $566,660 $18,160,223
======== ======== ===========
1999
Commercial Banking
Residential Construction
Lending........................ $ 24,181 $ 34,348 $ 1,169,138
Mortgage Banker Finance......... 22,300 30,047 1,088,144
Commercial Real Estate
Lending........................ 15,786 21,896 865,339
Multi-Family Lending............ 15,665 21,310 1,061,347
Healthcare Lending.............. 8,550 12,483 615,794
Other Commercial Lending........ 6,016 9,953 477,894
-------- -------- -----------
Total Commercial Banking... 92,498 130,037 5,277,656
Community Banking.................... 21,489 148,789 1,179,002
Mortgage Banking
Mortgage Servicing.............. 18,686 60,820 788,941
Mortgage Production............. 14,366 42,111 2,754,640
-------- -------- -----------
Total Mortgage Banking..... 33,052 102,931 3,543,581
Investment Portfolio................. 39,555 68,641 5,412,149
-------- -------- -----------
Reportable Segments............. 186,594 450,398 15,412,388
Other................................ (5,025) 19,184 832,291
-------- -------- -----------
Total........................... $181,569 $469,582 $16,244,679
======== ======== ===========
</TABLE>
The Commercial Bank's income grew over 37% during fiscal 2000, compared to
fiscal 1999, due to a 29% increase in commercial loan balances outstanding.
Income for the Community Bank also increased during fiscal 2000 due to expansion
of its deposit customer base and the resulting increase in deposit fees and
charges, somewhat offset by costs associated with the 7-Day Banking Center
initiative. Mortgage Servicing income increased during fiscal 2000 due to a
higher average servicing portfolio, increased servicing fees received per loan,
a slow down in the amortization rate, recovery of the impairment reserve, and
gains on sales of servicing rights in the current year. Mortgage Production
income decreased during fiscal 2000, compared to fiscal 1999, due to lower gains
on sales of single family loans caused by a reduction in fixed-rate
originations.
27
<PAGE>
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 "Quantitative and Qualitative
Disclosures About Market Risk," and Note 13 to the Consolidated
Financial Statements.
The Company's average balances, interest, and average yields were
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
2000 1999
--------------------------------- ----------------------
AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST
----------- ---------- ------ ----------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets
Short-term interest-earning
assets............................ $ 511,275 $ 34,468 6.74% $ 393,565 $ 20,842
Securities and other investments.... 166,220 9,920 5.97 166,467 7,264
Mortgage-backed securities.......... 940,174 63,446 6.75 1,098,249 69,665
Loans
Single family - held for
investment.................... 6,532,596 477,600 7.31 5,272,188 386,721
Single family - held for sale... 668,152 53,637 8.03 1,534,219 96,453
Commercial...................... 6,416,441 559,163 8.71 4,557,010 365,022
Consumer........................ 769,000 62,250 8.09 580,656 45,843
----------- ---------- ---- ----------- --------
Total loans................... 14,386,189 1,152,650 8.01 11,944,073 894,039
FHLB stock.......................... 342,716 26,577 7.75 295,206 16,176
----------- ---------- ---- ----------- --------
Total interest-earning assets... 16,346,574 1,287,061 7.87 13,897,560 1,007,986
Non-interest-earning assets......... 1,209,659 1,152,046
----------- -----------
Total assets.................... $17,556,233 $15,049,606
=========== ===========
Interest-bearing liabilities
Interest-bearing deposits
Checking accounts............... $ 252,664 2,555 1.01 $ 233,222 2,391
Money market accounts........... 2,574,383 143,551 5.58 2,202,400 109,393
Savings accounts................ 135,902 2,173 1.60 133,074 2,430
Certificates of deposit......... 4,282,467 243,777 5.69 3,469,732 182,416
Non-interest bearing deposits....... 1,225,427 -- -- 1,130,031 --
----------- ---------- ---- ----------- --------
Total deposits.................. 8,470,843 392,056 4.63 7,168,459 296,630
FHLB advances....................... 6,748,092 411,441 6.10 5,820,296 303,014
Reverse repurchase agreements and
federal funds purchased........... 601,459 35,234 5.86 644,911 32,929
Notes payable....................... 370,519 31,688 8.55 297,585 25,792
----------- ---------- ---- ----------- --------
Total interest-bearing
liabilities................... 16,190,913 870,419 5.38 13,931,251 658,365
Non-interest-bearing liabilities,
minority interest, redeemable
preferred stock, and stockholders'
equity............................ 1,365,320 1,118,355
----------- -----------
Total liabilities, minority
interest, redeemable preferred
stock, and stockholders'
equity........................ $17,556,233 $15,049,606
=========== ===========
Net interest income/interest rate
spread................................ $ 416,642 2.49% $349,621
========== ==== ========
Net yield on interest-earning assets.... 2.54%
====
Ratio of average interest-earning assets
to average interest-bearing
liabilities........................... 1.01
====
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
1999 1998
------ -------------------------------
YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE
------ ----------- -------- ------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets
Short-term interest-earning
assets............................ 5.36% $ 561,386 $ 40,601 7.23%
Securities and other investments.... 4.56 112,533 7,751 6.89
Mortgage-backed securities.......... 6.36 1,235,486 82,276 6.66
Loans
Single family - held for
investment.................... 7.34 4,844,430 371,286 7.66
Single family - held for sale... 6.29 1,667,629 111,143 6.66
Commercial...................... 8.04 2,860,296 246,427 8.62
Consumer........................ 7.94 393,671 33,638 8.54
---- ----------- -------- ----
Total loans................... 7.50 9,766,026 762,494 7.81
FHLB stock.......................... 5.48 211,544 12,678 5.99
---- ----------- -------- ----
Total interest-earning assets... 7.27 11,886,975 905,800 7.62
Non-interest-earning assets......... 966,708
-----------
Total assets.................... $12,853,683
===========
Interest-bearing liabilities
Interest-bearing deposits
Checking accounts............... 1.03 $ 215,976 3,109 1.44
Money market accounts........... 4.97 1,973,170 107,209 5.43
Savings accounts................ 1.83 127,373 3,041 2.39
Certificates of deposit......... 5.27 3,395,515 189,566 5.58
Non-interest bearing deposits....... -- 820,838 -- --
---- ----------- -------- ----
Total deposits.................. 4.15 6,532,872 302,925 4.63
FHLB advances....................... 5.21 4,090,581 236,265 5.78
Reverse repurchase agreements and
federal funds purchased........... 5.13 975,779 56,286 5.77
Notes payable....................... 8.67 220,019 19,571 8.90
---- ----------- -------- ----
Total interest-bearing
liabilities................... 4.73 11,819,251 615,047 5.20
Non-interest-bearing liabilities,
minority interest, redeemable
preferred stock, and stockholders'
equity............................ 1,034,432
-----------
Total liabilities, minority
interest, redeemable preferred
stock, and stockholders'
equity........................ $12,853,683
===========
Net interest income/interest rate
spread................................ 2.54% $290,753 2.42%
==== ======== ====
Net yield on interest-earning assets.... 2.53% 2.45%
==== ====
Ratio of average interest-earning assets
to average interest-bearing
liabilities........................... 1.00 1.01
==== ====
</TABLE>
28
<PAGE>
The following table analyzes net interest income in terms of changes in the
volume of interest-earning assets and interest-bearing liabilities and changes
in yields and rates. The table 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,
--------------------------------------------------------------------
2000 VS. 1999 1999 VS. 1998
-------------------------------- --------------------------------
VOLUME RATE NET VOLUME RATE NET
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
INTEREST INCOME
Short-term interest-earning
assets.......................... $ 7,349 $ 6,277 $ 13,626 $(10,593) $ (9,166) $(19,759)
Securities and other investments... (10) 2,666 2,656 2,789 (3,276) (487)
Mortgage-backed securities......... (10,368) 4,149 (6,219) (8,973) (3,638) (12,611)
Loans.............................. 205,407 53,204 258,611 172,394 (40,849) 131,545
FHLB stock......................... 2,942 7,459 10,401 4,655 (1,157) 3,498
-------- -------- -------- -------- -------- --------
Total...................... 205,320 73,755 279,075 160,272 (58,086) 102,186
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE
Deposits........................... 64,436 30,990 95,426 16,192 (22,487) (6,295)
FHLB advances...................... 52,709 55,718 108,427 91,948 (25,199) 66,749
Reverse repurchase agreements and
federal funds purchased......... (2,274) 4,579 2,305 (17,607) (5,750) (23,357)
Notes payable...................... 6,257 (361) 5,896 6,739 (518) 6,221
-------- -------- -------- -------- -------- --------
Total...................... 121,128 90,926 212,054 97,272 (53,954) 43,318
-------- -------- -------- -------- -------- --------
Net change in net interest
income................... $ 84,192 $(17,171) $ 67,021 $ 63,000 $ (4,132) $ 58,868
======== ======== ======== ======== ======== ========
</TABLE>
2000 COMPARED TO 1999. Net interest income was $416.6 million for fiscal
2000 compared to $349.6 million for fiscal 1999, a $67.0 million or 19%
increase. This increase was due to a $2.4 billion, or 18% increase in average
interest-earning assets.
The growth in average interest-earning assets was primarily due to a $1.9
billion or 41% increase in higher yielding commercial loans. During fiscal 2000,
average commercial loans totaled 39% of average interest-earning assets,
compared to 33% during fiscal 1999. The growth in average interest-earning
assets was funded with deposits and FHLB advances. See "-- Discussion of Changes
in Financial Condition."
The net yield was 2.54% for fiscal 2000, compared to 2.53% for fiscal 1999.
The Company's net interest income and gross yields continued an upward trend
during the current year benefiting from rate resets on the substantial portfolio
of LIBOR and prime-based commercial loans. During fiscal 2000, the Company
received a $5.4 million special dividend from the FHLB, contributing 3 basis
points to the net yield. Excluding this dividend, the net yield declined
slightly during the current year as a result of tightening market spreads
triggered by several rate increases by the Federal Reserve, the first of which
occurred during the latter part of fiscal 1999.
1999 COMPARED TO 1998. Net interest income was $349.6 million for fiscal
1999 compared to $290.7 million for fiscal 1998, a $58.9 million or 20%
increase. This increase was due to a $2.0 billion or 17% increase in average
interest-earning assets. The net yield increased 8 basis points to 2.53%.
The increase in average interest-earning assets came from growth in the
Company's higher yielding commercial loans. Average commercial loans totaled 33%
of average interest-earning assets for fiscal 1999 as compared to 24% for fiscal
1998. The growth in assets was funded primarily with FHLB advances and deposits.
The growth in deposits principally related to an increase in the number of lower
costing transaction accounts. See "-- Discussion of Changes in Financial
Condition."
The net yield increased 8 basis points during fiscal 1999. On average,
market interest rates were lower during fiscal 1999, as compared to fiscal 1998.
The favorable effect of the decline on the cost of funds exceeded the decline in
asset yields.
29
<PAGE>
PROVISION FOR CREDIT LOSSES
Management periodically evaluates each loan portfolio based on a variety of
factors in an effort to determine that the period end allowance for credit loss
level is adequate to cover probable losses. The allowance for credit losses
totaled $111.4 million or 0.74% of total loans at September 30, 2000, $82.7
million or 0.63% at September 30, 1999, and $47.5 million or 0.44% at September
30, 1998. The provision for credit losses totaled $40.7 million in fiscal 2000,
$38.4 million in fiscal 1999, and $20.1 million in fiscal 1998. See "-- Asset
Quality" and Note 6 to the Consolidated Financial Statements.
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
SINGLE
FAMILY COMMERCIAL CONSUMER TOTAL
------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at September 30, 1998........ $12,503 $32,745 $ 2,255 $ 47,503
Provision....................... 9,644 27,288 1,436 38,368
Acquisition..................... -- 2,594 -- 2,594
Net charge-offs................. (3,117) (1,356) (1,287) (5,760)
------- ------- ------- --------
Balance at September 30, 1999........ 19,030 61,271 2,404 82,705
Provision....................... 2,547 36,336 1,786 40,669
Net charge-offs................. (6,239) (4,165) (1,550) (11,954)
------- ------- ------- --------
Balance at September 30, 2000........ $15,338 $93,442 $ 2,640 $111,420
======= ======= ======= ========
</TABLE>
2000 COMPARED TO 1999. The provision for credit losses increased
$2.3 million during fiscal 2000, and was comprised of a $9.0 million increase in
the commercial loan provision offset by a $7.1 million decrease in the single
family loan provision. The consumer loan provision increased slightly year over
year.
The commercial loan provision was $36.3 million in fiscal 2000, compared to
$27.3 million in fiscal 1999, for an increase of $9.0 million. This increase,
along with an overall increase in the commercial loan allowance, was due to
higher levels of commercial loans outstanding during the year, increased risks
associated with this type of portfolio, and potential exposure associated with a
large commercial loan, which became nonperforming in June 2000. The commercial
loan allowance ratio increased to 1.35% at September 30, 2000, up from 1.14% at
September 30, 1999.
The single family loan provision was $2.5 million in fiscal 2000, compared
to $9.6 million in fiscal 1999, for a decrease of $7.1 million. This decrease
exhibits a decline in the single family held for investment loan portfolio
during fiscal 2000, a change in the mix of the portfolio during the previous
year, and the effects of a loss ratio reassessment performed in fiscal 2000. At
September 30, 2000 the single family held for investment loan portfolio totaled
$6.2 billion, down 5% from $6.5 billion at September 30, 1999. The fiscal 1999
single family provision included an additional $3 million relating to an
increase during that year of certain types of higher risk single family loans.
During fiscal 2000, the Company reassessed the single family allowance and
determined that it could be reduced based on the overall portfolio's historical
losses. Accordingly, $1.9 million of the single family allowance was reversed
through a negative provision, bringing the single family allowance ratio to
0.25% at September 30, 2000, compared to 0.29% at September 30, 1999.
The consumer loan provision increased slightly during fiscal 2000,
principally as a result of growth in the consumer loan portfolio, which
increased from $663.3 million at September 30, 1999 to $900.5 million at
September 30, 2000.
1999 COMPARED TO 1998. The increase in the provision for credit losses and
the related allowance during fiscal 1999 was a result of the significant growth
in the single family and commercial loan portfolios. An additional provision for
credit losses of $13.0 million was recorded in the fourth quarter of fiscal
1999. This provision related to the growth in certain types of single family and
commercial loans, which have historically experienced higher levels of default
and loss severity.
30
<PAGE>
The commercial loan provision was $27.3 million for fiscal 1999, compared
to $24.1 million for fiscal 1998, for an increase of $3.2 million. The provision
for fiscal 1999 resulted from an increase in the commercial loan portfolio
during the year, as well as a change in the mix of that portfolio during the
year. The commercial loan portfolio increased $1.9 billion during fiscal 1999,
from $3.5 billion at September 30, 1998 to $5.4 billion at September 30, 1999.
The commercial loan allowance ratio increased from 0.95% at September 30, 1998
to 1.14% at September 30, 1999.
The single family loan provision was $9.6 million for fiscal 1999, compared
to a negative $8.3 million for fiscal 1998, for an increase of $18.0 million.
The increase in the provision during fiscal 1999 exhibits an increase in the
single family held for investment loan portfolio, a change in the mix of that
portfolio during the year, and the effects of a loss ratio reassessment
performed in fiscal 1998. During fiscal 1998, $9.1 million of the single family
allowance was reversed through a negative provision as a result of the
historically low levels of losses experienced in that portfolio. The single
family held for investment loan portfolio increased $1.8 billion during fiscal
1999, from $4.7 billion at September 30, 1998 to $6.5 billion at September 30,
1999. The single family allowance ratio increased slightly from 0.27% at
September 30, 1998 to 0.29% at September 30, 1999.
The consumer loan provision decreased to $1.4 million during fiscal 1999,
compared to $4.4 million during fiscal 1998, primarily due to provisions
recorded during fiscal 1998 related to the consumer line of credit portfolio
which was sold during that year.
NON-INTEREST INCOME
2000 COMPARED TO 1999. The primary components of non-interest income are
net loan servicing fees, net gains from sales of single family loans, servicing
rights, and SBA loans, Community Banking deposit related fees and charges,
commissions from annuity and security sales to consumers, and Commercial Banking
fees. Non-interest income totaled $150.0 million for fiscal 2000, compared to
$120.0 million for fiscal 1999. During the current year, higher levels of net
loan servicing fees and gains on sales of single family servicing rights offset
the effect of lower fixed-rate single family loan originations and related
sales. The continued growth in the Community Bank contributed to increased
deposit fees and charges.
The largest component of non-interest income is net loan servicing fees,
which increased $17.4 million or 32% to $71.8 million during fiscal 2000,
compared to fiscal 1999. Increases in the average servicing portfolio, higher
servicing fees received per loan, and a slow down in the amortization rate all
contributed to this increase. The portfolio of single family loans serviced for
others increased $2.8 billion or 12% on average for fiscal 2000, compared to
fiscal 1999. During the last twelve months, the Company purchased $4.2 billion
in servicing rights, a large portion of which were GNMA securities, which
generally yield a higher servicing fee rate than conventional and other
government related servicing. The average service fee rate increased to 44.9
basis points for fiscal 2000, compared to 42.4 basis points for fiscal 1999. The
increased level of GNMA servicing coupled with the effect of rising market
interest rates on adjustable-rate loans in the servicing portfolio contributed
to the increase in the average service fee rate. Increased market interest rates
during the year caused a decline in mortgage loan prepayment activity, which
extended the average life and increased the overall value of the portfolio,
resulting in a slowdown in the amortization of MSRs and a recovery of the
impairment reserve. See "-- Discussion of Changes in Financial
Condition -- Mortgage Servicing Rights."
Deposit fees and charges, which are primarily comprised of Community
Banking transaction fees, totaled $35.1 million for fiscal 2000, an increase of
$11.9 million or 51%, compared to fiscal 1999. Over the past twelve months, the
Company has expanded its deposit customer base with the number of checking
accounts increasing 18% to 276,000 at September 30, 2000, compared to 233,000 at
September 30, 1999. This growth came primarily from the 7-Day Banking Centers
and, to a lesser extent, successful marketing efforts. See "-- Discussion of
Changes in Financial Condition -- Deposits."
Net gains from sales of single family loans, servicing rights, and SBA
loans and securities comprised the majority of the $23.4 million of gains during
fiscal 2000. Higher values in the Company's servicing portfolio and the
resulting gains on sales, offset the effect of lower levels of fixed-rate single
family loan originations and related sales. Gains during the current year
included $7.1 million related to the sale of $1.4 billion in servicing rights.
There were no sales of servicing rights during the prior year. Gains on sales of
single family loans were
31
<PAGE>
$5.5 million for fiscal 2000, a decline of $13.4 million from fiscal 1999,
primarily due to a decline in sales volume. Historically, single family loan
sales were comprised of fixed-rate loans originated by the Company. A sizable
decline in fixed-rate originations during fiscal 2000 caused the lower sales
volumes ($1.9 billion during fiscal 2000, compared to $2.8 billion during fiscal
1999). SBA banking gains were $10.1 million for fiscal 2000, up 114% over fiscal
1999.
1999 COMPARED TO 1998. Non-interest income increased $38.3 million or 47%
during fiscal 1999. Net loan servicing fees totaled $54.4 million, an increase
of $18.4 million or 51% during fiscal 1999. This increase was due to higher
average servicing fees received per loan and due to a larger average servicing
portfolio. The portfolio of single family loans serviced for others increased
$1.8 billion or 8% on average during fiscal 1999 as compared to fiscal 1998. The
average servicing fee rate increased to 42.4 basis points during fiscal 1999,
compared to 37.3 basis points during fiscal 1998. The increase in the servicing
portfolio was primarily due to purchases during fiscal 1999, which included a
significant amount of GNMA securities, also contributing to the increased
servicing fees earned. During fiscal 1998, the Company recorded a $4.8 million
valuation allowance to recognize the risks associated with expected increased
prepayments on the servicing portfolio's underlying loans. No additional
valuation allowance was required during fiscal 1999. See "-- Discussion of
Changes in Financial Condition -- Mortgage Servicing Rights."
Net gains from sales of single family loans, SBA loans, and securities made
in the ordinary course of business comprised the majority of the $23.5 million
of gains during fiscal 1999, up $9.0 million or 62% over fiscal 1998. Increased
volumes sold ($2.8 billion during fiscal 1999 versus $1.9 billion during fiscal
1998) and changes in the mix of products sold resulted in a $7.8 million or 70%
increase in net gains on sales of single family loans during fiscal 1999.
Increased SBA banking sales resulted in a $2.3 million or 100% increase in
related net gains, which totaled $4.7 million during fiscal 1999 compared to
$2.4 million during fiscal 1998.
Deposit fees and charges increased $5.3 million or 30% primarily due to an
increase in the number of checking accounts. Growth in the number of checking
accounts from 179,000 at September 30, 1998 to 233,000 at September 30, 1999 is
primarily due to the Midland and Texas Central acquisitions, as well as the
7-Day Banking Centers opened in Kroger stores during fiscal 1999. See
"-- Discussion of Changes in Financial Condition -- Deposits."
Other non-interest income increased $5.6 million or 42% primarily due to
increased income earned on sales of annuities due to higher sales volumes during
fiscal 1999 and higher fee revenue related to the mortgage banker finance
business.
NON-INTEREST EXPENSE
2000 COMPARED TO 1999. Non-interest expense was $292.5 million for fiscal
2000 and $249.6 million for fiscal 1999. The $42.9 million or 17% increase was
principally due to continued growth in the Community Bank and the Commercial
Bank. During fiscal 2000, the Community Banking branch network expanded to 157
branches from 150 and the number of checking accounts grew to 276,000 from
233,000. The increase in the Community Banking branches was primarily a result
of the Company's continued 7-Day Banking Center initiative. The expansion of the
SBA business within the Community Bank also contributed to the increase in
non-interest expenses. During fiscal 2000, the Commercial Bank again experienced
record loan volumes and expanded to 23 branches from 20, both of which
contributed to an increase in expenses in that segment. Technology initiatives,
including e-commerce efforts, also caused non-interest expenses to increase
during fiscal 2000. The efficiency ratio was 50.44% for fiscal 2000 and 51.86%
for fiscal 1999.
1999 COMPARED TO 1998. Non-interest expense was $249.6 for fiscal 1999 and
$192.5 million for fiscal 1998. The $57.1 million or 30% increase was due to
growth in all businesses of the Company, particularly the Community Bank and the
Commercial Bank. During fiscal 1999, the Community Banking branch network
expanded to 150 branches from 83, and the number of checking accounts grew to
233,000 from 179,000. The Community Bank expanded its 7-Day Banking Centers by
opening 59 new Kroger store locations during fiscal 1999 and expanded into
Midland, Texas by acquiring Midland American Bank in February 1999. The
Community Bank also expanded its SBA initiative during fiscal 1999, expanding
the number of offices to 23 offices at September 30, 1999 from two at September
30, 1998. During fiscal 1999, the Commercial Bank had
32
<PAGE>
record loan volumes, which contributed to additional expenses in that segment.
Technology initiatives, including the Year 2000 and e-commerce efforts also
caused non-interest expenses to increase year over year. Included in
non-interest expenses are litigation expenses of $7.6 million in fiscal 1999 and
$1.8 million in fiscal 1998 related to the Company's Court of Claims case
against the federal government. See "Legal Proceedings." Merger-related and
restructuring costs totaling $2.4 million related to the Company's acquisition
of Texas Central were also included in the fiscal 1999 non-interest expenses.
See Note 2 to the Consolidated Financial Statements. The efficiency ratio was
51.86% for fiscal 1999 and 50.22% for fiscal 1998.
INCOME TAXES
The provision for income taxes was $80.3 million for fiscal 2000,
$53.7 million for fiscal 1999, and $25.9 million for fiscal 1998. The Company's
issuance of its Corporate PIES and Redeemable Preferred Stock Series A in August
1999 caused an Ownership Change under Internal Revenue Code 382. This Ownership
Change will extend the utilization period of the Company's NOLs, with the result
that the Company will no longer be required to share certain of the tax benefits
associated with these losses with a third party pursuant to a contractual
agreement entered into in connection with the acquisition of the Bank. This
extension resulted in the recognition of $3 million of tax benefits during
fiscal 2000 and $13.5 million during fiscal 1999.
During fiscal 1998, the Company successfully resolved an outstanding tax
benefit lawsuit with the FDIC as manager of the FSLIC Resolution Fund, 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.
MINORITY INTEREST
Dividends paid on the Bank's preferred stock were $18.3 million for fiscal
2000, 1999, and 1998. These shares are not owned by the Company and,
accordingly, are shown as minority interest in the Consolidated Financial
Statements. See Note 17 to the Consolidated Financial Statements.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION
GENERAL
2000 ACTIVITY. Total assets increased $1.9 billion or 12% to
$18.2 billion at September 30, 2000, up from $16.2 billion at September 30,
1999, primarily due to growth in the commercial loan portfolio. Higher asset
levels were financed principally with an increase in deposits and FHLB advances.
1999 ACTIVITY. Total assets increased $2.4 billion or 17% to $16.2 billion
at September 30, 1999, up from $13.8 billion at September 30, 1998, primarily
due to growth in the commercial loan portfolio. Higher asset levels were
financed principally with FHLB advances and deposits.
INVESTMENTS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Repurchase agreements and federal
funds sold......................... $ 491,062 $ 390,326 $ 495,282
Securities and other investments
SBA interest-only strips........ 80,897 88,199 71,561
U.S. government and agency...... 40,299 47,468 31,127
State and local government
agency........................ 5,296 5,958 --
Other........................... 1,998 1,913 1,834
Mortgage-backed securities
U.S. government and agency...... 220,254 292,926 284,445
Other........................... 661,018 711,076 654,083
---------- ---------- ----------
Total...................... $1,500,824 $1,537,866 $1,538,332
========== ========== ==========
</TABLE>
33
<PAGE>
2000 ACTIVITY. The Company's portfolio of repurchase agreements and
federal funds sold is maintained for liquidity and short-term investment
purposes.
In connection with the Commercial Bank's SBA business, the Company
purchases SBA loans, pools these loans, and sells the resulting pools for the
purpose of generating gains. The higher yielding interest-only strips created in
connection with these poolings are retained by the Company. SBA interest-only
strips represent the contractual right to receive a portion of the interest due
on the underlying SBA loans. If actual prepayment speeds are higher than
anticipated, the value of the recorded investment may be impaired. During fiscal
2000, $365.4 million of SBA loans were pooled, of which $363.7 million were
sold, and $17.2 million of SBA interest-only strips were retained by the
Company.
The Company's MBS portfolio is maintained as a low risk, liquid asset and
is used as collateral for reverse repurchase agreements. See Note 5 to the
Consolidated Financial Statements. During fiscal 2000, the MBS portfolio
declined primarily due to sales of $55.4 million and principal repayments.
Principal repayments declined ($131.3 million in fiscal 2000 compared to
$368.3 million in fiscal 1999), as a result of higher interest rates causing a
reduction in payoffs and due to a lower average balance outstanding during the
current year. Purchases totaled $63.3 million during fiscal 2000. Trade date
purchases at September 30, 1999 totaling $42.9 million were settled during the
current year, resulting in a decline in other liabilities.
1999 ACTIVITY. During fiscal 1999, $474.4 million of SBA loans were
securitized, of which $451.5 million were sold and SBA interest-only strips of
$37.4 million were retained by the Company. Sales of securities other than SBA
totaled $29.6 million during fiscal 1999. Securities acquired in the Midland
transaction totaled $41.9 million.
During fiscal 1999, $469.9 million of MBS were purchased, a large portion
of which were AAA and AA rated commercial MBS. Principal repayments were $368.3
million for fiscal 1999, lower than the fiscal 1998 repayments of $539.7 million
due to a lower average portfolio balance outstanding as well as a decline in
payoffs during fiscal 1999. The increased net unrealized loss on securities
available for sale primarily related to the commercial MBS purchased during this
year, reflecting an increase in market interest rates and a widening of spreads
since the time of purchase.
34
<PAGE>
LOAN PORTFOLIO
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
SINGLE FAMILY
Held for investment................ $ 6,148,254 $ 6,470,636 $ 4,708,704 $5,827,260 $6,148,863
Allowance for credit losses........ (15,338) (19,030) (12,503) (24,538) (28,672)
----------- ----------- ----------- ---------- ----------
Net single family held for
investment............... 6,132,916 6,451,606 4,696,201 5,802,722 6,120,191
Held for sale...................... 947,629 592,583 2,149,009 697,410 256,656
----------- ----------- ----------- ---------- ----------
Net single family loans.... 7,080,545 7,044,189 6,845,210 6,500,132 6,376,847
----------- ----------- ----------- ---------- ----------
COMMERCIAL
Single family construction......... 1,550,382 1,254,796 781,729 392,956 243,249
Mortgage banker finance line of
credit.......................... 1,399,038 944,155 787,343 464,037 139,761
Commercial real estate
construction.................... 174,218 115,633 91,204 28,890 21,473
Commercial real estate............. 982,909 860,644 431,858 287,161 22,564
Multi-family construction.......... 334,348 228,043 171,670 106,579 30,840
Multi-family....................... 926,783 822,280 701,914 667,209 476,797
Healthcare construction............ 319,067 279,216 144,361 29,630 --
Healthcare......................... 461,775 328,541 121,348 65,545 8,750
Commercial syndication............. 292,807 305,945 173,998 72,380 --
SBA................................ 305,674 156,799 77,529 73,680 37,009
Small business..................... 241,529 135,884 68,071 61,146 40,046
Energy............................. 84,781 30,712 -- -- --
Agricultural....................... 6,072 7,298 -- -- --
----------- ----------- ----------- ---------- ----------
Total commercial........... 7,079,383 5,469,946 3,551,025 2,249,213 1,020,489
Allowance for credit losses........ (93,442) (61,271) (32,745) (9,315) (6,313)
----------- ----------- ----------- ---------- ----------
Net commercial loans....... 6,985,941 5,408,675 3,518,280 2,239,898 1,014,176
----------- ----------- ----------- ---------- ----------
CONSUMER
Real estate........................ 828,705 579,295 434,370 204,630 80,456
Installment........................ 68,889 80,253 64,491 57,121 41,059
Revolving.......................... 5,528 6,194 7,801 50,489 56,548
----------- ----------- ----------- ---------- ----------
Total consumer............. 903,122 665,742 506,662 312,240 178,063
Allowance for credit losses........ (2,640) (2,404) (2,255) (5,870) (5,219)
----------- ----------- ----------- ---------- ----------
Net consumer loans......... 900,482 663,338 504,407 306,370 172,844
----------- ----------- ----------- ---------- ----------
Total loans, net................... $14,966,968 $13,116,202 $10,867,897 $9,046,400 $7,563,867
=========== =========== =========== ========== ==========
</TABLE>
The Company's loan portfolio is concentrated in certain geographical
regions, particularly California and Texas. Because the performance of such
loans may be affected by changes in local economic and business conditions,
unfavorable or worsened economic conditions in these states could have a
materially adverse impact on the Company's financial condition, results of
operations, or liquidity. See Note 6 to the Consolidated Financial Statements
for a geographic distribution of the loan portfolio and see " -- Asset Quality."
35
<PAGE>
In recent years, the Company has focused on growing its commercial and
consumer loan portfolios primarily through originations. Single family mortgage
loan activity, however, continues to have a significant impact on the loan
portfolio. The table below shows the activity in the loan portfolio. Fundings
include originations of new loans and increases in existing loans, such as lines
of credit.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Beginning balance.................... $ 13,116,202 $ 10,867,897 $ 9,046,400
Fundings
Single family................... 2,815,923 3,680,202 3,791,447
Commercial...................... 6,342,774 4,479,385 2,883,938
Consumer........................ 447,594 318,409 370,338
Purchases
Single family................... 611,258 1,794,457 1,195,255
Commercial...................... 504,677 1,057,228 653,170
Consumer........................ -- 25,472 172
Net change in mortgage banker
finance line of credit.......... 454,883 156,812 323,306
Repayments
Single family................... (1,471,366) (2,354,372) (2,662,080)
Commercial...................... (4,981,482) (3,093,643) (2,036,509)
Consumer........................ (208,387) (178,567) (134,550)
Loans sold or securitized
Single family................... (1,918,920) (2,818,556) (1,954,080)
Commercial...................... (694,685) (692,333) (563,316)
Consumer........................ (1,267) -- --
Foreclosures....................... (49,298) (41,123) (34,738)
Net change in allowance for credit
losses.......................... (28,715) (35,202) (7,780)
Other.............................. 27,777 (49,864) (3,076)
------------ ------------ ------------
Ending balance....................... $ 14,966,968 $ 13,116,202 $ 10,867,897
============ ============ ============
</TABLE>
2000 ACTIVITY. As the Company continued to expand its commercial and
consumer lending businesses, the ratio of commercial and consumer loans, as well
as the size of the loan portfolio, increased during the year. At September 30,
2000, commercial and consumer loans made up 53% of the total loan portfolio,
compared to 46% at September 30, 1999.
The commercial loan portfolio is principally comprised of single family
construction, mortgage banker finance line of credit, commercial real estate,
multi-family, healthcare, SBA, and small business loans. The continued growth in
the commercial loan portfolio was primarily due to fundings of single family
construction loans, which totaled $4.1 billion for fiscal 2000, compared to
$2.7 billion for fiscal 1999. Commercial loan purchases during the year
primarily related to SBA loans. Purchases of mortgage banker finance loans also
contributed to the growth in the commercial loan portfolio. Higher principal
repayments during fiscal 2000, as compared to fiscal 1999, primarily related to
a larger portfolio balance.
A decrease in industry-wide refinancings caused by higher mortgage interest
rates resulted in a decline in single family loan originations, as well as lower
principal repayments during the year. Refinancings represented 35% of total
single family loan originations for fiscal 2000, compared to 67% for fiscal
1999. Purchases were higher during fiscal 1999 due to volatility in the market
that allowed the Company to purchase loans at favorable spreads. The decline in
single family loan sales volume was consistent with lower levels of fixed-rate
loan originations during the current year. See "-- Discussion of Results of
Operations -- Non-Interest Income."
The consumer loan portfolio increased 36% during fiscal 2000 as a result of
fundings of second lien, home improvement, and home equity loans.
36
<PAGE>
1999 ACTIVITY. During fiscal 1999, the Company expanded its commercial and
consumer lending businesses. At September 30, 1999, commercial and consumer
loans totaled 46% of the total loan portfolio, compared to 37% at September 30,
1998.
All commercial loan categories increased during fiscal 1999. The growth in
the commercial loan portfolio was due to fundings and purchases. A significant
portion of commercial loan fundings during fiscal 1999 related to single family
construction loans. Single family construction loan fundings totaled $2.7
billion for fiscal 1999, compared to $1.7 billion for fiscal 1998. Commercial
loan purchases during fiscal 1999 included SBA loans of $576.8 million, loans
collateralized by commercial real estate of $344.2 million, and loans obtained
in the Midland acquisition of $117.6 million. Higher principal repayments during
fiscal 1999, compared to fiscal 1998, were due to a larger portfolio balance
outstanding during the current period.
Total single family loans increased $205.5 million during fiscal 1999.
Single family loans held for investment increased $1.8 billion, while single
family loans held for sale decreased $1.6 billion. The increase in single family
loans held for investment portfolio was due to transfers of loans from the
available for sale portfolio as well as purchases during fiscal 1999. Volatility
in the secondary market during fiscal 1999 enabled the Company to obtain these
loans at favorable spreads. Sales increased $883.4 million or 46% during fiscal
1999, also contributing to the decline in the held for sale portfolio. The
decline in fundings, as well as the decline in repayments, was due to the
industry-wide reduction in refinance activity resulting from the increase in
market interest rates during the latter part of fiscal 1999.
The increase in the consumer loan portfolio primarily related to fundings
of home improvement and home equity loans.
MORTGAGE SERVICING RIGHTS
The following table shows activity in the Company's single family loans
serviced for others portfolio:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Beginning balance.................... $26,058,482 $23,491,960
Purchases....................... 4,162,179 6,673,467
Servicing on originated loans... 1,824,714 2,889,735
Sales........................... (1,397,465) --
Payoffs/amortization............ (3,577,753) (6,738,679)
Foreclosures/other.............. (309,275) (258,001)
----------- -----------
Total serviced for others............ $26,760,882 $26,058,482
=========== ===========
</TABLE>
2000 ACTIVITY. MSRs increased $45.2 million during fiscal 2000, primarily
due to purchases. During the current year, the Company purchased servicing
rights associated with $4.2 billion in loans at a cost of $90.5 million. At
September 30, 2000, $1.4 billion of these loans had not yet been transferred to
the Company and a liability approximating $49 million was included in other
liabilities at September 30, 2000. These servicing rights were transferred
during the first quarter of fiscal 2001. MSRs totaling $37.7 million were
created during fiscal 2000 through sales of $1.8 billion of originated single
family loans. Sales of servicing rights totaled $1.4 billion during the current
year. See "-- Discussion of Results of Operations -- Non-Interest Income."
Outstanding receivables related to these sales totaled $5.5 million at
September 30, 2000.
In an effort to mitigate the risk that increased prepayments would cause
the MSR portfolio to decline in value, the Company enters into interest rate
floor agreements. The Company was party to $3.2 billion in interest rate floor
agreements at September 30, 2000 and 1999. See Notes 7 and 13 to the
Consolidated Financial Statements.
During fiscal 2000, the $4.8 million valuation allowance originally
established in fiscal 1998 was reversed. A rise in market interest rates during
the current year caused a decline in prepayments, increasing the overall value
of the portfolio. Prepayments declined 46% to $3.6 billion during fiscal 2000
from $6.6 billion during fiscal 1999.
37
<PAGE>
1999 ACTIVITY. During fiscal 1999, the Company purchased servicing rights
associated with $6.7 billion in loans at a cost of $151.9 million. At
September 30, 1999, $3.3 billion of these loans had not yet been transferred to
the Company, and a resulting liability of $69.7 million was included in other
liabilities. These servicing rights were transferred during the first quarter of
fiscal 2000. Additionally, $49.5 million of MSRs were created during fiscal 1999
through sales of $2.9 billion of originated single family loans.
DEPOSITS
The composition of the Company's deposits by business unit, type of
customer, and type of account was as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------
2000 1999
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
BUSINESS UNIT
Community Banking.................... $5,761,063 $5,609,347
Commercial Banking................... 2,014,352 1,076,409
Mortgage Servicing(1)................ 454,641 391,472
Investment Portfolio................. 484,735 431,274
---------- ----------
$8,714,791 $7,508,502
========== ==========
TYPE OF CUSTOMER
Consumer............................. $5,841,375 $5,689,617
Commercial(2)........................ 2,388,681 1,387,611
Wholesale............................ 484,735 431,274
---------- ----------
$8,714,791 $7,508,502
========== ==========
TYPE OF ACCOUNT
Time (CDs)........................... $3,744,810 $3,860,553
Transaction.......................... 4,969,981 3,647,949
---------- ----------
$8,714,791 $7,508,502
========== ==========
</TABLE>
------------
(1) Comprised of escrow and principal and interest due investors.
(2) Includes $374.3 million and $311.2 million of Community Banking deposits.
2000 ACTIVITY. Transaction accounts, which include checking, savings,
money market, and escrow accounts, increased $1.3 billion or 36% during fiscal
2000, primarily due to growth in both Commercial Banking and Community Banking
deposits. The growth in the Commercial Banking deposit base is consistent with
the Company's overall strategy of providing a full range of loan and deposit
products and services to its commercial customers. Brokered deposits increased
to $478.4 million at September 30, 2000, up from $421.7 million at September 30,
1999. While the Company does not generally solicit brokered deposits, it may
from time to time accept these types of deposits when permitted by regulation
and if available at favorable rates. The increase in Community Banking deposits
primarily relates to the Company's 7-Day Banking Center initiative.
1999 ACTIVITY. Transaction accounts increased $166.6 million or 5% during
fiscal 1999. This growth was primarily due to deposits obtained in the Midland
acquisition and as a result of 48 new 7-Day Banking Centers opened in Kroger
stores in mid April 1999. Transaction accounts sourced through these Kroger
stores were $46.2 million during fiscal 1999. Brokered deposits increased to
$421.7 million at September 30, 1999.
NOTES PAYABLE
During fiscal 1999, the Bank issued $150 million of 8% subordinated
medium-term notes, with an effective rate of 8.1%. Proceeds were used for
general business purposes. See Note 11 to the Consolidated Financial Statements.
REDEEMABLE PREFERRED STOCK
In August 1999, the Company issued 2,000,000 shares of 8% Corporate PIES
for a price of $50 per share or $100 million in aggregate. Each of the Corporate
PIES consists of (a) a purchase contract for shares of Company common stock and
(b) a share of Company redeemable preferred stock ("Redeemable Preferred Stock
Series B"). Proceeds were contributed to the Bank for general business purposes.
Also in August 1999, the
38
<PAGE>
Company issued 1,200,000 shares of 7.55% Redeemable Preferred Stock Series A for
a price of $50 per share or $60 million in aggregate. Proceeds from this
offering were used for general corporate purposes. In February 2000, the Company
redeemed at par its Redeemable Preferred Stock Series A. See Note 17 to the
Consolidated Financial Statements.
OTHER
1999 ACTIVITY. The increase in premises and equipment primarily related to
the physical relocation of the servicing and loan production groups and the
opening of the 7-Day Banking Centers in Kroger stores. The increase in
intangible assets included $28.6 million of goodwill related to the Midland
acquisition.
ASSET QUALITY
The Company is exposed to certain credit risks related to the value of
collateral, if any, that secures loans held in its portfolio and the ability of
borrowers to repay their loans according to the terms thereof. In an effort to
manage these risks, the Company has implemented an overall credit review and
risk management process.
The Credit Committee, which is comprised of senior executives appointed by
the Board of Directors, establishes credit policies, approves all commercial
loans, approves all other loan fundings or loan packages exceeding certain
dollar amounts, and reports to the Board of Directors at regularly scheduled
meetings. The Company also has an Asset Review Department with the
responsibility of providing an independent ongoing review and evaluation of
asset quality to the Board of Directors.
Loan officers are responsible for recommending credit ratings to individual
loans and for classifying assets for regulatory reporting. The Credit Department
and the Credit Committee approve the credit ratings. Product directors are
required to monitor the credit quality of their portfolios, identify problem
loans, correct deficiencies and recommend loan loss allowances. They are also
required to report loan problems to the chief financial officer, the chief
credit officer, and the Asset Review Department. Additionally, changes in credit
ratings must be approved by the Asset Review Department.
The Risk Management Committee, which is comprised of senior executives
appointed by the Board of Directors, provides an oversight function for the
credit review and risk management process. This committee has been charged with:
the review of asset classifications, the review of individual portfolio risks
(including loan type concentrations, loan sizes, geographic concentrations, and
demographic and economic conditions), the approval of changes to the credit
policies, and the approval of the methodology of the allowance for credit
losses.
39
<PAGE>
SELECTED ASSET QUALITY RATIOS
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
Allowance for credit losses to
nonperforming loans
Single family................... 25.55% 25.71% 22.36% 47.37% 32.49%
Commercial...................... 249.89 436.59 607.29 669.18 1,357.63
Consumer........................ 193.12 151.77 329.20 635.97 554.03
Total........................... 112.79 92.25 76.62 73.40 44.85
Allowance for credit losses to total
loans
Single family................... 0.25 0.29 0.27 0.42 0.47
Commercial...................... 1.35 1.14 0.95 0.43 0.64
Consumer........................ 0.29 0.36 0.45 1.88 2.93
Total........................... 0.74 0.63 0.44 0.44 0.53
Nonperforming assets to total
assets............................. 0.66 0.67 0.59 0.62 1.12
Net loan charge-offs to average loans
Single family................... 0.10 0.06 0.08 0.19(2) 0.12
Commercial...................... 0.07 0.03 0.02 0.04 (0.02)
Consumer........................ 0.20 0.22 2.00(1) 2.50 4.09
Total........................... 0.08 0.05 0.13(1) 0.23(2) 0.17
</TABLE>
------------
(1) Excluding charge-offs in fiscal 1998 totaling $4.9 million related to the
sale of the consumer line of credit portfolio, the consumer charge-off ratio
would have been 0.77% and the total charge-off ratio would have been 0.08%.
(2) Excluding charge-offs totaling $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%.
IMPAIRED LOANS
The following table summarizes the recorded investments in impaired loans,
related allowances and income recognition:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
----------------------------
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
(IN THOUSANDS)
Impaired loans with allowance........ $29,493 $44,406 $3,053
Impaired loans with no allowance..... -- -- 590
------- ------- ------
Total impaired loans................. $29,493 $44,406 $3,643
======= ======= ======
Average impaired loans............... $25,130 $13,630 $3,707
Allowance for impaired loans......... 14,101 6,626 507
</TABLE>
At September 30, 2000, there were four impaired loans, three of which
became impaired during fiscal 2000. In addition to the total impaired loan
balance of $29.5 million at September 30, 2000, the Company was committed to
lend an additional $1.2 million to one of these borrowers. At September 30,
1999, there were six impaired loans, of which four were brought current and one
was foreclosed upon during fiscal 2000. The impaired loans outstanding at
September 30, 1998 were paid in full during fiscal 1999. The Company believes it
is adequately secured and reserved on each of the impaired loans at
September 30, 2000. Interest income of $2.1 million, $2.9 million, and $320,000
was recognized on impaired loans during fiscal 2000, 1999, and 1998, of which
$2.1 million, $2.9 million, and $317,000 was collected in cash.
40
<PAGE>
NONPERFORMING ASSETS
Nonperforming loans may include loans on both accrual and nonaccrual
status. On a loan-by-loan basis, management may continue to accrue interest on
loans that are past due more than 90 days, if management believes that the
individual loan is in the process of collection or renewal and the interest is
fully collectible. Nonperforming loans outstanding at September 30, 2000 were
primarily concentrated in Texas (42.52%) and California (11.17%).
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Nonperforming loans
Single family................... $ 59,503 $ 73,575 $ 55,800 $ 51,742 $ 92,187
Commercial...................... 37,428 14,170 5,398 2,159 494
Consumer........................ 1,375 1,617 688 974 1,039
-------- -------- -------- -------- --------
98,306 89,362 61,886 54,875 93,720
Premiums (discounts)................. 478 287 116 (759) (4,077)
-------- -------- -------- -------- --------
Nonperforming loans........ 98,784 89,649 62,002 54,116 89,643
Real estate owned
Single family................... 18,185 17,231 19,357 20,552 30,015
Commercial...................... 3,022 1,387 -- 486 751
-------- -------- -------- -------- --------
21,207 18,618 19,357 21,038 30,766
-------- -------- -------- -------- --------
Total nonperforming
assets................... $119,991 $108,267 $ 81,359 $ 75,154 $120,409
======== ======== ======== ======== ========
</TABLE>
Nonperforming assets increased 11% to $120.0 million during fiscal 2000,
while the nonperforming assets to total assets ratio declined from 0.67% at
September 30, 1999 to 0.66% at September 30, 2000. The growth in the commercial
loan portfolio and the inclusion of a large commercial loan, which became
nonperforming in June 2000, caused the increase in nonperforming commercial
loans. Nonperforming single family loans declined during fiscal 2000 reflecting
the Company's aggressive collection and loan modification efforts along with an
overall strong economy.
During the first quarter of fiscal 2001, a commercial loan to a mortgage
banking company was placed on nonaccrual status by the Company. At September 30,
2000, the unpaid principal balance of this loan was $36.7 million. The Company
expects it will have recoveries from available sources of repayment, including
collateral pledged to secure the loan, guaranties, claims against third parties,
and claims against various insurance policies, and that the loss, if any, in
connection with the loan is adequately reserved.
Nonperforming assets increased $26.9 million to $108.3 million during
fiscal 1999, and the nonperforming assets to total assets ratio increased from
0.59% at September 30, 1998 to 0.67% at September 30, 1999. The increase in
nonperforming assets during fiscal 1999 was a result of growth in the single
family and commercial loan portfolios, as well as the inclusion of a large
nonperforming loan to a mortgage banking company.
Nonperforming assets increased 8% or $6.2 million during fiscal 1998. This
increase was 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 rose during the year, nonperforming assets
as a percentage of the total assets decreased from 0.62% at September 30, 1997
to 0.59% at September 30, 1998.
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 real estate
owned ("REO") properties in fiscal 1997.
41
<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. The activity in,
and the allocation of the allowance for, credit losses were as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
ACTIVITY
Beginning balance....................... $ 82,705 $47,503 $39,723 $40,204 $37,170
Provision.......................... 40,669 38,368 20,123 18,107 16,489
Acquisitions....................... -- 2,594 -- -- --
Charge-offs........................ (12,650) (6,733) (13,044) (19,049) (13,860)
Recoveries......................... 696 973 701 461 405
-------- ------- ------- ------- -------
Ending balance.......................... $111,420 $82,705 $47,503 $39,723 $40,204
======== ======= ======= ======= =======
ALLOCATION
Single family........................... $ 15,338 $19,030 $12,503 $24,538 $28,672
Commercial(1)........................... 93,442 61,271 32,745 9,315 6,313
Consumer................................ 2,640 2,404 2,255 5,870 5,219
-------- ------- ------- ------- -------
Total.............................. $111,420 $82,705 $47,503 $39,723 $40,204
======== ======= ======= ======= =======
</TABLE>
(1) Includes $9.8 million, $6.6 million, $5.0 million, $2.2 million, and
$925,000 related to construction loans as of September 30, 2000, 1999,
1998, 1997, and 1996.
The allowance for credit losses increased $28.7 million or 35%, to $111.4
million during fiscal 2000. As a result of the additional reserves established,
the ratio of the allowance to nonperforming loans as well as the ratio of the
allowance to total loans increased to 112.79% and 0.74% at September 30, 2000,
up from 92.25% and 0.63% at September 30, 1999. The majority of the allowance
increase was allocated to the commercial portfolio. The increase in the
commercial loan allowance during the year was due to higher levels of commercial
loans outstanding, increased risks associated with this type of portfolio, and
potential exposure associated with a large commercial loan, which became
nonperforming in June 2000. See "-- Discussion of Results of Operations --
Provision for Credit Losses."
The allowance for credit losses increased $35.2 million or 74%, to $82.7
million during fiscal 1999. Additionally, the ratio of the allowance to
nonperforming loans and the ratio of the allowance to total loans increased to
92.25% and 0.63% at September 30, 1999, up from 76.62% and 0.44% at
September 30, 1998. These increases are a result of the significant growth in
the single family and commercial loan portfolios. An additional provision for
credit losses of $13.0 million was recorded during the fourth quarter of fiscal
1999. This provision is related to the growth in certain types of single family
and commercial loans, which have historically experienced higher levels of
default and loss severity. See "-- Discussion of Results of
Operations -- Provision for Credit Losses," and Note 6 to the Consolidated
Financial Statements. The single family loans held for investment portfolio
increased $1.8 billion or 37% during the year and the single family loans held
for investment allowance ratio increased slightly from 0.27% at September 30,
1998 to 0.29% at September 30, 1999. Similarly, the commercial loan portfolio
increased $1.9 billion or 54% during the year and the commercial loan allowance
ratio increased from 0.95% at September 30, 1998 to 1.14% at September 30, 1999.
The allowance for credit losses increased $7.8 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 loans held for investment portfolio. The
commercial loan portfolio increased $1.3 billion or 57% during fiscal 1998. Due
to this growth and the increased risks associated with this type of portfolio,
most particularly the nonresidential commercial loans, the Company increased
this portfolio's allowance levels to approximately one percent. The single
family loans held for investment portfolio decreased $1.1 billion or 19% during
fiscal 1998. The Company determined that its allowance for single family loans
held
42
<PAGE>
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 0.27%. The consumer loan allowance decreased from the year ago
period due to the sale of the consumer line of credit portfolio, of $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.
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 were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CHARGE-OFFS
Single family................... $ (6,297) $ (3,365) $ (3,933) $(11,886) $ (7,751)
Commercial...................... (4,491) (1,776) (829) (583) (114)
Consumer........................ (1,862) (1,592) (8,282) (6,580) (5,995)
-------- -------- -------- -------- --------
Total charge-offs.......... (12,650) (6,733) (13,044) (19,049) (13,860)
-------- -------- -------- -------- --------
RECOVERIES
Single family................... 58 248 241 63 31
Commercial...................... 326 420 154 21 230
Consumer........................ 312 305 306 377 144
-------- -------- -------- -------- --------
Total recoveries........... 696 973 701 461 405
-------- -------- -------- -------- --------
Total net charge-offs...... $(11,954) $ (5,760) $(12,343) $(18,588) $(13,455)
======== ======== ======== ======== ========
Net loan charge-offs to
average loans............ 0.08% 0.05% 0.13% 0.23% 0.17%
</TABLE>
Net loan charge-offs for fiscal 2000 increased over 100% from fiscal 1999,
both in the single family and commerical portfolios. Single family net loan
charge-offs increased $3.1 million, from 0.06% in fiscal 1999 to 0.10% in fiscal
2000, due primarily to the Company's aggressive collection, foreclosure, and
sales efforts during the year. Commercial net loan charge-offs increased $2.8
million, from 0.03% in fiscal 1999 to 0.07% in fiscal 2000, due to a $2.5
million partial charge-off on a nonperforming loan to a mortgage banking
company.
Net loan charge-offs for fiscal 1999 decreased $6.6 million from fiscal
1998 and the net charge-off to average loan ratio improved to 0.05%. The
decrease is primarily the result of $4.9 million of consumer charge-offs in
fiscal 1998, which were recognized upon the sale of the consumer line of credit
portfolio. Excluding the sale of the consumer line of credit portfolio, the
ratio of net charge-offs to average loans for fiscal 1998 would have been 0.08%.
Net loan charge-offs decreased $6.2 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 of $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
43
<PAGE>
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 $5.1 million during fiscal 1997. This
increase was the result of the fiscal 1997 sale of $31.3 million of
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 0.19% 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.
CAPITAL RESOURCES AND LIQUIDITY
LIQUIDITY
The management of the Company's liquidity focuses on ensuring that
sufficient funds are available to meet loan funding commitments, withdrawals
from deposit accounts, the repayment of borrowed funds, and ensuring that the
Bank complies with regulatory liquidity requirements.
The Company's primary sources of liquidity are deposits, FHLB advances,
securities sold under agreements to repurchase ("reverse repurchase
agreements"), principal and interest payments on loans and MBS, proceeds from
the sale of loans and servicing rights and proceeds from the issuance of debt
and stock. While maturities and scheduled payments of loans and MBS are
predictable sources of funds, deposit outflows, loan and servicing sales and
access to the capital markets for issuance of securities are greatly influenced
by economic conditions and general interest rates.
Deposits have provided the Bank with a stable source of funding. Average
deposits funded 48%, 48%, and 51% of average assets for fiscal 2000, 1999, and
1998. The Bank also utilizes the FHLB Dallas for a source of funds. Average FHLB
advances funded 38%, 39%, and 32% of average assets for fiscal 2000, 1999, and
1998. These advances are available to the Bank under a security and pledge
agreement. At September 30, 2000, the Bank had available $924 million under this
agreement. The Bank has also utilized borrowings under reverse repurchase
agreements as a source of funding. Borrowings under reverse repurchase
agreements are limited to the market value of the Bank's collateral. At
September 30, 2000, the Bank had $367.1 million in collateral that could be used
for additional reverse repurchase borrowings.
Under OTS regulations, the Bank must maintain, for each calendar quarter,
an average daily balance of liquid assets equal to at least 4.0% of either
(1) its net withdrawable accounts plus short-term borrowings (liquidity base) at
the end of the preceding calendar quarter or (2) the average daily balance of
its liquidity base during the preceding quarter. For the fourth quarter of
fiscal 2000, the Bank's liquidity ratio was 5.84%.
The primary source of funds for the Parent Company, excluding funds raised
through the capital markets, to meet its cash obligations and to make dividend
payments on its cumulative redeemable preferred stock, common stock, and
Corporate PIES, has been from dividends from the Bank, whose ability to pay
dividends is subject to regulations of the OTS and the terms of the preferred
stock of the Bank. At September 30, 2000, the Bank had $268.4 million of capital
available for payment of dividends without prior approval of the OTS.
At September 30, 2000, the Bank had 7,420,000 shares of preferred stock
outstanding or $185.5 million. The annual dividend requirement is
$18.3 million, and must be paid for the four most recent quarters and in full
before dividends can be paid on the Bank common stock.
At September 30, 2000, the Company had 2,000,000 shares or $100.0 million
of cumulative redeemable preferred stock outstanding. The fiscal 2000 dividend
requirement on the cumulative redeemable preferred stock was $7.3 million. The
Company may not pay dividends on its common stock, other than dividends paid in
common stock, unless full dividends on the cumulative redeemable preferred stock
have been paid, or declared and funds set aside for payment.
At September 30, 2000, the Bank had $150.0 million of subordinated
medium-term notes due in full in March 2009. The annual interest payments on the
subordinated debt total $12.0 million.
At September 30, 2000, the Company had $220.0 million of 8.875%
subordinated debt outstanding, due in May 2007. The annual interest payments on
the subordinated debt total $19.5 million. The subordinated debt indenture
restricts the Company, and any subsidiary, from paying dividends on any common
stock if the
44
<PAGE>
Company or any subsidiary is not in compliance with, or if the dividend payment
would cause the Company or any subsidiary to not meet its minimum capital
requirement as established by the FRB or another banking regulator.
COMMITMENTS
At September 30, 2000, the Company had $3.9 billion of outstanding
commitments to extend credit, $2.4 billion of which is scheduled to mature
during the 12 months following September 30, 2000. 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, 2000, total $2.7 billion and $4.1 billion. At September
30, 2000, the Company had $14.7 million in outstanding commitments to purchase
loans. Management believes that the Company has adequate resources to fund all
of its commitments. See Note 13 to the Consolidated Financial Statements.
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, 2000, 1999,
and 1998 qualified it as "well-capitalized", the highest of five tiers under
applicable regulatory definitions.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Tangible capital..................... 6.98% 7.14% 6.74%
Core capital......................... 6.99 7.15 6.76
Tier 1 risk-based capital............ 9.14 9.73 9.97
Total risk-based capital............. 11.04 11.71 10.48
</TABLE>
See "Business -- Regulation -- Capital Requirements," and Note 19 to the
Consolidated Financial Statements.
CONTINGENCIES AND UNCERTAINTIES
YEAR 2000
All of the Company's computer systems worked without incident through the
end of calendar 1999 and fiscal 2000.
RECENT ACCOUNTING STANDARDS
A discussion of recently issued accounting pronouncements and their impact
on the Consolidated Financial Statements is provided in Notes 1 and 24 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 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;
45
<PAGE>
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 loans as a percentage of the total loan portfolio;
LIQUIDITY AND CAPITAL
o changes in availability of funds increasing costs or reducing liquidity;
o changes in the ability of the Company and the Bank to pay dividends on
their preferred and 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;
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;
o changes in applicable accounting rules and interpretation thereof.
For further information regarding these factors, see "Risk Factors" in the
prospectus dated August 4, 1999, relating to the universal shelf for the
issuance of up to $830 million in various securities filed with the Securities
and Exchange Commission (File No. 333-75937 and File No. 333-83797).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 timing differences in
the duration or repricing of the Company's assets, liabilities, and
off-balance-sheet financial instruments. The Company is most affected by changes
in U.S. Treasury rates and 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 seeks to manage its interest rate risk exposure. This is done by
seeking to structure the balance sheet and off-balance-sheet portfolios to
maximize net interest income, while maintaining an acceptable level of risk to
changes in market interest rates. Management of market risk requires a balance
between profitability, liquidity, and interest rate risk.
ASSET AND LIABILITY MANAGEMENT
Interest rate risk is managed by the Asset and Liability Committee
("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
46
<PAGE>
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, 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.
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, financial options, and forward delivery
contracts. A hedge is an attempt to reduce risk by creating a relationship
whereby any gains or losses on the hedged asset or liability are expected to be
offset in whole or in part by gains or losses 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 13 to the
Consolidated Financial Statements.
SENSITIVITY ANALYSIS
The following table is a summary of the changes inherent in the Company's
net interest income over a 12 month period and market value of portfolio equity
("MVE") that are projected to result from hypothetical changes in market
interest rates. MVE is the market value of assets, less the market value of
liabilities, adjusted for the market value of off-balance-sheet instruments. The
interest rate scenarios presented in the table include interest rates at
September 30, 2000 and 1999 and as adjusted by instantaneous parallel rate
changes upward and downward of up to 200 basis points. The fiscal 2000 and 1999
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>
2000 1999
------------------------------- -------------------------------
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> <C>
+200 (4.12)% (22.78)% (5.45)% (33.28)%
+100 (1.93) (10.04) (1.79) (13.82)
0 0.00 0.00 0.00 0.00
-100 1.41 7.75 0.54 11.63
-200 2.69 13.09 0.62 26.34
</TABLE>
The positive effect of a decline in market interest rates is reduced by the
estimated effect of prepayments on the value of single family loans, MBS, and
MSRs. Further, this analysis is based on the Company's interest rate exposure at
September 30, 2000 and 1999 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
47
<PAGE>
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, 2000 was
negative $2.0 billion or 11.03% 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.
48
<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, 2000:
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING IN
-------------------------------------------------------------------
AFTER
THREE AFTER AFTER
LESS THAN MONTHS SIX MONTHS ONE YEAR
THREE BUT WITHIN BUT WITHIN BUT WITHIN AFTER NON-
MONTHS SIX MONTHS ONE YEAR FIVE YEARS FIVE YEARS REPRICING TOTAL
---------- ----------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
ASSETS(1)
Cash and investment
securities(2)................ $ 988,542 $ -- $ -- $ -- $ -- $ 181,507 $ 1,170,049
Adjustable-rate loans.......... 7,418,494 683,250 601,180 1,273,693 112,307 -- 10,088,924
Fixed-rate loans............... 982,028 114,852 278,228 1,792,995 1,757,479 -- 4,925,582
Adjustable-rate mortgage-backed
securities................... 321,568 84,216 13,376 -- -- -- 419,160
Fixed-rate mortgage-backed
securities................... 8,780 9,142 19,412 142,921 264,015 -- 444,270
Other assets................... -- -- -- -- -- 1,112,238 1,112,238
---------- ----------- ----------- ---------- ---------- ---------- -----------
Total assets............... $9,719,412 $ 891,460 $ 912,196 $3,209,609 $2,133,801 $1,293,745 $18,160,223
========== =========== =========== ========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Certificates of deposit........ $ 954,000 $ 368,637 $1,365,594 $1,056,455 $ 124 $ -- $ 3,744,810
Transaction deposits(3)........ 2,302,092 866,048 216,512 1,130,688 -- 454,641 4,969,981
---------- ----------- ----------- ---------- ---------- ---------- -----------
Total deposits............. 3,256,092 1,234,685 1,582,106 2,187,143 124 454,641 8,714,791
FHLB advances.................. 5,806,800 774,800 207,000 132,700 -- -- 6,921,300
Reverse repurchase
agreements................... 699,454 -- -- -- -- -- 699,454
Notes payable.................. -- -- -- -- 368,860 -- 368,860
Other liabilities.............. -- -- -- -- -- 306,078 306,078
Minority interest and
redeemable preferred stock... -- -- -- -- -- 285,500 285,500
Stockholders' equity........... -- -- -- -- -- 864,240 864,240
---------- ----------- ----------- ---------- ---------- ---------- -----------
Total liabilities, minority
interest, redeemable
preferred stock, and
stockholders' equity..... $9,762,346 $2,009,485 $1,789,106 $2,319,843 $ 368,984 $1,910,459 $18,160,223
========== =========== =========== ========== ========== ========== ===========
Gap before off-balance-sheet
financial instruments.......... $ (42,934) $(1,118,025) $ (876,910) $ 889,766 $1,764,817 $ (616,714)
OFF-BALANCE-SHEET(4)
Interest rate swap
agreements -- pay floating... (390,000) 300,000 -- 90,000 -- --
Interest rate swap
agreements -- pay fixed...... 125,500 -- -- (125,500) -- --
---------- ----------- ----------- ---------- ---------- ----------
Gap.............................. $ (307,434) $ (818,025) $ (876,910) $ 854,266 $1,764,817 $ (616,714)
========== =========== =========== ========== ========== ==========
Cumulative gap................... $ (307,434) $(1,125,459) $(2,002,369)
========== =========== ===========
Cumulative gap as a percentage of
total assets................... (1.69%) (6.20%) (11.03%)
========== =========== ===========
</TABLE>
------------
(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. Single family 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 18.45%.
(2) Investment securities include repurchase agreements, federal funds sold,
securities, and FHLB stock.
(3) Transaction deposits are presented over their expected repricing periods
because these types of accounts tend to reprice over time due to changes in
general market interest rates.
(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.
49
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included on page 71 and the Consolidated Financial Statements
which begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Information on the change in accountants of the Company in Form 8-K/A filed
June 23, 1999, is incorporated herein by reference.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors of the Company consists of 11 members and is divided
into three classes. The members of each class are elected for a term of three
years with one class being elected annually. Each director of the Company is
also a director of the Bank. The following table sets forth certain information
with respect to the directors of the Company, including information regarding
their ages and when they became directors.
<TABLE>
<CAPTION>
DIRECTOR OF DIRECTOR OF
THE COMPANY THE BANK TERM
NAME AGE SINCE SINCE EXPIRES
---- --- ----------- ------------ --------
<S> <C> <C> <C> <C>
Lewis S. Ranieri, Chairman........... 53 1988 1988 2003
Barry C. Burkholder.................. 60 1996 1991 2003
Lawrence Chimerine, Ph.D............. 60 1996 1990 2003
David M. Golush...................... 56 1996 1988 2001
Paul M. Horvitz, Ph.D................ 65 1996 1990 2002
Alan E. Master....................... 61 1996 1995 2003
Anthony J. Nocella................... 59 1996 1990 2001
Salvatore A. Ranieri................. 52 1988 1988 2001
Scott A. Shay........................ 43 1988 1988 2002
Patricia A. Sloan.................... 58 1996 1988 2002
Michael S. Stevens................... 51 1996 1996 2002
</TABLE>
LEWIS S. RANIERI. Mr. Ranieri is the Chairman of the Company. He was also
the President and Chief Executive Officer ("CEO") of the Company and Chairman of
the Bank from 1988 until July 15, 1996. Mr. Ranieri is the Chairman and CEO of
Ranieri & Co., Inc. ("Ranieri & Co."), positions he has held since founding
Ranieri & Co. in 1988. Mr. Ranieri is a founder of Hyperion Partners L.P., a
Delaware limited partnership ("Hyperion Partners") and of Hyperion Partners II
L.P., a Delaware limited partnership ("Hyperion Partners II"). He is also
Chairman of Hyperion Capital Management, Inc., a registered investment advisor
("Hyperion Capital"), and The Hyperion Total Return Fund, Inc. He is director of
Transworld Healthcare, Inc., the Hyperion 2002 Term Trust, Inc., and Hyperion
2005 Investment Grade Opportunity Trust, Inc. Mr. Ranieri is also Chairman and
President of various other indirect subsidiaries of Hyperion Partners and
Hyperion Partners II. Along with his brother, Salvatore A. Ranieri, and Scott A.
Shay, Mr. Ranieri controls the general partner of Hyperion Partners. Along with
Mr. Shay, Mr. Ranieri controls the general partner of Hyperion Partners II, an
investment partnership formed to make investments primarily in the financial and
real estate sectors of the economy. He is a director of Delphi Financial Group,
Inc. and a director of American Marine Holdings, Inc. ("American Marine").
Mr. Ranieri is a former Vice Chairman of Salomon Brothers Inc. ("Salomon"),
where he was employed from 1968 to 1987, and was one of the principal developers
of the secondary mortgage market. While at Salomon, Mr. Ranieri helped to
develop the capital markets as a source of funds for housing and commercial real
estate and to establish Salomon's then leading position in the mortgage-backed
securities area. He is a member of the National Association of Home Builders
Mortgage Roundtable.
50
<PAGE>
Mr. Ranieri is a Trustee for the Parish of Our Lady of the Rosary/Shrine of
St. Elizabeth Ann Seton and the Environmental Defense Fund. Mr. Ranieri is also
a director of the Peninsula Hospital Center in Queens, New York. Mr. Ranieri
received his Bachelor of Arts degree from St. John's University.
BARRY C. BURKHOLDER. Mr. Burkholder has been the President and CEO of the
Company since July 15, 1996, and has held similar positions with the Bank since
joining it on April 10, 1991. Since July 15, 1996, Mr. Burkholder also has been
Chairman of the Bank. Prior to joining the Bank, Mr. Burkholder was employed at
Citicorp/Citibank for 15 years. Mr. Burkholder became associated with Citicorp
through its then newly formed Consumer Services Group in 1976, and then became a
member of its International Staff. Mr. Burkholder moved to Citibank Savings in
London where he was named Chairman and Managing Director in 1977.
Mr. Burkholder returned to the United States in 1981 to become President of
Citicorp Person-to-Person, now part of Citicorp Mortgage, Inc., a nationwide
mortgage lending business with related mortgage banking, servicing, and
insurance activities. In 1984, he was named Chairman and CEO of Citibank
Illinois, and two years later became Central Division Executive for the U.S.
Consumer Bank. As Central Division Executive, Mr. Burkholder was responsible for
Citicorp's consumer banking activities in the Midwest and Southeast.
Mr. Burkholder began his career at Ford Motor Company in the financial planning
area and moved to Certain-teed Corporation, where his last position prior to
joining Citicorp was as President of its real estate development subsidiary.
Mr. Burkholder received a B.S. and an M.B.A. from Drexel University. He is a
former President of the Houston Symphony and serves currently as a Governing
Director. He is a Director of the Greater Houston Partnership and a trustee of
Drexel University.
LAWRENCE CHIMERINE, PH.D. Dr. Chimerine has served as President of his own
economic consulting firm, Radnor International Consulting Inc., since 1990. Dr.
Chimerine served as Chairman and CEO of the WEFA Group from 1987 to 1990 and of
Chase Econometrics from 1979 to 1987, both of which provide economic consulting
services. He testifies regularly before Congressional Committees on numerous
economic policy issues, and has served in the House Committee on International
Competitiveness and The Department of Commerce Economic Policy Board. He was
manager of economic research for the IBM Corporation from 1965 to 1979. Dr.
Chimerine received a B.S. from Brooklyn College and a Ph.D. from Brown
University.
DAVID M. GOLUSH. Mr. Golush is a private investor. Until April 2000, he
was a Managing Director of Ranieri & Co., with which he had been associated
since the firm's founding in 1988. He is an officer of direct and indirect
subsidiaries of Hyperion Partners and Hyperion Partners II. Mr. Golush was
employed by Salomon from 1972 to 1987 and was a Vice President from 1975. From
1984 to 1987, he was Chief Administrative Officer of Salomon's Mortgage and Real
Estate Department. From 1966 to 1972 he held positions in public accounting and
private industry. He has been a Certified Public Accountant in New York since
1972. Mr. Golush received a B.B.A. from the University of Cincinnati. He is
Treasurer of the New York Police & Fire Widows' & Children's Benefit Fund, Inc.
and a member of the board of the Jewish Federation of Central New Jersey.
PAUL M. HORVITZ, PH.D. Dr. Horvitz retired in 2000 from the University of
Houston where he was Professor of Banking and Finance since 1977. From 1967 to
1977, Dr. Horvitz held positions as Assistant Director of Research, Director of
Research and Deputy to the Chairman at the FDIC. Prior to joining the FDIC he
was an economist at the Federal Reserve Bank of Boston and the Office of
Comptroller of the Currency. From 1983 to 1990, Dr. Horvitz was a member of the
Board of Directors of the FHLB of Dallas, and in 1986 and 1987 he was a member
of the Federal Savings and Loan Advisory Council. He is currently a member of
the Shadow Financial Regulatory Committee. Dr. Horvitz received a B.A. from the
University of Chicago, an M.B.A. from Boston University, and a Ph.D. from
Massachusetts Institute of Technology.
ALAN E. MASTER. Mr. Master joined PaineWebber, Inc. in 1996 and is a
Financial Advisor in the Private Client Group, New York City. He began his
career with the Chemical Bank in 1961 as a commercial lending officer, became a
regional Office Head and later served as President or senior executive in banks
in Miami, Florida. In 1973, he joined Barnett Banks of Florida as President &
CEO of a major subsidiary and subsequently led the merger of five subsidiaries
of Barnett as Chairman and CEO. Other career positions have included President,
CEO, Vice Chairman and Chief Financial Officer of United Americas Bank of New
York, 1977-79; Executive Vice President and Director of The Merchants Bank of
New York, 1979-83; President and CEO, Ensign Bank FSB, New York City, 1983-1990;
President and CEO, The Master Group, specializing in financial
51
<PAGE>
services consulting, 1991-1996 and Director of Private Banking-USA, Bank
Hapoalim, New York City, 1998-99, rejoining PaineWebber in midyear 2000.
Mr. Master is a Director of ThunderWave, Inc., was a member of the Board of
Trustees of the Hyperion Government Mortgage Trust II and is a past member of
the Advisory Boards of Hyperion Partners, Hyperion Partners II and the Johnson
Graduate School of Management, Cornell University, Mr. Master received a B.A.
from Cornell University and completed all course work in finance and accounting
in the M.B.A. program at the New York University Graduate School of Business
Administration.
ANTHONY J. NOCELLA. Mr. Nocella has been the Vice Chairman and the Chief
Financial Officer of the Company and the Bank since July 27, 1997. Prior to that
date, Mr. Nocella had served as the Executive Vice President and Chief Financial
Officer of the Company since June 27, 1996, and has held those same positions
with the Bank since joining it in July 1990. He manages the Commercial Banking
and Financial Markets (Mortgage Production and Investment Portfolio) Groups of
the Bank. From 1988 to 1990, Mr. Nocella provided consulting services to the
Bank as President of Nocella Management Company, a firm that specialized in
asset and liability management consulting for financial institutions. From 1981
to 1987, Mr. Nocella served as Executive Vice President and Chief Financial
Officer of Meritor Financial Group, as well as President of its commercial
banking/financial markets arm, Meritor Financial Markets ("Meritor"). During his
13 years at Meritor (1974-1987), he also served as President of PSFS Management
Company, Inc., the holding company of The Philadelphia Saving Fund Society, the
nation's largest savings institution at the time. Mr. Nocella's other positions
have included Controller and Director of Financial Services for American
Medicorp (now Humana), Senior Managing Auditor and Consultant for KPMG LLP and
adjunct professor of finance at St. Joseph's University and Drexel University.
Mr. Nocella, a Certified Public Accountant, received an undergraduate degree in
accounting from LaSalle University and an M.B.A. in computer science and finance
from Temple University. He also completed the graduate Bank Financial Management
Program of the Wharton School at the University of Pennsylvania. Mr. Nocella is
the President and a director of the Community Bankers Association of Southeast
Texas, a delegate and member of the Mortgage Finance and FHLB Committees of the
America's Community Bankers, is Immediate Past Chairman and a director of the
Texas Savings and Community Bankers Association, and delegate and past President
of the Financial Executives Institute.
SALVATORE A. RANIERI. Mr. Ranieri is an attorney and private investor.
Mr. Ranieri was formerly the General Counsel and a Managing Director of Ranieri
& Co. He was also the Vice President, Secretary and General Counsel of the
Company from 1988 until July 15, 1996. He is a director of Hyperion Capital, as
well as of various other direct and indirect subsidiaries of Hyperion Partners.
Along with his brother, Lewis S. Ranieri, and Scott A. Shay, Mr. Ranieri
controls the general partner of Hyperion Partners. Mr. Ranieri was one of the
original founders of Ranieri & Co. and of Hyperion Partners. Prior to joining
Ranieri & Co., he had been President of Livia Enterprises, Inc., a private
venture capital and real estate investment company that oversaw investments in
the real estate, construction, and manufacturing sectors. In addition to his
business experience, Mr. Ranieri is also a lawyer. During his career, his
practice has included corporate, litigation, real estate and regulatory matters.
Until 1984, he had been a member of a law firm in New York City. He is admitted
to practice law in New York and various federal courts. He received his Bachelor
of Arts degree from New York University and his Juris Doctor degree from
Columbia Law School.
SCOTT A. SHAY. Mr. Shay has been a Managing Director of Ranieri & Co.,
since its formation in 1988. He was also a Vice President of the Company from
1988 until July 15, 1996. Mr. Shay is currently a director of Hyperion Capital,
Inc., and Transworld Healthcare, Inc., as well as an officer or director of
other direct and indirect subsidiaries of Hyperion Partners and Hyperion
Partners II. Mr. Shay is also a director of the general partner of Cardworks,
L.P., a credit card servicer, and of Capital Lease Funding, L.P., a specialized
commercial mortgage bank. Additionally, he is a director of Bank Hapoalim B.M.
in Tel Aviv, Israel. Along with Lewis S. Ranieri and Salvatore A. Ranieri,
Mr. Shay controls the general partner of Hyperion Partners. Along with
Mr. Lewis S. Ranieri, Mr. Shay controls the general partner of Hyperion Partners
II. Prior to joining Ranieri & Co., Mr. Shay was a director at Salomon where he
was employed from 1980 to 1988. Mr. Shay was involved with Salomon's thrift
mergers and acquisitions practice and with mortgage banking financing and
mergers and acquisitions. Mr. Shay graduated Phi Beta Kappa from Northwestern
University with a B.A. in economics and received a Master of Management degree
with distinction from Northwestern's Kellogg Graduate School of
52
<PAGE>
Management. Mr. Shay serves as Vice President and Treasurer of the Jewish Youth
Connection, Inc., a non-profit organization.
PATRICIA A. SLOAN. Ms. Sloan is an Investment Banker and a private
investor. Until April 2000, she was a Managing Director of Ranieri & Co. and has
an economic interest in Hyperion Partners and Hyperion Partners II. She is also
a director of certain funds managed by Hyperion Capital Management, including
Hyperion 2002 Term Trust, Inc., Hyperion Investment Grade Opportunity Term
Trust, Inc., and the Hyperion Total Return Fund, Inc. Prior to joining Ranieri &
Co. in 1988, Ms. Sloan was employed at Salomon from 1972 to 1988, where she
served as director of Salomon's Financial Institutions Group. Prior to joining
Salomon, Ms. Sloan was employed at Bache & Co., Inc. from 1965 to 1972. Ms.
Sloan received a B.A. from Radcliffe College and an M.B.A. from Northwestern
University.
MICHAEL S. STEVENS. Mr. Stevens has been a Director of the Company since
August 1996, and a Director of the Bank since October 1996. Mr. Stevens is
Chairman of Michael Stevens Interests, Inc., a real estate development and
management company, which he founded in 1981. Since its inception, the company
has developed, acquired, and managed over 80 real estate projects valued at over
$550 million and representing over 9 million square feet of building area and
9,000 apartment units. Through September 1999, Mr. Stevens served as the
founding Vice Chairman-Finance of the Board of the Harris County-Houston Sports
Authority, and led the negotiating team responsible for the Houston Astros new
downtown baseball stadium, as well as the new NFL stadium being built for the
Houston Texans expansion team recently awarded to Houston. Mr. Stevens serves on
the Board of Directors of Memorial Hermann Foundation, is on the Urban Center
Advisory Board of the Brookings Institute, serves on the Board of the 2012
Foundation, which is working to bring the Olympics to Houston, and is the
Houston Chair for Texas Exile, a gun crime initiative funded by the Governor's
Criminal Justice Division. From 1995 through 1997, Mr. Stevens served as
Assistant to the Mayor for Housing and Inner-City Revitalization, chairman of
the Houston Housing Finance Corporation and the Houston Redevelopment Authority,
and was instrumental, during the administration of Mayor Bob Lanier, for the
major downtown revitalization currently underway. He was also 1996-97 chairman
of the Fannie Mae National Advisory Council. Among his other volunteer
positions, Mr. Stevens serves as a deacon at Second Baptist Church and is
chairman of the Church's Centurion Foundation. He graduated from the University
of Houston in 1973 with a Bachelors in Business Administration.
Mr. Lewis Ranieri and Mr. Salvatore Ranieri are brothers. No other director
or executive officer is related to any other director or executive officer by
blood, marriage, or adoption. There are no existing arrangements or
understandings between a director and any other person pursuant to which such
person was elected a director.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established two standing committees:
an Audit Committee and a Compensation Committee. The Board of Directors does not
currently have a standing nominating committee. The following is a brief
description of the committees of the Board of Directors:
AUDIT COMMITTEE. The Audit Committee meets with management to consider the
adequacy of the internal controls and the objectivity of financial reporting.
The Audit Committee also meets with the independent auditors and with
appropriate financial personnel and internal auditors of the Company regarding
these matters. The Audit Committee recommends to the Board the appointment of
the independent auditors. Both the internal auditors and the independent
auditors periodically meet alone with the Audit Committee and have unrestricted
access to the Audit Committee. The Audit Committee consists of Mr. Master and
Drs. Chimerine and Horvitz, none of whom is an employee of the Company, with Dr.
Horvitz serving as Chair. The Audit Committee held five meetings during fiscal
2000.
COMPENSATION COMMITTEE. The Compensation Committee's functions include
administering management incentive compensation plans and making recommendations
to the Board with respect to the compensation of directors and officers of the
Company. The Compensation Committee also supervises the Company's employee
benefit plans. The Compensation Committee consists of all directors except Mr.
Burkholder and Mr. Nocella, with Mr. Lewis Ranieri serving as Chair. The
Compensation Committee held three meetings during fiscal 2000.
53
<PAGE>
To the extent that any permitted action taken by the Board conflicts with
action taken by the Compensation Committee, the action taken by the Board shall
control. Mr. Burkholder and Mr. Nocella have recused themselves from Board
deliberations regarding their compensation and it is anticipated that this
practice will continue.
COMPENSATION OF DIRECTORS
Each director, except Mr. Burkholder and Mr. Nocella, who are employees of
the Bank, receives a single annual retainer of $25,000 for service on the Boards
of Directors of the Company and the Bank. All non-employee directors also
receive a fee of $1,000 for each in person meeting of the Board of Directors of
the Company that they attend and a fee of $500 for each telephonic meeting of
the Board and each meeting of any Committee of the Board that they attend. The
Chair of the Audit Committee receives an additional annual retainer of $2,000.
Non-employee directors are also eligible to participate in the Director Stock
Compensation Plan and the Directors Supplemental Savings Plan. Directors who are
employees of the Company or any subsidiary do not receive additional
compensation for service as directors, and are not eligible to participate in
the Director Stock Compensation Plan or the Directors Supplemental Savings Plan.
See also "Executive Officer Compensation -- The Director Stock Compensation
Plan", " -- Directors Supplemental Savings Plan" and "Security Ownership of
Certain Beneficial Owners and Management" and "Certain Relationships and Related
Transactions".
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information concerning executive officers of
the Company and executive officers of the Bank who do not serve on the Board of
Directors of the Company. All executive officers of the Company and the Bank are
elected by the Board of Directors of the Company and the Board of Directors of
the Bank, respectively, and serve until their successors are elected and
qualified. There are no arrangements or understandings between the Company and
any person pursuant to which such individual was elected an executive officer of
the Company or the Bank.
PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
<TABLE>
<CAPTION>
NAME AGE POSITION AND OCCUPATION
---- --- -----------------------
<S> <C> <C>
Jonathon K. Heffron.................. 48 Chief Operating Officer of the Company
since July 15, 1996 and of the Bank since
May 1994. General Counsel of the Company
since July 15, 1996 and of the Bank since
May 1990. Prior to joining the Bank, Mr.
Heffron served for two years as President
and CEO of First Northern Bank, Keene, New
Hampshire. Prior to joining First Northern
Bank, Mr. Heffron served for more than 10
years in several capacities at the FHLB
Board, Washington, D.C. and at the FHLB
Dallas, including as Attorney Advisor,
Trial Attorney, General Counsel, Chief
Administrative Officer, and Chief
Operating Officer. Mr. Heffron received a
B.A. Magna Cum Laude from the University
of Minnesota, a J.D. from Southwestern
University School of Law, and an LL.M.
from the National Law Center of George
Washington University. Mr. Heffron is a
member of the Government Affairs Steering
Committee and the FHLB System Committee of
America's Community Bankers. Mr. Heffron
was a director of the FHLB of Dallas from
1995 to 1996.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION AND OCCUPATION
---- --- -----------------------
<S> <C> <C>
Ronald D. Coben. 43 Executive Vice President -- Community Banking
of the Company since July 15, 1996 and of the
Bank since July 1996. Previously, Mr. Coben
served as Regional Retail Director and
Marketing Director since joining the Bank in
October 1989. Prior to joining the Bank, Mr.
Coben was employed by Texas Commerce
Bancshares (Chemical Bank) since 1986 as Vice
President and Manager of the Relationship
Banking Division of the Retail Bank. Prior to
joining Texas Commerce Bancshares, Mr. Coben
served as the Director of Market Research for
ComputerCraft, Inc. and Foley's Department
Stores. Mr. Coben received a B.A. degree from
the University of Texas at Austin. Mr. Coben
is a member of the the Board of Directors of
the Houston Festival Foundation, Inc. and
INROADS, a leadership organization for
minority youth.
Karen J. Hartnett.................... 52 Senior Vice President -- Human Resources of
the Company since July 15, 1996 and of the
Bank since January 1991. Prior to joining the
Bank, Ms. Hartnett was employed by Equimark
as Senior Vice President Human Resources
since 1989. From 1988 to 1989, Ms. Hartnett
was Senior Vice President and Chief Personnel
Officer for NCNB Texas, and she served
predecessor organizations as Vice President
and as Director of Human Resources from 1983.
Ms. Hartnett's human resources experiences
include positions at Zale Corporation, Mobil
Oil Corporation and Sweet Briar College.
Ms. Hartnett received an A.B. from Sweet
Briar College in 1970. Ms. Hartnett serves on
the Executive Committee of the Board of
Trustees for the Houston Ballet Foundation
and is a lifetime member of the Houston
Livestock Show and Rodeo.
Sonny B. Lyles....................... 55 Senior Vice President and Chief Credit
Officer of the Company since July 15, 1996
and of the Bank since February 1991. Prior to
joining the Bank, Mr. Lyles was employed by
First Union National Bank as Senior Credit
Officer beginning in 1983. Prior to joining
First Union National Bank, Mr. Lyles was
employed at First Tulsa Bank, Florida
National Bank and South Carolina National
Bank. Mr. Lyles received a B.A. from Wofford
College. Mr. Lyles is a member of the Board
of the Texas Chapter, and a member of the
International Board of Directors of The Risk
Management Association, a trade association
of bank lending and credit officers.
Mr. Lyles is the Wofford College alumni
representative from Houston.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION AND OCCUPATION
---- --- -----------------------
<S> <C> <C>
Wayne J. Sadin....................... 47 Executive Vice President and Chief
Information Officer of the Company since
March 30, 1998. Prior to joining the
Company, Mr. Sadin was employed by
Michigan National Bank, a subsidiary of
National Australia Bank, as Senior Vice
President, Chief Technology Officer and
Director of Information Technology since
1992. From 1990 to 1992 Mr. Sadin was
employed by Data-Link Systems, a
subsidiary of Mellon Bank, as Vice
President of Products and Operations. From
1981 to 1990 Mr. Sadin was employed by
Murray Financial Corporation as Senior
Vice President and Director of Human
Resources and Information Technology.
Prior to joining Murray, Mr. Sadin held
various engineering, technology
management, and consulting positions.
Mr. Sadin received a B.S. degree from
Boston University and an M.S. degree from
the University of Texas, and completed the
program in Delivering Information Services
at the Harvard Business School. Mr. Sadin
is a Certified Computing Professional,
with four certificates: Management,
Procedural, Systems Programming, and
Business Programming. Mr. Sadin serves on
the Digital Insight Customer Advisory
Board, the Aspect Communications Customer
Advisory Board, and the Alltel "ACTION"
group Board of Directors.
</TABLE>
56
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash and non-cash compensation for each
of the last three fiscal years awarded to or earned by the CEO of the Company
and the other four most highly compensated executive officers of the Company and
the Bank.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- ---------------------------------------
AWARDS PAYOUTS
------------------------- ----------
OTHER SECURITIES
ANNUAL UNDERLYING
COMPEN- RESTRICTED OPTIONS/ LTIP
SALARY BONUS(1) SATION(3) STOCK(4) SARS(5) PAYOUTS(6)
NAME AND POSITION YEAR ($) ($) ($) ($) (#) ($)
----------------- ---- ------- --------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Barry C. Burkholder............... 2000 475,000 1,000,000 -- -- 22,500 2,260,500
President and 1999 475,000 875,000 -- 690,156 77,500 --
Chief Executive Officer 1998 375,000 825,000 -- -- 20,000 --
Anthony J. Nocella................ 2000 350,000 750,000 -- -- 20,000 1,849,500
Vice Chairman and 1999 350,000 662,500 -- 631,000 43,200 --
Chief Financial Officer 1998 315,000 585,000 -- -- 18,000 --
Jonathon K. Heffron............... 2000 250,000 525,000 -- -- 18,000 924,750
Executive Vice President, 1999 250,000 450,000 -- 394,375 34,000 --
General Counsel, and 1998 225,000 400,000 -- -- 16,000 --
Chief Operating Officer
Ronald D. Coben................... 2000 225,000 500,000 -- -- 15,000 667,875
Executive Vice President 1999 225,000 310,000 -- 394,375 27,000 --
Community Banking 1998 200,000 275,000 -- -- 15,000 --
Wayne J. Sadin(2)................. 2000 200,000 250,000 -- -- 15,000 308,250
Executive Vice President 1999 200,000 225,000 -- 394,375 27,000 --
Chief Information Officer 1998 101,538 100,000 -- -- 20,000 --
<CAPTION>
ALL
OTHER
COMPEN-
SATION(7)
NAME AND POSITION ($)
----------------- ---------
<S> <C>
Barry C. Burkholder............... 6,800
President and 9,051
Chief Executive Officer 7,856
Anthony J. Nocella................ 6,800
Vice Chairman and 47,010
Chief Financial Officer 18,127
Jonathon K. Heffron............... 6,800
Executive Vice President, 5,687
General Counsel, and 4,800
Chief Operating Officer
Ronald D. Coben................... 6,800
Executive Vice President 5,771
Community Banking 4,749
Wayne J. Sadin(2)................. 6,950
Executive Vice President 3,394
Chief Information Officer --
</TABLE>
------------
(1) For all named executives, the bonus column includes payments from the
Company's annual bonus plan. These and all other management bonuses were
paid as determined by the Compensation Committee and were based on the
Company's financial and the executive's individual performance for the
respective fiscal year. The Company's financial performance is measured by
net income, return on assets, and return on equity as compared to the Bank's
annual business plan and a specified peer group of other thrifts of
comparable size.
(2) Mr. Sadin was hired by the Company on March 30, 1998 as Executive Vice
President, Chief Information Officer. In fiscal 1998, Mr. Sadin received one
grant of 10,000 options as of the date he joined the Company and another
grant of 10,000 options on the Company's annual grant date of July 30, 1998.
(3) Each executive was provided an auto allowance, financial planning services,
and country club and dining club memberships. The value of such auto
allowances, financial planning services, and club memberships for each
executive did not exceed $50,000 or 10% of such officer's annual cash
compensation for each of the last three fiscal years.
(4) A total of 63,500 shares of the Company's common stock was awarded to the
named executive officers in April 1999. These shares vest 20% on April 9,
2001, 30% on April 9, 2002, and 50% on April 9, 2003 ("Officers Restricted
Stock"). The dollar amounts reported for fiscal 1999 reflect the fair market
value of the Company's common stock as of the date of grant (April 9,1999),
without diminution for restrictions on transfer. Based on the closing sale
price of the Company's common stock on the NASDAQ on September 30, 2000,
these shares had an aggregate value of $3.2 million ($50.6875 per share),
without giving effect to the diminution of value attributable to the
restrictions on such stock. Dividends are payable on the Officers Restricted
Stock at the same rate as all other shares of Company's common stock,
whether or not vested.
(5) In fiscal 2000, 1999, and 1998, the Company issued options to purchase an
aggregate of 90,500, 208,700, and 89,000 shares, to named executives
pursuant to option agreements under the 1996 Stock Incentive Plan.
(6) Represents the dollar value of all payouts pursuant to long-term incentive
plans ("LTIP"). A LTIP is any plan providing compensation intended to serve
as incentive for performance to occur over a period longer than one fiscal
year, whether such performance is measured by reference to financial
performance of the registrant or an affiliate, the registrant's stock price,
or any other measure, but excluding restricted stock, stock option and stock
appreciation right ("SAR") plans. In fiscal 2000, the Company made an
aggregate cash distribution of $6,010,875 to the named executive officers
pursuant to the performance units granted to such officers under the 1996
Stock Incentive Plan. The performance units granted equate in value to
shares of Company's common stock on a one-for-one basis and were earned
based on the achievement of performance goals over a performance period
beginning October 1, 1997 and ending September 30, 2000. Cash was
distributed to the named executive officers equal to the number of
performance units earned under the plan multiplied by the fair value of the
Company's common stock as of September 30, 2000.
(7) "All Other Compensation" amounts represent contributions by the Company to
each executive's account in the Bank's 401(k) Plan. For fiscal 1999 and
1998, the amounts include interest paid on a distribution from the Bank's
Supplemental Executive Savings Plan for Messrs. Burkholder and Nocella. For
fiscal 1999, the amounts include a tax equalization amount paid to Messrs.
Burkholder, Nocella, Heffron, and Coben.
57
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
individual grants of options to purchase the Company's common stock under the
1996 Stock Incentive Plan that were made during fiscal 2000 to the executive
officers named in the Summary Compensation Table. All options granted in fiscal
2000 had an exercise price no less than the fair market value at the date of
grant.
<TABLE>
<CAPTION>
% OF
NUMBER OF TOTAL
SECURITIES OPTIONS/
UNDERLYING SARS
OPTIONS/ GRANTED TO EXERCISE
SARS EMPLOYEES OR BASE GRANT DATE
GRANTED IN FISCAL PRICE EXPIRATION PRESENT VALUE(3)
NAME (#) YEAR(2) ($/SH) DATE $
---- ---------- ---------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Barry C. Burkholder.................. 22,500 3.86 26.219 1/28/10 262,800
Anthony J. Nocella................... 20,000 3.43 26.219 1/28/10 233,600
Jonathon K. Heffron.................. 18,000 3.09 26.219 1/28/10 210,240
Ronald D. Coben...................... 15,000 2.57 26.219 1/28/10 175,200
Wayne J. Sadin....................... 15,000 2.57 26.219 1/28/10 175,200
</TABLE>
------------
(1) All options have an exercise price equal to the fair market value of the
Company's common stock on the date of grant and vest pursuant to the
following schedule: 20% on January 28, 2002, 30% on January 28, 2003, and
50% on January 28, 2004.
(2) Based upon options to purchase an aggregate of 583,000 shares of the
Company's common stock granted to all employees in fiscal 2000. No SARs were
granted during fiscal 2000.
(3) The grant date present value is based on the Black-Scholes Option pricing
model and results in a grant date present value of $11.68 per share. The
calculation included the following assumptions: estimated volatility of
36.20%; risk-free interest rate of 6.66% (based on returns available through
U.S. Treasury bonds); dividend yield of 2.24% (assumes dividend yield paid
through expiration); and 3,652 days to expiration of options. Option values
are dependent on general market conditions and the performance of the
Company's common stock. There can be no assurance that the values in this
table will be realized.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth, with respect to the executive officers
named in the Summary Compensation Table, the aggregate number of options
exercised during fiscal 2000, any value realized thereon, the number of
unexercised options at the end of the fiscal year (exercisable and
unexercisable) and the value thereof.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
ACQUIRED FISCAL YEAR END(#) AT FISCAL YEAR-END(1)($)
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry C. Burkholder................ -- -- 529,327 112,000 15,445,431 1,541,765
Anthony J. Nocella................. -- -- 190,159 74,000 5,188,697 1,067,849
Jonathon K. Heffron................ -- -- 128,512 61,600 3,503,386 902,662
Ronald D. Coben.................... -- -- 40,534 51,000 913,945 742,781
Wayne J. Sadin..................... -- -- 8,000 54,000 31,000 732,468
</TABLE>
------------
(1) Total value of options based on a fair market value of $50.6875 per share as
of September 30, 2000, the closing sale price of the Company's common stock
as reported by the NASDAQ on that date.
MANAGEMENT COMPENSATION PROGRAM
In connection with the Company's initial public offering, the Company's
Boards of Directors approved a management compensation program for executive
officers, other key officers and employees, and certain directors. Options to
purchase shares of Company common stock issued under this plan became fully
vested and exercisable during fiscal 1999 and will expire if not exercised
within 10 years of the date of the grant. No further grants or compensation may
be made or awarded under this program. At September 30, 2000, there were
1,075,249 options outstanding under this plan.
58
<PAGE>
STOCK INCENTIVE PLANS
Since its initial public offering in fiscal 1996, the Company has
established three stock incentive plans (the 1996 Stock Incentive Plan, the 1999
Stock Incentive Plan and the 2000 Stock Incentive Plan), whereby it has granted
options to purchase shares of its common stock to certain employees of the Bank.
At September 30, 2000, options outstanding under these plans are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS AVAILABLE
PLAN AT SEPTEMBER 30, 2000 FOR FUTURE GRANTS
---- ---------------------- ------------------
<S> <C> <C>
2000 Stock Incentive Plan............ 451,200 48,300
1999 Stock Incentive Plan............ 794,550 38,200
1996 Stock Incentive Plan............ 1,232,750 220,100
</TABLE>
These plans are designed to promote the success and enhance the value of
the Company by linking the interests of certain of the full-time employees of
the Company and the Bank to those of the Company's stockholders and by providing
an incentive for outstanding performance. Non-employee directors are not
eligible to participate in these plans. The stock incentive plans are
administered by the Compensation Committee. Four types of awards may be granted
to participants under these plans: stock options (both non-qualified and
incentive), SARs, restricted common stock and performance units.
In the event of a "Change of Control" any option or SAR that is not then
exercisable and vested will become fully exercisable and vested, the
restrictions on any restricted stock will lapse and all performance units will
be deemed earned. The plans define a Change of Control as the acquisition of 25%
or more of the common stock of the Company, a change in a majority of the Board
of Directors, unless approved by the incumbent directors (other than as a result
of a contested election), and certain reorganizations, mergers, consolidations,
liquidations, or dissolutions.
In fiscal 1999, the Company issued 140,750 shares of restricted common
stock from the 1996 and 1999 Stock Incentive Plans. No shares or options were
awarded to any director or executive named in the Summary Compensation Table
under the 2000 or 1999 Stock Incentive Plans.
In fiscal 1998, the Company granted performance units to executive officers
and other key officers and employees under the 1996 Stock Incentive Plan. These
units, which equate in value to shares of the Company's common stock on a
one-for-one basis, were 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
Compensation Committee was to determine the number of units that were earned
based on the Company's performance. Subsequent to September 30, 2000, it was
determined that the number of units earned was 201,000. Accordingly, cash was
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 DIRECTOR STOCK COMPENSATION PLAN
The Company has a director stock compensation plan in order to promote a
greater identity of interest between the Company's non-employee directors (each
an "Eligible Director") and its stockholders, and attract and retain individuals
to serve as directors and to provide a more direct link between directors'
compensation and stockholder value. The plan is administered by the Company's
Board of Directors. A maximum of 250,000 shares of common stock is available for
issuance and available for grants under this plan.
The Director Stock Plan permits each Eligible Director to make an annual
irrevocable election to receive shares of common stock in lieu of all or any
portion of their Annual Retainer. In addition, 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 Company amended its Director Stock Plan
during fiscal 2000. Options issued under this plan after it was amended have an
exercise price equal to the fair value of the Company's common stock at the date
of grant and are fully vested and exercisable on the date of grant. Options
issued under this plan prior to its amendment have an exercise price equal to
115% of the fair value of the Company's common stock at the date of grant and
did not vest or become exercisable unless the fair value of the Company's common
stock equaled or exceeded the exercise price of the option during a 30-day
vesting period beginning one year after the date of grant. Vested options will
expire if not exercised within 10 years of the date of grant. Any unvested
Director options terminate and are cancelled as of
59
<PAGE>
the date the optionee's service as a director ceases for any reason. All
Director options become fully vested and exercisable upon a Change of Control.
The Company granted a total of 9,000 director options during fiscal 2000 and
10,000 each year for fiscal 1999 and 1998. At September 30, 2000, there were
29,000 options outstanding and 221,000 shares available for future grant under
this Plan.
MANAGEMENT EMPLOYMENT ARRANGEMENTS
The Parent Company entered into new employment agreements for Messrs.
Burkholder, Nocella, Heffron, and Coben on the effective date of its initial
public offering in 1996, and for Mr. Sadin on the effective date of July 1,
1999. These agreements supercede all prior employment arrangements.
Mr. Burkholder's agreement with the Company provides for his employment for
three years at an annual base salary of not less than $475,000 and a
discretionary bonus. Mr. Nocella's agreement with the Company provides for his
employment for three years at an annual base salary of not less than $350,000
and a discretionary bonus. Mr. Heffron's agreement with the Company provides for
his employment for three years at an annual base salary of not less than
$250,000 and a discretionary bonus. Mr. Coben's agreement with the Company
provides for his employment for three years at an annual base salary of not less
than $225,000 and a discretionary bonus. Mr. Sadin's agreement with the Parent
Company provides for his employment for three years at an annual base salary not
less than $200,000 and a discretionary bonus. These agreements provide that the
period of employment is automatically extended on the first day of each month so
that the period of employment terminates three years from such date, unless the
executive or the Company gives notice to terminate such automatic extension at
least sixty days before such monthly renewal date. In addition, upon a Change of
Control, if the executive is still employed by the Company, the period of
employment will be extended until the third anniversary of the effective date of
the Change of Control or if the period of employment has terminated prior to the
Change of Control, a new three year employment period shall commence upon a
Change of Control. If for any reason other than cause the Company elects to
terminate the employment of any of the above executives before the scheduled
expiration date of his agreement, the executive's employment will be deemed to
have been terminated by the Company without cause for purpose of the severance
and retirement benefits described below.
Under the terms of Mr. Burkholder's employment agreement, the amount of the
discretionary bonus paid to Mr. Burkholder is in the sole discretion of the
Board of Directors of the Company, which will take into account such matters as
the Company's actual financial performance as compared to its budgeted financial
performance, Mr. Burkholder's performance in implementing new business
initiatives approved by the Board of Directors of the Company, Mr. Burkholder's
performance in improving the financial performance of any division or unit of
the Company or the Bank, or any of their respective subsidiaries as determined
by the Board of Directors of the Company in its sole discretion, the Company's
actual financial performance compared to its peers, and Mr. Burkholder's total
compensation as compared to the total compensation of CEOs at comparable
financial institutions. The discretionary bonuses to be paid to the other
executive officers are at the discretion of the CEO and the Board of Directors
of the Company.
Under each agreement described above, if the executive's employment is
terminated by the Company other than for cause or disability or by the executive
for good reason or within a 30-day period following the first anniversary of a
Change of Control, he is generally entitled to receive a lump sum equal to three
times (for Messrs. Burkholder, Nocella, and Heffron) or two times (for Messrs.
Coben and Sadin) his annual base salary and the higher of his most recent bonus
under the Company's annual incentive plans and the highest bonus under such
annual incentive plans for the last three full fiscal years prior to the
effective date of the Change of Control, continue in the Company's welfare
benefit plans for three years (for Messrs. Burkholder, Nocella, and Heffron) or
two years (for Messrs. Coben and Sadin) and receive in a lump sum a supplemental
pension amount based on three years (for Messrs. Burkholder, Nocella, and
Heffron) or two years (for Messrs. Coben and Sadin) of deemed employment after
termination, have all stock options, restricted stock and other stock-based
compensation become immediately exercisable or vested, receive outplacement
services, at the Company's sole expense, as incurred, up to a maximum of $45,000
(for Messrs. Burkholder, Nocella and Heffron), and $25,000 (for Messrs. Coben
and Sadin). If any payment or distribution by the Company to an executive is
determined to be subject to the excise tax imposed by Section 4999 of the Code,
the amount of payment or distribution may be reduced so that the excise tax
liability of the executive is minimized.
60
<PAGE>
NON-QUALIFIED RETIREMENT SAVINGS PLAN
The Supplemental Executive Savings Plan ("SESP") is available to a select
group of management and other highly compensated employees. Eligible employees
are allowed to make irrevocable decisions prior to the beginning of the plan
year to defer up to 20% of compensation (as defined in the SESP) and up to 100%
of bonus income. The monies deferred earn interest at a rate approximately equal
to the Bank's five-year borrowing rate. The Bank does not contribute to the
SESP. The SESP is funded from the general assets of the Bank and participants
are general unsecured creditors of the Bank. As of September 30, 2000, there
were 24 participants in the SESP, the total amount of deferrals and interest
equaled approximately $1.6 million and the rate of interest for the SESP was
6.83%.
DIRECTORS SUPPLEMENTAL SAVINGS PLAN
The Directors Supplemental Savings Plan ("DSSP") is available to outside
directors. Eligible directors are allowed to make irrevocable decisions prior to
the beginning of the plan year to defer up to 100% of cash retainer and meeting
fees. The monies deferred earn interest at a rate approximately equal to the
Bank's five-year borrowing rate. The Bank does not contribute to the DSSP. The
DSSP is funded from the general assets of the Bank, and participants are general
unsecured creditors of the Bank. As of September 30, 2000, there were three
participants in the DSSP, the total amount of deferrals and interest equaled
approximately $488,000 and the rate of interest for the DSSP was 6.83%.
STANDARD ARRANGEMENTS WITH DIRECTORS
See "-- Directors and Executive Officers of Registrant -- Compensation of
Directors."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee determines the compensation of the Company's
executive officers. The Compensation Committee consists of all of the directors
of the Company other than Barry C. Burkholder and Anthony J. Nocella. No other
member of the Compensation Committee is an officer or employee of the Company or
the Bank. Lewis S. Ranieri, Salvatore A. Ranieri and Scott A. Shay are also
members of the Compensation Committee of the Bank and are also members of
various boards of directors and compensation committees of various companies
which are subsidiaries of, or entities controlled by, Hyperion Partners and, in
the case of Lewis S. Ranieri, Scott A. Shay and David M. Golush, of subsidiaries
of, or entities controlled by, Hyperion Partners II as well.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of September 30, 2000,
regarding shareholders who own beneficially more than 5% of the Company's voting
stock:
PERCENT OF
BENEFICIAL OWNER TITLE OF CLASS SHARES CLASS
---------------- -------------- --------- ----------
Forstmann-Leff International, Inc. Class A 1,749,757 5.32%(1)
590 Madison Avenue, 39th Floor Common Stock
New York, NY 10022
(1) Based on Schedule 13F filed by Forstmann-Leff International, Inc.
61
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information, as of December 12, 2000,
regarding the shares of Class A Common Stock beneficially owned by each
director, each executive officer of the Company set forth in the Summary
Compensation Table, and all of the directors and executive officers of the
Company as a group. None of the Corporate PIES are beneficially owned by any
director or any executive officer of the Company.
MANAGEMENT OWNERSHIP OF CLASS A COMMON STOCK
<TABLE>
<CAPTION>
NUMBER OF SHARES
AND NATURE OF PERCENT
NAME BENEFICIAL OWNERSHIP(1) OF CLASS
---- ----------------------- --------
<S> <C> <C>
Lewis S. Ranieri, Chairman........... 1,215,737(2) 3.71
Barry C. Burkholder.................. 119,174 *
Lawrence Chimerine, Ph.D............. 6,138 *
David M. Golush...................... 103,782(3) *
Paul M. Horvitz, Ph.D................ 4,538 *
Alan E. Master....................... 2,330(4) *
Anthony J. Nocella................... 61,614 *
Salvatore A. Ranieri................. 431,000(5) 1.32
Scott A. Shay........................ 335,367(6) 1.02
Patricia A. Sloan.................... 80,000 *
Michael S. Stevens................... -- *
Ronald D. Coben...................... 22,538 *
Jonathon K. Heffron.................. 33,826 *
Wayne J. Sadin....................... 10,000 *
Directors and executive officers as a
group (16 persons)................. 2,450,750 7.49%
</TABLE>
------------
* Percentages do not exceed 1% of the issued and outstanding shares.
(1) Calculated in accordance with Rule 13d-3 under the Exchange Act. Nature of
beneficial ownership is direct unless indicated otherwise by footnote.
Beneficial ownership of shares owned indirectly arises from shared voting
and investment power, unless otherwise indicated.
(2) Includes 1,198,337 shares held by LSR Hyperion Corp., a corporation that is
wholly owned by Mr. Lewis Ranieri.
(3) Includes 38,782 shares held by Mr. Golush's wife and 3,000 shares held by a
family limited partnership as to which Mr. Golush shares voting and
investment power.
(4) Includes 1,380 shares held by Mr. Master's wife.
(5) Includes 414,000 shares held by SAR Hyperion Corp., a corporation that is
wholly owned by Mr. Salvatore Ranieri.
(6) Includes 330,000 shares held by SAS Hyperion Corp., a corporation that is
wholly owned by Mr. Shay. Excludes 4,058 shares held in trust for minor
children, as to which Mr. Shay disclaims beneficial ownership.
62
<PAGE>
MANAGEMENT OWNERSHIP OF BANK PREFERRED STOCK
The following table sets forth with respect to the Bank's Preferred Stock,
Series A and Series B, as of December 12, 2000: (1) shares beneficially owned by
all directors of the Company; (2) each of the executive officers named in the
Summary Compensation Table; and (3) shares beneficially owned by all directors
and executive officers of the Company as a group.
MANAGEMENT OWNERSHIP OF BANK PREFERRED STOCK
<TABLE>
<CAPTION>
SERIES A SERIES B
------------------------------------ ------------------------------------
NUMBER OF SHARES NUMBER OF SHARES
AND NATURE OF PERCENT AND NATURE OF PERCENT
NAME BENEFICIAL OWNERSHIP(1) OF CLASS BENEFICIAL OWNERSHIP(1) OF CLASS
---- ----------------------- --------- ----------------------- ---------
<S> <C> <C> <C> <C>
Lewis S. Ranieri, Chairman........... -- * -- *
Barry C. Burkholder.................. 8,000 * -- *
Lawrence Chimerine, Ph.D............. 1,000 * 1,000 *
David M. Golush...................... 2,100 * -- *
Paul M. Horvitz, Ph.D................ 400(2) * -- *
Alan E. Master....................... 600 * 2,000 *
Anthony J. Nocella................... 1,000 * 2,000 *
Salvatore A. Ranieri................. -- * -- *
Scott A. Shay........................ -- * -- *
Patricia A. Sloan.................... -- * -- *
Michael S. Stevens................... -- * -- *
Ronald D. Coben...................... 200 * -- *
Jonathon K. Heffron.................. 478 * -- *
Wayne J. Sadin....................... -- * -- *
Directors and executive officers as a
group (16 persons)................. 15,310 * 5,000 *
</TABLE>
------------
* Percentages do not exceed 1% of the issued and outstanding shares.
(1) Calculated in accordance with Rule 13d-3 under the Exchange Act. Nature of
beneficial ownership is direct unless indicated otherwise by footnote.
(2) Includes 200 shares held directly and 200 shares held by Dr. Horvitz's
spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has from time to time made home mortgage or consumer loans to
directors and executive officers of the Company and commercial loans to related
interests of a director of the Company, in the ordinary course of business, and
on the same terms and conditions, including interest rates and collateral, as
those of comparable transactions prevailing at the time with non-affiliated
parties. No such loans are nonperforming or involve more than the normal risk of
collectibility or present other unfavorable features.
As a general benefit to all full-time employees with at least six months of
service (excluding executive officers), the Bank will waive the 1% origination
fee for a mortgage loan for the purchase or refinance of the employee's
principal residence. In addition, the Bank offers a 0.50% discount on its posted
rates for consumer installment loans made to employees.
The disinterested directors of the Bank approved an agreement with a
subsidiary of Hyperion Partners II, Cardholder Management Services L.P. ("CMS"),
whereby CMS acts as the servicer for a debit card offered to customers of the
Bank and a credit card portfolio originated by the Bank. Lewis S. Ranieri, Scott
A. Shay, David M. Golush and Patricia A. Sloan, who are directors of the
Company, have a material interest in Hyperion Partners II. During fiscal 2000,
the Bank paid CMS approximately $192,000 pursuant to this agreement. The Company
believes that the terms and conditions of this agreement were as favorable to
the Bank as those that could have been arranged with an independent third party.
The Bank made arrangements with another firm to provide these services and the
agreement with CMS was terminated on October 20, 1999.
63
<PAGE>
In August 1999, the Company entered into a consulting agreement pursuant to
which Lewis S. Ranieri serves as a consultant to the Company providing strategic
and managerial advice to the Company in exchange for an annual consulting fee of
$350,000. The consulting agreement will be in effect until the earliest of
(1) the third anniversary of the agreement, (2) the date that is 180 days after
the date on which either Mr. Ranieri or the Company delivers written notice to
the other party terminating the agreement, or (3) the date on which Mr. Ranieri
becomes disabled or dies. The consulting agreement does not prevent Mr. Ranieri
from engaging in business endeavors which may be competitive with the businesses
of the Company. Mr. Ranieri is paid an annual retainer and meeting fees for his
service as a director of the Company and of the Bank.
The Company and the Bank have entered into an agreement with Hyperion
Partners acknowledging the relative value, as among the parties, of their claims
in certain litigation pending against the United States relating to an agreement
entered into in 1988 in connection with the Bank's acquisition of certain assets
of an insolvent savings and loan in which the government agreed to waive or
forbear from the enforcement of certain regulatory requirements. The agreement
confirms that the Company and the Bank are entitled to receive 85% of the
amount, if any, recovered as a result of the settlement of or a judgment on such
claims, and that Hyperion Partners is entitled to receive 15% of such amount. In
addition, pursuant to this agreement, Hyperion Partners is paying 15% of related
legal fees. The agreement was approved by the disinterested directors of the
Company. The plaintiffs in the case (Hyperion Partners, the Bank and the
Company) have agreed to continue to cooperate in good faith and will use their
best efforts to maximize the total amount, if any, that they may recover. The
litigation is ongoing and no payments were made during fiscal 2000 pursuant to
this arrangement.
64
<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>
EXHIBIT NO. DESCRIPTION
------------------------ ------------------------------------------------------------
2.1 -- Form of Letter Agreement, by and among the general and
limited partners of Hyperion Partners, L.P., dated June 17,
1996. (Incorporated by reference to Exhibit 2.1 to Form S-1,
Registration No. 333-06229)
<C> <S>
2.2 -- Merger Agreement, dated June 17, 1996, by and between the
Company and Hyperion Holdings. (Incorporated by reference to
Exhibit 2.2 to Form S-1, Registration No. 333-06229)
2.3 -- Agreement and Plan of Merger, dated August 18, 2000, by and
between Washington Mutual, Inc. and the Company.
(Incorporated by reference to Appendix A to Form S-4,
Registration No. 333-47308)
3.1 -- Form of Restated Certificate of Incorporation of the
Registrant, as amended. (Incorporated 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)
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.6a -- Third Amendment to the Federal Stock Charter of the Bank
approved on April 23, 1996. (Incorporated by reference to
Exhibit 10.6a to Form S-1, Registration No. 333-06229)
10.6b -- Amended and Restated Bylaws of the Bank. (Incorporated by
reference to Exhibit 10.6b to Form S-1, Registration No.
333-06229)
10.7 -- Specimen Preferred Stock, Series A, certificate, $25.00 per
share stated value of the Bank. (Incorporated by reference
to Exhibit 10.7 to Form S-1, Registration No. 333-06229)
10.7a -- Certificate of Designation of Noncumulative Preferred Stock,
Series A, of the Bank. (Incorporated by reference to Exhibit
10.7a to Form S-1, Registration No. 333-06229)
10.7b -- Specimen Preferred Stock, Series B, certificate, $25.00 per
share stated value, of the Bank. (Incorporated by reference
to Exhibit 10.7b to Form S-1, Registration No. 333-06229)
10.7c -- Certificate of Designation of Noncumulative Preferred Stock,
Series B, of the Bank. (Incorporated by reference to Exhibit
10.7c to Form S-1, Registration No. 333-06229)
10.7d -- Certificate of Designation of Redeemable Preferred Stock
Series A of the Company. (Incorporated by reference to
Exhibit 4.1 to Form 8-K filed August 10, 1999)
10.7e -- Certificate of Designation of Redeemable Preferred Stock
Series B of the Company. (Incorporated by reference to
Exhibit 4.2 to Form 8-K filed August 10, 1999)
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)
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.12 -- Employment Agreement, dated March 18, 1991, between the Bank
and Barry C. Burkholder. (Incorporated by reference to
Exhibit 10.12 to Form S-1, Registration No. 333-06229)
10.12a -- Amendment, dated April 10, 1996, to the Employment Agreement
between the Bank and Barry C. Burkholder. (Incorporated by
reference to Exhibit 10.12a to Form S-1, Registration No.
333-06229)
10.13 -- Letter Agreement Related to Employment, dated April 4, 1990,
between the Bank and Anthony J. Nocella. (Incorporated by
reference to Exhibit 10.13 to Form S-1, Registration No.
333-06229)
10.15 -- 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)
10.27a -- Amendment of the Company's Director Stock Plan (Incorporated
by reference to Exhibit 10.27a to Form 10-Q for the quarter
ended June 30, 2000)
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)
10.29a -- Amendment to Employment Agreement, dated February 18, 1999,
between the Company and Anthony J. Nocella (Incorporated by
reference to Exhibit 10.29a to Form 10-Q for the quarter
ended March 31, 1999)
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)
10.30a -- Amendment to Employment Agreement dated November 18, 1999,
between the Company and Jonathon K. Heffron. (Incorporated
by reference to Exhibit 10.30a to Form 10-K for the fiscal
year ended September 30, 1999)
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)
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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)
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.
*23.1a -- Consent of Deloitte & Touche LLP, former independent
auditors.
*23.1b -- Consent of KPMG LLP, independent auditors.
*23.1c -- Consent of Payne Falkner Smith & Jones, P.C.
*24 -- Power of Attorney.
*27.1 -- Financial Data Schedule.
99.1 -- Form 8-K/A filed by the Company June 23, 1999. (Incorporated
by reference to Exhibit 99.1 to Form 10-K for the fiscal
year ended September 30, 1999.)
</TABLE>
------------
* Filed herewith.
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
See Index to the Consolidated Financial Statements on page 71. 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
On August 28, 2000, the Company filed a report on Form 8-K, reporting under
Item 5 of Form 8-K regarding the Company's merger with Washington Mutual.
68
<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 14, 2000.
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 14, 2000
BARRY C. BURKHOLDER Chief Executive Officer
(2) Principal Financial and Accounting Officer:
/s/ANTHONY J. NOCELLA Vice Chairman and December 14, 2000
ANTHONY J. NOCELLA Chief Financial Officer
(3) Directors:
* Chairman and Director December 14, 2000
LEWIS S. RANIERI
/s/BARRY C. BURKHOLDER Director December 14, 2000
BARRY C. BURKHOLDER
* Director December 14, 2000
LAWRENCE CHIMERINE, PH.D.
* Director December 14, 2000
DAVID M. GOLUSH
* Director December 14, 2000
PAUL M. HORVITZ, PH.D.
* Director December 14, 2000
ALAN E. MASTER
/s/ANTHONY J. NOCELLA Director December 14, 2000
ANTHONY J. NOCELLA
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
* Director December 14, 2000
SALVATORE A. RANIERI
* Director December 14, 2000
SCOTT A. SHAY
* Director December 14, 2000
PATRICIA A. SLOAN
* Director December 14, 2000
MICHAEL S. STEVENS
/s/JONATHON K. HEFFRON
JONATHON K. HEFFRON
ATTORNEY-IN-FACT
</TABLE>
------------
* Signed through Power of Attorney
granted to Jonathon K. Heffron,
Attorney-in-Fact.
70
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Reports...................................... F-1
Consolidated Statements of Financial Condition as of
September 30, 2000 and 1999...................................... F-4
Consolidated Statements of Operations for the Year Ended
September 30, 2000, 1999, and 1998............................... F-5
Consolidated Statements of Stockholders' Equity for the
Year Ended September 30, 2000, 1999, and 1998.................... F-6
Consolidated Statements of Cash Flows for the Year Ended
September 30, 2000, 1999, and 1998............................... F-7
Notes to Consolidated Financial Statements......................... F-9
71
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Bank United Corp.:
We have audited the accompanying consolidated statements of financial
condition of Bank United Corp. and subsidiaries as of September 30, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bank United
Corp. and subsidiaries as of September 30, 2000 and 1999, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
The consolidated financial statements of Bank United Corp. and subsidiaries
as of September 30, 1998, prior to their restatement for the 1999
pooling-of-interests transaction described in Note 2 to the consolidated
financial statements, were audited by other auditors whose report is presented
separately herein. The contribution of Bank United Corp. and subsidiaries to
consolidated interest income and net income represented 98% and 99% of the
restated totals for 1998. Separate financial statements of Texas Central
Bancshares, Inc. and subsidiaries also included in the 1998 restated
consolidated financial statements were audited by other auditors whose report is
presented separately herein. We also audited the combination of the accompanying
consolidated financial statements for the year ended September 30, 1998, after
restatement for the 1999 pooling of interests; in our opinion, such consolidated
statements have been properly combined on the basis described in Note 1 of the
notes to the consolidated financial statements.
KPMG LLP
Houston, Texas
October 23, 2000
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Bank United Corp.:
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows for the year ended September 30, 1998 (none of which are
presented herein) of Bank United Corp. and its subsidiaries (collectively known
as the "Company"). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of the Company's operations and its cash
flows of the year ended September 30, 1998 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
October 21, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Texas Central Bancshares, Inc. and Subsidiaries
We have audited the consolidated balance sheet of Texas Central Bancshares,
Inc. and Subsidiaries as of December 31, 1998, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
year then ended not presented herein. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Central Bancshares, Inc. and Subsidiaries as of December 31, 1998, the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
PAYNE FALKNER SMITH & JONES, P.C.
Dallas, Texas
February 9, 1999
F-3
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
AT SEPTEMBER 30,
--------------------------
NOTES 2000 1999
----------- ----------- -----------
ASSETS
Cash and cash equivalents............ 1 $ 193,996 $ 183,260
Securities purchased under agreements
to resell and federal funds sold... 3 491,062 390,326
Securities and other investments 4
Held to maturity, at amortized
cost (fair value of $10.8
million in 2000 and $11.7
million in 1999)............... 11,069 12,106
Available for sale, at fair
value.......................... 117,421 131,432
Mortgage-backed securities 5, 10
Held to maturity, at amortized
cost (fair value of
$253.2 million in 2000 and
$308.8 million in 1999)........ 261,020 315,288
Available for sale, at fair
value.......................... 620,252 688,714
Loans 6, 9, 13
Held for investment (allowance
for credit losses of
$111.4 million in 2000 and
$82.7 million in 1999)......... 13,845,013 12,422,238
Held for sale................... 1,121,955 693,964
Federal Home Loan Bank stock......... 351,925 328,886
Mortgage servicing rights............ 7, 13 579,880 534,694
Servicing receivables................ 130,392 118,025
Deferred tax asset................... 16 100,646 110,512
Premises and equipment............... 88,640 88,684
Intangible assets.................... 77,457 83,778
Real estate owned.................... 20,409 17,278
Other assets......................... 149,086 125,494
----------- -----------
TOTAL ASSETS......................... $18,160,223 $16,244,679
=========== ===========
LIABILITIES
Deposits............................. 8 $ 8,714,791 $ 7,508,502
Federal Home Loan Bank advances...... 6, 9, 13 6,921,300 6,443,470
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 5, 10, 13 699,454 516,900
Notes payable........................ 11 368,860 368,762
Other liabilities.................... 306,078 308,131
----------- -----------
Total liabilities.......... 17,010,483 15,145,765
----------- -----------
MINORITY INTEREST AND REDEEMABLE
PREFERRED STOCK 17
Preferred stock issued by
consolidated subsidiary............ 185,500 185,500
Redeemable preferred stock........... 100,000 160,000
----------- -----------
Total minority interest and
redeemable preferred
stock.................... 285,500 345,500
----------- -----------
STOCKHOLDERS' EQUITY 18, 19
Common stock......................... 325 325
Paid-in capital...................... 134,882 132,153
Retained earnings.................... 748,301 646,549
Unearned stock compensation.......... 14 (2,882) (4,686)
Accumulated other comprehensive
income -- net unrealized losses on
securities available for sale, net
of tax............................. (16,311) (20,058)
Treasury stock, at cost.............. (75) (869)
----------- -----------
Total stockholders'
equity................... 864,240 753,414
----------- -----------
TOTAL LIABILITIES, MINORITY INTEREST,
REDEEMABLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY............... $18,160,223 $16,244,679
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------
NOTES 2000 1999 1998
------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Short-term interest-earning assets... $ 34,468 $ 20,842 $ 40,601
Securities and other investments..... 9,920 7,264 7,751
Mortgage-backed securities........... 63,446 69,665 82,276
Loans................................ 1,152,650 894,039 762,494
Federal Home Loan Bank stock......... 26,577 16,176 12,678
---------- ---------- --------
Total interest income...... 1,287,061 1,007,986 905,800
---------- ---------- --------
INTEREST EXPENSE
Deposits............................. 392,056 296,630 302,925
Federal Home Loan Bank advances...... 411,441 303,014 236,265
Securities sold under agreements to
repurchase and federal funds
purchased.......................... 35,234 32,929 56,286
Notes payable........................ 31,688 25,792 19,571
---------- ---------- --------
Total interest expense..... 870,419 658,365 615,047
---------- ---------- --------
Net interest income........ 416,642 349,621 290,753
PROVISION FOR CREDIT LOSSES.......... 6 40,669 38,368 20,123
---------- ---------- --------
Net interest income after
provision for credit
losses................... 375,973 311,253 270,630
---------- ---------- --------
NON-INTEREST INCOME
Loan servicing fees, net............. 71,795 54,408 35,975
Deposit fees and charges............. 35,096 23,176 17,888
Net gains
Single family loans and
servicing rights.............. 12,611 18,909 11,124
Securities and mortgage-backed
securities.................... 3,587 1,290 2,761
Other loans..................... 7,176 3,299 651
---------- ---------- --------
Net gains.................. 23,374 23,498 14,536
Other................................ 19,753 18,879 13,254
---------- ---------- --------
Total non-interest
income................... 150,018 119,961 81,653
---------- ---------- --------
NON-INTEREST EXPENSE
Compensation and benefits............ 14 139,560 109,944 88,890
Occupancy............................ 26,861 22,841 15,945
Data processing...................... 28,257 20,574 16,804
Amortization of intangibles.......... 7,339 6,647 5,864
Merger-related and restructuring
costs.............................. 2 -- 2,394 --
Other................................ 90,500 87,245 64,975
---------- ---------- --------
Total non-interest
expense.................. 292,517 249,645 192,478
---------- ---------- --------
Income before income taxes
and minority interest.... 233,474 181,569 159,805
INCOME TAX EXPENSE................... 16 80,304 53,659 25,862
---------- ---------- --------
Income before minority
interest................. 153,170 127,910 133,943
MINORITY INTEREST -- subsidiary
preferred stock dividends.......... 17 18,253 18,253 18,253
---------- ---------- --------
NET INCOME........................... $ 134,917 $ 109,657 $115,690
========== ========== ========
NET INCOME AVAILABLE TO COMMON
STOCKHOLDERS....................... $ 125,948 $ 107,955 $115,690
========== ========== ========
EARNINGS PER COMMON SHARE 18
Basic........................... $ 3.88 $ 3.34 $ 3.59
Diluted......................... 3.80 3.28 3.51
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------
CLASS A CLASS B UNEARNED
------------------- ------------------- PAID-IN RETAINED STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS COMPENSATION
---------- ------ ---------- ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997..... 28,936,234 $290 3,241,320 $ 32 $131,850 $465,964 $--
Net income.................... -- -- -- -- -- 115,690 --
Net change in unrealized gains
(losses), net of tax benefit
of $4.7 million............. -- -- -- -- -- -- --
---------- ---- ---------- ----- -------- -------- -------
Total comprehensive
income.................. -- -- -- -- -- 115,690 --
---------- ---- ---------- ----- -------- -------- -------
Dividends declared: common
stock ($0.64 per share)..... -- -- -- -- -- (20,693) --
Stock options exercised....... 33,358 -- -- -- 216 -- --
Stock repurchased............. -- -- -- -- -- -- --
---------- ---- ---------- ----- -------- -------- -------
BALANCE AT SEPTEMBER 30, 1998..... 28,969,592 290 3,241,320 32 132,066 560,961 --
Net income.................... -- -- -- -- -- 109,657 --
Net change in unrealized gains
(losses), net of tax benefit
of $11.1 million............ -- -- -- -- -- -- --
---------- ---- ---------- ----- -------- -------- -------
Total comprehensive
income.................. -- -- -- -- -- 109,657 --
---------- ---- ---------- ----- -------- -------- -------
Dividend declared:
Common stock ($0.69 per
share).................. -- -- -- -- -- (22,367) --
Redeemable preferred stock
($0.53 per share)....... -- -- -- -- -- (1,702) --
Issuance costs -- redeemable
preferred stock............. -- -- -- -- (6,479) -- --
Conversion of shares.......... 3,241,320 32 (3,241,320) (32) -- -- --
Restricted stock issuance, net
of amortization............. 140,750 1 -- -- 5,550 -- (4,686)
Stock options exercised....... 126,164 2 -- -- 1,016 -- --
Stock repurchased............. -- -- -- -- -- -- --
---------- ---- ---------- ----- -------- -------- -------
BALANCE AT SEPTEMBER 30, 1999..... 32,477,826 325 -- -- 132,153 646,549 (4,686)
Net income.................... -- -- -- -- -- 134,917 --
Net change in unrealized gains
(losses), net of tax expense
of $2.2 million............. -- -- -- -- -- -- --
---------- ---- ---------- ----- -------- -------- -------
Total comprehensive
income.................. -- -- -- -- -- 134,917 --
---------- ---- ---------- ----- -------- -------- -------
Dividends declared:
Common stock ($0.74 per
share).................. -- -- -- -- -- (24,026) --
Redeemable preferred stock
($3.66 per share)....... -- -- -- -- -- (8,969) --
Stock options exercised....... 66,837 -- -- -- 2,729 (170) --
Stock repurchased............. -- -- -- -- -- -- --
Amortization of unearned stock
compensation................ -- -- -- -- -- -- 1,804
---------- ---- ---------- ----- -------- -------- -------
BALANCE AT SEPTEMBER 30, 2000..... 32,544,663 $325 -- $-- $134,882 $748,301 $(2,882)
========== ==== ========== ===== ======== ======== =======
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME--
UNREALIZED TREASURY STOCK TOTAL
GAINS ---------------------- STOCKHOLDERS'
(LOSSES) SHARES AMOUNT EQUITY
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997 ....... $ 6,326 -- $ -- $ 604,462
Net income ...................... -- -- -- 115,690
Net change in unrealized
(losses), net of tax
of $4.7 million ............... (7,780) -- -- (7,780)
--------- --------- --------- ---------
Total comprehensive
income .................... (7,780) -- -- 107,910
--------- --------- --------- ---------
Dividends declared: common
stock ($0.64 per share) ....... -- -- -- (20,693)
Stock options exercised ......... -- -- -- 216
Stock repurchased ............... -- (14,200) (501) (501)
--------- --------- --------- ---------
BALANCE AT SEPTEMBER 30, 1998 ....... (1,454) (14,200) (501) 691,394
Net income ...................... -- -- -- 109,657
Net change in unrealized gains
(losses), net of tax benefit
of $11.1 million .............. (18,604) -- -- (18,604)
--------- --------- --------- ---------
Total comprehensive
income .................... (18,604) -- -- 91,053
--------- --------- --------- ---------
Dividend declared:
Common stock ($0.69
per share) ................ -- -- -- (22,367)
Redeemable preferred
stock ($0.53 per share) ... -- -- -- (1,702)
Issuance costs -- redeemable
preferred stock ............... -- -- -- (6,479)
Conversion of shares ............ -- -- -- --
Restricted stock issuance, met
of amortization ............... -- -- -- 865
Stock options exercised ......... -- 7,000 246 1,264
Stock repurchased ............... -- (21,700) (614) (614)
--------- --------- --------- ---------
BALANCE AT SEPTEMBER 30, 1999 ....... (20,058) (28,900) (869) 753,414
Net income ...................... -- -- -- 134,917
Net change in unrealized gains
(losses), net of tax expense of
$2.2 million .................. 3,747 -- -- 3,747
--------- --------- --------- ---------
Total comprehensive
income .................... 3,747 -- -- 138,664
--------- --------- --------- ---------
Dividends declared:
Common stock ($0.74 per
share) .................... -- -- -- (24,026)
Redeemable preferred stock
($3.66 per share) ......... -- -- -- (8,969)
Stock options exercised ......... -- 48,084 1,389 3,948
Stock repurchased ............... -- (22,000) (595) (595)
Amortization of unearned stock
compensation .................. -- -- -- 1,804
--------- --------- --------- ---------
BALANCE AT SEPTEMBER 30, 2000 ....... $ (16,311) (2,816) $ (75) $ 864,240
========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------
<S> <C> <C> <C>
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................. $ 134,917 $ 109,657 $ 115,690
Adjustments to reconcile net income to
net cash used by operating activities:
Provision for credit losses........ 40,669 38,368 20,123
(Recovery of) provision for
mortgage servicing rights
impairment allowance............. (4,767) -- 4,767
Deferred tax expense............... 7,636 15,192 12,149
Net gains on sales of assets....... (27,553) (25,732) (19,046)
Depreciation and amortization...... 127,067 119,505 86,880
Federal Home Loan Bank stock
dividends........................ (26,577) (16,176) (12,678)
Fundings and purchases of loans
held for sale.................... (3,557,643) (4,128,607) (3,768,039)
Proceeds from the sale of loans
held for sale.................... 2,091,725 2,994,954 1,903,991
Change in loans held for sale...... 48,573 546,876 670,197
Change in interest receivable...... (28,548) (18,862) (4,748)
Change in other assets............. 247 7,361 (140,952)
Change in other liabilities........ 19,881 69,372 14,112
----------- ----------- -----------
Net cash used by operating
activities.................. (1,174,373) (288,092) (1,117,554)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase price of acquisitions..... (493) (45,000) (51,850)
Assets purchased in acquisitions... -- (184,968) --
Net change in securities purchased
under agreements to resell and
federal funds sold............... (100,736) 115,230 (129,033)
Fundings of loans held for
investment....................... (6,829,408) (5,074,920) (3,867,558)
Proceeds from principal repayments
and maturities of
Loans held for investment..... 6,566,338 5,117,746 4,162,942
Securities held to maturity... 6,442 11,749 96
Securities available for
sale........................ 332 7,879 10
Mortgage-backed securities
held to maturity............ 57,299 142,589 98,701
Mortgage-backed securities
available for sale.......... 74,019 225,730 465,195
Proceeds from the sale of
Securities available for
sale........................ 366,949 482,006 498,459
Mortgage-backed securities
available for sale.......... 56,437 6,459 93,131
Mortgage servicing rights..... 16,663 -- --
Federal Home Loan Bank
stock....................... 45,984 14,852 64,325
Real estate owned acquired
through foreclosure......... 46,303 46,290 37,031
Purchases of
Loans held for investment..... (335,175) (2,008,466) (1,158,270)
Securities held to maturity... (5,373) (12,487) (9,747)
Securities available for
sale........................ (1,811) (33,279) (22,471)
Mortgage-backed securities
held to maturity............ (3,133) (10,512) (5,989)
Mortgage-backed securities
available for sale.......... (60,124) (453,489) (21,084)
Mortgage servicing rights..... (111,216) (104,533) (161,570)
Federal Home Loan Bank
stock....................... (42,446) (84,371) (88,112)
Other changes in loans held for
investment....................... (277,634) (97,446) (234,899)
Other changes in mortgage servicing
rights........................... (43,136) (39,267) (31,597)
Net purchases of premises and
equipment........................ (16,445) (34,824) (26,440)
----------- ----------- -----------
Net cash used by investing
activities.................. (590,364) (2,013,032) (388,730)
----------- ----------- -----------
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
F-7
<PAGE>
BANK UNITED CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------
<S> <C> <C> <C>
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits.......... $ 1,206,289 $ 381,471 $ (186,863)
Proceeds from deposits
purchased...................... -- 232,804 1,509,688
Proceeds from Federal Home Loan
Bank advances.................. 7,104,700 4,815,600 3,130,583
Repayment of Federal Home Loan
Bank advances.................. (6,626,870) (3,155,628) (2,339,666)
Net change in securities sold
under agreements to repurchase
and federal funds purchased.... 182,554 (307,143) (488,258)
Proceeds from issuance of notes
payable........................ -- 148,984 --
Payment of issuance costs of
notes payable.................. -- (2,152) --
Proceeds from issuance of
redeemable preferred stock..... -- 160,000 --
Payment of issuance costs of
redeemable preferred stock..... -- (4,423) --
Redemption of redeemable
preferred stock................ (60,000) -- --
Payment of dividends............ (34,553) (22,367) (20,693)
Stock repurchased............... (595) (614) (501)
Stock options exercised......... 3,948 1,264 216
----------- ----------- -----------
Net cash provided by
financing activities..... 1,775,473 2,247,796 1,604,506
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 10,736 (53,328) 98,222
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 183,260 236,588 138,366
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 193,996 $ 183,260 $ 236,588
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest.......... $ 836,773 $ 642,408 $ 614,657
Cash paid for income taxes...... 43,760 34,754 20,151
NONCASH INVESTING ACTIVITIES
Real estate owned acquired
through foreclosure............ 49,298 41,123 34,738
Securitization of loans......... 365,373 476,025 506,110
Net transfer of loans (to) from
held for investment (from) to
held for sale.................. (622,187) (1,671,006) 671,704
Transfer of acquisition-related
securities from held to
maturity to available for
sale........................... -- 17,082 --
Transfer of acquisition-related
mortgage-backed securities from
held to maturity to available
for sale....................... -- 6,827 --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-8
<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") is the indirect holding company
for Bank United (the "Bank"), a federal savings bank. The accompanying
Consolidated Financial Statements include the accounts of the Parent Company,
the Bank, and subsidiaries of both the Parent Company and the Bank (collectively
known as the "Company"). All significant intercompany accounts and transactions
have been eliminated in consolidation. The majority of the Company's assets and
operations are derived from the Bank.
The Company is the largest publicly traded depository institution
headquartered in Texas, with $18.2 billion in assets, $8.7 billion in deposits
and $864.2 million in stockholders' equity at September 30, 2000. The Company
provides consumers and businesses in Texas and selected markets throughout the
United States with a broad array of financial services. The Company serves over
343,000 Texas consumers and small businesses through a 157-branch community
banking network, has 16 Small Business Administration ("SBA") lending offices in
10 states, is a national middle market commercial bank with 23 regional offices
in 16 states, originates wholesale mortgage loans through 11 offices in 11
states, and operates a national mortgage servicing business serving
approximately 310,000 customers and an investment portfolio business.
Certain amounts within the accompanying Consolidated Financial Statements
and the related Notes have been reclassified for comparative purposes to conform
to the current presentation.
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 and
the disclosure of contingent assets and liabilities. Actual results could differ
from these estimates and assumptions.
ACQUISITIONS
Prior period Consolidated Financial Statements have been restated, as
necessary, to include the accounts of an entity that was acquired using the
pooling of interests method of accounting. Entities acquired that were accounted
for as purchases are included in the Consolidated Financial Statements beginning
on their date of acquisition. Assets and liabilities of institutions accounted
for as purchases are adjusted to their fair values as of their dates of
acquisition.
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. Cash and cash equivalents consist of interest-earning
deposits, non-interest-earning deposits in other banks, and short-term
investments in commercial paper.
Federal Reserve Board regulations require average cash reserve balances
based on deposit liabilities to be maintained by the Bank at the Federal Reserve
Bank. The required reserve balance was $58.5 million for the period including
September 30, 2000. 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. 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
F-9
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 with
any unrealized gains or losses 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 are actively and frequently bought and sold with the objective of
generating income on short-term changes in price.
The return or yield earned on MBS depends on the amount of interest
collected over the life of the security and the amortization of any purchase
premiums or discounts. 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.
INTEREST-ONLY STRIPS
SBA interest-only strips are created in connection with the Company's
pooling of SBA loans and represent the contractual right to receive a portion of
the interest on the underlying SBA loans. The interest-only strips are carried
at fair value, which is the net present value of the future interest to be
collected, using assumptions of prepayments and discount rates that the Company
believes market participants would use for similar securities. Interest-only
strips are amortized using the level-yield method and are classified as
securities and other investments available for sale.
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 is 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 is
paid 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 (adjusted for anticipated
prepayments) or when such loans are sold.
IMPAIRED LOANS
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan -- Income Recognition and Disclosures,"
states that a loan is considered "impaired" when it is probable that the
creditor will be unable to collect all principal and interest amounts due
according to the contractual terms of the loan agreement. Smaller balance
homogeneous loans, including single family residential and consumer loans, are
F-10
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
excluded from the scope of SFAS No. 114. These loans, however, are considered
when determining the adequacy of the allowance for credit losses.
Impaired loans are identified and measured in conjunction with management's
review of nonperforming loans, classified assets, and the allowance for credit
losses. Impairment of large non-homogeneous loans is measured one of three ways:
discounting estimated future cash flows, the loan's market price, or the fair
value of the collateral, if the loan is collateral dependent. If the measurement
of the loan is less than the Book Value of the loan, excluding any allowance for
credit losses and including accrued interest, then the impairment is recognized
by a charge to operations or an allocation of the allowance for credit losses.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at levels management deems
adequate to cover probable losses on loans. This allowance covers all loans,
including loans deemed to be impaired, loans not impaired, and loans excluded
from the impairment test. The adequacy of the allowance is based on management's
periodic evaluation of the loan portfolio, which 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 has been realized. Cash recoveries are
credited to the allowance for credit losses.
SALES OF SINGLE FAMILY LOANS
Gains or losses on loan sales are recognized at the time of sale and are
determined using the specific identification method. Certain loans 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 maintained for the probable future
costs of such obligations at a level management believes adequate. This accrual
is included in other liabilities in the Consolidated Statements of Financial
Condition, and the related expense is included in non-interest expense in the
Consolidated Statements of Operations.
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 estimating future servicing income and expense,
including assumptions about prepayment, default, and interest rates. For
purposes of measuring impairment, the loans underlying the MSRs are stratified
by type (conventional fixed-rate, conventional adjustable-rate, and government).
Impairment is measured by the 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. The recovery of any previously
established impairment reserve is recognized as income in 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 secured primarily by single family properties. Servicing fee revenue
represents fees earned for servicing single family loans for investors and
related ancillary income, including late charges. Servicing fee revenue is
recognized as earned, unless collection is doubtful. The amortization expense is
deducted from the related servicing fee revenue in the Consolidated Statements
of Operations. The amortization of MSRs is periodically evaluated and adjusted,
if necessary, to reflect changes in prepayment rates or other related factors.
F-11
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SERVICING RECEIVABLES
The Company services single family loans for its own portfolio and for
other investors. Mortgage servicing activities include collecting and accounting
for loan payments from borrowers, remitting those payments to investors,
collecting funds for and paying mortgage-related expenses, collecting payments
from delinquent borrowers, filing claims and collecting proceeds on government
guaranteed or insured loans, and generally administering the loans. Servicing
receivables relating to these activities include amounts due from governmental
agencies and investors. A valuation allowance is maintained at levels deemed
adequate by management to cover probable losses on these receivables. Various
factors, including the frequency, volume, and amount of claims filed with
governmental agencies, as well as historical loss experience, are used to
determine the amount and adequacy of the valuation allowance.
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 three 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 a period up to 15 years. Debt issuance costs are
amortized over the life of the debt 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 in the Consolidated
Statements of Operations. The Company's REO is primarily comprised of single
family properties held by the Investment Portfolio Segment. The Company's
historical average holding period for REO is six months.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company enters into traditional off-balance-sheet financial instruments
such as interest rate exchange agreements ("swaps"), interest rate caps, locks,
and floors, financial options, 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. To qualify for hedge accounting, 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,
liability, or anticipated transaction. In addition, for hedges of anticipated
transactions, significant characteristics and terms of the transaction must be
identified, and it must be probable the transaction will occur. The
effectiveness of a hedge is evaluated at inception and throughout the hedge
period using statistical calculations of correlation.
Gains or losses on early termination of financial contracts, if any, are
deferred and amortized over the remaining terms of the hedged items. Generally,
the Company terminates the off-balance-sheet financial
F-12
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 current operations.
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, LOCKS AND FLOORS, FINANCIAL OPTIONS, AND FORWARD
DELIVERY CONTRACTS. The market value of off-balance-sheet instruments that are
hedging assets carried at lower of cost or market are included in the overall
valuation analysis of the hedged asset to determine if a loss allowance is
necessary. Cash paid and received on off-balance-sheet instruments that meet the
criteria for hedge accounting are offset against the interest income or expense
on the hedged asset or liability. Cash paid or received on off-balance sheet
instruments that do not meet hedge accounting criteria is included in trading
interest income, which is included in interest income on short-term
interest-earning assets. Fees paid to enter cap and floor contracts are
capitalized and amortized over the lives of the contracts. Costs related to
financial option and interest rate lock contracts are capitalized and offset
against the related gain or loss upon the sale of the hedged items. Fees paid to
cancel commitments to deliver loans are charged against the gain or loss on
single family loans.
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
Basic earnings per share ("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 by the weighted-average number of common shares
and potentially dilutive common shares outstanding during the period.
Potentially dilutive common shares are computed using the treasury stock method.
RECENT ACCOUNTING STANDARDS
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," replaces SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
but carries over most of SFAS 125's provisions without change. SFAS No. 140
elaborates on the qualifications necessary for a special-purpose entity,
clarifies sales accounting criteria in certain circumstances, refines accounting
for collateral, and adds disclosures for collateral, securitizations, and
retained interests in securitized assets. This statement should be applied
prospectively and is effective for transactions occurring after March 31, 2001.
Disclosure requirements of this statement and any changes in accounting for
collateral are effective for fiscal years ending after December 15, 2000 or
fiscal 2001 for the Company. The Company is evaluating the impact, if any, this
statement may have on its future Consolidated Financial Statements.
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," effective October 1, 2000. See Note 24.
F-13
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
In August 1999, the Company acquired and merged with Texas Central
Bancshares, Inc. ("Texas Central"), a commercial bank operating three branches
in the Dallas area with assets of $113.1 million and deposits of $92.9 million
at acquisition. The acquisition was accounted for as a pooling of interests.
Accordingly, financial information for all periods reported prior to the date of
acquisition were restated to present the combined financial information as if
the acquisition had been in effect for all periods presented. Under the terms of
the merger agreement, holders of Texas Central common stock received 2.0266
shares of the Company's common stock for each share of Texas Central common
stock. The Company issued 709,980 shares of common stock to complete the Texas
Central acquisition. The operations of Texas Central Bank, the principal
subsidiary of Texas Central, were merged into the operations of the Bank. In
connection with the Texas Central acquisition, the Company recorded
merger-related and restructuring costs of $2.4 million. At September 30, 1999,
the unpaid liability relating to the Texas Central acquisition was $320,000 a
majority of which was paid by September 30, 2000.
In February 1999, the Company acquired Midland American Bank, a commercial
bank operating five branches in Midland, Texas, with assets of $282.5 million
and deposits of $232.8 million at acquisition. The acquisition was accounted for
as a purchase. The goodwill of $28.6 million related to this acquisition is
being amortized on a straight-line basis over 15 years.
In January 1998, the Company acquired 18 branches with combined deposits of
$1.44 billion at acquisition from Guardian Savings and Loan Association. The
acquisition was accounted for as a purchase. The goodwill of $48.9 million
related to this acquisition is being amortized on a straight-line basis over 15
years.
In December 1997, the Company acquired three branches with combined
deposits of $66 million at acquisition from California Federal Savings Bank,
FSB. The acquisition was accounted for as a purchase. The goodwill of $2.8
million related to this acquisition is being amortized on a straight-line basis
over 15 years.
3. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND FEDERAL FUNDS SOLD
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
REPURCHASE AGREEMENTS
Balance outstanding at
period-end .................... $ 341,048 $ 305,312 $ 414,483
Fair value of collateral at
period-end .................... 349,104 307,772 423,772
Maximum outstanding at any
month-end ..................... 341,048 418,868 819,604
Daily average balance ........... 273,138 286,695 446,913
Average interest rate for the
period ........................ 7.18% 6.04% 6.14%
FEDERAL FUNDS SOLD
Balance outstanding at
period-end .................... $1,150,014 $ 85,014 $ 80,799
Maximum outstanding at any
month-end ..................... 260,014 148,979 212,165
Daily average balance ........... 93,278 90,177 65,889
Average interest rate for the
period ........................ 5.76% 4.87% 5.46%
The repurchase agreements outstanding at September 30, 2000, were secured
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, 2000, matured during October 2000. The repurchase
agreements provide for the same loans and MBS to be resold at maturity. At
September 30, 2000, the Company did not have repurchase and federal funds sold
agreements at risk with any individual counterparty that exceeded 10% of
stockholders' equity.
F-14
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SECURITIES AND OTHER INVESTMENTS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
COST GAINS LOSSES VALUE VALUE
--------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
2000
HELD TO MATURITY
U.S. government and agency...... $ 5,773 $-- $ 86 $ 5,687
State and local government
agency........................ 5,296 -- 199 5,097
-------- ----- ------ --------
11,069 $-- $ 285 10,784 $ 11,069
-------- ===== ====== -------- ========
AVAILABLE FOR SALE
SBA interest-only strips........ 85,067 $-- $4,170 80,897
U.S. government and agency...... 35,384 4 862 34,526
Corporate securities............ 2,041 -- 43 1,998
-------- ----- ------ --------
122,492 $ 4 $5,075 117,421 $117,421
-------- ===== ====== -------- ========
Total...................... $133,561 $128,205
======== ========
1999
HELD TO MATURITY
U.S. government and agency...... $ 6,148 $-- $ 111 $ 6,037
State and local government
agency........................ 5,958 -- 259 5,699
-------- ----- ------ --------
12,106 $-- $ 370 11,736 $ 12,106
-------- ===== ====== -------- ========
AVAILABLE FOR SALE
SBA interest-only strips........ 93,665 $-- $5,466 88,199
U.S. government and agency...... 42,347 64 1,091 41,320
Corporate securities............ 1,949 -- 36 1,913
-------- ----- ------ --------
137,961 $ 64 $6,593 131,432 $131,432
===== ====== -------- ========
--------
Total...................... $150,067 $143,168
======== ========
</TABLE>
Securities outstanding at September 30, 2000, were scheduled to mature as
follows:
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
------------------------------------ -------------------------------------
PERIOD-END PERIOD-END
WEIGHTED- WEIGHTED-
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
---------- ------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Due in one year or
less.................. $ 2,495 $ 2,481 6.27% $ 1,486 $ 1,452 5.91%
Due in one to five
years................. 8,574 8,303 5.04 2,550 2,549 5.90
Due after five years
through ten years..... -- -- -- 30,423 29,553 6.17
Due after ten years..... -- -- -- 88,033 83,867 10.18
------- ------- ---- -------- -------- -----
$11,069 $10,784 5.32% $122,492 $117,421 9.03%
======= ======= ==== ======== ======== =====
</TABLE>
F-15
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. 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
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
2000
HELD TO MATURITY
Agency
Fixed-rate.................... $ 16,221 $ 3 $ 72 $ 16,152
Adjustable-rate............... 1,681 -- 25 1,656
Non-agency
Adjustable-rate............... 196,543 681 7,227 189,997
CMOs -- fixed-rate............ 46,575 -- 1,143 45,432
---------- ------ -------- --------
Held to maturity........... 261,020 $ 684 $ 8,467 253,237 $261,020
---------- ====== ======== -------- ========
AVAILABLE FOR SALE
Agency
Fixed-rate.................... 62,409 $ 6 $ 2,064 60,351
Adjustable-rate............... 6,204 105 10 6,299
CMOs -- fixed-rate............ 14,402 -- 391 14,011
CMOs -- adjustable-rate....... 121,077 783 169 121,691
Non-agency
Fixed-rate.................... 284,876 -- 15,686 269,190
Adjustable-rate............... 34,036 23 436 33,623
CMOs -- fixed-rate............ 50,813 2,364 2,945 50,232
CMOs -- adjustable-rate....... 64,865 69 210 64,724
Other........................... 131 -- -- 131
---------- ------ -------- --------
Available for sale......... 638,813 $3,350 $ 21,911 620,252 $620,252
---------- ====== ======== -------- ========
Total mortgage-backed
securities............... $ 899,833 $873,489
========== ========
1999
HELD TO MATURITY
Agency
Fixed-rate.................... $ 13,387 $-- $ 38 $ 13,349
Adjustable-rate............... 2,159 -- 45 2,114
Non-agency
Adjustable-rate............... 248,497 1,010 7,313 242,194
CMOs -- fixed-rate............ 51,245 -- 141 51,104
---------- ------ -------- --------
Held to maturity........... 315,288 $1,010 $ 7,537 308,761 $315,288
---------- ====== ======== -------- ========
AVAILABLE FOR SALE
Agency
Fixed-rate.................... 67,259 $ 106 $ 1,994 65,371
Adjustable-rate............... 28,230 420 25 28,625
CMOs -- fixed-rate............ 19,534 3 421 19,116
CMOs -- adjustable-rate....... 163,239 1,255 226 164,268
Non-agency
Fixed-rate.................... 284,878 -- 17,631 267,247
Adjustable-rate............... 53,331 35 556 52,810
CMOs -- fixed-rate............ 59,629 2,082 3,657 58,054
CMOs -- adjustable-rate....... 34,647 -- 1,669 32,978
Other........................... 245 -- -- 245
---------- ------ -------- --------
Available for sale......... 710,992 $3,901 $ 26,179 688,714 $688,714
---------- ====== ======== -------- ========
Total mortgage-backed
securities............... $1,026,280 $997,475
========== ========
</TABLE>
F-16
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 2000, MBS with carrying values totaling $435.0 million and
fair values totaling $419.3 million were used to secure securities sold under
agreements to repurchase ("reverse repurchase agreements").
6. LOANS
Loans are presented net of deferred loan fees, premiums, and discounts. At
September 30, 2000 and 1999, these amounts net to a premium of $17.1 million and
$6.9 million.
AT SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
HELD FOR INVESTMENT
Single family................... $ 6,148,254 $ 6,470,636
Commercial...................... 6,905,057 5,368,565
Consumer........................ 903,122 665,742
----------- -----------
13,956,433 12,504,943
Allowance for credit losses..... (111,420) (82,705)
----------- -----------
13,845,013 12,422,238
----------- -----------
HELD FOR SALE
Single family................... 947,629 592,583
Commercial...................... 174,326 101,381
----------- -----------
1,121,955 693,964
----------- -----------
Total loans................ $14,966,968 $13,116,202
=========== ===========
The following table sets forth the geographic distribution of loans by
state at September 30, 2000.
<TABLE>
<CAPTION>
TOTAL NON-REAL
SINGLE REAL ESTATE ESTATE % OF
STATE FAMILY COMMERCIAL CONSUMER LOANS LOANS TOTAL TOTAL
----- ---------- ------------ -------- ----------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
California........................... $2,800,496 $ 926,185 $23,562 $3,750,243 $ 17,913 $ 3,768,156 25.00%
Texas................................ 772,804 1,572,338 697,450 3,042,592 357,619 3,400,211 22.55
Arizona.............................. 482,960 329,289 54,588 866,837 2,204 869,041 5.76
Florida.............................. 306,436 402,828 5,778 715,042 16,709 731,751 4.85
Other................................ 2,704,220 1,893,151 34,937 4,632,308 1,676,921 6,309,229 41.84
---------- ---------- -------- ----------- ---------- ----------- ------
Total.............................. $7,066,916 $5,123,791 $816,315 $13,007,022 $2,071,366 $15,078,388 100.00%
========== ========== ======== =========== ========== =========== ======
</TABLE>
Loans held for investment at September 30, 2000, mature in the years ended
September 30 as follows:
<TABLE>
<CAPTION>
2001 2002-2005 THEREAFTER TOTAL
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
TYPE OF LOAN
Single family........................ $ 103,161 $ 499,616 $5,545,477 $ 6,148,254
Commercial........................... 3,988,309 1,532,809 1,383,939 6,905,057
Consumer............................. 55,136 210,111 637,875 903,122
---------- ---------- ---------- -----------
Total........................... $4,146,606 $2,242,536 $7,567,291 $13,956,433
========== ========== ========== ===========
TYPE OF INTEREST
Adjustable........................... $3,977,964 $1,533,927 $4,376,787 $ 9,888,678
Fixed................................ 168,642 708,609 3,190,504 4,067,755
---------- ---------- ---------- -----------
Total........................... $4,146,606 $2,242,536 $7,567,291 $13,956,433
========== ========== ========== ===========
</TABLE>
F-17
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At September 30, 2000, the performing single family and multi-family loans
were pledged, under a blanket lien, as collateral securing advances from the
Federal Home Loan Bank ("FHLB").
The activity in the allowance for credit losses was as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------
2000 1999 1998
-------- ------- --------
(IN THOUSANDS)
Beginning balance.................... $ 82,705 $47,503 $ 39,723
Provision....................... 40,669 38,368 20,123
Acquisitions.................... -- 2,594 --
Charge-offs..................... (12,650) (6,733) (13,044)
Recoveries...................... 696 973 701
-------- ------- --------
Ending balance....................... $111,420 $82,705 $ 47,503
======== ======= ========
Nonaccrual loans, net of related premiums and discounts, totaled
$97.5 million and $89.6 million at September 30, 2000 and 1999. If the
nonaccrual loans as of September 30, 2000, had been performing in accordance
with their original terms throughout fiscal 2000, interest income recognized on
these loans would have been $9.7 million. The actual interest income recognized
on these loans for fiscal 2000 was $3.2 million.
The following table summarizes the recorded investments in impaired loans,
related allowances and income recognition information as required by SFAS No.
114:
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------------
2000 1999 1998
------- ------- ------
(IN THOUSANDS)
Impaired loans with allowance........ $29,493 $44,406 $3,053
Impaired loans with no allowance..... -- -- 590
------- ------- ------
Total impaired loans................. $29,493 $44,406 $3,643
======= ======= ======
Average impaired loans............... $25,130 $13,630 $3,707
Allowance for impaired loans......... 14,101 6,626 507
At September 30, 2000, there were four impaired loans, three of which
became impaired during fiscal 2000. In addition to the total impaired loan
balance of $29.5 million at September 30, 2000, the Company was committed to
lend an additional $1.2 million to one of these borrowers. At September 30,
1999, there were six impaired loans, of which four were brought current and one
was foreclosed upon during fiscal 2000. The impaired loans outstanding at
September 30, 1998 were paid in full during fiscal 1999. The Company believes it
is adequately secured and reserved on each of the impaired loans at
September 30, 2000. Interest income of $2.1 million, $2.9 million, and $320,000
was recognized on impaired loans during fiscal 2000, 1999, and 1998, of which
$2.1 million, $2.9 million, and $317,000 was collected in cash.
F-18
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. MORTGAGE SERVICING RIGHTS
The activity in the Company's MSRs was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Balance at beginning of period....... $ 534,694 $ 410,868 $ 272,214
Additions....................... 128,172 201,442 199,513
Amortization.................... (77,464) (67,342) (54,679)
Deferred hedging losses
(gains)....................... 2,213 (28,169) (8,828)
Sales........................... (15,080) -- --
Cost of hedges.................. 2,578 17,895 7,415
Recovery of (provision for)
impairment.................... 4,767 -- (4,767)
----------- ----------- -----------
Balance at end of period............. $ 579,880 $ 534,694 $ 410,868
=========== =========== ===========
Loan servicing portfolio............. $31,791,445 $30,892,993 $27,935,300
Loans serviced for others............ 26,760,882 26,058,482 23,491,960
Advances from borrowers for taxes and
insurance.......................... 304,635 276,247 270,135
Principal and interest due
investors.......................... 150,006 115,225 207,626
</TABLE>
At September 30, 2000, $1.4 billion of servicing rights purchased had not
yet been transferred to the Company. These servicing rights were subserviced
until transferred to the Company during the first quarter of fiscal 2001.
8. DEPOSITS
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------
2000 1999
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
NON-INTEREST BEARING DEPOSITS........ $1,330,325 -- % $1,072,936 -- %
---------- ---- ---------- ----
INTEREST-BEARING DEPOSITS
Checking accounts............... 252,660 0.95 240,125 0.80
Money market accounts........... 3,253,390 5.91 2,199,350 4.78
Savings accounts................ 133,606 1.40 135,538 1.69
Certificates of deposit......... 3,744,810 5.95 3,860,553 5.24
---------- ---- ---------- ----
Total interest-bearing
deposits................. 7,384,466 5.68 6,435,566 4.84
---------- ---- ---------- ----
Total deposits............. $8,714,791 4.81% $7,508,502 4.15%
========== ==== ========== ====
</TABLE>
Certificates of deposit ("CDs") outstanding at September 30, 2000, were
scheduled to mature in the years ended September 30 as follows:
(IN THOUSANDS)
---------------
2001............................ $2,675,708
2002............................ 859,373
2003............................ 70,425
2004............................ 78,039
2005 and thereafter............. 61,265
----------
$3,744,810
==========
F-19
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of CDs $100,000 or more outstanding at September 30,
2000, were as follows:
NUMBER OF DEPOSIT
ACCOUNTS AMOUNT
--------- --------
(DOLLARS IN
THOUSANDS)
Three months or less................. 1,549 $186,760
Over three to six months............. 537 58,933
Over six to twelve months............ 2,783 302,360
Over twelve months................... 1,861 200,688
----- --------
Total...................... 6,730 $748,741
===== ========
9. FEDERAL HOME LOAN BANK ADVANCES
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Balance outstanding at period-end.. $6,921,300 $6,443,470 $4,783,498
Average interest rate at
period-end....................... 6.51% 5.36% 5.54%
Maximum outstanding at any
month-end........................ $7,221,300 $6,468,830 $4,783,498
Daily average balance.............. 6,748,092 5,820,296 4,090,581
Average interest rate for the
period........................... 6.10% 5.21% 5.78%
Scheduled maturities for FHLB advances outstanding at September 30, 2000,
were as follows:
WEIGHTED-
AVERAGE
AMOUNT RATE
---------- ---------
(DOLLARS IN THOUSANDS)
2001................................. $3,419,400 6.37%
2002................................. 3,436,400 6.65
2003................................. -- --
2004................................. 65,500 6.57
2005 and thereafter.................. -- --
---------- ----
Total...................... $6,921,300 6.51%
========== ====
F-20
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND FEDERAL FUNDS PURCHASED
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------
2000 1999 1998
-------- ---------- ----------
(DOLLARS IN THOUSANDS)
REVERSE REPURCHASE AGREEMENTS
Balance outstanding at
period-end................. $399,454 $ 291,900 $ 599,043
Average interest rate at
period-end................. 6.65% 5.50% 5.62%
Maximum outstanding at any
month-end.................. $412,827 $ 578,406 $1,225,624
Daily average balance........ 338,073 416,333 890,998
Average interest rate for the
period..................... 5.47% 5.05% 5.78%
FEDERAL FUNDS PURCHASED
Balance outstanding at
period-end................. $300,000 $ 225,000 $ 225,000
Average interest rate at
period-end................. 6.67% 5.51% 5.44%
Maximum outstanding at any
month-end.................. $320,000 $ 320,000 $ 225,000
Daily average balance........ 263,386 228,578 84,781
Average interest rate for the
period..................... 6.36% 5.27% 5.66%
Reverse repurchase agreements and federal funds purchased outstanding at
September 30, 2000, matured during October 2000 and November 2000. The
counterparties to all reverse repurchase agreements at September 30, 2000 have
agreed to resell the same securities upon maturity of such agreements. The
securities securing the reverse repurchase agreements have been delivered to the
counterparty or its agent. At September 30, 2000, the Company did not have any
reverse repurchase or federal funds purchased agreements at risk with any
individual counterparty that exceeded 10% of stockholders' equity.
11. NOTES PAYABLE
In January 1999, the Bank established a $500 million medium-term note
program. The program provides for the issuance of notes on a continuous basis by
the Bank. In March 1999, the Bank issued $150 million, par value, of
subordinated medium-term notes due in full in March 2009, with a stated rate of
8% and an effective rate of 8.1%. Net proceeds from the issuance of these notes
were used for general business purposes. At September 30, 2000, the outstanding
balance of the medium-term notes, net of related discounts, was $149.1 million.
The medium-term notes are unsecured general obligations of the Bank. In a
liquidation, holders of the medium-term notes could receive, if anything,
significantly less than holders of deposit liabilities of the Bank.
The Company has $220 million of fixed-rate subordinated notes due in full
in May 2007, with a stated rate of 8.875% and an effective rate of 8.896%. At
September 30, 2000, the outstanding balance of the subordinated notes, net of
related discounts, was $219.8 million. The subordinated notes are subordinate to
all liabilities of the Company's subsidiaries, including preferred stock and
deposit liabilities.
F-21
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. 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, 2000 and 1999. 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:
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
prepayments. No prepayments were assumed for commercial 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.
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.
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. Negative fair values of these instruments represent the net unrealized
loss on these instruments at period end.
F-22
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS NO. 107 FAIR VALUES
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------
2000 1999
-------------------------- -------------------------
CARRYING SFAS NO. CARRYING SFAS NO.
VALUE 107 VALUE VALUE 107 VALUE
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
FINANCIAL ASSETS
Short-term interest-earning
assets........................ $ 685,058 $ 685,058 $ 573,586 $ 573,586
Securities and other
investments................... 128,490 128,205 143,538 143,168
Mortgage-backed securities...... 881,272 873,489 1,004,002 997,475
Loans........................... 14,966,968 14,974,113 13,116,202 13,160,017
FHLB stock...................... 351,925 351,925 328,886 328,886
Other assets.................... 271,530 271,530 235,765 235,765
NON-FINANCIAL ASSETS
Mortgage servicing rights....... 579,880 608,373 534,694 592,923
Other........................... 295,100 N/A 308,006 N/A
----------- =========== ----------- ==========
Total assets............... $18,160,223 $16,244,679
=========== ===========
FINANCIAL LIABILITIES
Deposits........................ $ 8,714,791 $ 8,718,422 $ 7,508,502 $7,503,864
FHLB advances................... 6,921,300 6,917,943 6,443,470 6,429,694
Reverse repurchase agreements
and federal funds purchased... 699,454 699,462 516,900 516,973
Notes payable................... 368,860 357,778 368,762 373,261
Other liabilities............... 299,384 299,384 301,138 301,138
NON-FINANCIAL LIABILITIES
AND STOCKHOLDERS' EQUITY........... 1,156,434 N/A 1,105,907 N/A
----------- =========== ----------- ==========
Total liabilities and
stockholders' equity..... $18,160,223 $16,244,679
=========== ===========
FAIR VALUES OF OTHER FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK
Interest rate swaps........... $ (57) $ 4,189
Interest rate floors.......... 10,461 6,154
Financial options............. -- 75
Forward delivery contracts.... (2,704) (1,624)
Commitments to extend
credit..................... (1,160) 1,097
</TABLE>
F-23
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. 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 gains or losses on the hedged asset or liability are
expected to be offset by gains or losses 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 thereby reducing
volatility in net income due to changes in market conditions.
The Company is exposed to a limited amount of credit related losses in the
event of non-performance of the counterparties to the off-balance-sheet
agreements. The Company seeks to manage credit risk by limiting the total amount
of arrangements outstanding, both by counterparty and in the aggregate, by
monitoring the size and maturity structure of the financial instruments, by
assessing the creditworthiness of the counterparty, and by applying uniform
credit standards for all activities with credit risk.
Notional principal amounts indicated in the following table do not
represent the Company's exposure to credit loss. Notional amounts 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, 2000, were scheduled to mature as follows:
<TABLE>
<CAPTION>
MATURING IN THE YEAR ENDING SEPTEMBER 30, AT SEPTEMBER 30,
------------------------------------------------- -----------------------
2001 2002 2003 THEREAFTER 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest rate swaps.................. $ 486,000 $ 80,000 $ 40,000 $ 95,500 $ 701,500 $ 662,000
Interest rate caps................... -- -- -- -- -- 243,000
Interest rate floors................. 156,506 606,700 2,119,311 350,532 3,233,049 3,162,036
Financial options.................... -- -- -- -- -- 20,000
Forward delivery contracts........... 413,100 -- -- -- 413,100 361,243
Commitments to extend credit......... 2,370,258 714,601 462,394 368,884 3,916,137 2,850,961
Commitments to purchase loans........ 14,664 -- -- -- 14,664 59,605
---------- ---------- ---------- -------- ---------- ----------
Total...................... $3,440,528 $1,401,301 $2,621,705 $814,916 $8,278,450 $7,358,845
========== ========== ========== ======== ========== ==========
</TABLE>
INTEREST RATE SWAPS. During fiscal 2000, the Company entered into $480
million of interest rate swap agreements and $440.5 million matured. During
fiscal 1999, the Company entered into $351 million in interest rate swap
agreements and $166 million matured. The Company entered into these contracts in
an effort to match the repricing of its liabilities with its assets and to
change the term of some of its assets with short-term rates into long-term.
<TABLE>
<CAPTION>
AVERAGE AVERAGE
NOTIONAL FIXED FLOATING HEDGED
AMOUNT RATE RATE(1) ITEM
-------- ------- --------- ----------------------------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 2000
Receive Floating/Pay Fixed........... $ 35,500 6.62% 6.69% FHLB advances
186,000 4.61 6.62 Reverse repurchase agreements
Receive Fixed/Pay Floating........... 300,000 6.82 6.62 Mortgage banker finance loans
</TABLE>
(1) Based on one or three month LIBOR.
F-24
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following swaps were entered into during fiscal 2000 and were accounted
for as trading assets. Although these swaps were entered into with the intent of
reducing interest rate risk on certain commercial deposits, they did not meet
the criteria required to receive hedge accounting treatment.
<TABLE>
<CAPTION>
AVERAGE AVERAGE
NOTIONAL FIXED FLOATING
AMOUNT RATE RATE(1)
-------- ------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Receive Floating/Pay Fixed........... $90,000 7.07% 6.50%
Receive Fixed/Pay Floating........... 90,000 7.23 6.62
<CAPTION>
AVERAGE AVERAGE
NOTIONAL FIXED FLOATING HEDGED
AMOUNT RATE RATE(1) ITEM
-------- ------- --------- ----------------------------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 1999
Receive Floating/Pay Fixed........... $476,000 5.43% 5.35% FHLB advances
186,000 4.61 5.38 Reverse repurchase agreements
</TABLE>
(1) Based on one or three month LIBOR.
INTEREST RATE CAPS AND FLOORS. Amortizing interest rate caps and floors,
together known as a "collar", 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 change at each reset date.
These amortizing caps and floors expired during fiscal 2000.
<TABLE>
<CAPTION>
AVERAGE
NOTIONAL INDEX CONTRACTED
AMOUNT RATE(1) RATE
-------- ------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 1999................ floor $243,000 5.60% 7.86%
cap 243,000 5.60 8.57
</TABLE>
(1) Based on six month LIBOR.
INTEREST RATE FLOORS. Floor contracts were entered into in an effort to
hedge MSRs against declines in value resulting from increased prepayments caused
by changes in market interest rates.
<TABLE>
<CAPTION>
AVERAGE AVERAGE
NOTIONAL INDEX FLOOR
AMOUNT RATE(1) RATE HEDGED ITEM
---------- --------- ------- ------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AT SEPTEMBER 30, 2000................ $3,233,049 6.73% 5.66% MSRs
AT SEPTEMBER 30, 1999................ 3,162,036 6.51 5.39 MSRs
</TABLE>
(1) Based on five or ten year Constant Maturity Treasury index or seven, ten, or
fifteen year Constant Maturity Swap index.
Costs to enter floor agreements are included as a component of MSRs on the
Consolidated Statements of Financial Condition and were amortized into current
operations over the lives of the floor agreements. Interest received on floor
agreements and gains and losses on sales of floor agreements are deferred and
amortized into current operations over the lives of the MSRs being hedged.
During fiscal 2000 and 1999, the Company reset portions of its hedge position by
selling $529 million and $2.3 billion of its interest rate floor agreements and
then purchasing new agreements with different terms and maturities. The sales
resulted in a deferred loss of $2.4 million during fiscal 2000 and a deferred
gain of $24.2 million during fiscal 1999. Floors totaling $830 million and
$2.4 billion were purchased during fiscal 2000 and 1999. During fiscal 2000 and
1999,
F-25
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expirations totaled $230 million and $270 million. Interest received on interest
rate floor agreements was $151,000 and $4 million for fiscal 2000 and 1999. The
unamortized gain, including interest received, was $43.2 million at
September 30, 2000 and $45.4 million at September 30, 1999. The unamortized
costs to enter the floor agreements were $16.7 million and $21.1 million at
September 30, 2000 and 1999.
INTEREST RATE LOCKS. Interest rate locks were entered into in an effort to
manage the risk that a change in interest rates would decrease the value of
certain commercial loans available for sale prior to their disposition. During
fiscal 1999, $24.5 million in interest rate locks were closed as the loans being
hedged were sold. The loss on the sale of the loans totaling $876,000 was
partially offset by the $682,000 of income on this hedge. There was no interest
rate lock activity during fiscal 2000.
FINANCIAL OPTIONS. Treasury options were entered into in an effort to
manage the risk that a change in interest rates would decrease the value of
single family loans held for sale or commitments to originate mortgage loans
("mortgage pipeline"). During fiscal 2000, $113.5 million in options were
purchased, $65 million were sold, and $68.5 million expired. During fiscal 1999,
$340 million of options were purchased and $320 million were sold.
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 the mortgage pipeline.
AT SEPTEMBER 30,
---------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
FORWARD DELIVERY CONTRACTS........... $ 413,100 $ 361,243
========== ==========
LOANS AVAILABLE TO FILL COMMITMENTS
Single family........................ $ 875,921 $ 574,675
Mortgage pipeline (estimated)........ 340,672 166,599
---------- ----------
Total...................... $1,216,593 $ 741,274
========== ==========
Net losses related to forward delivery contracts totaling $47,000 during
fiscal 2000 and net gains totaling $8.3 million during fiscal 1999 were included
in gains on sales of single family loans.
COMMITMENTS TO EXTEND CREDIT. The Company's exposure to credit loss for
commitments to extend credit is represented by the contractual amount of these
agreements. The Company uses the same credit policies in making funding
commitments as it does for on-balance-sheet instruments. These commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee to the Company. Because commitments may expire
without being drawn upon, the total contract amounts do not necessarily
represent future cash requirements. Commitments to extend credit outstanding at
September 30, 2000 and 1999 were $3.9 billion and $2.9 billion. Included in
these commitments are $1.8 billion and $1.5 billion representing the undisbursed
portion of loans in process and letters of credit totaling $65.7 million and
$68.4 million as of September 30, 2000 and 1999.
COMMITMENTS TO PURCHASE LOANS. The Company's outstanding commitments to
purchase loans at September 30, 2000 and 1999, were $14.7 million and
$59.6 million.
RECOURSE OBLIGATIONS. Over time, the Company sells loans for which certain
recourse obligations apply. At September 30, 2000 and 1999, the amount subject
to these recourse provisions totaled $58.0 million and $64.2 million. Management
believes that it has adequately provided reserves for its recourse obligations
related to these loan sales.
F-26
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EMPLOYEE BENEFITS
SAVINGS PLANS
The Company has an employee tax-deferred savings plan available to all
eligible employees, which qualifies as a 401(k) plan. Prior to January 1, 2000,
the Company contributed 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. Effective January 1, 2000, the Company began
matching contributions 100% up to 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 $2.5 million, $1.3 million, and
$1.1 million for fiscal 2000, 1999, and 1998.
STOCK INCENTIVE PLANS
Since its initial public offering in fiscal 1996, the Company has
established three stock incentive plans (the 1996 Stock Incentive Plan, the 1999
Stock Incentive Plan, and the 2000 Stock Incentive Plan), whereby it has granted
options to purchase shares of its common stock to certain employees of the Bank.
At September 30, 2000, options outstanding under these plans and their vesting
terms were as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS AVAILABLE EXPIRATION DATE
PLAN AT SEPTEMBER 30, 2000 FOR FUTURE GRANTS VESTING TERMS IF NOT EXERCISED
---- ---------------------- ------------------ -------------- ----------------
<S> <C> <C> <C> <C>
2000 Stock Incentive Plan............ 451,200 48,300 4 years 10 years from
grant date
1999 Stock Incentive Plan............ 794,550 38,200 4 years 10 years from
grant date
1996 Stock Incentive Plan............ 1,232,750 220,100 3 to 5 years 5 to 10 years
from grant date
</TABLE>
In fiscal 1999, the Company issued 140,750 shares of restricted common
stock from the 1996 and 1999 Stock Incentive Plans. These shares will fully vest
by April 2003 (20% vests April 2001, 30% vests April 2002 and 50% vests April
2003). The market value of the restricted stock at the time of grant, which
totaled $5.6 million, was recorded as unearned stock compensation and is shown
as a separate component of stockholders' equity. The unearned stock compensation
is being amortized to compensation expense over the vesting period. Compensation
expense of $1.8 million and $865,000 was recorded in fiscal 2000 and 1999 for
this restricted stock.
In fiscal 1998, the Company granted performance units to executive officers
and other key officers and employees under the 1996 Stock Incentive Plan. These
units, which equate in value to shares of the Company's common stock on a
one-for-one basis, were to 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
Compensation Committee was to determine the number of units earned based on the
Company's performance. Subsequent to September 30, 2000, it was determined that
the number of performance units earned was 201,000. Accordingly, cash was
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. Compensation expense of $7.6 million, $1.9 million, and $731,000 was
recorded in fiscal 2000, 1999, and 1998 for these units.
MANAGEMENT COMPENSATION PROGRAM
In connection with the Company's initial public offering, the Company's
Boards of Directors approved a management compensation program for executive
officers, other key officers and employees, and certain directors. Options to
purchase shares of Company common stock issued under this plan became fully
vested and exercisable during fiscal 1999 and will expire if not exercised
within 10 years of the date of the grant. No further
F-27
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grants or compensation awards may be made or awarded under this plan. At
September 30, 2000, there were 1,075,249 options outstanding under this plan.
DIRECTOR STOCK COMPENSATION PLAN
The Company has a director stock compensation plan for members of the
Company's Board who are not employees. 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 Company amended its Director Stock Plan
during fiscal 2000. Options issued under this plan after it was amended have an
exercise price equal to the fair value of the Company's common stock at the date
of grant and are fully vested and exercisable on the date of grant. Options
issued under this plan prior to its amendment have an exercise price equal to
115% of the fair value of the Company's common stock at the date of grant and
did not vest or become exercisable unless the fair value of the Company's common
stock equaled or exceeded the exercise price of the option during a 30-day
vesting period beginning one year after the date of grant. The 10,000 options
issued to directors in fiscal 1999 and 1998 did not vest and were cancelled.
Vested options will expire if not exercised within 10 years of the date of
grant. At September 30, 2000, there were 29,000 options outstanding and 221,000
shares were available for future grant under this plan.
SUMMARY OF STOCK-BASED COMPENSATION
Stock option activity was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- -------------------------- --------------------------
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> <C>
Outstanding at beginning of year........ 3,160,070 $32.57 2,161,720 $29.41 1,653,020 $24.49
Granted............................. 592,000 26.35 1,074,650 38.98 549,700 44.67
Exercised........................... (114,921) 26.95 (37,000) 20.13 (1,500) 38.06
Forfeited........................... (54,400) 39.10 (39,300) 45.53 (39,500) 35.28
--------- ------ --------- ------ --------- ------
Outstanding at end of year.............. 3,582,749 $31.63 3,160,070 $32.57 2,161,720 $29.41
========= ====== ========= ====== ========= ======
Exercisable at end of year.............. 1,676,979 $26.66 1,268,720 $22.11 32,500 $32.16
========= ====== ========= ====== ========= ======
</TABLE>
Stock options outstanding and exercisable, by range of exercise price, were
as follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
----------------------------------------------- ---------------------------
RANGE OF NUMBER WEIGHTED- WEIGHTED-AVERAGE NUMBER WEIGHTED-
EXERCISE OF AVERAGE REMAINING OF AVERAGE
PRICES OPTIONS EXERCISE PRICE CONTRACTUAL LIFE OPTIONS EXERCISE PRICE
---------------------------------------- --------- -------------- ------------------ --------- ---------------
<S> <C> <C> <C> <C> <C>
$20.00-$25.00........................... 1,085,249 $20.15 5.85years 1,084,249 $20.15
$25.01-$30.00........................... 648,200 26.30 8.93 82,000 26.87
$30.01-$35.00........................... 11,500 31.22 9.40 9,000 30.85
$35.01-$40.00........................... 1,326,300 38.67 6.93 299,500 38.01
$40.01-$45.00........................... 497,750 44.33 2.86 196,730 44.37
$45.01-$50.00........................... 13,750 48.97 2.52 5,500 48.97
--------- ------ ---- --------- ------
3,582,749 $31.63 6.39 1,676,979 $26.66
========= ====== ==== ========= ======
</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
available to common stockholders would have been
F-28
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$118.9 million, $102.4 million, and $112.9 million and diluted EPS would have
been $3.59, $3.11, and $3.42 for fiscal 2000, 1999, and 1998.
The weighted-average grant date fair value of stock options granted during
fiscal 2000, 1999, and 1998, was $11.76, $19.16, and $14.86. 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 2000,
1999, and 1998: estimated volatility of 36.32%, 42.37%, and 35.80%; risk-free
interest rate of 6.65%, 5.11%, and 5.50%; dividend yield of 2.24%, 1.60%, and
1.40%; and an expected life of 10 years for the options issued in fiscal 2000,
9.97 years for the options issued in fiscal 1999, and 5.1 years for the options
issued in fiscal 1998.
15. RELATED PARTIES
In August 1999, the Parent Company entered into five loan participation
agreements with the Bank totaling $60 million with an average initial interest
rate of 8.12%. These participation agreements provided the Parent Company with a
direct ownership interest in five revolving single family construction loans
made by the Bank to various borrowers. The Bank repurchased the participation
agreements in February 2000.
In the ordinary course of business, the Company has granted loans to
principal officers and directors and their affiliates amounting to $88.1 million
at September 30, 2000, including $84.2 million of commercial loans
collateralized by multi-family properties. Such loans were at market rates and
on market terms and conditions.
16. INCOME TAXES
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
2000 1999 1998
--------- --------- --------
(IN THOUSANDS)
CURRENT TAX EXPENSE
Federal and state............... $ 67,463 $ 22,158 $ 7,230
Payments due in lieu of taxes... 5,205 16,309 6,483
DEFERRED TAX EXPENSE (BENEFIT)
Federal and state............... 10,655 28,692 39,649
Change in valuation
allowance -- utilization and
reduction of NOLs............. -- -- (27,500)
Change in value of net operating
losses........................ (3,019) (13,500) --
-------- -------- -------
Total income tax expense... $ 80,304 $ 53,659 $25,862
======== ======== =======
The Company's issuance of its Corporate Premium Income Equity Securities
("Corporate PIES") and cumulative redeemable preferred stock ("Redeemable
Preferred Stock Series A") in August 1999 caused an Ownership Change under
Internal Revenue Code 382 (see Note 17). This Ownership Change will extend the
utilization period of the Company's net operating losses ("NOLs"), with the
result that the Company will no longer be required to share certain of the tax
benefits associated with these losses with a third party pursuant to a
contractual agreement entered into in connection with the acquisition of the
Bank. This extension resulted in the recognition of $3 million of tax benefits
during fiscal 2000 and $13.5 million during fiscal 1999.
During fiscal 1998, the Company successfully resolved an outstanding tax
benefit lawsuit with the Federal Deposit Insurance Corporation ("FDIC"), as
manager of the Federal Savings and Loan Insurance Corporation ("FSLIC")
Resolution Fund, which resulted in a positive income tax adjustment of
approximately $6.0 million.
F-29
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Tax NOLs outstanding at September 30, 2000, were as follows:
ALTERNATIVE EXPIRATION
YEAR GENERATED REGULAR TAX MINIMUM TAX DATE
-------------- ----------- ----------- ----------
(IN MILLIONS)
September 30, 1990................. $162 -$- 2005
September 30, 1991................. 119 -- 2006
September 30, 1992................. 33 -- 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 2000, the current federal tax
expense was a result of regular income tax due to the limitation of the amount
of NOLs available to offset taxable income. For fiscal 1999 and 1998, the
current federal tax expense was the result of AMT.
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,
-----------------------------------
2000 1999 1998
-------- -------- -------
(IN THOUSANDS)
TAXES................................ $ 81,716 $ 63,549 $55,932
INCREASE (DECREASE) FROM
Reduction in valuation allowance
for the utilization and
reduction of NOLs............. -- -- (27,500)
Change in value of net operating
losses........................ (3,019) (13,500) --
State income tax -- current..... 5,614 4,063 3,949
Tax benefit lawsuit
resolution.................... -- -- (6,020)
Other........................... (4,007) (453) (499)
-------- -------- -------
Income tax expense......... $ 80,304 $ 53,659 $25,862
======== ======== =======
F-30
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred tax assets and liabilities outstanding at September 30, 2000
and 1999, were as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
(IN THOUSANDS)
DEFERRED TAX ASSETS
Net operating losses............ $ 91,543 $ 89,203
Tax mark to market.............. -- 15,435
AMT credit...................... 10,111 15,915
Bad debt........................ 27,854 13,906
Purchase accounting............. 2,014 2,778
Net unrealized losses on
securities available for
sale........................... 9,787 12,017
Depreciation -- premises and
equipment...................... 5,408 5,214
Real estate mortgage investment
conduits....................... 4,556 4,006
Hedges.......................... 15,090 15,862
Other........................... 9,174 13,357
-------- --------
Total deferred tax
assets................... 175,537 187,693
-------- --------
DEFERRED TAX LIABILITIES
Originated mortgage servicing
rights......................... 33,350 42,556
FHLB stock...................... 33,449 24,349
Tax mark to market.............. 1,608 --
Other........................... 6,484 10,276
-------- --------
Total deferred tax
liabilities.............. 74,891 77,181
-------- --------
Net deferred tax asset before
valuation allowance............ 100,646 110,512
Valuation allowance............. -- --
-------- --------
Net deferred tax assets.... $100,646 $110,512
======== ========
</TABLE>
As of September 30, 2000, future taxable income of $431 million would fully
utilize the net deferred tax assets. No valuation allowance has been established
as management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the 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, 2000, the Bank had approximately $30 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 could 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.
F-31
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concurrent with the Bank's incorporation in December 1988, the Parent
Company, the Bank, and certain related entities entered into an agreement with
the FSLIC providing financial assistance to the Bank, among other things. In
December 1993, this agreement was terminated. As part of the termination, the
Bank agreed to pay the FSLIC Resolution Fund one-third of certain tax benefits
that are utilized by the Bank through September 30, 2003. Amounts reflected as
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.
17. MINORITY INTEREST AND REDEEMABLE PREFERRED STOCK
MINORITY INTEREST
The Bank is authorized to issue a total of 10,000,000 shares of preferred
stock. At September 30, 2000, the Bank had 4,000,000 shares, $25 liquidation
preference per share, of 9.60% noncumulative preferred stock (par value $0.01)
(the "Bank Preferred Stock Series B") outstanding ($100 million in aggregate)
and 3,420,000 shares, $25 liquidation preference per share, of 10.12%
noncumulative preferred stock (par value $0.01) (the "Bank Preferred Stock
Series A") outstanding ($85.5 million in aggregate). These shares are not owned
by the Parent Company.
The shares of Bank Preferred Stock Series A and Series B 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>
REDEEMABLE PREFERRED STOCK
In August 1999, the Company issued 2,000,000 shares of 8% Corporate PIES
for a price of $50 per Corporate PIES or $100 million in aggregate. Each of the
Corporate PIES consists of (a) a purchase contract for shares of Company common
stock and (b) a share of Company redeemable preferred stock ("Redeemable
Preferred Stock Series B").
The purchase contract obligates the holder of the Corporate PIES to
purchase shares of Company common stock in August 2002. Upon purchase of the
common stock, the holder of the Corporate PIES must remit $50 per Corporate PIES
owned in exchange for shares of the Company's common stock. The number of shares
of common stock ultimately issued to the holder will depend on the average
closing price of the common stock over a 20-day trading period preceding the
time of purchase. The maximum number of shares to be issued under the purchase
contract is 2,671,120 and the minimum number is 2,225,940. The Company will
remit quarterly contract payments under the purchase contract equal to 0.75% per
annum of the $50 stated amount of the purchase contract.
The cumulative Redeemable Preferred Stock Series B, which has a liquidation
preference of $50 per share and certain voting rights, may be redeemed at the
option of the Company on or after October 16, 2002 at 100% of its liquidation
preference and is subject to mandatory redemption in full in August 2004. The
Redeemable Preferred Stock Series B will be pledged to the Company to secure the
holders' obligation to purchase the
F-32
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock under the purchase contract. The Company makes quarterly dividend
payments equal to 7.25% per annum of the $50 liquidation preference.
Proceeds from the Corporate PIES offering were contributed to the Bank for
general business purposes.
Also in August 1999, the Company issued 1,200,000 shares of 7.55%
Redeemable Preferred Stock Series A for a price of $50 per share or $60 million
in aggregate. Redeemable Preferred Stock Series A, which had a $50 per share
liquidation preference, and certain voting rights, was redeemable at the option
of the Company on or after February 2000 at 100% of its liquidation preference.
Proceeds from this offering were used for general business purposes. In February
2000, the Company redeemed at par its Redeemable Preferred Stock Series A. In
exchange for the Series A Preferred Stock, a cash payment of $50.94375 per share
was delivered to the holders, representing the redemption price of $50.00 per
share plus all accrued and unpaid dividends from the last dividend date up to
the date of redemption.
18. STOCKHOLDERS' EQUITY
CAPITAL STOCK
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.
In June 1999, the Company released certain transfer restrictions on
7,887,436 shares of its outstanding common stock. These restrictions, which
would otherwise have expired in August 1999, were agreed to by shareholders who
owned five percent or more of the Company's common stock at the time of its
initial public offering. As a result of the lifting of these restrictions, the
Company's Class B common stock was converted to Class A common stock. In July
1999, the restrictions on the remaining 318,342 shares of common stock that were
restricted at the time of the initial public offering were also released.
TREASURY STOCK
In August 1998, the Company's Board of Directors authorized the repurchase
of up to $50 million of the Company's common stock. This program was rescinded
in August 1999. In September 1999, the Company's Board of Directors authorized
the repurchase of up to 36,000 shares of the Company's common stock.
EARNINGS PER COMMON SHARE
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
INCOME
Net income........................... $134,917 $109,657 $115,690
Less redeemable preferred stock
dividends.......................... 8,969 1,702 --
-------- -------- --------
Net income available to common
stockholders....................... $125,948 $107,955 $115,690
======== ======== ========
SHARES
Average common shares outstanding.... 32,460 32,299 32,200
Potentially dilutive common shares
from options....................... 569 642 776
Potentially dilutive common shares
from Corporate PIES................ 74 -- --
-------- -------- --------
Average common shares and potentially
dilutive common shares
outstanding........................ 33,103 32,941 32,976
======== ======== ========
BASIC EPS............................ $ 3.88 $ 3.34 $ 3.59
======== ======== ========
DILUTED EPS.......................... $ 3.80 $ 3.28 $ 3.51
======== ======== ========
F-33
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options to purchase 1,573,397, 961,722, and 193,393 shares of common stock
at weighted-average exercise prices of $40.34, $41.97, and $45.20 were excluded
from the computation of diluted EPS for fiscal 2000, 1999, and 1998, because the
options' exercise price was greater than the average market price of the common
stock.
19. REGULATORY MATTERS
The Bank is subject to the regulatory capital requirements of the Office of
Thrift Supervision ("OTS"). Any savings association that fails to meet 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, 2000
and 1999, the Bank met all capital adequacy requirements.
As of September 30, 2000 and 1999, 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
risk-based capital, and total risk-based capital. There have been no conditions
or events since September 30, 2000, 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
----- ---------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
2000
Stockholders' equity of the Bank................... $1,338,270
Add: Net unrealized losses................... 16,311
Less: Intangible assets of the Bank........... (73,017)
Non-qualifying MSRs..................... (20,906)
----------
TANGIBLE CAPITAL................................... 6.98% 1,260,658 1.50% $270,889 -- --
Add: Core deposit intangibles................ 1,815
----------
CORE CAPITAL....................................... 6.99% 1,262,473 3.00% 541,832 5.00% $903,053
Less: Low level recourse deduction............ (8,757)
----------
TIER 1 RISK-BASED CAPITAL.......................... 9.14% 1,253,716 -- -- 6.00% 822,870
Add: Allowance for loan and MBS credit
losses................................. 111,455
Qualifying subordinated debt............ 149,092
----------
TOTAL RISK-BASED CAPITAL........................... 11.04% $1,514,263 8.00% 1,097,159 10.00% 1,371,449
==========
1999
Stockholders' equity of the Bank................... $1,224,957
Add: Net unrealized losses................... 20,058
Less: Intangible assets of the Bank........... (78,712)
Non-qualifying MSRs..................... (18,060)
----------
TANGIBLE CAPITAL................................... 7.14% 1,148,243 1.50% $241,273 -- --
Add: Core deposit intangibles................ 2,536
----------
CORE CAPITAL....................................... 7.15% 1,150,779 3.00% 482,622 5.00% $804,371
Less: Low level recourse deduction............ (7,752)
----------
TIER 1 RISK-BASED CAPITAL.......................... 9.73% 1,143,027 -- -- 6.00% 704,707
Add: Allowance for loan and MBS credit
losses................................. 82,747
Qualifying subordinated debt............ 149,019
----------
TOTAL RISK-BASED CAPITAL........................... 11.71% $1,374,793 8.00% 939,609 10.00% 1,174,512
==========
</TABLE>
F-34
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000,
there was $268.4 million of capital 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, 2000.
COURT OF CLAIMS LITIGATION
Notwithstanding the above capital requirements, the Bank's capital
requirements were established pursuant to the forbearance letter (a "Forbearance
Agreement") issued simultaneously with the original acquisition of the Bank by
the Parent Company in 1988. The OTS took the position that the capital
forbearances were no longer available because of the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). On July
25, 1995 the Bank, the Parent Company, and Hyperion Partners LP (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 that 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 that would have allowed the Bank to count as capital for regulatory
purposes, and to amortize over a period of 25 years, the $30.7 million
difference between certain FSLIC payment obligations to the Bank and the
discounted present value of those future FSLIC payments.
In March 1999, the United States Court of Federal Claims granted the
Company's motion for summary judgment on the issue of liability and held that
the United States was liable for claims in the case filed by the Plaintiffs. On
August 5, 1999, the Court denied a motion for summary judgment filed by the
United States of America on the issue of lost profits damages. The Company's
case proceeded to trial on the amount of damages on September 13, 1999, and the
taking of evidence by the Court concluded on October 21, 1999. The parties have
submitted post-trial briefs and presented final oral arguments. The Plaintiffs'
seek and offered evidence in support of damages of approximately $560 million.
The government argued that damages to Plaintiffs as a result of the breach, if
any, approached zero. The Company is unable to predict the outcome of the
Plaintiffs' suit against the United States and the amount of judgment for
damages, if any, that may be awarded. No assurances can be given on the outcome
of this case.
F-35
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. 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
The Company leases various branch offices, office facilities, and equipment
under operating leases and contracts with a service bureau for data processing.
Total rental and data processing expense for fiscal 2000, 1999, and 1998, after
consideration of certain credits and rental income, was $27.2 million,
$20.9 million, and $16.7 million. Future minimum commitments on data processing
agreements and significant operating leases in effect at September 30, 2000,
were scheduled to expire in the years ended September 30 as follows:
(IN THOUSANDS)
2001.............................. $23,966
2002.............................. 23,341
2003.............................. 18,378
2004.............................. 9,276
2005.............................. 7,476
Thereafter........................ 23,930
21. SEGMENTS
The Company's business segments include Commercial Banking (comprised of
Residential Construction Lending, Mortgage Banker Finance, Commercial Real
Estate Lending, Multi-Family Lending, Healthcare Lending and Other Commercial
Lending), Community Banking, Mortgage Banking (comprised of Mortgage Servicing
and Mortgage Production), and Investment Portfolio.
o Commercial Banking provides credit and a variety of cash management and
other services primarily to mortgage bankers, builders, developers, and
healthcare operators. Other products and industry specialties include
SBA poolings, syndications, and energy lending.
o Community Banking activities include deposit gathering, consumer
lending, small business banking, and investment product sales.
o Mortgage Servicing activities include collecting and applying payments
from borrowers, remitting payments to investors, collecting funds for
and paying mortgage-related expenses, and, in general, the overall
administration of an investor's loan.
o Mortgage Production originates wholesale single family mortgage loans
for the Company's portfolio and for sale in the secondary market.
o Investment Portfolio invests in single family loans, short-term
interest-earning assets, securities and other investments, and MBS.
F-36
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information by business segment for the periods
indicated, was as follows:
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------------
INCOME REVENUES ASSETS
-------- -------- -----------
(IN THOUSANDS)
2000
Commercial Banking
Residential Construction
Lending....................... $ 32,989 $ 45,806 $ 1,590,238
Mortgage Banker Finance......... 26,768 40,474 1,682,357
Commercial Real Estate
Lending....................... 21,115 27,652 1,106,372
Multi-Family Lending............ 20,543 27,560 1,275,153
Healthcare Lending.............. 16,959 22,624 782,452
Other Commercial Lending........ 9,263 16,835 451,322
-------- -------- -----------
Total Commercial Banking... 127,637 180,951 6,887,894
Community Banking.................... 29,238 199,722 1,626,274
Mortgage Banking
Mortgage Servicing.............. 33,489 77,356 835,369
Mortgage Production............. 4,491 33,238 3,519,111
-------- -------- -----------
Total Mortgage Banking..... 37,980 110,594 4,354,480
Investment Portfolio................. 44,714 71,446 4,472,730
-------- -------- -----------
Reportable Segments............. 239,569 562,713 17,341,378
Other................................ (6,095) 3,947 818,845
-------- -------- -----------
Total........................... $233,474 $566,660 $18,160,223
======== ======== ===========
1999
Commercial Banking
Residential Construction
Lending....................... $ 24,181 $ 34,348 $ 1,169,138
Mortgage Banker Finance......... 22,300 30,047 1,088,144
Commercial Real Estate
Lending....................... 15,786 21,896 865,339
Multi-Family Lending............ 15,665 21,310 1,061,347
Healthcare Lending.............. 8,550 12,483 615,794
Other Commercial Lending........ 6,016 9,953 477,894
-------- -------- -----------
Total Commercial Banking... 92,498 130,037 5,277,656
Community Banking.................... 21,489 148,789 1,179,002
Mortgage Banking
Mortgage Servicing.............. 18,686 60,820 788,941
Mortgage Production............. 14,366 42,111 2,754,640
-------- -------- -----------
Total Mortgage Banking..... 33,052 102,931 3,543,581
Investment Portfolio................. 39,555 68,641 5,412,149
-------- -------- -----------
Reportable Segments............. 186,594 450,398 15,412,388
Other................................ (5,025) 19,184 832,291
-------- -------- -----------
Total........................... $181,569 $469,582 $16,244,679
======== ======== ===========
F-37
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------------
INCOME REVENUES ASSETS
-------- -------- -----------
(IN THOUSANDS)
1998
Commercial Banking
Residential Construction
Lending....................... $ 13,347 $ 21,998 $ 762,639
Mortgage Banker Finance......... 15,403 21,114 924,514
Commercial Real Estate
Lending....................... 7,662 12,244 496,595
Multi-Family Lending............ 16,979 23,313 866,449
Healthcare Lending.............. 3,352 6,110 266,064
Other Commercial Lending........ 6,295 9,080 328,826
-------- -------- -----------
Total Commercial Banking... 63,038 93,859 3,645,087
Community Banking.................... 19,023 121,189 760,887
Mortgage Banking
Mortgage Servicing.............. 16,070 50,886 635,964
Mortgage Production............. 4,087 30,618 2,197,176
-------- -------- -----------
Total Mortgage Banking..... 20,157 81,504 2,833,140
Investment Portfolio................. 68,160 78,930 5,823,756
-------- -------- -----------
Reportable Segments............. 170,378 375,482 13,062,870
Other................................ (10,573) (3,076) 718,185
-------- -------- -----------
Total........................... $159,805 $372,406 $13,781,055
======== ======== ===========
Financial information by segment is reported on a basis consistent with how
such information is presented to management for purposes of making operating
decisions and assessing performance. Income for segment reporting purposes is
defined as income before income taxes and minority interest as these items are
not allocated to the segments. Revenues are comprised of net interest income
before the provision for credit losses and non-interest income.
Non-interest income and expenses directly attributable to a segment are
assigned to that segment. The budgeted non-interest expenses of support areas
are allocated to each segment. Such allocation contemplates income, assets, and
headcount for a particular segment. Non-interest expenses incurred by the
support areas which differ from budgeted amounts are not allocated to the
segments, but are included in the other caption shown above. Certain provisions
for credit losses are not allocated to the segments and are included in the
other caption shown above.
Transfer pricing is used in calculating each segment's income and revenues
and measures the cost of funds used and provided by a segment. Through this
process, funds are "purchased" from liability-generating businesses, such as
Community Banking, and are "sold" to asset-generating businesses, such as
Commercial Banking. The price at which funds are bought and sold is based on the
Bank's wholesale cost of funds. Transfer pricing results in a difference between
interest income or expense as shown in the Consolidated Financial Statements and
the amount allocated to the segments. This difference is reported as a component
of the other caption shown above. Financing costs incurred by the Parent Company
are also included in the other caption shown above as these costs are not
allocated to the segments.
Segment income and revenues include certain inter-segment transactions that
the Company views as appropriate for purposes of reflecting the performance of
the segments. The Mortgage Servicing segment receives a fee for servicing loans
held by the Mortgage Production and Investment Portfolio segments. The Community
Banking segment is allocated actual costs incurred by the Mortgage Servicing
segment in servicing consumer loans. The Community Banking segment receives a
fee for originating single family loans in its
F-38
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
branches for the Investment Portfolio segment. The Investment Portfolio segment
is allocated actual costs incurred by the Community Banking segment for time
spent on telemarketing related to refinancing loans in the single family loan
portfolio. Deposit operations is considered part of the Community Banking
segment and a portion of the related costs is allocated to the Commercial
Banking segment based on time spent servicing that segment's deposits.
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents summarized data for each of the quarters in
fiscal 2000 and 1999. The first three quarters of fiscal 1999 have been restated
to reflect an entity acquired in fiscal 1999 using the pooling of interests
method of accounting.
<TABLE>
<CAPTION>
2000 1999
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $350,375 $334,693 $307,319 $294,674 $276,088 $251,161 $242,605 $238,132
Interest expense..................... 243,617 225,500 206,294 195,008 176,789 161,667 159,994 159,915
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income.................. 106,758 109,193 101,025 99,666 99,299 89,494 82,611 78,217
Provision for credit losses.......... 4,705 19,897 8,925 7,142 20,283 5,617 5,982 6,486
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for credit losses.................. 102,053 89,296 92,100 92,524 79,016 83,877 76,629 71,731
Non-interest income.................. 38,747 39,275 38,657 33,339 31,008 27,464 28,326 33,163
Non-interest expense................. 76,808 73,776 72,658 69,275 75,399 63,742 56,633 53,871
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes and
minority interest.................. 63,992 54,795 58,099 56,588 34,625 47,599 48,322 51,023
Income tax expense (benefit)......... 22,833 16,502 20,721 20,248 (1,356) 17,639 18,292 19,084
-------- -------- -------- -------- -------- -------- -------- --------
Income before minority interest...... 41,159 38,293 37,378 36,340 35,981 29,960 30,030 31,939
Minority interest -- subsidiary
preferred stock dividends.......... 4,564 4,563 4,563 4,563 4,564 4,563 4,563 4,563
-------- -------- -------- -------- -------- -------- -------- --------
Net income........................... $ 36,595 $ 33,730 $ 32,815 $ 31,777 $ 31,417 $ 25,397 $ 25,467 $ 27,376
======== ======== ======== ======== ======== ======== ======== ========
Net income available to common
stockholders....................... $ 34,782 $ 31,918 $ 30,436 $ 28,812 $ 29,715 $ 25,397 $ 25,467 $ 27,376
======== ======== ======== ======== ======== ======== ======== ========
Earnings per common share
Basic............................ $ 1.07 $ 0.98 $ 0.94 $ 0.89 $ 0.92 $ 0.78 $ 0.79 $ 0.85
Diluted.......................... 1.03 0.97 0.93 0.87 0.90 0.77 0.77 0.83
Average common shares outstanding.... 32,493 32,451 32,439 32,456 32,424 32,401 32,190 32,181
Average common shares and potentially
dilutive common shares
outstanding........................ 33,725 33,049 32,721 32,950 32,694 33,082 32,913 32,803
</TABLE>
F-39
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. FINANCIAL STATEMENTS OF PARENT COMPANY
PARENT COMPANY
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
AT SEPTEMBER 30,
------------------------
2000 1999
---------- ----------
ASSETS
Cash and cash equivalents............ $ 13,037 $ 5,837
Loans held for investment............ -- 60,000
Investment in subsidiaries........... 1,156,781 1,043,145
Deferred tax asset................... 18,013 18,415
Tax receivable from subsidiary....... 4,049 14,691
Intangible assets.................... 2,643 3,045
Other assets......................... 171 874
---------- ----------
TOTAL ASSETS......................... $1,194,694 $1,146,007
========== ==========
LIABILITIES
Notes payable........................ $ 219,768 $ 219,743
Other liabilities.................... 10,686 12,850
---------- ----------
Total liabilities.......... 230,454 232,593
---------- ----------
REDEEMABLE PREFERRED STOCK........... 100,000 160,000
STOCKHOLDERS' EQUITY
Common stock......................... 325 325
Paid-in capital...................... 134,882 132,153
Retained earnings.................... 748,301 646,549
Unearned stock compensation.......... (2,882) (4,686)
Accumulated other comprehensive
income -- net unrealized losses on
subsidiary's securities available
for sale, net of tax............... (16,311) (20,058)
Treasury stock, at cost.............. (75) (869)
---------- ----------
Total stockholders'
equity................... 864,240 753,414
---------- ----------
TOTAL LIABILITIES, REDEEMABLE
PREFERRED STOCK, AND STOCKHOLDERS'
EQUITY............................. $1,194,694 $1,146,007
========== ==========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-40
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PARENT COMPANY
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE YEAR ENDED SEPTEMBER 30,
------------------------------------
2000 1999 1998
-------- -------- --------
INCOME
Dividends from subsidiary............ $ 38,500 $ 37,204 $ 41,697
Interest income -- loans............. 1,953 700 --
Interest income -- other............. 21 -- --
-------- -------- --------
Total income............... 40,474 37,904 41,697
-------- -------- --------
EXPENSE
Interest expense -- notes payable.... 19,615 19,556 19,546
Amortization of intangibles.......... 402 401 401
Other................................ 828 1,192 1,181
-------- -------- --------
Total expense.............. 20,845 21,149 21,128
-------- -------- --------
INCOME BEFORE UNDISTRIBUTED INCOME OF
SUBSIDIARIES AND INCOME TAXES...... 19,629 16,755 20,569
Equity in undistributed income of
subsidiaries....................... 107,233 85,291 87,238
-------- -------- --------
INCOME BEFORE INCOME TAXES........... 126,862 102,046 107,807
Income tax benefit................... (8,055) (7,611) (7,883)
-------- -------- --------
NET INCOME........................... $134,917 $109,657 $115,690
======== ======== ========
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-41
<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,
----------------------------------
2000 1999 1998
--------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................... $ 134,917 $109,657 $ 115,690
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed income
of subsidiaries............... (107,233) (85,291) (87,238)
Deferred tax expense
(benefit)..................... 402 8,340 (4,166)
Amortization.................... 492 432 422
Change in other assets.......... 11,345 (13,156) (2,304)
Change in other liabilities..... (671) 140 369
--------- -------- ---------
Net cash provided by
operating activities..... 39,252 20,122 22,773
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contributions to
subsidiary.................... -- (91,300) (750)
Sale (purchase) of loans held
for investment................ 60,000 (60,000) --
--------- -------- ---------
Net cash provided (used) by
investing activities..... 60,000 (151,300) (750)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of
redeemable preferred stock.... -- 160,000 --
Payment of issuance costs of
redeemable preferred stock.... -- (4,423) --
Redemption of redeemable
preferred stock............... (60,000) -- --
Payment of dividends............ (34,553) (22,367) (20,693)
Stock repurchased............... (595) (614) (501)
Stock options exercised......... 3,096 1,264 216
--------- -------- ---------
Net cash (used) provided by
financing activities..... (92,052) 133,860 (20,978)
--------- -------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 7,200 2,682 1,045
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 5,837 3,155 2,110
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 13,037 $ 5,837 $ 3,155
========= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest............. $ 19,615 $ 19,556 $ 19,200
These condensed financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
F-42
<PAGE>
BANK UNITED CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
24. SUBSEQUENT EVENTS
MERGER WITH WASHINGTON MUTUAL
On August 18, 2000, the Company and Washington Mutual, Inc. ("Washington
Mutual") entered into a definitive agreement whereby the Company will merge into
Washington Mutual. The agreement provides that each share of Bank United Corp.
common stock will be converted into 1.3 shares of Washington Mutual common
stock. In addition, Bank United Corp.'s shareholders will receive contingent
payment right certificates representing the right to receive the proceeds, if
any, relating to the Company's pending forbearance claim, less related taxes and
expenses. See Note 19 Regulatory Matters -- Court of Claims Litigation. Also
Bank United Corp.'s Corporate PIES will be converted into a new series of
Washington Mutual corporate premium income equity securities with substantially
the same terms. As an inducement and condition to Washington Mutual entering
into the merger agreement, the Company and Washington Mutual entered into a
stock option agreement, which granted Washington Mutual an option to purchase
6,462,862 shares of Bank United Corp. common stock (approximately 19.9% of those
outstanding) at a price of $42.375 per share under certain terms and conditions
set forth in that agreement. Additionally, the merger agreement requires the
Company to pay termination fees of up to $52 million to Washington Mutual if the
merger agreement terminates under a number of specified circumstances. The
transaction is subject to approval of the Company's stockholders and the OTS and
is expected to close during the quarter ending March 31, 2001.
In connection with, but prior to the merger with Washington Mutual, the
Bank may exercise its right to call its preferred stock (Bank Preferred Stock
Series A and B). In the event the Bank decides to call the preferred stock, an
agreement will be entered into by Washington Mutual, the Bank, and the Company
providing that the Bank and the Company will be made financially whole for all
of their costs, expenses, and charges in connection with these transactions. The
agreement also will provide for the Bank to maintain existing regulatory capital
levels.
ADOPTION OF SFAS NO. 133
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," requires companies to recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure all derivatives
at fair value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, depending
on the type of hedge transaction. For fair value hedge transactions in which the
Company is hedging changes in the fair value of an asset, liability, or firm
commitment, changes in the derivative instrument's fair value will generally be
offset in the statement of operations by changes in the hedged item's fair
value. For cash flow hedge transactions in which the Company is hedging the
variability of cash flows related to a variable-rate asset, liability, or a
forecasted transaction, changes in the fair value of the derivative instrument
will be reported in other comprehensive income. The gains and losses on the
derivative instrument that are reported in other comprehensive income will be
reclassified to earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The ineffective portion of all
hedges will be recognized in current period earnings. SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133," deferred the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," amended the
accounting and reporting under SFAS No. 133 for certain derivative instruments,
hedging activities, and decisions made by the Derivatives Implementation Group
("DIG"). The Company adopted these statements on October 1, 2000.
The implementation of SFAS No. 133 on October 1, 2000 caused the Company to
record a $5.3 million loss ($3.4 million net of tax or $0.10 per diluted share)
to earnings during the first quarter fiscal 2001. This loss represents the
impact of recording costs to terminate certain derivative contracts, as well as
the loss associated with derivative contracts that did not qualify for hedge
accounting. There was no net earnings impact for fair value or cash flow hedges
upon implementation. The adoption of SFAS No. 133 resulted in a $7.3 million
increase in the book values of the hedged instruments, a $8.5 million decrease
in derivative assets, and a $4.1 million increase in derivative liabilities.
The Company anticipates that ongoing accounting for derivatives under SFAS
No. 133 could increase the volatility of reported earnings and stockholders'
equity. In addition, the DIG is still addressing certain issues that could
change the on-going impact of SFAS No. 133.
F-43
