SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission file number: 000-23745
---------------------------------
BNP U.S. Funding L.L.C.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3972207
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
787 Seventh Avenue, New York, N.Y. 10019
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 841-2000
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Securities registered pursuant to Section 12(b) of the Act: None
Title of Each Class Name of Each Exchange on
to be Registered which Registered
------------------------------ ------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Noncumulative Preferred Securities, Series A
(Liquidation Preference US$10,000 per Series A Preferred Security)
(Title of class)
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]
Number of Shares of Common Stock outstanding on December 31, 2001: 53,011
All outstanding shares of Common Stock were held by BNP PARIBAS, the
Registrant's parent Company, at December 31, 2001
Document incorporated by Part of Form 10-K
reference in this Form 10-K which incorporated
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None --
Form 10-K Index
PAGE
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PART I
Item 1: Business.........................................................3
Item 2: Properties......................................................10
Item 3: Legal Proceedings...............................................10
Item 4: Submission of Matters to a Vote of Securityholders..............10
PART II
Item 5: Market for Registrant's Common Equity and Related
Securityholder Matters........................................10
Item 6: Selected Financial Data.........................................10
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................10
Item 7A: Quantitative and Qualitative Disclosure About Market Risk.......16
Item 8: Financial Statements and Supplementary Data.....................20
Item 9: Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure......................................38
PART III
Item 10: Directors and Executive Officers of the Company.................38
Item 11: Executive Compensation..........................................39
Item 12: Security Ownership of Certain Beneficial Owners and Management..39
Item 13: Certain Relationships And Related Transactions..................39
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on
Form 8-K......................................................39
From time to time, the company may publish, verbally or in written
form, forward-looking statements relating to such matters as anticipated
financial performance, economic conditions, interest rate levels, investment
prospects and similar matters. In fact, this Form 10-K (or any other periodic
reporting documents required by the 1934 Act) may contain forward-looking
statements reflecting the current views of the Company concerning potential
future events or developments. The Private Securities Litigation Reform Act of
1995 (the "Act") provides a "safe harbor" for forward-looking statements. In
order to comply with the terms of the "safe harbor," the Company cautions
investors that any forward-looking statements made by the Company are not
guarantees of future performance and that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties which may affect the
operations, performance, development and results of the Company's business
include, but are not limited to, the following: uncertainties relating to
economic conditions and interest rate levels, and uncertainties relating to
government and regulatory policies. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made.
Item 1: Business
General
BNP U.S. Funding L.L.C. (the "Company" or the "Registrant") is a
Delaware limited liability company formed on October 14, 1997 for the purpose of
acquiring and holding certain types of eligible securities that generate net
income for distribution to the holders of its Series A Preferred Securities (as
defined below) and its redeemable Common Securities (as defined below). The
Company has no subsidiaries. The Company is a wholly owned subsidiary of the New
York Branch (the "Branch") of BNP PARIBAS, a societe anonyme or limited
liability corporation organized under the laws of the Republic of France (the
"Bank", "BNP PARIBAS" or "BNPP"). The Company was continued pursuant to the
Amended and Restated Limited Liability Company Agreement of the Company (the
"Company's Charter" or the "Charter") entered into on December 5, 1997 by the
New York Branch of Banque Nationale de Paris ("BNP"), the predecessor to BNP
PARIBAS, as holder of all of the redeemable common limited liability company
interests of the Company, $10,000 par value (the "Common Securities"), and the
holders of the preferred limited liability company interests of the Company,
including the Noncumulative Preferred Securities, Series A, liquidation
preference $10,000 per security, (the "Series A Preferred Securities") as they
may exist and be outstanding from time to time.
The Company was initially capitalized on October 14, 1997 with the
issuance to the Branch of one share of the Company's Common Securities. On
December 5, 1997 (inception), the Company commenced operations concurrent with
the issuance of 50,000 Series A Preferred Securities to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, and the issuance
of an additional 53,010 Common Securities to the Branch. These issuances raised
in the aggregate $1,030,115,873 of net capital (including $5,873 of additional
paid in capital). This entire amount was used to acquire a portfolio of debt
securities (the "Initial Portfolio") at their fair values from the Branch.
The Company entered into a services agreement (the "Services
Agreement") with the Branch on December 5, 1997 pursuant to which the Branch
maintains the securities portfolio of the Company (the "Portfolio") and performs
other administrative functions. All of the Company's officers and employees are
officers or employees of the Branch or the Bank. The securities in the Portfolio
are held by Citibank N.A., acting as trustee (the "Trustee") under the trust
agreement between the Company and Citibank N.A. dated December 1, 1997 (the
"Trust Agreement").
General Description of the Portfolio
Types of Eligible Securities
Pursuant to its Charter and resolutions adopted by its Board of
Directors, the Company may invest only in specified types of securities
("Eligible Securities"). Eligible Securities currently consist of (i) mortgage
pass-through securities issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC") that represent fractional
undivided interests in pools of the relevant mortgage loans ("Agency
Securities"); (ii) REMIC securities that are issued or guaranteed by GNMA, FHLMC
or FNMA and that represent beneficial ownership interests in trusts established
by GNMA, FHLMC or FNMA, the assets of which consist directly or indirectly of
Agency Securities or other, previously issued REMIC securities of this type
("REMIC Agency Securities"); (iii) REMIC securities that are issued by an
unrelated private company and secured directly or indirectly by Agency
Securities and rated AAA by Standard & Poor's as to creditworthiness, that
represent beneficial ownership interests in a trust established by such private
company, the assets of which consist directly or indirectly of Agency
Securities, REMIC Agency Securities, or other previously issued REMIC securities
of this type ("Agency Collateralized Securities"); (iv) unsecured, current pay,
direct debt obligations of FNMA and FHLMC ("Agency Debentures"); (v) U.S.
Treasury securities with a maturity of up to ten years ("Treasuries"); and (vi)
specified short-term investments not subject to U.S. withholding tax
("Short-Term Instruments" and, collectively with the securities included in
(i)-(v) above, the "Eligible Securities"). Categories (i) through (iii) above
are referred to herein as "Mortgage-Backed Securities". REMIC Agency Securities
include GNMA REMIC Securities, FHLMC REMIC Securities and FNMA REMIC Securities.
The trusts set up in connection with REMIC Agency Securities and Agency
Collateralized Securities may have elected to be treated as real estate mortgage
investment conduits ("REMICs") for federal income tax purposes.
The types of Agency Securities in the Portfolio are (i) securities backed
only by mortgages with adjustable rates that reset annually at a given rate plus
a net margin ("Agency ARMs"); (ii) securities backed by mortgages with a fixed
rate for a specified period of time, after which they reset annually at a given
rate plus a net margin ("Agency Hybrid ARMs"); (iii) unsubordinated debentures
which bear interest at a fixed rate and are not redeemable by the issuer prior
to maturity ("Agency Debentures"); and (iv) securities backed by fixed rate
loans on multifamily properties ("Agency DUSs").
Set forth below is a description, as of December 31, 2001, of the
Portfolio. As of December 31, 2001, the Eligible Securities included in the
Portfolio had an aggregate amortized cost of $1,007,767,868 and an estimated
fair value of $1,044,367,951. As of such date, calculated by aggregate amortized
cost, 5.18% of the securities in the Portfolio were floating rate REMIC
securities ("Floating-Rate REMICs"), 4.73% were fixed rate REMIC securities
("Fixed-Rate REMICs"), 4.75% were Agency ARMs, 7.18% were Agency Hybrid ARMs,
47.29% were Agency Debentures and 30.87% were Agency DUSs.
The following table sets forth certain information with respect to each
type of security included in the Portfolio:
Portfolio As of December 31, 2001
Percentage of
Aggregate Portfolio by
Amortized Cost Aggregate Number of
Type of Security ($000) Amortized Cost Securities
------------------------------------------- ----------------- ------------- ----------
Floating-Rate REMICs....................... $ 52,209 5.18% 14
Fixed-Rate REMICs.......................... 47,711 4.73 2
Agency ARMs................................ 47,863 4.75 27
Agency Hybrid ARMs......................... 72,355 7.18 17
Agency Debentures.......................... 476,520 47.29 11
Agency DUSs................................ 311,110 30.87 25
------- ----- --
TOTAL...................................... $ 1,007,768 100.00% 96
=========== ======= ==
Description of Types of Securities
Floating-Rate REMICs
Floating-Rate REMICs are backed by Agency Securities where a particular
portion of the cash flows are directed to the Floating-Rate REMICs. FNMA, FHLMC,
and GNMA all guarantee the full and timely payment of principal and interest on
the pools of mortgages, which flow through to the REMICs. These REMICs are
floating-rate securities whose interest rates reset monthly at the then-current
rate of one-month LIBOR plus a margin. The interest ratio is subject to a
lifetime cap and floor. The interest cap, floor, and margin all vary by
security.
FLOATING-RATE REMICS
As of December 31, 2001
Amortized Weighted
Cost Current Average Life
Series ($000) Coupon Life Cap (Years) Maturity Date
- --------------------------------- ---------- ------- -------- ------------ -------------
FANNIE MAE 1993-210 FB........... $12,177 2.34% 9% 1.98 10-25-2022
FHLMC-GNMA 38 F.................. 1,208 2.44 10 0.77 8-25-2023
FANNIE MAE 1997-28 FA............ 2,523 5.39 10 1.77 5-25-2027
FANNIE MAE 1996-51 FA............ 247 2.44 9 0.20 3-18-2025
FANNIE MAE 1990-121 F............ 5,116 2.74 11.5 3.02 10-25-2020
FANNIE MAE 1992-141 FA........... 1,769 2.44 10.5 1.78 8-25-2007
Morgan Stanley Mortgage
Trust 41 Class 1(1).......... 2,148 3.15 10 3.25 2-20-2022
FANNIE MAE 1993-155 FG........... 281 2.44 9.5 0.45 6-25-2023
FREDDIE MAC 1040 H............... 6,173 2.89 11 2.96 2-15-2021
FANNIE MAE 1997-42 F............. 1,624 2.44 9 0.98 12-18-2025
FANNIE MAE 1935 FA............... 3,192 2.54 9 0.99 2-15-2026
FANNIE MAE 2054 FA............... 5,370 2.25 9 2.29 9-15-2026
FANNIE MAE 1721 M................ 8,182 4.48 9 1.09 5-15-2024
FANNIE MAE G92 60 F.............. 2,199 4.28 10 3.51 10-25-2022
-----
Total............................. $ 52,209
========
(1) Morgan Stanley Mortgage Trust 41 was established as of December 1, 1991 by
Morgan Stanley Capital I Inc.
Fixed-Rate REMICs
Fixed-Rate REMICs are backed by Agency Securities where a particular
portion of the cash flows is directed to the Fixed-Rate REMICs. FNMA, GNMA and
FHLMC all guarantee the full and timely payment of principal and interest on the
pools of mortgages, which flow through to the Fixed-Rate REMICs.
FIXED-RATE REMICS
As of December 31, 2001
Amortized
Cost Current Weighted Average Maturity
Series ($000) Coupon Life (Years) Date
- ----------------------------------- ---------- ------- ---------------- ----------
FANNIE MAE 1997-56 PE.............. $46,814 6.50% 4.48 6-18-2026
FANNIE MAE X-188B TA 897 6.50 1.57 10-25-2013
Total.............................. $47,711
==========
Agency ARMs
The Agency ARMs in the Adjustable Rate Mortgage ("ARM") pools consist
of securities having the timely payment of principal and interest generally
guaranteed by GNMA, FNMA and FHLMC. The securities consist of pools of
adjustable rate mortgages, whose interest rates reset annually at a rate equal
to the then-current rate of the One-Year Constant Maturity Treasury Index (as
defined below) plus a net margin. The interest ratio for each ARM pool is
subject to a periodic cap and a lifetime cap, which vary by agency and pool.
The One-Year Constant Maturity Treasury Index ("CMT") is the weekly
average yield on U.S. Treasury securities adjusted to a constant maturity of one
year as published by the Federal Reserve Board in Statistical Release H. 15(519)
or any similar publication or, if not so published, as reported by any Federal
Reserve Bank or by any U.S. Government department or agency. The Three-Year
Constant Maturity Treasury Index is the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of three years as published in a
similar manner as The One-Year Constant Maturity Treasury Index.
AGENCY ARMs
As of December 31, 2001
Amortized
Cost Current Life Weighted Average Maturity
Pool No. (1) ($000) Coupon Cap Life (Years) Date
------------ ---------- ------- ------ ---------------- ---------
FH 846384 $1,858 6.80% 11.77% 4.77 12-1-2026
FN 313190 1,113 6.87 12.12 4.56 9-1-2026
FN 313242 553 6.54 11.96 4.16 11-1-2026
FN 313311 740 6.90 11.86 3.80 12-1-2026
FN 313377 1,560 7.62 11.74 1.38 2-1-2027
FN 313432 635 7.32 11.84 0.70 2-1-2027
FN 363057 559 8.30 11.38 0.97 2-1-2027
FN 363070 445 7.36 11.49 15.33 3-1-2027
FN 367349 191 8.35 11.98 1.03 12-1-2026
FN 370478 181 8.09 11.37 0.78 2-1-2027
FN 370479 316 7.75 11.31 10.95 3-1-2027
FN 374711 504 6.45 11.72 2.03 7-1-2027
FN 374773 260 7.47 11.83 15.29 3-1-2027
FN 378243 60 6.48 12.23 15.61 7-1-2027
FN 391247 2,245 7.11 11.37 3.04 4-1-2027
FN 394850 544 6.60 12.07 1.17 7-1-2027
FN 397901 758 6.63 11.89 3.04 8-1-2027
FH 610727 187 7.14 12.35 13.72 5-1-2027
FH 410544 104 6.63 12.53 1.47 9-1-2026
G 280094 6,978 6.75 11.00 1.37 7-20-2027
G 28506 6,013 6.75 12.50 2.36 9-20-2027
G 280001 1,265 7.63 12.50 2.35 10-20-2027
FH 786213 8,158 6.87 12.55 1.73 12-1-2027
FH 785825 3,159 6.68 12.18 2.45 5-1-2027
FH 786088 8,950 6.76 12.26 1.69 12-1-2027
FN 396355 286 6.53 11.80 1.25 8-1-2027
FN 419444 241 7.85 11.59 0.55 2-1-2028
----
Total................ $47,863
=======
- --------------
(1)"FN"= FNMA; "G"= GNMA; and "FH"= FHLMC.
Agency Hybrid ARMs
The Agency Hybrid ARMs consist of securities having the timely payment
of principal and interest guaranteed by FNMA and FHLMC. The securities consist
of mortgages that have a fixed interest rate for a specified period of time,
after which the interest rate resets annually at a rate equal to the
then-current rate of the One-Year Constant Maturity Treasury Index (as defined
above) plus a security net margin, except that pools underlying the Fannie Mae
422268 have a coupon that resets every three years at a rate equal to the
then-current rate of the Three-Year Constant Maturity Treasury Index (as defined
above) plus a security net margin. The interest rate of each ARM pool is subject
to a periodic cap and a lifetime cap which vary by pool.
AGENCY HYBRID ARMs
As of December 31, 2001
Amortized
Cost Current Life Weighted Average Maturity
Pool No.(1) ($ 000) Coupon Cap Life (Years) Date
- ----------- ---------- ------- ------ ---------------- --------
FN 312824 $1,889 7.38% 12.38% 2.77 6-1-2025
FN 345856 3,974 5.88 11.87 2.39 8-1-2026
FN 361370 8,721 7.47 13.57 1.51 7-1-2026
FN 361372 11,539 7.83 12.90 1.96 7-1-2026
FN 374138 4,749 6.32 11.35 1.26 3-1-2027
FN 397136 4,224 7.66 13.76 1.56 6-1-2027
FN 362968 1,013 7.65 12.24 1.32 1-1-2026
FN 374917 2,638 6.64 11.75 2.49 4-1-2027
FN 403006 4,008 6.46 11.50 2.38 11-1-2027
FN 404484 3,973 6.49 11.50 3.41 11-1-2027
FN 422265 3,658 6.91 13.26 3.25 1-1-2026
FN 422268 1,459 7.77 12.94 2.91 12-1-2024
FN 422276 8,861 7.18 13.23 2.69 12-1-2027
FN 409850 2,217 6.58 11.63 2.28 3-1-2028
FN 415286 2,203 6.31 12.38 1.98 2-1-2028
FN 417833 4,808 6.36 11.45 2.17 3-1-2028
FH 786414 2,421 6.57 12.03 2.38 7-1-2028
Total....... $ 72,355
========
(1) "FN"= FNMA; and "FH"= FHLMC
Agency Debentures
Pursuant to a Board of Directors resolution of November 4, 1998, the
Company may invest in Agency Debentures. The Agency Debentures consist of
conventional debt securities issued periodically directly by either FNMA or
FHLMC. Such Agency Debentures are not secured by any collateral and represent
general unsecured obligations of FNMA or FHLMC. The Company is permitted to
purchase only unsubordinated debentures which pay interest on a current basis.
The Agency Debentures purchased by the Company bear interest at a fixed rate and
are not redeemable by the issuer prior to maturity.
AGENCY DEBENTURES
As of December 31, 2001
Amortized
Security Cost Current Weighted Average Maturity
Description ($ 000) Coupon Life (Years) Date
- --------------------------- ---------- ------- ---------------- ----------
FHLMC 3134A2DT2............ $24,348 5.75% 5.16 4-15-2008
FNMA 31359MCY7............. 129,400 2.13 5.38 10-9-2007
FNMA 31359MDR1............. 60,000 1.75 5.84 3-26-2008
FNMA 31359MDU4............. 45,968 6.00 5.21 5-15-2008
FNMA 31359C5BO............. 23,893 6.44 4.58 8-14-2007
FNMA 31359C6C7............. 7,495 6.48 4.61 8-27-2007
FNMA 31359CU55............. 12,228 6.70 4.55 6-19-2007
FNMA 31359CYE2............. 50,000 6.68 4.27 3-5-2007
FNMA 31359MGH0............. 54,118 6.63 4.73 10-15-2007
FNMA 31359CYX0............. 50,000 6.80 4.28 3-14-2007
FNMA 31359C5Q7............. 19,070 6.55 4.59 8-20-2007
------
Total $476,520
========
Agency DUSs
Pursuant to a Board of Directors resolution of November 4, 1998, the
Company may invest in Agency DUSs. A Delegated Underwriting and Servicing (DUS)
pool is 100% guaranteed by FNMA and backed by loans on multifamily properties.
These are fixed-rate loans ranging in size from $1 million to $70 million. FNMA
guarantees timely payment of interest and principal, including any balloon
payments. Consequently, there is no risk of a loss of principal. Loans include
yield maintenance provisions that permit the borrower to prepay his mortgage but
only with a penalty that is sufficient to compensate the investor for early
prepayment. Any yield maintenance collected is passed through to the investor.
Lenders share any loss on defaulted loans, assuming that the loans are
underwritten properly.
AGENCY DUSs
As of December 31, 2001
Amortized
Security Cost Current Weighted Average Maturity
Description ($ 000) Coupon Life (Years) Date
- --------------------------- ---------- ------- ---------------- ----------
FNMA 380491 $ 5,762 6.11% 6.23 7-1-2008
FNMA 380583 19,247 6.15 6.22 8-1-2008
FNMA 381578 23,246 6.23 7.40 5-1-2009
FNMA 381608 7,104 5.93 7.03 5-1-2009
FNMA 381640 5,754 5.86 6.96 4-1-2009
FNMA 380933 8,011 5.92 6.61 12-1-2008
FNMA 381152 5,174 5.88 6.76 1-1-2009
FNMA 381294 1,958 5.81 6.76 2-1-2009
FNMA 381488 4,323 6.19 6.97 4-1-2009
FNMA 381514 4,969 6.19 6.97 4-1-2009
FNMA 381730 15,744 6.39 7.13 6-1-2009
FNMA 381705 4,008 6.26 7.13 6-1-2009
FNMA 381450 11,857 5.78 6.91 3-1-2009
FNMA 381115 11,627 5.97 6.60 12-1-2008
FNMA 381117 4,972 5.80 6.76 1-1-2009
FNMA 380115 43,395 6.29 5.94 3-1-2008
FNMA 381556 15,543 6.04 6.93 4-1-2008
FNMA 380798 4,614 5.64 6.44 10-1-2008
FNMA 375433 8,362 6.68 5.57 10-1-2007
FNMA 375618 7,000 6.42 5.98 12-1-2007
FNMA 375385 4,780 6.87 5.50 9-1-2007
FNMA 20021 68,594 7.20 4.66 10-1-2006
FNMA 535642 9,871 6.94 5.02 10-1-2007
FNMA 313672 7,575 7.01 3.88 6-1-2007
FNMA 382497 7,620 7.41 5.42 7-1-2007
Total................. $311,110
========
Item 2: Properties
The Company does not own or lease any property. It uses the facilities
of the Branch located at 787 Seventh Avenue, New York, New York 10019.
Item 3: Legal Proceedings
None.
Item 4: Submission of Matters to a Vote of Securityholders
None.
Item 5: Market for Registrant's Common Equity and Related Securityholder
Matters
Market Information
There is no established public trading market for the Company's Common
Securities, all of which are held by the Branch. The Bank has agreed with the
Company that, so long as any Series A Preferred Securities are outstanding, it
will maintain direct or indirect ownership of 100% of the outstanding Common
Securities.
Dividends
Holders of Common Securities are entitled to receive dividends when, as
and if declared by the Company's Board of Directors, out of net gains from the
disposition of securities in the Portfolio and net income not required to be
applied to fund dividends with respect to the Series A Preferred Securities.
During 2001 the Company had declared and paid $10,718,708 in dividends
on the Common Securities.
Item 6: Selected Financial Data
The following table sets forth selected financial data for the years
ended December 31, 2001 and December 31, 2000:
(in thousands, except share and yield data)
Year Ended Year Ended
Income Statement: December 31, 2001 December 31, 2000
- ---------------- ----------------- -----------------
Interest income $ 52,568 $ 67,330
Net income 52,277 66,341
Average number of redeemable Common Securities outstanding 53,011 53,011
Net income per redeemable Common Security 256.31 521.61
Balance Sheet:
- -------------
Investment Securities at carrying value 1,041,244 1,019,696
Total Assets 1,081,823 1,056,505
Series A Preferred Securities outstanding 500,000 500,000
Total Redeemable Common Securities, Preferred Securities,
and Securityholders' Equity $1,051,702 $1,039,143
Other Data:
- ----------
Comprehensive Income $ 61,968 $ 75,003
Dividends paid on Series A Preferred Securities $ 38,690 $ 38,690
Dividends paid on redeemable Common Securities $ 10,719 $ 27,301
Number of Series A Preferred Securities outstanding 50,000 50,000
Number of redeemable Common Securities outstanding 53,011 53,011
Average yield on investment securities
(before results of hedging activities) 6.40% 6.39%
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion pertains to the years ended December 31, 2001
and December 31, 2000 (the "2001 Period" and the "2000 Period").
General
The Company was formed on October 14, 1997 and commenced operations on
December 5, 1997 by the sale to qualified institutional buyers of 50,000 Series
A Preferred Securities and the sale to the Branch of 53,011 Common Securities.
Together, such sales raised net capital of $1,030,115,873, which the Company
used to purchase the Initial Portfolio from the Branch.
The Company's sole business is to acquire, hold and manage debt
instruments, largely consisting of mortgage obligations, in the Portfolio, which
generate net income for distribution to securityholders. The Company's major
source of income is interest generated by the securities in the Portfolio.
Results of Operations
For the 2001 Period and 2000 Period, the Company had revenues of
$52,567,798 and $67,330,596, respectively. These amounts consisted of interest
income on the investment securities, the unrealized gain/loss on hedged
securities and the derivatives used as hedging instruments and interest on
deposits.
The interest income on the investment securities includes interest
income on the remaining securities in the Initial Portfolio, which are
considered to be collateral held by the Company and which are no longer
recognized on the balance sheet pursuant to new guidance in Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, a replacement of SFAS
125" ("SFAS 140"), which modified SFAS 125 in this respect, as explained in Note
3 to the financial statements. The receivable for the consideration paid to the
Branch for the Initial Portfolio is recognized on the balance sheet and is an
asset of similar size as the remaining securities in the Initial Portfolio. The
balance sheet presentation results from compliance with SFAS 140 but does not
reflect the economic substance of the transaction, as further explained in the
section on the application of SFAS 125 as replaced by SFAS 140 below. For all
economic intent and purposes, the securities in the Initial Portfolio are owned
by the Company and managed as any other investment security, with related
revenues belonging to the Company and recorded as such in the income statement.
For the 2001 Period and 2000 Period, interest on the securities in the
Portfolio amounted to $50,881,325 and $53,275,817, respectively, representing an
aggregate yield of 6.40% and 6.39%, respectively. Interest earned and average
yield with respect to each category of security in the Portfolio was as follows
(yield based on amortized cost):
2001 2000
--------------------- ---------------------
Floating-Rate REMICs.................. $ 3,425,596 4.90% $ 6,355,013 6.55%
Fixed-Rate REMICs..................... $ 3,170,738 6.51% $ 3,682,504 6.39%
Agency ARMs........................... $ 4,074,858 6.40% $ 6,075,972 6.53%
Agency Hybrid ARMs.................... $ 5,512,599 6.04% $ 8,003,254 6.55%
Agency Debentures..................... $ 15,579,758 6.50% $ 15,316,671 6.59%
Agency DUS............................ $ 19,117,776 6.79% $ 13,842,403 6.02%
The 6.50% yield on Agency Debentures is based on U.S. dollar
denominated securities which excludes the Japanese Yen denominated securities.
During the 2001 Period, the yield on the Agency DUSs and Agency
Debentures was approximately 4.96% and 4.78%, respectively, when taking into
account the income from the derivative products used to hedge these securities.
The average amortized cost of the Portfolio during the 2001 and the
2000 Period was $983,343,224 and $988,551,198, respectively. This reflects the
following prepayments and reinvestments:
PREPAYMENTS 2001 2000
- -------------------- --------------------- ---------------------
Floating-Rate REMICs.................. $ 33,209,726 $ 24,758,977
Fixed-Rate REMICs..................... $ 4,558,040 $ 9,883,773
Agency ARMs........................... $ 32,828,037 $ 24,620,540
Agency Hybrid ARMs.................... $ 36,295,472 $ 27,084,077
Agency DUS............................ $ 4,100,197 $ 2,181,573
Agency Debentures..................... $ --- $ ---
REINVESTMENTS 2001 2000
- -------------------- --------------------- ---------------------
Floating-Rate REMICs.................. $ --- $ ---
Fixed-Rate REMICs..................... $ --- $ ---
Agency ARMs........................... $ --- $ ---
Agency Hybrid ARMs.................... $ --- $ ---
Agency DUS............................ $ 49,267,414 $ 71,450,077
Agency Debentures..................... $ 72,206,900 $ 15,000,000
The Company also recorded interest income from short-term investments
for 2001 and 2000 of $1,774,383 and $3,095,087, respectively. These amounts are
attributable to (i) interest payments on securities in the Portfolio and (ii)
prepayments of principal pending their reinvestment.
As of December 31, 2001, approximately 52.71% of the Portfolio
consisted of collateralized mortgage obligations (Floating-Rate REMICs and
Fixed-Rate REMICs) and mortgage-backed securities (Agency ARMs, Agency Hybrid
ARMs and Agency DUSs), and approximately 47.29% consisted of Agency Debentures.
Floating Rate securities accounted for approximately 17.11% of the Portfolio's
collateralized mortgage obligations and mortgage backed securities. In addition,
a significant portion of the Agency Debentures and the Agency DUSs are hedged so
that, in all but one case, the fixed rate payments received are converted into
prevailing floating rates.
The aggregate market value of the securities in the Portfolio as of
December 31, 2001 was higher than the amortized cost by approximately 3.63%, due
to a net decrease in interest rates from the time of their original purchase.
For the hedged securities, changes in the fair market value of both the
securities and the derivatives used as hedging instruments (cross currency and
interest rate swaps) are reported in current earnings in the Statement of
Income, pursuant to application of SFAS 133 (Note 2). Unrealized gains and
losses on the non-hedged securities are reported as a component of "Other
Comprehensive Income".
Operating expenses for the years ended December 31, 2001 and December
31, 2000 totaled $1,229,832 and $989,172 respectively. Operating expenses
consisted largely of fees paid to the Branch under the Services Agreement, fees
of Citibank as Trustee, consulting fees and audit fees. Under a specific
allocation methodology, the costs of Branch personnel servicing the Company have
increased. This allocation is based on actual man-hours devoted to the
activities of the Company and remains at arms length.
The Company's net income for the year ended December 31, 2001 was
$57,276,636 and for the year ended December 31, 2000 it was $66,341,424. As of
December 31, 2001, the Company had declared and paid dividends as follows:
Security Amount Date Paid
- ----------------------------- ----------- ----------------
Series A Preferred Securities $19,345,000 June 5, 2001
$19,345,000 December 5, 2001
Common Securities $10,718,708 June 19, 2001
These amounts were paid from the Company's retained earnings generated
from net income for the period from December 1, 2000 to November 30, 2001.
Receivable Arising from Payment for Securities Pursuant to the Application of
SFAS 125 as Replaced by SFAS 140
Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a replacement of SFAS 125" ("SFAS 140") revises the standards of accounting for
securitizations and other transfers of financial assets and collateral
established by Statement of Financial Accounting Standards No. 125 ("SFAS 125")
and requires certain additional disclosures, but carries over most of SFAS 125's
provisions without reconsideration. Under SFAS 125, as replaced by SFAS 140,
transfers of financial assets that do not meet certain sale accounting
requirements must be accounted for as a secured borrowing transaction with a
pledge of collateral. Under SFAS 140, the collateral and the related obligation
previously recognized in financial statements in accordance with SFAS 125 is no
longer recognized. The change in presentation has no impact on the Company's
Statement of Income or Total Redeemable Common Securities, Preferred Securities
and Securityholders' Equity. All financial statements for previous periods
presented have been restated accordingly. Disclosures required under SFAS 125,
as replaced by SFAS 140, are included in Note 3.
Due to the potential consequences of a Shift Event (defined herein
Item 8, Note 2), the Company's purchase of the Initial Portfolio (as defined in
Item 1 herein) from the Branch did not meet certain SFAS 125, as replaced by
SFAS 140, sale accounting requirements. Accordingly, the Company recorded at
December 5, 1997 a receivable for the consideration paid to the Branch for the
Initial Portfolio treated as collateral. As a legal and economic matter,
however, there is no such receivable since (a) neither the Bank nor the Branch
has any obligation to repay any part of the purchase price for the Initial
Portfolio or to repurchase or redeem any of the securities included therein, and
(b) the Company has no obligation to return any of such securities to the Bank
or the Branch (except in the limited circumstances and to the extent that the
occurrence of a Shift Event under the Charter would require the transfer of any
assets held by the Company at the time). As the securities in the Initial
Portfolio are paid, the receivable will be deemed to be realized by an amount
corresponding to the amount of the payments received. At December 31, 2001 and
December 31, 2000, respectively, the receivable arising from payment for
securities amounted to $135,255,432 and $192,428,747. The decrease in the amount
of such receivable between the two dates reflects the prepayment of securities
in the Initial Portfolio. The Company recognized the cash proceeds of such
prepayments as a reduction in the receivable. Such decreases in the receivable
did not affect the Company's results of operations or cash flow.
Liquidity and Capital Resources
The objective of liquidity management is to ensure the availability of
sufficient cash flows to meet all of the Company's financial commitments. The
Company's sole liquidity needs are to acquire reinvestment securities as
original securities repay or prepay and to pay dividends on the Series A
Preferred Securities. The acquisition of reinvestment securities is funded with
the proceeds of principal repayments or prepayments on original securities, and
the payments of dividends on the Series A Preferred Securities are funded
through interest income from the securities in the Portfolio. Given the limited
scope of its activities (acquiring and holding eligible securities to fund the
payment of dividends on the Series A Preferred Securities and the Common
Securities), and the fact that the Company is prohibited from incurring
indebtedness, the Company believes that its liquidity and capital resources will
be sufficient to meet its liquidity requirements in the short and long term.
BNP PARIBAS Group's total and Tier 1 risk-based capital ratios at
December 31, 2001 were 10.8% and 7.80%, which are well above the minimum
standards required by French banking regulations, currently 8% for total
risk-based capital and 4% for Tier 1 risk-based capital. A "shift event" would
occur if BNP Paribas' risk-based capital fell below these minimum standards of
8% and 4%, respectively. See Note 2 of the attached financial statements for a
detailed explanation of "shift events".
Accounting and Reporting Developments
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS 133"), which establishes accounting and reporting standards
for all derivative instruments and hedging activities. SFAS 133, amended by the
issuance of SFAS 137, entitled "Accounting for Derivatives and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133" is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 as amended by SFAS 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of FASB Statement No. 133", in June
2000. SFAS 133 requires that an entity measure all derivatives at fair value and
recognize those derivatives as either assets or liabilities on the balance
sheet. The change in the derivative's fair value is generally to be recognized
in current period earnings. However, if certain conditions are met, a derivative
may be specifically designated as a hedge of an exposure to changes in fair
value, variability of cash flows, or certain foreign currency exposures.
The Company has made an assessment of all their financial
instruments and concluded that it holds freestanding derivative instruments but
no embedded derivative instruments at December 31, 2001. As part of its asset
management activities the Company uses foreign exchange and interest rate swaps
to modify the interest rate and foreign exchange characteristics of existing
assets. The interest rate swaps have a high correlation between the instrument
and the asset being hedged, both at inception and throughout the hedge period.
Prior to the adoption of SFAS 133, these interest rate swaps are
carried at fair value. The accrual of interest receivable or interest payable on
these swaps is reported in Interest Income. Changes in the market values of
these swaps, exclusive of net interest accruals, are reported in
Securityholders' Equity: Accumulated Other Comprehensive Income.
All of the Company's outstanding hedging transactions are fair value
hedges. For the year ended December 31, 2001, the Company recognized $1,041,095
in current year earnings related to the ineffective portion of fair value
hedges: $938,670 shown as cumulative-effect-type adjustment at January 1, 2001
and $102,425 included in interest income for the 2001 Period. The Company did
not recognize any gains or losses in relation to firm commitments that no longer
qualified as fair value hedges. The fair value of these fair value hedging
instruments was $(19,003,975) at December 31, 2001 and $(17,311,062) at December
31, 2000 and has been recorded in "Other liabilities". It has been offset,
except for the ineffective portion of the hedge, by the revaluation of the
respective hedged investment securities. The fair value of the hedging
instruments does not include accrued interest receivable and payable, which are
shown separately on the balance sheet.
For a further discussion on derivative instruments and hedging
activities, see Note 8 to the financial statements.
Item 7A: Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Sensitivity
The Company's principal market risk exposure is to changes in interest
rates. This exposure arises from its investments in collateralized mortgage
obligations, mortgage-backed securities, agency debentures, agency DUSs and
certain derivative instruments used by the Company to modify interest rate
exposures.
The outstanding principal amount and estimated fair value as of
December 31, 2001, by each category of investment, is depicted in Item 8.
Interest Rate Risk
The Company's income consists primarily of interest payments on
collateralized mortgage obligations, mortgage-backed securities, agency
debentures and agency DUSs. Currently, the Company uses derivative products to
manage a portion of its interest rate risk.
The low interest rate environment has affected the Company's income in
2001 and will continue to weigh on the results in 2002 through the floating rate
component of the portfolio (floating-rate securities and fixed-rate securities
converted to floating-rate instruments through interest rate swaps). However,
since management believes that the market has reached its lowest levels and that
the expected rebound of the economy will be accompanied by a series of increases
in the rates on which the floating instruments are indexed, the income for 2002
will therefore be closely linked to the pace of increase of the yield curve.
The Company regularly reviews its hedging requirements. In the future,
the Company expects to enter into additional swaps, unwind part or all of the
initial and any future swaps in order to rebalance the fixed and floating mix of
interest obligations (including those arising as a result of previous interest
rate swaps entered into) and the fixed and floating mix of interest payments.
The Company's interest rate management strategy will continue to be
rebalanced with any purchase of new investments. There can be no assurance,
however, that the Company's interest rate risk management strategies will be
effective in this regard.
The Company is a party to twenty-three interest rate swaps and two
cross currency swaps with BNP PARIBAS. In all but one of these swaps, where the
Company pays out and receives a fixed rate, the Company pays a fixed coupon and
receives floating rate payments on the notional balances as set out below:
(000's omitted)
Fair Value at Notional
December 31, 2001 Balance Value Date Maturity Date Fixed Rate Receive Rate
- ------------------- --------- ----------------- --------------- ---------- -------------------------------
$ 1,363 $ 42,000 November 25, 1998 March 26, 2008 JPY 1.75 US Three Month Libor Plus Six
Basis Points
544 58,000 November 25, 1998 October 9, 2007 JPY 2.125 US Three Month Libor Plus Six
Basis Points
(828) 19,247 November 25, 1998 August 25, 2008 US 6.15 US One Month Libor Plus Five
Basis Points
(1,099) 23,246 May 25, 1999 May 25, 2009 US 6.23 US One Month Libor Plus One and
Half Basis Points
(3,830) 50,000 February 12, 1999 March 5, 2007 US 6.68 US Three Month Libor Minus Two
Basis Points
(4,105) 50,000 February 11, 1999 March 14, 2007 US 6.80 US Three Month Libor Minus Two
Basis Points
1,018 30,000 March 29, 1999 October 9, 2007 JPY 2.125 US Three Month Libor Minus Two
and Half Basis Points
168 26,400 April 6, 1999 October 9, 2007 JPY 2.125 US Three Month Libor Minus One
Basis Point
(914) 26,158 June 25, 1999 June 25, 2009 US 6.23 US One Month Libor plus Three
and Half Basis Points
(626) 20,905 February 25, 1999 February 25, 2009 US 5.41 US One Month Libor Plus Three
Basis Points
(876) 15,744 July 1, 1999 June 25, 2009 US 6.39 US One Month Libor Plus Three
and Half Basis Points
(2,265) 43,395 September 27, 1999 March 28, 2008 US 6.29 US One Month Libor Plus Five
Basis Points
(532) 15,543 November 26, 1999 April 25, 2009 US 6.04 US One Month Libor Plus Four
Basis Points
(675) 28,456 September 27, 1999 March 25, 2009 US 5.85 US One Month Libor Plus Four
Basis Points
(477) 7,000 August 1, 2000 December 1, 2007 US 6.42 US One Month Libor Minus Two
Basis Points
(2,910) 29,398 August 1, 2000 October 1, 2006 US 7.20 US One Month Libor Minus Two
Basis Points
(626) 8,362 June 26, 2000 October 1, 2007 US 6.68 US One Month Libor Plus One and
Half Basis Points
(493) 9,394 June 26, 2000 October 1, 2008 US 6.19 US One Month Libor
1,595 15,000 November 2, 2000 October 9, 2007 JPY 2.125 US Three Month Libor Minus Two
Basis Points
(703) 7,575 October 2, 2000 June 1, 2007 US 7.024 US One Month Libor Minus Two
Basis Points
(852) 7,620 October 2, 2000 July 1, 2007 US 7.405 US One Month Libor Minus Two
Basis Points
1,831 18,000 January 17, 2001 March 26, 2008 JPY 1.750 US 5.80
(869) 9,871 March 25, 2001 October 25, 2007 US 6.94 US One Month Libor Plus Two
Basis Points
(1,910) 19,598 September 4, 2001 October 1, 2006 US 7.20 US One Month Libor Plus Two
Basis Points
(933) 9,799 October 2, 2001 October 1, 2006 US 7.20 US One Month Libor Plus Seven
------------ -------- Basis Points
$ (19,004) $590,711
============ ========
The fair value of interest rate swaps was $(19,003,975) and
$(17,311,062) at December 31, 2001 and December 31, 2000, respectively. The
change in fair value was primarily due to changes in prevailing market interest
rates.
The breakdown of the Company's available-for-sale securities by
category and weighted average life distribution (stated in terms of amortized
cost) is summarized below ($ in 000's) based on management's prepayment
assumptions:
At December 31, 2001 Due in Due after Due after Due after Due after Due after Due after
Non-Collateral 2002 2002 2003 2004 2005 2006 2007 Total
- ------------------------------------------ ------ --------- --------- --------- --------- --------- --------- --------
Fixed Rate Instruments:
Fixed-Rate REMICs......................... $--- $ 897 $--- $--- $--- $--- $--- $ 897
Agency DUS................................ --- --- --- 7,575 68,594 81,029 153,912 311,110
Agency Debentures ........................ --- --- --- --- 216,804 259,716 --- 476,520
------- ------- ------- ------- -------- -------- -------- ---------
Total Fixed Rate Instruments.............. --- 897 --- 7,575 285,398 340,745 153,912 788,527
------- ------- ------- ------- -------- -------- -------- ---------
Floating-Rate Instruments:
Floating-Rate REMICs...................... 3,192 8,182 5,370 2,199 --- --- --- 18,943
Agency ARMs............................... 241 17,108 10,436 --- --- --- --- 27,785
Agency Hybrid ARMs........................ --- 3,216 26,412 7,630 --- --- --- 37,258
------- ------- ------- ------- -------- -------- -------- ---------
Total Floating Rate Instruments........... 3,433 28,506 42,218 9,829 --- --- --- 83,986
------- ------- ------- ------- -------- -------- -------- ---------
Total..................................... $ 3,433 $29,403 $42,218 $17,404 $285,398 $340,745 $153,912 $ 872,513
======= ======= ======= ======= ======== ======== ======== =========
Due in Due after Due after Due after Due after Due after Due after
At December 31, 2001 Collateral 2002 2002 2003 2004 2005 2006 2007 Total
- ------------------------------------------ ------ --------- --------- --------- --------- --------- --------- --------
Fixed Rate Instruments:
Fixed-Rate REMICs......................... $--- $--- $--- $--- $46,814 $--- $--- $46,814
Agency DUS................................ --- --- --- --- --- --- --- ---
Agency Debentures ........................ --- --- --- --- --- --- --- ---
------- ------- ------- ------- ------- ------- ------- ---------
Total Fixed Rate Instruments.............. --- --- --- --- 46,814 --- --- 46,814
------- ------- ------- ------- ------- ------- ------- ---------
Floating-Rate Instruments:
Floating-Rate REMICs...................... 3,360 16,470 6,173 7,263 --- --- --- 33,266
Agency ARMs............................... 1,376 9,664 504 3,743 3,524 --- 1,267 20,078
Agency Hybrid ARMs........................ --- 29,234 5,863 --- --- --- --- 35,097
------- ------- ------- ------- ------- ------- ------- ---------
Total Floating Rate Instruments........... 4,736 55,368 12,540 11,006 3,524 --- 1,267 88,441
------- ------- ------- ------- ------- ------- ------- ---------
Total.................................... $ 4,736 $55,368 $12,540 $11,006 $50,338 $ --- $ 1,267 $ 135,255
======= ======= ======= ======= ======= ======= ======= =========
At December 31, 2001 Total Portfolio...... $ 8,169 $84,771 $54,758 $28,410 $335,736 $340,745 $155,179 $1,007,768
======= ======= ======= ======= ======== ======== ======== ==========
At December 31, 2000 Due in Due after Due after Due after Due after Due after Due after
Non-Collateral 2001 2001 2002 2003 2004 2005 2006 Total
- ------------------------------------------ ------ --------- --------- --------- --------- --------- --------- --------
Fixed Rate Instruments:
Fixed-Rate REMICs......................... $4,545 $ 1,476 $--- $--- $--- $--- $--- $ 6,021
Agency DUS................................ --- --- --- --- --- 38,542 227,434 265,976
Agency Debentures ........................ --- --- --- --- 100,000 132,779 171,400 404,179
------- ------- ------- ------- -------- -------- -------- --------
Total Fixed Rate Instruments.............. 4,545 1,476 --- --- 100,000 171,321 398,834 676,176
------- ------- ------- ------- -------- -------- -------- --------
Floating-Rate Instruments:
Floating-Rate REMICs...................... 502 6,032 13,293 --- --- 2,940 10,303 33,070
Agency ARMs............................... --- --- --- 15,239 15,623 12,522 --- 43,384
Agency Hybrid ARMs........................ --- --- 6,430 10,314 28,104 3,372 5,367 53,587
------- ------- ------- ------- -------- -------- -------- --------
Total Floating Rate Instruments........... 502 6,032 19,723 25,553 43,727 18,834 15,670 130,041
------- ------- ------- ------- -------- -------- -------- --------
Total.................................... $ 5,047 $ 7,508 $19,723 $25,553 $143,727 $190,155 $414,504 $806,217
======= ======= ======= ======= ======== ======== ======== ========
Due in Due after Due after Due after Due after Due after Due after
At December 31, 2000 Collateral 2001 2001 2002 2003 2004 2005 2006 Total
- ------------------------------------------ ------ --------- --------- --------- --------- --------- --------- --------
Fixed Rate Instruments:
Fixed-Rate REMICs......................... $--- $--- $--- $--- $--- $--- $ 46,816 $46,816
Agency DUS................................ --- --- --- --- --- --- --- ---
Agency Debentures ........................ --- --- --- --- --- --- --- ---
------- ------- ------- ------- ------- -------- -------- --------
Total Fixed Rate Instruments.............. --- --- --- --- --- --- 46,816 46,816
------- ------- ------- ------- ------- -------- -------- --------
Floating-Rate Instruments:
Floating-Rate REMICs...................... 1,697 3,891 23,550 22,762 --- --- --- 51,900
Agency ARMs............................... 502 1,207 21,529 --- 6,667 3,962 3,956 37,823
Agency Hybrid ARMs........................ --- --- --- 16,893 --- 26,048 12,949 55,890
------- ------- ------- ------- ------- -------- -------- --------
Total Floating Rate Instruments........... 2,199 5,098 45,079 39,655 6,667 30,010 16,905 145,613
------- ------- ------- ------- ------- -------- -------- --------
Total.................................... $ 2,199 $ 5,098 $45,079 $39,655 $ 6,667 $ 30,010 $ 63,721 $192,429
======= ======= ======= ======= ======= ======== ======== ========
At December 31, 2000 Total Portfolio..... $ 7,246 $12,607 $64,801 $65,209 $150,394 $220,165 $478,224 $998,646
======= ======= ======= ======= ======== ======== ======== ========
Actual maturities may differ from maturities shown above due to prepayments.
Item 8: Financial Statements and Supplementary Data
Report of Independent Accountants
To the Board of Directors and
Securityholders of BNP U.S. Funding L.L.C.
In our opinion, the accompanying balance sheet and the related
statements of income, of comprehensive income, of changes in redeemable common
securities, preferred securities and securityholders' equity and of cash flows
present fairly, in all material respects, the financial position of BNP U.S.
Funding L.L.C. (the "Company") at December 31, 2001 and December 31, 2000, and
the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As more fully described in Note 2 to the financial statements, the
Company adopted Statement of Financial Accounting Standards No. 133, Accounting
for Derivatives and Hedging Activities, as amended, on January 1, 2001.
PricewaterhouseCoopers LLP
New York, New York
March 27, 2002
/s/ PricewaterhouseCoopers LLP
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BNP U.S. FUNDING L.L.C.
BALANCE SHEET
(in thousands, except per share data)
December 31, 2001 December 31, 2000
----------------- -----------------
ASSETS:
Cash and cash equivalents $ 31,084 $ 30,373
Investment securities (Notes 3 and 4)
Available-for-sale, at fair value 905,989 827,267
Receivable arising from payment for securities,
pursuant to the application of SFAS 125, as replaced by 135,255 192,429
SFAS 140 (Note 3)
Accounts receivable 2,171 ---
Accrued interest receivable 7,324 6,436
TOTAL ASSETS $ 1,081,823 $ 1,056,505
=========== ===========
LIABILITIES:
Accrued interest payable 1,178 ---
Accrued expenses 137 51
Payable for securities purchased 9,802 ---
Other liabilities 19,004 17,311
------ ------
TOTAL LIABILITIES 30,121 17,362
----------- -----------
Redeemable common securities, par value and redeemable
value $10,000 per security; 150,000 securities
authorized, 53,011 securities issued and outstanding 530,110 530,110
(Note 5)
Preferred securities, liquidation preference $10,000 per
security; 150,000 securities authorized, 50,000
securities issued and outstanding 500,000 500,000
Additional paid in capital 6 6
Accumulated other comprehensive income 13,430 3,739
Retained earnings 8,156 5,288
----------- -----------
TOTAL REDEEMABLE COMMON SECURITIES, PREFERRED SECURITIES
AND SECURITYHOLDERS' EQUITY 1,051,702 1,039,143
----------- -----------
TOTAL LIABILITIES AND TOTAL REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND SECURITYHOLDERS' EQUITY $ 1,081,823 $ 1,056,505
=========== ===========
The accompanying Notes to Financial Statements are an integral part of these
Statements.
BNP U.S. FUNDING L.L.C.
STATEMENT OF INCOME
(in thousands, except per share data)
Twelve-month Twelve-month
period ended period ended
December 31, 2001 December 31, 2000
INTEREST INCOME: ----------------- -----------------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 3,425 $ 6,355
Fixed-Rate REMICs 3,171 3,682
Mortgage Backed Securities:
Agency ARMs 4,075 6,076
Agency Hybrid ARMs 5,513 8,003
Agency DUSs 13,959 14,550
Agency Debentures 20,650 25,569
Interest on Deposits 1,775 3,095
----------- -----------
Total 52,568 67,330
----------- -----------
NONINTEREST EXPENSE:
Fees and expenses 1,230 989
----------- -----------
Cumulative effect of the change in accounting principle for
Derivatives and Hedging activities (SFAS133) 939 ---
----------- -----------
NET INCOME APPLICABLE TO PREFERRED AND REDEEMABLE COMMON
SECURITIES $ 52,277 $ 66,341
=========== ===========
NET INCOME PER REDEEMABLE COMMON SECURITY $ 256.31 $ 521.61
=========== ===========
The accompanying Notes to Financial Statements are an integral part of these
Statements.
BNP U.S. FUNDING L.L.C.
STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
Twelve-month Twelve-month
period ended period ended
December 31, 2001 December 31, 2000
----------------- -----------------
NET INCOME $ 52,277 $ 66,341
OTHER COMPREHENSIVE INCOME (Note 3):
Net change in unrealized gain (loss) in fair value of
securities and foreign exchange rate swaps
available-for-sale not treated as collateral 10,630 8,662
Transition adjustment pursuant to the application of
SFAS 133 (939) ---
----------- -----------
OTHER COMPREHENSIVE INCOME 9,691 8,662
----------- -----------
COMPREHENSIVE INCOME $ 61,968 $ 75,003
=========== ===========
The accompanying Notes to Financial Statements are an integral part of these
Statements.
BNP U.S. FUNDING L.L.C.
STATEMENT OF CHANGES IN REDEEMABLE COMMON SECURITIES,
PREFERRED SECURITIES AND SECURITYHOLDERS' EQUITY
(in thousands)
TOTAL REDEEMABLE
ACCUMULATED COMMON SECURITIES,
REDEEMABLE ADDITIONAL OTHER PREFERRED SECURITIES
COMMON PREFERRED PAID IN COMPREHENSIVE RETAINED AND SECURITYHOLDERS'
SECURITIES SECURITIES CAPITAL INCOME EARNINGS EQUITY
---------- ---------- ---------- ------------- -------- --------------------
Balance at December 31, 1999 $ 530,110 $ 500,000 $ 6 $ (4,923) $ 4,938 $ 1,030,131
--------- --------- ------- -------- ------- -----------
Net income 66,341 66,341
Other comprehensive income 8,662 8,662
Dividends Paid
Preferred Securities (38,690) (38,690)
Dividends Paid
Common Securities --- --- --- --- (27,301) (27,301)
--------- --------- ------- -------- ------- -----------
Balance at December 31, 2000 530,110 500,000 6 3,379 5,288 1,039,143
--------- --------- ------- -------- ------- -----------
Net income 52,277 52,277
Other comprehensive income 9,691 9,691
Dividends Paid
Preferred Securities (38,690) (38,690)
Dividends Paid
Common Securities --- --- --- --- (10,719) (10,719)
--------- --------- ------- -------- ------- -----------
Balance at December 31, 2001 $ 530,110 $ 500,000 $ 6 $ 13,430 $ 8,156 $ 1,051,702
========= ========= ======= ======== ======= ===========
The accompanying Notes to Financial Statements are an integral part of these
Statements.
BNP U.S. FUNDING L.L.C.
STATEMENT OF CASH FLOWS
(in thousands)
Twelve-month Twelve-month
period ended period ended
December 31, 2001 December 31, 2000
----------------- -----------------
OPERATING ACTIVITIES:
Net income $ 52,277 $ 66,341
Adjustments to reconcile net income to cash provided from
operating activities:
Premium amortization 1,360 899
Net change in interest receivable (888) (204)
Net change in accounts receivable (2,171) 15
Net change in accrued expenses 86 45
Net change in accrued interest payable 1,178 ---
Net change in payable for securities purchased 9,802 ---
(Gain)/loss on hedge activity (102) ---
Cumulative effect of the change in accounting principle
for derivatives and hedging activities (SFAS 133) (939) ---
-------- --------
Net cash provided from operating activities 60,603 67,096
-------- --------
INVESTING ACTIVITIES:
Purchase of investment securities:
Agency DUSs (72,207) (71,450)
Agency Debentures (49,267) (15,000)
Proceeds from principal payments of securities
available-for-sale, not treated as collateral 54,886 43,695
Proceeds from principal payments of securities
available-for-sale, treated as collateral 56,105 44,834
-------- --------
Net cash provided (used) by investing activities (10,483) 2,079
-------- --------
FINANCING ACTIVITIES:
Cash dividends - preferred securities (38,690) (38,690)
Cash dividends - common securities (10,719) (27,301)
-------- --------
Net cash provided (used) by financing activities (49,409) (65,991)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 711 3,184
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,373 27,189
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,084 $ 30,373
======== ========
NONCASH FINANCING AND INVESTING ACTIVITIES:
Decrease in receivable arising from payment for securities,
pursuant to the application of SFAS 125, as replaced by
SFAS 140 (Note 3) 57,174 45,609
The accompanying Notes to Financial Statements are an integral part of these
Statements.
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION:
BNP U.S. Funding L.L.C. (the "Company") is a Delaware limited liability
company formed on October 14, 1997 for the purpose of acquiring and holding
Eligible Securities (as defined in Item 1 herein) that will generate net income
for distribution to the holders of its Series A Preferred Securities (as defined
below) and its redeemable Common Securities (as defined below). The Company is a
wholly owned subsidiary of the New York Branch (the "Branch") of BNP PARIBAS
(the "Bank"). The Bank is a French corporation that conducts retail banking
activities in France and corporate and private banking and other financial
activities both in France and throughout the world.
The Company was initially capitalized on October 14, 1997 with the
issuance to the Branch of one share of the Company's redeemable common
securities, $10,000 par value (the "Common Securities"). On December 5, 1997
(inception), the Company commenced operations concurrent with the issuance of
50,000 noncumulative preferred securities, Series A, liquidation preference
$10,000 per security, (the "Series A Preferred Securities") to qualified
institutional buyers, and the issuance of an additional 53,010 Common Securities
to the Branch. These issuances raised in the aggregate $1,030,115,873 of net
capital (including $5,873 of additional paid in capital). This entire amount was
used to acquire from the Branch a portfolio of debt securities (including
accrued interest) at their fair values (the "Initial Portfolio").
The accounting and financial reporting policies of the Company conform
to U.S. generally accepted accounting principles and current industry practices.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and revenues during the
reporting periods. Actual results could differ from those estimates.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INVESTMENT SECURITIES:
Investments in debt securities are classified as available-for-sale and
are carried at fair value. The debt securities can be categorized as hedged or
non-hedged securities. For the hedged securities, changes in the fair market
value of both the securities and the derivatives used as hedging instruments
(cross currency and interest rate swaps) are reported in current earnings in the
Statement of Income, pursuant to application of SFAS 133, (see below,
"Accounting for Derivatives and Hedging Activities"). Unrealized gains and
losses on the non-hedged securities are reported as a component of "Other
Comprehensive Income".
Interest on securities is included in interest income and is recognized
using the interest method. Premiums and discounts are amortized using the
effective interest method and are recognized in interest income.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include cash and short-term deposits with
original maturities of three months or less.
DIVIDENDS:
Dividends on the Series A Preferred Securities, when, as and if
declared by the Company's Board of Directors, are payable semi-annually in
arrears on a non-cumulative basis on the fifth day of June and December of each
year, commencing June 5, 1998, at a rate per annum of 7.738% of the liquidation
preference through and including December 5, 2007. Thereafter, dividends, when,
as and if declared by the Company's Board of Directors, will be payable
quarterly in arrears on the third Wednesday of March, June, September, and
December of each year and will be calculated on a weekly basis in each quarter
at a rate per annum of the liquidation preference equal to 2.8% per annum above
one-week LIBOR for the week concerned as determined on the related LIBOR
Determination Date. Holders of Common Securities are entitled to receive
dividends when, as and if declared by the Company's Board of Directors out of
the Company's net income not required to be applied to fund dividends with
respect to the Series A Preferred Securities.
To date, the Company has declared and paid dividends as follows:
Security Amount Date Paid
- ----------------------------- ------------ -----------------
Series A Preferred Securities $ 19,345,000 June 5, 1998
Common Securities $ 5,347,365 June 22, 1998
Series A Preferred Securities $ 19,345,000 December 5, 1998
Common Securities $ 8,787,127 December 15, 1998
Series A Preferred Securities $ 19,345,000 June 5, 1999
Common Securities $ 8,454,284 June 15, 1999
Series A Preferred Securities $ 19,345,000 December 5, 1999
Common Securities $ 10,352,672 December 15, 1999
Series A Preferred Securities $ 19,345,000 June 5, 2000
Common Securities $ 12,508,486 June 19, 2000
Series A Preferred Securities $ 19,345,000 December 5, 2000
Common Securities $ 14,792,297 December 19, 2000
Series A Preferred Securities $ 19,345,000 June 5, 2001
Common Securities $ 10,718,708 June 19, 2001
Series A Preferred Securities $ 19,345,000 December 5, 2001
If the Bank's financial condition were to deteriorate with the
consequence that a Shift Event (as defined below) were to occur, substantially
all of the Common Securities would be redeemed automatically without prior
redemption of the Series A Preferred Securities and dividends payable on each
Series A Preferred Security could be substantially reduced or completely
eliminated. In addition, if the Bank's Tier 1 risk-based capital ratio were to
decline below the minimum percentage required by French banking regulations
(currently 4%), the Company would pay a special dividend consisting of all of
the Company's net assets (other than assets having a total market value of
approximately $40 million) to the Bank as holder of the Common Securities.
A "Shift Event" would be deemed to have occurred if (i) the Bank's
total risk-based capital ratio or Tier 1 risk-based capital ratio were to
decline below the minimum percentages required by French banking regulations,
(ii) the Bank were to become subject to certain specified receivership
proceedings or (iii) the French Banking Commission (Commission bancaire), in its
sole discretion, were to notify the Bank and the Company that it has determined
that the Bank's financial condition was deteriorating such that either of the
foregoing clauses (i) or (ii) would apply in the near term. French banking
regulations currently require French banks to maintain a minimum total
risk-based capital ratio of at least 8.0% and a minimum Tier 1 risk-based
capital ratio of at least 4.0%.
The Company may not pay dividends or make other distributions on the
Common Securities or the Series A Preferred Securities if, after giving effect
to the distributions, the Company's liabilities would exceed the fair value of
its assets. Additionally, as long as any Series A Preferred Securities are
outstanding, except during a Shift Period (i.e., following the occurrence of a
Shift Event causing a shift in dividend preference and before the termination
thereof), the amount of dividends on the Common Securities in any fiscal year
may not exceed the amount by which the net income of the Company for such fiscal
year exceeds the stated dividends on the Series A Preferred Securities scheduled
to be paid during such fiscal year irrespective of whether dividends on the
Series A Preferred Securities are in fact declared and paid. Additionally, other
than during a Shift Period, no dividends may be declared, paid or set apart for
payment on the Common Securities (a) with respect to any period of time included
in any Dividend Period unless full dividends have been or contemporaneously are
declared and paid, or declared and a sum sufficient for the payment thereof is
set apart for such payment on the Series A Preferred Securities for the
then-current Dividend Period and (b) the Company may not declare, pay or set
apart funds for any dividends or other distributions with respect to any Common
Securities unless and until (x) full dividends on the Series A Preferred
Securities for the two most recent preceding Dividend Periods are declared and
paid, or declared and a sum sufficient for payment has been paid over to the
dividend disbursing agent for payment of such dividends and (y) the Company has
declared a cash dividend on the Series A Preferred Securities at the annual
dividend rate for the then-current Dividend Period, and sufficient funds have
been paid over to the dividend disbursing agent for payment of such cash
dividends for such then-current Dividend Period.
NET INCOME PER REDEEMABLE COMMON SECURITY:
Net income per redeemable common security is calculated by dividing net
income after preferred dividends by the weighted average number of Common
Securities outstanding.
INCOME TAXES:
The Company expects to be treated as a partnership for U.S. Federal
income tax purposes. As a partnership is not a taxable entity, the Company will
not be subject to U.S. federal, state and local income tax on its income.
Instead, each securityholder is required to take into account its allocable
share of items of income, gain, loss and deduction of the partnership in
computing its U.S. Federal tax liability. Accordingly, the Company has made no
provision for income taxes in the accompanying statement of income.
ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES:
In June of 1998, the Financial Accounting Standards Board issued
"Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which
establishes accounting and reporting standards for all derivative instruments
and hedging activities. SFAS 133, amended by the issuance of SFAS 137, entitled
"Accounting for Derivatives and Hedging Activities-Deferral of the Effective
Date of FASB Statement No. 133" is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000 as amended by SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities, an amendment
of FASB Statement No. 133", in June 2000. SFAS 133, requires that an entity
measure all derivatives at fair value and recognize those derivatives as either
assets or liabilities on the balance sheet. The change in the derivative's fair
value is generally to be recognized in current period earnings. However, if
certain conditions are met, a derivative may be specifically designated as a
hedge of an exposure to changes in fair value, variability of cash flows, or
certain foreign currency exposures.
The Company has made an assessment of all their financial
instruments and concluded that it holds freestanding derivative instruments but
no embedded derivative instruments at December 31, 2001. As part of its asset
management activities the Company uses foreign exchange and interest rate swaps
to modify the interest rate and foreign exchange characteristics of existing
assets. The interest rate swaps have a high correlation between the instrument
and the asset being hedged, both at inception and throughout the hedge period.
Prior to the adoption of SFAS 133, these interest rate swaps are
carried at fair value. The accrual of interest receivable or interest payable on
these swaps is reported in Interest Income. Changes in the market values of
these swaps, exclusive of net interest accruals, are reported in
Securityholders' Equity: Accumulated Other Comprehensive Income.
The Company has adopted SFAS 133 as of January 1, 2001. The SFAS 133
transition adjustments resulted in a cumulative-effect-type adjustment of
$938,670 and $(938,670) to net income and accumulated other comprehensive
income, respectively, as of January 1, 2001.
FOREIGN CURRENCY TRANSLATION:
Assets denominated in foreign currencies are translated to US dollars
using applicable rates of exchange.
All of the Company's assets denominated in a foreign currency are
included in its available-for-sale securities portfolio and their foreign
currency exchange risk is hedged by means of cross-currency swaps. In accordance
with the requirements of SFAS 133, the change in fair value, due to the change
in the foreign currency exchange rate, of both the hedged securities and the
hedging instruments is recorded in current period earnings.
Revenues and expenses are translated monthly at amounts which
approximate weighted average exchange rates.
NOTE 3--RECEIVABLE ARISING FROM PAYMENT FOR SECURITIES, PURSUANT TO THE
APPLICATION OF SFAS 125, AS REPLACED BY SFAS 140:
Statement of Financial Accounting Standards No.140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 140") governs the accounting for the transfer of financial assets. Under
SFAS 140 transfers of financial assets that do not meet certain sale accounting
requirements must be accounted for as a secured borrowing transaction with a
pledge of collateral.
Due to the potential consequences of a Shift Event (as described
above), the Company's purchase of the Initial Portfolio from the Branch did not
meet certain SFAS 125, as replaced by SFAS 140 sale accounting requirements.
Therefore, the purchase of the Initial Portfolio has been accounted for as a
secured borrowing transaction with a pledge of collateral. In accounting for
this transaction as a secured borrowing transaction in accordance with SFAS 125,
as replaced by SFAS 140, the Company has recorded a receivable in an amount
equal to the remaining amount paid to the Branch to acquire the Initial
Portfolio. In this case, however, having delivered the securities in the Initial
Portfolio to the Company, neither the Branch nor BNPP has any further obligation
to the Company to repay any part of the purchase price for the Initial Portfolio
or otherwise to repurchase or redeem any securities in the Initial Portfolio.
Under SFAS 140, the collateral and the related obligation of
$190,647,665 previously recognized in the 2000 financial statements in
accordance with SFAS 125 is no longer recognized. The change in presentation has
no impact on the Company's Statement of Income or Total Redeemable Common
Securities, Preferred Securities and Securityholders' Equity. All financial
statements for previous periods presented have been restated accordingly.
The Company has not sold or repledged the collateral; the securities
within the Initial Portfolio mature or prepay over time. As they do, the Company
recognizes the cash proceeds as a reduction in the receivable arising from
payment for securities. The collateral at December 31, 2001 and December 31,
2000 is reported in Note 4 below.
NOTE 4--INVESTMENT SECURITIES:
The amortized cost and estimated fair value of available-for-sale
securities were as follows ($ in 000's) based on management's prepayment
assumptions:
Gross Gross
December 31, 2001 Non-Collateral Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- -------------------------------- -------------- ---------------- ----------------- ------------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 18,943 $ 17 $ 18 $ 18,942
Fixed-Rate REMICs 897 25 --- 922
Mortgage Backed Securities:
Agency ARMs 27,785 914 --- 28,699
Agency Hybrid ARMs 37,258 1,488 69 38,677
Agency DUSs 311,110 17,588 --- 328,698
Agency Debentures 476,520 19,009 5,478 490,051
---------- --------- --------- ----------
Total $ 872,513 $ 39,041 $ 5,565 $ 905,989
========== ========= ========= ==========
Gross Gross
December 31, 2001 Collateral Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- -------------------------------- -------------- ---------------- ----------------- ------------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 33,266 $ 168 $ 102 $ 33,332
Fixed-Rate REMICs 46,814 1,199 --- 48,013
Mortgage Backed Securities:
Agency ARMs 20,078 535 16 20,597
Agency Hybrid ARMs 35,097 1,340 --- 36,437
Agency DUSs --- --- --- ---
Agency Debentures --- --- --- ---
---------- --------- --------- ----------
Total $ 135,255 $ 3,242 $ 118 $ 138,379
========== ========= ========= ==========
December 31, 2001 Total Portfolio $1,007,768 $ 42,283 $ 5,683 $1,044,368
========== ========= ========= ==========
Gross Gross
December 31, 2000 Non-Collateral Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- -------------------------------- -------------- ---------------- ----------------- ------------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 33,070 $ --- $ 302 $ 32,768
Fixed-Rate REMICs 6,021 --- 22 5,999
Mortgage Backed Securities:
Agency ARMs 43,384 --- 565 42,819
Agency Hybrid ARMs 53,587 38 411 53,214
Agency DUSs 265,976 802 1,974 264,804
Agency Debentures 404,179 23,484 --- 427,663
---------- --------- --------- ----------
Total $ 806,217 $ 24,324 $ 3,274 $ 827,267
========== ========= ========= ==========
Gross Gross
December 31, 2000 Collateral Amortized Cost Unrealized Gains Unrealized Losses Fair Value
- ---------------------------- -------------- ---------------- ----------------- ------------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 51,900 $ --- $ 272 $ 51,628
Fixed-Rate REMICs 46,816 --- 887 45,929
Mortgage Backed Securities:
Agency ARMs 37,823 --- 180 37,643
Agency Hybrid ARMs 55,890 --- 442 55,448
Agency DUSs --- --- --- ---
Agency Debentures --- --- --- ---
---------- --------- --------- ----------
Total $ 192,429 $ --- $ 1,781 $ 190,648
========== ========= ========= ==========
December 31, 2000 Total Portfolio $ 998,646 $ 24,324 $ 5,055 $1,017,915
========== ========= ========= ==========
The breakdown of the Company's available-for-sale securities by
category and weighted average life distribution (stated in terms of amortized
cost) is summarized below ($ in 000's) based on management's prepayment
assumptions:
Due after 1 Due after 5
Due in 1 year through 5 through 10 Due after 10
December 31, 2001 Non Collateral or less years years years Total
- -------------------------------- ------------- ----------- ----------- ------------ ----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 3,192 $ 15,751 $ --- $ --- $ 18,943
Fixed-Rate REMICs --- 897 --- --- 897
Mortgage Backed Securities:
Agency ARMs 241 27,544 --- --- 27,785
Agency Hybrid ARMs --- 37,258 --- --- 37,258
Agency DUSs --- 76,169 234,941 --- 311,110
Agency Debentures --- 216,804 259,716 --- 476,520
---------- --------- --------- --------- ----------
Total $ 3,433 $ 374,423 $ 494,657 $ --- $ 872,513
========== ========= ========= ========= ==========
Due after 1 Due after 5
Due in 1 year through 5 through 10 Due after 10
December 31, 2001 Collateral or less years years years Total
- ---------------------------- ------------- ----------- ----------- ------------ ----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 3,360 $ 29,906 $ --- $ --- $ 33,266
Fixed-Rate REMICs --- 46,814 --- --- 46,814
Mortgage Backed Securities:
Agency ARMs 1,376 17,435 --- 1,267 20,078
Agency Hybrid ARMs --- 35,097 --- --- 35,097
Agency DUSs --- --- --- --- ---
Agency Debentures --- --- --- --- ---
---------- --------- --------- --------- ----------
Total $ 4,736 $ 129,252 $ --- $ 1,267 $ 135,255
========== ========= ========= ========= ==========
December 31, 2001 Total Portfolio $ 8,169 $ 503,675 $ 494,657 $ 1,267 $1,007,768
========== ========= ========= ========= ==========
Due after 1 Due after 5
Due in 1 year through 5 through 10 Due after 10
December 31, 2000 Non Collateral or less years years years Total
- -------------------------------- ------------- ----------- ----------- ------------ ----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 502 $ 19,325 $ 13,243 $ --- $ 33,070
Fixed-Rate REMICs 4,545 1,476 --- --- 6,021
Mortgage Backed Securities:
Agency ARMs --- 30,862 12,522 --- 43,384
Agency Hybrid ARMs --- 44,848 3,372 5,367 53,587
Agency DUSs --- --- 265,976 --- 265,976
Agency Debentures --- 100,000 304,179 --- 404,179
---------- --------- --------- --------- ----------
Total $ 5,047 $ 196,511 $ 599,292 $ 5,367 $ 806,217
========== ========= ========= ========= ==========
Due after 1 Due after 5
Due in 1 year through 5 through 10 Due after 10
December 31, 2000 Collateral or less years years years Total
- ---------------------------- ------------- ----------- ----------- ------------ ----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 1,697 $ 50,203 $ --- $ --- $ 51,900
Fixed-Rate REMICs --- --- 46,816 --- 46,816
Mortgage Backed Securities:
Agency ARMs 502 29,403 5,355 2,563 37,823
Agency Hybrid ARMs --- 16,893 38,997 --- 55,890
Agency DUSs --- --- --- --- ---
Agency Debentures --- --- --- --- ---
---------- --------- --------- --------- ----------
Total $ 2,199 $ 96,499 $ 91,168 $ 2,563 $ 192,429
========== ========= ========= ========= ==========
December 31, 2000 Total Portfolio $ 7,246 $ 293,010 $ 690,460 $ 7,930 $ 998,646
========== ========= ========= ========= ==========
Actual maturities may differ from maturities shown above due to
prepayments.
The breakdown of the Company's available-for-sale securities by
category and yield, before the results of the hedges, is summarized below:
Due after 1 Due after 5
Due in 1 year through 5 through 10 Due after 10 Yield After
December 31, 2001 or less years years years Total Hedging
- ----------------- ------------- ----------- ----------- ------------ ---------- -----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs 4.56% 4.96% ---% ---% 4.90% 4.90%
Fixed-Rate REMICs 7.25 6.50 --- --- 6.51 6.51
Mortgage Backed Securities:
Agency ARMs 6.13 6.39 --- 7.22 6.40 6.40
Agency Hybrid ARMs --- 6.04 --- --- 6.04 6.04
Agency DUSs --- 7.47 6.66 --- 6.79 4.96
Agency Debentures --- 6.52 6.45 --- 6.50 4.78
----- ----- ----- ----- ----- -----
Total 5.03% 6.25% 6.57% 7.22% 6.40% 5.16%
===== ===== ===== ===== ===== =====
Due after 1 Due after 5
Due in 1 year through 5 through 10 Due after 10 Yield after
December 31, 2000 or less years years years Total Hedging
- ----------------- ------------- ----------- ----------- ------------ ---------- -----------
Collateralized Mortgage Obligations:
Floating-Rate REMICs 6.46% 6.55% 6.58% ---% 6.55% 6.55%
Fixed-Rate REMICs 5.84 6.46 6.50 --- 6.39 6.39
Mortgage Backed Securities:
Agency ARMs 4.81 6.50 6.62 7.10 6.53 6.53
Agency Hybrid ARMs --- 6.51 6.65 6.35 6.55 6.55
Agency DUSs --- --- 6.02 --- 6.02 6.32
Agency Debentures --- 6.75 6.47 --- 6.59 6.53
----- ----- ----- ----- ----- -----
Total 5.95% 6.61% 6.26% 6.55% 6.39% 6.50%
===== ===== ===== ===== ===== =====
NOTE 5--REDEEMABLE COMMON SECURITIES:
General
The Company is authorized to issue up to 150,000 Common Securities; as
of December 31, 2001 and December 31, 2000, the Company had outstanding 53,011
Common Securities, all of which were held by the Branch. The Bank has agreed
with the Company in the Contingent Support Agreement that, so long as any Series
A Preferred Securities are outstanding, it will maintain direct or indirect
ownership of 100% of the outstanding Common Securities.
Dividends
Holders of Common Securities are entitled to receive dividends when, as
and if declared by the Company's Board of Directors out of the Company's net
income not required to be applied to fund dividends with respect to the Series A
Preferred Securities; provided that so long as any Series A Preferred Securities
are outstanding, no dividends or other distributions (including redemptions and
purchases) may be made with respect to the Common Securities unless full
dividends on all Series A Preferred Securities have been paid for the current
and the two immediately preceding Dividend Periods (except during a Shift Period
if the Bank does not distribute dividends on its common stock).
Redemption Requirements
If the Bank's financial condition were to deteriorate with the
consequence that a Shift Event were to occur, substantially all the Common
Securities would be redeemed automatically without prior redemption of any
Series A Preferred Securities.
Voting Rights
Subject to the rights, if any, of the holders of Series A Preferred
Securities (in particular the right to remove and replace any Independent
Director and to elect an additional director, in certain circumstances), all
voting rights are vested in the Common Securities. The Holders of Common
Securities are entitled to one vote per security.
Rights Upon Liquidation
In the event of the dissolution, liquidation or winding up of the
Company, whether voluntary or involuntary, after there shall have been paid or
set aside for the holders of all Series A Preferred Securities the full
preferential amounts to which such holders are entitled, the holders of Common
Securities will be entitled to share equally and ratably in any assets remaining
after the payment of all debts and liabilities. Upon a liquidation of the
Company during a Shift Period, the Common Securities will have a preference over
the Series A Preferred Securities to the extent, if any, that the liabilities of
the Bank (including any debt instruments, such as titres participatifs and prets
participatifs) have not been paid in full.
NOTE 6--RELATED PARTY TRANSACTIONS:
The Company entered into a Services Agreement with the Branch on
December 5, 1997 pursuant to which the Branch manages the securities portfolio
of the Company and performs other administrative functions. Expenses incurred
under such Agreement were $807,343 as of December 31, 2001 and $758,889 as of
December 31, 2000. Under a specific allocation methodology, the costs of
personnel servicing the Company has increased. This allocation is based on
actual man-hours devoted to the activities of the Company and remains at arms
length.
The Branch, also, serves as the dividend paying agent, registrar, and
transfer agent with respect to the Series A Preferred Securities. The fee is
$4,000 per annum for these services.
The Company maintains a credit balance account with the Branch for
clearing certain transactions.
All of the Company's officers and employees and all but one of the
members of the Company's Board of Directors are officers and employees of the
Branch or BNP PARIBAS.
NOTE 7--FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair values of securities at December 31, 2001 and December 31,
2000 were obtained from independent market sources and are summarized in Note 4.
The carrying values of securities, as shown in Note 4, approximates their fair
value. The fair value of the receivable arising from payment for securities,
pursuant to the application of SFAS 125, as replaced by SFAS 140, approximates
the aggregate carrying value of the investment securities treated as collateral,
which at December 31, 2001 and December 31, 2000 was $138,379,090 and
$190,647,665 respectively.
The carrying value of cash and cash equivalents, accounts receivable,
accrued interest receivable, accrued expenses, and due to affiliates
approximates fair value.
The fair value of the interest rate swaps described in Note 8 below at
December 31, 2001 was $(19,003,975) and $(17,311,062) at December 31, 2000.
NOTE 8 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company maintains an overall risk management strategy that
incorporates the use of derivative instruments to hedge the interest rate risk
and foreign currency risk of fixed-income securities. As a result of interest
rate or exchange rate fluctuations, hedged fixed rate assets will appreciate or
depreciate in market value. The effect of this unrealized appreciation or
depreciation is expected to substantially offset the Company's gains or losses
on the derivative instruments that are linked to these hedged assets and
liabilities. The Company considers its use of derivatives to be a prudent method
of managing interest rate and foreign currency rate sensitivity, as it prevents
earnings from being exposed to undue risk posed by changes in interest and
exchange rates in compliance with the Company's policies.
Derivative instruments that are used as part of the Company's interest
rate risk management strategy include interest rate and cross-currency swap
contracts that have indices related to the pricing of specific balance sheet
assets and liabilities. As a matter of policy, the Company does not use highly
leveraged derivative instruments for interest rate risk management. Interest
rate swaps generally involve the exchange of fixed and variable rate interest
payments between two parties, based on a common notional principal amount and
maturity date.
By using derivative instruments, the Company exposes itself to credit
and market risk. If a counterparty fails to fulfill its performance obligations
under a derivative contract, the Company's credit risk will equal the fair value
gain in a derivative. Generally, when the fair value of a derivative contract is
positive, this indicates that the counterparty owes the Company, thus creating a
repayment risk for the Company. When the fair value of a derivative contract is
negative, the Company owes the counterparty and, therefore, assumes no repayment
risk. The Company minimizes the credit (or repayment) risk in derivative
instruments by entering into transactions with BNP PARIBAS S.A. Consequently,
the Company does not require that collateral be provided by the counterparty.
Market risk is the adverse effect that a change in interest rates,
currency, or implied volatility rates might have on the value of a financial
instrument. The Company does not expose itself to market risk by using
derivatives but rather reduces market risk since it uses derivatives only for
fair value hedges that effectively offset fluctuations in the fair value of
hedged items.
The Company formally documents all relationships between derivatives
and hedged items, as well as its risk management objectives and strategies for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair value or cash flow hedges to (1) assets
and liabilities on the balance sheet, (2) firm commitments or (3)forecasted
transactions.
Fair Value Hedges
The Company mainly enters into interest rate swaps and cross-currency
interest rate swaps to convert fixed rate Agency Debentures and Agency DUSs into
variable rate securities.
For the year ended December 31, 2001, the Company recognized $1,041,095
in current year earnings related to the ineffective portion of fair value
hedges: $938,670 shown as cumulative-effect-type adjustment at January 1, 2001
and $102,425 included in interest income for the 2001 Period. The Company did
not recognize any gains or losses in relation to firm commitments that no longer
qualified as fair value hedges. The fair value of these fair value hedging
instruments was $(19,003,975) at December 31, 2001 and $(17,311,062) at December
31, 2000 and has been recorded in "Other liabilities". It has been offset,
except for the ineffective portion of the hedge, by the revaluation of the
respective hedged investment securities. The fair value of the hedging
instruments does not include accrued interest receivable and payable, which are
shown separately on the balance sheet.
Cash Flow Hedges
For the year ended December 31, 2001, the Company did not enter into
cash flow hedge transactions and it is not the intention of the Company to use
interest rate swaps to convert floating rate financial instruments to fixed rate
financial instruments as part of a cash flow hedge strategy.
At December 31, 2001 and December 31, 2000, the Company had outstanding
interest rate swap agreements with a notional principal amount of $590,711,267
and $537,376,097, respectively.
BNP U.S. FUNDING L.L.C.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share data)
First Quarter Second Quarter Third Quarter Fourth Quarter Totals
------------- -------------- ------------- -------------- --------
INTEREST INCOME:
Collateralized Mortgage Obligations:
Floating-Rate REMICs $ 1,295 $ 973 $ 708 $ 449 $ 3,425
Fixed-Rate REMICs 832 786 777 776 3,171
Mortgage Backed Securities:
Agency ARMs 1,313 1,087 939 736 4,075
Agency Hybrid ARMs 1,692 1,472 1,309 1,040 5,513
Agency DUSs 4,116 3,494 2,906 3,443 13,959
Agency Debentures 6,452 5,657 5,725 2,816 20,650
Interest on Deposits 385 545 563 282 1,775
-------- -------- ------- -------- --------
16,085 14,014 12,927 9,542 52,568
-------- -------- ------- -------- --------
NONINTEREST EXPENSE:
Fees and expenses 235 384 320 291 1,230
-------- -------- ------- -------- --------
Cumulative effect of the change in
accounting principle for Derivatives and
Hedging activities (SFAS133) 939 --- --- --- 939
-------- -------- ------- -------- --------
NET INCOME APPLICABLE TO PREFERRED
AND REDEEMABLE COMMON SECURITIES $ 16,789 $ 13,630 $ 12,607 $ 9,251 $ 52,277
======== ======== ======== ======== =========
NET INCOME PER REDEEMABLE
COMMON SECURITY $ 316.71 $(107.81) $ 237.82 $(190.41) $ 256.31
======== ======== ======== ======== =========
Item 9: Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 10: Directors and Executive Officers of the Company
The following table sets forth information concerning the directors and
executive officers of the Company. The directors serve 3-year terms (5 years in
the case of the independent director), subject to earlier resignation or
removal. The current term of office of each officer and director commenced on
December 5, 2000 except in the case of Donald J Puglisi, independent director,
which commenced December 5, 1997.
Name and Age Position and Offices Held
------------ -------------------------
Georges Chodron de Courcel (51) Chairman and Director
Martine Billeaud (56) Director
Jean-Pierre Beck (58) President and Director
Donald J. Puglisi (56) Independent Director
George T. Deason (56) Secretary
Sady Karet (47) Treasurer and Director
The following is a summary of the experience of the executive officers
and directors of the Company:
Georges Chodron de Courcel is currently a Member of the Executive
Committee and Head of Investment Banking of BNP PARIBAS. Born in 1950, he
graduated in 1971 from Ecole Centrale de Paris and in Economics in 1972. He
immediately started his career with Banque Nationale de Paris where he handled
various assignments. After having spent 6 years with Commercial Banking, he was
successively responsible for Stock Exchange Research, Banexi's Administration
(BNP merchant bank) and Investment Management. In 1989, he was named Director of
Corporate Finance and Chairman of Banexi. Since January 1991, he has headed all
Capital Markets and was appointed Chief Executive International and Finance of
BNP in September 1996.
Georges Chodron de Courcel also holds directorships in different
companies such as Bouygues, Lagardere, Scor and Sommer Allibert.
Martine Billeaud is in charge of the Bank's medium and long term
funding activities related to Asset and Liability Management. She was previously
responsible for domestic treasury business. Ms. Billeaud was born in 1945 in
Choisy-le-Roi, France.
Jean-Pierre Beck is an Executive Vice President in charge of Asset and
Liability Management of the Bank's U.S. branches. Prior to this position, he was
the General Market Risk Manager of the Bank. He has worked for the Bank since
1964. Mr. Beck was born in 1943 in Mulhouse, France.
Donald J. Puglisi, the Independent Director, is the MBNA America
Business Professor and Professor of Finance at the University of Delaware where
he has been on the faculty since 1971. In addition, he is the Managing Director
of Puglisi and Associates, a company which provides investment management,
accounting and other administrative services to a variety of different
companies. Mr. Puglisi holds a Directorship or Trusteeship in the following
companies that are registered under either the Exchange Act or the 1940 Act: AJL
PEPS Trust, Automatic Common Exchange Security Trust II, DECS Trust, DECS Trust
II, Dole Food Automatic Common Exchange Security Trust, Great Lakes Fund, Inc.,
Huron Investment Fund, Inc., Mandatory Common Exchange Trust, Nextel STRYPES
Trust, Select Asset Fund, Series 1, Inc., Select Asset Fund, Series 2, Inc.,
Snyder STRYPES Trust, and WBK STRYPES Trust.
George T. Deason became Deputy General Counsel for BNP PARIBAS in North
America after the merger of BNP and Paribas in 2000. He was previously General
Counsel for Paribas in North America since 1993. He joined Paribas in 1985 after
ten years with the Bank of America Legal Department, is a graduate of Cornell
Law School and a member of the New York Bar.
His current responsibilities include overseeing delivery of legal
services to the banking operations of BNP PARIBAS in North America, advising of
regulatory changes and overseeing implementation of regulations, overseeing all
legal documentation entered into by the banking operations of BNP PARIBAS in
North America, preventing or defending litigation, assisting senior management
with legal aspects of new initiatives.
Sady Karet is Vice President in charge of Asset and Liability analysis
of the Bank's US branches. He was previously posted in Hong-Kong where he was in
charge of Market Risks for North Asia (excluding Japan). Mr. Karet was born in
1954 in Paris, France.
Item 11: Executive Compensation
The Independent Director Donald J. Puglisi, receives director's fees of
$6,000 per year. All of the other members of the Company's Board of Directors
and Officers are also Officers or employees of the Branch or the Bank and do not
receive compensation from the Company or additional compensation from the Branch
or the Bank for services rendered to the Company.
Item 12: Security Ownership of Certain Beneficial Owners and Management
None.
Item 13: Certain Relationships and Related Transactions
Reference is hereby made to Item 1. Business and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations for a
discussion of the Company's various relationships with the Branch, the sole
holder of all its outstanding Common Securities.
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
Index To Exhibits
Exhibit 11: Computation of net income per share
Exhibit 12(a): Computation of ratio of earnings to fixed charges
Exhibit 12(b): Computation of ratio of earnings to fixed charges
and preferred securities dividend
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
BNP U.S. FUNDING L.L.C.
-----------------------
Registrant
Date: April 1, 2002 By /s/
-------------------------------
Jean-Pierre Beck
President and Director
Date: April 1, 2002 By /s/
-------------------------------
Sady Karet
Treasurer and Director