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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21850
BANKUNITED FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0377773
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
255 ALHAMBRA CIRCLE, CORAL GABLES, FLORIDA 33134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 569-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
8% NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES 1993
9% NONCUMULATIVE PERPETUAL PREFERRED STOCK
(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, 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 the Form 10-K. [ ]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant, based upon the average price on December 26,
1997, was $170,746,778.* The other voting securities of the Registrant are not
publicly traded.
The shares of the Registrant's common stock outstanding as of December 26,
1997 were as follows:
CLASS NUMBER OF SHARES
- ----------------------------------------------- -----------------
Class A Common Stock, $.01 par value 13,871,915
Class B Common Stock, $.01 par value 285,958
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form 10-K
pursuant to Rule G(3) of the General Instructions for Form 10-K. Information
from such Definitive Proxy Statement will be incorporated by reference into
Part III, Items 10, 11, 12 and 13 hereof.
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* Based on reported beneficial ownership of all directors and executive
officers of the Registrant; this determination does not, however, constitute
an admission of affiliated status for any of these individual stockholders.
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PART I
ITEM 1. BUSINESS
BUSINESS OF BANKUNITED FINANCIAL CORPORATION
GENERAL
BankUnited Financial Corporation (the "Company" or "BankUnited") is a
Florida corporation and the savings and loan holding company for BankUnited,
FSB (the "Bank"). The Company currently has seventeen branch offices in South
Florida and anticipates opening at least six additional branch offices by
September 30, 1998 in its market area, either by acquisition or de novo
branching, and may expand into other parts of Florida. The Company's business
has traditionally consisted of attracting deposits from the general public and
using those deposits, together with borrowings and other funds, to purchase
nationwide and to originate in Florida single-family residential mortgage
loans, and to a lesser extent, to purchase and originate commercial real
estate, commercial business and consumer loans. The Company also invests in tax
certificates and other permitted investments. The Company's revenues are
derived principally from interest earned on loans, mortgage-backed securities
and investments. The Company's primary expenses arise from interest paid on
deposits and borrowings and non-interest operating expenses incurred in
operations.
During the past three years the Company has redefined its strategy to
increase its emphasis on strategic product niches which management believes are
being underserved as South Florida's banks consolidate. Such product niches
include commercial business and commercial real estate lending and deposit
services for small to mid-sized businesses. The Company also focuses on
attracting depositors by stressing convenience, competitive rates and
personalized service.
The Company's operating plan emphasizes (i) rapidly expanding the
Company's deposit base by providing convenience, competitive rates and
personalized service in its market area and continuing expansion of the
Company's branch network through de novo branching or the acquisition of
branches of, and mergers with, existing financial institutions; (ii)
concentrating lending activities on purchasing single-family residential
mortgage loans and originating such loans when market opportunities are
favorable; (iii) expanding the Company's commercial and multi-family real
estate, commercial business, and real estate construction lending; (iv)
increasing non-interest income, and (v) maintaining asset quality.
The Bank is a member of the Federal Home Loan Bank of Atlanta (the "FHLB")
and is subject to comprehensive regulation, examination and supervision by the
Office of Thrift Supervision (the "OTS") and the Federal Deposit Insurance
Corporation (the "FDIC"). Deposits at the Bank are insured by the Savings
Association Insurance Fund to the maximum extent permitted by law.
MARKET AREA AND COMPETITION
The Company conducts operations in South Florida, which geographic region,
at December 31, 1996, had a total of approximately $76 billion in deposits at
commercial banks, savings institutions, and credit unions (39% of the total of
$195 billion of deposits in Florida). The Company intends to continue to
establish or acquire branch offices in its market area and may expand into
other parts of Florida.
In 1995, the Company sold its three branch offices on the west coast of
Florida, including their deposits which totaled $130.3 million at the date of
sale. The sale was pursuant to a strategy designed to take advantage of
consolidation trends in banking and growth opportunities in South Florida.
Also, as part of this strategy, the Company opened additional Florida branch
offices in Boynton Beach in June 1996, West Palm Beach in September 1996, Boca
Hamptons in August 1997, Coconut Creek in October 1997 and Aventura in November
1997. On March 29, 1996, the Company acquired The Bank of Florida with total
assets of $28.1 million which was merged into the Bank and consolidated into
the Bank's
1
South Miami branch. On November 15, 1996, the Company acquired Suncoast Savings
and Loan Association, FSA ("Suncoast"), with total assets of $409.4 million,
which was merged into the Bank. On September 19, 1997 the Company signed a
definitive agreement to acquire Consumers Bancorp and merge its subsidiary,
Consumers Savings Bank, into the Bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Acquisitions."
The Company encounters strong competition in attracting deposits and in
its lending activities. Its most direct competition for deposits historically
has been from commercial banks, brokerage houses, other savings associations,
and credit unions located in the Company's market area, and the Company expects
continued strong competition from such financial institutions in the
foreseeable future. Within the Company's market area are branch offices of
several super-regional commercial banks and savings associations that are
substantially larger and that have more extensive operations than does the
Company. In addition, many financial institutions formerly independent and
operating in South Florida have recently been acquired by larger institutions
headquartered in other parts of the state or headquartered out of state. The
Company's goal is to compete for savings and other deposits by offering
depositors a higher level of personal service, together with a wide range of
deposit products offered at competitive rates. The Company believes that this
strategy will enable it to attract depositors as the number of local
institutions declines and depositors who desire more personal service,
particularly retirees, relocate their accounts.
The competition in originating real estate and other loans comes
principally from commercial banks, mortgage banking companies and other savings
associations. The Company competes for loan originations primarily through the
interest rates and loan fees it charges, the types of loans it offers, and the
efficiency and quality of service it provides. The Company purchases
residential first mortgage loans in the existing secondary mortgage market and
competes with other mortgage purchasers primarily on the basis of price. While
the Company has been, and intends to continue to be, primarily a residential
lender, the Company has recently increased its emphasis on commercial real
estate, construction and commercial lending, as discussed more fully below.
Factors that affect competition in lending include general and local economic
conditions, current interest rates and volatility of the mortgage markets. As
with its deposit products, the Company's strategy is to promote its higher
level of personal service and to position itself as a small- to middle-market
lender servicing businesses left underserved by larger institutions.
Management's strategy has included and continues to include evaluating
market needs and offering products to meet those needs. The Company will
continue to offer products and services that will allow it to control the
growth of its assets and liabilities. These new products and services will
allow the Company to properly position itself to its customers as a community
bank.
FACTORS AFFECTING EARNINGS
The results of the Company's operations are affected by many factors
beyond the Company's control, including general economic conditions and the
related monetary and fiscal policies of the federal government. Earnings
generated from lending activities are affected by the demand for mortgages and
other types of loans, which is in turn affected by the interest rates at which
such loans may be offered, and other factors affecting the supply of housing
and the availability of funds. Sources and costs of funds, principally deposits
and borrowings, are influenced by yields available on competing investments and
by general market rates of interest.
ASSET AND LIABILITY MANAGEMENT. The Company's net earnings depend
primarily on its net interest income, which is the difference between interest
income received on its interest-earning assets (principally loans, short-term
and long-term investments, and mortgage-backed securities) and interest expense
paid on its interest-bearing liabilities (principally deposits, FHLB advances,
and trust preferred securities). The Company's net interest income is
significantly affected by (i) the difference between yields received on its
interest-earning assets and the rates paid on its interest-bearing liabilities
(the "interest rate spread") and (ii) the relative amounts of its
interest-earning assets and interest-bearing
2
liabilities. When interest-earning assets equal or exceed interest-bearing
liabilities, any positive interest rate spread will generate net interest
income. When such liabilities exceed such assets, the greater the positive
interest rate spread must be in order to produce net interest income.
Non-interest sources of income and non-interest expenses also affect the
Company's net income. The higher non-interest expenses are, the greater the
positive interest rate spread and/or non-interest sources of income must be to
produce net income.
The Company's exposure to interest rate risk is measured as the
sensitivity of the value of its financial instruments and net interest income
to changes in the level of interest rates. Generally, interest rate risk for a
financial institution results from differences in repricing intervals or
maturities between interest-earning assets and interest-bearing liabilities.
When such differences exist, a change in the level of interest rates will most
likely result in an increase or decrease in net interest income. The Company's
ability to manage interest rate risk depends upon a number of factors,
including competition for loans and deposits in its market area and conditions
prevailing in the secondary mortgage market.
To reduce the adverse impact of increases in market interest rates on the
Company's net interest income, the Company has emphasized the origination and
purchase of adjustable-rate mortgage loans. At September 30, 1997, 76.1% of the
Company's net loans receivable and mortgage-backed securities carried
adjustable interest rates. The Company has from time to time acquired longer
term fixed-rate mortgage loans when the yields on these interest-earning assets
have been deemed advantageous by management. As a part of its asset and
liability management strategy, and when market conditions are favorable, the
Company attempts to lengthen the maturities of its interest-bearing liabilities
(i) with longer term deposits or (ii) when advantageous, with longer term
borrowed funds.
The Company has rate-sensitive (maturing or subject to repricing within
one year) assets that exceed its rate-sensitive liabilities, resulting in a
positive cumulative one-year gap position of 4.9% of total assets as of
September 30, 1997. This imbalance, when coupled with the deregulation of the
restrictions previously imposed on the types of savings products that financial
institutions are permitted to offer, subjects the Company's earnings to change
based on fluctuations in interest rates. The Company constantly attempts to
reduce the sensitivity of its earnings to fluctuations in interest rates by
adjusting the average maturities of its interest-bearing liabilities and
interest-earning assets. There can be no assurance, however, of the degree to
which the Company will be able to effectively maintain the balance of its
short-term interest-earning assets as compared to its short-term
interest-bearing liabilities and manage the risks to liquidity associated
therewith.
3
GAP TABLE. The following table sets forth the amount of interest-earning
assets and interest-bearing liabilities outstanding at September 30, 1997,
which are expected to reprice or mature in each of the future time periods
shown.
AT SEPTEMBER 30, 1997
------------------------------------------
INTEREST SENSITIVITY PERIOD (1)
------------------------------------------
6 MONTHS 6 MONTHS OVER 1 -
OR LESS - 1 YEAR 5 YEARS
-------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investments, tax certificates, Federal funds sold,
FHLB overnight deposits and other interest
earning assets, at cost ........................ $ 139,450 $ 23,108 $ 24,397
Mortgage-backed securities ........................ 24,058 7,013 46,488
Loans:
Adjustable-rate mortgages ........................ 789,494 416,262 115,574
Fixed-rate mortgages .............................. 72,257 26,124 152,548
Commercial and consumer loans ..................... 10,182 310 1,704
--------- --------- ---------
Total loans .................................... 871,933 442,696 269,826
--------- --------- ---------
Total interest-earning assets .................. 1,035,441 472,817 340,711
Total non-interest-earning assets ............... -- -- --
--------- --------- ---------
Total assets .................................... $1,035,441 $ 472,817 $ 340,711
========== ========= =========
Interest-bearing liabilities:
Customer deposits:
Money market and NOW accounts ..................... 2,916 2,918 23,344
Passbook accounts ................................. 6,018 6,020 48,160
Certificate accounts .............................. 613,825 195,619 126,429
---------- --------- ---------
Total customer deposits ........................ 622,759 204,557 197,933
Borrowings:
FHLB advances .................................... 440,000 105,000 125,000
Trust Preferred ................................. -- -- --
Other borrowings ................................. 30,000 -- --
---------- --------- ---------
Total borrowings ................................. 470,000 105,000 125,000
---------- --------- ---------
Total interest-bearing liabilities ............... 1,092,759 309,557 322,933
Total non-interest-bearing liabilities ............ -- -- --
Shareholders' equity .............................. -- -- --
---------- --------- ---------
Total liabilities and shareholders' equity ...... $1,092,759 $ 309,557 $ 322,933
========== ========= =========
Total interest-earning assets less interest-bearing
liabilities ("GAP") .............................. $ (57,318) $ 163,260 $ 17,778
========== ========= =========
Ratio of GAP to total assets ..................... (2.67)% 7.61% .83%
========== ========= =========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities ......... $ (57,318) $ 105,942 $ 123,720
========== ========= =========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities, as a
percentage of total assets ... (2.67)% 4.94% 5.77%
========== ========= =========
NON-
OVER 5- OVER 10- INTEREST
10 YEARS YEARS EARNING TOTAL
------------- ------------- ------------- -----------
Interest-earning assets:
Investments, tax certificates, Federal funds sold,
FHLB overnight deposits and other interest
earning assets, at cost ........................ $ -- $ -- $ -- $ 186,955
Mortgage-backed securities ........................ 19,202 23,510 -- 120,271
Loans:
Adjustable-rate mortgages ........................ -- 1,018 10,447 1,332,795
Fixed-rate mortgages .............................. 96,221 76,818 411 424,379
Commercial and consumer loans ..................... 8 30 8 12,242
--------- -------- -------- ----------
Total loans .................................... 96,229 77,866 10,866 1,769,416
--------- -------- -------- ----------
Total interest-earning assets .................. 115,431 101,376 10,866 2,076,642
Total non-interest-earning assets ............... -- -- 68,764 68,764
--------- -------- -------- ----------
Total assets .................................... $ 115,431 $101,376 $ 79,630 $2,145,406
========= ======== ======== ==========
Interest-bearing liabilities:
Customer deposits:
Money market and NOW accounts ..................... 29,175 19,443 21,436 99,232
Passbook accounts ................................. 60,207 40,152 -- 160,557
Certificate accounts .............................. 230 -- -- 936,103
--------- -------- -------- ----------
Total customer deposits ........................ 89,612 59,595 21,436 1,195,892
Borrowings:
FHLB advances .................................... 1,484 -- -- 671,484
Trust Preferred ................................. -- 116,000 -- 116,000
Other borrowings ................................. -- -- -- 30,000
--------- -------- -------- ----------
Total borrowings ................................. 1,484 116,000 -- 817,484
--------- -------- -------- ----------
Total interest-bearing liabilities ............... 91,096 175,595 21,436 2,013,376
Total non-interest-bearing liabilities ............ -- -- 32,385 32,385
Shareholders' equity .............................. -- -- 99,645 99,645
--------- -------- -------- ----------
Total liabilities and shareholders' equity ...... $ 91,096 $175,595 $153,466 $2,145,406
========= ======== ======== ==========
Total interest-earning assets less interest-bearing
liabilities ("GAP") .............................. $ 24,335 $(74,219) $(73,836) $ --
========= ======== ======== ==========
Ratio of GAP to total assets ..................... 1.13% (3.46)% (3.44)% --
========= ======== ======== ==========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities ......... $ 148,055 $ 73,836
========= ========
Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities, as a
percentage of total assets ... 6.90% 3.44%
========= ========
- ---------------
(1) In preparing the table above, certain assumptions have been made with
regard to the repricing or maturity of certain assets and liabilities.
Assumptions as to prepayments on first and second mortgage loans and
mortgage-backed securities were obtained from prepayment rate tables that
provide assumptions correlating to recent actual repricing experienced in
the marketplace. Assumptions have also been made with regard to payments
on tax certificates based on historical experience. Money market, NOW and
passbook accounts are assumed to decay based upon duration estimates
utilized in the OTS Interest Rate Risk Model. All other assets and
liabilities have been repriced based on the earlier of repricing or
contractual maturity. The mortgage prepayment rate tables, deposit decay
rates and the historical assumptions used regarding payments on tax
certificates should not be regarded as indicative of the actual repricing
that may be experienced by the Company.
4
YIELDS EARNED AND RATES PAID. The following table sets forth certain
information relating to the categories of the Company's interest-earning assets
and interest-bearing liabilities for the periods indicated. All yield and rate
information is calculated on an annualized basis by dividing the income or
expense item for the period by the average balances during the period of the
appropriate balance sheet item. Net interest margin is calculated by dividing
net interest income by average interest-earning assets. Non-accrual loans are
included for the appropriate periods, whereas recognition of interest on such
loans is discontinued and any remaining accrued interest receivable is
reversed, in conformity with generally accepted accounting principles and
federal regulations. The yields and net interest margins appearing in the
following table have been calculated on a pre-tax basis.
AS OF
9/30/97
YIELD/RATE
-----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable, net ............... 7.44%
Mortgage-backed securities ......... 6.86
Short-term investments (1) ......... 6.30
Tax certificates ..................... 8.09
Long-term investments and FHLB
stock, net ........................ 7.05
-----
Total interest-earning assets ...... 7.36
-----
Interest-bearing liabilities:
NOW/Money Market ..................... 2.63
Savings .............................. 4.66
Certificate of deposits ............ 5.72
Trust preferred securites ............ 10.17
FHLB advances and other
borrowings ........................ 5.86
-----
Total interest-bearing
liabilities ..................... 5.79
-----
Excess of interest-earning assets over
interest-bearing liabilities .........
Net interest income ..................
Interest rate spread .................. 1.57%
=====
Net interest margin .................. 1.74%
=====
Ratio of interest-earning assets to
interest-bearing liabilities .........
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------- ----------------------------------- --------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE
--------------- ---------- ---------- ------------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable, net ............... $ 1,217,181 $ 94,655 7.78% $ 540,313 $41,313 7.65% $ 419,501
Mortgage-backed securities ......... 103,389 7,035 6.80 62,711 4,250 6.78 59,204
Short-term investments (1) ......... 27,612 1,613 5.84 41,240 2,359 5.72 23,884
Tax certificates ..................... 41,162 3,171 7.70 34,831 3,018 8.66 37,377
Long-term investments and FHLB
stock, net ........................ 33,161 2,300 6.94 17,352 1,192 6.87 7,930
----------- -------- ----- --------- -------- ---- ---------
Total interest-earning assets ...... 1,422,505 108,774 7.65 696,447 52,132 7.49 547,856
----------- -------- ----- --------- -------- ---- ---------
Interest-bearing liabilities:
NOW/Money Market ..................... 91,515 2,236 2.44 33,148 775 2.34 41,196
Savings .............................. 137,912 6,342 4.60 59,965 2,627 4.38 55,950
Certificate of deposits ............ 735,008 41,558 5.65 313,521 17,389 5.55 276,564
Trust preferred securites ............ 63,008 6,473 10.27 -- -- -- --
FHLB advances and other
borrowings ........................ 335,112 19,351 5.77 235,264 13,831 5.88 144,052
----------- -------- ----- --------- -------- ---- ---------
Total interest-bearing
liabilities ..................... 1,362,555 75,960 5.58 641,898 34,622 5.39 517,762
----------- -------- ----- --------- -------- ---- ---------
Excess of interest-earning assets over
interest-bearing liabilities ......... $ 59,950 $ 54,549 $ 30,094
=========== ========= =========
Net interest income .................. $ 32,814 $17,510
======== ========
Interest rate spread .................. 2.07% 2.10%
===== ====
Net interest margin .................. 2.31% 2.51%
===== ====
Ratio of interest-earning assets to
interest-bearing liabilities ......... 104.40% 108.50% 105.81%
=========== ========= =========
YIELD/
INTEREST RATE
---------- ----------
Interest-earning assets:
Loans receivable, net ............... $30,171 7.19%
Mortgage-backed securities ......... 4,093 6.91
Short-term investments (1) ......... 1,491 6.25
Tax certificates ..................... 3,087 8.26
Long-term investments and FHLB
stock, net ........................ 577 7.29
-------- ----
Total interest-earning assets ...... 39,419 7.20
-------- ----
Interest-bearing liabilities:
NOW/Money Market ..................... 875 2.12
Savings .............................. 2,420 4.33
Certificate of deposits ............ 14,554 5.26
Trust preferred securites ............ -- --
FHLB advances and other
borrowings ........................ 8,456 5.87
-------- ----
Total interest-bearing
liabilities ..................... 26,305 5.08
-------- ----
Excess of interest-earning assets over
interest-bearing liabilities .........
Net interest income .................. $13,114
========
Interest rate spread .................. 2.12%
====
Net interest margin .................. 2.39%
====
Ratio of interest-earning assets to
interest-bearing liabilities .........
- ---------------
(1) Short-term investments include FHLB overnight deposits, securities
purchased under agreements to resell, federal funds sold and certificates
of deposit.
5
RATE/VOLUME ANALYSIS. The following table presents, for the periods
indicated, the changes in interest income and the changes in interest expense
attributable to the changes in interest rates and the changes in the volume of
interest-earning assets and interest-bearing liabilities. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (i) changes in volume (change in volume
multiplied by prior year rate); (ii) changes in rate (change in rate multiplied
by prior year volume); (iii) changes in rate/volume (change in rate multiplied
by change in volume); and (iv) total changes.
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1997 V. 1996
------------------------------------------------
INCREASE (DECREASE)
DUE TO
------------------------------------------------
CHANGES CHANGES CHANGES TOTAL
IN IN IN INCREASE
VOLUME RATE RATE/VOLUME (DECREASE)
----------- --------- ------------- ------------
(DOLLARS IN THOUSANDS)
Interest income attributable to:
Loans ........................... $52,842 $ 53 $ 447 $53,342
Mortgage-backed securities and
collateralized mortgage
obligations ..................... 2,757 17 11 2,785
Short-term investments (1) ...... (780) 49 (15) (746)
Tax Certificates .................. 549 (335) (61) 153
Long-term investments and
FHLB stock ..................... 1,078 28 2 1,108
------- ------ -------- -------
Total interest-earning assets ... 56,446 (188) 384 56,642
------- ------ -------- -------
Interest expense attributable to:
NOW/Money Market .................. 1,365 35 61 1,461
Savings ........................... 3,415 131 169 3,715
Certificates of Deposit ............ 23,377 338 454 24,169
Trust preferred securities ......... -- -- 6,473 6,473
FHLB advances and other
borrowings ........................ 5,855 (233) (102) 5,520
------- ------ -------- -------
Total interest-bearing
liabilities ..................... 34,012 271 7,055 41,338
------- ------ -------- -------
Increase (decrease) in net interest
income ........................... $22,434 $ (459) $ (6,671) $15,304
======= ====== ======== =======
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1996 V. 1995
---------------------------------------------
INCREASE (DECREASE)
DUE TO
---------------------------------------------
CHANGES CHANGES CHANGES TOTAL
IN IN IN INCREASE
VOLUME RATE RATE/VOLUE (DECREASE)
---------- --------- ------------ -----------
Interest income attributable to:
Loans ........................... $ 8,689 $1,905 $548 $11,142
Mortgage-backed securities and
collateralized mortgage
obligations ..................... 242 (81) (4) 157
Short-term investments (1) ...... 1,088 (127) (93) 868
Tax Certificates .................. (210) 152 (11) (69)
Long-term investments and
FHLB stock ..................... 687 (33) (39) 615
------- ------ ------ -------
Total interest-earning assets ... 10,496 1,816 401 12,713
------- ------ ------ -------
Interest expense attributable to:
NOW/Money Market .................. (171) 88 (17) (100)
Savings ........................... 173 31 3 207
Certificates of Deposit ............ 1,946 785 104 2,835
Trust preferred securities ......... -- -- --
FHLB advances and other
borrowings ........................ 5,354 13 8 5,375
------- ------ ------ -------
Total interest-bearing
liabilities ..................... 7,302 917 98 8,317
------- ------ ------ -------
Increase (decrease) in net interest
income ........................... $ 3,194 $ 899 $303 $ 4,396
======= ====== ====== =======
- ---------------
(1) Short-term investments include FHLB overnight deposits, securities
purchased under agreements to resell, federal funds sold and certificates
of deposit.
6
LENDING ACTIVITIES
The Company focuses its lending activity on purchasing and originating
single-family residential mortgage loans. The Company's lending strategy also
includes expanding its commercial real estate, commercial business, and real
estate construction lending. The Company also currently offers consumer loans,
such as automobile loans and boat loans, primarily as an accommodation to
existing customers.
LOAN PORTFOLIO. The Company's loan portfolio primarily consists of
adjustable-rate mortgage loans ("ARMs") and, to a lesser extent, fixed-rate
mortgage loans secured by one-to-four family residential and commercial real
estate. As of September 30, 1997, the Company's loan portfolio totaled $1.8
billion, of which $1.6 billion or 88.3 % consisted of one-to-four family
residential first mortgages. At the present time, the Company's residential
real estate loans are primarily "conventional" loans not insured by the Federal
Housing Administration (the "FHA") or guaranteed by the Veterans Administration
(the "VA"). The Company is, however, approved to originate FHA and VA loans. As
of September 30, 1997, the remainder of the Company's loan portfolio consisted
of $130.2 million of commercial real estate loans (7.4 % of total loans);
five-or-more units residential real estate loans of $32.2 million (1.8 % of
total loans, net); $6.0 million of second mortgage loans (.3 % of total loans,
net); $1.7 million of consumer loans (.1% of total loans, net); $10.9 million
of commercial business loans (.6 % of total loans, net); and $15.5 million of
other loans (.9% of total loans, net).
At September 30, 1997, the Company's loan portfolio included $93.9 million
of residential mortgage loans to non-resident aliens. See "Residential Mortgage
Loan Purchases and Originations" for additional information on the Company's
loans to non-resident aliens.
Set forth below is a table showing the Company's loan origination,
purchase and sale activity for the periods indicated.
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Total loans receivable, net, at beginning of period (1) ...... $ 646,385 $ 453,350 $ 413,287
Loans originated:
Residential real estate .................................... 159,533 65,954 54,438
Commercial business and consumer ........................... 18,804 16,705 7,556
---------- --------- ---------
Total loans originated .................................... 178,337 82,659 61,994
Loans acquired in Suncoast/Bank of Florida mergers (2) ...... 341,394 8,116 --
Loans purchased (3) .......................................... 913,653 242,099 76,081
Loans sold ................................................... (39,934) (4,356) (2,449)
Principal repayments and amortization of discounts
and premiums ................................................ (271,212) (133,836) (93,787)
Loans charged off ............................................. (604) (493) (594)
Transfers to real estate owned, net ........................... (2,296) (1,154) (1,182)
---------- --------- ---------
Total loans receivable, net, at end of period(1) ............ $1,765,723 $ 646,385 $ 453,350
========== ========= =========
- ----------------
(1) Includes loans held for sale.
(2) Loans acquired in the Suncoast merger included $230.7 million of
one-to-four family residential real estate loans, $95.8 million of
commercial real estate loans and $14.9 million of other types of loans.
(3) All loans purchased are one-to-four family residential real estate loans
except for the purchase of $32.0 million of commercial real estate loans
in fiscal 1996.
7
The following table sets forth certain information with respect to the
composition of the Company's loan portfolio, including mortgage loans held for
sale, as of the dates indicated.
AS OF SEPTEMBER 30,
-----------------------------------------------
1997 1996
------------------------ ----------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
First mortgage loans:
One-to four-family
residential loans ...... $1,559,823 88.3% $568,203 87.9%
Five or more units
residential loans ...... 32,163 1.8 12,559 2.0
Commercial ............... 130,197 7.4 49,318 7.6
Construction ............ 7,477 .4 -- --
Land ..................... 7,997 .5 2,687 .4
Second mortgages loans . 5,992 .3 2,748 .4
---------- ----- -------- -----
Total first
and second
mortgage loans ......... 1,743,649 98.7 635,515 98.3
---------- ----- -------- -----
Consumer loans ............ 1,748 .1 2,687 .4
Commercial business
loans ..................... 10,890 .6 5,822 .9
---------- ----- -------- -----
Total loans
receivable ............ 1,756,287 99.4 643,985 99.6
---------- ----- -------- -----
Deferred loan fees,
premiums and
(discounts) ............... 13,129 .8 4,558 .7
Allowance for loan losses (3,693) ( .2) (2,158) ( .3)
---------- ----- -------- -----
Loans receivable,
net ..................... $1,765,723 100.0% $646,385 100.0%
========== ===== ======== =====
1995 1994 1993
---------------------- ---------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ --------- ------------ --------- ------------ ----------
First mortgage loans:
One-to four-family
residential loans ...... $432,472 95.4% $393,933 95.3% $298,342 96.1%
Five or more units
residential loans ...... 1,124 0.2 2,164 0.5 705 0.2
Commercial ............... 10,223 2.3 4,469 1.1 748 0.2
Construction ............ 200 0.1 -- -- 2,248 0.7
Land ..................... 450 0.1 1,095 0.3 1,099 0.4
Second mortgages loans . 2,412 0.5 2,616 0.6 623 0.2
-------- ----- -------- ----- -------- -----
Total first
and second
mortgage loans ......... 446,881 98.6 404,277 97.8 303,765 97.8
-------- ----- -------- ----- -------- -----
Consumer loans ............ 920 0.2 2,336 0.6 2,786 0.9
Commercial business
loans ..................... 3,632 0.8 4,732 1.1 3,665 1.2
-------- ----- -------- ----- -------- -----
Total loans
receivable ............ 451,433 99.6 411,345 99.5 310,216 99.9
-------- ----- -------- ----- -------- -----
Deferred loan fees,
premiums and
(discounts) ............... 3,386 0.7 2,783 0.7 1,409 0.5
Allowance for loan losses (1,469) ( 0.3) (841) ( 0.2) (1,184) ( 0.4)
-------- ----- -------- ----- -------- -----
Loans receivable,
net ..................... $453,350 100.0% $413,287 100.0% $310,441 100.0%
======== ===== ======== ===== ======== =====
The following table sets forth, as of September 30, 1997, the amount of
loans (including mortgage loans held for sale) by category and expected
principal repayments by year.
OUTSTANDING AT
SEPTEMBER 30, 1997 1998 1999
-------------------- ---------- ----------
(DOLLARS IN THOUSANDS)
First mortgage loans:
One-to-four family residential $1,559,823 $343,918 $257,389
Five-or-more units residential . 32,163 4,312 3,751
Commercial ........................ 130,197 68,154 19,612
Construction ..................... 7,477 5,301 1,394
Land .............................. 7,997 5,571 2,239
Second mortgage loans ............... 5,992 1,315 1,122
---------- -------- --------
Total first and second mortgage
loans ........................... 1,743,649 428,571 285,507
---------- -------- --------
Consumer loans ..................... 1,748 1,043 705
Commercial business loans ......... 10,890 7,723 3,167
---------- -------- --------
Total loans ..................... $1,756,287 $437,337 $289,379
========== ======== ========
2002- 2004- 2008 AND
2000 2001 2003 2007 THEREAFTER
---------- ---------- ---------- ---------- -----------
First mortgage loans:
One-to-four family residential $198,224 $153,567 $213,382 $216,351 $176,992
Five-or-more units residential . 6,674 2,399 3,894 11,133 --
Commercial ........................ 11,239 11,239 9,978 9,975 --
Construction ..................... 764 18 -- -- --
Land .............................. 95 92 -- -- --
Second mortgage loans ............... 956 812 1,265 522 --
-------- -------- -------- -------- ---------
Total first and second mortgage
loans ........................... 217,952 168,127 228,519 237,981 176,992
-------- -------- -------- -------- ---------
Consumer loans ..................... -- -- -- -- --
Commercial business loans ......... -- -- -- -- --
-------- -------- -------- -------- ---------
Total loans ..................... $217,952 $168,127 $228,519 $237,981 $176,992
======== ======== ======== ======== =========
Applicable regulations permit the Company to engage in various categories
of secured and unsecured commercial and consumer lending, in addition to
residential real estate financing, subject to limitations on the percentage of
total assets attributable to certain categories of loans. An additional
limitation imposed by regulation requires that certain types of loans only be
made in aggregate amounts that do not exceed specified percentages of the
institution's capital. As of September 30, 1997, 33.7% of the Company's gross
loans receivable (27.8% of total assets) were secured by properties located in
Florida and 13.8 % of gross loans receivable (11.4% of total assets) were
secured by properties located in California. Because of this concentration,
regional economic circumstances in those states could affect the level of the
Company's non-performing loans.
8
The following table sets forth, as of September 30, 1997 the distribution
of the amount of the Company's loans (including mortgage loans held for sale)
by state.
OUTSTANDING ON
STATE SEPTEMBER 30, 1997
- ------------------------------------- -------------------
(IN THOUSANDS)
Florida(l) ..................... $ 596,327
California ..................... 243,722
Illinois ........................ 95,141
Michigan ........................ 90,447
Colorado ........................ 66,069
Massachusetts .................. 61,652
Virginia ........................ 59,046
Maryland ........................ 49,529
New Jersey ..................... 48,182
Texas ........................... 39,678
Ohio ........................... 36,801
New York ........................ 34,569
Arizona ........................ 34,470
Georgia ........................ 34,273
Connecticut ..................... 33,096
Pennsylvania ..................... 28,928
Washington ..................... 27,613
North Carolina .................. 17,146
Missouri ........................ 15,677
Minnesota ........................ 12,472
Utah ........................... 11,239
Tennessee ........................ 10,822
Oregon ........................... 10,054
Nevada ........................... 9,465
South Carolina .................. 8,839
Kentucky ........................ 7,261
Indiana ........................ 7,204
Washington, DC .................. 6,873
Kansas ........................... 6,073
Wisconsin ........................ 4,913
Alabama ........................ 4,867
Oklahoma ........................ 4,273
New Mexico ..................... 3,502
Rhode Island ..................... 2,981
Louisiana ........................ 2,637
Idaho ........................... 2,612
Hawaii ........................... 2,036
Maine ........................... 1,664
Alaska ........................... 1,654
Arkansas ........................ 1,606
Mississippi ..................... 1,505
Iowa ........................... 1,216
New Hampshire .................. 1,211
Others(2) ........................ 3,912
Not secured by real estate ...... 13,030
----------
Total ........................... $1,756,287
==========
- ----------------
(1) Does not include $49.3 million of tax certificates representing liens
secured by properties in Florida.
(2) Less than $1 million in any one state.
9
RESIDENTIAL MORTGAGE LOAN PURCHASES AND ORIGINATIONS. The Company's
lending primarily involves purchasing in the secondary mortgage market and
originating loans secured by first mortgages on real estate improved with
single-family dwellings. The Company's first mortgage loans purchased or
originated are generally repayable over 15 or 30 years. Additionally, the
Company offers second mortgage residential loans with maturities ranging from
five to 15 years. Residential loans typically remain outstanding for shorter
periods than their contractual maturities because borrowers prepay the loans in
full upon sale of the mortgaged property or upon refinancing of the original
loan. The Company currently originates and purchases fixed-rate and
adjustable-rate first mortgage loans secured by owner-occupied residences with
15-year term or 30-year term amortization, and second mortgage loans with
15-year term amortization or 30-year term amortization with a balloon payment
after five years.
The Company's ARMs generally have interest rates that adjust monthly,
semi-annually or annually at a margin over the weekly average yield on U.S.
Treasury securities adjusted to a constant maturity of one year published by
the Federal Reserve or the Eleventh District Cost of Funds Index ("COFI"). The
maximum interest rate adjustment of the Company's ARMs is generally 1%
semi-annually and 6% over the life of the loan, above or below the initial rate
on the loan for semi-annual adjustables, or 2% annually and 6% over the life of
the loan, above or below the initial rate on the loan for annual adjustables.
The Company's COFI loans with monthly adjustable interest rates generally
provide for a 7.5% cap on monthly payment increases from one annual payment
adjustment to the next, except at the end of five years, when monthly payments
may be adjusted by more than the payment increase cap in order to provide for
the complete amortization by maturity. Because of the payment cap and the
different times at which interest rate adjustments and payment adjustments are
made on these loans, monthly payments on certain loans may not be sufficient to
pay the interest accruing on the loan. The amount of any shortage is added to
the principal balance of the loan to be repaid through future monthly payments
to the Company ("negative amortization"). If the loan-to-value ratio is high,
negative amortization could significantly increase the risk associated with the
loan; the Company's management, however, believes that this risk is mitigated
due to the relative stability of the index used and to conservative
underwriting policies.
The Company generally purchases or originates loans with "teaser" rates
that are below market rates during an initial period after the loan is
originated. For loans with teaser rates, the borrower's ability to repay is
determined upon fully indexed rates. The Company underwrites these loans
pursuant to its underwriting guidelines prior to purchase. As of September 30,
1997 there were approximately $538.7 million of loans with teaser rates.
Applicable regulations permit the Company to lend up to 100% of the
appraised value of the real property securing a loan ("loan-to-value ratio").
The Company, however, generally does not make or acquire loans with
loan-to-value ratios that exceed 80% at origination. When terms are favorable,
the Company may purchase or originate single-family mortgage loans with
loan-to-value ratios between 80% and 95%. In most of these cases, the Company
will, as a matter of policy, require the borrower to obtain private mortgage
insurance which insures that portion of the loan exceeding the 80% loan-to-value
ratio, thereby reducing the risk to no more than 80% of appraised value.
The Company generally applies the same underwriting criteria to
residential mortgage loans purchased or originated. In its loan purchases, the
Company generally reserves the right to reject particular loans from a loan
package being purchased and does reject loans in a package that do not meet its
underwriting criteria. In determining whether to purchase or originate a loan,
the Company assesses both the borrower's ability to repay the loan and the
adequacy of the proposed collateral. On originations, the Company obtains
appraisals of the property securing the loan. On purchases, the Company reviews
the appraisal obtained by the loan seller or originator and arranges for an
updated review appraisal before purchasing the loan. On purchases and
originations, the Company reviews information concerning the income, financial
condition, employment and credit history of the applicant. On purchases, the
Company generally obtains a credit report on the borrower separate from that
provided by the loan seller.
10
The Company has adopted written, non-discriminatory underwriting standards
for use in the underwriting and review of every loan considered for origination
or purchase. These underwriting standards are reviewed and approved annually by
the Company's Board of Directors. The Company's underwriting standards for
residential mortgage loans generally conform (except as to principal balance
and with regard to certain loans discussed below, as to the borrower's
citizenship and related factors) to standards established by Fannie Mae
("FNMA") and the Federal Home Loan Mortgage Corporation (the "FHLMC"). A loan
application is obtained or reviewed by the Company's underwriters to determine
the borrower's ability to repay, and confirmation of the more significant
information is obtained through the use of credit reports, financial
statements, and employment and other verifications.
The Company generally uses appraisals to determine the value of collateral
for all loans it originates. When originating a real estate mortgage loan, the
Company obtains a new appraisal of the property from an independent third party
to determine the adequacy of the collateral, and such appraisal is reviewed by
one of the underwriters. With respect to a substantial percentage of loans
purchased, the collateral value is determined by reference to a review
appraisal. Otherwise, the collateral value is determined by reference to the
documentation contained in the original file. Borrowers are required to obtain
casualty insurance and, if applicable, flood insurance in amounts at least
equal to the outstanding loan balance or the maximum amount allowed by law.
The Company also requires that a survey be conducted and title insurance
be obtained, insuring the priority of its mortgage lien. Pursuant to its
underwriting standards, the Company generally requires private mortgage
insurance policies on newly originated mortgage loans with loan-to-value ratios
greater than 80%. All loans are reviewed by the Company's underwriters to
ensure that its guidelines are met or that waivers are obtained in limited
situations where offsetting factors exist.
With regard to loan purchases, a legal review of every loan file is
conducted to determine the adequacy of the legal documentation. The Company
receives various representations and warranties from the sellers of the loans
regarding the quality and characteristics of the loans.
At September 30, 1997, approximately $93.9 million, or 5.3%, of the
Company's gross loans receivable are first mortgage loans to non-resident
aliens secured by single-family residences located in Florida. These loans are
purchased and originated by the Company in a manner similar to that described
above for other residential loans. Loans to non-resident aliens generally
afford the Company an opportunity to receive rates of interest higher than
those available from other single-family residential loans. Nevertheless, such
loans generally involve a greater degree of risk than other single-family
residential mortgage loans. The ability to obtain access to the borrower is
more limited for non-resident aliens, as is the ability to attach or verify
assets located in foreign countries. The Company has attempted to minimize
these risks through its underwriting standards for such loans (including
generally lower loan-to-value ratios and qualification based on verifiable
assets located in the United States).
The Company has also established a correspondent mortgage banking
operation for the origination of single-family residential mortgage loans in
its market area. This correspondent operation consists of a network of mortgage
brokers and lenders in South Florida that generate mortgage loans for the
Company. Originations in the correspondent program, together with branch
lending, reached $159.5 million in fiscal 1997 and $66.0 million for the year
ended September 30, 1996.
Beginning in the Company's fiscal 1997 fourth quarter, management began a
program to sell approximately 50% to 75% of the Company's internally generated
residential loans. In the fourth quarter, a package of residential loans
totalling $30.1 million was sold for a gain of $523,000. In addition, as part
of starting this program, the Company reclassified $93.5 million of its
internally generated portfolio of residential loans as available for sale in
the fourth quarter. It is currently the Company's intention that future loans
classified as available for sale will be identified and so classified at time
of origination. Loans held for sale as of September 30, 1997 were $104.3
million.
11
COMMERCIAL REAL ESTATE LENDING. The Company's commercial real estate
lending division originates or purchases multi-family and commercial real
estate loans from approximately $250,000 to $5.0 million. The Company's
strategy is to promote commercial lending together with private banking, as
both areas seek to develop long-term relationships with select businesses, real
estate borrowers, and professionals. At September 30, 1997, the Company had
$130.2 million of commercial real estate loans, representing a total of 7.4% of
the Company's loan portfolio before net items. The Company's commercial real
estate loan portfolio includes loans secured by apartment buildings, office
buildings, warehouses, retail stores and other properties, which are located in
the Company's primary market area. Commercial real estate loans generally are
originated in amounts up to 75% of the appraised value of the property securing
the loan. In determining whether to originate or purchase multi-family or
commercial real estate loans, the Company also considers such factors as the
financial condition of the borrower and the debt service coverage of the
property. Commercial real estate loans are made at both fixed and adjustable
interest rates for terms of up to 10 years.
REAL ESTATE CONSTRUCTION LENDING. The Company makes real estate
construction loans to individuals for the construction of their residences, as
well as to builders and real estate developers for the construction of
one-to-four-family residences and commercial and multi-family real estate. At
September 30, 1997, the Company had $7.5 million of construction loans
representing a total of .4% of the Company's loan portfolio before net items.
COMMERCIAL BUSINESS LENDING. Commercial business loans totaled $10.9
million as of September 30, 1997 representing .6 % of total loans. In its
commercial business loan underwriting, the Company evaluates the value of the
collateral securing the loan and assesses the borrower's creditworthiness and
ability to repay. While commercial business loans generally are made for
shorter terms and at higher yields than one-to-four-family residential loans,
such loans generally involve a higher level of risk than one-to-four-family
residential loans because the risk of borrower default is greater and the
collateral may be more difficult to liquidate and more likely to decline in
value.
LOAN PORTFOLIO QUALITY. Federal regulations require a savings institution
to review its assets on a regular basis and, if appropriate, to classify assets
as "substandard," "doubtful," or "loss" depending on the likelihood of loss.
General allowances for loan losses are required to be established for assets
classified as substandard or doubtful. For assets classified as loss, the
institution must either establish specific allowances equal to the amount
classified as a loss or charge off such amount. Assets that do not require
classification as substandard but that possess credit deficiencies or potential
weaknesses deserving management's close attention are required to be designated
as "special mention." The deputy director of the appropriate OTS regional
office may approve, disapprove or modify any classifications of assets and any
allowance for loan losses established.
Additionally, under standard banking practices, an institution's asset
quality is also measured by the level of non-performing loans in the
institution's portfolio. Non-performing loans consist of (i) non-accrual loans;
(ii) loans that are more than 90 days contractually past due as to interest or
principal but that are well-secured and in the process of collection or renewal
in the normal course of business; and (iii) loans that have been renegotiated
to provide a deferral of interest or principal because of a deterioration in
the financial condition of the borrower. The Company issues delinquency notices
to borrowers when loans are 30 or more days past due. The Company places
conventional mortgage loans on non-accrual status when more than 90 days past
due, unless the loan is fully secured and in the process of collection. When a
loan is placed on non-accrual status, the Company reverses all accrued and
uncollected interest. The Company also begins appropriate legal procedures to
obtain repayment of the loan or otherwise satisfy the obligation.
12
As of September 30, 1997, the Company had $14.6 million in substandard
assets of which $14.3 million are included in non-performing assets.
Substandard assets consisted of the following:
AS OF SEPTEMBER 30, 1997
-------------------------
(IN THOUSANDS)
One-to-four family residential loans ...... $10,087
Commercial real estate ..................... 2,517
Consumer and business loans ............... 150
REO ....................................... 611
Tax certificates ........................... 1,247
-------
Total Substandard Assets .................. $14,612
=======
In addition, $336,000 of tax certificates, for which reserves have been
established, were classified as loss as of September 30, 1997.
The following table sets forth information regarding the Company's
allowance for loan losses for the periods indicated:
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- --------- ----------- ---------
(IN THOUSANDS)
Allowance for loan losses, balance (at beginning of
period) ................................................... $2,158 $1,469 $ 841 $ 1,184 $ 265
Provisions (credit) for loan losses ........................ 1,295 (120) 1,221 1,187 1,052
Allowance from Suncoast/Bank of Florida ..................... 775 183 -- -- --
Allocation from discounts on loans purchased ............... -- -- -- -- 90
Loans charged off:
One-to-four family residential loans ........................ (604) (493) (535) (1,582) (223)
Commercial and other ....................................... -- -- (59) -- --
------ ------ ------ -------- ------
Total (604) (493) (594) (1,582) (223)
------ ------ ------ -------- ------
Recoveries:
One-to-four family residential loans ........................ 48 1,119 1 52 --
Commercial and other ....................................... 21 -- -- -- --
------ ------ ------ -------- ------
Total 69 1,119 1 52 --
------ ------ ------ -------- ------
Allowance for loan losses, balance (at end of period) ...... $3,693 $2,158 $1,469 $ 841 $1,184
====== ====== ====== ======== ======
Historically, recoveries of charged off loans have been minimal since
charged off loans have been primarily one-to-four family residential loans and
typically the only substantial asset available to the Company is the real
estate securing the loan which is acquired through foreclosure and sold.
However, in its fiscal year ended September 30, 1996, the Company received a
recovery of approximately $1.0 million as settlement of litigation the Company
initiated against a seller of residential mortgage loans. The Company is not
aware of any significant liability related to REO or loans that may be
foreclosed.
13
The following table sets forth the allocation of general allowance for
loan losses by loan category for the periods indicated.
AS OF SEPTEMBER 30,
-----------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -----------------------
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ------------- -------- ------------- -------- ------------
(DOLLARS IN THOUSANDS)
Balance at end of period
applicable to:
One-to-four family residential
mortgages ........................... $1,873 89.2% $1,381 88.6% $1,207 95.9%
Commercial and other loans ............ 1,787 10.8 739 11.4% 168 4.1%
Unallocated ........................... 33 N/A 38 N/A 94 N/A
------ ---- ------ ---- ------ ----
Total allowances for loan losses ...... $3,693 100.0% $2,158 100.0% $1,469 100.0%
====== ===== ====== ===== ====== =====
For additional information regarding the Company's allowance for loan
losses and the credit quality of the Company's assets, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Description of Financial Condition Changes for the Years Ended
September 30, 1997, 1996, and 1995--Credit Quality."
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The Company maintains an investment portfolio consisting primarily of
federal agency securities, FHLB overnight deposits, securities purchased under
agreements to resell and tax certificates. Federal regulations limit the
instruments in which the Company may invest its funds. The Company's current
investment policy permits purchases only of investments (with the exception of
tax certificates) rated in one of the three highest grades by a nationally
recognized rating agency and does not permit purchases of securities of
non-investment grade quality (such as so-called "junk bonds").
The Company's portfolio also includes tax certificates issued by various
counties in the State of Florida. Tax certificates represent tax obligations
that are auctioned by county taxing authorities on an annual basis in order to
collect delinquent real estate taxes. Although tax certificates have no stated
maturity, the certificate holder has the right to collect the delinquent tax
amount, plus interest, and can file for a tax deed if the delinquent tax amount
is unpaid at the end of two years. Tax certificates have a claim superior to
most other liens. If the holder does not file for deed within seven years, the
certificate becomes null and void. The Company has adopted detailed policies
with regard to its investment in tax certificates, which specify due diligence
procedures, purchasing procedures (including parameters for the location, type
and size of tax certificates acceptable for purchase) and procedures for
managing the portfolio after acquisition.
Mortgage-backed securities are primarily acquired for their liquidity,
yield, and credit characteristics. Such securities may be used as collateral
for borrowing or pledged as collateral for certain deposits, including public
funds deposits. Mortgage-backed securities acquired include fixed and
adjustable rate agency securities (GNMA, FNMA and FHLMC), private issue
securities and collateralized mortgage obligations.
14
The following table sets forth information regarding the Company's
investments and mortgage-backed securities as of the dates indicated. Amounts
shown are historical amortized cost. For additional information regarding the
Company's investments and mortgage-backed securities, including the carrying
values and approximate market values of such securities, see Notes 1 and 5 of
the Notes to Consolidated Financial Statements.
AS OF SEPTEMBER 30,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Federal funds sold ............... $ -- $ 400 $ 400
Federal agency securities ......... 23,283 4,985 4,675
FHLB overnight deposits ............ 79,413 28,253 31,813
Tax certificates .................. 49,283 40,088 39,544
Mortgage-backed securities ......... 120,271 70,165 52,998
Other .............................. 1,377 1,711 11
--------- --------- ---------
Total investment securities ...... $ 273,627 $ 145,602 $ 129,441
========= ========= =========
Weighted average yield ............ 6.91% 7.09% 7.43%
========= ========= =========
The following table sets forth information regarding the maturities of the
Company's investments as of September 30, 1997. Amounts shown are book values.
PERIODS TO MATURITY
FROM SEPTEMBER 30, 1997
---------------------------------------------------------
AS OF WITHIN 1 THROUGH 5 THROUGH OVER
SEPTEMBER 30, 1997 1 YEAR 5 YEARS 10 YEARS 10 YEARS
------------------- -------------- ----------- ----------- ------------
(IN THOUSANDS)
Federal agency securities ...... $ 23,283 $ -- $ 23,283 $ -- $ --
FHLB overnight deposits ......... 79,413 79,413 -- -- --
Mortgage-backed securities ...... 120,271 31,071 46,488 19,202 23,510
Tax certificates (1) ............ 49,283 49,283 -- -- --
Other ........................... 1,377 254 1,113 10 --
--------- ---------- -------- -------- --------
Total ........................... $ 273,627 $ 160,021 $ 70,884 $ 19,212 $ 23,510
========= ========== ======== ======== ========
Weighted average yield ......... 6.91% 6.97% 6.70% 7.06% 7.06%
========= ========== ======== ======== ========
- ----------------
(1) Maturities are based on historical experience.
MORTGAGE LOAN SERVICING
Prior to November 1996, the Company primarily serviced mortgage loans only
for its portfolio. With the acquisition of Suncoast on November 15, 1996, the
Company acquired a servicing portfolio consisting of 19,487 loans owned by
outside investors.
Servicing agreements generally provide for loan servicing fees ranging
from 0.25% to 0.50% per annum of the declining principal amount of the loans,
plus any late charges or other ancillary fees. Loan servicing fees for loans
serviced under mortgage-backed securities programs are either subject to
negotiation with the sponsoring agency or in certain instances set by the
sponsoring agency. Servicing fees for loans sold to private investors are
determined by agreement with the investor. Income from servicing is calculated
based upon the contractual servicing fee, net of amortization of the carrying
value of the loan servicing rights.
The Company is subject to certain costs and risks related to servicing
delinquent loans. Servicing agreements relating to the mortgage-backed security
programs of FNMA and FHLMC require the servicer to advance funds to make
scheduled payments of interest, taxes and insurance, and in some instances
principal, if such payments have not been received from the borrowers. However,
the
15
Company recovers substantially all of the advanced funds upon cure of default
by the borrower, or through foreclosure proceedings and claims against agencies
or companies that have insured or guaranteed the loans. Certain servicing
agreements for loans sold directly to other investors require the Company to
remit funds to the loan purchaser only upon receipt of payments from the
borrower and, accordingly, the investor bears the risk of loss. The Company,
however, is subject to the risk that declines in the market rates of interest
for mortgage loans or other economic conditions will result in a revaluation of
its servicing assets as borrowers refinance or otherwise prepay higher interest
rate loans.
The following table sets forth, by category of investor, the composition
of the acquired servicing portfolios of the Company as of the dates indicated:
NOVEMBER 15, 1996
SEPTEMBER 30, 1997 (SUNCOAST ACQUISITION)
-------------------------------- ----------------------------------
# OF BOOK # OF BOOK
LOANS PRINCIPAL VALUE LOANS PRINCIPAL VALUE
------- ----------- -------- -------- ------------ --------
(IN THOUSANDS)
GNMA ........................ -- $ -- $ -- 5,791 $ 299,183 $ 4,952
FNMA ........................ 1,297 102,805 1,514 1,462 117,856 1,690
FHLMC ..................... 2,903 246,557 2,318 3,425 295,392 2,758
Private investors ......... 472 68,906 951 337 50,741 626
FDIC/RTC-subservicing ...... -- -- -- 7,087 150,317 --
Private subservicing ...... 320 14,275 -- 1,385 190,350 --
----- --------- ------ ----- ---------- -------
4,992 $432,543 $4,783 19,487 $1,103,839 $10,026
===== ========= ====== ====== ========== =======
In the second quarter of 1997, the GNMA mortgage servicing portfolio was
sold at its fair market value recognized in purchase accounting. As of August
31, 1997, the Company transferred the FDIC/ RTC subservicing portfolios to a
third party servicer. These actions were taken to increase the Company's
profitability from mortgage loan servicing.
SOURCES OF FUNDS
The Company's primary sources of funds for its investment and lending
activities are customer deposits, loan repayments, funds from operations, the
Company's capital (including trust preferred securities) and FHLB advances.
DEPOSITS. The Company offers a full variety of deposit accounts ranging
from passbook accounts to certificates of deposit with maturities of up to five
years. The Company also offers transaction accounts, which include commercial
checking accounts, negotiable order of withdrawal ("NOW") accounts, super NOW
accounts and money market deposit accounts. The rates paid on deposits are
established periodically by management based on the Company's need for funds
and the rates being offered by the Company's competitors with the goal of
remaining competitive without offering the highest rates in the market area.
The Company has not utilized brokered deposits.
The Company has placed increasing reliance on passbook accounts, money
market accounts, certificates of deposit and other savings alternatives that
are more responsive to market conditions than long-term, fixed-rate
certificates. While market-sensitive savings instruments permit the Company to
reduce its cost of funds during periods of declining interest rates, such
savings instruments also increase the Company's vulnerability to periods of
high interest rates. There are no regulatory interest rate ceilings on the
Company's accounts.
16
The following table sets forth information concerning the Company's
deposits by account type and the weighted average nominal rates at which
interest is paid thereon as of the dates indicated:
AS OF SEPTEMBER 30,
-------------------------------------------------------------------------
1997 1996 1995
------------------------- ----------------------- -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------ ---------- ---------- ---------- ---------- ------
(DOLLARS IN THOUSANDS)
Passbook accounts:
Regular .................................... $ 160,522 4.66% $ 73,741 4.44% $ 50,327 3.04%
Holiday club .............................. 35 2.00 39 2.00 46 2.00
---------- -------- --------
Total passbook accounts .................. 160,557 73,780 50,373
---------- -------- --------
Checking:
Insured money market ........................ 20,325 4.00 16,556 3.87 7,733 2.68
NOW and non-interest-bearing accounts ...... 78,907 2.28 24,566 1.49 18,157 2.17
---------- -------- --------
Total transaction accounts ............... 99,232 41,122 25,890
---------- -------- --------
Total passbook and checking accounts ...... 259,789 114,902 76,263
---------- -------- --------
Certificates:
30-89-day certificates of deposit ......... -- -- -- -- 91 2.73
3-5-month certificates of deposit ......... 18,674 4.94 7,114 4.67 1,465 4.78
6-8-month certificates of deposit ......... 439,091 5.67 159,850 5.40 93,684 5.65
9-11-month certificates of deposit ......... 15,721 5.66 20,279 5.45 5,654 5.55
12-17-month certificates of deposit ......... 307,305 5.73 124,637 5.49 79,637 5.90
18-23-month certificates of deposit ......... 20,410 5.80 12,375 5.79 12,382 5.37
24-29-month certificates of deposit ......... 58,279 5.84 42,875 5.94 18,593 5.57
30-35-month certificates of deposit ......... 12,517 5.85 1,774 5.57 2,868 4.99
36-60-month certificates of deposit ......... 64,106 6.07 22,300 5.93 19,437 5.81
---------- -------- --------
Total certificates ........................ 936,103 391,204 233,811
---------- -------- --------
Total .................................... $1,195,892 $506,106 $310,074
========== ======== ========
Weighted average rate .................. 5.32% 5.11% 4.99%
The following table sets forth information by various rate categories
regarding the amounts of the Company's certificate accounts (under $100,000) as
of September 30, 1997 that mature during the periods indicated:
PERIODS TO MATURITY
FROM SEPTEMBER 30, 1997
-----------------------------------------------
AS OF WITHIN 1 TO 2 TO MORE THAN
SEPTEMBER 30, 1997 1 YEAR 2 YEARS 3 YEARS 3 YEARS
------------------- ---------- --------- --------- ----------
(IN THOUSANDS)
Certificate accounts:
3.00% to 3.99% ......... $ 173 $ 173 $ -- $ -- $ --
4.00% to 4.99% ......... 17,414 17,144 270 -- --
5.00% to 5.99% ......... 706,619 637,978 59,921 5,599 3,121
6.00% to 6.99% ......... 54,220 15,892 8,793 3,478 26,057
7.00% to 7.99% ......... 814 10 47 706 51
-------- -------- ------- ------- --------
Total certificate accounts
(under $100,000) ...... $779,240 $671,197 $69,031 $9,783 $29,229
======== ======== ======= ======= ========
17
The following table sets forth information by various rate categories
regarding the amounts of the Company's jumbo ($100,000 and over) certificate
accounts as of September 30, 1997 that mature during the periods indicated:
PERIODS TO MATURITY
FROM SEPTEMBER 30, 1997
-----------------------------------------------
AS OF WITHIN 1 TO 2 TO MORE THAN
SEPTEMBER 30, 1997 1 YEAR 2 YEAR 3 YEARS 3 YEARS
------------------- ---------- --------- --------- ----------
(IN THOUSANDS)
Jumbo certificate accounts:
4.00% to 4.99% ........................ $ 3,317 $ 3,317 $ -- $ -- $ --
5.00% to 5.99% ........................ 135,714 125,217 9,996 401 100
6.00% to 6.99% ........................ 17,174 9,563 2,785 560 4,266
7.00% to 7.99% ........................ 658 150 100 408 --
-------- -------- ------- ------- ------
Total Jumbo certificate amounts ...... $156,863 $138,247 $12,881 $1,369 $4,366
======== ======== ======= ======= ======
Of the Company's total deposits at September 30, 1997, 1996, and 1995,
13.1%, 10.5%, and 8.6%, respectively, were deposits of $100,000 or more issued
to the public. Although jumbo certificates of deposit are generally more rate
sensitive than smaller size deposits, management believes that the Company will
retain these deposits.
In the 1997 and 1996 fiscal years, the Company opened four new branch
offices and acquired six branch offices (one of which was closed) from
Suncoast. In fiscal 1998, the Company intends to open as many as eight new
branch offices including two that opened in the first fiscal quarter. These
additional branches are part of the Company's rapid growth as it takes
advantage of the bank consolidation in South Florida.
BORROWINGS. When the Company's primary sources of funds are not sufficient
to meet deposit outflows, loan originations and purchases and other cash
requirements, the Company may borrow funds from the FHLB of Atlanta and from
other sources. The FHLB system acts as an additional source of funding for
savings institutions. In addition, the Company uses subordinated notes and
securities sold under agreements to repurchase in order to increase available
funds.
FHLB borrowings, known as "advances," are made on a secured basis, and the
terms and rates charged for FHLB advances vary in response to general economic
conditions. As a shareholder of the FHLB of Atlanta, the Bank is authorized to
apply for advances from this bank. A wide variety of borrowing plans are
offered by the FHLB of Atlanta, each with its own maturity and interest rate.
The FHLB of Atlanta will consider various factors, including an institution's
regulatory capital position, net income, quality and composition of assets,
lending policies and practices, and level of current borrowings from all
sources, in determining the amount of credit to extend to an institution. In
addition, an institution that fails to meet the qualified thrift lender test
may have restrictions imposed on its ability to obtain FHLB advances. The Bank
currently meets the qualified thrift lender test.
18
The following tables set forth information as to the Company's borrowings
as of the dates and for the periods indicated.
SEPTEMBER 30, 1997
-----------------------------------------------------------------------------
1997 1996 1995
----------------------- ---------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE WEIGHTED
BALANCE RATE BALANCE RATE BALANCE AVERAGE RATE
---------- ---------- ---------- --------- ---------- -------------
(DOLLARS IN THOUSANDS)
PERIOD END BALANCES:
FHLB advances(l) ............... $671,484 5.87% $237,000 5.73% $241,000 5.92%
Company Obligated Mandatorily
Redeemable Trust Preferred
Securities of Subsidiary Trusts
Holding Solely Junior
Subordinated Deferrable
Interest Debentures of
the Company .................. 116,000 10.17 -- -- -- --
Subordinated notes ............ -- -- 775 9.00 775 9.00
Securities sold under agreements
to repurchase(2) ............ 30,000 5.64 -- -- -- --
-------- ----- -------- ---- -------- ----
Total borrowings ............... $817,484 6.47% $237,775 5.74% $241,775 5.93%
======== ===== ======== ==== ======== ====
FOR THE YEAR ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ---------- ---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
AVERAGE BALANCES:
FHLB advances(l) .................. $325,580 5.77% $234,489 5.77% $136,706 5.86%
Company Obligated Mandatorily
Redeemable Trust Preferred
Securities of Subsidiary Trusts
Holding Solely Junior Subordinated
Deferrable Interest Debentures of
the Company ..................... 63,008 10.27 -- -- -- --
Subordinated notes ............... 704 10.53 775 9.00 775 9.00
Securities sold under agreements to
repurchase(2) .................. 8,828 5.73 -- -- 6,571 5.59
-------- ----- -------- ---- -------- ----
Total borrowings .................. $398,120 6.49% $235,264 5.78% $144,052 5.86%
======== ===== ======== ==== ======== ====
- ----------------
(1) The maximum amount of FHLB advances outstanding during the years ended
September 30, 1997, 1996 and 1995 was $671.5 million, $244.0 million and
$246.0 million, respectively.
(2) The maximum amount of securities sold under agreements to repurchase at any
month-end during the years ended September 30, 1997, 1996, and 1995 was
$30.0 million, $0.0 million and $33.6 million, respectively.
ACTIVITIES OF SUBSIDIARIES
T&D Properties of South Florida, Inc., a Florida corporation ("T&D"), is a
wholly owned operating subsidiary of the Bank that invests in tax certificates
and holds title to, maintains, manages and supervises the disposition of real
property acquired through tax deeds. T&D was established in 1991 for the
purpose of insulating the Bank from risk of liability concerning the
maintenance, management and disposition of real property.
19
Bay Holdings, Inc., a Florida corporation ("Bay Holdings"), is a wholly
owned operating subsidiary of the Bank that holds title to, maintains, manages
and supervises the disposition of real property acquired through foreclosure.
Bay Holdings was established in 1994 for the purpose of insulating the Bank
from risk of liability concerning maintenance, management and disposition of
real property.
BU Ventures, Inc., a Florida corporation, is a wholly owned operating
subsidiary of the Company organized in 1994 to assume from T&D the
responsibility for the maintenance, management and disposition of real property
acquired through tax deeds.
BankUnited Mortgage Corporation, a Florida corporation ("BMC"), is a
wholly owned operating subsidiary of the Company that services loans secured by
real property. BMC was established for this purpose in 1996, and commenced
operations in October 1997.
BankUnited Capital, BankUnited Capital II and BankUnited Capital III (the
"Trusts") are Delaware statutory business trusts wholly owned by the Company.
BankUnited Capital was formed in 1996, and BankUnited Capital II and BankUnited
Capital III were formed in 1997, for the purpose of issuing Trust Preferred
Securities and investing the proceeds therefrom in Junior Subordinated
Debentures issued by the Company. BankUnited Capital and BankUnited Capital II
are operating, but BankUnited Capital III has not yet issued any capital stock.
BUFC Financial Services, Incorporated, a Florida corporation, is a wholly
owned operating subsidiary of the Company organized in 1997 for the purpose of
selling annuities, insurance and securities products.
BankUnited Financial Services, Inc., a Florida corporation, is a wholly
owned operating subsidiary of the Company, organized in 1997 for the purpose of
brokering loans.
EMPLOYEES
At September 30, 1997, the Company had 246 full-time equivalent employees.
The Company's employees are not represented by a collective bargaining group,
and the Company considers its relations with its employees to be excellent. The
Company provides employee benefits customary in the savings industry, which
include group medical and life insurance, a 401(k) savings plan and paid
vacations. The Company also provides a stock bonus plan, a profit sharing plan
and the two stock option plans for certain officers, directors and employees.
REGULATION
RECENT LEGISLATIVE DEVELOPMENTS
In recent years, measures have been taken to reform the thrift and banking
industries and to strengthen the insurance funds for depository institutions.
The most significant of these measures for savings institutions was the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (the
"FIRREA"), which has had a major impact on the operation and regulation of
savings associations generally. In 1991, the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "FDICIA"), became law. Although the
FDICIA's primary purpose was to recapitalize the Bank Insurance Fund (the
"BIF") of the FDIC, which insures the deposits of commercial banks, the FDICIA
also affected the supervision and regulation of all federally insured
depository institutions, including federal savings banks such as the Bank. More
recent legislation has attempted to resolve the problems of the SAIF in meeting
its minimum required reserve ratio and the related concern facing SAIF-insured
institutions, such as the Bank, of paying significantly higher deposit
insurance premiums than BIF-insured institutions. The following discussion is a
summary of the significant provisions of the recent legislation affecting the
banking industry.
20
THE FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989.
The FIRREA, which was enacted in response to concerns regarding the soundness
of the thrift industry, brought about a significant regulatory restructuring,
limited savings institutions' business activities, and increased their
regulatory capital requirements. The FIRREA abolished the Federal Home Loan
Bank Board and the Federal Savings and Loan Insurance Corporation (the
"FSLIC"), and established the OTS as the primary federal regulator for savings
institutions. Deposits at the Bank are insured through the SAIF, a separate
fund managed by the FDIC for institutions whose deposits were formerly insured
by the FSLIC. Regulatory functions relating to deposit insurance are generally
exercised by the FDIC. The Resolution Trust Corporation (the "RTC") was created
under the FIRREA to manage conservatorships and receiverships of insolvent
thrifts, and was succeeded by the FDIC.
THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. The
FDICIA authorizes regulators to take prompt corrective action to solve the
problems of critically undercapitalized institutions. As a result, the banking
regulators are required to take certain supervisory actions against
undercapitalized institutions, the severity of which increases as an
institution's level of capitalization decreases. Pursuant to the FDICIA, the
federal banking agencies have established the levels at which an insured
institution is considered to be "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." See "--Savings Institution Regulations--Prompt Corrective
Action" below for a discussion of the applicable capital levels.
The FDICIA requires that the federal banking agencies revise their
risk-based capital requirements to include components for interest rate risk,
concentration of credit risk and the risk of non-traditional activities. See
"--Savings Institution Regulations--Regulatory Capital Requirements" below for
a description of the final rule adopted by the OTS that incorporates an
interest rate risk component in the risk-based capital requirement. Although
adopted, implementation of this rule has been postponed indefinitely.
In addition, the FDICIA requires each federal banking agency to establish
standards relating to internal controls, information systems, and internal
audit systems that are designed to assess the financial condition and
management of the institution; loan documentation; credit underwriting;
interest rate exposure; asset growth; and compensation, fees and benefits. The
FDICIA lowered the qualified thrift lender ("QTL") investment percentage
applicable to SAIF-insured institutions. See "--Savings Institution
Regulations--Qualified Thrift Lender Test" below. The FDICIA also provided that
a risk based assessment system for insured depository institutions must be
established before January 1, 1994. See "--Savings Institution
Regulations--Insurance of Accounts" below. These requirements have been
implemented. The FDICIA further requires annual on-site full examinations of
depository institutions, with certain exceptions, and annual reports on
institutions' financial and management controls.
THE RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994.
In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Interstate Branching Act") became law. Savings associations,
whose primary federal regulator is the OTS, generally are not directly affected
by the Interstate Branching Act except for a provision that allows an insured
savings association that was an affiliate of a bank on July 1, 1994, to act as
the bank's agent as though it were an insured bank affiliate of the bank.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier
I or core capital to risk-weighted assets ("Tier I risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier I risk-based capital ratios of less than 4% or
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
21
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio to
that designated reserve level, or such higher reserve ratio as is established
by the FDIC. The FDIC may also impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
For the first six months of 1995, the assessment schedule for members of
the BIF of the FDIC and SAIF members ranged from .23% to .31% of deposits. As
is the case with the SAIF, the FDIC is authorized to adjust the insurance
premium rates for banks that are insured by the BIF of the FDIC in order to
maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits. As a
result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF insured institutions to provide a range of .04% to
.31% of deposits. The revisions became effective in the third quarter of 1995.
In addition, the BIF rates were further revised, effective January 1996, to
provide a range of 0% to .27%. The SAIF rates, however, were not adjusted. At
the time the FDIC revised the BIF premium schedule, it noted that, absent
legislative action (as discussed below), the SAIF would not attain its
designated reserve ratio until the year 2002. As a result, SAIF insured members
would continue to be generally subject to higher deposit insurance premiums
than BIF insured institutions until, all things being equal, the SAIF attained
its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one-time assessment to be imposed on all
deposits assessed at the SAIF rates, as of March 31, 1995, in order to
recapitalize the SAIF. It also provided for the merger of the BIF and the SAIF
on January 1, 1999 if no savings associations then exist. The special
assessment rate was established at .657% of deposits by the FDIC and the
resulting assessment of $2.6 million (exclusive of an additional $2.3 million
payment which relates to Suncoast deposits) was paid in November 1996. This
special assessment significantly increased non-interest expense and adversely
affected the Bank's results of operations for the year ended September 30,
1996. As a result of the special assessment, the Bank's deposit insurance
premiums were initially reduced to 6.7 basis points, and as of June 30, 1997 to
6.3 basis points based upon its current risk classification and the new
assessment schedule for SAIF insured institutions. These premiums are subject
to change in future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for
resolving the thrift crisis in the 1980's. Although the FDIC has proposed that
the SAIF assessment be equalized with the BIF assessment schedule, SAIF-insured
institutions will continue to be subject to a FICO assessment as a result of
this continuing obligation. Although the legislation also now requires
assessments to be made on BIF-assessable deposits for this purpose, that
assessment will be limited to 20% of the rate imposed on SAIF assessable
deposits until the earlier of December 31, 1999 or when no savings association
continues to exist, thereby imposing a greater burden on SAIF member
institutions such as the Bank. Thereafter, however, assessments on BIF-member
institutions will be made on the same basis as SAIF-member institutions. The
rates to be established by the FDIC to implement this requirement for all
FDIC-insured institutions were 6.48 basis points assessment on SAIF deposits
and 1.30 basis points on BIF deposits until BIF insured institutions
participate fully in the assessment.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
TRANSACTIONS WITH AFFILIATES. The Company is a unitary savings and loan
holding company and is subject to the OTS regulations, examination, supervision
and reporting requirements pursuant to certain provisions of the Home Owners'
Loan Act (the "HOLA") and the Federal Deposit Insurance Act. As an insured
institution and a subsidiary of a savings and loan holding company, the Bank is
subject to restrictions in its dealings with companies that are "affiliates" of
the Company under the
22
HOLA, certain provisions of the Federal Reserve Act that were made applicable
to savings institutions by the FIRREA, and the OTS regulations.
As a result of the FIRREA, savings institutions' transactions with their
affiliates are subject to the limitations set forth in the HOLA and the OTS
regulations, which incorporate Sections 23A, 23B, 22(g) and 22(h) of the
Federal Reserve Act and Regulation O adopted by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Under Section 23A, an
"affiliate" of an institution is defined generally as (i) any company that
controls the institution and any other company that is controlled by the
Company that controls the institution, (ii) any company that is controlled by
the shareholders who control the institution or any company that controls the
institution, or (iii) any company that is determined by regulation or order to
have a relationship with the institution (or any subsidiary or affiliate of the
institution) such that "covered transactions" with the Company may be affected
by the relationship to the detriment of the institution. "Control" is
determined to exist if a percentage stock ownership test is met or if there is
control over the election of directors or the management or policies of the
Company or institution. "Covered transactions" generally include loans or
extensions of credit to an affiliate, purchases of securities issued by an
affiliate, purchases of assets from an affiliate (except as may be exempted by
order or regulation), and certain other transactions. The OTS regulations and
Sections 23A and 23B require that covered transactions and certain other
transactions with affiliates be on terms and conditions consistent with safe
and sound banking practices or on terms comparable to similar transactions with
non-affiliated parties, and imposes quantitative restrictions on the amount of
and collateralization requirements on covered transactions. In addition, a
savings institution is prohibited from extending credit to an affiliate (other
than a subsidiary of the institution), unless the affiliate is engaged only in
activities that the Federal Reserve Board has determined, by regulation, to be
permissible for bank holding companies. Sections 22(g) and 22(h) of the Federal
Reserve Act impose limitations on loans and extensions of credit from an
institution to its executive officers, directors and principal shareholders and
each of their related interests.
ACTIVITIES LIMITATIONS. A unitary savings and loan holding company, such
as the Company, whose sole insured institution subsidiary qualifies as a QTL
(described below) generally has the broadest authority to engage in various
types of business activities. A holding company that acquires another
institution and maintains it as a separate subsidiary or whose sole subsidiary
fails to meet the QTL test will become subject to the activities limitations
applicable to multiple savings and loan holding companies.
In general, a multiple savings and loan holding company (or subsidiary
thereof that is not an insured institution) may not commence, or continue for
more than a limited period of time after becoming a multiple savings and loan
holding company (or a subsidiary thereof), any business activity other than (i)
furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or an escrow business, (iii)
holding, managing or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust,
(vi) those activities previously directly authorized by the OTS by regulation
as of March 5, 1987 to be engaged in by multiple savings and loan holding
companies, or (vii) subject to prior approval of the OTS, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. These restrictions do not apply to a multiple savings and loan
holding company if (a) all, or all but one, of its insured institution
subsidiaries were acquired in emergency thrift acquisitions or assisted
acquisitions and (b) all of its insured institution subsidiaries are QTL's.
SAVINGS INSTITUTION REGULATIONS
Federal savings institutions such as the Bank are chartered by the OTS,
are members of the FHLB system, and have their deposits insured by the SAIF.
They are subject to comprehensive OTS and FDIC regulations that are intended
primarily to protect depositors. SAIF-insured, federally chartered institutions
may not enter into certain transactions unless applicable regulatory tests are
met or they obtain necessary approvals. They are also required to file reports
with the OTS describing their
23
activities and financial condition, and periodic examinations by the OTS test
compliance by institutions with various regulatory requirements, some of which
are described below.
INSURANCE OF ACCOUNTS. The Bank's deposits are insured by the SAIF up to
$100,000 for each insured account holder, the maximum amount currently
permitted by law. Under the FDIC regulations implementing risk-based insurance
premiums, institutions are divided into three groups-well capitalized,
adequately capitalized and undercapitalized-based on criteria consistent with
those established pursuant to the prompt corrective action provisions of the
FDICIA. See "--Prompt Corrective Action" below. Each of these groups is further
divided into three subgroups, based on a subjective evaluation of supervisory
risk to the insurance fund posed by the institution.
As an insurer, the FDIC issues regulations and conducts examinations of
its insured members. SAIF insurance of deposits may be terminated by the FDIC,
after notice and hearing, upon a finding that an institution has engaged in
unsafe and unsound practices, cannot continue operations because it is in an
unsafe and unsound condition, or has violated any applicable law, regulation,
rule, order or condition imposed by the OTS or FDIC. When conditions warrant,
the FDIC may impose less severe sanctions as an alternative to termination of
insurance. The Bank's management does not know of any present condition
pursuant to which the FDIC would seek to impose sanctions on the Bank or
terminate insurance of its deposits.
REGULATORY CAPITAL REQUIREMENTS. As mandated by the FIRREA, the OTS
adopted capital standards under which savings institutions must currently
maintain (i) a tangible capital requirement of 1.5% of tangible assets, (ii) a
leverage (or core capital) ratio of 3.0% of adjusted tangible assets, and (iii)
a risk-based capital requirement of 8.0% of risk-weighted assets. These
requirements (which cannot be less stringent than those applicable to national
banks) apply to the Bank. Under current law and regulations, there are no
capital requirements directly applicable to the Company. See also "--Changes to
Capital Requirements" below.
Under the current OTS regulations, "tangible capital" includes common
shareholders' equity, noncumulative perpetual preferred stock and related
paid-in capital, certain qualifying nonwithdrawable accounts and pledged
deposits, and minority interests in fully consolidated subsidiaries, less
intangible assets (except certain purchased mortgage servicing rights) and
specified percentages of debt and equity investments in certain subsidiaries.
"Core capital" is tangible capital plus limited amounts of intangible assets
meeting marketability criteria. The "risk-based capital" requirement provides
that an institution's total capital must equal 8% of risk-weighted assets.
Certain institutions will be required to deduct an interest rate risk component
from their total capital, as described below. "Total capital" equals core
capital plus "supplementary capital" (which includes specified amounts of
cumulative preferred stock, certain limited-life preferred stock, subordinated
debt and other capital instruments) in an amount equal to not more than 100% of
core capital. "Risk-weighted assets" are determined by assigning designated
risk weights based on the credit risk associated with the particular asset. As
provided by OTS regulations, representative risk weights include: 0% for cash
and assets that are backed by the full faith and credit of the United States;
20% for cash items in the process of collection, FHLB stock, agency securities
not backed by the full faith and credit of the United States and certain
high-quality mortgage-related securities; 50% for certain revenue bonds,
qualifying mortgage loans, certain non-high-quality mortgage-related securities
and certain qualifying residential construction loans; and 100% for consumer,
commercial and other loans, repossessed assets, assets that are 90 or more days
past due, and all other assets.
As of September 30, 1997, the Bank's tangible, core and risk-based capital
ratios were 8.1%, 8.1% and 11.3% respectively.
The OTS regulatory capital regulations take into account a savings
institution's exposure to the risk of loss from changing interest rates. Under
the regulations, a savings institution with an above normal level of interest
rate risk exposure will be required to deduct an IRR component from its total
capital when determining its compliance with the risk-based capital
requirements. An "above normal" level of
24
interest rate risk exposure is a projected decline of 2% in the net present
value of an institution's assets and liabilities resulting from a 2% swing in
interest rates. The IRR component will equal one-half of the difference between
the institution's measured interest rate exposure and the "normal" level of
exposure. Savings institutions are required to file data with the OTS that the
OTS will use to calculate, on a quarterly basis, the institutions' measured
interest rate risk and IRR components. The IRR component to be deducted from
capital is the lowest of the IRR components for the preceding three quarters.
The OTS may waive or defer an institution's IRR component on a case-by-case
basis. Implementation of the IRR requirements have been delayed. As of
September 30, 1997, the Company would have been required to deduct an IRR
component from its total capital when determining its compliance with the
Bank's risk-based capital requirements; however, the Bank would continue to be
well capitalized.
If an institution becomes categorized as "undercapitalized" under the
definitions established by the "prompt corrective action" provisions of the
FDICIA, it will become subject to certain restrictions imposed by the FDICIA.
See "Prompt Corrective Action" below.
PROMPT CORRECTIVE ACTION. The OTS and other federal banking regulators
have established capital levels for institutions to implement the "prompt
corrective action" provisions of the FDICIA. Based on these capital levels,
insured institutions will be categorized as well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized or critically
undercapitalized. The FDICIA requires federal banking regulators, including the
OTS, to take prompt corrective action to solve the problems of those
institutions that fail to satisfy their applicable minimum capital
requirements. The level of regulatory scrutiny and restrictions imposed become
increasingly severe as an institution's capital level falls.
A "well capitalized" institution must have risk-based capital of 10% or
more, core capital of 5% or more and Tier I risk-based capital (based on the
ratio of core capital to risk-weighted assets) of 6% or more and may not be
subject to any written agreement, order, capital directive, or prompt
corrective action directive issued by the OTS. The Bank is a well capitalized
institution under the definitions as adopted. An institution will be
categorized as "adequately capitalized" if it has total risk-based capital of
8% or more, Tier 1 risk-based capital of 4% or more, and core capital of 4% or
more; "undercapitalized" if it has total risk-based capital of less than 8%,
Tier I risk-based capital of less than 4%, or core capital of less than 4%;
"significantly undercapitalized" if it has total risk-based capital of less
than 6%, Tier 1 risk-based capital of less than 3%, or core capital of less
than 3%; and "critically undercapitalized" if it has a ratio of tangible equity
to total assets that is equal to less than 2%.
In the case of an institution that is categorized as "undercapitalized,"
such an institution must submit a capital restoration plan to the OTS. An
undercapitalized depository institution generally will not be able to acquire
other banks or thrifts, establish additional branches, pay dividends, or engage
in any new lines of business unless consistent with its capital plan. A
"significantly undercapitalized" institution will be subject to additional
restrictions on its affiliate transactions, the interest rates paid by the
institution on its deposits, the institution's asset growth, compensation of
senior executive officers, and activities deemed to pose excessive risk to the
institution. Regulators may also order a significantly undercapitalized
institution to hold elections for new directors, terminate any director or
senior executive officer employed for more than 180 days prior to the time the
institution became significantly undercapitalized, or hire qualified senior
executive officers approved by the regulators.
The FDICIA provides that an institution that is "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of becoming categorized as such unless the institution's regulator and the
FDIC jointly determine that some other course of action would result in a lower
resolution cost to the institution's insurance fund. Thereafter, the
institution's regulator must periodically reassess its determination to permit
a particular critically undercapitalized institution to continue to operate. A
conservator or receiver must be appointed for the institution at the end of an
approximately one-year period following the institution's initial
classification as critically undercapitalized unless a number of stringent
conditions are met, including a determination by the regulator and the FDIC
that the institution has positive net worth and a certification by such
agencies that the institution is viable and not expected to fail.
25
The final rules establishing the capital levels for purposes of the FDICIA
also indicate that the federal regulators intend to lower or eliminate the core
capital requirement from the definitions of well capitalized, adequately
capitalized and undercapitalized after the requirement to deduct an IRR
component from total capital becomes effective. This action has not yet been
taken. See "Regulatory Capital Requirements" above.
In addition to the foregoing prompt corrective action provisions, the
FDICIA also sets forth requirements that the federal banking agencies,
including the OTS, review their capital standards every two years to ensure
that their standards require sufficient capital to facilitate prompt corrective
action and to minimize loss to the SAIF and the BIF.
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. The current OTS
regulation applicable to the payment of dividends or other capital
distributions by savings institutions imposes limits on capital distributions
based on an institution's regulatory capital levels and net income. An
institution that meets or exceeds all of its capital requirements (both before
and after giving effect to the distribution) and is not in need of more than
normal supervision would be a "Tier 1 association." A Tier I association may
make capital distributions during a calendar year of up to the greater of (i)
100% of net income for the current calendar year plus 50% of its capital
surplus or (ii) the amount permitted for a "Tier 2 association" which is 75% of
its net income over the most recent four quarters. Any additional capital
distributions would require prior regulatory approval. The Bank currently
exceeds its fully phased-in capital requirements and qualifies as a Tier I
association under the regulation. A "Tier 3 association" is defined as an
institution that does not meet all of the minimum regulatory capital
requirements and therefore may not make any capital distributions without the
prior approval of the OTS.
Savings institutions must provide the OTS with at least 30 days written
notice before making any capital distributions. All such capital distributions
are also subject to the OTS' right to object to a distribution on safety and
soundness grounds.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net
income to date during the calendar year. As under the current rule, the OTS may
object to a capital distribution if it would constitute an unsafe or unsound
practice. No assurance may be given as to whether or in what form the
regulations may be adopted.
QUALIFIED THRIFT LENDER TEST. Pursuant to amendments effected by the
FDICIA, a savings institution will be a QTL if its qualified thrift investments
equal or exceed 65% of its portfolio assets on a monthly average basis in nine
of every 12 months. Qualified thrift investments, under the revised QTL test,
include (i) certain housing-related loans and investments, (ii) certain
obligations of the FSLIC, the FDIC, the FSLIC Resolution Fund and the RTC,
(iii) loans to purchase or construct churches, schools, nursing homes and
hospitals (subject to certain limitations), (iv) consumer loans (subject to
certain limitations), (v) shares of stock issued by any FHLB, and (vi) shares
of stock issued by the FHLMC or the FNMA (subject to certain limitations).
Portfolio assets under the revised test consist of total assets minus (a)
goodwill and other intangible assets, (b) the value of properties used by the
savings institution to conduct its business, and (c) certain liquid assets in
an amount not exceeding 20% of total assets.
Any savings institution that fails to become or remain a QTL must either
convert to a national bank charter or be subject to restrictions specified in
the OTS regulations. Any such savings institution that does not become a bank
will be: (i) prohibited from making any new investment or engaging in
26
activities that would not be permissible for national banks; (ii) prohibited
from establishing any new branch office in a location that would not be
permissible for a national bank in the institution's home state; (iii)
ineligible to obtain new advances from any FHLB; and (iv) subject to
limitations on the payment of dividends comparable to the statutory and
regulatory dividend restrictions applicable to national banks. Also, beginning
three years after the date on which the savings association ceases to be a QTL,
the savings association would be prohibited from retaining any investment or
engaging in any activity not permissible for a national bank and would be
required to repay any outstanding advances to any FHLB. A savings institution
may requalify as a QTL if it thereafter complies with the QTL test. At
September 30, 1997, the Bank exceeded the QTL requirements.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB system,
which consists of 12 regional Federal Home Loan Banks governed and regulated by
the Federal Housing Finance Board. The Federal Home Loan Banks provide a
central credit facility for member institutions, The Bank, as a member of the
FHLB of Atlanta, is required to acquire and hold shares of capital stock in the
FHLB of Atlanta in an amount at least equal to the greater of 1% of the
aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations as of the close of each calendar
year, or 5% of its borrowings from the FHLB of Atlanta (including advances and
letters of credit issued by the FHLB on the Bank's behalf). The Bank is
currently in compliance with this requirement, with a $33.6 million investment
in stock of the FHLB of Atlanta as of September 30, 1997.
The FHLB of Atlanta makes advances to members in accordance with policies
and procedures periodically established by the Federal Housing Finance Board
and the Board of Directors of the FHLB of Atlanta. Currently outstanding
advances from the FHLB of Atlanta are required to be secured by a member's
shares of stock in the FHLB of Atlanta and by certain types of mortgages and
other assets. The FIRREA further limited the eligible collateral in certain
respects. Interest rates charged for advances vary depending on maturity, the
cost of funds to the FHLB of Atlanta and the purpose of the borrowing. As of
September 30, 1997, advances from the FHLB of Atlanta totaled $671.5 million.
The FIRREA restricted the amount of FHLB advances that a member institution may
obtain, and in some circumstances requires repayment of outstanding advances,
if the institution does not meet the QTL test. See "--Qualified Thrift Lender
Test," above.
LIQUIDITY. OTS regulations currently require member savings institutions
to maintain for each calendar month an average daily balance of liquid assets
(cash and certain time deposits, securities of certain mutual funds, bankers'
acceptances, corporate debt securities and commercial paper, and specified U.S.
government, state government and federal agency obligations) equal to at least
5% of its average daily balance during the preceding calendar month of net
withdrawable deposits and short-term borrowings (generally borrowings having
maturities of one year or less). An institution must also maintain for each
calendar month an average daily balance of short-term liquid assets (generally
those having maturities of one year or less) equal to at least 1% of its
average daily balance during the preceding calendar month of net withdrawable
accounts and short-term borrowings. The Director of the OTS may vary this
liquidity requirement from time to time within a range of 4% to 10%. Monetary
penalties may be imposed for failure to meet liquidity requirements. For the
month of September 1997, the Bank's liquidity ratio was 8.49%, and its
short-term liquidity ratio, which must be at least 1%, was 5.15%. Effective
November 24, 1997, OTS regulations were revised to eliminate the short-term
liquidity ratio and to reduce the liquidity ratio to 4%. The Bank is also
required to maintain cash reserve requirements at the Federal Home Loan Bank.
At September 30, 1997 this cash reserve requirement was $3.1 million.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act (the
"CRA"), as implemented by the OTS regulations, a savings institution has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a financial
institution,
27
to assess the institution's record of meeting the credit needs of its community
and to take such records into account in its evaluation of certain
applications. The FIRREA amended the CRA to require public disclosure of an
institution's CRA rating and to require that the OTS provide a written
evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system in lieu of the existing five-tiered numerical rating
system. Based upon an OTS examination in fiscal 1997, the Bank's CRA rating is
satisfactory.
Effective July 1, 1995, the OTS together with the other federal banking
agencies, adopted a joint rule amending each of their regulations concerning
the CRA. Subject to certain exceptions and elections, the new regulations
prescribe three tests for the evaluation of a savings institution's
performance. The lending test evaluates a savings institution's record of
helping to meet the credit needs of its assessment area through its lending
activities by considering an institution's home mortgage, small business, small
farm, and community development lending. The investment test evaluates a
savings institution's record of helping to meet the credit needs of its
assessment area through qualified investments that benefit its assessment area
or a broader statewide or regional area including the assessment area. Finally,
the service test evaluates a savings institution by analyzing both the
availability and the effectiveness of the institution's systems for delivering
retail banking services and the extent and innovativeness of its community
development services. Based upon the savings institution's performance under
the lending, investment and service tests, and any other tests which may be
applicable to the institution under the new regulations, the OTS will assign
the savings institution one of the same four ratings prescribed under current
regulations. Additionally, under the new regulations, the OTS will continue to
consider an institution's record of performance under the CRA in the same
manner and for the same purposes as required under current regulations.
These new regulations, while effective July 1, 1995, were implemented over
a two-year time frame. A savings institution may elect to be evaluated under
the revised performance tests beginning January 1, 1996, although the Company
has not made such election. Absent such an election, these revised performance
tests became mandatory and were deemed to replace the regulations described
above effective July 1, 1997.
LOANS-TO-ONE-BORROWER LIMITATIONS. The FIRREA provided that loans-to-one
borrower limits applicable to national banks apply to savings institutions.
Generally, under current limits, loans and extensions of credit outstanding at
one time to a single borrower shall not exceed 15% of the savings institution's
unimpaired capital and unimpaired surplus. Loans and extensions of credit fully
secured by certain readily marketable collateral may represent an additional
10% of unimpaired capital and unimpaired surplus. As of September 30, 1997, the
Bank was in compliance with the loans-to-one-borrower limitations.
PORTFOLIO POLICY GUIDELINES
The Federal Financial Institutions Examination Council issued a
Supervisory Policy Statement on Securities Activities (the "Policy"), which
provides guidance to an institution in developing its portfolio policy,
specifies factors that must be considered when evaluating an institution's
investment portfolio, and provides guidance on the suitability of acquiring and
holding certain products, such as mortgage derivative products, in its
investment portfolio. The Policy, among other things, defines "high-risk
mortgage securities" and provides that such securities are not suitable
investment portfolio holdings for depository institutions and that they may
only be acquired to reduce interest rate risk. The determination of a high-risk
mortgage security will be based upon a quantitative calculation of the average
life of the security, and the change in the average life and market price
sensitivity of the security based on a 300-basis-point shift in the yield
curve. Currently, the Bank does not hold any high-risk mortgage securities. The
Policy, however, is applicable to all depository institutions and will affect
the Bank's ability to invest in certain mortgage securities, primarily
collateralized mortgage obligations, in the future.
28
GENERAL LENDING REGULATIONS
The Bank's lending activities are subject to federal and state regulation,
including the Equal Credit Opportunity Act, the Truth in Lending Act, the Real
Estate Settlement Procedures Act, the Community Reinvestment Act and the laws
of Florida, California and other jurisdictions governing discrimination, lender
disclosure to borrowers, foreclosure procedures and anti-deficiency judgments,
among other matters.
FEDERAL RESERVE SYSTEM
The Bank is subject to certain regulations promulgated by the Federal
Reserve Board. Pursuant to such regulations, savings institutions are required
to maintain reserves against their transaction accounts (primarily
interest-bearing checking accounts) and non-personal time deposits. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the OTS.
In addition, Federal Reserve Board regulations limit the periods within which
depository institutions must provide availability for and pay interest on
deposits to transaction accounts. Depository institutions are required to
disclose their check-hold policies and any changes to those policies in writing
to customers. The Bank is in compliance with all such Federal Reserve Board
regulations.
TAXATION
The Company reports its income and expenses under an accrual method of
accounting and prior to 1994 filed federal income tax returns on a calendar
year basis. Beginning in 1994 and continuing thereafter, the Company and its
subsidiaries have elected to file consolidated tax returns on a fiscal year
basis ended September 30. The Tax Reform Act of 1986 (the "1986 Act"), which
was signed into law on October 22, 1986, revised the income tax laws applicable
to corporations in general and to savings institutions, such as the Bank, in
particular. Except as specifically noted, the discussion below relates to
taxable years beginning after December 31, 1986.
The Company has not been notified of a proposed examination by the
Internal Revenue Service (the "IRS") of its federal income tax returns.
BAD DEBT RESERVES
DEDUCTIONS. Prior to legislation enacted in August 1996, the Internal
Revenue Code (the "Code") permitted savings institutions, such as the Bank, to
establish a reserve for bad debts and to make annual additions thereto, which
additions may, within specified formula limits, be deducted in determining
taxable income. The bad debt reserve deduction was generally based upon a
savings institution's actual loss experience (the "experience method"). In
addition, provided that certain definitional tests relating to the composition
of assets and sources of income are met, a savings institution was permitted to
elect annually to compute the allowable addition to its bad debt reserve for
losses on qualifying real property loans (generally loans secured by improved
real estate) by reference to a percentage of its taxable income (the
"percentage of taxable income method").
Under the percentage of taxable income method, a savings institution was
permitted, in general, to claim a deduction for additions to bad debt reserves
equal to 8% of the savings institution's taxable income. Taxable income for
this purpose is defined as taxable income before the bad debt deduction, but
without regard to any deduction allowable for any addition to the reserve for
bad debt. Certain adjustments must also be made for gains on the sale of
corporate stock and tax exempt obligations. For this purpose, the taxable
income of a savings institution for a taxable year is calculated after
utilization of net operating loss carry forwards.
In August of 1996, legislation was enacted that repealed the reserve
method of accounting (including the percentage of taxable income method) used
by many thrifts, including the Bank, to
29
calculate their bad debt deduction for federal income tax purposes. The
legislation requires thrifts to account for bad debts for federal income tax
purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. As such, thrifts with assets whose tax basis exceeds
$500,000,000 must change to the specific charge off method in computing its bad
debt deduction. As such, the Bank must use the specific charge off method in
computing its bad debt deduction for tax years beginning after December 31,
1995.
As a result of this change in accounting method, the Bank must recapture
the excess of its January 1, 1996 bad debt reserve over the reserve in
existence on December 31, 1987. This recapture will occur over a six-year
period, the commencement of which will be delayed until the first taxable year
beginning after December 31, 1997, provided the institution meets certain
residential lending requirements. The management of the Company does not
believe that the legislation will have a material impact on the Company or the
Bank.
DISTRIBUTIONS. Under the Code, the Bank's December 31, 1987 reserve must
be recaptured into taxable income as a result of certain non-dividend
distributions. A distribution is a non-dividend distribution to the extent
that, for federal income tax purposes, (i) it is in redemption of shares, (ii)
it is pursuant to a liquidation of the institution, or (iii) in the case of a
current distribution it, together with all other such distributions during the
taxable year, exceeds the Bank's current and post-1951 accumulated earnings and
profits. The amount charged against the Bank's bad debt reserves in respect of
a distribution will be includable in its gross income and will equal the amount
of such distribution, increased by the amount of federal income tax resulting
from such inclusion.
ALTERNATIVE MINIMUM TAX
In addition to the income tax, corporations are generally subject to an
alternative minimum tax at a rate of 20%. The alternative minimum tax is
imposed on the sum of regular taxable income (with certain adjustments) and tax
preference items, less any available exemption ("AMTI"). The alternative
minimum tax is imposed to the extent that it exceeds a corporation's regular
income tax liability. The items of tax preference that constitute AMTI for 1990
and thereafter include 75% of the difference between the taxpayer's adjusted
current earnings and AMTI (determined without regard to this preference and
prior to any deduction for net operating loss carry forwards or carry backs).
In addition, net operating loss carry forwards cannot offset more than 90% of
AMTI.
INTEREST ALLOCABLE TO TAX-EXEMPT OBLIGATIONS
The 1986 Act eliminates for financial institutions the deduction for
interest expense allocable to the purchase or carrying of most tax-exempt
obligations for taxable years ending after December 31, 1986, with respect to
tax-exempt obligations acquired after August 7, 1986 excluding certain
financial institution-qualified issues. For all qualified issues and for
non-qualified tax-exempt obligations acquired after 1982 and before August 7,
1986, 20% of allocable interest expense deductions will be disallowed.
STATE TAXATION
The State of Florida imposes a corporate income tax on the Company, at a
rate of 5.5% of the Company's taxable income as determined for Florida income
tax purposes. Taxable income for this purpose is based on federal taxable
income with certain adjustments. A credit against the tax, for Florida
intangible taxes paid, is allowable in an amount equal to the lesser of (i) the
amount of such intangible taxes paid or (ii) 65% of the tax liability.
FORECLOSURES
Tax legislation enacted in August of 1996 significantly changed the tax
treatment with respect to foreclosures for taxable years beginning after
December 31, 1995. Prior to this legislation, a thrift's acquisition of
property by means of foreclosure was not treated as a taxable event for federal
tax
30
purposes. As such no gain or loss was recognized at the time of foreclosure and
no portion of the debt could be treated as worthless. In addition, prior to the
August 1996 legislation, thrift institutions were allowed a tax benefit for
write downs of foreclosed property to fair market value. Finally, for thrifts
that computed its bad debt deduction under the experience method, gains or
losses realized from the sale of foreclosed property were not taken into
account in computing taxable income, but were credited or charged to the
thrift's bad debt reserve.
As a result of the newly enacted tax legislation, thrift foreclosures are
treated as a taxable event for federal tax purposes for property acquired after
December 31, 1995. As such, a thrift may recognize gain, loss or a bad debt
deduction at the time of foreclosure depending on the method by which the
property was acquired. In addition, write downs of foreclosed property to fair
market value no longer give rise to a tax benefit. Finally, gains and losses
realized upon the sale of foreclosed property are included in taxable income of
the thrift.
ITEM 2. PROPERTIES
The executive and administrative offices of the Company and the Bank and
the Coral Gables branch are located at 255 Alhambra Circle, Coral Gables,
Florida 33134. The Company owns electronic data processing equipment for its
exclusive use, which consists of personal computers and peripherals and
software having an aggregate net book value of approximately $1.3 million as of
September 30, 1997.
The following table sets forth the location of, and certain additional
information regarding, the Company's and Bank's offices and branches as of
September 30, 1997.
NET BOOK VALUE OF PREMISES
OR LEASEHOLD IMPROVEMENTS LEASE EXPIRATION DATE
LOCATION AND EQUIPMENT AND RENEWAL TERMS SQUARE FOOTAGE
- ------------------------------------- --------------------------- ---------------------- ---------------
Executive and administrative offices,
and savings branches
Aventura branch ..................... $ 11,319 1999 5,000
2984 Aventura Boulevard (2 options to renew
Aventura, Florida 33180 for 5 years each)
Boca Hamptons branch ............... 238,411 2002 2,700
9070 Kimberly Boulevard (3 options to renew
Suite 68 for 5 years each)
Boca Raton, Florida 33434
Boca Raton branch .................. 136,407 1999 2,442
21222 St. Andrews Boulevard #11 (3 options to renew
Raton, Florida 33434 for 3 years each)
Boynton Beach branch ............... 195,726 2001 2,933
117 North Congress Avenue (2 options to renew
Boynton Beach, Florida 33426 for 5 years)
Coconut Creek branch ............... 123,731 2002 2,400
4913 Coconut Creek Parkway (2 options to renew
Coconut Creek, Florida 33063 for 5 years each)
Coral Gables branch ............... 1,458,317 2001 14,097
255 Alhambra Circle (2 options to renew
Coral Gables, Florida 33134 for 5 years each)
Coral Springs branch ............... 68,272 2001 2,805
1307 University Drive (2 options to renew
Coral Springs, Florida 33071 for 5 years each)
31
NET BOOK VALUE OF PREMISES
OR LEASEHOLD IMPROVEMENTS LEASE EXPIRATION DATE
LOCATION AND EQUIPMENT AND RENEWAL TERMS SQUARE FOOTAGE
- ------------------------------------ --------------------------- ---------------------- ---------------
Deerfield Beach branch ............ 297,753 1998 4,000
and Commercial Real Estate office (2 options to renew
2201 West Hillsboro Boulevard for 5 years each)
Deerfield Beach, Florida 33442
Delray Beach branch ............... 376,256 1995 4,000
7431-39 West Atlantic Avenue (3 options to renew
Delray Beach, Florida 33446 for 5 years each)
Hallandale branch .................. 635,114 (1)(2) 4,500
501 Golden Isles
Drive Hallandale, Florida 33009
Hollywood branch .................. 34,068 2004 4,111
4350 Sheridan Street, Unit 101
Hollywood, Florida 33021
Lauderdale by the Sea branch ...... 773,301 (1) 5,000
227 Commercial Boulevard
Lauderdale by the Sea, Florida
33008
Pembroke Pines branch ............ 49,451 2001 4,059
100 South Flamingo Road (1 option to renew
Pembroke Pines, Florida 33027 for 5 years)
Pompano Beach branch ............... $708,102 (1) 5,000
1313 North Ocean Boulevard
Pompano Beach, Florida 33062
South Miami branch ............... 127,783 2002 6,701
6075 Sunset Drive (1 option to renew
South Miami, Florida 33143 for 5 years)
Tamarac branch ..................... 110,937 2002 3,531
5779 North University Drive (1 option to renew
Tamarac, Florida 33321 for 5 years)
West Airport branch ............... 283,723 2000 7,200
2410 N.W. 72nd Avenue (4 options to renew
Miami, Florida 33122 for 3 years)
West Palm Beach branch ............ 167,794 2001 3,740
2911C North Military Trail (2 options to renew
West Palm Beach, Florida 33409 for 5 years)
Mortgage Servicing office ......... 811,765 2000 32,850
Presidential Circle (2 options to renew
4000 Hollywood Boulevard for 5 years each)
Hollywood, Florida 33021
Miami Lakes Operation Center ...... -- 2002 14,880
7815 N.W. 148 Street (2 options to renew
Miami Lakes, Florida 33016 for 5 years each)
32
NET BOOK VALUE OF PREMISES
OR LEASEHOLD IMPROVEMENTS LEASE EXPIRATION DATE
LOCATION AND EQUIPMENT AND RENEWAL TERMS SQUARE FOOTAGE
- ----------------------------------------- --------------------------- ---------------------- ---------------
Hollywood Training Office ............... -- 1999 4,042
4350 Sheridan Street,
Units 200 & 201
Hollywood, Florida 33021
Mortgage Origination Office ............ 177,384 2004 2,000
255 Alhambra Circle 3rd Floor
Coral Gables, Florida 33134
Other Offices
1177 George Bush Boulevard, #200 ...... -- 1998 5,371
Delray Beach, Florida 33483 (1 option to renew
for 3 years)
4340 Sheridan Street .................. 585,855 (1)(3) 4,764
Hollywood, Florida 33021
6101 Sunset Drive ..................... -- 1998 4,000
South Miami, Florida 33143
7700 North Kendall Drive, #506 ......... -- 1998 1,129
Miami, Florida 33143
- ----------------
(1) The Bank owns the facility.
(2) The Bank leases 1,400 square feet to unrelated parties
(3) The entire space is currently sub-leased to an unrelated party
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries, from time to time, are involved as
plaintiff or defendant in various legal actions arising in the normal course of
their businesses. While the ultimate outcome of any such proceedings cannot be
predicted with certainty, it is the opinion of management that no proceedings
exist, either individually or in the aggregate, which, if determined adversely
to the Company and its subsidiaries, would have a material effect on the
Company's consolidated financial condition, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended September 30, 1997.
33
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers and directors of the Company and the Bank.
POSITIONS WITH COMPANY
NAME AGE AND BUSINESS EXPERIENCE
- -------------------- ----- ------------------------------------------------------------------------
Alfred R. Camner 53 Director, Chairman of the Board, Chief Executive Officer and
President of the Company (1993 to present); Director, Chairman of
the Board and Chief Executive Officer (1984 to present) and
President (1984 to 1993, 1994 to present) of the Bank; Senior
Managing Director (1996 to present) and Managing Director (1973 to
1996) of Stuzin and Camner, Professional Association, attorneys-at-
law; General Counsel to CSF Holdings, Inc. and its subsidiary,
Citizens Federal Bank, a federal savings bank (1973 to 1996);
Director and member of the Executive Committee of the Board of
Directors of Loan America Financial Corporation, a national
mortgage banking company (1985 to 1994); Director of CSW
Associates, Inc., an asset management firm (1990 to 1995).
Lawrence H. Blum 54 Director and Vice Chairman of the Board of the Company (1993 to
present) and the Bank (1984 to present); Managing Director (1992 to
present) and partner (1974 to present) of Rachlin, Cohen & Holtz,
certified public accountants.
James A. Dougherty 47 Director (December 1995 to present) and Chief Operating Officer
and Executive Vice President (1994 to present) of the Company;
Director, Executive Vice President and Chief Operating Officer of the
Bank (1994 to present); Executive Vice President of Retail Banking
of Intercontinental Bank (1989 to 1994).
Earline G. Ford 54 Director, Executive Vice President and Treasurer of the Company
(1993 to present); Director (1984 to present), Executive Vice
President (1990 to present), Senior Vice President--Administration
(1988 to 1990), Treasurer (1984 to present) and Vice President--
Administration (1984 to 1988) of the Bank; Legal Administrator of
Stuzin and Camner, Professional Association, attorneys-at-law (1973
to 1996); Vice Chairman of CSW Associates, Inc., an asset
management firm (1990 to 1995).
Marc D. Jacobson 55 Director (1993 to present) and Secretary (1993 to 1997) of the
Company; Director (1984 to present) and Secretary (1985 to 1996) of
the Bank; Vice President of Head-Beckham Insurance Agency, Inc.
(1990 to present).
Allen M. Bernkrant 67 Director of the Company (1993 to present) and the Bank (1985 to
present); Private investor in Miami, Florida (1990 to present);
Chairman, President and principal owner of Southern General
Diversified, Inc., manufacturer and distributor of recreational
equipment (1960 to 1990).
Bruce D. Friesner 55 Director of the Company and the Bank (1996 to present); Director of
Loan America Financial Corporation, a national mortgage banking
company (1990 to 1994); Partner of F&G Associates, a commercial
real estate development company (1972 to present).
Patricia L. Frost 58 Director of the Company (1993 to present) and the Bank (1990 to
1997); Private investor in Miami, Florida (1993 to present); Principal,
West Laboratory School, Coral Gables, Florida (1970 to 1993).
34
POSITIONS WITH COMPANY
NAME AGE AND BUSINESS EXPERIENCE
- ------------------------- ----- ---------------------------------------------------------------------
Elia J. Gusti 63 Director of the Company and the Bank (1996 to present); Director of
Suncoast (1990 to 1996); President and principal owner of Lee Guisti
Realty, Inc., a real estate and mortgage brokerage firm (1982 to
present).
Marc Lipsitz 55 Director (1996 to present) and Secretary (1997 to present) of the
Company; Managing Director (1996 to present) of Stuzin and
Camner, Professional Association, attorneys-at-law; General Counsel
of Jefferson National Bank (1993 to 1996); Partner, Stroock Stroock
& Lavan, attorneys-at-law (1991 to 1993).
Norman E. Mains 54 Director of the Company and the Bank (November 1996 to present);
Director of Suncoast (1985 to 1986); Chief Economist and Director of
Research for the Chicago Mercantile Exchange (1994 to present);
President and Chief Operating Officer of Rodman & Renshaw
Capital Group, Inc., a securities broker/dealer firm (1991 to 1994).
Neil H. Messinger, M.D. 59 Director of the Company and the Bank (1996 to present);
Radiologist; President (1986 to present), Radiological Associates,
P.A.; Chairman (1986 to present) of Imaging Services of Baptist
Hospital.
Christina Cuervo 32 Director of the Company and the Bank (1995 to present); Executive
Vice President, the Beacon Council (1996 to present); Assistant City
Manager and Chief of Staff of the City of Miami (1992 to present);
Assistant Vice President of United National Bank (1992); Assistant
Vice President, First Union National Bank (formerly Southeast Bank,
N.A.) (1986 to 1992).
Anne W. Solloway 82 Director of the Company (1993 to present) and the Bank (1985 to
present); Private investor in Miami, Florida.
EXECUTIVE OFFICERS OF THE COMPANY AND/OR THE BANK
WHO ARE NOT DIRECTORS:
Clifford A. Hope 49 Executive Vice President of the Company and the Bank (1997 to
present); Banking industry consultant in private practice (1996 to
1997); Senior Vice President and Chief Accounting Officer, Citizens
Federal Bank (1987 to 1996).
Samuel A. Milne 47 Executive Vice President and Chief Financial Officer (1996 to
present) and Senior Vice President and Chief Financial Officer (1995
to 1996) of the Company and the Bank; Senior Vice President and
Chief Financial Officer, Consolidated Bank (1992 to 1995); Senior
Vice President, Southeast Bank, N.A. (1984 to 1991).
Donald Putnam 40 Executive Vice President of the Company (1997 to present) and the
Bank (1996 to present); Senior Vice President and Regional Sales
Manager, NationsBank of Florida, N.A. (1996); Senior Vice President
(1994 to 1996), and First Vice President (1987 to 1994), of Citizens
Federal Bank.
----------------
All executive officers serve at the discretion of the Board of Directors
and are elected annually by the Board.
35
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS
STOCK INFORMATION
The Company's Class A Common Stock, $.01 par value ("Class A Common
Stock"), is traded in the over-the-counter market and quoted in the Nasdaq
Stock Market ("Nasdaq"). The Company's Class B Common Stock, $.01 par value
("Class B Common Stock"), is not currently traded on any established public
market.
At December 11, 1997, there were 400 and 19 holders of record of the
Company's Class A Common Stock and Class B Common Stock, respectively. The
number of holders of record of the Class A Common Stock includes nominees of
various depository trust companies for an undeterminable number of individual
stockholders. Class B Common Stock is convertible into Class A Common Stock at
a ratio (subject to adjustment on the occurrence of certain events) of one
share of Class A Common Stock for each Class B share surrendered for
conversion.
There were no common stock dividends declared or paid in fiscal 1997 or
1996. See Note 12 to the Company's Consolidated Financial Statements for a
discussion of restrictions on the Bank's payment of dividends to the Company.
The following tables set forth, for the periods indicated, the range of
high and low bid prices for the Class A Common Stock quoted on Nasdaq. Stock
price data in the Nasdaq reflects inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
CLASS A COMMON STOCK
--------------------
PRICE
--------------------
HIGH LOW
--------- --------
Fiscal Year Ended September 30, 1997:
1st Quarter ..................... $10.00 $ 7.875
2nd Quarter ..................... $11.25 $ 9.25
3rd Quarter ..................... $10.875 $ 8.50
4th Quarter ..................... $13.375 $ 9.625
Fiscal Year Ended September 30, 1996:
1st Quarter ..................... $ 8.75 $ 6.00
2nd Quarter ..................... $ 8.50 $ 6.50
3rd Quarter ..................... $ 8.50 $ 7.25
4th Quarter ..................... $ 8.25 $ 7.25
36
ITEM 6. SELECTED FINANCIAL DATA
AS OF OR FOR THE FISCAL
YEARS ENDED SEPTEMBER 30,
-----------------------------
1997 1996
------------ ----------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
OPERATIONS DATA
Interest income ................................................ $ 108,774 $ 52,132
Interest expense ............................................. 75,960 34,622
---------- ------------
Net interest income .......................................... 32,814 17,510
Provision for loan losses .................................... 1,295 (120)
---------- ------------
Net interest income after provision for loan losses ............ 31,519 17,630
---------- ------------
Non-interest income:
Service fees ................................................... 2,993 597
Gain on sales of loans and mortgage-backed
securities, net ............................................. 819 5
Gain (loss) on sales of other assets, net(1) .................. 1 (6)
Other ......................................................... 247 53
---------- ------------
Total non-interest income .................................... 4,060 649
---------- ------------
Non-interest expense:
Employee compensation and benefits ........................... 8,880 4,275
Occupancy and equipment ....................................... 3,568 1,801
Insurance(2) ................................................ 948 3,610
Professional fees ............................................. 1,605 929
Other ......................................................... 7,964 3,421
---------- ------------
Total non-interest expense ................................. 22,947 14,036
---------- ------------
Income before income taxes .................................... 12,632 4,243
Provision for income taxes(3) ................................. 5,033 1,657
---------- ------------
Net income before Preferred Stock dividends .................. 7,599 2,586
Preferred stock dividends:
Bank ......................................................... - -
Company ...................................................... 2,890 2,145
---------- ------------
Net income after Preferred Stock dividends ..................... $ 4,709 $ 441
========== ============
FINANCIAL CONDITION DATA:
Total assets ................................................... $2,145,406 $ 824,360
Loans receivable, net, and mortgage-backed securities(4) ...... 1,281,652 716,550
Investments, overnight deposits, tax certificates, reverse
purchase agreements, certificates of deposits and other
earning assets ................................................ 186,955 87,662
Total liabilities ............................................. 2,045,76 1755,249
Deposits ...................................................... 1,195,892 506,106
Borrowings ................................................... 817,484 237,775
Total stockholders' equity .................................... 99,645 69,111
Common stockholders' equity .................................... 61,371 42,350
PER COMMON SHARE DATA:
Primary earnings per common share and common
equivalent share ............................................. $ .54 $ .10
========== ============
Earnings per common share assuming full dilution ............... $ .54 $ .10
========== ============
Weighted average number of common shares and common
equivalent shares assumed outstanding during the period:
Primary ...................................................... 8,679,845 4,558,521
Fully diluted ................................................ 9,030,843 4,558,521
Equity per common share ....................................... $7.94 $ 7.85
Fully diluted equity per common share ........................ $ 6.51 $ 6.83
Cash dividends per common share
Class A ...................................................... $ - $ -
Class B ...................................................... $ - $ -
AS OF OR FOR THE FISCAL YEARS ENDED
SEPTEMBER 30,
----------------------------------------
1995 1994 1993
------------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
OPERATIONS DATA
Interest income ................................................ $ 39,419 $ 30,421 $ 25,722
Interest expense ............................................. 26,305 16,295 12,210
----------- ----------- -----------
Net interest income .......................................... 13,114 14,126 13,512
Provision for loan losses .................................... 1,221 1,187 1,052
----------- ----------- -----------
Net interest income after provision for loan losses ............ 11,893 12,939 12,460
----------- ----------- -----------
Non-interest income:
Service fees ................................................... 423 358 221
Gain on sales of loans and mortgage-backed
securities, net ............................................. 239 150 1,496
Gain (loss) on sales of other assets, net(1) .................. 9,569 -- --
Other ......................................................... 6 46 2
----------- ----------- -----------
Total non-interest income .................................... 10,237 554 1,719
----------- ----------- -----------
Non-interest expense:
Employee compensation and benefits ........................... 3,997 3,372 2,721
Occupancy and equipment ....................................... 1,727 1,258 978
Insurance(2) ................................................ 1,027 844 835
Professional fees ............................................. 1,269 833 543
Other ......................................................... 4,129 3,579 2,746
----------- ----------- -----------
Total non-interest expense ................................. 12,149 9,886 7,823
----------- ----------- -----------
Income before income taxes .................................... 9,981 3,607 6,356
Provision for income taxes(3) ................................. 3,741 1,328 2,318
----------- ----------- -----------
Net income before Preferred Stock dividends .................. 6,240 2,279 4,038
Preferred stock dividends:
Bank ......................................................... - 198 787
Company ...................................................... 2,210 1,871 726
----------- ----------- -----------
Net income after Preferred Stock dividends ..................... $ 4,030 $ 210 $ 2,525
=========== =========== ===========
FINANCIAL CONDITION DATA:
Total assets ................................................... $ 608,415 $ 551,075 $ 435,378
Loans receivable, net, and mortgage-backed securities(4) ...... 506,132 470,154 313,899
Investments, overnight deposits, tax certificates, reverse
purchase agreements, certificates of deposits and other
earning assets ................................................ 88,768 64,783 100,118
Total liabilities ............................................. 562,670 509,807 397,859
Deposits ...................................................... 310,074 347,795 295,108
Borrowings ................................................... 241,775 158,175 97,775
Total stockholders' equity .................................... 45,745 41,268 30,273
Common stockholders' equity .................................... 21,096 16,667 17,162
PER COMMON SHARE DATA:
Primary earnings per common share and common
equivalent share ............................................. $ 1.77 $ .10 $ 1.42
=========== =========== ===========
Earnings per common share assuming full dilution ............... $ 1.26 $ .10 $ 1.00
=========== =========== ===========
Weighted average number of common shares and common
equivalent shares assumed outstanding during the period:
Primary ...................................................... 2,296,021 2,175,210 1,773,264
Fully diluted ................................................ 4,158,564 2,175,210 3,248,618
Equity per common share ....................................... $ 10.20 $ 8.33 $ 8.86
Fully diluted equity per common share ........................ $ 7.81 $ 6.87 $ 7.07
Cash dividends per common share
Class A ...................................................... $ - $ .075 $ .094
Class B ...................................................... $ - $ .03 $ 0.38
(Continued on next page)
37
AS OF OR FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED FINANCIAL RATIOS
PERFORMANCE RATIOS:
Return on average assets(5) ................................. .51% .36% 1.10% .46% 1.12%
Return on average common equity .............................. 9.38 1.30 22.60 1.21 18.55
Return on average total equity .............................. 8.08 4.30 14.70 5.84 14.07
Interest rate spread ....................................... 2.07 2.10 2.12 2.78 3.59
Net interest margin .......................................... 2.31 2.51 2.39 3.01 3.87
Dividend payout ratio(6) .................................... 38.03 82.95 35.42 96.79 40.66
Ratio of earnings to combined fixed charges and preferred
stock dividends(7):
Excluding interest on deposits .............................. 1.26 1.05 1.52 1.07 1.87
Including interest on deposits .............................. 1.10 1.02 1.21 1.03 1.27
Total loans, net, and mortgage-backed securities to
total deposits ............................................. 148.98 141.58 163.13 134.40 109.65
Non-interest expenses to average assets ..................... 1.55 1.97 2.14 2.04 2.18
Efficiency ratio(8) .......................................... 57.56 76.45 14.58 66.06 45.17
ASSET QUALITY RATIOS:
Ratio of non-performing loans to total loans ............... .72% .99% 1.02% 1.07% 1.54%
Ratio of non-performing assets to total loans, real estate
owned and tax certificates ................................. .79 1.14 1.35 1.41 1.78
Ratio of non-performing assets to total assets ............... .67 .95 1.10 1.17 1.46
Ratio of charge-offs to total loans ........................ .03 .08 .13 .39 .07
Ratio of loan loss allowance to total loans .................. .21 .34 .32 .20 .38
Ratio of loan loss allowance to non-performing loans ......... 28.96 33.74 31.54 18.89 24.70
CAPITAL RATIOS:
Ratio of average common equity to average total assets ...... 3.40% 4.78% 3.14% 3.58% 3.79%
Ratio of average total equity to average total assets ...... 6.36 8.44 7.47 8.05 7.99
Tangible capital-to-assets ratio(9) ........................ 8.07 7.01 7.09 6.65 7.56
Core capital-to-assets ratio(9) .............................. 8.07 7.01 7.09 6.65 7.56
Risk-based capital-to-assets ratio(9) ........................ 11.27 14.19 15.79 14.13 15.85
- ----------------
(1) In 1995 the Company recorded a $9.3 million gain ($5.8 million after tax)
from the sale of its branches on the west coast of Florida.
(2) In 1996 the Company recorded a one-time SAIF special assessment of $2.6
million ($1.6 million after tax).
(3) Amount reflects expense from change in accounting principle of $194,843 for
fiscal 1994. See Note 15 to Consolidated Financial Statements.
(4) Does not include mortgage loans held for sale.
(5) Return on average assets is calculated before payment of Preferred Stock
dividends.
(6) The ratio of total dividends declared during the period (including
dividends on the Bank's and the Company's Preferred Stock and the
Company's Class A and Class B Common Stock) to total earnings for the
period before dividends.
(7) The ratio of earnings to combined fixed charges and Preferred Stock
dividends excluding interest on deposits is calculated by dividing income
before taxes and extraordinary items by interest on borrowings plus 33% of
rental expense plus Preferred Stock dividends on a pretax basis. The ratio
of earnings to combined fixed charges and Preferred Stock dividends
including interest on deposits is calculated by dividing income before
taxes and extraordinary items by interest on deposits plus interest on
borrowings plus 33% of rental expense plus Preferred Stock dividends on a
pretax basis.
(8) Efficiency ratio is calculated by dividing non-interest expenses less
non-interest income by net interest income.
(9) Regulatory capital ratio of the Bank.
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis and the related financial data
present a review of the consolidated operating results and financial condition
of BankUnited Financial Corporation (also referred to as the "Company" or
"BankUnited") for the fiscal years ended September 30, 1997, 1996 and 1995.
This discussion and analysis are presented to assist the reader in
understanding and evaluating the financial condition, results of operations and
future prospects of BankUnited, and are intended to supplement, and should be
read in conjunction with, the Consolidated Financial Statements and Notes
thereto.
BankUnited's income is derived primarily from its loans and other
investments. Funding for such loans and investments is derived principally from
deposits, loan repayments, and borrowings. Consequently, BankUnited's net
income depends, to a large extent, on the interest rate spread between the
average yield earned on loans and investments and the average rate paid on
deposits and borrowings. Results of operations are also dependent on the dollar
volume and asset quality of BankUnited's loans and investments.
In addition to the foregoing, results of BankUnited's operations, like
those of other financial institution holding companies, are affected by
BankUnited's asset and liability management policies, as well as factors beyond
BankUnited's control, such as general economic conditions and the monetary and
fiscal policies of the federal government. Lending activities are affected by
the demand for mortgage financing and other types of loans, which is in turn
affected by the interest rates at which such financings may be offered and
other factors affecting the supply of housing and the availability of funds.
Deposit flows and costs of funds are influenced by yields available on
competing investments and by general market rates of interest.
ACQUISITIONS
The Company has had an active acquisition program during the last two
years and expects to continue this program in the foreseeable future.
In September 1997, the Company entered into a definitive agreement to
acquire Consumers Bancorp, Inc. for approximately $11 million in a combination
of cash and stock. Consumers Bancorp, Inc. is a thrift holding company for
Consumers Savings Bank which had assets of $108.0 million and deposits of $87.8
million at September 30, 1997.
On November 15, 1996, BankUnited completed its acquisition of Suncoast.
Suncoast had total assets of $409.4 million, net loans of $335.0 million,
deposits of $298.5 million and shareholders' equity of $24.7 million as of
September 30, 1996. The cost of the acquisition to BankUnited was $27.8
million, representing the fair value of consideration given to Suncoast
shareholders as well as option and warrant holders. See Note 2 of the Notes to
Consolidated Financial Statements for additional information regarding this
acquisition.
In March 1996, BankUnited also acquired for cash consideration of $2.8
million, The Bank of Florida, a one branch state commercial bank which had
assets of $28.1 million and deposits of $27.3 million on the date of
acquisition.
DISCUSSION OF FINANCIAL CONDITION CHANGES FOR THE YEARS ENDED SEPTEMBER 30,
1997, 1996, AND 1995
Total assets increased $1.3 billion, or 160% to $2.1 billion at September
30, 1997 from $824 million at September 30, 1996, as compared to $608 million
at September 30, 1995.
LOANS. The Company's net loans receivable increased by $1.1 billion, or
173% to $1.7 billion at September 30, 1997 from $646 million at September 30,
1996. The increase was primarily the result of the $913.7 million of
residential loans purchased in fiscal 1997, $341.4 million of loans acquired
with
39
Suncoast, and $178.3 million of loan originations, partially offset by
principal repayments of $376 million (net of accretion of discount and
amortization of premium).
In fiscal 1996, the Company's net loans receivable increased by $193.3
million, or 42.6%, from $453.1 million at September 30, 1995. The increase was
primarily the result of $218.9 million of purchased residential loans, a $32.0
million purchase of a commercial real estate loan package, and $82.7 million of
loan originations, partially offset by principal repayments of $133.8 million.
The commercial real estate loan package was comprised of 23 loans in South
Florida with principal balances ranging from $376,000 to $4.7 million.
Of the new loans originated or purchased during fiscal 1997 totaling $1.4
billion, $728.2 million or 51% represented adjustable-rate residential loans
("ARMs"). Of BankUnited's total net loans receivable of $1.7 billion at
September 30, 1997, $1.2 billion or 71% were ARMs. Of this amount BankUnited
had $122.8 million in ARMs tied to the 11th District Federal Home Loan Bank
cost of funds index ("COFI"). COFI is a lagging index in that it does not
change as quickly as market rates. (See "Business--Lending
Activities--Residential Mortgage Loan Purchases and Originations.")
Loans available for sale as of September 30, 1997, were $104.3 million as
compared to no such loans available for sale as of September 30, 1996 and
$216,000 as of September 30, 1995. Beginning in the Company's fiscal 1997
fourth quarter, management began a program to sell approximately 50% to 75% of
the Company's internally generated residential loans. In the fourth quarter, a
package of residential loans totaling $30.1 million was sold for a gain of
$523,000. In addition, as part of starting this program, the Company
reclassified $93.5 million of its internally generated portfolio of residential
loans as available for sale in the fourth quarter. It is currently the
Company's intention that future loans classified as available for sale will be
identified and so classified at time of origination.
The Company also reclassified all commercial loans acquired with Suncoast
that were secured by properties outside the state of Florida totaling $10.8
million as available for sale.
CREDIT QUALITY. At September 30, 1997, non-performing assets totaled $14.3
million as compared to $7.8 million and $6.7 million at September 30, 1996 and
1995, respectively. Expressed as a percentage of total assets, non-performing
assets declined to .67% as of September 30, 1997 as compared to .95% as of
September 30, 1996 and 1.10% as of September 30, 1995. The increase in
non-performing assets in both 1997 and 1996 is due primarily to the increase in
loans.
Prior to 1993, BankUnited did not experience significant loan losses.
However, beginning in late 1993, BankUnited began to charge off loans,
particularly in Southern California where real estate values declined. Real
estate values in Southern California had declined because of i) a slowing in
the economy due to plant closings and layoffs in certain industries, ii)
natural disasters in the area, and iii) an over-valuation of the real estate
market, in general, prior to the decline. While real estate values in Southern
California stabilized during 1996, BankUnited believes that real estate values
there have declined sufficiently since 1993 for there to be a continuing risk
that borrowers faced with home mortgage payments based on 1993 values would
default on their home mortgages. From late 1993 through September 1997,
BankUnited recorded a total of $3.0 million in charge offs for residential
loans secured by property in Southern California. Of these Southern California
charge offs, $1.0 million were for loans purchased from a single seller.
BankUnited instituted legal action against the seller for breach of warranty to
recover BankUnited's losses. In October 1995, this legal action was settled,
which resulted in a recovery of $1.0 million. Taking this recovery into
account, BankUnited recorded net charge offs of $2.3 million for the period
from late 1993 through September 30, 1997, of which $2.0 million or 82.4% were
for residential loans secured by real properties in Southern California.
Beginning in fiscal 1993, BankUnited began to reduce the percentage of new
loans acquired which were secured by property located in California and ceased
acquiring all but de minimis amounts of such loans in April 1994. As of
September 30, 1997 BankUnited had $243.7 million of residential loans in
California which constituted 11.4% of its assets. This compares to $125.8
million, or 15.3% of its assets
40
as of September 30, 1996, and $147.2 million or 24.2% as of September 30, 1995.
Effective in fiscal 1997, after taking into account the improved economic
conditions in Southern California, management discontinued this policy.
The allowance for loan losses was $3.7 million, $2.2 million, and $1.5
million at September 30, 1997, 1996, and 1995, respectively. The allowance for
loan losses as a percentage of total loans decreased to .21% at fiscal year end
1997, as compared to .34% at fiscal year end 1996, and .32% at fiscal year end
1995. The decrease in the allowance as a percentage of total loans reflects the
Company's recent charge-off history which shows net charge-offs (recoveries) as
a percentage of average loans of .04%, (.12%) and .14% for 1997, 1996 and 1995,
respectively. The increase in non-performing assets to $14.3 million as of
September 30, 1997 from $7.8 million as of September 30, 1996 was due to
increases in non-performing loans of $6.4 million which, as stated above,
relates to the increase in total loans. Real estate owned declined from $1.5
million as of September 30, 1995 to $632,000 as of September 30, 1996, to
$611,000 as of September 30, 1997. At September 30, 1997, $3.0 million, or
23.5%, of BankUnited's non-performing loans were secured by Southern California
properties as compared to $2.8 million, or 43.4%, as of September 30, 1996, and
$1.1 million, or 28.2% as of September 30, 1995.
Effective October 1, 1995, BankUnited adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan" as amended by SFAS No. 118 "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures ("SFAS No. 114"). There was no
impact on the consolidated statement of operations upon implementation due to
the composition of BankUnited's loan portfolio (primarily residential or
collateral dependent loans) and BankUnited's policy for establishing the
allowance for loan losses. The only impact to the consolidated statement of
financial condition and to non-performing assets was to reclassify three loans
totaling $522,000 previously classified as in substance foreclosures in real
estate owned to non accrual loans. These loans were reclassified because
BankUnited did not have possession of the collateral which, under SFAS No. 114,
is required for a loan to be classified as real estate owned. SFAS No. 114 does
not apply to large groups of smaller balance homogenous loans that are
collectively evaluated for impairment. Loans collectively reviewed by
BankUnited for impairment include all residential and consumer loans that are
past due not more than 60 days. All other loans are reviewed based on specific
criteria such as delinquency or other factors that may come to the attention of
management. BankUnited's impaired loans within the scope of SFAS No. 114
include all non-performing loans.
BankUnited's process for evaluating the adequacy of the allowance for
loans losses has three basic elements: first is the identification of impaired
loans; second is the establishment of an appropriate loan loss allowance once
individual specific impaired loans are identified; and third is a methodology
for establishing loan losses based on the inherent risk in the remainder of the
loan portfolio, past loan loss experience, specific loans which could have loss
potential, geographic and industry concentration, delinquency trends, economic
conditions, the views of its regulators, and other relevant factors.
The identification of impaired loans is achieved mainly through individual
reviews of all loans 60 or more days past due. Loss allowances are established
for specifically identified impaired loans based on the fair value of the
underlying collateral in accordance with SFAS No. 114.
Impairment losses are included in the allowance for loan losses through a
charge to the provision for loan losses. Adjustments to impairment losses
resulting from changes in the fair value of an impaired loan's collateral are
included in the provision for loan losses. Upon disposition of an impaired loan
any related valuation allowance is removed from the allowance for loan losses.
The allowance for loan losses is adjusted by additions charged to operations as
a provision for loan losses and by loan recoveries, with actual losses charged
as reductions to the allowance.
Management believes that the allowance for loan losses is adequate given
the strength of BankUnited's collateral position and the attention given to
loan review and classifications. There can be no assurance that additional
provisions for loan losses will not be required in future periods.
41
The following table sets forth information concerning the Company's
non-performing assets for the periods indicated:
SEPTEMBER 30,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Non-accrual loans(1) ........................... $ 10,866 $ 4,939 $ 3,496 $ 3,918 $ 4,225
Restructured loans(2) ........................... 1,888 1,457 1,070 533 569
Loans past due 90 days and still accruing ...... -- -- 92 -- --
-------- ------- -------- -------- --------
Total non-performing loans .................. 12,754 6,396 4,658 4,451 4,794
Non-accrual tax certificates .................. 958 800 574 -- --
Real estate owned .............................. 611 632 1,453 1,983 1,581
-------- ------- -------- -------- --------
Total non-performing assets ..................... $ 14,323 $ 7,828 $ 6,685 $ 6,434 $ 6,375
======== ======= ======== ======== ========
Allowance for losses on tax certificates ...... $ 697 $ 614 $ 569 $ 85 $ --
Allowance for loan losses ..................... 3,693 2,158 1,469 841 1,184
-------- ------- -------- -------- --------
Total allowance .............................. $ 4,390 $ 2,772 $ 2,038 $ 926 $ 1,184
======== ======= ======== ======== ========
Non-performing assets as a percentage of
total assets ................................. .67% .95% 1.10% 1.17% 1.46%
Non-performing loans as a percentage of
total loans(4) .............................. .72% .99% 1.02% 1.07% 1.54%
Allowance for loan losses as a percentage
of total loans(4) ........................... .21% .34% .32% .20% .38%
Allowance for loan losses as a percentage
of non-performing loans ..................... 28.96% 33.74% 31.54% 18.89% 24.70%
Net chargeoffs as a percentage of average
total loans ................................. .04% ( .12%) .14% .42% .08%
- ----------------
(1) Gross interest income that would have been recorded on non-accrual loans
had they been current in accordance with original terms was $556,000,
$217,000, $128,000, $52,000, and $295,000, for the years ended September
30, 1997, 1996, 1995, 1994, and 1993, respectively. The amount of interest
income on such non-accrual loans included in net income for years ended
September 30, 1997, 1996, and 1995 was $369,000, $145,000, and $113,000,
respectively.
(2) All restructured loans were accruing.
(3) In addition to the above, management has concerns as to the borrower's
ability to comply with present repayment terms on $1,878,000 and $109,000
of accruing loans as of September 30, 1997 and 1996, respectively.
Management estimates the loss, if any, on these loans will not be
significant.
(4) Based on balances prior to deductions for allowance for loan losses.
FEDERAL HOME LOAN BANK (FHLB) OVERNIGHT DEPOSITS. FHLB overnight deposits
increased to $79.4 million at September 30, 1997 from $28.3 million at
September 30, 1996 and $31.8 million at September 30, 1995. This increase is
due to increased liquidity requirements caused by the growth in the balance
sheet.
TAX CERTIFICATES. BankUnited's investment in tax certificates increased
$9.2 million, or 18.6%, to $49.3 million at September 30, 1997 from $40.1
million at September 30, 1996 and $39.5 million at September 30, 1995. The
increase was primarily the result of $42.3 million in certificate purchases
during fiscal 1997 which exceeded $33.0 million in certificate redemptions and
repayments.
INVESTMENTS. Investments held to maturity increased $14.5 million to $14.5
million as of September 30, 1997 as compared with $11,000 as of September 30,
1996 and $4.7 million as of September 30, 1995. Investments available for sale
increased $3.5 million to $10.2 million as of September 30, 1997 as compared to
$6.7 million as of September 30, 1996 and none as of September 30, 1995. The
increase in both of these categories is primarily due to the investment in
agency securities for liquidity purposes.
42
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities, held to maturity
were $11.4 million, $14.7 million and $50.9 million at September 30, 1997, 1996
and 1995 respectively. In fiscal 1996 the Company's portfolio decreased $36.2
million, or 71.1%, primarily as a result of BankUnited's reclassifying $31.8
million of held-to-maturity mortgage-backed securities to available-for-sale in
accordance with "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities" issued by the Financial
Accounting Standards Board which permitted a one-time reclassification. The
reclassified securities had a market value of $916,000 in excess of their book
value at the time of the transfer.
BankUnited's available for sale mortgage-backed securities portfolio
increased $53.4 million to $108.9 million as of September 30, 1997 from $55.5
million as of September 30, 1996, and $2.1 million as of September 30, 1995. In
fiscal 1997, the increase was due to $18.7 million of securities acquired with
Suncoast and purchases of $56.4 million, partially offset by maturities and pay
downs of $21.7 million. In fiscal 1996, $31.8 million of the increase was due
to the reclassification from held to maturity discussed above; $9.1 million of
the increase was due to securities acquired with the Bank of Florida; and the
remainder of the increase was due to purchases made during the 1996 fiscal
year.
OTHER INTEREST EARNING ASSETS. Other interest earning assets increased to
$33.6 million at September 30, 1997 from $12.2 million as of September 30, 1996
and $12.3 million as of September 30, 1995. This category primarily represents
stock in the FHLB which the Company is required to purchase as FHLB advances
increase.
OTHER ASSETS. From September 30, 1996 to September 30, 1997, Office
properties and equipment, net, mortgage servicing rights, goodwill and prepaid
and other assets increased by $4.8 million, $4.8 million, $11.8 million and
$16.7 million, respectively. These increases all relate primarily to the
acquisition of Suncoast.
Since acquiring Suncoast, the Company sold its $292 million Ginnie Mae
("GNMA") mortgage servicing portfolio for $4.7 million and transferred its
FDIC/RTC subservicing portfolio. No gain or loss was recorded on either of
these transactions.
DEPOSITS. Deposits increased by $689.8 million, or 136.3%, to $1.2 billion
at September 30, 1997 from $506.1 million at September 30, 1996. Of this
growth, $323.7 million was acquired with Suncoast; $96.6 million of the
increase represents growth in former Suncoast branches since acquisition;
$128.1 million represents growth in the four branches opened in the two years;
and $22.0 million represents deposits from the State of Florida. Management
believes this strong deposit growth was primarily attributable to BankUnited
offering competitive interest rates and personalized service. BankUnited
intends to open as many as eight branches in the 1998 fiscal year.
FHLB ADVANCES. FHLB advances were $671.5 million at September 30, 1997, up
$434.5 million from the $237.0 million at September 30, 1996. This increase was
the result of FHLB advances being used to fund the purchase of residential
loans as well as $26.5 million of advances assumed by BankUnited in connection
with the acquisition of Suncoast.
TRUST PREFERRED SECURITIES. In December 1996, BankUnited's subsidiary,
BankUnited Capital, issued $50 million of Trust Preferred Securities; in March
1997, BankUnited Capital issued an additional $20 million of Trust Preferred
Securities; and in June 1997, BankUnited's subsidiary, BankUnited Capital II,
issued $46 million of Trust Preferred Securities. The net proceeds from the
sales of the Trust Preferred Securities were $111 million. These funds may be
used for general corporate purposes, including, but not limited to,
acquisitions by either the Bank or the Company, capital contributions to
support the Bank's growth and for working capital, and the possible repurchase
of shares of the Company's preferred stock subject to acceptable market
conditions. In the year ended September 30, 1997, BankUnited contributed $85
million of additional capital to the Bank.
SUBORDINATED NOTES. On August 31, 1997, BankUnited called all outstanding
subordinated notes totaling $774,500.
43
STOCKHOLDERS' EQUITY. BankUnited's total stockholders' equity was $99.6
million at September 30, 1997, an increase of $30.5 million, or 44.1% from
$69.1 million at September 30, 1996. This was due primarily to the issuance of
2,199,930 shares of Class A Common Stock and 920,000 shares of 8% Noncumulative
Convertible Preferred Stock, Series 1996, in connection with the Suncoast
acquisition. The estimated value of the stock issued to acquire Suncoast was
$27.8 million.
In February 1997, the holder of BankUnited's Series C and Series C-II
classes of preferred stock exercised the right to convert both classes to Class
A Common Stock at exchange ratios of 1.45475 shares of Class A Common Stock for
each share of Series C preferred stock and 1.3225 shares of Class A Common
Stock for each share of Series C-II preferred stock. BankUnited had previously
exercised its right to call both classes of preferred stock. In July 1997,
BankUnited began a tender offer to purchase any and all of its outstanding
shares of 9% Preferred Stock at $10.25 per share. The offer expired on August
15, 1997, and BankUnited purchased 448,583 shares pursuant thereto. The number
of shares remaining outstanding after the tender offer is 701,417 shares.
In September 1997, the Company exercised its right to call all the
outstanding shares of its 8% Non-cumulative Convertible Preferred Stock Series
1996, effective October 10, 1997. As a result 927,204 shares (387,709 shares as
of September 30, 1997) converted to 1,548,410 Class A Common Stock at a ratio
of 12/3 shares of common stock for each share of preferred. The remaining 5,696
shares of preferred shares were redeemed at $15 per share.
In October 1997, the Company issued 3,680,000 shares of Class A Common
Stock pursuant to a public stock offering. Net proceeds from the offering were
approximately $43.9 million.
LIQUIDITY AND CAPITAL RESOURCES. BankUnited's most significant sources of
funds are deposits, FHLB advances, amortization and pre-payment of mortgage
loans and securities, maturities of investment securities and other short term
investments, and earnings and funds provided from operations. While FHLB
advances, scheduled mortgage loan repayments and securities repayments are
relatively predictable sources of funds, deposit flows and prepayments on loans
and mortgage-backed securities are greatly influenced by general interest
rates, economic conditions and competition. BankUnited manages the pricing of
its deposits to maintain a desired balance. In addition, BankUnited invests
excess funds in federal funds and other short-term interest-earning assets
which provide liquidity to meet lending requirements.
The Bank is required under applicable federal regulations to maintain
specified levels of liquid investments in cash, United States government
securities and other qualifying investments. Regulations currently in effect
require the Bank to maintain liquid assets of not less than 5.0% of its net
withdrawable accounts plus short-term borrowings, of which short-term liquid
assets must consist of not less than 1.0%. As of September 30, 1997, the Bank
had liquid assets and short-term liquid assets of 8.49% and 5.15%,
respectively, which was in compliance with these requirements, and as of
September 30, 1996, the Bank had liquid assets and short-term liquid assets of
6.75% and 3.80%, respectively. These applicable federal regulations were
revised effective November 24, 1997, eliminating the 1.0% short-term liquid
asset requirement and reducing the 5.0% liquid asset requirement to 4%.
BankUnited's primary use of funds is to purchase or originate loans and to
purchase mortgage-backed and investment securities. In fiscal 1997, 1996, and
1995, loans increased $1.1 billion, $193.0 million, and $40.1 million,
respectively, and BankUnited purchased $77.8 million, $22.7 million, and $16.6
million, respectively, of mortgage-backed and investment securities. In
addition, in 1995, BankUnited sold branches having $130.3 million of deposits.
Funding for the above came primarily from increases in deposits of $689.8
million, $196.1 million and $92.6 million (exclusive of the branch sale) in
1997, 1996 and 1995, respectively, and increases in FHLB advances and other
borrowings of $464.5 million in 1997, $52.7 million in 1996 and $83.6 million
in 1995.
Federal savings banks such as the Bank are also required to maintain
capital at levels specified by applicable minimum capital ratios. At September
30, 1997, the Bank was in compliance with all capital requirements and met the
definition of a "well capitalized" institution under applicable federal
regulations.
44
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1997
AND 1996
NET INCOME AFTER PREFERRED STOCK DIVIDENDS. BankUnited had net income
after preferred stock dividends of $4.7 million for the year ended September
30, 1997, compared to net income after preferred stock dividends of $441,000
for the year ended September 30, 1996. All major categories of income and
expense increased significantly in the year ended September 30, 1997 as
compared to the year ended September 30, 1996 and reflect the significant
growth BankUnited has experienced in the last year. A significant factor in
such growth was the acquisition of Suncoast, which was completed on November
15, 1996. BankUnited's Consolidated Statement of Operations for the year ended
September 30, 1997 reflects Suncoast's operations from the date of acquisition.
Below is a more detailed discussion of each major category of income and
expenses.
NET INTEREST INCOME. Net interest income increased $13.9 million, or
78.8%, to $31.5 million for the year ended September 30, 1997 from $17.6
million for the year ended September 30, 1996. This increase was attributable
to an increase in average interest-earning assets of $726.0 million, or 104.3%,
to $1.4 billion for the year ended September 30, 1997 from $696.4 million for
the year ended September 30, 1996. Approximately $350 million of the increase
in average interest-earning assets for the year ended September 30, 1997 was a
result of the acquisition of Suncoast. The remaining increase in average
interest-earning assets is due primarily to loan purchases. The average yield
on interest-earning assets increased 16 basis points to 7.65% for the year
ended September 30, 1997, from 7.49% for the year ended September 30, 1996. The
increase in average yield was attributable to an increase in the yield on loans
receivable relating primarily to commercial real estate and construction loans
acquired with Suncoast. Suncoast had a greater percentage of higher yielding
commercial real estate and construction loans than the Bank.
The increase in interest income of $56.6 million, or 108.8%, to $108.8
million for the year ended September 30, 1997 from $52.1 million for the year
ended September 30, 1996, primarily reflects increases in interest and fees on
loans of $53.3 million. The average yield on loans receivable increased to
7.78% for the year ended September 30, 1997 from 7.65% for the year ended
September 30, 1996 and the average balance of loans receivable increased $676.9
million, or 125.3%, to $1.2 billion for the year ended September 30, 1997.
Approximately $300 million of the increase in loans was due to the acquisition
of Suncoast and, as stated above, the increase in the yield on loans was also
attributed to Suncoast.
The increase in interest expense of $41.3 million, or 119.4%, to $76.0
million for the year ended September 30, 1997 from $34.6 million for the year
ended September 30, 1996 primarily reflects an increase in interest expense on
interest-bearing deposits of $29.3 million, or 141.1%, from $20.8 million for
the year ended September 30, 1996, to $50.1 million for the year ended
September 30, 1997, an increase in interest expense on FHLB advances of $5
million from $13.8 million for the year ended September 30, 1996 to $18.8
million for the year ended September 30, 1997, and interest expense of $6.5
million on Trust Preferred Securities which were issued in fiscal 1997. This
increase was due to an increase in average interest-bearing deposits of $557.8
million, or 137.2%, from $406.6 million for the year ended September 30, 1996
to $964.4 million for the year ended September 30, 1997. Approximately $250
million of this increase represents deposits acquired with Suncoast. The
average rate paid on interest-bearing deposits increased 9 basis points from
5.11% for the year ended September 30, 1996 to 5.20% for the year ended
September 30, 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year
ended September 30, 1997 was $1.3 million as compared with a credit for loan
losses of $120,000 for the year ended September 30, 1996. The credit in 1996
was due to a recovery of approximately $1 million as a result of a legal
settlement relating to certain loans previously purchased. The provision for
loan losses represents management's estimate of the charge to operations after
reviewing the nature, volume, delinquency status, and inherent risk in the loan
portfolio in relation to the allowance for loan losses. For a detailed
discussion of BankUnited's asset quality and allowance for loan losses, see
"--Description of Financial Condition Changes for the Years Ended September 30,
1997, 1996 and 1995--Credit Quality."
45
NON-INTEREST INCOME. Non-interest income for the year ended September 30,
1997 was $4.1 million compared with $649,000 for the year ended September 30,
1996, an increase of $3.4 million. Of this increase, $1.6 million represents
loan servicing fees (net of amortization of capitalized servicing rights) from
operations acquired with Suncoast, and $819,000 represent gains on the sale of
loans and mortgage backed securities. The remaining increase was primarily
attributable to service fees on deposits reflecting the increase in the amount
of deposits outstanding.
NON-INTEREST EXPENSES. Operating expenses increased $8.9 million, or
63.5%, to $22.9 million for the year ended September 30, 1997 compared to $14.0
million for the year ended September 30, 1996. The increase in expenses was
attributable to the growth BankUnited has experienced including the expenses of
Suncoast's operations. The year ended September 30, 1996 included a one time
assessment to replenish the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation (FDIC) of $2.6 million.
INCOME TAXES. The income tax provision was $5.0 million for the year ended
September 30, 1997 compared to $1.7 million for the year ended September 30,
1996. The increase in income taxes was the result of BankUnited's higher
pre-tax earnings during the year ended September 30, 1997, compared to the year
ended September 30, 1996.
PREFERRED STOCK DIVIDENDS. Preferred stock dividends for the year ended
September 30, 1997 were $2.9 million, an increase of $745,000, as compared to
$2.1 million for the year ended September 30, 1996. This increase is the result
of dividends paid on the 8% Noncumulative Convertible Preferred Stock, Series
1996, issued in connection with the acquisition of Suncoast and retired in
October, 1997, partially offset by the conversion of the Noncumulative
Convertible Preferred Stock, Series C and C-II in February 1997.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996
AND 1995
NET INCOME. Net income before preferred stock dividends for fiscal 1996
was $2.6 million compared to $6.2 million in 1995. The decrease in net income
was primarily attributable to the pretax gain recorded in the fourth quarter of
fiscal 1995 of $9.3 million ($5.8 million after tax) from the sale of
BankUnited's three branches on the west coast of Florida and the expense of a
one-time special assessment by the SAIF of $2.6 million ($1.6 million after
tax) in the fourth quarter of 1996. The SAIF special assessment became
effective on September 30, 1996, in connection with the federal government's
plan to recapitalize the SAIF. Many banks and thrifts were levied a 65.7 basis
point charge against their SAIF deposit base to help meet the 1.25% mandated
deposit reserve ratio. See "--Non-Interest Expenses" below.
Primary earnings per share were $0.10 in 1996 compared to $1.77 in 1995.
Fully diluted earnings per share totaled $0.10 in 1996 compared to $1.26 in
1995. There were no common share stock dividends declared in 1996 or 1995. In
the fourth quarter of fiscal 1994 BankUnited suspended common stock dividends
for the foreseeable future in order to use funds to support managed and
controlled growth.
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $4.4 million or 33.6% to $17.5 million in fiscal 1996 from $13.1
million in fiscal 1995. The increase was attributed to an increase in the
average interest-earning assets of $148.6 million, or 27.1%, to $696.4 million
in 1996 from $547.9 million in 1995, offset by a decline in the net interest
rate spread of two basis points, to 2.10% for 1996 from 2.12% for 1995. Average
interest-earning assets increased primarily because of purchases of loans which
were funded by an increase in certificates of deposit. The average yield on
interest-earning assets increased 29 basis points to 7.49% for 1996 from 7.20%
for fiscal 1995, and the average cost of interest-bearing liabilities increased
31 basis points to 5.39% for 1996 from 5.08% for 1995.
The increase in interest income of $12.7 million, or 32.2%, to $52.1
million for fiscal 1996 from $39.4 million for 1995 reflects increases in
interest and fees on loans of $11.1 million or 36.9%. The average
46
yield on loans increased to 7.65% for 1996 from 7.19% for 1995 and the average
balance of loans receivable increased $120.8 million, or 28.8%, to $540.3
million for fiscal 1996. The increase in average loans receivable was primarily
due to purchases of residential loans. In this regard BankUnited acquired
$110.7 million of non-residential loans as part of the Suncoast acquisition
subsequent to year end.
The increase in interest expense of $8.3 million, or 31.6% to $34.6
million for fiscal 1996 from $26.3 million for 1995 primarily reflects an
increase in interest on deposits of $2.9 million or 16.5% to $20.8 million for
1996, and an increase in interest on borrowings of $5.4 million, or 63.6%, to
$13.8 million for 1996. The average cost of interest-bearing deposits increased
34 basis points to 5.12% in fiscal 1996 compared with 4.78% in fiscal 1995. The
average cost of interest-bearing deposits increased primarily because higher
rate certificates of deposit represent a greater percentage of interest-bearing
liabilities. The average balance of interest-bearing deposits increased $32.9
million or 8.8% to $406.6 million for fiscal 1996. The average cost of
borrowings remained relatively unchanged at 5.88% in fiscal 1996 versus 5.87%
in fiscal 1995, however the average balance of borrowings increased $91.2
million, or 63.3% to $235.3 million for 1996. Borrowings increased in the
fourth quarter of fiscal 1995 to replace deposits sold with BankUnited's
branches on the west coast of Florida.
PROVISIONS FOR LOAN LOSSES. In fiscal 1996, BankUnited recorded a credit
for loan losses of $120,000 as compared to a provision of $1.2 million in
fiscal 1995. The credit for loan losses recorded in fiscal 1996 was primarily
due to a recovery of $1.0 million as a result of a legal settlement reached in
October 1995 with a seller/servicer of loans from which BankUnited had
previously purchased approximately $38.7 million of loans. BankUnited
experienced unusually large losses on these purchased loans and as a result
instituted a lawsuit against the seller for breach of warranty. Total charge
offs in fiscal 1996 were $493,000 and recoveries were $1.1 million compared
with charge offs of $594,000 and recoveries of $1,000 in fiscal 1995. (For a
detailed discussion of BankUnited's asset quality and allowance for loan
losses, see "--Description of Financial Condition Changes for the Years Ended
September 30, 1997, 1996 and 1995--Credit Quality.")
NON-INTEREST INCOME. Other income for fiscal 1996 was $0.6 million
compared with $10.2 million in fiscal 1995. Fiscal 1995 included a gain of $9.3
million from the sale of BankUnited's branches on the west coast of Florida, a
gain of $263,000 from the sale of $23.7 million of mortgage servicing rights
and gains of $239,000 from the sale of loans and mortgage-backed securities.
There were no significant gains or losses from the sale of assets in 1996.
NON-INTEREST EXPENSES. Operating expenses increased $1.9 million or 15.7%
to $14.0 million for fiscal 1996 compared to $12.1 million for fiscal 1995
primarily as a result of a $2.6 million ($1.6 million after tax) accrual for
the one time SAIF special assessment. The SAIF special assessment was a 65.7
basis point charge on deposits that were insured by the SAIF of the FDIC on
March 31, 1995.
The reduction of operating expenses as a result of the sale of
BankUnited's three branches on the west coast of Florida in July 1995 were
substantially offset by the opening of three new branches in Palm Beach County
on the east coast of Florida in fiscal 1996. Employee compensation and benefits
increased $278,000 or 7.0% to $4.3 million in fiscal 1996 from $4.0 million in
fiscal 1995. The increase primarily represents increased personnel resulting
from BankUnited's growth.
Insurance expense increased 251.5% due to the one time SAIF special
assessment of $2.6 million.
Expenses associated with real estate owned ("REO") decreased to $73,000 in
fiscal 1996 from $559,000 in fiscal 1995, a decrease of $486,000. This decrease
reflected net gains on the sale of REO of $178,000 in fiscal 1996, compared
with net losses of $172,000 in fiscal 1995.
Other operating expenses decreased $420,000 or 17.1%, to $2.0 million for
fiscal 1996 from $2.4 million for fiscal 1995. The decrease primarily reflects
a decrease in the provision for losses on tax certificates. In fiscal 1995,
BankUnited recorded an additional provision on tax certificates previously
purchased, which have not been redeemed and on which BankUnited elected not to
seek tax deeds.
47
INCOME TAX PROVISION. The income tax provision was $1.7 million for fiscal
1996 compared to $3.7 million for fiscal 1995. The difference primarily results
from the difference in income before income taxes. The effective tax rate was
39.1% in 1996 and 37.5% in 1995.
PREFERRED STOCK DIVIDENDS. Total preferred stock dividends were $2.1
million in fiscal 1996 compared to $2.2 million in fiscal 1995. This decrease
was because BankUnited declared a special dividend in the fourth quarter of
fiscal 1995 on the Series A and Series B Noncumulative Convertible Preferred
Stock of $1.25 and $0.92 per share, respectively, payable in Class A Common
Stock. The special dividend represented five quarters of unpaid dividends.
Regular dividends were paid on all other classes of preferred stock for both
fiscal 1996 and 1995.
48
SELECTED QUARTERLY FINANCIAL DATA
Set forth below is selected quarterly data for the fiscal years ended
September 30, 1997 and 1996.
1997
--------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Net interest income .................................... $7,076 $8,001 $8,842 $8,895
Provision for loan losses .............................. 250 165 280 600
Non-interest income .................................... 600 1,001 916 1,543
Non-interest expense .................................... 4,805 5,751 6,158 6,233
------- ------- ------- ------
Income before taxes and preferred stock dividends ...... 2,621 3,086 3,320 3,605
Income taxes .......................................... 1,022 1,243 1,329 1,439
------- ------- ------- ------
Net income before preferred stock dividends ............ 1,599 1,843 1,991 2,166
Preferred stock dividends .............................. 672 777 718 723
------- ------- ------- ------
Net income applicable to common stock .................. $ 927 $1,066 $1,273 $1,443
======= ======= ======= ======
Primary earnings per share .............................. $ 0.13 $ 0.12 $ 0.14 $ 0.15
======= ======= ======= ======
Fully diluted earnings per share ........................ $ 0.13 $ 0.12 $ 0.14 $ 0.15
======= ======= ======= ======
1996
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ------------
(DOLLARS IN THOUSANDS)
Net interest income .......................................... $3,538 $3,758 $4,723 $ (5,491)
Provision (credit) for loan losses ........................... (300) -- 75 105
Non-interest income .......................................... 158 129 198 164
Non-interest expense .......................................... 2,528 2,764 3,006 5,738
------ ------- ------- --------
Income (loss) before taxes and preferred stock dividends ...... 1,468 1,123 1,840 (188)
Income taxes ................................................... 557 430 706 (36)
------ ------- ------- --------
Net income (loss) before preferred stock dividends ............ 911 693 1,134 (152)
Preferred stock dividends .................................... 536 536 537 536
------ ------- ------- --------
Net income (loss) applicable to common stock .................. $ 375 $ 157 $ 597 $ (688)
====== ======= ======= ========
Primary earnings (loss) per share .............................. $ 0.16 $ 0.04 $ 0.10 $ (0.12)
====== ======= ======= ========
Fully diluted earnings (loss) per share ........................ $ 0.15 $ 0.04 $ 0.10 $ (0.12)
====== ======= ======= ========
In the fourth quarter of 1996, the Company recorded an expense of $2.6
million for a one-time special assessment by the SAIF. The SAIF special
assessment required by the FDIC became effective on September 30, 1996, in
connection with the federal government's plan to recapitalize the SAIF.
49
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The business of the Company and the composition of its balance sheet
consists of investments in interest-earning assets (primarily loans,
mortgage-backed securities, and investment securities) which are primarily
funded by interest-bearing liabilities (deposits and borrowings). Such
financial instruments have varying levels of sensitivity to changes in market
interest rates resulting in market risk. Other than loans which are originated
and held for sale, all of the financial instruments of the Company are for
other than trading purposes.
Interest rate risk results when the maturity or repricing intervals and
interest rate indices of the interest-earning assets, interest-bearing
liabilities, and off-balance sheet financial instruments are different,
creating a risk that changes in the level of market interest rates will result
in disproportionate changes in the value of, and the net earnings generated
from, the Company's interest-earning assets, interest-bearing liabilities, and
off-balance sheet financial instruments. The Company's exposure to interest
rate risk is managed primarily through the Company's strategy of selecting the
types and terms of interest-earning assets and interest-bearing liabilities
which generate favorable earnings, while limiting the potential negative
effects of changes in market interest rates. Since the Company's primary source
of interest-bearing liabilities is customer deposits, the Company's ability to
manage the types and terms of such deposits may be somewhat limited by customer
preferences in the market areas in which the Company operates. Borrowings,
which include FHLB Advances, short-term borrowings, and long-term borrowings,
are generally structured with specific terms which in management's judgement,
when aggregated with the terms for outstanding deposits and matched with
interest-earning assets, mitigate the Company's exposure to interest rate risk.
The rates, terms and interest rate indices of the Company's interest-earning
assets result primarily from the Company's strategy of investing in loans and
securities (a substantial portion of which have adjustable-rate terms) which
permit the Company to limit its exposure to interest rate risk, together with
credit risk, while at the same time achieving a positive interest rate spread
from the difference between the income earned on interest-earning assets and
the cost of interest-bearing liabilities (see "Business--Factors Affecting
Earnings--Asset and Liability Management" for a further discussion of rate
sensitive assets, rate sensitive liabilities and net interest spread).
SIGNIFICANT ASSUMPTIONS UTILIZED IN MANAGING INTEREST RATE RISK
Managing the Company's exposure to interest rate risk involves significant
assumptions about the exercise of imbedded options and the relationship of
various interest rate indices of certain financial instruments.
IMBEDDED OPTIONS. A substantial portion of the Company's loans and
mortgage-backed securities are residential mortgage loans containing
significant imbedded options which permit the borrower to prepay the principal
balance of the loan prior to maturity ("prepayments") without penalty. A loan's
propensity for prepayment is dependent upon a number of factors, including, the
current interest rate and interest rate index (if any) on the loan, the
financial ability of the borrower to refinance, the economic benefit to be
obtained from refinancing, availability of refinancing at attractive terms, as
well as economic and other factors in specific geographic areas which affect
the sales and price levels of residential property. In a changing interest rate
environment, prepayments may increase or decrease on fixed- and adjustable-rate
loans depending on the current relative levels and expectations of future
short- and long-term interest rates. Since a significant portion of the
Company's loans are ARM loans, prepayments on such loans generally increase
when long-term interest rates fall or are at historically low levels relative
to short-term interest rates making fixed-rate loans more desirable.
Investment securities, other than those with early call provisions,
generally do not have significant imbedded options and repay pursuant to
specific terms until maturity. While savings and checking deposits generally
may be withdrawn upon the customer's request without prior notice, a continuing
relationship with customers resulting in future deposits and withdrawals is
generally predictable resulting in a dependable and uninterruptible source of
funds. Time deposits generally have early
50
withdrawal penalties, while term FHLB Advances have prepayment penalties, which
discourage customer withdrawal of time deposits and prepayment of FHLB Advances
prior to maturity.
INTEREST RATE INDICES. The Company's ARM loans and mortgage-backed
securities are primarily indexed to the One Year Constant Maturity Treasury
Index or COFI (see "Business--Lending Activities"). When such loans and
mortgage-backed securities are funded by interest-bearing liabilities which are
determined by other indices, primarily deposits and FHLB Advances, a changing
interest rate environment may result in different levels of change in the
different indices leading to disproportionate changes in the value of, and the
net earnings generated from, the Company's financial instruments. Each index is
unique and is influenced by different external factors, therefore, the
historical relationships in various indices may not necessarily be indicative
of the actual change which may result in a changing interest rate environment.
INTEREST RATE RISK MEASUREMENT
In addition to periodic gap reports (see "Business--Factors Affecting
Earnings--Asset and Liability Management") comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in interest
rates, management also utilizes a quarterly report ("model") prepared for the
Bank by the OTS based on information provided by the Bank which measures the
Bank's exposure to interest rate risk. The model calculates the present value
of assets, liabilities, off-balance sheet financial instruments, and equity at
current interest rates, and at hypothetical higher and lower interest rates at
one percent intervals. The present value of each major category of financial
instrument is calculated by the model using estimated cash flows based on
weighted average contractual rates and terms at discount rates representing the
estimated current market interest rate for similar financial instruments. The
resulting present value of longer term fixed-rate financial instruments are
more sensitive to change in a higher or lower market interest rate scenario,
while adjustable-rate financial instruments largely reflect only a change in
present value representing the difference between the contractual and
discounted rates until the next interest rate repricing date.
51
The following table reflects the estimated present value of
interest-earning assets, interest-bearing liabilities, and off-balance sheet
financial instruments as calculated by the OTS for the Bank as of September 30,
1997, consolidated with the estimated present values of other financial
instruments of the Company, at current interest rates and at hypothetical
higher and lower interest rates of one and two percent.
AT SEPTEMBER 30, 1997
------------------------------------------------------------------------
PRESENT VALUE
------------------------------------------------------------------------
-2% -1% CURRENT +1% +2%
------------ ------------ ------------ -------------- --------------
Interest-earning assets:
Investments, tax certificates, Federal
funds sold, FHLB overnight deposits
and other interest earning assets,
at cost ................................. $ 191,067 $ 189,499 $ 187,074 $ 186,141 $ 184,475
Mortgage-backed securities ............... 127,699 124,954 120,211 114,403 108,636
Loans:
Adjustable-rate mortgages ............... 1,402,745 1,392,526 1,378,638 1,359,515 1,334,774
Fixed-rate mortgages ..................... 450,068 442,009 426,906 407,384 387,172
Commercial and consumer loans ............ 12,771 12,689 12,608 12,533 12,455
---------- ---------- ---------- ---------- ----------
Total loans .............................. 1,865,584 1,847,224 1,818,152 1,779,432 1,734,401
---------- ---------- ---------- ---------- ----------
Total interest-earning assets ............ $2,184,350 $2,161,677 $2,125,437 $2,079,976 $2,027,512
========== ========== ========== ========== ==========
Interest-bearing liabilities:
Customer deposits:
Money market and NOW accounts ............ $ 99,357 $ 99,357 $ 99,357 $ 99,357 $ 99,357
Passbook accounts ........................ 160,431 160,431 160,431 160,431 160,431
Certificate accounts ..................... 950,266 944,105 938,083 932,140 926,336
---------- ---------- ---------- ---------- ----------
Total customer deposits .................. 1,210,054 1,203,893 1,197,871 1,191,928 1,186,124
Borrowings:
FHLB advances ........................... 678,664 676,676 674,705 672,752 670,815
Trust preferred ........................... 142,791 129,923 119,010 109,035 100,538
Other borrowings ........................ 30,000 30,000 30,000 30,000 30,000
---------- ---------- ---------- ---------- ----------
Total borrowings ........................ 851,455 836,599 823,715 811,787 801,353
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities ...... $2,061,509 $2,040,492 $2,021,586 $2,003,715 $1,987,477
========== ========== ========== ========== ==========
Loan commitments ........................... $ 30,219 $ 20,174 $ 7,371 $ (8,716) $ (28,481)
========== ========== ========== ========== ==========
The calculations of present value have certain shortcomings. The discount
rates utilized for loans and mortgage-backed securities are based on estimated
market interest rate levels for similar loans and securities nationwide, with
prepayment levels generally assumed based on global statistics. The unique
characteristics of the Company's loans and mortgage-backed securities may not
necessarily parallel those assumed in the model, and therefore, would likely
result in different discount rates, prepayment experiences, and present values.
The discount rates utilized for deposits and borrowings are based upon
available alternative types and sources of funds which are not necessarily
indicative of the present value of deposits and FHLB Advances since such
deposits and Advances are unique to, and have certain price and customer
relationship advantages for, depository institutions. The present values are
determined based on the discounted cash flows over the remaining estimated
lives of the financial instruments and assumes that the resulting cash flows
are reinvested in financial instruments with virtually identical terms. The
total measurement of the Company's exposure to interest rate risk as presented
in the above table may not be representative of the actual values which might
result from a higher or lower interest rate environment. A higher or lower
interest rate environment will most likely
52
result in different investment and borrowing strategies by the Company designed
to further mitigate the effect on the value of, and the net earnings generated
from, the Company's net assets from any change in interest rates.
NET PORTFOLIO VALUE. The OTS adopted a final rule in August of 1993
incorporating an interest rate risk ("IRR") component into the risk-based
capital rules (see "Regulation"). The IRR component is a dollar amount that is
deducted from total capital for the purpose of calculating an institution's
risk-based capital requirement and is measured in terms of the sensitivity of
its net portfolio value ("NPV") to changes in interest rates. An institution's
NPV is calculated as the net discounted cash flows from assets, liabilities,
and off-balance sheet contracts. An institution's IRR component is measured as
the change in the ratio of NPV to the net present value of total assets as a
result of a hypothetical 200 basis point change in market interest rates. A
resulting decline in this ratio of more than 2% of the estimated present value
of an institution's total assets prior to the hypothetical 200 basis point
change will require the institution to deduct from its regulatory capital 50%
of that excess decline. Implementation of the rule has been postponed
indefinitely.
The following table presents the Bank's ratio of NPV to the present value
of total assets as of September 30, 1997, as calculated by the OTS, based on
information provided to the OTS by the Company.
CHANGE IN INTEREST RATES RATIO OF NPV
IN BASIS POINTS PRESENT VALUE OF TO THE PRESENT VALUE OF
(RATE SHOCK) NPV TOTAL ASSETS TOTAL ASSETS CHANGE
- -------------------------- ---------- ------------------ ------------------------ ----------
(DOLLARS IN THOUSANDS)
+200 $114,075 $2,061,248 5.53% (4.46)%
+100 169,500 2,104,648 8.05 (1.94)
Static 214,066 2,141,024 10.00 --
-100 244,597 2,166,744 11.29 1.29
-200 265,113 2,185,364 12.13 2.13
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
mortgage loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the loan. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the tables. Finally, the
ability of many borrowers to service their debt may decrease in the event of a
significant interest rate increase.
In addition, the previous table does not necessarily indicate the impact
of general interest rate movements on the Company's net interest income because
the repricing of certain categories of assets and liabilities are subject to
competitive and other pressures beyond the Company's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may in fact mature or reprice at different times and at
different volumes.
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BANKUNITED FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-
Report of Independent Certified Public Accountants .................. 55
Consolidated Statements of Financial Condition as of September 30, 1997
and September 30, 1996 ............................................. 56
Consolidated Statements of Operations for the Years Ended
September 30, 1997, 1996 and 1995 .................................... 57
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1997, 1996 and 1995 .................................... 58
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995 .................................... 60
Notes to Consolidated Financial Statements ........................... 62
54
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
BankUnited Financial Corporation:
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of operations, of
stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of BankUnited Financial Corporation and its
subsidiaries at September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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.
PRICE WATERHOUSE LLP
Miami, Florida
November 12, 1997
55
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FOR THE YEARS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash .................................................................................... $ 10,571 $ 5,483
Federal Home Loan Bank overnight deposits ................................................ 79,413 28,253
Federal funds sold ..................................................................... -- 400
Tax certificates, (net of reserves of $697 and $614 at September 30, 1997 and 1996,
respectively) ........................................................................... 49,283 40,088
Investments held to maturity (market value of approximately $14,613 and $11 at
September 30, 1997 and 1996, respectively) ............................................. 14,494 11
Investments available for sale, at market ................................................ 10,166 6,685
Mortgage-backed securities, held to maturity (market value of approximately $11,292 and
$14,274 at September 30, 1997 and 1996, respectively).................................... 11,352 14,698
Mortgage-backed securities available for sale, at market ................................. 108,919 55,467
Loans receivable, net .................................................................. 1,661,381 646,385
Mortgage loans held for sale (market value of approximately $105,980 at September 30, 104,342 --
1997) .
Other interest earning assets ............................................................ 33,599 12,225
Office properties and equipment, net ................................................... 7,371 2,608
Real estate owned, net .................................................................. 611 632
Accrued interest receivable ............................................................ 16,261 7,023
Mortgage servicing rights ............................................................... 4,783 --
Goodwill ................................................................................. 14,278 2,457
Prepaid expenses and other assets ...................................................... 18,582 1,945
---------- --------
Total assets ........................................................................... $2,145,406 $824,360
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits .............................................................................. $1,195,892 $506,106
Securities sold under agreements to repurchase .......................................... 30,000 --
Advances from Federal Home Loan Bank ................................................... 671,484 237,000
Company obligated mandatorily redeemable trust preferred securities of subsidiary trust
holding solely junior subordinated deferrable interest debentures of the Company ...... 116,000 --
Subordinated notes ..................................................................... -- 775
Interest payable (primarily on deposits and advances from Federal Home Loan Bank) ...... 3,844 1,244
Advance payments by borrowers for taxes and insurance ................................. 10,688 4,292
Accrued expenses and other liabilities ................................................ 17,853 5,832
---------- --------
Total liabilities ..................................................................... 2,045,761 755,249
---------- --------
Commitments and contingencies (Notes 7 and 16)
Stockholders' equity:
Preferred stock, Series B, 1993 and 1996, $0.01 par value. Authorized shares--10,000,000;
issued and outstanding shares--2,175,296 and 2,664,547 at September 30, 1997 and 1996,
respectively ........................................................................ 22 27
Class A Common Stock, $.01 par value. Authorized shares--30,000,000; issued and
outstanding shares--9,257,098 and 5,454,201 at September 30, 1997 and 1996, 92 54
respectively .
Class B Common Stock, $.01 par value. Authorized shares--3,000,000; issued and
outstanding shares--275,685 and 251,515 at September 30, 1997 and 1996, respectively 3 3
Additional paid-in capital ............................................................... 86,679 62,055
Retained earnings ........................................................................ 11,988 7,279
Net unrealized gains (losses) on securities available for sale, net of tax ............... 861 (307)
---------- --------
Total stockholders' equity ............................................................ 99,645 69,111
---------- --------
Total liabilities and stockholders' equity ............................................. $2,145,406 $824,360
========== ========
See accompanying notes to consolidated financial statements.
56
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
SEPTEMBER 30:
--------------------------------------
1997 1996 1995
---------- -------------- --------
(DOLLARS IN THOUSANDS,
EXCEPT EARNINGS PER SHARE)
Interest income:
Interest and fees on loans ....................................... $ 94,655 $ 41,313 $30,171
Interest on mortgage-backed securities ........................... 7,035 4,250 4,093
Interest on short-term investments ................................. 1,613 2,359 1,491
Interest and dividends on long-term investments and other
interest-earning assets .......................................... 5,471 4,210 3,664
- ---------------------------------------------------------------------- -------- -------- -------
Total interest income ............................................. 108,774 52,132 39,419
-------- -------- -------
Interest expense:
Interest on deposits ............................................. 50,136 20,791 17,849
Interest on borrowings ............................................. 19,351 13,831 8,456
Preferred dividends of Trust Subsidiary ........................... 6,473 -- --
-------- -------- -------
Total interest expense .......................................... 75,960 34,622 26,305
-------- -------- -------
Net interest income before provision (credit) for loan
losses ......................................................... 32,814 17,510 13,114
Provision (credit) for loan losses ................................. 1,295 (120) 1,221
-------- -------- -------
Net interest income after provision (credit) for loan losses ...... 31,519 17,630 11,893
-------- -------- -------
Non-interest income:
Service fees ...................................................... 2,993 597 423
Gain on sale of loans and mortgage-backed securities ............... 819 5 239
Gain (loss) on sale of other assets .............................. 1 (6) 9,569
Other ............................................................ 247 53 6
-------- --------- -------
Total non-interest income ....................................... 4,060 649 10,237
-------- --------- -------
Non-interest expenses:
Employee compensation and benefits ................................. 8,880 4,275 3,997
Occupancy and equipment .......................................... 3,568 1,801 1,727
Insurance ......................................................... 948 3,610 1,027
Professional fees--legal and accounting ........................... 1,605 929 1,269
Data processing ................................................... 992 340 356
Loan servicing expense ............................................. 1,796 979 765
Real estate owned operations ....................................... 301 73 559
Other operating expenses .......................................... 4,875 2,029 2,449
-------- --------- -------
Total non-interest expenses ....................................... 22,947 14,036 12,149
-------- --------- -------
Income before income taxes and preferred stock
dividends ...................................................... 12,632 4,243 9,981
Income taxes ...................................................... 5,033 1,657 3,741
-------- --------- -------
Net Income before preferred stock dividends ..................... 7,599 2,586 6,240
Preferred stock dividends of the Company ........................... 2,890 2,145 2,210
-------- --------- -------
Net income after preferred stock dividends ........................ $ 4,709 $ 4,441 $ 4,030
======== ========= =======
Primary earnings per share .......................................... $ 0.54 $ 0.10 $ 1.77
======== ========= =======
Fully diluted earnings per share .................................... $ 0.54 $ 0.10 $ 1.26
======== ========= =======
See accompanying notes to consolidated financial statements.
57
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------------ -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- ---------- ----------- -------- ----------- --------
Balance at September 30, 1994 ......... 2,679,107 $ 27 1,787,018 $18 214,834 $ 2
Issuance of Class A and Class B
Common Stock ........................ -- -- 22,418 -- 18,232 --
Conversion of Class B Common
Stock to Class A Common
Stock .............................. -- -- 742 -- (742) --
Payment of dividends on
Company's preferred stock ......... -- -- 24,992 -- -- --
Net unrealized gain on
investments available for sale . -- -- -- -- -- --
Net income for the year ended
September 30, 1995 .................. -- -- -- -- -- --
--------- ----- --------- --- ------- ---
Balance at September 30, 1995 ......... 2,679,107 27 1,835,170 18 232,324 2
Conversion of Preferred Stock
to Common Stock Class A ............ (14,560) -- 21,340 -- -- --
Issuance of Class A and Class B
Common Stock ........................ -- -- 25,210 -- 19,191 1
Underwritten public offering of
the Company's Common
Class A, net ........................ -- -- 3,565,000 36 -- --
Payment of dividends on the
Company's Preferred Stock ......... -- -- 7,481 -- -- --
Net change in unrealized loss on
investments available for sale . -- -- -- -- -- --
Net income for the year ended
September 30, 1996 .................. -- -- -- -- -- --
--------- ----- --------- --- ------- ---
Balance at September 30, 1996 ......... 2,664,547 27 5,454,201 54 251,515 3
Issuance of Class A and Class B
Common Stock ........................ -- -- 40,357 -- 24,423 --
Conversion of Preferred Stock
to Common Class A .................. (973,568) (10) 1,470,359 13 -- --
Conversion of Common Class B
to Common Class A .................. -- -- 253 -- (253) --
Preferred Stock, Series 9%
tender offer ........................ (448,583) (4) -- -- -- --
Issuance of Stock in connection
with the Suncoast acquisition . 920,000 9 2,199,730 22 -- --
Stock options and warrants
exercised ........................... 12,900 -- 89,004 -- -- --
Payments of dividends on the
Company's Preferred Stock ......... -- -- 3,194 3 -- --
Net change in unrealized loss on
investments available for sale . -- -- -- -- -- --
Net income for the year ended
September 30, 1997 .................. -- -- -- -- -- --
--------- ------- --------- --- ------- ---
Balance at September 30, 1997 ......... 2,175,296 $ 22 9,257,098 $92 275,685 $ 3
========= ======= ========= === ======= ===
UNREALIZED
GAIN ON
SECURITIES
AVAILABLE TOTAL
PAID-IN RETAINED FOR SALE, STOCKHOLDERS'
CAPITAL EARNINGS NET OF TAX EQUITY
------------- ---------- ----------- --------------
Balance at September 30, 1994 ......... $38,413 $ 2,808 $ -- $ 41,268
Issuance of Class A and Class B
Common Stock ........................ 222 -- -- 222
Conversion of Class B Common
Stock to Class A Common
Stock .............................. -- -- -- --
Payment of dividends on
Company's preferred stock ......... 200 (2,210) -- (2,010)
Net unrealized gain on
investments available for sale . -- -- 25 25
Net income for the year ended
September 30, 1995 .................. -- 6,240 -- 6,240
-------- ------- ------- --------
Balance at September 30, 1995 ......... 38,835 6,838 25 45,745
Conversion of Preferred Stock
to Common Stock Class A ............ -- -- -- --
Issuance of Class A and Class B
Common Stock ........................ 330 -- -- 331
Underwritten public offering of
the Company's Common
Class A, net ........................ 22,831 -- -- 22,867
Payment of dividends on the
Company's Preferred Stock ......... 59 (2,145) -- (2,086)
Net change in unrealized loss on
investments available for sale . -- -- (332) (332)
Net income for the year ended
September 30, 1996 .................. -- 2,586 -- 2,586
-------- ------- ------- --------
Balance at September 30, 1996 ......... 62,055 7,279 (307) 69,111
Issuance of Class A and Class B
Common Stock ........................ 501 -- -- 501
Conversion of Preferred Stock
to Common Class A .................. (3) -- -- --
Conversion of Common Class B
to Common Class A .................. -- -- -- --
Preferred Stock, Series 9%
tender offer ........................ (4,481) -- -- (4,485)
Issuance of Stock in connection
with the Suncoast acquisition . 27,781 -- -- 27,812
Stock options and warrants
exercised ........................... 794 -- -- 794
Payments of dividends on the
Company's Preferred Stock ......... 32 (2,890) -- (2,855)
Net change in unrealized loss on
investments available for sale . -- -- 1,168 1,168
Net income for the year ended
September 30, 1997 .................. -- 7,599 -- 7,599
--------- ------- ------- --------
Balance at September 30, 1997 ......... $86,679 $11,988 $ 861 $ 99,645
========= ======= ======= ========
(CONTINUED ON NEXT PAGE)
58
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
The beginning balance at September 30, 1994 of each series of the
Company's preferred stock were as follows:
SHARES AMOUNT
----------- -------
Series A ......... 55,000 $ 1
Series B ......... 142,378 2
Series C ......... 363,636 4
Series C-II ...... 222,223 2
Series 1993 ...... 745,870 7
Series 9% ......... 1,150,000 11
--------- ---
Total ......... 2,679,107 $27
========= ===
The ending balance at September 30, 1997 of Preferred Stock were as
follows:
SHARES AMOUNT
----------- -------
Series B ......... 183,818 $ 2
Series 1993 ...... 744,870 7
Series 9% ......... 701,417 8
Series 1996 ...... 545,191 5
------- ---
Total ......... 2,175,296 $22
========= ===
Effective September 30, 1995, the Series A Preferred Stock was exchanged
for Series B Preferred Stock.
See accompanying notes to consolidated financial statements.
59
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------------------------------
1997 1996 1995
------------ --------------- -------------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income ......................................................... $ 7,599 $ 2,586 $ 6,240
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision (credit) for loan losses ................................. 1,295 (120) 1,221
Provision for losses on tax certificates ........................... 84 76 484
Depreciation and amortization ....................................... 1,320 674 526
Amortization of discounts and premiums on investments ............... 38 20 3
Amortization of discounts and premiums on
mortgage-backed securities ....................................... 101 144 84
Amortization of goodwill .......................................... 683 -- --
Amortization of discounts and premiums on loans ..................... (570) (2,332) (784)
Amortization of loan servicing assets .............................. 931 -- --
Loans originated for sale .......................................... (28,467) (4,141) (2,376)
Increase in accrued interest receivable ........................... (6,285) (1,239) (320)
Increase in interest payable on deposits and FHLB advances ......... 1,142 31 685
Increase (decrease) in accrued expenses ........................... 3,312 213 (68)
Increase (decrease) in accrued taxes .............................. 792 (2,960) 3,065
Increase (decrease) in deferred taxes .............................. (1,854) (469) 33
Increase (decrease) in other liabilities ........................... (22,130) 2,841 1,763
(Increase) decrease in prepaid expenses and other assets ............ (1,635) (224) 566
Gain on sales of mortgage-backed securities ........................ (185) -- (231)
Proceeds from sale of loans ....................................... 39,890 4,362 2,456
Proceeds from sale of loan servicing assets ........................ 4,215 -- 265
Recovery on loans ................................................... 69 1,119 1
(Gain) loss on sales of loans ....................................... 44 (5) (8)
(Gain) loss on real estate owned operations ........................ 236 (185) 94
(Gain) on sales of tax certificates ................................. -- -- (3)
(Gain) loss on sale of other assets ................................. -- 7 --
Gain on sale of loan servicing rights .............................. -- -- (265)
Gain on sale of branches .......................................... -- -- (9,304)
--------- ----------- ----------
Net cash provided by (used in) operating activities ............... 625 398 4,127
--------- ----------- ----------
Cash flows from investing activities:
Net increase in loans ............................................. (792,501) (185,457) (44,744)
Proceeds from sale of real estate owned ........................... 2,257 2,661 4,607
Purchase of investment securities ................................. (22,144) (3,510) (4,675)
Purchase of mortgage-backed securities .............................. (56,499) (19,228) (11,931)
Purchases of other earning assets ................................. (32,300) (650) (9,580)
Proceeds from repayments of investment securities .................. 4,051 5,675 2,000
Proceeds from repayments of mortgage-backed securities ............ 19,345 10,523 6,326
Proceeds from repayments of other earning assets .................. 14,176 750 5,125
Proceeds from sales of investment securities ........................ 126 2,097 --
Proceeds from sale of mortgage-backed securities .................. 7,653 -- 9,947
Purchases of office properties and equipment ........................ (1,980) (1,170) (742)
Sales of premises and equipment .................................... 1,364 -- --
Net decrease (increase) in tax certificates ........................ (9,278) (620) 2,587
Purchase of Bank of Florida, net of acquired cash equivalents ...... -- 1,521 --
Cash and cash equivalents of Suncoast at date of acquisition ...... 32,803 -- --
--------- ----------- ----------
Net cash used in investing activities .............................. (832,927) (187,408) (41,080)
--------- ----------- ----------
(CONTINUED ON NEXT PAGE)
60
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
FOR THE YEARS ENDED
SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
------------ ------------ -------------
(DOLLARS IN THOUSANDS)
Cash flows from financing activities:
Net increase in deposits .......................................... $366,049 $168,744 $ 92,555
Net (decrease) in deposits from sale of branches .................. -- -- (130,276)
Net (decrease) increase in Federal Home Loan Bank advances ...... 382,984 (4,000) 105,000
Net (decrease) increase in other borrowings ..................... 30,000 -- (21,400)
Decrease in subordinated notes .................................... (775) -- --
Premium on sale of branches ....................................... -- -- 9,304
Net proceeds from issuance of trust preferred securities ......... 111,456 -- --
Net proceeds from issuance of common stock ........................ 1,329 23,198 222
Preferred Stock, Series 9% tender offer ........................... (4,486) -- --
Dividends paid on the Company's preferred stock .................. (2,890) (2,086) (2,010)
Increase in advances from borrowers for taxes and insurance ...... 4,483 560 1,526
-------- -------- ----------
Net cash provided by financing activities ........................ 888,150 186,416 54,921
-------- -------- ----------
Increase (decrease) in cash and cash equivalents .................. 55,848 (594) 17,968
Cash and cash equivalents at beginning of year .................. 34,136 34,730 16,762
-------- -------- ----------
Cash and cash equivalents at end of year ........................ $ 89,984 $ 34,136 $ 34,730
======== ======== ==========
Supplemental Disclosures:
Interest paid on deposits and borrowings ........................ $ 73,385 $ 34,547 $ 25,617
======== ======== ==========
Income taxes paid ................................................ $ 3,390 $ 4,626 $ 676
======== ======== ==========
Transfers from loans to real estate owned ........................ $ 2,296 $ 1,154 $ 1,182
======== ======== ==========
Transfer of mortgage-backed securities from held to maturity to
available for sale ............................................. $ -- $ 31,780 $ --
======== ======== ==========
See accompanying notes to consolidated financial statements.
61
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of BankUnited Financial Corporation
(the "Company") and subsidiaries conform to generally accepted accounting
principles and to general practices within the savings and loan industry.
Presented below is a description of the Company and its principal accounting
policies.
(A) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, including BankUnited, FSB (the "Bank"). The Bank provides
a full range of banking services to individual and corporate customers through
its branches in South Florida. The Bank is subject to the regulations of
certain federal agencies and undergoes periodic examinations by those
regulatory authorities. All significant intercompany transactions and balances
have been eliminated.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the consolidated statements of financial condition and operations for the
period.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses
and the allowance for losses on tax certificates, the valuation of mortgage
servicing rights, and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the determination
of the allowances for loan losses and real estate owned, management obtains
independent appraisals for properties.
(B) MORTGAGE-BACKED SECURITIES AND INVESTMENTS
Mortgage-backed securities and other investments available for sale are
carried at fair value (market value), inclusive of unrealized gains and losses,
and net of discount accretion and premium amortization computed using the level
yield method. Net unrealized gains and losses are reflected as a separate
component of stockholders' equity, net of applicable deferred taxes.
Mortgage-backed securities and investments held to maturity are carried at
amortized cost. Mortgage-backed securities and investment securities that the
Company has the positive intent and ability to hold to maturity are designated
as held-to-maturity securities.
Gain or losses on sales of mortgage securities and investments are
recognized on the specific identification basis.
Tax certificates are considered investments held to maturity and,
accordingly, are carried at cost less a valuation allowance. Interest is
accrued on tax certificates until payoff or until it appears uncollectible.
When deemed uncollectible, accrued but uncollected interest is reversed.
Applicable law permits application for tax deeds to be applied for two years
after the effective date of the acquisition of the tax certificate. Tax deeds
applied for are carried at the cost of the tax certificates, adjusted for
accrued interest. Tax deeds applied for carry an annual interest rate of 18%.
(C) ALLOWANCE FOR LOAN LOSSES
A provision for losses on loans is charged to operations when, in
management's opinion, the collectibility of the balances is doubtful and the
carrying value is greater than the estimated net
62
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
realizable value of the collateral. The provision is based upon a review of the
nature, volume, delinquency status and inherent risk of the loan portfolio in
relation to the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for loan losses.
Such agencies may require additions to the allowance based on their judgments
about information available to them at the time of their examination.
The Company's non-accrual policy provides that all loans are placed on
non-accrual status when they are 90 days past due as to either principal or
interest, unless the loan is fully secured and in the process of collection.
Loans are returned to accrual status when they become less than 90 days
delinquent.
Payments received on impaired loans are generally applied to principal and
interest based on contractual terms. See Note 6 for information regarding the
Company's adoption of Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan."
(D) LOANS RECEIVABLE
Loans receivable are considered long-term investments and, accordingly,
are carried at historical cost. Loans held for sale are recorded at the lower
of cost or market, determined in the aggregate. In determining cost, deferred
loan origination fees and costs are adjusted to the principal balances of the
related loans.
(E) LOAN-ORIGINATION FEES, COMMITMENT FEES AND RELATED COSTS
Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized as an adjustment to interest
income using the interest method over the contractual life of the loans,
adjusted for estimated prepayments based on the Company's historical prepayment
experience. Commitment fees and costs relating to commitments, of which the
likelihood of exercise is remote, are recognized over the commitment period on
a straight-line basis. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the life of the loan as an adjustment of yield.
(F) OTHER INTEREST EARNING ASSETS
Other interest earning assets includes Federal Home Loan Bank of Atlanta
stock and an equity investment in the Community Reinvestment Group. The fair
value is estimated to be the carrying value which is par.
(G) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is provided using the estimated
service lives of the assets for furniture,
63
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
fixtures and equipment (7 to 10 years), and computer equipment and software (3
to 5 years), or with leases, the term of the lease or the useful life (10
years), whichever is shorter. Repair and maintenance costs are charged to
operations as incurred, and improvements are capitalized.
(H) ACCRUED INTEREST RECEIVABLE
Recognition of interest on the accrual method is generally discontinued
when interest or principal payments are greater than 90 days in arrears, unless
the loan is well secured and in the process of collection. At the time a loan
is placed on nonaccrual status, previously accrued and uncollected interest is
reversed against interest income in the current period.
(I) REAL ESTATE OWNED
Property acquired through foreclosure, deeds in lieu of foreclosures, or
loans judged to be in-substance foreclosures are recorded at the lower of the
related principal balance at foreclosure or estimated fair value less estimated
costs to sell the property. Any excess of the loan balance over the net
realizable value is charged to the allowance for loan losses when the property
is classified as real estate owned. The net realizable value is reviewed
periodically and, when necessary, any decline in the value of the real estate
is charged to expense. Significant property improvements which enhance the
salability of the property are capitalized to the extent that the carrying
values do not exceed their estimated realizable values. Maintenance and
carrying costs on the property are charged to operations as incurred.
(J) GOODWILL
Goodwill is amortized on a straight-line basis over its estimated
beneficial life of 10 to 25 years.
(K) INCOME TAXES
The Company and its subsidiaries file consolidated income tax returns.
Deferred income taxes have been provided for elements of income and expense
which are recognized for financial reporting purposes in periods different than
such items are recognized for income tax purposes. The Company accounts for
income taxes utilizing the liability method, which applies the enacted
statutory rates in effect at the statement of financial condition date to
differences between the book and tax bases of assets and liabilities. The
resulting deferred tax liabilities and assets are adjusted to reflect changes
in tax laws.
(L) EARNINGS PER SHARE
Primary earnings per common and common equivalent share is computed on a
weighted average number of common shares and common share equivalents
outstanding during the year. Common share equivalents include the dilutive
effect of stock options using the treasury stock method. The weighted average
number of common share equivalents assumed outstanding for the years ended
September 30, 1997, 1996 and 1995 were 8,680,000, 4,559,000, and 2,296,000,
respectively. Earnings per common share, assuming full dilution, assume the
maximum dilutive effect of the average number of shares from stock options and
the conversion equivalents of preferred stocks. The weighted average number of
fully
64
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
diluted common shares outstanding during the years ended September 30, 1997,
1996 and 1995 were 9,031,000, 4,559,000 and 4,159,000, respectively. Stock
dividends have been included in the calculation of earnings per share for all
years presented.
(M) STOCK OPTIONS
At the time stock options are granted to employees and directors, no
accounting entries are made, as the options are granted at the fair market
value of the Company's common stock. The proceeds from the exercise of options
are credited to common stock for the par value of the shares issued, and the
excess, net of any tax benefit, is credited to paid-in capital. (See Note 14.)
(N) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and in December 1996, the FASB issued a related
Statement of Financial Accounting Standards No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB No. 125" (collectively "Statement No. 125").
Statement No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities based on a
financial components approach that focuses on control. Portions of Statement
No. 125 were effective for transactions entered into after December 31, 1996
with the remaining portions effective for transactions entered into after
December 31, 1997. The impact of adopting Statement No. 125 has not been nor is
it currently expected to be material to the Company's financial position or the
results of operations.
In February 1997, FASB issued Statement of Financial Accounting Standards
No. 128 "Earnings per Share" ("Statement No. 128"). Statement No. 128 specifies
the computation, presentation and disclosure requirements for earnings per
share. It replaces primary earnings per share and fully diluted earnings per
share with basic earnings per share and diluted earnings per share and is
effective for reporting periods ending after December 15, 1997. For the
Company, the computation for basic earnings per share is similar to primary
earnings per share except stock options are not considered when computing basic
earnings per share. Also, for the Company, diluted earnings per share and fully
diluted earnings per share are similar.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure"
("Statement No. 129"). Statement No. 129 continues previous requirements to
disclose certain information about an entity's capital structure. The Company
currently complies with the disclosure requirements of Statement No. 129.
(O) FINANCIAL STATEMENT RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
September 30, 1997 consolidated financial statements.
(2) ACQUISITIONS
On March 31, 1996, the Company acquired for cash consideration of $2.8
million, The Bank of Florida, a one branch state commercial bank which had
assets of $28.1 million and deposits of $27.3 million on the date of
acquisition. The acquisition was accounted for as a purchase and $2.5 million
of goodwill was recorded.
65
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(2) ACQUISITIONS--(CONTINUED)
On November 15, 1996, the Company acquired Suncoast Savings & Loan
Association, FSA ("Suncoast"). The Company issued one share of its Class A
Common Stock for each share of Suncoast common stock of which 2,199,930 were
outstanding and one share of newly created 8% Noncumulative Convertible
Preferred Stock, Series 1996 for each share of Suncoast preferred stock of
which 920,000 shares were outstanding. The 8% Noncumulative Convertible
Preferred Stock, Series 1996 has substantially the same terms and conditions as
the Suncoast preferred stock. The cost of the acquisition, which was accounted
for as a purchase was $27.8 million, representing the fair value of the
consideration given to the Suncoast common and preferred stockholders as well
as the option and warrant holders. In addition, the Company incurred
approximately $1.3 million of costs directly related to the merger. The balance
sheet and results of operations of Suncoast have been included with those of
BankUnited as of and for periods subsequent to November 15, 1996.
At the date of acquisition, the fair value of the assets and liabilities
acquired from Suncoast are as follows (in thousands):
Cash and cash equivalents ...... $ 32,804
Loans receivable, net ............ 341,394
Mortgage-backed securities ...... 18,672
Goodwill ........................ 11,643
Other assets ..................... 34,930
Deposits ........................ (323,737)
FHLB advances .................. (51,500)
Other liabilities ............... (36,394)
----------
Net purchase price ............ $ 27,812
==========
The unaudited proforma combined condensed statements of operations for the
years ended September 30, 1997 and 1996, after giving effect to certain
proforma adjustments are as follows (in thousands except per share data):
1997 1996
---------- --------
Interest income .................................... $112,642 $81,752
Interest expense ................................. 78,268 52,423
Provision for loan losses ........................ 1,401 45
Non-interest income .............................. 4,714 9,193
Non-interest expense .............................. 24,770 31,885
Income tax expense ................................. 5,166 2,654
-------- -------
Net income before preferred stock dividends ...... 7,751 3,938
Preferred stock dividends ........................ 3,028 3,249
-------- -------
Net income after preferred stock dividends ...... $ 4,723 $ 689
======== =======
Earnings per share
Primary .......................................... $ .53 $ .10
Fully-diluted .................................... $ .52 $ .10
The proforma combined condensed statement of operations assumes the
acquisition occurred as of October 1, 1995.
66
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(2) ACQUISITIONS--(CONTINUED)
As part of the purchase of Suncoast, the Company issued warrants to
Suncoast's warrant holders to purchase 80,000 shares of the newly created 8%
Noncumulative Convertible Preferred Stock, Series 1996, and assumed Suncoast's
outstanding stock options. The warrants are exercisable at a price of $18.00
for each share of the 8% Noncumulative Convertible Preferred Stock, Series 1996
or each warrant could be exercised to purchase 1.68595 shares, subject to
adjustment, of Class A Common Stock at a per share price of $10.68, also
subject to adjustment under certain conditions. The warrants expire on July 8,
1998 and, as of September 30, 1997, 63,541 warrants were outstanding.
In September 1997, the Company entered into a definitive agreement to
acquire Consumers Bancorp, Inc. for approximately $11 million in a combination
of cash and stock. Consumers Bancorp, Inc. is a thrift holding company for
Consumers Savings Bank which had assets of $108.0 million and deposits of $87.8
million at September 30, 1997. The acquisition will be accounted for as a
purchase and is expected to result in goodwill of approximately $3.5 million.
(3) TAX CERTIFICATES
Tax certificates are certificates representing delinquent real estate
taxes owed to the respective counties. A substantial percentage of tax
certificates are for properties located in southeast Florida. The Company's
policy is to purchase tax certificates only for properties located in Florida.
The net carrying value of tax certificates was $49.3 million and $40.0
million at September 30, 1997 and 1996, respectively. Included in these amounts
at September 30, 1997 and 1996 were $1.3 million and $1.9 million,
respectively, of tax certificates for which the Company had made application
for the tax deeds. The Company maintains loss reserves for tax certificates
which were $697,000 and $614,000 at September 30, 1997 and 1996, respectively.
The estimated market values of the Company's tax certificates are the same
as the carrying values, since historically the tax certificates have had
relatively short lives and their yields approximate market rates.
(4) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Interest income from securities purchased under agreements to resell
aggregated approximately $1.2 million for the year ended September 30, 1995.
67
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(4) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL--(CONTINUED)
The following sets forth information concerning the Company's agreements
to resell for the periods indicated:
AS OF AND FOR
THE YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1996 1995
------ ------ ------------
(DOLLARS IN THOUSANDS)
Maximum amount of outstanding agreements at any month end
during the period .................................... $-- $-- $ 700
Average amount outstanding during the period ............ $-- $-- $ 20,262
Weighted average interest rate for the period ......... -- -- 6.10%
Maturity ................................................ -- -- --
(5) INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Securities designated as available for sale are carried at market value
with the resultant after-tax appreciation or depreciation from amortized cost
reflected as an addition to, or deduction from, stockholders' equity.
INVESTMENTS
Presented below is an analysis of the carrying values and approximate
market values of investments held to maturity.
SEPTEMBER 30, 1997
---------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ --------
(DOLLARS IN THOUSANDS)
U.S. government agency securities ...... $14,483 $119 $-- $14,602
State of Israel Bonds .................. 11 -- -- 11
-------- ---- -------- -------
Total ................................. $14,494 $119 $-- $14,613
======== ==== ======== =======
SEPTEMBER 30, 1996
--------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ -------
(DOLLARS IN THOUSANDS)
State of Israel Bonds ...... $11 $-- $-- $11
--- -------- -------- ---
Total ..................... $11 $-- $-- $11
=== ======== ======== ===
68
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(5) INVESTMENTS AND MORTGAGE-BACKED SECURITIES--(CONTINUED)
All investments held to maturity at September 30, 1997 and 1996 had
maturities between one and five years. Presented below is analysis of the
investments designated as available for sale.
SEPTEMBER 30, 1997
---------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ --------
(DOLLARS IN THOUSANDS)
U.S. government agency securities ...... $ 8,799 $ 2 $-- $ 8,801
Other ................................. 1,353 12 -- 1,365
-------- --- -------- -------
Total ................................. $10,152 $14 $-- $10,166
======== === ======== =======
SEPTEMBER 30, 1996
--------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ -------
(DOLLARS IN THOUSANDS)
U.S. Treasury Notes ..................... $2,005 $-- $ 1 $2,004
U.S. government agency securities ...... 2,999 -- 18 2,981
Other ................................. 1,702 -- 2 1,700
------ -------- --- ------
Total ................................. $6,706 $-- $21 $6,685
====== ======== === ======
MORTGAGE-BACKED SECURITIES
The carrying value and historical cost of mortgage-backed securities
available for sale are summarized as follows:
SEPTEMBER 30, 1997
------------------------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
------------ ------------ ------------ ---------
(DOLLARS IN THOUSANDS)
GNMA mortgage-backed securities ...... $ 48,881 $ 994 $ (41) $ 49,834
FNMA mortgage-backed securities ...... 4,198 108 (6) 4,300
FHLMC mortgage-backed securities ...... 31,839 119 (19) 31,939
Other ................................. 22,625 282 (61) 22,846
-------- ------ ------- --------
Total ................................. $107,543 $1,503 $(127) $108,919
======== ====== ======= ========
69
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(5) INVESTMENTS AND MORTGAGE-BACKED SECURITIES--(CONTINUED)
SEPTEMBER 30, 1996
------------------------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
------------ ------------ ------------ ---------
(DOLLARS IN THOUSANDS)
GNMA mortgage-backed securities ...... $24,943 $207 $(338) $24,812
FNMA mortgage-backed securities ...... 6,055 61 (2) 6,114
FHLMC mortgage-backed securities ...... 22,172 33 (432) 21,773
Other ................................. 2,772 6 (10) 2,768
------- ---- ------- -------
Total ................................. $55,942 $307 $(782) $55,467
======= ==== ======= =======
The market value and historical cost of mortgage-backed securities held to
maturity are summarized as follows:
SEPTEMBER 30, 1997
---------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ --------
(DOLLARS IN THOUSANDS)
GNMA mortgage-backed securities ......... $ 74 $ 6 $ -- $ 80
FHLMC mortgage-backed securities ......... 3,434 -- (44) 3,390
Mortgage pass-through certificates ...... 7,844 -- (22) 7,822
-------- --- ----- -------
Total ................................. $11,352 $ 6 $ (66) $11,292
======== === ===== =======
SEPTEMBER 30, 1996
---------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ --------
(DOLLARS IN THOUSANDS)
GNMA mortgage-backed securities ......... $ 83 $ 5 $ -- $ 88
FHLMC mortgage-backed securities ......... 4,144 -- (118) 4,026
Collateralized mortgage obligations ...... 8,802 -- (289) 8,513
Mortgage pass-through certificates ...... 1,669 -- (22) 1,647
-------- --- ------ -------
Total .................................... $14,698 $ 5 $ (429) $14,274
======== === ====== =======
The mortgage-backed securities have contractual maturities which range
from the years 1997 to 2027, however, expected maturities will differ from
contractual maturities as borrowers have the right to prepay obligations with
or without prepayment penalties.
Gross proceeds on sales of mortgage-backed securities and collateralized
mortgage obligations were $7.7 million for the year ended September 30, 1997
and $10.0 million for the year ended September 30, 1995. There were no sales of
mortgage-backed securities and collateralized mortgage obligations in 1996.
Gross realized gains were $250,000 and $231,000 on sales of mortgage-backed
securities and collateralized mortgage obligations during the years ended
September 30, 1997 and 1995, respectively. There were no realized losses during
the years ended September 30, 1997 and 1995.
70
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(5) INVESTMENTS AND MORTGAGE-BACKED SECURITIES--(CONTINUED)
At September 30, 1997 , GNMA mortgage-backed securities with carrying
values of approximately $10.9 million were pledged as collateral for public
funds on deposit.
At September 30, 1997, FHLMC and GNMA mortgage-backed securities with a
carrying value of approximately $34.0 million and a market value of
approximately $34.5 million were pledged as collateral for a $30.0 million
reverse repurchase agreement. The securities underlying the agreement were held
in safekeeping by a trustee.
(6) LOANS RECEIVABLE
Loans receivable consist of the following:
AS OF SEPTEMBER 30,
----------------------------
1997 1996
------------- ------------
(DOLLARS IN THOUSANDS)
Mortgage loans-conventional ........................ $ 387,096 $263,757
Mortgage loans-conventional serviced by others ...... 1,110,686 317,103
Mortgage loans-other ................................. 140,393 53,817
Commercial loans:
Secured ............................................. 9,475 5,618
Unsecured .......................................... 1,168 787
Line of credit loans ................................. 1,456 1,254
Share loans .......................................... 835 648
Installment loans .................................... 836 1,001
---------- --------
Total ............................................. 1,651,945 643,985
Less allowance for loan losses ..................... (3,693) (2,158)
Deferred loan fees, discounts and premiums ......... 13,129 4,558
---------- --------
Loans receivable, net .............................. $1,661,381 $646,385
========== ========
Of the total gross loans receivable of $1.7 billion at September 30, 1997,
approximately $506.1 million, or 30.6%, represents residential loans secured by
properties in Florida, $243.7 million, or 15.0% represents loans in California
and $950.2 million, or 54.4% represents loans secured by properties in other
states.
71
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(6) LOANS RECEIVABLE--(CONTINUED)
Changes in the allowance for loan losses are as follows:
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1997 1996 1995
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of the period ...... $2,158 $1,469 $ 841
Provision (credit) ..................... 1,295 (120) 1,221
Allowance from Bank of Florida ......... -- 183 --
Allowance from Suncoast .................. 775 -- --
Loans charged-off ........................ (604) (493) (594)
Recoveries .............................. 69 1,119 1
------ ------ ------
Balance at end of the period ............ $3,693 $2,158 $1,469
====== ====== ======
Effective October 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures" ("Statement No. 114"). There was
no significant impact on the consolidated statement of operations upon
implementation due to the composition of the Company's loan portfolio
(primarily residential or collateral dependent loans) and the Company's policy
for establishing the allowance for loan losses.
As of September 30, 1997 and 1996, the Company had impaired or non-accrual
loans of $10.9 million and $4.9 million, respectively and had recorded specific
reserves on these loans of $704,000 and $801,000, respectively. For the years
ended September 30, 1997, 1996 and 1995 the average amounts of impaired loans
were $8.0 million, $4.8 million and $2.3 million, respectively. No income is
recognized on loans during the period for which the loan is deemed impaired.
(7) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
AS OF SEPTEMBER 30,
-------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Office buildings ........................... $ 2,600 $ --
Leasehold improvements ..................... 2,700 1,640
Furniture, fixtures and equipment ......... 3,504 1,881
Computer equipment and software ............ 3,548 1,124
-------- --------
Total .................................... 12,352 4,645
Less: accumulated depreciation ............ (4,981) (2,037)
-------- --------
Office properties and equipment, net ...... $ 7,371 $ 2,608
======== ========
Depreciation expense was $1.2 million, $674,000 and $526,000, for the
years ended September 30, 1997, 1996, and 1995, respectively.
72
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(7) OFFICE PROPERTIES AND EQUIPMENT--(CONTINUED)
The Company has entered into non-cancelable leases with approximate
minimum future rentals as follows:
YEARS ENDING SEPTEMBER 30, AMOUNT
- ---------------------------- -----------------------
(DOLLARS IN THOUSANDS)
1998 .................. $ 2,961
1999 .................. 2,889
2000 .................. 2,051
2001 .................. 1,464
2002 .................. 956
Thereafter ............ 997
-------
Total .................. $11,318
=======
Rent expense for the years ended September 30, 1997, 1996, and 1995 was
$1.6 million, $905,000, and $959,000, respectively.
(8) DEPOSITS
The weighted average nominal interest rate payable on all deposit accounts
at September 30, 1997 and 1996 was 5.20% and 5.11%, respectively.
Types of deposits and related range of interest rates were as follows:
SEPTEMBER 30,
--------------------------------------------------------------------------
1997 1996
------------------------------------ -----------------------------------
(DOLLARS IN THOUSANDS)
Non-interest-bearing deposits ......... --% - --% $ 21,436 --% - --% $ 7,301
Passbook and statement savings deposits 2.00% - 5.16% 160,557 2.00% - 4.97% 73,780
Super NOW deposits .................. 0.00% - 3.93% 57,471 0.00% - 3.00% 17,265
Money market deposits ............... 0.00% - 3.10% 20,325 0.00% - 4.65% 16,556
Certificates of deposit ............... 3.92% - 6.06% 936,103 3.92% - 6.16% 391,204
---------- --------
Total .............................. $1,195,892 $506,106
========== ========
Deposit accounts with balances of $100,000 or more totaled approximately
$174.0 millioin and $69.4 million at September 30, 1997 and 1996, respectively.
Interest expense on deposits for the years ended September 30, 1997, 1996
and 1995 was as follows:
1997 1996 1995
--------- --------- --------
(DOLLARS IN THOUSANDS)
Super NOW and money market deposits ......... $ 2,236 $ 775 $ 875
Passbook and statement savings deposits ...... 6,342 2,627 2,420
Certificates of deposit ..................... 41,558 17,389 14,554
------- ------- -------
Total ....................................... $50,136 $20,791 $17,849
======= ======= =======
Early withdrawal penalties on deposits are recognized as a reduction of
interest on deposits. For the years ended September 30, 1997, 1996 and 1995,
early withdrawal penalties totaled $101,000, $42,000, and $110,000,
respectively.
73
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(8) DEPOSITS--(CONTINUED)
The amounts and scheduled maturities of certificate accounts at September
30, 1997 are as follows:
YEARS ENDING SEPTEMBER 30, AMOUNT
- ---------------------------- -----------------------
(DOLLARS IN THOUSANDS)
1998 .................. $809,444
1999 .................. 81,912
2000 .................. 11,152
2001 .................. 4,951
2002 .................. 28,414
Thereafter ............ 230
--------
Total .................. $936,103
========
(9) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Atlanta (FHLB) incur interest
and are repayable as follows:
SEPTEMBER 30,
----------------------
REPAYABLE DURING YEAR ENDING SEPTEMBER 30, INTEREST RATE 1997 1996
- -------------------------------------------- --------------------- ---------- ---------
(DOLLARS IN THOUSANDS)
1997 .................................... 4.56% - 6.07% $ -- 192,000
1998 .................................... 5.63% - 6.55% 480,000 5,000
1999(1) ................................. 5.60% 25,000 --
2001(2) ................................. 5.33% - 5.61% 15,000 40,000
2002(3) ................................. 5.43% - 6.24% 150,000 --
2005 .................................... 6.65% 1,484 --
-------- -------
$671,484 $237,000
======== ========
- ----------------
(1) Advances for $25 million are callable by the FHLB in 1998.
(2) Advances for $15 million are callable by the FHLB in 1997.
(3) Advances for $25 million are callable by the FHLB in 1998 and $125 million
in 1999.
The terms of a security agreement with the FHLB of Atlanta include a
blanket floating lien that requires the maintenance of qualifying first
mortgage loans as pledged collateral with unpaid principal amounts at least
equal to 100% of the FHLB advances, when discounted at 75% of the unpaid
pricipal balance. The FHLB of Atlanta stock, which is recorded at cost, is also
pledged as collateral for these advances.
(10) SECURITIES SOLD UNDER AN AGREEMENT TO REPURCHASE
Interest expense on securities sold under an agreement to repurchase
aggregated $506,000 and $367,000 for the years ended September 30, 1997 and
1995, respectively.
74
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(10) SECURITIES SOLD UNDER AN AGREEMENT TO REPURCHASE--(CONTINUED)
The following sets forth information concerning repurchase agreements for
the periods indicated:
AS OF AND FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------------------------
1997 1996 1995
---------------- ------ ------------
(DOLLARS IN THOUSANDS)
Maximum amount of outstanding agreements at any month
end during the period .............................. $30,000 $-- $ 33,600
Average amount outstanding during the period ...... $8,828 $-- $ 6,572
Weighted average interest rate for the period ...... 5.73% -- 5.59%
Maturity .......................................... Nov. 28, 1997 -- --
At September 30, 1997, the Company had $34.0 million of mortgage-backed
securities pledged under repurchase agreements. At September 30, 1996 and 1995,
the Company had no pledged securities under repurchase agreements.
(11) COMPANY OBLIGATED MANDATORILY REEDEMABLE TRUST PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY.
On December 30, 1996, a newly formed trust subsidiary created under the
laws of Delaware, BankUnited Capital, issued $50 million of 10-1/4% Trust
Preferred Securities, Series A and $2 million of common securities. The common
securities are wholly owned by the Company. In connection with this
transaction, BankUnited Capital simultaneously purchased $52 million of 10-1/4%
Junior Subordinated Deferrable Interest Debentures, Series A issued by
BankUnited Financial Corporation with terms similar to the 10-1/4% Trust
Preferred Securities, Series A which are the sole assets of BankUnited Capital.
On March 24, 1997, BankUnited Capital issued an additional $20 million of
10-1/4% Trust Preferred Securities, Series A and $800,000 of common securites,
which common securities are also wholly owned by the Company. BankUnited
Capital simultaneously purchased an additional $20.8 million of 10-1/4% Junior
Subordinated Deferrable Interest Debentures, Series A issued by BankUnited
Financial Corporation. These securities mature December 31, 2026 and pay a
preferential cumulative cash distribution at an annual rate of 10-1/4%. The
Company and BankUnited Capital have the right to defer payment of interest for
up to 5 years. BankUnited Financial Corporation has guaranteed all of the
obligations of the 10-1/4% Trust Preferred Securities, Series A subject to
certain limitations.
On June 5, 1997, BankUnited Capital II, a newly formed trust subsidiary
created under the laws of Delaware, issued $46 million of 9.60% Cumulative
Trust Preferred Securities and $1.84 million of common securities. The common
securities are wholly owned by the Company. In connection with this
transaction, BankUnited Capital II simultaneously purchased $47.8 million of
9.60% Junior Subordinated Deferrable Interest Debentures issued by BankUnited
Financial Corporation with terms similar to the 9.60% Cumulative Trust
Preferred Securities which are the sole assets of BankUnited Capital II.
These securities mature June 30, 2027 and pay a preferential cumulative
cash distribution at an annual ratae of 9.60%. The Company and BankUnited
Capital II have the right to defer payment of
75
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(11) COMPANY OBLIGATED MANDATORILY REEDEMABLE TRUST PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST
DEBENTURES OF THE COMPANY.--(CONTINUED)
interest for up to five years. BankUnited Financial Corporation has guaranteed
all the obligations of the 9.60% Cumulative Trust Preferred Securities, subject
to certain limitations. The 9.60% Junior Subordinated Deferrable Interest
Debentures rank pari pasu with the 10-1/4% Junior Subordinated Deferrable
Interest Debentures.
Considered together the back-up undertakings constitute a full and
unconditional guarantee by the Company of the obligations of the Trust
Preferred Securities.
(12) REGULATORY CAPITAL
The Bank is required by federal regulations to maintain minimum levels of
capital as follows:
REGULATORY CAPITAL
REQUIREMENT ACTUAL CAPITAL EXCESS CAPITAL
--------------------------- ---------------------------- ----------------------------
1997 1996 1997 1996 1997 1996
------------ ------------ ------------- ------------ ------------- ------------
(DOLLAR IN THOUSANDS)
Tangible capital ......... $ 31,542 $ 12,196 $ 169,708 $ 56,967 $ 138,166 $ 44,771
1.5% 1.5% 8.1% 7.0% 6.6% 5.5%
Core Capital ............ $ 63,084 $ 24,392 $ 169,708 $ 56,967 $ 106,624 $ 32,575
3.0% 3.0% 8.1% 7.0% 5.1% 4.0%
Risk-based capital ...... $123,365 $ 33,927 $ 173,725 $ 60,164 $ 50,360 $ 26,237
8.0% 8.0% 11.3% 14.2% 3.3% 6.2%
Under the Office of Thrift Supervision (OTS) regulations adopted to
implement the "prompt corrective action" provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (the "FDICIA"), a "well
capitalized" institution must have a risk-based capital ratio of 10%, a core
capital ratio of 5% and a Tier 1 risk-based capital ratio of 6%. (The "Tier 1
risk-based capital" ratio is the ratio of core capital to risk-weighted
assets.) The Bank is a well capitalized institution under the definitions as
adopted. Regulatory capital and net income amounts as of and for the years
ended September 30, 1997, 1996 and 1995 did not differ from regulatory capital
and net income amounts reported to the OTS.
On August 31, 1993, the OTS adopted an amendment to its regulatory capital
regulations to take into account a savings institution's exposure to the risk
of loss from changing interest rates. Under the regulation as amended, a
savings institution with an above normal level of interest rate risk exposure
will be required to deduct an interest rate risk ("IRR") component from its
total capital when determining its compliance with the risk-based capital
requirements. An "above normal" level of interest rate risk exposure is a
projected decline of 2% in the net present value of an institution's assets and
liabilities resulting from a 2% swing in interest rates. The IRR component will
equal one-half of the difference between the institution's measured interest
rate exposure and the "normal" level of exposure. Savings institutions will be
required to file data with the OTS that the OTS will use to calculate, on a
quarterly basis (but with a two-quarter lag), institutions' measured interest
rate risk and IRR components. Implementation of the IRR requirements have been
delayed pending the testing of the
76
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(12) REGULATORY CAPITAL--(CONTINUED)
OTS appeals process. If the IRR component had been required as of September 30,
1997, the Bank would have been required to deduct an IRR component from its
total capital when determining its compliance with its risk-based capital
requirements, however the Bank would continue to be well capitalized.
Payment of dividends by the Bank is limited by federal regulations, which
provide for certain levels of permissible dividend payments depending on the
Bank's regulatory capital and other relevant factors.
(13) STOCKHOLDERS' EQUITY
The Company has the following capital structure:
PREFERRED STOCK--issuable in series with rights and preferences to be
designated by the Board of Directors. As of September 30, 1997, 5,666,310
shares were authorized but not designated to a particular series.
NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A:
Effective September 30, 1995, pursuant to an Offer to Exchange Preferred
Stock, the holders of the Noncumulative Convertible Preferred Stock, Series A,
agreed to exchange each of the 55,000 shares of the Series A Preferred stock
for one share of the Company's Noncumulative Convertible Preferred Stock,
Series B. Because the dividend rate, redemption price, and the liquidation
preference for the Series B Preferred Stock are lower than those for the Series
A Preferred Stock, the Company agreed not to redeem the shares of Series B
Preferred Stock issued pursuant to the exchange offer for a period of three
years and for three years thereafter, such Series B Preferred Stock will only
be redeemed at a 50% premium or $11.0625 per share.
NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B:
Authorized shares--200,000 shares.
Issued and outstanding shares--183,818 shares
Dividends--noncumulative cash dividends payable quarterly at the fixed
annual rate of $0.6750 per share beginning October 1, 1997 and $0.7375 per
share prior to that date.
Preference on liquidation--voluntary liquidation at the applicable
redemption price per share and involuntary liquidation at $7.375 per share.
Redemption Prior to October 1, 1997--except for the shares converted from
Series A discussed above, at the option of the Company at $7.67 per share at
September 30, 1995, declining thereafter at $.07375 per share during each year
through January 31, 1998, and thereafter the redemption price remains at $7.375
per share.
Effective October 1, 1997, the Company, in exchange for a reduction in the
dividend rate described above, has agreed not to redeem the Series B, Preferred
Stock until October 1, 2007 or later unless earlier redemption is approved by
the holders of at least 50 percent of the Series B Preferred shares.
77
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(13) STOCKHOLDERS' EQUITY--(CONTINUED)
Voting rights--two-and-one-half votes per share. If the Company fails to
pay dividends for six quarters, whether or not consecutive, the holders shall
have the right to elect two additional directors until dividends have been paid
for four consecutive quarters.
Convertibility--convertible into 1.4959 shares (adjusted for all stock
dividends) of Class B Common Stock for each share of Noncumulative Convertible
Preferred Stock, Series B, surrendered for conversion, subject to adjustment on
the occurrence of certain events.
NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES C:
Authorized, issued and outstanding shares--none as of September 30, 1997
and 363,636 shares as of September 30, 1996.
Dividends--noncumulative cash dividends payable quarterly at the fixed
annual rate of $0.550 per share.
Preference on liquidation--voluntary liquidation at the applicable
redemption price per share and involuntary liquidation at $5.50 per share.
Redemption--at the option of the Company, at $5.50 per share.
Voting rights--nonvoting.
Convertibility--convertible into 1.45475 shares (adjusted for all stock
dividends) of Class A Common Stock for each share of Noncumulative Preferred
Stock, Series C, surrendered for conversion, subject to adjustment on the
occurrence of certain events.
NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES C-II:
Authorized, issued and outstanding shares--none as of September 30, 1997
and 222,223 shares as of September 30, 1996.
Dividends--noncumulative cash dividends payable quarterly at the fixed
annual rate of $0.80 per share.
Preference on liquidation--voluntary liquidation at the applicable
redemption price per share and involuntary liquidation at $9.00 per share.
Redemption--at the option of the Company, at $9.00 per share.
Voting rights--nonvoting.
Convertibility--convertible into 1.3225 shares (adjusted for all stock
dividends) of Class A Common Stock for each share of Noncumulative Preferred
Stock, Series C-II, surrendered for conversion, subject to adjustment on the
occurrence of certain events.
78
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(13) STOCKHOLDERS' EQUITY--(CONTINUED)
8% NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES 1993:
Authorized shares--1,610,000 shares.
Issued and outstanding--744,870 shares as of September 30, 1997 and
September 30, 1996.
Dividends--noncumulative cash dividends payable quarterly at the fixed
annual rate of $.80 per share.
Preference on liquidation--voluntary liquidation at the applicable
redemption price per share and involuntary liquidation at $10.00 per share.
Redemption--not redeemable prior to July 1, 1998, unless certain criteria
are met, in which case the redemption price would be $10.00 per share;
beginning July 1, 1998, redemption is at the option of the Company at a
redemption price of $10.40 per share, declining thereafter at $0.08 per share
during each year through July 1, 2003, and thereafter the redemption price
remains $10.00 per share.
Voting rights--nonvoting. However, if the Company fails to pay dividends
for six quarters, whether or not consecutive, the holders shall have the right
to elect two additional directors until dividends have been paid for four
consecutive quarters.
Convertibility--convertible into one share of Class A Common Stock for
each share of non-cumulative Convertible Preferred Stock, Series 1993,
surrendered for conversion, subject to adjustment on the occurrence of certain
events.
9% NONCUMULATIVE PERPETUAL PREFERRED STOCK:
Authorized shares--1,851,417 shares as of September 30, 1997 and 2,300,000
shares as of September 30, 1996.
Issued and outstanding--701,417 as of September 30, 1997 and 1,150,000 as
of September 30, 1996.
Dividends--noncumulative cash dividends payable quarterly at the fixed
annual rate of $0.90 per share.
Preference on liquidation--voluntary liquidation at the applicable
redemption price per share and involuntary liquidation at $10.00 per share.
Redemption--not redeemable prior to October 1, 1998; subsequent to
September 30, 1998, redemption is at the option of the Company at a redemption
price of $10.00 per share.
Voting rights--nonvoting. However, if the Company fails to pay dividends
for six quarters, whether or not consecutive, the holders shall have the right
to elect two additional directors until dividends have been paid for four
consecutive quarters.
Convertibility--none.
79
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(13) STOCKHOLDERS' EQUITY--(CONTINUED)
8% NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES 1996:
Authorized shares--608,732 shares as of September 30, 1997 and none as of
September 30, 1996.
Issued and outstanding shares--545,191 shares as of September 30, 1997 and
none as of September 30, 1996.
Dividends--non-cumulative cash dividends payable quarterly at the fixed
annual rate of $1.20 per share.
Preference on liquidation--voluntary liquidation at the applicable
redemption price per share and involuntary liquidation at $15.00 per share.
Redemption--called for redemption effective October 10, 1997 for $15.00
per share. As a result 927,204 shares were converted to Class A Common Stock
and 5,696 shares were or will be redeemed.
Voting rights--nonvoting except under certain circumstances.
Convertibility--convertible into 1.67 shares of Class A Common Stock for
each share of 8% Noncumulative Convertible Preferred Stock, Series 1996,
surrendered for conversion.
CLASS A COMMON STOCK:
Issuable in series with rights and preferences to be designated by the
Board of Directors:
As of September 30, 1997, 10,000,000 shares of Class A Common Stock were
authorized but not designated to a series. As of September 30, 1996, 5,000,000
shares were authorized but not designated.
SERIES I CLASS A COMMON STOCK:
Authorized shares--20,000,000 at September 30, 1997 and 10,000,000 at
September 30, 1996.
Issued and outstanding--9,257,098 shares as of September 30, 1997 and
5,454,201 shares as of September 30, 1996.
Dividends--as declared by the Board in the case of a dividend on the Class
A Common Stock alone or not less than 110% of the amount per share of any
dividend declared on the Class B Common Stock.
Voting rights--one tenth of one vote per share.
In October 1997, the Company issued 3,680,000 shares of Series I Class A
Common Stock pursuant to a public stock offering. Net proceeds from the
offering were approximately $43.9 million.
80
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(13) STOCKHOLDERS' EQUITY--(CONTINUED)
CLASS B COMMON STOCK:
Authorized shares--3,000,000.
Issued and outstanding--275,685 shares as of September 30, 1997 and
251,515 shares as of September 30, 1996.
Dividends--as declared by the Board of Directors.
Voting rights--one vote per share.
Convertibility--convertible into one share of Class A Common Stock for
each share of Class B Common Stock surrendered for conversion, subject to
adjustment on the occurrence of certain events.
(14) STOCK BONUS PLAN, OPTION AGREEMENTS AND OTHER BENEFIT PLANS
The Company maintains the 1992 Stock Bonus Plan whereby it is authorized
to issue up to 125,000 shares and to allow directors of the Company who are not
employees to participate in the plan and receive stock in partial payment of
their director's fees. As of September 30, 1997, 64,857 shares of Class A
Common Stock and 54,779 shares of Class B Common Stock have been issued under
the 1992 Stock Bonus Plan. As of September 30, 1997, there were 5,364 shares
available for grant under the 1992 Stock Bonus Plan.
The Company also maintains a non-statutory stock option plan under which
options for up to 825,000 shares of Class A and Class B Common Stock may be
granted. The options are for a period of 10 years and are exercisable at the
fair market value of the stock at the grant date. As of September 30, 1997,
825,000 options have been granted under this plan and 75,207 options have been
exercised.
The Company also maintains an incentive stock option plan under which
options for up to 250,000 shares of Class A and Class B Common Stock may be
granted. As of September 30, 1997, 250,000 options have been granted under this
plan.
BankUnited's Board of Directors approved several non-qualified stock
option agreements (the "Agreements") under which options to purchase shares of
Class B Common Stock were granted at the fair market price of the Class B
Common Stock on the date of the grant. The Agreements, which originally expired
on October 23, 1994, have been extended pursuant to Stockholders' approval to
October 23, 1999. As of September 30, 1997, the Agreements are exercisable for
a total of 155,367 shares at the exercise price of $4.64 per share; none have
been exercised.
Pursuant to stockholder approval in February 1997, the Company maintains
the 1996 Incentive and Stock Award Plan. Under this plan, the Compensation
Committee of the Board of Directors may grant options to purchase, or may issue
in connection with Stock Awards, Stock Bonuses and Restricted Stock, up to
550,000 shares of Class A or Class B Common Stock. Additionally, the number of
shares of Noncumulative Convertible Preferred Stock, Series B for which Options
may be granted or which may be issued in connection with Stock Bonuses, Stock
Awards and Restricted Stock in lieu of cash or other
81
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(14) STOCK BONUS PLAN, OPTION AGREEMENTS AND OTHER BENEFIT PLANS--(CONTINUED)
stock awards is 100,000. As of September 30, 1997, options to purchase 149,365
shares of Class A Common Stock and 237,000 shares of Class B Common Stock had
been granted and 9,452 shares of Class A Common Stock had been issued.
The following table presents additional data concerning the Company's
outstanding stock options:
NUMBER OPTION PRICE AGGREGATE
OF SHARES PER SHARE OPTION PRICE
----------- ---------------- -------------
Options outstanding, September 30, 1994 ............ 616,587 $3.11 - $10.98 3,361,572
Options granted .................................... 208,671 4.95 - 7.95 1,139,902
Options exercised ................................. (6,695) 3.21 - 5.73 (23,958)
------- ---------------- ----------
Options outstanding, September 30, 1995 ............ 818,563 3.11 - 10.98 4,477,516
Options granted .................................... 122,585 7.24 - 8.26 933,064
------- ---------------- ----------
Options outstanding, September 30, 1996 ............ 941,148 3.11 - 10.98 5,410,580
Options granted (including Suncoast options) ...... 729,381 3.00 - 10.74 5,839,961
Options exercised ................................. (83,004) 3.00 - 8.80 (490,932)
------- ---------------- ----------
Options outstanding, September 30, 1997 ............ 1,587,525 $3.00 - $10.98 $10,759,609
========= ================ ===========
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" and as permitted by SFAS No. 123, the Company continues to follow
the measurement provisions of Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees, " and does not recognize
compensation expense for its stock-based incentive plans. Had compensation cost
for the Company's stock based incentive compensation plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the methodology prescribed by SFAS No. 123, the Company's net
income and earnings per share for fiscal 1997 and 1996 would have been reduced
to the pro forma amounts indicated below:
1997 1996
-------- -------
As Reported ........................... $7,599 $2,586
Pro forma .............................. 6,218 2,349
Primary earnings per common share:
As reported ........................... $ .54 $ .10
Pro forma .............................. $ .39 $ .04
Fully diluted earnings pper common share:
As reported ........................... $ .54 $ .10
Pro forma .............................. $ .38 $ .04
The fair value of each option is estimated on the date of the grant using
the Black Scholes option pricing model, with the following historical weighted
average assumptions applied to grants in fiscal 1997 and 1996:
1997 1996
---------- ----------
Dividend yields ............... -- --
Expected volatility ............ 30.1 % 30.1 %
Risk-free interest rates ...... 6.30% 6.52%
Expected life (in years) ...... 9.52 7.88
82
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(14) STOCK BONUS PLAN, OPTION AGREEMENTS AND OTHER BENEFIT PLANS--(CONTINUED)
Based upon the above assumptions, the weighted average fair value of
options granted during 1997 and 1996 was $2,484,000 and $334,000, respectively.
The Company has a 401(k) savings plan pursaunt to which eligible employees
are permitted to contribute up to 15% of their annual salary to the savings
plan. The Company will provide matching contributions at a rate of 33% of such
contributions, up to a maximum of 2% of an employee's salary. The amount of
such matching by the Company for the years ended September 30, 1997, 1996, and
1995 totaled approximately $34,600, $7,000, and $30,000 respectively. Employees
are eligible to participate in the plan after one year of service and begin
vesting in the company's contribution after two years of participation in the
plan at the rate of 25% per year up to 100%.
In September 1995, the Company's Board of Directors adopted a Profit
Sharing Plan. Under the terms of the plan, the Company, at the discretion of
the Board of Directors, may contribute Class A Common Stock to the plan. The
contributions are allocated to the account of the eligible employees based upon
their salaries. Employees become eligible for the plan after one year of
service and become vested at the rate of 20% per year up to 100%. The Board of
Directors authorized a contribution of $170,000, $100,000 and $75,000 in 1997,
1996 and 1995, respectively.
In connection with the Suncoast acquisition the Company assumed 119,000 of
Suncoast's options with option prices ranging from $3.00 to $7.38 per share of
Class A Common Stock with an aggregate exercise price of $610,000. As of
September 30, 1997, 73,000 of these options had been exercised.
(15) INCOME TAXES
The Company's effective tax rate differs from the statutory federal income
tax rate as follows:
YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ---------- -------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Tax at federal income tax rate ...... $4,295 34.0% $1,443 34.0% $3,394 34.0%
Increase (decrease) resulting from:
State tax ........................... 314 2.5% 154 3.6 362 3.6
Other, net ........................ 424 3.3% 60 1.5 (15) (0.1)
------ ---- ------ ---- ------ ----
Total .............................. $5,033 39.8% $1,657 39.1% $3,741 37.5%
====== ==== ====== ==== ====== ====
83
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(15) INCOME TAXES--(CONTINUED)
The components of the provision for income taxes for the year ended
September 30, 1997, 1996 and 1995 are as follows:
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------------
1997 1996 1995
-------- -------- ----------
(DOLLARS IN THOUSANDS)
Current-federal ...... $1,150 $1,324 $3,590
Current-state ......... 125 227 620
Deferred-federal ...... 3,391 90 (400)
Deferred-state ......... 367 16 (69)
------ ------ ------
Total ............... $5,033 $1,657 $3,741
====== ====== ======
The tax effects of significant temporary differences included in the
deferred tax asset as of September 30, 1997 and 1996 were:
SEPTEMBER 30,
----------------
1997 1996
-------- -----
(DOLLARS IN
THOUSANDS)
Deferred tax asset:
Non-accrual interest ............... $ 200 $185
Loan loss and other reserves ...... 875 431
Fixed assets ........................ 77 5
Deferrals and amortization ......... 250 19
Purchase accounting ............... 1,605 --
Other .............................. 236 --
------ ----
Gross deferred tax asset ......... 3,243 640
------ ----
Deferred tax liability:
FHLB Atlanta stock dividends ...... 159 167
Deferrals and amortizations ......... 912 --
Other .............................. 91 13
------ ----
Gross deferred tax liability ...... 1,162 180
------ ----
Net deferred tax asset ............ $2,081 $460
====== ====
At September 30, 1997, the Company had $409,000 in Tax Bad Debt Reserves
originating before December 31, 1987 for which deferred taxes have not been
provided. The amount becomes taxable under the Internal Revenue Code upon the
occurrence of certain events, including certain non-dividend distributions. The
Company does not anticipate any actions which would ultimately result in the
recapture of this amount for income tax purposes.
84
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(15) INCOME TAXES--(CONTINUED)
The components of deferred income tax provision (benefit) relate to the
following:
YEARS ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
-------- ----------- ---------
(DOLLARS IN THOUSANDS)
Differences in book/tax depreciation ...... $ -- $(10) $ (21)
Delinquent interest ........................ (18) (7) (80)
FHLB Stock dividends ..................... -- -- (144)
Loan fees ................................. 15 -- --
Loan loss and other reserves ............... (294) 156 (164)
Deferrals and amortization ............... (145) (33) (60)
SAIF special assessment .................. 758 -- --
Purchase accounting ........................ 2,635 -- --
Other .................................... 807 -- --
------ ------ ------
Total deferred taxes ..................... $3,758 $106 $ (469)
====== ====== ======
In connection with the acquisition of Suncoast, the Company recorded
deferred tax assets and liabilities for the differences between values assigned
in purchase accounting and the tax bases of acquired assets and liabilities.
The resultant net deferred tax asset is not included in the summary of
significant temporary differences at September 30, 1996 above. Approximately
$2,635,000 of this deferred tax asset has been recognized as deferred tax
expense during the year ended September 30, 1997 and $1,605,000 represents the
tax effect at September 30, 1997 of amounts deductible for tax purposes in
future periods.
The Company also acquired net deferred tax assets of approximately
$1,140,000 in conjunction with its acquisition of Suncoast. These net deferred
tax assets are not included in the summary of significant temporary differences
at September 30, 1996 above.
(16) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into instruments that
are not recorded in the consolidated financial statements, but are required to
meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include commitments
to extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statements of financial condition. The
contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party on the financial instrument for commitments to extend credit
and standby letters of credit by the other party is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or
85
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(16) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
other termination clauses and may require payment of a fee. Total commitments
to extend credit at September 30, 1997 were as follows:
SEPTEMBER 30, 1997
----------------------------------
FIXED VARIABLE
RATE RATE TOTAL
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
Commitments to fund loans ......... $ 9,980 $ 15,826 $ 25,806
Loans in process .................. 4,297 8,664 12,961
Letters of credit .................. 127 -- 127
Commitments to purchase loans ...... -- 873,553 873,553
------- -------- --------
Total .............................. $14,404 $898,043 $912,447
======= ======== ========
The Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company,
upon extension of credit is based on management's credit evaluation of the
customer. Collateral varies but may include accounts receivable, property,
plant and equipment, residential real estate, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. The Company requires collateral to support those commitments.
The Company is a party to certain other claims and litigation arising in
the ordinary course of business. In the opinion of management, the resolution
of such claims and litigation will not materially affect the Company's
consolidated financial position or results of operations.
(17) RELATED PARTY TRANSACTIONS
The Company employs the services of a law firm, of which the Company's
Chairman of the Board and President is senior managing director and of which
another director of the Company is managing director; and the services of an
insurance agency, of which a member of the Board of Directors is a vice
president. For the years ended September 30, 1997, 1996 and 1995, total fees (a
portion of which were capitalized) paid to this law firm totaled approximately
$2.2 million, $986,000, and $1.1 million, respectively, and amounts paid to
this insurance agency totaled approximately $373,000, $147,000, and $129,000,
respectively.
In fiscal 1997, the Company leased property for a new branch, which is 25%
owned by the Company's Chairman of the Board. The lease is for a term of 3
years with four three year options to renew. The annual rent for the property
is approximately $126,000, and in fiscal 1997, the Company paid a total of
$82,000 in rent.
86
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(18) BANKUNITED FINANCIAL CORPORATION
The following summarizes the major categories of the Company's (parent
company only) financial statements:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30,
------------------------
1997 1996
---------- -----------
(DOLLARS IN THOUSANDS)
Assets:
Cash ......................................................... $ 623 $ 88
FHLB overnight deposits ....................................... 2,822 7,889
Tax certificates ............................................. 40 312
Investments, net (market value of approximately $10 and $10 at
September 30, 1997 and 1996, respectively) .................. 10 10
Investments available for sale .............................. -- 155
Mortgage-backed securities, available for sale ............... 18,644 1,309
Accrued interest receivable ................................. 173 132
Investment in the Bank ....................................... 183,807 59,443
Investment in subsidiaries .................................... 4,640 --
Other assets ................................................ 9,622 248
-------- -------
Total ...................................................... $220,381 $69,586
======== =======
Liabilities ................................................... $ 3,396 $ 475
Junior subordinated deferrable interest debentures ............ 120,640 --
Stockholders' equity:
Preferred stock ............................................. 22 27
Common stock ................................................ 95 57
Paid-in capital ............................................. 86,679 62,055
Retained earnings ............................................. 11,988 7,279
Net unrealized gains (losses) on securities available for sale,
net of taxes ................................................ 861 (307)
-------- -------
Total stockholders' equity ................................. 99,645 69,111
-------- -------
Total liabilities and stockholders' equity .................. $220,381 $69,586
======== =======
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
----------- -------- ---------
(DOLLARS IN THOUSANDS)
Interest income .................. $ 2,626 $ 803 $ 307
Interest expense .................. 6,726 17 36
Equity income of the Bank ......... 10,927 2,406 6,587
Operating expenses ............... 1,166 491 818
-------- ------ ------
Income before income taxes ......... 5,661 2,701 6,040
Income tax expense (benefit) ...... (1,938) 115 (200)
-------- ------ ------
Net income ........................ $ 7,599 $2,586 $6,240
======== ====== ======
87
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(18) BANKUNITED FINANCIAL CORPORATION--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
1997 1996 1995
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
Cash flow from operating activities:
Net income ................................................... $ 7,599 $ 2,586 $ 6,240
Less: Undistributed income of the Bank ..................... (11,551) (406) (6,587)
Other ...................................................... (2,757) 242 156
--------- --------- --------
Net cash provided by (used in) operating activities ......... (6,709) 2,422 (191)
--------- --------- --------
Cash from investing activities:
Equity contributions to the Bank ........................... (85,000) (16,000) --
Equity contributions to subsidiaries ........................ (4,640) -- --
Purchase of investment securities ........................... -- (155) --
Proceeds from sale of investments ........................... 155 -- --
Purchase of mortgage-backed securities ..................... (27,411) -- --
Proceeds from repayments of mortgage- backed securities . 5,054 368 181
Proceeds from sales of mortgage-backed securities ............ 5,021 -- --
Net decrease in tax certificates ........................... 269 145 732
--------- --------- --------
Net cash provided by (used in) investing activities ......... (106,552) (15,642) 913
--------- --------- --------
Cash flow from financing activities:
Net proceeds from issuance of Junior subordinated
deferrable interest debentures ........................... 114,776 -- --
Net proceeds from issuance of common stock .................. 1,329 23,198 222
Dividends paid on preferred stock ........................... (2,890) (2,086) (2,010)
Preferred Stock, Series 9% tender offer ..................... (4,486) -- --
--------- --------- --------
Net cash provided by (used in) financing activities ......... 108,729 21,112 (1,788)
(Decrease) increase in cash and cash equivalents ............ (4,532) 7,892 (1,066)
Cash and cash equivalents at beginning of year ............... 7,977 85 1,151
--------- --------- --------
Cash and cash equivalents at end of year ..................... $ 3,445 $ 7,977 $ 85
========= ========= ========
(19) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the estimated fair
value of the Company's financial instruments. Management has made estimates of
fair value discount rates that it believes to be reasonable. However, because
there is no market for many of these financial instruments, management has no
basis to determine whether the fair value presented would be indicative of the
value negotiated in an actual sale. The fair value estimates do not consider
the tax effect that would be associated with the disposition of the assets or
liabilities at their fair value estimates.
Fair values are estimated for loan portfolios with similar financial
characteristics. Loans are segregated by category, such as commercial,
commercial real estate, residential mortgage, second mortgages, and other
installment. Each loan category is further segmented into fixed and adjustable
rate
88
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(19) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
interest terms and by performing and non-performing status. The fair value of
loans, except residential mortgage and adjustable rate loans, is calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent
in the loan. The estimate of average maturity is based on historical experience
with prepayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions.
For residential mortgage loans, fair value is estimated by discounting
contractual cash flows adjusted for national historical prepayment estimates
using discount rates based on secondary market sources adjusted to reflect
differences in servicing and credit costs.
For adjustable-rate loans, the fair value is estimated at book value after
adjusting for credit risk inherent in the loan. The Company's interest rate
risk is considered insignificant since the majority of the Company's adjustable
rate loans are based on the average cost of funds for the Eleventh District of
the Federal Home Loan Bank System ("COFI") or one-year Constant Maturity
Treasuries ("CMT") rates and adjust monthly or at intervals generally over a
period not exceeding one year.
The fair value of the tax certificates is estimated at book value as these
investments historically have had relatively short lives and their yields
approximate market rates. The fair value of mortgage-backed securities and
investment securities is estimated based on bid prices available from
securities dealers.
The fair value of deposits with no stated maturity, such as
non-interest-bearing demand deposits, savings and NOW accounts, and money
market accounts, is equal to the amount payable on demand. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the Company's current rates for
deposits of similar maturities adjusted for insurance costs.
The fair value of the Trust Preferred Securities is estimated based on bid
prices available from securities dealers.
The fair value of subordinated notes is estimated by discounting
contractual cash flows using estimated market rates. The contract amounts and
related fees of the Company's commitments to extend credit approximate the fair
value of these commitments.
89
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997
(19) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--(CONTINUED)
The following table presents information for the Company's financial
instruments at September 30, 1997 and 1996:
AS OF SEPTEMBER 30, 1997
------------------------------
CARRYING VALUE FAIR VALUE
---------------- -----------
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and overnight investments ............... $ 89,984 $ 89,984
Tax certificates and other investments ...... 73,943 74,062
Mortgage-backed securities .................. 120,271 120,211
Loans receivable ........................... 1,765,723 1,814,459
Mortgage servicing assets .................. 4,783 4,890
Other interest-earning assets ............... 33,599 33,599
Financial liabilities:
Deposits .................................... $1,195,892 $1,197,871
Borrowings ................................. 701,484 704,705
Trust Preferred Securities .................. 116,000 119,010
AS OF SEPTEMBER 30, 1996
------------------------------
CARRYING VALUE FAIR VALUE
---------------- -----------
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and overnight investments ............... $ 34,136 $ 34,136
Tax certificates and other investments ...... 46,784 46,784
Mortgage-backed securities .................. 70,163 69,741
Loans receivable ........................... 646,385 646,547
Other interest-earning assets ............... 12,225 12,225
Financial liabilities:
Deposits .................................... $506,106 $506,025
Advances from the FHLB ..................... 237,000 237,218
Subordinated notes ........................... 775 859
90
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information contained under the caption "Election of Directors" to
appear in the Company's definitive proxy statement relating to the Company's
1998 Annual Meeting of Stockholders, which definitive proxy statement will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the Company's fiscal year covered by this report on Form 10-K
(hereinafter referred to as the "Annual Meeting Proxy Statement"), is
incorporated herein by reference. Information concerning the executive officers
of the Company is included in Part I of this Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the caption "Executive Compensation" to
appear in the Annual Meeting Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" to appear in the Annual Meeting Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the captions "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions" to appear in the Annual Meeting Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) Financial Statements.
The following consolidated financial statements of the Company and the
report of the independent certified public accountants thereon filed with this
report:
Report of Independent Certified Public Accountants (Price
Waterhouse LLP).
Consolidated Statements of Financial Condition as of September 30,
1997 and 1996.
Consolidated Statements of Operations for the years September 30,
1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 1997, 1996 and 1995.
91
Consolidated Statements of Cash Flows for the years ended September
30, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules.
Schedules are omitted because the conditions requiring their filing
are not applicable or because the required information is provided in
the Consolidated Financial Statements, including the Notes thereto.
(3) Exhibits.*
2.1 Agreement and Plan of Merger, dated July 15, 1996, between
BankUnited and Suncoast Savings and Loan Association, FSA. (Exhibit 2.1
to BankUnited's Form S-4 Registration Statement, File No. 333-13211, as
filed with the Securities and Exchange Commission on October 1, 1996).
2.2 Agreement and Plan of Merger between BankUnited and Consumers
Bancorp, Inc. dated September 19, 1997 (Exhibit 2.2 to BankUnited's
Form S-4 Registration Statement, File No. 333-39921, as filed with the
Securities and Exchange Commission on November 10, 1997).
3.1 Articles of Incorporation of BankUnited.
3.2 Statement of Designation of Series I Class A Common Stock and
Class B Common Stock of BankUnited (included as an appendix to Exhibit
3.1).
3.3 Statement of Designation of Noncumulative Convertible Preferred
Stock, Series A, of BankUnited (included as an appendix to Exhibit
3.1).
3.4 Statement of Designation of Noncumulative Convertible Preferred
Stock, Series B of BankUnited (included as appendix to Exhibit 3.1).
3.5 Statement of Designation of 8% Noncumulative Convertible
Preferred Stock, Series 1993 of BankUnited (included as an appendix to
Exhibit 3.1).
3.6 Statement of Designation of 9% Noncumulative Perpetual Preferred
Stock of BankUnited (included as an appendix to Exhibit 3.1).
3.7 Statement of Designation of 8% Noncumulative Convertible
Preferred Stock, Series 1996 of BankUnited (included as appendix to
Exhibit 3.1).
3.8 Form of Letter Agreement between BankUnited and the holders of
shares of BankUnited's Noncumulative Convertible Preferred Stock,
Series B.
3.9 Bylaws of BankUnited (Exhibit 4.5 to BankUnited's Form S-8
Registration Statement, File No. 333-43211, as filed with the
Securities and Exchange Commission on November 14, 1996).
4.1 Agreement for Advances and Security Agreement with Blanket
Floating Lien dated as of September 25, 1992, between BankUnited, FSB
(the "Bank") and the Federal Home Loan Bank of Atlanta (Exhibit 4.1 to
the Bank's Form 10-K for the year ended September 30, 1992, filed with
the Securities and Exchange Commission as an exhibit to BankUnited's
Form 8-K dated March 25, 1993).
92
4.2 Forms of Series 15A-F, Series 18E and Series 20A-F of
Subordinated Notes of the Bank (Exhibit 4.3 to BankUnited's Form S-4
Registration Statement, File No. 33-55232, as filed with the Securities
and Exchange Commission on December 2, 1992).
10.1 Non-Statutory Stock Option Plan, as amended, (Exhibit 4.9 to
BankUnited's Form S-8 Registration Statement, File No. 33-76882, as
filed with the Securities and Exchange Commission on March 24, 1994).
**
10.2 1992 Stock Bonus Plan, as amended (Exhibit 10.2 to BankUnited's
Form 10-K Report for the year ended September 30, 1994 [the "1994
10-K"]).**
10.3 1994 Incentive Stock Option Plan. (Exhibit 10.3 to the 1994
10-K).**
10.4 The Bank's Profit Sharing Plan. (Exhibit 10.4 to BankUnited's
Form S-2 Registration Statement, File No. 33-80791, as filed with the
Securities and Exchange Commission on December 22, 1995).**
10.5 1996 Incentive Compensation and Stock Award Plan (Exhibit 10.5
to BankUnited's Form 10-K Report for the year ended September 30,
1996).**
10.6 Purchase and Assumption Agreement dated March 20, 1995 by and
among BankUnited, the Bank, SouthTrust Corporation, SouthTrust of
Florida, Inc. and SouthTrust Bank of the Suncoast (Exhibit 10.1 to
BankUnited's Form 10-Q Report for the quarter ended March 31, 1995 [the
"March 31, 1995 10-Q"]).
10.7 Purchase and Assumption Agreement dated March 20, 1995 by and
among BankUnited, the Bank, SouthTrust Corporation, SouthTrust of
Florida, Inc., and SouthTrust Bank of Southwest Florida, N.A. (Exhibit
10.2 to the March 31, 1995 10-Q).
10.8 First Amendment to Purchase and Assumption Agreement dated July
27, 1995 by and among BankUnited, the Bank, SouthTrust Corporation,
SouthTrust of Florida, Inc., and SouthTrust Bank of the Suncoast
(Exhibit 10.1 to BankUnited's Form 10-Q Report for the quarter ended
June 30, 1995 [the "June 30, 1995 10-Q"]).
10.9 First Amendment to Purchase and Assumption Agreement dated July
27, 1995 by and among BankUnited, the Bank, SouthTrust Corporation,
SouthTrust of Florida, Inc., and SouthTrust of Southwest Florida, N.A.
(Exhibit 10.2 to the June 30, 1995 10-Q).
10.10 Form of Employment Agreement between BankUnited and Alfred R.
Camner (Exhibit 10.10 to BankUnited's 10-K Report for the year ended
September 30, 1996).
10.11 Form of Employment Agreement between BankUnited and Earline G.
Ford (Exhibit 10.11 to BankUnited's 10-K Report for the year ended
September 30, 1996).
10.12 Form of Employment Agreement between BankUnited and certain of
its senior officers (Exhibit 10.12 to BankUnited's 10-K Report for the
year ended September 30, 1996).
10.13 Junior Subordinated Indenture with respect to BankUnited's
101/4% Junior Subordinated Debentures. (Exhibit 4.1A to the Company's
Registration Statement on Form S-4, File No. 333-24025, as filed with
the Securities and Exchange Commission on March 27, 1997).
10.14 Supplemental Indenture (Exhibit 4.1B to the Company's
Registration Statement on Form S-4, File No. 333-24025, as filed with
the Securities and Exchange Commission on March 27, 1997).
93
10.15 Form of Amended and Restated Trust Agreement of BankUnited
Capital. (Exhibit 4.3 to the Company's Registration Statement on Form
S-4, No. 333-24025, as filed with the Securities and Exchange
Commission on March 27, 1997).
10.16 Form of Amended and Restated Guarantee Agreement for
BankUnited Capital. (Exhibit 4.5 to the Company's Registration
Statement on Form S-4, No. 333-24025, as filed with the Securities and
Exchange Commission on March 27, 1997).
10.17 Form of Agreement as to Expenses and Liabilities (included as
an exhibit to Exhibit 99.6 to the Company's Registration Statement on
Form S-4, No. 333-24025, as filed with the Securities and Exchange
Commission on March 27, 1997).
10.18 Registration Rights Agreement (Exhibit 4.6 to the Company's
Registration Statement on Form S-4, No. 333-24025, as filed with the
Securities and Exchange Commission on March 27, 1997).
10.19 Registration Rights Agreement (Exhibit 4.7 to the Company's
Registration Statement on Form S-4, No. 333-24025, as filed with the
Securities and Exchange Commission on March 27, 1997).
10.20 Purchase Agreement (Exhibit 99.4 to the Company's Registration
Statement on Form S-4, No. 333-24025, as filed with the Securities and
Exchange Commission on March 27, 1997).
10.21 Purchase Agreement (Exhibit 99.5 to the Company's Registration
Statement on Form S-4, No. 333-24025, as filed with the Securities and
Exchange Commission on March 27, 1997).
10.22 Form of Indenture with respect to BankUnited's 9.60% Junior
Subordinated Debentures. (Exhibit 4.3 to the Company's Registration
Statement on Form S-2, File No. 333-27597, as filed with the Securities
and Exchange Commission on May 22, 1997).
10.23 Trust Agreement of BankUnited Capital II. (Exhibit 4.6 to the
Company's Registration Statement on Form S-2, File No. 333-27597, as
filed with the Securities and Exchange Commission on May 22, 1997).
10.24 Form of Amended and Restated Trust Agreement of BankUnited
Trust II. (Exhibit 4.7 to the Company's Registration Statement on Form
S-2, No. 333-27597, as filed with the Securities and Exchange
Commission on May 22, 1997).
10.25 Form of Guarantee Agreement for BankUnited Capital II.
(Exhibit 4.9 to the Company's Registration Statement on Form S-2, No.
333-27597, as filed with the Securities and Exchange Commission on May
22, 1997).
10.26 Form of Agreement as to Expenses and Liabilities (included as
an exhibit to Exhibit 4.7) (Exhibit 4.10 to the Company's Registration
Statement on Form S-2, No. 333-27597, as filed with the Securities and
Exchange Commission on May 22, 1997).
11.1 Statement regarding calculation of earnings per common share.
12.1 Statement regarding calculation of earnings to combined fixed
charges and preferred stock dividends.
21.1 Subsidiaries of the Registrant (Exhibit 21.1 to BankUnited's
Form S-4 Registration Statement, File No. 333-39921, as filed with the
Securities and Exchange Commission on November 10, 1997).
94
23.1 Consent of Price Waterhouse LLP.
24.1 Power of attorney (set forth on the signature page in Part IV
of this Report on Form 10-K for the year ended September 30, 1997).
27.1 Financial Data Schedule.
- ----------------
* Exhibits followed by a parenthetical reference are incorporated herein by
reference from the documents described therein.
** Exhibits 10.1--10.5 are compensatory plans or arrangements.
(B) REPORTS ON FORM 8-K.
During the quarter ended September 30, 1997, the Company filed with the
Securities and Exchange Commission, (i) a Current Report on Form 8-K dated
September 12, 1997, which reported that the Company had called its 8%
Noncumulative Convertible Preferred Stock, Series 1996, for redemption, and
(ii) a Current Report on Form 8-K announcing that the Company had agreed to
acquire Consumers Savings Bancorp, Inc., the parent company of Consumers
Savings Bank.
SUPPLEMENTAL INFORMATION
As of the date of filing of this report on Form 10-K no annual report or
proxy material has been sent to security holders. Such material will be
furnished to security holders and the Securities and Exchange Commission
subsequent to the filing of this report on Form 10-K.
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized on
December 29, 1997.
BANKUNITED FINANCIAL CORPORATION
By: /s/ Alfred R. Camner
-----------------------------------
Alfred R. Camner
Chairman of the Board, President
and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alfred R. Camner, Earline G. Ford and Marc
Jacobson and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments to
this report on Form 10-K and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his substitutes, may lawfully do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on December 29, 1997 on behalf of the Registrant by the
following persons and in the capacities indicated.
/s/ Alfred R. Camner Chairman of the Board, Chief Executive
- ---------------------------- Officer, President and Director
Alfred R. Camner (Principal Executive Officer)
/s/ Earline G. Ford Executive Vice President, Treasurer and
- ---------------------------- Director
Earline G. Ford
/s/ James A. Dougherty Executive Vice President and Director
- ----------------------------
James A. Dougherty
/s/ Samuel A. Milne Executive Vice President and Chief Financial
- ---------------------------- Officer (Principal Financial Officer and
Samuel A. Milne Principal Accounting Officer)
/s/ Marc D. Jacobson Director
- ----------------------------
Marc D. Jacobson
/s/ Allen M. Bernkrant Director
- ----------------------------
Allen M. Bernkrant
/s/ Lawrence H. Blum Director
- ----------------------------
Lawrence H. Blum
/s/ Patricia L. Frost Director
- ----------------------------
Patricia L. Frost
96
- --------------------------- Director
Anne W. Solloway
/s/ Neil Messinger Director
- ---------------------------
Neil Messinger
/s/ Christina Cuervo Director
- ---------------------------
Christina Cuervo
- --------------------------- Director
Elia J. Giusti
- --------------------------- Director
Norman Mains
/s/ Bruce Friesner Director
- ---------------------------
Bruce Friesner
/s/ Marc Lipsitz Director and Corporate Secretary
- ---------------------------
Marc Lipsitz
97
BANKUNITED FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED SEPTEMBER 30, 1997
INDEX TO EXHIBITS*
SEQUENTIALLY
NUMBERED
EXHIBIT NO. PAGE
- ---------------- -----------------
3.1 Articles of Incorporation of the Company
3.8 Form of Letter Agreement between BankUnited and the holders of
shares of BankUnited Noncumulative Convertible Preferred Stock,
Series B
11.1 Statement regarding calculation of earnings per common share.
12.1 Statement regarding calculation of ratios
23.1 Consent of Price Waterhouse LLP
24.1 Power of Attorney (set forth on the signature page of this
annual report on Form 10-K)
27.1 Financial Data Schedule
- -------------
* All other exhibits listed under Item 14 of Part IV of the Form 10-K are
incorporated by reference to documents previously filed, as indicated
therein.
98