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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 5-43936
BANKUNITED FINANCIAL CORPORATION
--------------------------------
(Exact name of Registrant as specified in its charter)
FLORIDA 65-037773
- ------------------------------- ----------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
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 1996
8% Noncumulative Convertible Preferred Stock, Series 1993
9% Noncumulative Perpetual Preferred Stock
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 this Form 10-K.
---
The aggregate market value of the Class A Common Stock and Class B
Common Stock held by non-affiliates of the Registrant, based upon the average
price on December 23, 1998, was $118,495,647.* The Class A Common Stock is the
only publicly traded voting security of the Registrant.
The shares of the Registrant's common stock outstanding as of December
23, 1998 were as follows:
CLASS NUMBER OF SHARES
----- ----------------
Class A Common Stock, $.01 par value 17,829,675
Class B Common Stock, $.01 par value 376,392
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement for its 1999 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.
- ----------------
* 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.
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 twenty-five branch offices, twenty-four
in southeast and one in southwest Florida and anticipates opening additional
branch offices in 1999 in its market area. 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 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 fiscal 1999, the Company expects to place increased emphasis on
retail and commercial branches and retail and correspondent lending, with a view
towards increasing the Company's margins and generating increased non-interest
income. It is also anticipated that the rapid expansion experienced during the
1998 fiscal year will be moderated during the 1999 fiscal year.
In connection with its emphasis on retail and commercial banking, as of
December 1, 1998, the Company and the Bank appointed a new President and Chief
Operating Officer who was formerly responsible for the Miami-Dade and Monroe
County operations of the largest commercial bank operating in South Florida.
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.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the word or phrases "will likely
result", "expect", "will continue", "anticipate", "estimate", "project",
"believe" and similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including general economic factors and
conditions, changes in levels of market interest rates, credit risks of lending
activities, competitive and regulatory factors, and expansion strategies could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
MARKET AREA AND COMPETITION
The Company conducts operations in Dade, Broward, Palm Beach and Collier
counties ("South Florida") which geographic region, at June 30, 1998, had a
total of approximately $79.7 billion in deposits at commercial banks and savings
institutions (42.1% of the total of $189.3 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.
1
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. The Company also competes in its market area with the branch offices of
several super-regional commercial banks and savings associations that are
substantially larger and have more extensive operations than the Company. In
addition, many financial institutions formerly independent and operating in
South Florida have recently been acquired by larger institutions 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 which it charges, the types of loans which it
offers, and the efficiency and quality of service which 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.
In the current interest rate environment, when long-term interest rates are
generally low on a historical basis and the spread between short-term rates and
long-term rates is relatively narrow, prepayments of adjustable rate and higher
fixed-rate mortgages tend to accelerate. As a result of the historically high
levels of prepayments, the results of operations for the year ended September
30, 1998 reflect an acceleration in the amortization of purchase premiums on
loans and mortgage-backed securities from $1.1 million for the year ended
September 30, 1997 to $11.4 million for the year ended September 30, 1998. In
turn, this caused a corresponding reduction in net interest income. To reduce
the adverse impact of declining market interest rates on the Company's net
interest income, the Company began to emphasize originating and purchasing
fixed-rate loans in the latter half of the fiscal year.
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 4.58% of total assets as of September 30,
1998. 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.
The Company currently utilizes derivative instruments on a limited basis to
hedge the interest rate risks of certain financial instruments. Interest Rate
Cap contracts have been acquired by the Company to hedge the risk on an increase
in market interest rates for variable rate sources of funds which are partially
funding financial instruments which have interest rate terms which are fixed for
certain periods of time (see Note 17 "Commitments and Contingencies" of the
Notes to Consolidated Financial Statements for further discussion of the
Interest Rate Cap contracts). The Interest Rate Cap contracts will be treated as
cash flow hedges and it is anticipated that any change in their fair value will
be substantially offset by an opposite change in the fair value of the financial
instruments designated in the hedge transaction.
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, 1998, which
are expected to reprice or mature in each of the future time periods shown.
AT SEPTEMBER 30, 1998
INTEREST SENSITIVITY PERIOD (1)
----------------------------------------------------------------------------
6 MONTHS 6 MONTHS - OVER 1- OVER 5 - OVER 10-
OR LESS 1 YEAR 5 YEARS 10 YEARS YEARS
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investments, tax certificates,
Federal funds sold, FHLB
overnight deposits and other
interest earning assets, at cost .............. $ 92,080 $ 11,556 $ 24,733 $ 51,289 $ 15,133
Mortgage-backed securities ..................... 308,754 30,848 304 511 5,339
Loans:
Adjustable-rate mortgages ...................... 1,080,972 599,087 126,637 18 26
Fixed-rate mortgages ........................... 195,482 84,991 508,154 260,928 124,568
Commercial and consumer loans .................. 16,120 8,501 20,472 59 --
----------- ----------- ----------- ----------- -----------
Total loans .................................. 1,292,574 692,579 655,263 261,005 124,594
----------- ----------- ----------- ----------- -----------
Total interest-earning assets .............. 1,693,408 734,983 680,300 312,805 145,066
Nonaccrual loans .................................. -- -- -- -- --
Other non-interest-earning assets ................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total assets ................................... $ 1,693,408 $ 734,983 $ 680,300 $ 312,805 $ 145,066
=========== =========== =========== =========== ===========
Interest-bearing liabilities:
Customer deposits:
Money market and NOW accounts ................ $ 98,719 $ 20,900 $ 33,458 $ 33,458 $ --
Passbook accounts ............................ 178,162 31,278 24,359 24,359 --
Certificate accounts ......................... 1,093,897 457,921 81,382 183 --
----------- ----------- ----------- ----------- -----------
Total customer deposits .................... 1,370,778 510,099 139,199 58,000 --
Borrowings:
FHLB advances .................................. 255,000 -- 765,000 1,466 --
Trust Preferred .................................. -- -- -- -- 218,500
Other borrowings ............................... 121,148 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total borrowings ............................. 376,148 -- 765,000 1,466 218,500
----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities ......... 1,746,926 510,099 904,199 59,466 218,500
Non-interest-bearing customer deposits ............ -- -- -- -- --
Other non-interest-bearing liabilities ............ -- -- -- -- --
Shareholders' equity .............................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,746,926 $ 510,099 $ 904,199 $ 59,466 $ 218,500
=========== =========== =========== =========== ===========
Total interest-earning assets less
interest-bearing liabilities ("GAP") .......... $ (53,518) $ 224,884 $ (223,899) $ 253,339 $ (73,434)
=========== =========== =========== =========== ===========
Ratio of GAP to total assets ...................... (1.43)% 6.01% (5.99)% 6.78 % (1.96)%
=========== =========== =========== =========== ===========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities ............................ $ (53,518) $ 171,366 $ (52,533) $ 200,806 $ 127,372
=========== =========== =========== =========== ===========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities, as a percentage
of total assets ................................ (1.43)% (4.58)% (1.41)% 5.37% 3.41%
=========== =========== =========== =========== ===========
AT SEPTEMBER 30, 1998
INTEREST SENSITIVITY PERIOD (1)
-------------------------------
NON-
INTEREST
EARNING TOTAL
-------------- -------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investments, tax certificates,
Federal funds sold, FHLB
overnight deposits and other
interest earning assets, at cost ............ $ -- $ 194,791
Mortgage-backed securities ................... -- 345,756
Loans:
Adjustable-rate mortgages .................... -- 1,806,740
Fixed-rate mortgages ......................... -- 1,174,123
Commercial and consumer loans ................ -- 45,152
----------- -----------
Total loans ................................ -- 3,026,015
----------- -----------
Total interest-earning assets ............ -- 3,566,562
Nonaccrual loans ................................ 15,999 15,999
Other non-interest-earning assets ............... 155,822 155,822
----------- -----------
Total assets ................................. $ 171,821 $ 3,738,383
=========== ===========
Interest-bearing liabilities:
Customer deposits:
Money market and NOW accounts .............. $ -- $ 186,535
Passbook accounts .......................... -- 258,158
Certificate accounts ....................... -- 1,633,383
----------- -----------
Total customer deposits .................. -- 2,078,076
Borrowings:
FHLB advances ................................ -- 1,021,466
Trust Preferred ................................ -- 218,500
Other borrowings ............................. -- 121,148
----------- -----------
Total borrowings ........................... -- 1,361,114
----------- -----------
Total interest-bearing liabilities ....... -- 3,439,190
Non-interest-bearing customer deposits .......... 46,748 46,748
Other non-interest-bearing liabilities .......... 53,153 53,153
Shareholders' equity ............................ 199,292 199,292
----------- -----------
Total liabilities and shareholders' equity $ 299,193 $ 3,738,383
=========== ===========
Total interest-earning assets less
interest-bearing liabilities ("GAP") ........ $ -- $ 127,372
=========== ===========
Ratio of GAP to total assets .................... -% 3.41%
=========== ===========
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities ..........................
Cumulative excess (deficiency) of
interest-earning assets over interest-
bearing liabilities, as a percentage
of total assets ..............................
(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 determined by management. The rates paid in these
accounts, however, are determined by management based on market
conditions and other factors and may reprice more slowly than assumed.
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.
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1998 1997 1996
AS OF ----------------------------- ---------------------------- --------------------------
9/30/98 AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
YIELD/RATE(1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------- ------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net......... 7.05% $2,529,219 $ 177,252 7.01% $1,217,181 $94,655 7.78% $540,313 $ 41,313 7.65%
Mortgage-backed securities.... 6.27 288,832 16,588 5.74 103,389 7,035 6.80 62,711 4,250 6.78
Short-term investments (2).... 5.75 86,642 5,013 5.79 27,612 1,613 5.84 41,240 2,359 5.72
Tax certificates.............. 6.10 38,978 2,952 7.57 41,162 3,171 7.70 34,831 3,018 8.66
Long-term investments and
FHLB stock, net ............ 7.27 81,600 5,762 7.06 33,161 2,300 6.94 17,352 1,192 6.87
---- ---------- --------- ---- ---------- ------- ----- -------- ------- ----
Total interest-earning
assets.................... 6.95 3,025,271 207,567 6.86 1,422,505 108,774 7.65 696,447 52,132 7.49
---- ---------- --------- ---- ---------- ------- ----- -------- ------- ----
Interest-bearing liabilities:
NOW/Money Market.............. 3.00 163,513 5,083 3.11 91,515 2,236 2.44 33,148 775 2.34
Savings....................... 4.72 193,564 8,983 4.64 137,912 6,342 4.60 59,965 2,627 4.38
Certificate of deposits....... 5.56 1,384,710 79,365 5.73 735,008 41,558 5.65 313,521 17,389 5.55
Trust preferred securities.... 9.53 173,288 16,952 9.78 63,008 6,473 10.27 - - -
FHLB advances and other
borrowings.................. 5.55 998,562 57,160 5.72 335,112 19,351 5.77 235,264 13,831 5.88
---- ---------- --------- ---- ---------- ------- ----- -------- ------- ----
Total interest-bearing
liabilities................5.58 2,913,637 167,543 5.75 1,362,555 75,960 5.58 641,898 34,622 5.39
---- ---------- --------- ---- ---------- ------- ----- -------- ------- ----
Excess of interest-earning
assets over interest-bearing
liabilities................... $ 111,634 $ 59,950 $ 54,549
========== ========== ========
Net interest income.............. $ 40,024 $32,814 $17,510
========= ======= =======
Interest rate spread............. 1.37% 1.11% 2.07% 2.10%
==== ==== ===== ====
Net interest margin.............. 1.76% 1.32% 2.31% 2.51%
==== ==== ===== ====
Ratio of interest-earning
assets to interest-bearing
liabilities................... 103.83% 104.40% 108.50%
========== ========== ========
(1) The yields and rates along with the corresponding interest rate spread and
net interest margin represent the yields earned and rates paid on the
Company's interest-earning assets and interest-bearing liabilities,
respectively, as of the close of business on September 30, 1998 and do not
include any estimates of the effect accelerated amortization of purchased
premiums would have on the yields earned.
(2) 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, YEAR ENDED SEPTEMBER 30,
--------------------------------------------- ------------------------------------------
1998 V. 1997 1997 V. 1996
--------------------------------------------- ------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
--------------------------------------------- ------------------------------------------
CHANGES CHANGES
CHANGES CHANGES IN TOTAL CHANGES CHANGES IN TOTAL
IN IN RATE/ INCREASE IN IN RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE)
--------- --------- --------- --------- --------- ------- ------- ---------
(Dollars in thousands)
Interest income attributable to:
Loans ............................... $ 102,032 $ (9,353) $ (10,082) $ 82,597 $ 52,842 $ 53 $ 447 $ 53,342
Mortgage-backed securities and
collateralized mortgage obligations 12,619 (1,098) (1,968) 9,553 2,757 17 11 2,785
Short-term investments (1) .......... 3,447 (15) (32) 3,400 (780) 49 (15) (746)
Tax Certificates .................... (168) (53) 2 (219) 549 (335) (61) 153
Long-term investments and FHLB stock 3,360 42 60 3,462 1,078 28 2 1,108
--------- --------- --------- --------- --------- ------- ------- ---------
Total interest-earning assets ..... 121,290 (10,477) (12,020) 98,793 56,446 (188) 384 56,642
--------- --------- --------- --------- --------- ------- ------- ---------
Interest expense attributable to:
NOW/Money Market .................... 1,760 608 479 2,847 1,365 35 61 1,461
Savings ............................. 2,559 58 24 2,641 3,415 131 169 3,715
Certificates of Deposit ............. 36,735 569 503 37,807 23,377 338 454 24,169
Trust preferred securities .......... 11,330 (309) (542) 10,479 -- -- 6,473 6,473
FHLB advances and other borrowings .. 38,310 (168) (333) 37,809 5,855 (233) (102) 5,520
--------- --------- --------- --------- --------- ------- ------- ---------
Total interest-bearing liabilities 90,694 758 131 91,583 34,012 271 7,055 41,338
--------- --------- --------- --------- --------- ------- ------- ---------
Increase (decrease) in net
interest income .............. $ 30,596 $ (11,235) $ (12,151) $ 7,210 $ 22,434 $ (459) $(6,671) $ 15,304
========= ========= ========= ========= ========= ======= ======= =========
- ----------
(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.
LOAN PORTFOLIO. The Company's loan portfolio primarily consists of
adjustable-rate mortgage loans ("ARMs") and fixed-rate mortgage loans secured by
one-to-four family residential and commercial real estate. As of September 30,
1998, the Company's loan portfolio totaled $3.0 billion, of which $2.8 billion
or 91.5 % 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, 1998, the
remainder of the Company's loan portfolio consisted of $145.9 million of
commercial real estate loans (4.8 % of total loans); five-or-more units
residential real estate loans of $24.4 million (0.8 % of total loans, net); $4.3
million of second mortgage loans (0.1 % of total loans, net); $30.4 million of
consumer loans (1.0% of total loans, net); $15.6 million of commercial business
loans (0.5 % of total loans, net); and $13.2 million of other loans (0.4% of
total loans, net).
At September 30, 1998, the Company's loan portfolio included $199.4
million, or 6.6% of the Company's total loans receivable, net, 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,
---------------------------------------------------
1998 1997 1996
------------- ------------- --------------
(IN THOUSANDS)
Total loans receivable, net, at beginning of period (1)....... $ 1,765,723 $ 646,385 $ 453,350
Loans originated:.............................................
Residential real estate.................................... 312,749 159,533 65,954
Commercial business and consumer........................... 73,692 18,804 16,705
----------- ----------- ------------
Total loans originated................................... 386,441 178,337 82,659
Loans acquired in acquisitions (2)............................ 111,786 341,394 8,116
Loans purchased (3)........................................... 2,747,061 913,653 242,099
Loans sold.................................................... (173,498) (39,934) (4,356)
Loans securitized............................................. (355,469) - -
Principal repayments and amortization of discounts
and premiums............................................... (1,435,075) (270,281) (133,640)
Increase in allowance for loan losses......................... (2,435) (1,535) (689)
Transfers to real estate owned, net........................... (2,520) (2,296) (1,154)
----------- ----------- ------------
Total loans receivable, net, at end of period(1)........... $ 3,042,014 $ 1,765,723 $ 646,385
=========== =========== ============
- -------------------------
(1) Includes loans held for sale.
(2) Loans acquired in the Central and Consumers mergers included $69.6 million
of one-to-four family residential real estate loans, $15.3 million of
commercial real estate loans and $26.8 million of other types of loans. 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Acquisitions" for
additional information regarding the acquisitions.
(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,
----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------- ----------------- ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
First mortgage loans:
One-to four-family
residential loans $2,784,494 91.5% $1,559,823 88.3% $568,203 87.9% $432,472 95.4% $393,933 95.3%
Five or more units
residential loans 24,392 0.8 32,163 1.8 12,559 2.0 1,124 0.2 2,164 0.5
Commercial......... 145,819 4.8 130,197 7.4 49,318 7.6 10,223 2.3 4,469 1.1
Construction....... 7,827 0.3 7,477 0.4 - - 200 0.1 - -
Land............... 5,410 0.2 7,997 0.5 2,687 0.4 450 0.1 1,095 0.3
Second mortgages
loans............ 4,344 0.1 5,992 0.3 2,748 0.4 2,412 0.5 2,616 0.6
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total first
and second
mortgage loans 2,972,286 97.7 1,743,649 98.7 635,515 98.3 446,881 98.6 404,277 97.8
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Consumer loans..... 30,401 1.0 1,748 0.1 2,648 0.4 920 0.2 2,336 0.6
Commercial business
loans............ 15,550 0.5 10,890 0.6 5,822 0.9 3,632 0.8 4,732 1.1
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Total loans
receivable... 3,018,237 99.2 1,756,287 99.4 643,985 99.6 451,433 99.6 411,345 99.5
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Deferred loan fees,
premiums and
(discounts)...... 29,905 1.0 13,129 0.8 4,558 0.7 3,386 0.7 2,783 0.7
Allowance for loan
losses........... (6,128) (0.2) (3,693) (0.2) (2,158) (0.3) (1,469) (0.3) (841) (0.2)
---------- ----- ---------- ----- -------- ----- -------- ----- -------- -----
Loans receivable,
net........... $3,042,014 100.0% $1,765,723 100.0% $646,385 100.0% $453,350 100.0% $413,287 100.0%
========== ===== ========== ===== ======== ===== ======== ===== ======== =====
The following table sets forth, as of September 30, 1998, the amount of
loans (including mortgage loans held for sale) by category and expected
principal repayments by year.
OUTSTANDING AT 2003- 2005- 2009 AND
SEPTEMBER 30, 1998 1999 2000 2001 2002 2004 2008 THEREAFTER
------------------- ---------- --------- --------- --------- --------- --------- ----------
(IN THOUSANDS)
First mortgage loans:
One-to-four-family residential $2,784,494 $860,283 $ 549,271 $ 365,307 $ 251,455 $ 179,781 $ 418,077 $ 160,320
Five-,or-more-unit residential 24,392 3,640 2,348 1,520 1,450 3,405 7,629 4,400
Commercial.................... 145,819 52,597 18,812 12,224 13,953 9,736 33,623 4,874
Construction.................. 7,827 4,123 457 3,247 - - - -
Land.......................... 5,410 3,840 147 135 124 767 249 148
Second mortgage loans............ 4,344 1,343 857 570 392 280 652 250
---------- ---------- --------- --------- --------- --------- --------- ---------
Total first and second mortgage loan 2,972,286 925,826 571,892 383,003 267,374 193,969 460,230 169,992
---------- ---------- --------- --------- --------- --------- --------- ---------
Consumer loans................... 30,401 13,449 8,584 6,849 1,519 - - -
Commercial business loans........ 15,550 11,857 965 667 1,335 666 60 -
---------- ---------- --------- --------- --------- --------- --------- ---------
Total loans................ $3,018,237 $ 951,132 $ 581,441 $ 390,519 $ 270,228 $ 194,635 $ 460,290 $ 169,992
========== ========== ========= ========= ========= ========= ========= =========
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, 1998, 18.9% of the Company's gross
loans receivable (15.3% of total assets) were secured by properties located in
Florida and 16.5 % of gross loans receivable (13.3% 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, 1998, the distribution
of the amount of the Company's loans (including mortgage loans held for sale) by
state.
OUTSTANDING ON
STATE SEPTEMBER 30, 1998
----- ------------------
(IN THOUSANDS)
Florida(l)................................................$ 571,695
California................................................ 496,450
Illinois.................................................. 180,503
Massachusetts............................................. 163,724
Michigan.................................................. 156,496
Colorado.................................................. 155,256
Virginia.................................................. 115,805
Texas..................................................... 100,960
Maryland.................................................. 100,694
New York.................................................. 99,921
New Jersey................................................ 80,170
Washington................................................ 77,109
Arizona................................................... 69,705
Ohio...................................................... 66,722
Georgia................................................... 58,620
Connecticut............................................... 53,516
Pennsylvania.............................................. 46,720
North Carolina............................................ 44,048
Utah...................................................... 38,067
Oregon.................................................... 37,216
Tennessee................................................. 28,276
Missouri.................................................. 27,718
Minnesota................................................. 21,063
Indiana................................................... 19,402
South Carolina............................................ 18,168
Nevada.................................................... 15,485
District of Columbia...................................... 13,444
New Mexico................................................ 12,837
Kansas.................................................... 11,186
Wisconsin................................................. 10,306
Alabama................................................... 8,542
Oklahoma.................................................. 7,468
Idaho..................................................... 6,848
Kentucky.................................................. 6,829
Hawaii.................................................... 6,522
Louisiana................................................. 5,961
Delaware.................................................. 5,262
Arkansas.................................................. 4,894
Iowa...................................................... 4,583
Montana................................................... 4,099
Rhode Island.............................................. 3,936
New Hampshire............................................. 3,682
Nebraska.................................................. 3,307
Wyoming................................................... 2,738
Mississippi............................................... 1,915
Maine..................................................... 1,708
Alaska.................................................... 1,231
Vermont................................................... 1,067
Other(2).................................................. 461
Not secured by real estate................................ 45,902
------------
Total........................................... $ 3,018,237
===========
(1) Does not include $40.0 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's ARMs generally have interest rates that adjust semi-annually,
annually and, to a lesser extent, after a 3, 5 or 7 year fixed-rate term with
subsequent annual interest rate adjustments 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. 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 has purchased and originated loans with "teaser" rates that are
below market rates during an initial period after the loan is originated. The
teaser rate loans are generally tied to the constant maturity of one year
published by the Federal Reserve. For loans with teaser rates, the borrower's
ability to repay is determined by reference to the teaser rate plus 2%. As of
September 30, 1998 there were approximately $492.4 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").
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
commitment 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, based upon pre-determined
criteria and review of the loan file, may arrange for an updated review
appraisal before purchasing the loan. An appraisal will generally be ordered if
the property securing the loan is located in a designated area (such as a
geographic region known for fluctuating property values), if the loan size or
loan -to-value ratio meets certain thresholds, or if an underwriter or other
Bank officer, upon review of the loan file, determines that it is prudent to
order an appraisal. 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 to standards established by Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation (the "FHLMC"), except that the Company's underwriting standards
allow it to make loans (i) to non-resident aliens, as discussed below, (ii)
exceeding the FHMA or FHLMC limits, and (iii) in cases where specific
characteristics of the loan or borrower may compensate for the lack of
conformity with the FNMA or FHLMC criteria. 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 confirmed by
one of the underwriters. With respect to a substantial percentage of loans
purchased, the collateral value is confirmed 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, 1998, approximately $199.4 million, or 6.6%, of the
Company's gross loans receivable were first mortgage loans to non-resident
aliens secured by single-family residences located in Florida. These loans are
primarily 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, certain aspects of
such loans may involve a greater degree of risk than conforming 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
$312.7 million in fiscal 1998 and $159.5 million for the year ended September
30, 1997.
Beginning in the Company's fiscal 1997 fourth quarter, management began a
program to sell substantially all of the Company's internally generated
residential loans. These loans are classified as held for sale when originated
and if, after attempting to market the loans, management determines that certain
loans are unable to be packaged into saleable pools, the Company may transfer
such loans to its portfolio at the lower of cost or market. During the fiscal
year ended September 30, 1998 and the fiscal 1997 fourth quarter, residential
loans totaling $173.5 million and $30.1 million, respectively, were sold for a
gain of $4.0 million and $523,000, respectively. In addition, as part of
starting this program, the Company reclassified $93.5 million of its internally
generated portfolio of residential loans as held for sale in the fiscal 1997
fourth quarter. Loans held for sale as of September 30, 1998 were $172.4
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, 1998, the Company had $145.8 million of
commercial real estate loans, representing a total of 4.8% 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, 1998, the Company had $7.8 million of construction loans
representing a total of 0.2% of the Company's loan portfolio before net items.
COMMERCIAL BUSINESS LENDING. Commercial business loans totaled $15.6
million as of September 30, 1998 representing 0.5 % 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, 1998, the Company had $21.6 million in substandard
assets of which $20.9 million are included in non-performing assets. Substandard
assets consisted of the following:
AS OF SEPTEMBER 30, 1998
------------------------
(IN THOUSANDS)
One-to-four family residential loans................... $ 13,787
Commercial real estate................................. 4,734
Consumer and business loans............................ 1,128
REO.................................................... 1,974
-----------
Total Substandard Assets............................. $ 21,623
==========
In addition, $521,000 of nonresidential mortgage loans, for which reserves
have been established, were classified as loss as of September 30, 1998.
The following table sets forth information regarding the Company's
allowance for loan losses for the periods indicated:
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
Allowance for loan losses, balance (at beginning
of period)............................................ $ 3,693 $ 2,158 $ 1,469 $ 841 $ 1,184
Provisions (credit) for loan losses...................... 1,700 1,295 (120) 1,221 1,187
Allowance from acquisitions.............................. 1,262 775 183 - -
Loans charged off:
One-to-four family residential loans................... (508) (604) (493) (535) (1,582)
Commercial and other................................... (91) - - (59) -
-------- -------- -------- -------- --------
Total................................................ (599) (604) (493) (594) (1,582)
-------- -------- -------- -------- --------
Recoveries:
One-to-four family residential loans................... 33 48 1,119 1 52
Commercial and other................................... 39 21 - - -
-------- -------- -------- -------- --------
Total................................................ 72 69 1,119 1 52
-------- -------- -------- -------- --------
Allowance for loan losses, balance (at end of period).... $ 6,128 $ 3,693 $ 2,158 $ 1,469 $ 841
======== ======== ======== ======== ========
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,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------------- ------------------------
% 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....................... $ 1,917 92.4% $ 1,873 89.2% $ 1,381 88.6%
Commercial and other loans......... 3,332 7.6 1,787 10.8 739 11.4
Unallocated........................ 879 N/A 33 N/A 38 N/A
-------- ----- --------- ----- --------- -----
Total allowances for loan losses... $ 6,128 100.0% $ 3,693 100.0% $ 2,158 100.0%
======== ===== ========= ===== ========= =====
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--Discussion of Financial Condition Changes for the Years Ended
September 30, 1998, 1997, and 1996--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, trust preferred securities 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.
Also included in the Company's investment portfolio are trust preferred
securities issued by FDIC-insured financial institutions or their holding
companies. Such securities are primarily acquired for their liquidity and yield
characteristics.
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 6 of
the Notes to Consolidated Financial Statements.
AS OF SEPTEMBER 30,
----------------------------------------------------
1998 1997 1996
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Federal funds sold........................................ $ - $ - $ 400
Federal agency securities................................. 22,188 23,283 4,985
FHLB overnight deposits................................... 65,268 79,413 28,253
Tax certificates.......................................... 40,007 49,283 40,088
Mortgage-backed securities................................ 345,756 120,271 70,165
Other (1)................................................. 16,015 1,377 1,711
------------- ------------- -------------
Total investment securities............................ $ 489,234 $ 273,627 $ 145,602
============= ============= =============
Weighted average yield................................. 6.47% 6.91% 7.09%
============= ============= =============
(1) Includes $15.3 million of trust preferred securities.
The following table sets forth information regarding the maturities of the
Company's investments as of September 30, 1998. Amounts shown are book values:
PERIODS TO MATURITY
FROM SEPTEMBER 30, 1998
---------------------------------------------------------
AS OF WITHIN 1 THROUGH 5 THROUGH OVER
SEPTEMBER 30, 1998 1 YEAR 5 YEARS 10 YEARS 10 YEARS
------------------ ----------- ----------- ----------- -----------
(Dollars in thousands)
Federal agency securities...... $ 22,188 $ 4,586 $ 17,602 $ - $ -
FHLB overnight deposits........ 65,268 65,268 - - -
Tax certificates (1)........... 40,007 30,005 10,002 - -
Mortgage-backed
securities................. 345,756 3,601 19,071 1,327 321,757
Other.......................... 16,015 - 388 491 15,136
----------- ----------- ----------- ---------- ----------
Total....................... $ 489,234 $ 103,460 $ 47,063 $ 1,818 $ 336,893
=========== =========== =========== =========== ===========
Weighted average yield...... 6.47 % 6.09% 6.76% 6.29% 6.54%
=========== =========== =========== =========== ===========
- -------------------------
(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. In addition, the Company retains the servicing on the
internally generated residential loans that are sold in connection with the loan
sales program initiated by management in the Company's 1997 fiscal fourth
quarter.
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 Company recovers substantially all of the advanced funds upon cure of
default by the borrower, or through
15
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:
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------------------------- --------------------------------------
# OF BOOK # OF BOOK
LOANS PRINCIPAL VALUE LOANS PRINCIPAL VALUE
----- --------- ----- ----- --------- -----
(Dollars in thousands)
FNMA....................... 1,042 $ 78,007 $ 1,331 1,297 $ 102,805 $ 1,514
FHLMC...................... 2,810 250,152 2,760 2,903 246,557 2,318
Private investors.......... 1,419 202,125 4,826 472 68,906 951
Private subservicing....... 280 11,676 - 320 14,275 -
----- ----------- --------- ----- ----------- ---------
5,551 $ 541,960 $ 8,917 4,992 $ 432,543 $ 4,783
===== =========== ========= ===== =========== =========
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. In addition,
as of September 30, 1998, the Company had $75.0 million in brokered certificates
of 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,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------------- ---- ------------- ---- ------------- ----
(DOLLARS IN THOUSANDS)
Passbook accounts:
Regular....................................... $ 258,127 4.72% $ 160,522 4.66% $ 73,741 4.44%
Holiday club.................................. 31 2.00 35 2.00 39 2.00
------------- ------------- -------------
Total passbook accounts..................... 258,158 160,557 73,780
------------- ------------- -------------
Checking:
Insured money market.......................... 115,104 4.05 20,325 4.00 16,556 3.87
NOW and non-interest-bearing accounts......... 118,179 1.97 78,907 2.28 24,566 1.49
------------- ------------- -------------
Total transaction accounts.................. 233,283 99,232 41,122
------------- ------------- -------------
Total passbook and checking accounts........ 491,441 259,789 114,902
------------- ------------- -------------
Certificates:
30-89-day certificates of deposit............. 3,485 4.63 - - - -
3-5-month certificates of deposit............. 96,221 5.20 18,674 4.94 7,114 4.67
6-8-month certificates of deposit............. 516,674 5.47 439,091 5.67 159,850 5.40
9-11-month certificates of deposit............ 104,296 5.69 15,721 5.66 20,279 5.45
12-17-month certificates of deposit........... 618,385 5.62 285,305 5.73 124,637 5.49
18-23-month certificates of deposit........... 9,770 5.64 20,410 5.80 12,375 5.79
24-29-month certificates of deposit........... 35,497 5.76 58,279 5.84 42,875 5.94
30-35-month certificates of deposit........... 15,040 5.89 12,517 5.85 1,774 5.57
36-60-month certificates of deposit........... 72,856 6.07 64,106 6.07 22,300 5.93
Public funds.................................. 86,159 5.35 22,000 5.78 - -
Brokered certificates of deposit.............. 75,000 5.66 - - - -
------------- ------------- -------------
Total certificates.......................... 1,633,383 936,103 391,204
------------- ------------- -------------
Total..................................... $ 2,124,824 $ 1,195,892 $ 506,106
============= ============= =============
Weighted average rate................... 5.18% 5.32% 5.11%
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, 1998 that mature during the periods indicated:
PERIODS TO MATURITY
FROM SEPTEMBER 30, 1998
---------------------------------------------------------
AS OF WITHIN 1 TO 2 TO MORE THAN
SEPTEMBER 30, 1998 1 YEAR 2 YEARS 3 YEARS 3 YEARS
------------------ ----------- ----------- ----------- -----------
(IN THOUSANDS)
Certificate accounts:
4.00% to 4.99%................ $ 56,956 $ 55,548 $ 1,060 $ 348 $ -
5.00% to 5.99%................ 1,173,855 1,145,179 22,106 4,352 2,218
6.00% to 6.99%................ 63,502 22,106 4,218 1,957 35,221
7.00% to 7.99%................ 1,437 298 1,087 52 -
----------- ----------- ----------- ----------- -----------
Total certificate accounts
(under $100,000).......... $ 1,295,750 $ 1,223,131 $ 28,471 $ 6,709 $ 37,439
=========== =========== =========== =========== ===========
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, 1998 that mature during the periods indicated:
PERIODS TO MATURITY
FROM SEPTEMBER 30, 1998
---------------------------------------------------------
AS OF WITHIN 1 TO 2 TO MORE THAN
SEPTEMBER 30, 1998 1 YEAR 2 YEARS 3 YEARS 3 YEARS
------------------ ----------- ----------- ----------- -----------
(IN THOUSANDS)
Jumbo certificate accounts:
4.00% to 4.99%................ $ 21,005 $ 20,577 $ 213 $ 215 $ -
5.00% to 5.99%................ 306,676 304,595 1,627 251 203
6.00% to 6.99%................ 9,722 3,963 687 349 4,723
7.00% to 7.99%................ 230 - 230 - -
----------- ----------- ----------- ----------- -----------
Total Jumbo certificate
amounts..................... $ 337,633 $ 329,135 $ 2,757 $ 815 $ 4,926
=========== =========== =========== =========== ===========
Included in the table of jumbo certificates accounts above, are $86.2
million in certificates of deposit issued to the State of Florida, referred to
as public funds, where $76.6 million have interest rates ranging from 5.05% to
5.63% and $10.0 million have interest rates of 4.80%.
Of the Company's total deposits, excluding public funds, at September 30,
1998, 1997, and 1996, 12.3%, 11.5%, and 10.5%, respectively, were deposits of
$100,000 or more issued to the general 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 fiscal 1998, the Company opened six new branch offices and acquired four
branch offices from Central. The branches acquired from Consumers were closed
and the deposits were consolidated with an existing branch of the Company. In
fiscal 1999, the Company intends to open several new branch offices including
two that are scheduled to be opened in the first quarter of 1999.
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,
securities sold under agreements to repurchase and trust preferred securities 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.
During the 1997 and 1998 fiscal years, the Company issued an aggregate of
$227.2 million in Junior Subordinated Deferrable Interest Debentures, which were
purchased by its Delaware trust subsidiaries primarily with proceeds from the
sale of trust preferred securities. See Note 12 of the Notes to Consolidated
Financial Statements for a description of the Junior Subordinated Deferrable
Interest Debentures and the trust preferred securities.
During November 1998, the Bank established a program to issue up to $500
million aggregate principal amount of its Senior Notes backed by an irrevocable
standby letter of credit from the FHLB of Atlanta. The notes, none of which have
been issued, may have either a fixed or variable rate of interest determined at
the time of issuance and will mature no sooner than 9 months and no more than 10
years from the date of issuance. The Bank intends to use the net proceeds from
the sale of the notes for general corporate purposes that will ultimately
promote home financing or other housing activity and assist the Bank's
asset/liability management. The notes have been rated "Aaa" by Moody's Investors
Service, Inc. and "AAA" by Standard and Poor's Rating Services.
18
The following tables set forth information as to the Company's borrowings
as of the dates and for the periods indicated.
AT SEPTEMBER 30,
---------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
----------- ---- ----------- ---- ----------- ----
(DOLLARS IN THOUSANDS)
PERIOD END BALANCES:
FHLB advances(l)...................... $ 1,021,466 5.61% $ 671,484 5.87% $ 237,000 5.73%
Company Obligated Mandatorily
Redeemable Trust Preferred
Securities of Subsidiary Trusts
Holding Solely Junior
Subordinated Deferrable
Interest Debentures of
the Company(2)..................... 218,500 9.53 116,000 10.17 - -
Subordinated notes.................... - - - - 775 9.00
Securities sold under agreements
to repurchase(3)................... 121,148 5.43 30,000 5.64 - -
----------- ---- ----------- ---- ----------- ----
Total borrowings................... $ 1,361,114 6.22% $ 817,484 6.47% $ 237,775 5.74%
=========== ==== =========== ==== =========== ====
AT SEPTEMBER 30,
---------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
----------- ---- ----------- ---- ----------- ----
(DOLLARS IN THOUSANDS)
AVERAGE BALANCES:
FHLB advances(l)...................... $ 901,269 5.64% $ 325,580 5.77% $ 234,489 5.77%
Company Obligated Mandatorily
Redeemable Trust Preferred
Securities of Subsidiary Trusts
Holding Solely Junior Subordinated
Deferrable Interest Debentures of
the Company(2)..................... 173,288 9.81 63,008 10.27 - -
Subordinated notes.................... - - 704 10.53 775 9.00
Securities sold under agreements to
repurchase(3)...................... 97,292 5.69 8,828 5.73 - -
----------- ---- ----------- ---- ----------- ----
Total borrowings................... $ 1,171,849 6.26% $ 398,120 6.49% $ 235,264 5.78%
=========== ==== =========== ==== =========== ====
- -------------------------
(1) The maximum amount of FHLB advances outstanding during the years ended
September 30, 1998, 1997 and 1996 was $1.3 billion, $671.5 million and
$244.0 million, respectively.
(2) The maximum amount of trust preferred securities outstanding during the
years ended September 30, 1998, 1997 and 1996 was $218.5 million, $116.0
million and $0.0 million, respectively.
(3) The maximum amount of securities sold under agreements to repurchase at
any month-end during the years ended September 30, 1998, 1997, and 1996
was $192.6 million, $30.0 million and $0.0 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.
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.
19
BankUnited Mortgage Corporation, a Florida corporation ("BMC"), is a wholly
owned operating subsidiary of the Company which was established in 1996 for the
purpose of servicing loans secured by real property. BMC is currently inactive.
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.
BUFC Financial Services, Incorporated, a Florida corporation ("BUFC"), is a
wholly owned operating subsidiary of the Company organized in 1997 for the
purpose of selling annuities, insurance and securities products. During fiscal
1998, BUFC implemented a program for selling fixed annuities, and, more
recently, variable annuities and mutual finds, to customers of the Bank and
others. The program is conducted separate from the business of the Bank, under
the supervision of licenced insurance agents and a registered broker-dealer, and
is expected to continue and expand during the 1999 fiscal year. BUFC is also
reviewing the feasibility of selling traditional life, health or property and
casualty insurance 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.
CRE Properties, Inc., a Florida corporation, is a wholly owned operating
subsidiary of the Bank that holds title to, maintains, manages and supervises
the disposition of commercial real estate acquired through foreclosure. CRE
Properties, Inc. was established in 1998 for the purpose of insulating the Bank
from risk of liability concerning maintenance, management and disposition of
commercial real estate.
EMPLOYEES
At September 30, 1998, the Company had 383 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 profit sharing plan and incentive
compensation plans (including stock bonus and stock option plans) for officers,
directors and employees.
REGULATION
The following discussion is a summary of the significant provisions of the
banking laws and regulations which affect the Company and the Bank.
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 limits savings institutions' business activities, and
establishes their regulatory capital requirements. The FIRREA establishes the
OTS as the primary federal regulator for savings institutions. Deposits at the
Bank are insured through the Savings Association Insurance Fund ("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 and the FDIC also manages conservatorships and
receiverships of insolvent thrifts.
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 also requires that the federal banking agencies include
components for interest rate risk, concentration of credit risk and the risk of
non-traditional activities in their risk-based capital requirements. See
"--Savings Institution Regulations--Regulatory Capital Requirements" below for a
description of the OTS rule that incorporates an interest rate risk component in
the risk-based capital requirement. Although implementation of this rule has
been postponed indefinitely.
In addition, the FDICIA requires each federal banking agency to have
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 also
establishes the qualified thrift lender ("QTL") investment percentage applicable
to SAIF-insured institutions, (see "--Savings
20
Institution Regulations--Qualified Thrift Lender Test" below) and pursuant to
the FDICIA, a risk based assessment system for insured depository institutions
(see "--Savings Institution Regulations--Insurance of Accounts" below) has 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.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Branching Act") , which was enacted in September 1994, generally
does not directly affect savings associations, 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.
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 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.
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 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"
21
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.
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.
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.
In September 1996, Congress enacted legislation to eliminate this
disparity, and any competitive disadvantage between BIF and SAIF member
institutions, from SAIF deposit insurance premiums, which were generally higher
that BIF deposit insurance premiums. 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 September 30,
1998 to 6.2 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.
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 adjusted total assets, (ii) a leverage
(or core capital) ratio of 3.0% of adjusted total 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 (including retained earnings), noncumulative perpetual
preferred stock and related earnings, certain qualifying nonwithdrawable
accounts and pledged deposits, and minority interests in fully consolidated
subsidiaries, less intangible assets (except certain servicing assets) and
specified portions 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
22
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, 1998, the Bank's tangible, core and risk-based capital
ratios were 8.7%, 8.7% and 17.5% 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 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" (i,e. 2%) 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, 1998, the Company would not
have been required to deduct an IRR component from its total capital when
determining its compliance with the Bank's risk-based capital.
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 total 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 either core capital of 4% or more or
core capital 3% or more and a CAMEL composite rating of 1; "undercapitalized" if
it has total risk-based capital of less than 8%, Tier I risk-based capital of
less than 4%, or either core capital of less than 4% or core capital of less
than 3% and a CAMEL rating of 1; "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," or
worse, 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
23
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.
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 notice and opportunity for objection or 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 to conform to the rules of the other banking agencies.
The proposed rule would require a savings association to file an application
with the OTS prior to making any capital distribution, if the total amount of
the association's capital distributions, including the proposed distribution,
for the applicable calendar year exceeds the associations net income for that
year to date plus the association's net income for the preceding two years or if
the association is not eligible for expedited treatment. A notice would be
required if an application is not required, but the savings association would
not be at least adequately capitalized after the distribution, the proposed
distribution would reduce the amount of or retire any part of the associations
common or preferred stock or any part of debt instruments such as notes or
debentures included in capital (other than regular debt payments on approved
debt instruments), the proposed distribution would violate any applicable
statute, regulation or agreement between the association and the OTS, or the
association is a holding company subsidiary. In all other circumstances not
listed herein, no notice or application would be required. A savings association
would qualify for expedited treatment if it has a CAMEL rating of 1 or 2, has a
CRA rating of satisfactory or better, has a compliance rating of 1 or 2, is
meeting all of its capital requirements, and is not of supervisory concern. The
OTS may disapprove a notice or deny an application if the association would be
undercapitalized after the distribution, if the OTS determines that the
distribution raises safety or soundness concerns, or if the distribution
violates any applicable statute, regulation or agreement between the OTS and the
association.
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 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
24
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, 1998, 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 $51.3 million investment in stock of
the FHLB of Atlanta as of September 30, 1998.
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, 1998,
advances from the FHLB of Atlanta totaled $1.0 billion. 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
4% 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). 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 1998, the Bank's liquidity ratio was 7.18%. The Bank is also required
to maintain cash reserve requirements at the Federal Home Loan Bank. At
September 30, 1998 this cash reserve requirement was $8.2 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, 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
25
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, 1998, 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.
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").
26
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 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 September 30, 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
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
27
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 $2.5 million as of September
30, 1998.
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, 1998:
NET BOOK VALUE OF PREMISES
OR LEASEHOLD IMPROVEMENTS, LEASE EXPIRATION DATE
LOCATION PROPERTY AND EQUIPMENT AND RENEWAL TERMS SQUARE FOOTAGE
- ------------------------------------- -------------------------- --------------------- --------------
Executive and administrative offices,
and savings branches
Aventura branch......................... $ 490,123 1999 5,000
2984 Aventura Boulevard (2 options to renew
Aventura, Florida 33180 for 5 years each)
Boca Hamptons branch.................... 243,017 2002 2,700
9070 Kimberly Boulevard (3 options to renew
Suite 68 for 5 years each)
Boca Raton, Florida 33434
Boca Raton branch....................... 122,803 1999 2,442
21222 St. Andrews Boulevard #11 (3 options to renew
Boca Raton, Florida 33434 for 3 years each)
Boynton Beach branch.................... 197,435 2001 2,933
117 North Congress Avenue (2 options to renew
Boynton Beach, Florida 33426 for 5 years)
Coconut Creek branch.................... 280,607 2002 2,400
4913 Coconut Creek Parkway (2 options to renew
Coconut Creek, Florida 33063 for 5 years each)
Coral Gables branch..................... 1,715,760 2001 14,097
255 Alhambra Circle (2 options to renew
Coral Gables, Florida 33134 for 5 years each)
Coral Gables North branch............... 49,563 1999 2,366
999 Ponce de Leon Boulevard
Coral Gables, Florida 33134
Coral Springs branch.................... 71,580 2001 2,805
1307 University Drive (2 options to renew
Coral Springs, Florida 33071 for 5 years each)
Deerfield Beach branch.................. 279,400 1998 4,000
and Commercial Real Estate office (2 options to renew
2201 West Hillsboro Boulevard for 5 years each)
Deerfield Beach, Florida 33442
28
NET BOOK VALUE OF PREMISES
OR LEASEHOLD IMPROVEMENTS, LEASE EXPIRATION DATE
LOCATION PROPERTY AND EQUIPMENT AND RENEWAL TERMS SQUARE FOOTAGE
- ------------------------------------- -------------------------- --------------------- --------------
Deerfield Promenade branch.............. 59,819 2003 2,030
1333 South Military Trail
Deerfield Beach, Florida 33442
Delray Beach branch..................... 340,251 2001 4,000
7431-39 West Atlantic Avenue (3 options to renew
Delray Beach, Florida 33446 for 5 years each)
Doral branch............................ 134,445 1999 8,000
7970 N.W. 36 Street (4 options to renew
Miami, Florida 33166 for 5 years)
Hialeah branch.......................... 80,524 2000 5,063
1291 West 49 Street (5 options to renew
Hialeah, Florida 33012 for 3 years)
Hallandale branch....................... 645,915 (1) 4,500
501 Golden Isles Drive
Hallandale, Florida 33009
Hollywood branch........................ 49,543 2004 4,111
4350 Sheridan Street, Unit 101
Hollywood, Florida 33021
Lake Worth branch....................... 390,321 2002 3,200
7737 Lake Worth Road
Lake worth, Florida 33467
Lauderdale by the Sea branch............ 751,661 (1)(2) 5,000
227 Commercial Boulevard
Lauderdale by the Sea, Florida 33008
Miami Lakes branch...................... 54,105 1999 3,085
16800 N.W. 67 Avenue (1 option to renew
Miami, Florida 33015 for 5 years)
Naples branch........................... 244,605 2003 2,000
4649 Ninth Street North (2 options to renew
Naples, Florida 34103 for 5 years)
Pembroke Pines branch................... 61,286 2001 4,059
100 South Flamingo Road (1 option to renew
Pembroke Pines, Florida 33027 for 5 years)
Plantation branch....................... 46,054 2003 5,000
8167 West Sunrise Boulevard., Unit 50
Plantation, Florida 33322
Pompano Beach branch.................... 705,561 (1) 5,000
1313 North Ocean Boulevard
Pompano Beach, Florida 33062
South Miami branch...................... 116,294 2002 6,701
6075 Sunset Drive (1 option to renew
South Miami, Florida 33143 for 5 years)
Tamarac branch.......................... 107,003 2002 3,531
5779 North University Drive (1 option to renew
Tamarac, Florida 33321 for 5 years)
The Falls branch........................ 549,671 2010 3,000
8941 SW 136 St.
Miami, Florida 33015
29
NET BOOK VALUE OF PREMISES
OR LEASEHOLD IMPROVEMENTS, LEASE EXPIRATION DATE
LOCATION PROPERTY AND EQUIPMENT AND RENEWAL TERMS SQUARE FOOTAGE
- ------------------------------------- -------------------------- --------------------- --------------
West Airport branch..................... 1,035,987 2003 7,200
2410 N.W. 72nd Avenue (4 options to renew
Miami, Florida 33122 for 3 years)
West Palm Beach branch.................. 169,958 2001 3,740
2911C North Military Trail (2 options to renew
West Palm Beach, Florida 33409 for 5 years)
Miami Lakes Operation Center............ 4,496,878 2002 40,000
7815 N.W. 148 Street (2 options to renew
Miami Lakes, Florida 33016 for 5 years each)
Hollywood............................... 149,164 1999 4,042
4350 Sheridan Street,
Units 200 & 201
Hollywood, Florida 33021
Other Offices:
Presidential Circle.................. - 2000(4) 32,850
4000 Hollywood Boulevard (2 options to renew
Hollywood, Florida 33021 for 5 years each)
1177 George Bush Boulevard, #200..... - 2002 4,059
Delray Beach, Florida 33483 (1 option to renew
for 5 years)
4340 Sheridan Street................. 558,676 (1)(3) 4,764
Hollywood, Florida 33021
- -------------------------
(1) The Bank owns the facility.
(2) The Bank leases part of the facility to unrelated parties.
(3) The entire space is currently sub-leased to an unrelated party.
(4) The Bank subleases 20,000 square feet 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, 1998.
30
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 54 Director, Chairman of the Board and Chief Executive Officer (1993 to
present) and President (1993 to 1998) of the Company; Director,
Chairman of the Board and Chief Executive Officer (1984 to present)
and President (1984 to 1993, 1994 to 1998) of the Bank; Senior
Managing Director (1996 to present) of Camner, Lipsitz and Poller,
Professional Association, attorneys-at-law, and its predecessor, Stuzin
and Camner, Professional Association, attorneys-at-law; 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).
Mehdi Ghomeshi 42 Director, President and Chief Operating Officer of the Company and
the Bank (December 1998 to present); Market President of
NationsBank, South Florida (January 1998 to December 1998);
President and Chief Operating Officer of Barnett Bank, South Florida
(1996 to 1998); Director of Special Assets and Risk Management,
Barnett Bank, Inc. (1995 to 1996); Executive Vice President,
Commercial Real Estate, Barnett Bank of South Florida (1993 to
1995).
Lawrence H. Blum 55 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.
Earline G. Ford 55 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 56 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 68 Director of the Company (1993 to present) and the Bank (1985 to
present); Private investor in Miami, Florida (1990 to present).
Bruce D. Friesner 56 Director of the Company and the Bank (1996 to present); Principal of
F&G Associates, a commercial real estate development company
(1972 to present); Director of Loan America Financial Corporation, a
national mortgage banking company (1990 to 1994).
Marc Lipsitz 57 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).
31
POSITIONS WITH COMPANY
NAME AGE AND BUSINESS EXPERIENCE
---- --- -----------------------
Neil H. Messinger, M.D. 60 Director of the Company and the Bank (1996 to present); Radiologist;
President (1986 to present), Radiological Associates, Professional
Association; Chairman (1986 to present) of Imaging Services of
Baptist Hospital.
Anne W. Solloway 83 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:
James A. Dougherty 48 Executive Vice President, Commercial and Middle Market Lending
(December 1998 to present) of the Company and the Bank; Director
(1995 to December 1998), Chief Operating Officer (1994 to
December 1998) and Executive Vice President (1994 to present) of
the Company; Director and Chief Operating Officer (1994 to
December 1998) and Executive Vice President (1994 to present) of
the Bank; Executive Vice President of Retail Banking of
Intercontinental Bank (1989 to 1994).
Donald Putnam 41 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.
David Malinoff 53 Executive Vice President, Senior Loan Officer of the Bank (July 1998
to present); President and Chief Executive Officer of Central Bank
(1991 to 1998).
Diane DeLella 47 Vice President and Chief Financial Officer (December 1998 to
present) and Controller (1995 to present) of the Company and the
Bank; Vice President and Controller of Coral Gables Federal Savings
and Loan (1986 to 1995).
-------------------------
All executive officers serve at the discretion of the Board of Directors
and are elected annually by the Board.
32
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 22, 1998, there were 535 and 18 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 1998 or
1997. See Note 13 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, 1998:
1st Quarter................................... $15.63 $ 12.75
2nd Quarter................................... $15.63 $ 12.25
3rd Quarter................................... $18.50 $ 13.75
4th Quarter................................... $17.00 $ 8.25
Fiscal Year Ended September 30, 1997:
1st Quarter................................... $10.25 $ 7.875
2nd Quarter................................... $11.25 $ 9.25
3rd Quarter................................... $ 10.875 $ 8.50
4th Quarter................................... $ 13.375 $ 9.625
33
ITEM 6. SELECTED FINANCIAL DATA
AS OF OR FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATIONS DATA:
Interest income................................ $ 207,567 $ 108,774 $ 52,132 $ 39,419 $ 30,421
Interest expense............................... 167,543 75,960 34,622 26,305 16,295
------------ ------------ ------------ ------------ ------------
Net interest income............................ 40,024 32,814 17,510 13,114 14,126
Provision (credit) for loan losses............. 1,700 1,295 (120) 1,221 1,187
------------ ------------ ------------ ------------ ------------
Net interest income after provision (credit)
for loan losses........................... 38,324 31,519 17,630 11,893 12,939
------------ ------------ ------------ ------------ ------------
Non-interest income:
Service fees, net.............................. 1,139 2,993 597 423 358
Net gain on sales of loans and mortgage-backed
securities.................................. 4,429 819 5 239 150
Net gain (loss) on sales of other assets(1).... 6 1 (6) 9,569 -
Other.......................................... 651 247 53 6 46
------------ ------------ ------------ ------------ ------------
Total non-interest income................... 6,225 4,060 649 10,237 554
------------ ------------ ------------ ------------ ------------
Non-interest expense:
Employee compensation and benefits.......... 10,943 8,880 4,275 3,997 3,372
Occupancy and equipment..................... 4,854 3,568 1,801 1,727 1,258
Insurance(2)................................ 1,185 948 3,610 1,027 844
Professional fees........................... 1,891 1,605 929 1,269 833
Other....................................... 13,310 7,946 3,421 4,129 3,579
------------ ------------ ------------ ------------ ------------
Total non-interest expense................ 32,183 22,947 14,036 12,149 9,886
------------ ------------ ------------ ------------ ------------
Income before income taxes..................... 12,366 12,632 4,243 9,981 3,607
Provision for income taxes(3).................. 5,009 5,033 1,657 3,741 1,328
------------ ------------ ------------ ------------ ------------
Net income before Preferred Stock dividends.... 7,357 7,599 2,586 6,240 2,279
Preferred stock dividends:
Bank........................................ - - - - 198
Company..................................... 897 2,890 2,145 2,210 1,871
------------ ------------ ------------ ------------ ------------
Net income after Preferred Stock dividends..... $ 6,460 $ 4,709 $ 441 $ 4,030 $ 210
============ ============ ============ ============ ============
FINANCIAL CONDITION DATA:
Total assets................................... $ 3,738,383 $ 2,145,406 $ 824,360 $ 608,415 $ 551,075
Loans receivable, net, and
mortgage-backed securities(4)............... 3,215,360 1,781,652 716,550 506,132 470,154
Investments, overnight deposits, tax certificates,
reverse repurchase agreements, certificates of
deposits and other earning assets........... 194,791 186,955 87,662 88,768 64,783
Total liabilities.............................. 3,539,091 2,045,761 755,249 562,670 509,807
Deposits....................................... 2,124,824 1,195,892 506,106 310,074 347,795
Long-term debt................................. 766,466 191,484 45,000 62,000 6,000
Company obligated mandatorily redeemable
trust preferred securities of subsidiary trust
holding solely junior subordinated deferrable
interest debentures of the Company.......... 218,500 116,000 - - -
Borrowings..................................... 1,361,114 817,484 237,775 241,775 158,175
Total stockholders' equity..................... 199,292 99,645 69,111 45,745 41,268
Common stockholders' equity.................... 190,627 75,649 44,807 21,096 16,667
(Continued on next page)
34
AS OF OR FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PER COMMON SHARE DATA:
Basic earnings per common share................ $ 0.41 $ 0.57 $ 0.10 $ 1.77 $ 0.10
============ ============ ============ ============ ============
Fully diluted.................................. $ 0.39 $ 0.54 $ 0.10 $ 1.26 $ 0.10
============ ============ ============ ============ ============
Weighted average number of common shares and common
equivalent shares assumed outstanding during the period:
Basic....................................... 15,692,566 8,210,890 4,306,042 2,296,021 2,175,210
Diluted..................................... 16,666,415 9,148,229 4,558,521 4,158,564 2,175,210
Book value per common share.................... $ 10.50 $ 7.94 $ 7.85 $ 10.20 $ 8.33
Fully converted tangible book value per
common share............................... $ 8.66 $ 6.88 $ 7.13 $ 8.15 $ 7.39
Cash dividends per common share
Class A..................................... $ - $ - $ - $ - $ 0.075
Class B..................................... $ - $ - $ - $ - $ 0.030
SELECTED FINANCIAL RATIOS
PERFORMANCE RATIOS:
Return on average assets(5).................... 0.24% 0.51% 0.36% 1.10% 0.46%
Return on average common equity................ 4.94 9.34 1.30 22.60 1.21
Return on average total equity................. 4.53 8.06 4.30 14.70 5.84
Interest rate spread........................... 1.11 2.07 2.10 2.12 2.78
Net interest margin............................ 1.32 2.31 2.51 2.39 3.01
Dividend payout ratio(6)....................... 12.19 38.03 82.95 35.42 96.79
Ratio of earnings to combined fixed charges
and preferred stock dividends(7):
Excluding interest on deposits............ 1.14 1.26 1.05 1.52 1.07
Including interest on deposits............ 1.06 1.10 1.02 1.21 1.03
Total loans, net, and mortgage-backed
securities to total deposits................ 151.32 148.98 141.58 163.13 134.40
Non-interest expenses to average assets........ 1.03 1.55 1.97 2.14 2.04
Efficiency ratio(8)............................ 64.86 57.56 76.45 14.58 66.06
ASSET QUALITY RATIOS:
Ratio of non-performing loans to total loans... 0.64% 0.72% 0.99% 1.02% 1.07%
Ratio of non-performing assets to total loans,
real estate owned and tax certificates...... 0.73 0.79 1.14 1.35 1.41
Ratio of non-performing assets to total assets. 0.61 0.67 0.95 1.10 1.17
Ratio of net charge-offs to total average loans 0.02 0.04 (0.12) 0.14 0.42
Ratio of loan loss allowance to total loans.... 0.20 0.21 0.34 0.32 0.20
Ratio of loan loss allowance to non-performing
loans....................................... 31.51 28.96 33.74 31.54 18.89
CAPITAL RATIO:
Ratio of average common equity to average
total assets................................ 4.18% 3.40% 4.78% 3.14% 3.58%
Ratio of average total equity to average
total assets................................ 5.19 6.36 8.44 7.47 8.05
Core capital-to-assets ratio(9)................ 8.72 8.07 7.01 7.09 6.65
Risk-based capital-to-assets ratio(9).......... 17.54 11.27 14.19 15.79 14.13
- -------------------------
(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.
(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.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BankUnited Financial Corporation (the "Company" or "BankUnited") is a
Florida-incorporated savings and loan holding company that operates as a
financial intermediary by acquiring and investing funds primarily through its
principal subsidiary, BankUnited, FSB (the "Bank"). The Bank is subject to the
regulations of certain federal agencies and undergoes periodic examinations by
those regulatory authorities. References to the Company include the activities
of all of its subsidiaries, including the Bank and its subsidiaries, if the
context so requires.
The following discussion and analysis and the related financial data
present a review of the consolidated operating results and financial condition
of the Company for the fiscal years ended September 30, 1998, 1997 and 1996.
This discussion and analysis is presented to assist the reader in understanding
and evaluating the financial condition, results of operations and future
prospects of BankUnited, and is 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.
On June 19, 1998, the Company acquired Central Bank ("Central"), for
1,386,000 shares of the Company's Class A Common Stock, and merged Central,
which had assets of $93.9 million and deposits of $65.9 million as of June 19,
1998, into the Bank.
On January 23, 1998, the Company acquired Consumers Bancorp, Inc.
("Consumers"), for approximately $12.0 million in a combination of cash and
stock, and merged its wholly-owned subsidiary, Consumers Savings Bank, which had
assets of $104.4 million and deposits of $88.3 million as of January 23, 1998,
into the Bank.
On November 15, 1996, BankUnited completed its acquisition of Suncoast
Savings and Loan Association, FSA ("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 3 of the Notes to Consolidated Financial Statements for additional
information regarding these acquisitions.
DISCUSSION OF FINANCIAL CONDITION CHANGES FOR THE YEARS ENDED SEPTEMBER 30,
1998, 1997, AND 1996
Total assets increased $1.6 billion, or 76.2% to $3.7 billion at September
30, 1998 from $2.1 billion at September 30, 1997, as compared to $824 million at
September 30, 1996.
LOANS. The Company's net loans receivable increased by $1.2 billion, or
70.6% to $2.9 billion at September 30, 1998 from $1.7 billion at September 30,
1997. The increase was primarily the result of the $2.7 billion of residential
loans purchased, $386.0 million of loans originated, and $66.3 million and $44.2
million of loans acquired with Consumers and Central, respectively, partially
offset by repayments of $1.4 billion (net of accretion of discount and
amortization of premium) and the securitization of $355.5 million of mortgage
loans.
In fiscal 1997, the Company's net loans receivable increased by $1.1
billion, or 170.2% 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 Suncoast, and $178.3 million of loan originations, partially offset by
principal repayments of $271 million (net of accretion of discount and
amortization of premium).
Of the new loans originated or purchased during fiscal 1998 totaling $3.1
billion, $2.0 billion or 64.5% represented adjustable-rate residential loans
("ARMs"). Of BankUnited's total net loans receivable of $2.9 billion at
September 30, 1998, $1.6 billion or 55.2% were ARMs. Of this amount BankUnited
had $98.1 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.
Loans available for sale as of September 30, 1998, were $172.4 million as
compared to $104.3 million at September 30, 1997 and no such loans were
available for sale as of September 30, 1996. Beginning in the Company's fiscal
1997 fourth quarter,
36
management began a program to sell substantially all of the Company's internally
generated residential loans. These loans are classified as held for sale when
originated and if, after attempting to market the loans, management determines
that certain loans are unable to be packaged into saleable pools, the Company
may transfer such loans to its portfolio at the lower of cost or market. During
the fiscal year ended September 30, 1998 and the fiscal 1997 fourth quarter,
residential loans totaling $173.5 million and $30.1 million, respectively, were
sold for a gain of $4.0 million and $523,000, respectively. 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
fiscal 1997 fourth quarter. Currently, the Company classifies loans as available
for sale at time of origination.
CREDIT QUALITY. At September 30, 1998, non-performing assets totaled $22.6
million as compared to $14.3 million and $7.8 million at September 30, 1997 and
1996, respectively. Expressed as a percentage of total assets, non-performing
assets declined to 0.61% as of September 30, 1998 as compared to 0.67% as of
September 30, 1997 and 0.95% as of September 30, 1996. The increase in
non-performing assets in 1998 is due primarily to the increase in total loans.
The allowance for loan losses was $6.1 million, $3.7 million, and $2.2
million at September 30, 1998, 1997, and 1996, respectively. The allowance for
loan losses as a percentage of total loans decreased to 0.20% at fiscal year end
1998, as compared to 0.21% at fiscal year end 1997, and 0.34% at fiscal year end
1996. 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 0.02%, 0.04% and (0.12%) for 1998, 1997 and
1996, respectively. The increase in non-performing assets to $22.6 million as of
September 30, 1998 from $14.3 million as of September 30, 1997 was due to
increases in non-performing loans of $6.7 million which, as stated above,
relates to the increase in total loans. Real estate owned increased to $2.0
million as of September 30, 1998 from $611,000 as of September 30, 1997.
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" (collectively, "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.
37
The following table sets forth information concerning the Company's
non-performing assets for the periods indicated:
SEPTEMBER 30,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Non-accrual loans(1)............................. $ 15,999 $ 10,866 $ 4,939 $ 3,496 $ 3,918
Restructured loans(2)............................ 1,137 1,888 1,457 1,070 533
Loans past due 90 days and still accruing........ 2,313 -- -- 92 --
----------- ----------- ----------- ----------- -----------
Total non-performing loans(3)................. 19,449 12,754 6,396 4,658 4,451
Non-accrual tax certificates..................... 1,225 958 800 574 --
Real estate owned................................ 1,974 611 632 1,453 1,983
----------- ----------- ----------- ----------- -----------
Total non-performing assets...................... $ 22,648 $ 14,323 $ 7,828 $ 6,685 $ 6,434
=========== =========== =========== =========== ===========
Allowance for losses on tax certificates......... $ 469 $ 697 $ 614 $ 569 $ 85
Allowance for loan losses........................ 6,128 3,693 2,158 1,469 841
----------- ----------- ----------- ----------- -----------
Total allowance............................... $ 6,597 $ 4,390 $ 2,772 $ 2,038 $ 926
=========== =========== =========== =========== ===========
Non-performing assets as a percentage of
total assets................................ 0.61% 0.67% 0.95% 1.10% 1.17%
Non-performing loans as a percentage of
total loans(4).............................. 0.64% 0.72% 0.99% 1.02% 1.07%
Allowance for loan losses as a percentage
of total loans(4)........................... 0.20% 0.21% 0.34% 0.32% 0.20%
Allowance for loan losses as a percentage
of non-performing loans..................... 31.51% 28.96% 33.74% 31.54% 18.89%
Net chargeoffs as a percentage of average
total loans................................. 0.02% 0.04% (0.12%) 0.14% 0.42%
(1) Gross interest income that would have been recorded on non-accrual loans
had they been current in accordance with original terms was $1,037,000,
$556,000, $217,000, $128,000, and $52,000, for the years ended September
30, 1998, 1997, 1996, 1995, and 1994, respectively. The amount of interest
income on such non-accrual loans included in net income for years ended
September 30, 1998, 1997, and 1996 was $372,000, $369,000, and $145,000,
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 $2,679,000 and $1,878,000
of accruing loans as of September 30, 1998 and 1997, 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
decreased to $65.3 million at September 30, 1998 from $79.4 million at September
30, 1997, but increased from $28.3 million at September 30, 1996. This change is
due to adjustments to BankUnited's liquidity position in response to the growth
in the balance sheet and projected cash requirements.
TAX CERTIFICATES. BankUnited's investment in tax certificates decreased
$9.3 million, or 18.9%, to $40.0 million at September 30, 1998 from $49.3
million at September 30, 1997 and $40.1 million at September 30, 1996. The
decrease was primarily the result of $27.7 million in certificate purchases
during fiscal 1998 which was offset by $37.0 million in certificate redemptions
and repayments.
INVESTMENTS. Investments held to maturity remained constant at $14.5
million as of September 30, 1998 as compared with $14.5 million as of September
30, 1997 and increased from $11,000 as of September 30, 1996. Investments
available for sale increased $13.5 million to $23.7 million as of September 30,
1998 as compared to $10.2 million as of September 30, 1997 and $6.7 million as
of September 30, 1996. The increase is primarily due to the investment in agency
securities to be used as collateral for future borrowings.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities held to maturity
were $146.1 million, $11.4 million and $14.7 million at September 30, 1998, 1997
and 1996, respectively. The increase in fiscal 1998 was primarily due to the
securitization of $356.0 million of mortgage loans less repayments and
amortization of approximately $221.3 million.
BankUnited's available for sale mortgage-backed securities portfolio
increased $90.7 million to $199.6 million as of September 30, 1998 from $108.9
million as of September 30, 1997, and $55.5 million as of September 30, 1996. In
fiscal 1998, the increase was due to $17.2 million and $13.2 million of
mortgage-backed securities acquired with Consumers and Central, respectively,
and purchases of $118.3 million, partially offset by sales of $15.0 million and
repayments and amortization of $44.8 million.
38
OTHER INTEREST EARNING ASSETS. Other interest earning assets increased to
$51.3 million at September 30, 1998 from $33.6 million at September 30, 1997 and
$12.2 million as of September 30, 1996 . This category primarily represents
stock in the FHLB which the Company is required to purchase as FHLB advances
increase.
OTHER ASSETS. Office properties and equipment, net, mortgage servicing
rights, goodwill and prepaid and other assets increased by $6.8 million, $4.1
million, $17.8 million and $20.9 million, respectively, from September 30, 1997
to September 30, 1998. These increases all relate primarily to the acquisition
of Consumers and Central. Accrued interest receivable increased $16.6 million
from September 30, 1997 to September 30, 1998, due to the increase in the loan
portfolio.
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 $0.9 billion, or 75.0%, to $2.1 billion at
September 30, 1998 from $1.2 billion at September 30, 1997. Management believes
this increase is attributable to the Company's opening of additional branch
offices, the offering of competitive interest rates and personalized service in
a market area dominated by super-regional banks and continued industry
consolidation. The acquisition of Consumers and Central also contributed to this
increase with deposits of $88.3 million and $65.9 million, respectively.
BankUnited intends to open as many as 5 branches in the 1999 fiscal year.
FHLB ADVANCES. FHLB advances were $1.0 billion at September 30, 1998, up
$0.3 billion from $0.7 billion at September 30, 1997. This increase was used to
fund, together with deposits and other sources, the purchase of residential
loans.
TRUST PREFERRED SECURITIES. In March 1998, BankUnited's subsidiary,
BankUnited Capital III, issued $102.5 million of Trust Preferred Securities; in
June 1997, BankUnited's subsidiary, BankUnited Capital II, issued $46 million of
Trust Preferred Securities; in December 1996, BankUnited's subsidiary,
BankUnited Capital, issued $50 million of Trust Preferred Securities; and in
March 1997, BankUnited Capital issued an additional $20 million of Trust
Preferred Securities. The net proceeds from the sales of the Trust Preferred
Securities were $98.9 million and $111.5 million for the years ended September
30, 1998 and 1997, respectively. 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, 1998,
BankUnited contributed $110.0 million of additional capital to the Bank.
SUBORDINATED NOTES. On August 31, 1997, BankUnited called all outstanding
subordinated notes totaling $774,500.
STOCKHOLDERS' EQUITY. BankUnited's total stockholders' equity was $199.3
million at September 30, 1998, an increase of $99.7 million, or 100.1% from
$99.6 million at September 30, 1997. This was due primarily to the issuance of
3.7 million shares of Class A Common stock pursuant to a public stock offering
in October 1997 with net proceeds of approximately $43.9 million; the issuance
of 0.6 million shares of Class A Common Stock in connection with the acquisition
of Consumers in January 1998 with an approximate value of $7.7 million; the
issuance of 1.4 million shares of Class A Common Stock in connection with the
acquisition of Central in June 1998 with an approximate value of $22.8 million;
and the issuance of 1.08 million shares of Class A Common Stock, 30,000 shares
of Class B Common Stock and 25,000 shares of Series B Preferred Stock in a
publicly underwritten offering and a direct offering to certain directors and
principal stockholders during April 1998 with net proceeds of $15.3 million.
In September 1997, the Company exercised its right to call all the
outstanding shares of its 8% Noncumulative Convertible Preferred Stock, Series
1996, effective October 10, 1997. As a result 927,204 shares converted to
1,548,410 shares of Class A Common Stock at a ratio of 1- 2/3 shares of common
stock for each share of preferred. The remaining 5,696 shares of preferred stock
were redeemed at $15 per share.
In January 1998, the Company called the outstanding 743,870 shares of its
Series 1993 Preferred Stock effective February 20, 1998 at $10.00 per share.
Holders of shares of the Series 1993 Preferred Stock had the right to convert
them into shares of the Company's Class A Common Stock at a ratio of
one-for-one. Holders of 712,464 shares of Series 1993 Preferred Stock exercised
their conversion right, which resulted in the issuance of 712,464 additional
shares of Class A Common Stock, and 31, 406 shares of Series 1993 Preferred
Stock were redeemed.
In June 1998, holders of 42,655 warrants issued by Suncoast exercised their
conversion right, which resulted in the issuance of 71,259 shares of Class A
Common Stock. The 5,545 warrants which remained unexercised after July 9, 1998
expired pursuant to the terms of the warrant agreements.
In December 1998, the Board of Directors of the Company authorized the
purchase from time to time in open market transactions of up to 1,000,000 shares
of the Company's Class A Common Stock at such prices as the Executive Committee
shall deem advantageous.
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.
Over the last couple of years, the Company has increased the total deposit
base primarily through branch expansion in the South Florida market by 25% for
transaction accounts and 75% for certificates of deposit with contractual
maturities. While there
39
is no guarantee that the certificates of deposit will remain with the Company
upon maturity, the Company's branch network cultivates a strong customer base
which gives the Company reasonable assurance of available deposits at market
rates. Management expects the Company's market share to continue to grow.
Additional sources of funds are FHLB advances, which the Company generally uses
as a source of funds with longer maturities than deposits. FHLB advances are
limited to 30% of assets in accordance with the FHLB policy. As of September 30,
1998, the Company had 27% of FHLB advances to total assets. Other sources of
short-term funds are available through other collateral borrowings.
During November 1998, the Company finalized a medium-term note program
which permits the issuance, from time to time, of up to $500 million of senior
notes with maturities from 9 months to 10 years from the date of issue. As a
condition of issuance, principal and interest on all offered notes will be
supported by an irrevocable stand-by letter of credit of the FHLB of Atlanta and
provide an additional source of funding, potentially with longer maturities with
attractive rates.
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 4.0% of its net
withdrawable accounts plus short-term borrowings. As of September 30, 1998, the
Bank had liquid assets of 7.18% which was in compliance with this requirement,
and as of September 30, 1997, the Bank had liquid assets of 8.49%.
BankUnited's primary use of funds is to purchase or originate loans and to
purchase mortgage-backed and investment securities. In fiscal 1998, 1997, and
1996, loans increased $1.2 billion, $1.1 billion, and $193.0 million,
respectively, and BankUnited purchased $133.7 million, $78.6 million, and $22.7
million, respectively, of mortgage-backed and investment securities. Funding for
the above came primarily from increases in deposits of $928.9 million, $689.8
million and $196.1 million in 1998, 1997 and 1996, respectively, and increases
in FHLB advances and other borrowings of $543.6 million in 1998, $580.5 million
in 1997 and $52.7 million in 1996.
Federal savings banks such as the Bank are also required to maintain
capital at levels specified by applicable minimum capital ratios. At September
30, 1998, the Bank was in compliance with all capital requirements and met the
definition of a "well capitalized" institution under applicable federal
regulations.
YEAR 2000
The Company utilizes extensive electronic data processing hardware and
software in its banking operations, among other things, to process and record
customer transactions, determine and collect revenue to be earned and expenses
to be paid in connection with customer transactions, maintain and report
customer transaction information, record and manage the Company's short-term and
long-term investments, accounting and financial management, and risk management.
The Company also relies on certain vendors to provide critical services to the
Company's banking operations, including telecommunications, loan servicing and
correspondent banking. Failure of the electronic data processing hardware or
software of the Company, its third-party service bureaus, or certain vendors to
properly recognize the Year 2000 could result in a significant disruption of the
Company's banking operations.
The Company's customer transactions are processed through a network of
electronic data processing workstations in its branch offices and loan servicing
department and are recorded on electronic data processing hardware and software,
a substantial portion of which are maintained by two third-party service
bureaus. The Company is in the process of replacing any hardware or software in
its branch offices to ensure compliance with Year 2000 issues, while one of the
Company's third-party service bureaus is working with the Company to convert its
customer transaction hardware and software to a more advanced version which is
expected to be completed in February 1999 and which will also be Year 2000
compliant. The third-party service bureau which processes the Company's loan
servicing transactions is also expected to be Year 2000 compliant. The Company
is in the process of replacing any other hardware and software used in its
operations as necessary for Year 2000 compliance. The Company is also seeking
Year 2000 compliance certifications from its major telecommunications, loan
servicing and correspondent banking vendors. While a portion of the Company's
financial assets and liabilities are with commercial businesses and government
sponsored entities, the Company's loans and deposits are primarily with
individuals. As a result, the Company does not expect any significant
disruptions resulting from customers that may not be Year 2000 compliant.
While the Company does not anticipate any difficulties becoming Year 2000
compliant with its third-party service bureaus, the Company continues to monitor
the feasibility of using a substitute third-party service bureau in the event of
such difficulties. Following the February 1999 conversion, should any
operational problems arise regarding compliance with Year 2000, the Company will
immediately pursue an alternative plan. Management is unable at this time to
estimate the additional costs should such alternative plans become necessary.
The Company has designated a Year 2000 task force under the direction of a
senior officer of the Company which is identifying and coordinating the
Company's efforts to become Year 2000 compliant. Additionally, the Company and
its banking subsidiary are subject to regulation and supervision by the OTS
which regularly conducts reviews of the safety and soundness of the Company's
operations, including the Company's progress in becoming Year 2000 compliant.
Failure by the Company to adequately prepare for Year 2000 issues could
negatively impact the Company's banking operations resulting in restrictions on
its banking operations by the OTS. No such restrictions exist at this time, nor
does the Company expect any such restrictions resulting from failure to address
Year 2000 issues.
The Company has estimated the costs associated with becoming Year 2000
compliant to be approximately $679,000, of which, approximately $353,000 has
been expensed through September 30, 1998.
40
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1998
AND 1997
NET INCOME AFTER PREFERRED STOCK DIVIDENDS. BankUnited had net income after
preferred stock dividends of $6.5 million for the year ended September 30, 1998,
compared to net income after preferred stock dividends of $4.7 million for the
year ended September 30, 1997. All major categories of income and expense
increased significantly in the year ended September 30, 1998 as compared to the
year ended September 30, 1997 and reflect the significant growth BankUnited has
experienced in the last year. Significant factors in such growth were the
acquisitions of Consumers and Central, which were completed on January 23, 1998
and June 19, 1998, respectively. BankUnited's Consolidated Statement of
Operations for the year ended September 30, 1998 reflects Consumers' and
Central'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 $7.2 million, or 22.0%,
to $40.0 million for the year ended September 30, 1998 from $32.8 million for
the year ended September 30, 1997. This increase was attributable to an increase
in average interest-earning assets of $1.6 billion, or 114.3%, to $3.0 billion
for the year ended September 30, 1998 from $1.4 billion for the year ended
September 30,1997 partially offset by a decrease in the net interest margin to
1.32% for the year ended September 30, 1998 from 2.31% for the year ended
September 30, 1997. The increase in average interest-earning assets was
primarily due to the purchase of $2.7 billion of residential mortgage loans
during the 1998 fiscal year. The decrease in the net interest margin was due to
a decrease in the yield on interest-earning assets to 6.86% for the year ended
September 30, 1998 from 7.65% for the year ended September 30, 1997, primarily
attributable to the lower yields on the loans purchased, and a 17 basis point
increase in the cost of interest-bearing liabilities to 5.75% for the year ended
September 30, 1998 from 5.58% for the year ended September 30, 1997.
The increase in interest income of $98.8 million, or 90.8%, to $207.6
million for the year ended September 30, 1998 from $108.8 million for the year
ended September 30, 1997, primarily reflects increases in interest and fees on
loans of $82.6 million and a $9.6 million increase in interest on
mortgage-backed securities. This increase in interest and fees on loans is due
to an increase in average loans outstanding of $1.3 billion, or 108.3%, to $2.5
billion for the year ended September 30, 1998 from $1.2 billion for the year
ended September 30, 1997 which resulted primarily from purchases of residential
loans in the secondary mortgage market. The results of operations for the year
ended September 30, 1998 reflect an acceleration in the amortization of purchase
premiums on loans and mortgage-backed securities which increased from $1.1
million for the year ended September 30, 1997 to $11.4 million for the year
ended September 30, 1998. The increase in premium amortization was largely the
result of increased prepayments on purchased mortgage loans. Prepayments on
purchased mortgage loans also negatively affect interest income since such loans
are generally serviced by other entities who only remit funds received from
prepayments on a monthly basis, which results in a loss of interest income from
the delay in remittance and use of funds from such prepayments. As a result of
prepayments and because many of the loans purchased are adjustable-rate
mortgages in the "teaser" period, the yield on loans declined from 7.78% for the
year ended September 30, 1997 to 7.01% for the year ended September 30, 1998.
This 77 basis point drop in the yield earned on loans was a significant factor
in the decline of the yield on interest earning assets.
The increase in interest expense of $91.5 million, or 120.4%, to $167.5
million for the year ended September 30, 1998 from $76.0 million for the year
ended September 30, 1997 primarily reflects an increase in interest expense on
interest-bearing deposits of $43.3 million, or 86.4%, to $93.4 million for the
year ended September 30, 1998, from $50.1 million for the year ended September
30, 1997, an increase in interest expense on FHLB advances of $32.9 million to
$51.6 million for the year ended September 30, 1998, from $18.7 million for the
year ended September 30, 1997, an increase in preferred dividends of the trust
subsidiaries of $10.5 million to $17.0 million for the year ended September 30,
1998 from $6.5 million for the year ended September 30, 1997 and an increase in
interest expense on securities sold under agreements to repurchase of $5.0
million to $5.5 million for the year ended September 30, 1998 from $0.5 million
for the year ended September 30, 1997. This was due to an increase in average
interest-bearing deposits of $777.4 million, or 80.6%,to $1.7 billion for the
year ended September 30, 1998, from $964.4 million for the year ended September
30, 1997. Approximately $79.1 million of this increase represents deposits
acquired with Consumers and Central. The average rate paid on interest-bearing
deposits increased 16 basis points to 5.36% for the year ended September 30,
1998 from 5.20% for the year ended September 30, 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the year ended
September 30, 1998 was $1.7 million as compared with a provision for loan losses
of $1.3 million for the year ended September 30, 1997. 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
"--Discussion of Financial Condition Changes for the Years Ended September 30,
1998, 1997 and 1996--Credit Quality."
NON-INTEREST INCOME. Non-interest income for the year ended September 30,
1998 was $6.2 million compared with $4.1 million for the year ended September
30, 1997, an increase of $2.1 million. Of this increase, $3.6 million represents
gains on the sale of loans and mortgage backed securities, partially offset by a
$2.3 million decrease in loan servicing fee income, net, primarily due to the
acceleration of amortization of mortgage servicing rights resulting from an
increase in prepayments. 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 $9.3 million, or 40.6%,
to $32.2 million for the year ended September 30, 1998 compared to $22.9 million
for the year ended September 30, 1997. The increase in expenses was attributable
to the growth BankUnited has experienced including the expenses of Consumers'
and Central's operations.
41
INCOME TAXES. The income tax provision was $5.0 million for each of the
years ended September 30, 1998 and 1997.
PREFERRED STOCK DIVIDENDS. Preferred stock dividends for the year ended
September 30, 1998 were $0.9 million, a decrease of $2.0 million, as compared to
$2.9 million for the year ended September 30, 1997. This decrease is the result
of the retirement, in October 1997, of the 8% Noncumulative Convertible
Preferred Stock, Series 1996, issued in connection with the acquisition of
Suncoast and ,in January 1998, of the Series 1993 Preferred Stock, partially
offset by the issuance of the Series B Preferred Stock in April 1998.
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 experienced in
fiscal 1997. 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 "--Discussion of Financial
Condition Changes for the Years Ended September 30, 1997, 1996 and 1995--Credit
Quality."
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.
42
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.
43
SELECTED QUARTERLY FINANCIAL DATA
Set forth below is selected quarterly data for the fiscal years ended
September 30, 1998 and 1997.
The quarterly financial data for the fourth quarter of 1998 and 1997 was
not reviewed by the Company's independent certified public accountants in
accordance with standards established for such reviews.
1998
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
Net interest income.................................... $ 9,367 $ 11,360 $ 8,151 $ 11,146
Provision for loan losses.............................. 650 400 300 350
Non-interest income.................................... 1,644 1,015 2,503 1,063
Non-interest expense................................... 7,025 8,170 8,054 8,934
----------- ----------- ----------- -----------
Income before taxes and preferred stock dividends...... 3,336 3,805 2,300 2,925
Income taxes........................................... 1,361 1,513 949 1,186
----------- ----------- ----------- -----------
Net income before preferred stock dividends............ 1,975 2,292 1,351 1,739
Preferred stock dividends.............................. 332 182 185 198
----------- ----------- ----------- -----------
Net income applicable to common stock.................. $ 1,643 $ 2,110 $ 1,166 $ 1,541
=========== =========== =========== ===========
Basic earnings per share............................... $ 0.13 $ 0.14 $ 0.07 $ 0.09
=========== =========== =========== ===========
Diluted earnings per share............................. $ 0.12 $ 0.13 $ 0.07 $ 0.08
=========== =========== =========== ===========
In the fourth quarter of 1998, as a result of increased prepayments, the
Company recorded amortization expense of approximately $6.8 million relating to
premiums on loans and mortgage-backed securities. In addition, during the fourth
quarter, the Company adjusted normal recurring accruals of certain non-interest
and operating expenses, deferred loan costs and estimates of required reserves
based upon management's determination of amounts so required, in an aggregate of
approximately $1.0 million resulting in an increase to net income before taxes.
1997
---------------------------------------------------------
First Second Third Fourth
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ---------- -----------
(Dollars in thousands, except per share data)
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
=========== =========== =========== ===========
Basic earnings per share............................... $ 0.14 $ 0.13 $ 0.14 $ 0.16
=========== =========== =========== ===========
Diluted earnings per share............................. $ 0.13 $ 0.12 $ 0.14 $ 0.15
=========== =========== =========== ===========
44
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 withdrawal penalties, while term FHLB
Advances have prepayment penalties, which discourage customer withdrawal of time
deposits and prepayment of FHLB Advances prior to maturity.
The Company's trust preferred securities may be redeemed at varying times,
and as to $70 million of such securities, until 2016, at a premium. (See Note 12
of the Notes to Consolidated Financial Statements for further discussion of the
trust preferred securities).
INTEREST RATE INDICES. The Company's ARM loans and mortgage-backed
securities are primarily indexed to the One Year Constant Maturity Treasury
Index (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
45
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.
46
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
present value of the interest rate caps is calculated by the model using
estimated cash flows based on the contractual rates and terms at a discount rate
representing the index to which the interest rate caps are tied. 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.
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,
1998, 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, 1998
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.............................. $ 198,567 $ 196,731 $ 194,948 $ 194,200 $ 191,549
Mortgage-backed securities............. 348,445 345,764 343,115 338,054 331,164
Loans:
Adjustable-rate mortgages.............. 1,899,162 1,883,720 1,869,052 1,851,441 1,826,847
Fixed-rate mortgages................... 1,394,086 1,368,699 1,340,019 1,288,675 1,222,284
Commercial and consumer loans.......... 52,104 51,495 50,902 50,323 49,757
-------------- ------------- ------------- -------------- -------------
Total loans.......................... 3,345,352 3,303,914 3,259,973 3,190,439 3,098,888
-------------- ------------- ------------- -------------- -------------
Total interest-earning assets.......... $ 3,892,364 $ 3,846,409 $ 3,798,036 $ 3,722,693 $ 3,621,601
============== ============= ============= ============== =============
Interest-bearing liabilities:
Customer deposits:
Money market and NOW accounts........ $ 233,661 $ 233,661 $ 233,661 $ 233,661 $ 233,661
Passbook accounts.................... 257,780 257,780 257,780 257,780 257,780
Certificate accounts................. 1,660,614 1,651,162 1,641,745 1,632,549 1,623,507
-------------- ------------- ------------- -------------- -------------
Total customer deposits.............. 2,152,055 2,142,603 2,133,186 2,123,990 2,114,948
Borrowings:
FHLB advances........................ 1,096,430 1,060,280 1,026,135 993,863 963,340
Trust preferred...................... 230,117 221,266 212,915 205,029 197,575
Other borrowings..................... 121,148 121,148 121,148 121,148 121,148
-------------- ------------- ------------- -------------- -------------
Total borrowings..................... 1,447,695 1,402,694 1,360,198 1,320,040 1,282,063
-------------- ------------- ------------- -------------- -------------
Total interest-bearing liabilities..... $ 3,599,750 $ 3,545,297 $ 3,493,384 $ 3,444,030 $ 3,397,011
============== ============= ============= ============== =============
Loan commitments and interest rate caps... $ (19,815) $ (11,946) $ (4,180) $ 549 $ 3,667
============= ============ ============ ============== =============
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
47
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 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, 1998, as calculated by the OTS, based on
information provided to the OTS by the Bank.
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 $ 273,973 $3,521,702 7.78% (16.72)%
+100 312,389 3,603,318 8.67 (4.73)
Static 328,964 3,666,638 8.97 -
-100 317,941 3,707,525 8.58 (3.35)
-200 304,220 3,747,892 8.12 (7.52)
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.
RISKS ASSOCIATED WITH THE COMPANY'S ADJUSTABLE RATE MORTGAGE LOANS. The
Company has purchased and intends to continue to purchase a significant amount
of residential mortgage loans. During the fiscal years ended September 30, 1998
and 1997, the Company purchased $2.7 billion and $913.7 million, respectively,
of one-to-four family residential loans, of which $2.0 billion and $728.2
million, respectively, were ARM loans. At September 30, 1998 the Company's
residential loan portfolio included $1.6 billion of ARMs (55.2% of the Company's
gross loan portfolio). The ARMs purchased by the Company have annual interest
rate adjustment caps that limit rate increases or decreases to 2% per year.
Further, a portion of the ARMs purchased by the Company provide for initial
rates of interest below the rates which would prevail were the contractual index
and margin used for repricing applied initially (the "teaser rate period").
48
If market interest rates rise rapidly, the annual and lifetime interest
rate adjustment caps on the ARMs may limit the increase in the interest rates on
ARMs relative to the increase in market interest rates, and yields on ARMs with
teaser rates may be limited to repricing at interest rates below the contractual
index plus the margin. At September 30, 1998, $492.4 million of the Company's
ARM loans (17.3% of the Company's gross loan portfolio) were in the teaser rate
period with an average teaser rate of 6.21% and an average fully indexed rate of
7.48%. Rapid increases in market interest rates may not be fully reflected in
loans which are in the teaser rate period and may, accordingly, have a negative
impact on the Company's net interest margin.
REFINANCING RISKS. A significant portion of the Company's loans receivable
are single-family residential mortgages that generally have an imbedded option
that allows the borrower to prepay the loan at any time without penalty. A
substantial portion of these loans have been purchased by the Company in the
secondary mortgage market at a premium.
In the current interest rate environment, when long-term interest rates are
generally low on a historical basis and the spread between short-term rates and
long-term rates is relatively narrow, prepayments of ARMs and higher fixed-rate
mortgages tend to accelerate. In addition, at September 30, 1998, $492.4 million
of the Company's ARMs had teaser rates, which will be subject to interest rate
adjustments within the next twelve months. Teaser rate loans may tend to be
prepaid near the end of the teaser period in the current interest rate
environment, creating higher levels of prepayments on loans overall which the
Company may not be able to reinvest quickly enough and at sufficient interest
rates to mitigate the effect on it net interest margin.
Premiums, net of discounts and deferred origination costs, which at
September 30, 1998 were $29.9 million, are recognized as a reduction 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. As prepayments accelerate, the Company's historical prepayment
experience changes, resulting in a shortening of the estimated life of the loan
portfolio, and an increase in the rate at which premiums are expensed, resulting
in a greater reduction in interest income. Accelerated prepayments could,
therefore, have a material adverse effect on the Company's results of
operations. Based on a continuation of the current interest rate environment, a
significant portion of the premium may be expensed in a relatively short term
period.
AVAILABILITY OF MORTGAGE LOANS. The Company's net income depends
significantly on its ability to acquire mortgage loans an acceptable terms and
at favorable spreads over the Company's borrowing costs. If the Company is
unable to acquire mortgage loans, its results of operations will be adversely
affected.
In acquiring mortgage loans, the Company will compete with REITs,
investment banking firms, savings and loan associations, banks, mortgage
bankers, insurance companies, mutual funds, other lenders, FNMA, FHLMC, GNMA and
other entities purchasing mortgage loans, some of which have greater financial
resources than the Company. Increased competition for the acquisition of
eligible mortgage loans or a diminution in the supply could result in higher
prices and, thus, lower yields on such mortgage loans that could further narrow
the yield spread over borrowing costs.
The availability of mortgage loans meeting the Company's criteria is
dependent upon, among other things, the size and level of activity in the
residential real estate lending market, which depends on various factors,
including the level of interest rates, regional and national economic conditions
and changes in residential real estate values. To the extent the Company is
unable to acquire a sufficient volume of mortgage loans meeting its criteria,
the Company's results of operations would be adversely affected.
RISKS ASSOCIATED WITH INVESTMENTS AND MORTGAGE-BACKED SECURITIES. The
Company purchases fixed and adjustable rate mortgage-backed and other securities
for liquidity, yield and risk management purposes. The Company has also, and
will continue to, securitize whole loans in its loan portfolio primarily for
liquidity and collateral purposes. Such securities provide liquidity through the
ability of the Company to dispose of certain securities from time to time and
the ability of the Company to use securities as collateral for borrowings,
thereby adding leverage capability and lower borrowing costs. Certain securities
are purchased for risk management purposes when the terms of those securities
mitigate interest rate, credit, prepayment or basis risk within the Company's
balance sheet. Certain purchases of securities may increase risk in one area
while decreasing risk in another, or may not mitigate any existing risk. The
Company manages its exposure to risk in its acquisition of securities through
its selection of prices, collateral and terms. Changes in market interest rates
and/or prepayment rates associated with the Company's investments and
mortgage-backed securities could negatively impact the Company's net interest
margin.
49
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BANKUNITED FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants........................ 52
Consolidated Statements of Financial Condition as of September 30, 1998
and September 30, 1997................................................. 53
Consolidated Statements of Operations for the Years Ended
September 30, 1998, 1997 and 1996...................................... 54
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1998, 1997 and 1996...................................... 55
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996...................................... 58
Notes to Consolidated Financial Statements................................ 60
50
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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1998,
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.
PRICEWATERHOUSECOOPERS LLP
Miami, Florida
December 7, 1998
51
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
------------------------------
1998 1997
------------- -------------
(Dollars in thousands)
ASSETS:
Cash................................................................................... $ 26,243 $ 10,571
Federal Home Loan Bank overnight deposits.............................................. 65,268 79,413
Tax certificates (net of reserves of $469 and $697 at September 30, 1998 and 1997,
respectively)........................................................................ 40,007 49,283
Investments held to maturity (market value of approximately $14,699 and $14,613 at
September 30, 1998 and 1997, respectively)........................................... 14,542 14,494
Investments available for sale, at market.............................................. 23,661 10,166
Mortgage-backed securities, held to maturity (market value of approximately $143,505
and $11,292 at September 30, 1998 and 1997, respectively)............................ 146,146 11,352
Mortgage-backed securities available for sale, at market............................... 199,610 108,919
Loans receivable, net.................................................................. 2,869,604 1,661,381
Mortgage loans held for sale (market value of approximately $179,503 and $105,980
at September 30, 1998 and 1997,respectively)........................................ 172,410 104,342
Other interest earning assets.......................................................... 51,313 33,599
Office properties and equipment, net................................................... 14,198 7,371
Real estate owned...................................................................... 1,974 611
Accrued interest receivable............................................................ 32,864 16,261
Mortgage servicing rights.............................................................. 8,917 4,783
Goodwill............................................................................... 32,106 14,278
Prepaid expenses and other assets...................................................... 39,520 18,582
------------- -------------
TOTAL................................................................................ $ 3,738,383 $ 2,145,406
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits............................................................................... $ 2,124,824 $ 1,195,892
Securities sold under agreements to repurchase......................................... 121,148 30,000
Advances from Federal Home Loan Bank................................................... 1,021,466 671,484
Company obligated mandatorily redeemable trust preferred securities of subsidiary trust
holding solely junior subordinated deferrable interest debentures of the Company..... 218,500 116,000
Interest payable (primarily on deposits and advances from Federal Home Loan Bank)...... 7,825 3,844
Advance payments by borrowers for taxes and insurance.................................. 12,645 10,688
Accrued expenses and other liabilities................................................. 32,683 17,853
------------- -------------
TOTAL LIABILITIES.................................................................... 3,539,091 2,045,761
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 17)
STOCKHOLDERS' EQUITY:
Preferred stock, Series B, Series 1993, Series 9% and Series 1996, $0.01 par
value. Authorized shares--10,000,000; issued and outstanding shares -
926,697 and 2,175,296 at September 30, 1998 and 1997, respectively................... 9 22
Class A Common Stock, $.01 par value. Authorized shares--30,000,000; issued and
outstanding shares - 17,816,213 and 9,257,098 at September 30, 1998 and 1997,
respectively......................................................................... 178 92
Class B Common Stock, $.01 par value. Authorized shares--3,000,000; issued and
outstanding shares - 331,743 and 275,685 at September 30, 1998 and 1997,
respectively........................................................................ 3 3
Additional paid-in capital............................................................. 178,777 86,679
Retained earnings...................................................................... 18,448 11,988
Net unrealized gains on securities available for sale, net of tax...................... 1,877 861
------------- -------------
TOTAL STOCKHOLDERS' EQUITY........................................................... 199,292 99,645
------------- -------------
TOTAL.............................................................................. $ 3,738,383 $ 2,145,406
============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
52
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30:
---------------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands, except per share data)
Interest income:
Interest and fees on loans............................................... $ 177,252 $ 94,655 $ 41,313
Interest on mortgage-backed securities................................... 16,588 7,035 4,250
Interest on short-term investments....................................... 5,013 1,613 2,359
Interest and dividends on long-term investments and other
interest-earning assets................................................ 8,714 5,471 4,210
---------- ---------- ----------
Total interest income................................................ 207,567 108,774 52,132
---------- ---------- ----------
Interest expense:
Interest on deposits..................................................... 93,431 50,136 20,791
Interest on borrowings................................................... 57,160 19,351 13,831
Preferred dividends of Trust Subsidiary.................................. 16,952 6,473 -
---------- ---------- ----------
Total interest expense................................................. 167,543 75,960 34,622
---------- ---------- ----------
Net interest income before provision (credit) for loan losses........ 40,024 32,814 17,510
Provision (credit) for loan losses.......................................... 1,700 1,295 (120)
---------- ---------- ----------
Net interest income after provision (credit) for loan losses............. 38,324 31,519 17,630
---------- ---------- ----------
Non-interest income:
Service fees, net........................................................ 1,139 2,993 597
Net gain on sale of loans and mortgage-backed securities................. 4,429 819 5
Net gain (loss) on sale of other assets.................................. 6 1 (6)
Other ................................................................... 651 247 53
---------- ---------- ----------
Total non-interest income.............................................. 6,225 4,060 649
---------- ---------- ----------
Non-interest expenses:
Employee compensation and benefits....................................... 10,943 8,880 4,275
Occupancy and equipment.................................................. 4,854 3,568 1,801
Insurance................................................................ 1,185 948 3,610
Professional fees--legal and accounting.................................. 1,891 1,605 929
Data processing.......................................................... 1,109 992 340
Loan servicing expense................................................... 5,313 1,796 979
Real estate owned operations............................................. 82 301 73
Other operating expenses................................................. 6,806 4,857 2,029
---------- ---------- ----------
Total non-interest expenses............................................ 32,183 22,947 14,036
---------- ---------- ----------
Income before income taxes and preferred stock dividends................. 12,366 12,632 4,243
Income taxes................................................................ 5,009 5,033 1,657
---------- ---------- ----------
Net income before preferred stock dividends.............................. 7,357 7,599 2,586
Preferred stock dividends of the Company.................................... 897 2,890 2,145
---------- ---------- ----------
Net income after preferred stock dividends............................... $ 6,460 $ 4,709 $ 441
========== ========== ==========
Basic earnings per share.................................................... $ 0.41 $ 0.57 $ 0.10
========== ========== ==========
Diluted earnings per share.................................................. $ 0.39 $ 0.54 $ 0.10
========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
53
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
---------------------------------------------------------------------
CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK
--------- ---------- ---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- ---------- --------- -------- ---------
(Dollars in thousands)
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 gain 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
Issuance of Class A and Class B
Common Stock....................... - - 35,477 - 3,541 -
Conversion of Preferred Stock
to Common Class A..................(1,290,061) (13) 1,614,104 16 - -
Issuance of Series B Preferred Stock. 20,762 - - - - -
Preferred Stock, Series 9%
tender offer....................... (4,300) - - - - -
Underwritten public offering and
direct offering of the Company's Class A
and Class B Common Stock and
Series B Preferred Stock, net...... 25,000 - 4,761,500 48 30,000 -
Issuance of Stock in connection with
the Consumers Bancorp acquisition...... - - 562,508 6 - -
Issuance of Stock in connection with
the Central Bank acquisition........... - - 1,386,000 14 - -
Stock options and warrants exercised. - - 195,584 2 22,517 -
Payments of dividends on the
Company's Preferred Stock.......... - - 3,942 - - -
Net change in unrealized gain on
investments available for sale..... - - - - - -
Net income for the year ended
September 30, 1998................. - - - - - -
--------- ---------- ---------- --------- -------- ---------
BALANCE AT SEPTEMBER 30, 1998........... 926,697 $ 9 17,816,213 $ 178 331,743 $ 3
========= ========== ========== ========= ======== =========
54
UNREALIZED
GAIN(LOSS) ON
SECURITIES
AVAILABLE TOTAL
PAID-IN RETAINED FOR SALE, STOCKHOLDERS'
CAPITAL EARNINGS NET OF TAX EQUITY
------------- ------------- ------------- -------------
(Dollars in thousands)
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 gain 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
Issuance of Class A and Class B
Common Stock...................................... 237 - - 237
Conversion of Preferred Stock
to Common Class A................................. (463) - - (460)
Issuance of Series B Preferred Stock................ 398 - - 398
Preferred Stock, Series 9%
tender offer...................................... (43) - - (43)
Underwritten public offering and direct
offering of the Company's Class A
and Class B Common Stock and Series B Preferred
Stock, net........................................ 59,055 - - 59,103
Issuance of Stock in connection
with the Consumers Bancorp acquisition............ 7,647 - - 7,653
Issuance of Stock in connection
with the Central Bank acquisition................. 22,769 - - 22,783
Stock options and warrants exercised................ 2,438 - - 2,440
Payments of dividends on the
Company's Preferred Stock......................... 60 (897) - (837)
Net change in unrealized gain on
investments available for sale.................... - - 1,016 1,016
Net income for the year ended
September 30, 1998................................ - 7,357 - 7,357
------------- ------------- ------------- -------------
BALANCE AT SEPTEMBER 30, 1998.......................... $ 178,777 $ 18,448 $ 1,877 $ 199,292
============= ============= ============= =============
(CONTINUED ON NEXT PAGE)
55
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997
AND 1996
The beginning balance at September 30, 1995 of each series of the Company's
preferred stock was as follows:
SHARES AMOUNT
----------- -------------
(Dollars in thousands)
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, 1998 of each series of the Company's
preferred stock was as follows:
SHARES AMOUNT
------------ -------------
(Dollars in thousands)
Series B....................................................... 229,580 $ 2
Series 9%...................................................... 697,117 7
------------- -------------
Total.......................................................... 926,697 $ 9
============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
56
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1998 1997 1996
------------- -------------- -------------
(in thousands)
Cash flows from operating activities:
Net income............................................................ $ 7,357 $ 7,599 $ 2,586
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision (credit) for loan losses................................ 1,700 1,295 (120)
Provision (credit) for losses on tax certificates................. (166) 84 76
Depreciation and amortization..................................... 1,633 1,320 674
Amortization (accretion) of fees, discounts and premiums.......... 11,449 (431) (2,168)
Amortization of mortgage servicing rights......................... 2,236 931 -
Amortization of goodwill.......................................... 1,070 683 -
Net gain on sale of loans and mortgage-backed securities............ (4,429) (819) (5)
Net (gain) loss on sale of real estate owned........................ (39) 236 (185)
Loans originated for sale.......................................... (312,749) (28,467) (4,141)
Proceeds from sale of loans........................................ 177,504 39,890 4,362
Increase in accrued interest receivable............................ (15,506) (6,285) (1,239)
Increase in interest payable on deposits and FHLB advances......... 3,523 1,142 31
Decrease in accrued taxes.......................................... (9,418) (1,062) (3,429)
Increase (decrease) in other liabilities........................... 20,228 (18,818) 3,054
Increase in prepaid expenses and other assets...................... (17,475) (1,635) (224)
Proceeds from sale of mortgage servicing rights..................... - 4,215 -
Purchase of mortgage servicing rights............................... (678) - -
Other, net.......................................................... (2,523) 712 1,126
------------- -------------- -------------
Net cash provided by (used in) operating activities............... (136,283) 590 398
------------- -------------- -------------
Cash flows from investing activities:
Net increase in loans................................................. (1,392,617) (792,501) (185,457)
Purchase of investment securities..................................... (15,363) (22,144) (3,510)
Purchase of mortgage-backed securities................................ (118,336) (56,499) (19,228)
Purchase of other earning assets...................................... (46,325) (32,300) (650)
Proceeds from repayments of investment securities..................... 22,323 4,051 5,675
Proceeds from repayments of mortgage-backed securities................ 264,164 19,345 10,523
Proceeds from repayments of other earning assets...................... 29,423 14,176 750
Proceeds from sale of investment securities........................... - 126 2,097
Proceeds from sale of mortgage-backed securities...................... 15,572 7,653 -
Proceeds from sale of real estate owned............................... 1,225 2,257 2,661
Purchase of office properties and equipment........................... (8,140) (1,980) (1,170)
Sale of office properties and equipment............................... 23 1,364 -
Capitalized cost for loan securities.................................. (581) - -
Net (increase) decrease in tax certificates........................... 9,276 (9,278) (620)
Purchase of Bank of Florida, net of acquired cash equivalents......... - - 1,521
Cash and cash equivalents of Suncoast at date of acquisition.......... - 32,803 -
Purchase of Consumers, net of acquired cash equivalents............... 8,098 - -
Cash and cash equivalents of Central at date of acquisition........... 18,170 - -
------------- ------------- -------------
Net cash used in investing activities............................... $ (1,213,088) $ (832,927) $ (187,408)
------------- ------------- -------------
(CONTINUED ON NEXT PAGE)
57
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
(in thousands)
Cash flows from financing activities:
Net increase in deposits.............................................. $ 774,720 $ 366,049 $ 168,744
Net increase (decrease) in Federal Home Loan Bank advances............ 341,982 382,984 (4,000)
Net increase in other borrowings...................................... 74,199 30,000 -
Decrease in subordinated notes........................................ - (775) -
Net proceeds from issuance of trust preferred securities.............. 98,913 111,456 -
Net proceeds from issuance of preferred stock......................... 488 - -
Net proceeds from issuance of common stock............................ 60,502 1,329 23,198
Preferred Stock, Series 9% tender offer............................... (43) (4,486) -
Preferred Stock, Series 1996 redemption............................... (85) - -
Preferred Stock, Series 1993 redemption............................... (339) - -
Dividends paid on the Company's preferred stock....................... (837) (2,855) (2,086)
Increase in advances from borrowers for taxes and insurance........... 1,398 4,483 560
------------- -------------- -------------
Net cash provided by financing activities........................... 1,350,898 888,185 186,416
------------- -------------- -------------
Increase (decrease) in cash and cash equivalents......................... 1,527 55,848 (594)
Cash and cash equivalents at beginning of year........................... 89,984 34,136 34,730
------------- -------------- -------------
Cash and cash equivalents at end of year................................. $ 91,511 $ 89,984 $ 34,136
============= ============== =============
Supplemental disclosure of non-cash investing and financing activities:
Interest paid on deposits and borrowings.............................. $ 163,561 $ 73,385 $ 34,547
Income taxes paid..................................................... $ 3,884 $ 3,390 $ 4,626
Transfers from loans to real estate owned............................. $ 2,226 $ 2,296 $ 1,154
Transfer of mortgage-backed securities from held to maturity to
available for sale.................................................. $ - $ - $ 31,780
Issuance of Class A Common Stock upon conversion of preferred stock $ (460) $ - $ -
Issuance of Class A Common Stock in connection with the Suncoast
acquisition......................................................... $ - $ 27,812 $ -
Issuance of Class A Common Stock in connection with the Consumers
acquisition......................................................... $ 7,653 $ - $ -
Issuance of Class A Common Stock in connection with the Central
acquisition......................................................... $ 22,783 $ - $ -
Securitization of loans receivable.................................... $ 355,469 $ - $ -
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
58
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(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 and West 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 effect of
prepayments on premiums on purchased loans, the valuation of mortgage servicing
rights, and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. Premiums on purchased loans are
amortized based, in part, on management's estimate of future prepayment rates.
If actual prepayments exceed these estimates, premium amortization is increased
through charges to interest income in the period the excess prepayments occur.
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 income 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.
Gains 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 deemed 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 fair value, net of selling costs, of
collateral dependent loans or the estimated net realizable value of other loans.
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 more than 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.
59
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(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, LOAN PREMIUMS 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.
Premiums paid on purchased loans are capitalized and recognized as an
adjustment to interest income over the contractual life of the loans, adjusted
for estimated prepayments based on the Company's historical prepayment
experience. If actual prepayments exceed those estimated by the Company, premium
amortization is increased through charges to interest income in the period the
excess prepayments occur.
(F) OTHER INTEREST EARNING ASSETS
Other interest earning assets includes Federal Home Loan Bank of
Atlanta ("FHLB") 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, 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 or deeds in lieu of 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 carrying value is charged to the allowance for loan
losses when the property is classified as real estate owned. The carrying 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) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, assets to be disposed of and certain identifiable
intangibles, such as mortgage servicing rights, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability,
the Company estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, an impairment is recognized. Measurement of an impairment
loss for long-lived assets, assets to be disposed of and identifiable
intangibles that an entity expects to hold and use is based upon the fair value
of the asset.
(K) GOODWILL
Goodwill is amortized on a straight-line basis over its estimated
beneficial life of 10 to 25 years. Goodwill is evaluated by management for
impairment on an annual basis based upon undiscounted cash flows of the related
net assets acquired.
60
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(L) 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.
(M) EARNINGS PER SHARE
Basic earnings per common share is computed on the weighted average
number of common shares outstanding during the year. The weighted average number
of common shares outstanding for the years ended September 30, 1998, 1997 and
1996 were 15,693,000, 8,211,000, and 4,306,000, respectively. Earnings per
common share, assuming dilution, assume the maximum dilutive effect of the
average number of shares from stock options and the conversion equivalents of
preferred stocks and certain warrants. The weighted average number of diluted
common shares outstanding during the years ended September 30, 1998, 1997 and
1996 were 16,667,000, 9,148,000 and 4,558,000, respectively. Stock dividends
have been included in the calculation of earnings per share for all years
presented.
(N) STOCK OPTIONS
When stock options are granted to employees and directors, a
determination is made of any compensation component based on the excess, if any,
of the fair market value of the underlying stock and the option price of the
grant. The proceeds from the exercise of options are credited to common stock
for the par value of the shares issued, and the excess, adjusted for any tax
benefit, is credited to paid-in capital. (See Note 15.)
(O) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("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
Statement No. 125" (collectively "SFAS No. 125"). SFAS 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 SFAS 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 SFAS No. 125 has not been material to the Company's financial position
or the results of operations.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS No. 128"). SFAS 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. All amounts
presented have been restated to conform to the requirements of SFAS No. 128.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS
No. 129"). SFAS No. 129 continues previous requirements to disclose certain
information about an entity's capital structure. The Company currently complies
with the disclosure requirements of SFAS No. 129.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"), which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from non-owner sources; and
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"), which establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products, services, geographic areas, and
major customers. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows, and any
effect will be limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133") which is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (October 1, 1999 for the Company). SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivative instruments are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative instrument is designated as part of a hedge
transaction and, if it is, the type of hedge transaction as set forth in the
guidance. The Company currently utilizes derivative instruments on a limited
basis to hedge the interest rate risks of certain financial instruments.
Interest Rate Cap contracts have been acquired by the Company to hedge the risk
on an increase in market interest rates for variable rate sources of funds which
are partially funding financial instruments which
61
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
have interest rate terms which are fixed for certain periods of time (see Note
17 "Commitments and Contingencies" for further discussion of the Interest Rate
Cap contracts). The Interest Rate Cap contracts will be treated as cash flow
hedges under SFAS No. 133 and it is anticipated that any change in their fair
value will be substantially offset by an opposite change in the fair value of
the financial instruments designated in the hedge transaction. Under SFAS No.
133, the portion of change in fair value of any derivative instrument designated
as a hedge which is not effective will be recognized in current period earnings.
Management does not expect the adoption of SFAS No. 133 for its current
derivative instruments to have any material effect on the Company's financial
position or results of operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134") which applies
to mortgage banking enterprises and other entities conducting similar
operations. SFAS No. 134 requires that securities retained after a
securitization of loans held for sale be accounted for in accordance with SFAS
No. 115, unless the entity has entered into a commitment to sell the retained
securities before or during the securitization process. Such securities would be
classified as trading. SFAS No. 134 is effective for the first fiscal quarter
beginning after December 15, 1998. The adoption of SFAS No. 134 is not expected
to be material to the Company's financial position or results of operations.
(P) FINANCIAL STATEMENT RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
September 30, 1998 consolidated financial statements.
(2) EARNINGS PER SHARE
Earnings per common share is calculated as follows:
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------
1998 1997 1996
-------- -------- -------
(In thousands, except
per share amounts)
BASIC EARNINGS PER SHARE:
Numerator:
Net income after preferred stock dividends........................................... $ 6,460 $ 4,709 $ 441
======== ======== ========
Denominator:
Weighted average common shares outstanding........................................... 15,693 8,211 4,306
======== ======== ========
Basic earnings per share............................................................... $ 0.41 $ 0.57 $ 0.10
======= ======== ========
DILUTED EARNINGS PER SHARE:
Numerator:
Net income after preferred stock dividends........................................... $ 6,460 $ 4,709 $ 441
Plus:
Reduction of interest expense...................................................... - - 3
Reduction of preferred stock dividends............................................. 111 217 -
-------- -------- --------
Diluted net income available to common shareholders.................................. $ 6,571 $ 4,926 $ 444
======== ======== ========
Denominator:
Weighted average common shares outstanding........................................... 15,693 8,211 4,306
Plus:
Number of common shares from the conversion of options and warrants................ 655 468 252
Number of common shares from the conversion of dilutive preferred stock(1)......... 319 469 -
-------- -------- --------
Diluted weighted average shares outstanding.......................................... 16,667 9,148 4,558
======== ======== ========
Diluted earnings per share............................................................. $ 0.39 $ 0.54 $ 0.10
======== ======== ========
(1) For the years ended September 30, 1998, 1997 and 1996 there were
233,000, 2,040,000 and 1,841,000, respectively, common stock
equivalent shares of convertible preferred stock that were not
included in the computation of diluted earnings per share because of
their antidilutive effect.
During October 1998, the Company repriced stock options on Class A and
Class B Common Stock and Series B Preferred Stock. (See Note 15)
62
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(3) ACQUISITIONS
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 had 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.
As part of the purchase of Suncoast, the Company issued warrants to
Suncoast's warrant holders to purchase 80,000 shares of 8% Noncumulative
Convertible Preferred Stock, Series 1996, and assumed Suncoast's outstanding
stock options. The warrants were exercisable to purchase one share of the 8%
Noncumulative Convertible Preferred Stock, Series 1996 at a per share price of
$18.00, or to purchase 1.68595 shares, subject to adjustment, of Class A Common
Stock at a per share price of $10.68, also subject to adjustment under certain
conditions. A total of 42,655 warrants were converted into 71,259 shares of
Class A Common Stock during June 1998. The 5,545 warrants which remained
unexercised after July 9, 1998 expired pursuant to the terms of the warrant
agreements.
At the date of acquisition, the fair value of the assets and liabilities
acquired from Suncoast were as follows (in thousands):
Cash and cash equivalents................................$ 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 were 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
Basic..............................................................$ .53 $ .10
Diluted............................................................$ .52 $ .10
The proforma combined condensed statement of operations assumes the
acquisition occurred as of October 1, 1995.
On January 23, 1998, the Company acquired Consumers Bancorp, Inc.
("Consumers") for approximately $12 million in a combination of cash and stock
and merged its wholly-owned subsidiary, Consumers Savings Bank, which had assets
of $104.4 million and deposits of $88.3 million as of January 23, 1998, into the
Bank. The acquisition was accounted for as a purchase and resulted in goodwill
of approximately $5.6 million. This acquisition did not have a material impact
on the financial condition or results of operations of the Company.
On June 19, 1998, the Company acquired Central Bank ("Central"), for
1,386,000 shares of the Company's Class A Common Stock, and merged Central,
which had assets of $93.9 million and deposits of $65.9 million as of June 19,
1998 into the Bank. The acquisition was accounted for as a purchase and resulted
in goodwill of approximately $12.8 million. This acquisition did not have a
material impact on the financial condition or results of operations of the
Company.
63
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(4) 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 $40.0 million and $49.3
million at September 30, 1998 and 1997, respectively. Included in these amounts
at September 30, 1998 and 1997 were $0.2 million and $1.3 million, respectively,
of tax certificates for which the Company had made application for tax deeds.
The Company maintains loss reserves for tax certificates which were $469,000 and
$697,000 at September 30, 1998 and 1997, 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.
(5) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Interest income from securities purchased under agreements to resell
aggregated approximately $2.5 million for the year ended September 30, 1998.
The following sets forth information concerning the Company's agreements to
resell for the periods indicated:
AS OF AND FOR
THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1998 1997 1996
------------- ------------- ------------
(dollars in thousands)
Maximum amount of outstanding agreements at any month end
during the period.....................................................$ 95,032 $ - $ -
Average amount outstanding during the period............................$ 44,009 $ - $ -
Weighted average interest rate for the period........................... 5.56% -% -%
Maturity................................................................ -- - -
(6) INVESTMENTS AND MORTGAGE-BACKED SECURITIES
INVESTMENTS
Presented below is an analysis of the carrying values and approximate
market values of investments held to maturity.
SEPTEMBER 30, 1998
----------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------ ----------- ---------- -----------
(Dollars in thousands)
U.S. government agency securities............................ $ 14,481 $ 157 $ - $ 14,638
State of Israel Bonds........................................ 61 - - 61
----------- ----------- ----------- -----------
Total...................................................... $ 14,542 $ 157 $ - $ 14,699
=========== =========== =========== ===========
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
=========== =========== =========== ===========
64
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(6) INVESTMENTS AND MORTGAGE-BACKED SECURITIES--(CONTINUED)
All investments held to maturity at September 30, 1998 and 1997 had
maturities between one and five years.
Presented below is analysis of the investments designated as available for
sale.
SEPTEMBER 30, 1998
---------------------------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
------------ ----------- ----------- -----------
(Dollars in thousands)
U.S. Treasury notes.......................................... $ 2,821 $ 18 $ - $ 2,839
U.S. government agency securities............................ 5,316 45 - 5,361
Other........................................................ 15,681 183 (403) 15,461
------------ ----------- ----------- -----------
Total...................................................... $ 23,818 $ 246 $ (403) $ 23,661
============ =========== =========== ===========
SEPTEMBER 30, 1997
----------------------------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED CARRYING
COST 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
============ =========== =========== ===========
MORTGAGE-BACKED SECURITIES
The market value and historical cost of mortgage-backed securities held to
maturity are summarized as follows:
SEPTEMBER 30, 1998
---------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
----------- ----------- ----------- -----------
(Dollars in thousands)
GNMA mortgage-backed securities.............................. $ 59 $ 4 $ - $ 63
FHLMC mortgage-backed securities............................. 1,731 - (13) 1,718
Collateralized mortgage obligations.......................... 6,165 193 - 6,358
Mortgage pass-through certificates........................... 138,191 - (2,825) 135,366
------------ ----------- ----------- -----------
Total...................................................... $ 146,146 $ 197 $ (2,838) $ 143,505
=========== =========== =========== ===========
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
Collateralized mortgage obligations.......................... 7,844 - (22) 7,822
----------- ----------- ----------- -----------
Total...................................................... $ 11,352 $ 6 $ (66) $ 11,292
=========== =========== =========== ===========
65
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(6) INVESTMENTS AND MORTGAGE-BACKED SECURITIES--(CONTINUED)
The carrying value and historical cost of mortgage-backed securities
available for sale are summarized as follows:
SEPTEMBER 30, 1998
----------------------------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
(Dollars in thousands)
GNMA mortgage-backed securities.............................. $ 56,168 $ 1,288 $ (91) $ 57,365
FNMA mortgage-backed securities.............................. 26,618 213 (262) 26,569
FHLMC mortgage-backed securities............................. 78,236 1,183 (209) 79,210
Other........................................................ 35,404 1,062 - 36,466
----------- ----------- ----------- -----------
Total...................................................... $ 196,426 $ 3,746 $ (562) $ 199,610
=========== =========== =========== ===========
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
=========== =========== =========== ===========
The mortgage-backed securities have contractual maturities which range from
the years 1998 to 2028, however, expected maturities will differ from
contractual maturities as borrowers have the right to prepay obligations.
Gross proceeds on sales of mortgage-backed securities and collateralized
mortgage obligations were $15.6 million for the year ended September 30, 1998
and $7.7 million for the year ended September 30, 1997. There were no sales of
mortgage-backed securities and collateralized mortgage obligations in 1996.
Gross realized gains were $423,000 and $250,000 on sales of mortgage-backed
securities and collateralized mortgage obligations during the years ended
September 30, 1998 and 1997, respectively. There were no realized losses during
the years ended September 30, 1998 and 1997.
At September 30, 1998 , GNMA and FNMA mortgage-backed securities with
carrying values of approximately $25.5 million were pledged as collateral for
public funds on deposit.
At September 30, 1998, investment and mortgage-backed securities with an
aggregate carrying value of approximately $5.2 million were pledged as
collateral for retail repurchase agreements and a portion of a real estate
mortgage investment conduit pass-through security, securitized by the Company
from its whole loan portfolio, with a carrying value of approximately $121.1
million was pledged as collateral for a $107.1 million repurchase agreement.
66
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(7) LOANS RECEIVABLE
Loans receivable consist of the following:
AS OF SEPTEMBER 30,
------------------------------
1998 1997
------------- -------------
(Dollars in thousands)
Mortgage loans-conventional............................................................ $ 317,807 $ 387,096
Mortgage loans-conventional serviced by others......................................... 2,271,474 1,110,686
Mortgage loans-other................................................................... 203,375 140,393
Commercial loans:
Secured.............................................................................. 17,547 9,475
Unsecured............................................................................ 5,223 1,168
Line of credit loans................................................................... 3,331 1,456
Share loans............................................................................ 789 835
Installment loans...................................................................... 26,281 836
------------- -------------
Total................................................................................ 2,845,827 1,651,945
Less allowance for loan losses......................................................... (6,128) (3,693)
Deferred loan fees, discounts and premiums............................................. 29,905 13,129
------------- -------------
Loans receivable, net................................................................ $ 2,869,604 $ 1,661,381
============= =============
Of the total gross loans receivable of $2.8 billion at September 30,
1998, approximately $0.5 billion, or 17.5%, represents loans secured by
properties in California and $0.4 billion, or 14.1%, represents loans secured by
properties in Florida. No other state represents more than 10% of the Company's
loan portfolio.
At September 30, 1998, the Bank had pledged approximately $1.6 billion of
mortgage loans as collateral for advances from the Federal Home Loan Bank of
Atlanta (see Note 11).
Changes in the allowance for loan losses are as follows:
YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1998 1997 1996
------------ ------------- ------------
(Dollars in thousands)
Balance at beginning of the period......................... $ 3,693 $ 2,158 $ 1,469
Provision (credit)....................................... 1,700 1,295 (120)
Allowance from Bank of Florida........................... - - 183
Allowance from Suncoast.................................. - 775 -
Allowance from Consumers and Central..................... 1,262 - -
Loans charged-off........................................ (599) (604) (493)
Recoveries............................................... 72 69 1,119
------------- ------------- -------------
Balance at end of the period............................. $ 6,128 $ 3,693 $ 2,158
============= ============= =============
As of September 30, 1998 and 1997, the Company had impaired or non-accrual
loans of $16.0 million and $10.9 million, respectively, and had recorded
specific reserves on these loans of $521,000 and $704,000, respectively. For the
years ended September 30, 1998, 1997 and 1996 the average amounts of impaired
loans were $12.1 million, $8.0 million and $4.8 million, respectively. No income
is recognized on loans during the period for which the loan is deemed impaired.
67
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
AS OF SEPTEMBER 30,
------------------------
1998 1997
----------- -----------
(Dollars in thousands)
Office buildings......................................... $ 2,599 $ 2,600
Leasehold improvements................................... 6,568 2,700
Furniture, fixtures and equipment........................ 7,331 3,504
Computer equipment and software.......................... 5,388 3,548
----------- -----------
Total.................................................. 21,886 12,352
Less: accumulated depreciation........................... (7,688) (4,981)
----------- -----------
Office properties and equipment, net..................... $ 14,198 $ 7,371
=========== ===========
Depreciation expense was $1.6 million, $1.2 million and $674,000, for the
years ended September 30, 1998, 1997, and 1996, respectively.
The Company has entered into non-cancelable leases with approximate minimum
future rentals as follows:
YEARS ENDING SEPTEMBER 30, AMOUNT
----------------------
(Dollars in thousands)
1999.................................................................. $ 3,365
2000.................................................................. 2,365
2001.................................................................. 1,802
2002.................................................................. 1,282
2003.................................................................. 739
Thereafter............................................................ 1,023
---------------------
Total............................................................... $ 10,576
====================
Rent expense for the years ended September 30, 1998, 1997, and 1996 was
$2.2 million, $1.6 million, and $905,000, respectively.
68
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(9) DEPOSITS
The weighted average nominal interest rate payable on all deposit
accounts at September 30, 1998 and 1997 was 5.18% and 5.20%, respectively.
Types of deposits and related range of interest rates were as follows:
SEPTEMBER 30,
---------------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
(Dollars in thousands)
Non-interest-bearing deposits................... -% - -% $ 46,748 -% - -% $ 21,436
Super NOW deposits.............................. 0.00% - 5.16% 71,431 0.00% - 3.93% 57,471
Money market deposits........................... 1.64% - 4.58% 115,104 0.00% - 3.10% 20,325
Passbook and statement savings deposits......... 2.00% - 5.13% 258,158 2.00% - 5.16% 160,557
Certificates of deposit - retail................ 4.51% - 6.45% 1,472,224 3.92% - 6.06% 914,103
Certificates of deposit - public funds.......... 4.80% - 5.63% 86,159 5.74% - 5.81% 22,000
Certificates of deposit - brokered funds........ 5.25% - 5.40% 75,000 -% - -% -
------------ -------------
Total......................................... $ 2,124,824 $ 1,195,892
============= =============
Deposit accounts with balances of $100,000 or more totaled
approximately $469.1 million and $174.0 million at September 30, 1998 and 1997,
respectively. Included in balances of $100,000 or more are $161.2 million and
$22.0 million in public and brokered funds at September 30, 1998 and 1997,
respectively.
Interest expense on deposits for the years ended September 30, 1998,
1997 and 1996 was as follows:
1998 1997 1996
------------- ------------- -------------
(Dollars in thousands)
Super NOW and money market deposits...................... $ 5,083 $ 2,236 $ 775
Passbook and statement savings deposits.................. 8,983 6,342 2,627
Certificates of deposit.................................. 79,365 41,558 17,389
------------- ------------- -------------
Total.................................................. $ 93,431 $ 50,136 $ 20,791
============= ============= =============
Early withdrawal penalties on deposits are recognized as a reduction of interest
on deposits. For the years ended September 30, 1998, 1997 and 1996, early
withdrawal penalties totaled $217,000, $101,000, and $42,000, respectively.
The amounts and scheduled maturities of certificate accounts at
September 30, 1998 are as follows:
YEARS ENDING SEPTEMBER 30, AMOUNT
- ------------------------- ---------------------
(Dollars in thousands)
1999..................................................................... $ 1,552,266
2000..................................................................... 31,228
2001..................................................................... 7,524
2002..................................................................... 32,741
2003..................................................................... 9,581
Thereafter............................................................... 43
----------------------
Total.................................................................. $ 1,633,383
======================
69
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(10) SECURITIES SOLD UNDER AN AGREEMENT TO REPURCHASE
Interest expense on securities sold under an agreement to repurchase
aggregated $5.5 million and $506,000 for the years ended September 30, 1998 and
1997, respectively.
The following sets forth information concerning repurchase agreements for the
periods indicated:
AS OF AND FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
(dollars in thousands)
Maximum amount of outstanding agreements at any month
end during the period...................................................$ 192,610 $ 30,000 $ -
Average amount outstanding during the period............................$ 97,292 $ 8,828 $ -
Weighted average interest rate for the period........................... 5.77% 5.73% -
Of the $121.1 million of repurchase agreements outstanding at September 30,
1998, $114.3 million matures in October 1998, $0.4 million matures in November
1998, $5.4 million matures in December 1998, $0.3 million matures in March 1999,
$0.2 million matures in May 1999 and $0.5 million matures in June 1999.
At September 30, 1998 and 1997, the Company had $126.3 million and $34.0
million, respectively, of investment and mortgage-backed securities pledged
under repurchase agreements. At September 30, 1996, the Company had no pledged
securities under repurchase agreements.
(11) 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 1998 1997
- ------------------------------------------ ----------------- ------------- -------------
(Dollars in thousands)
1998............................................... 5.63% - 6.55% $ - $ 480,000
1999............................................... 5.28% - 5.80% 255,000 25,000
2000(1)............................................ 5.13% - 5.85% 125,000 --
2001(2)............................................ 5.54% - 5.92% 140,000 15,000
2002(3)............................................ 5.43% - 6.24% 150,000 150,000
2003(4)............................................ 4.70% - 5.94% 125,000 --
2005............................................... 6.65% 1,466 1,484
2007(5)............................................ 4.99% - 5.06% 75,000 --
2008(6)............................................ 4.75% - 5.50% 150,000 --
------------- -------------
Total.............................................. $ 1,021,466 $ 671,484
============= =============
______________
(1) Advances for $25 million are callable by the FHLB in 1998.
(2) Advances for $15 million are callable by the FHLB in 1998 and $25 million
in 1999.
(3) Advances for $25 million are callable by the FHLB in 1998 and $125 million
in 1999.
(4) Advances for $25 million are callable by the FHLB in each of 1998, 1999 and
2000.
(5) Advances for $75 million are callable by the FHLB in 1998.
(6) Advances for $25 million are callable by the FHLB in each of 1998, 1999 and
2003 and $75 million in 2000.
The terms of a security agreement with the FHLB of Atlanta include a
specific assignment of collateral 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 85% of the unpaid
principal balance. The FHLB of Atlanta stock, which is recorded at cost, is also
pledged as collateral for these advances.
70
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(12) COMPANY OBLIGATED MANDATORILY REDEEMABLE 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 (the "Series A Preferred Securities") 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 (the "Series A Subordinated Debentures") issued by
BankUnited Financial Corporation with terms similar to the Series A Preferred
Securities, which are the sole assets of BankUnited Capital.
On March 24, 1997, BankUnited Capital issued an additional $20 million
of the Series A Preferred Securities and $800,000 of common securities, which
common securities are also wholly owned by the Company. BankUnited Capital
simultaneously purchased an additional $20.8 million of the Series A
Subordinated Debentures 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 Series A
Preferred Securities.
The Series A Preferred Securities are subject to mandatory redemption,
in whole or in part, upon the maturity or earlier redemption of the Series A
Subordinated Debentures. The Series A Subordinated Debentures are redeemable on
or after December 31, 2006 at a redemption price of 105.125% during the 12-month
period beginning December 31, 2006 and declining 51 basis points annually
thereafter to 100% on December 31, 2016.
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 (the "9.60% 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 (the
"9.60% Subordinated Debentures") issued by BankUnited Financial Corporation with
terms similar to the 9.6% 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 rate of 9.60%. The Company and BankUnited Capital
II have the right to defer payment of interest for up to five years. BankUnited
Financial Corporation has guaranteed all the obligations of the 9.60% Preferred
Securities. The 9.60% Subordinated Debentures rank PARI PASU with the Series A
Subordinated Debentures.
The 9.60% Preferred Securities are subject to mandatory redemption, in
whole or in part, upon the maturity or earlier redemption of the 9.60%
Subordinated Debentures. The 9.60% Subordinated Debentures are redeemable on or
after June 30, 2002 at a redemption price equal to the accrued and unpaid
interest on the 9.60% Subordinated Debentures to be redeemed to the date fixed
for redemption, plus 100% of the principal amount.
On March 11, 1998, BankUnited Capital III, a newly formed trust
subsidiary created under the laws of Delaware, issued $102.5 million of 9%
Cumulative Trust Preferred Securities (the "9% Preferred Securities") and $4.1
million of common securities. The common securities are wholly owned by the
Company. In connection with this transaction, BankUnited Capital III
simultaneously purchased $106.6 million 9% Junior Subordinated Deferrable
Interest Debentures (the "9% Subordinated Debentures") issued by BankUnited
Financial Corporation with terms similar to the 9% Preferred Securities, which
are the sole assets of BankUnited Capital III.
These securities mature March 31, 2028 and pay a preferential
cumulative cash distribution at an annual rate of 9%. The Company and BankUnited
Capital III have the right to defer payment of interest for up to five years.
BankUnited Financial Corporation has guaranteed all the obligations of the 9%
Preferred Securities. The 9% Subordinated Debentures rank PARI PASU with the
Series A Subordinated Debentures.
The 9% Preferred Securities are subject to mandatory redemption, in
whole or in part, upon the maturity or earlier redemption of the 9% Subordinated
Debentures. The 9% Subordinated Debentures are redeemable on or after March 31,
2003 at a redemption price equal to the accrued and unpaid interest on the 9%
Subordinated Debentures to be redeemed to the date fixed for redemption, plus
100% of the principal amount.
Considered together the back-up undertakings constitute a full and
unconditional guarantee by the Company of the obligations of the Trust Preferred
Securities.
71
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(13) REGULATORY CAPITAL
The Bank's required, actual and excess regulatory capital levels as of
September 30, 1998 and 1997 are as follows:
REGULATORY CAPITAL
------------------------------------------------------------------------------------------
REQUIRED ACTUAL EXCESS
----------------------------- ----------------------------- ----------------------------
1998 1997 1998 1997 1998 1997
-------------- ------------- ------------- ------------- ------------- -------------
(dollars in thousands)
Core Capital................ $ 108,958 $ 63,084 $ 316,586 $ 169,708 $ 207,628 $ 106,624
3.0% 3.0% 8.7% 8.1% 5.7% 5.1%
Risk-based capital.......... $ 146,972 $ 123,365 $ 322,238 $ 173,725 $ 175,266 $ 50,360
8.0% 8.0% 17.5% 11.3% 9.5% 3.3%
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, 1998,
1997 and 1996 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 OTS appeals process. If the IRR component had
been required as of September 30, 1998, the Bank would not have been required to
deduct an IRR component from its total capital when determining its compliance
with its risk-based capital requirements.
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.
72
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(14) 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, 1998, 10,000,000 shares of
Preferred Stock were authorized, of which 7,012,628 shares were 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- 500,000 shares as of September 30, 1998 and 200,000
shares as of September 30, 1997.
Issued and outstanding shares-229,580 as of September 30, 1998 and 183,818
shares as of September 30, 1997.
Dividends-noncumulative cash dividends payable quarterly in cash or shares
of Class A Common Stock at the option of the holder, at the fixed
annual rate of $0.55 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 Preferred Stock in 1995, for which the redemption price is
$11.0625 until September 30, 2001, the redemption price is $7.375 per
share. Effective October 1, 1997, the Company agreed, in exchange for
the reduction in the dividend rate described above, 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.
Voting rights-two-and-one-half votes per share.
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.
Issuances-During the fiscal year ended September 30, 1998, the Company
awarded 20,762 shares to directors and officers of the Company and, in
April 1998, issued 25,000 shares in a direct offering to certain
directors and principal shareholders.
NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES C:
In February 1997 all outstanding shares of Noncumulative Convertible
Preferred Stock, Series C were converted into shares of Class A Common
Stock.
NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES C-II:
In February 1997 all outstanding shares of Noncumulative Convertible
Preferred Stock, Series C-II were converted into shares of Class A
Common Stock.
8% NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES 1993:
In February 1998 the Company redeemed all outstanding shares of
Noncumulative Convertible Preferred Stock, Series 1993 at a redemption
price of $10.00 per share.
73
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(14) STOCKHOLDERS' EQUITY--(CONTINUED)
9% NONCUMULATIVE PERPETUAL PREFERRED STOCK:
Authorized shares- 1,554,942 shares as of September 30, 1998 and 1,851,417
shares as of September 30, 1997.
Issued and outstanding- 697,117 as of September 30, 1998 and 701,417 as of
September 30, 1997.
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- at the option of the Company at a redemption price of $10.00
per share.
Voting rights- nonvoting, except under certain circumstances.
8% NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES 1996:
In October 1997 the Company redeemed all outstanding shares of its
Noncumulative Convertible Preferred Stock, Series 1996 at a redemption
price of $15.00 per share.
CLASS A COMMON STOCK- Issuable in series with rights and preferences to be
designated by the Board of Directors. As of September 30, 1998 and 1997,
30,000,000 shares of Class A Common Stock were authorized, of which
10,000,000 shares were not designated to a series.
SERIES I CLASS A COMMON STOCK:
Authorized shares- 20,000,000 at September 30, 1998 and 1997.
Issued and outstanding- 17,816,213 shares as of September 30, 1998 and
9,257,098 shares as of September 30, 1997.
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.
Issuances-During the fiscal year ended September 30, 1998, the Company
issued 195,584 shares with the exercise of options and warrants, 39,419
shares in awards and issuances to directors, officers and employees of
the Company, 1,948,508 shares with the acquisitions of Consumers and
Central and 1,614,104 shares from the conversion of preferred stock.
Additionally, the Company issued 3,680,000 shares in a public stock
offering in October 1997 and, in April 1998, issued 977,500 shares in a
publicly underwritten offering and 104,000 shares to certain directors
and principal shareholders in a direct offering.
74
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(14) STOCKHOLDERS' EQUITY--(CONTINUED)
CLASS B COMMON STOCK:
Authorized shares- 3,000,000.
Issued and outstanding- 331,743 shares as of September 30, 1998 and 275,685
shares as of September 30, 1997.
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.
Issuances-During the fiscal year ended September 1998, the Company issued
30,000 shares in a direct offering to certain directors and principal
shareholders of the Company, awarded 3,541 shares to directors and
officers and issued 22,517 shares in connection with the exercise of
stock options.
(15) 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 of Class A and Class B Common Stock to provide
long-term incentives and rewards to officers, directors and employees of the
Company. As of September 30, 1998, 70,221 shares of Class A Common Stock and
54,779 shares of Class B Common Stock had been issued under the 1992 Stock Bonus
Plan. As of September 30, 1998, there were 6,000 shares available for grant
under the 1992 Stock Bonus Plan, due to stock awards which had been forfeited by
officers and employees who terminated service with the Company prior to full
vesting of such awards.
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 have been
granted. As of September 30, 1998, no shares were available for the grant of
options under this plan, and 101,528 options had been exercised.
The Company also maintains the 1994 Incentive Stock Option Plan under which
options for up to 250,000 shares of Class A and Class B Common Stock have been
granted. As of September 30, 1998, 28,906 shares were available for the grant of
options under this plan (due to options which had been forfeited by officers and
employees who terminated service with the Company prior to full vesting of these
options), and options for 23,327 shares had been exercised.
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, 1998, the Agreements are exercisable for a total of
155,367 shares at the exercise price of $4.64 per share.
The Company maintains the 1996 Incentive Compensation 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 (as amended in January 1998) 1,300,000 shares of
Class A and Class B Common Stock and up to 375,000 shares of Series B Preferred.
As of September 30, 1998, options to purchase 449,540 shares of Class A Common
Stock, 287,500 shares of Class B Common Stock and 315,000 shares of Series B
Preferred Stock had been granted and options for 20,571 shares of Class A Common
Stock had been exercised. In addition, 32,733 shares of Class A Common Stock and
20,762 shares of Series B Preferred Stock had been issued pursuant to other
awards under this plan. As of September 30, 1998, 594,745 shares of Class A
Common Stock and Class B Common Stock and 39,238 shares of Series B Preferred
Stock were available for grant under this plan.
Options granted under the Company's stock option plans expire ten years
after the date of grant unless extended by the Board of Directors, and are
exercisable at the fair market value of the stock on the date of grant. Options
granted under the 1994 Incentive Stock Option Plan and the 1996 Incentive
Compensation and Stock Award Plan may become exercisable over a period of three
or five years, subject to forfeiture as to any portion which is not exercisable
upon termination of employment.
75
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(15) STOCK BONUS PLAN, OPTION AGREEMENTS AND OTHER BENEFIT PLANS--(CONTINUED)
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, 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
Options granted..................................................... 665,705 9.63 - 21.07 10,726,793
Options exercised................................................... (120,991) 3.00 - 13.25 (646,547)
Options expired..................................................... (106,924) 5.73 - 13.24 (1,069,860)
Reduction of option price(1)........................................ - 9.30 - 13.91 (2,999,259)
------------ ------------------- -------------
Options outstanding, September 30, 1998(2).......................... 2,025,315 $ 3.00 - $13.91 $ 16,770,736
============ =================== =============
(1) On September 3, 1998, the Company repriced options to purchase Class A
Common Stock, Class B Common Stock and Series B Preferred Stock which
had exercise prices which exceeded the fair market value of the
underlying stock on that date. As a result of this repricing the
exercise price of options to purchase 302,850 shares of Class A Common
Stock and 77,500 shares of Class B Common Stock was reduced to $9.298
per share, and the exercise price of options to purchase 315,000
shares of Series B Preferred Stock was reduced to $13.909 per share.
(2) On October 14, 1998, the Company repriced options to purchase Class A
Common Stock, Class B Common Stock and Series B Preferred Stock which
had exercise prices which exceeded the fair market value of the
underlying stock on that date. As a result of this repricing the
exercise price of options to purchase 456,368 shares of Class A Common
Stock and 595,800 shares of Class B Common Stock was reduced to $7.25
per share, and the exercise price of options to purchase 315,000
shares of Series B Preferred Stock was reduced to $10.8452 per share.
The aggregate option price is reduced to approximately $14.4 million
as a result of this reduction.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation" and as permitted by SFAS No. 123, the Company continues to follow
the measurement provisions of Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees, " and, accordingly, does not
recognize compensation expense for its stock-based incentive plans. Had
compensation cost for the Company's stock based incentive compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the methodology prescribed by SFAS No. 123, the
Company's net income and earnings per share for fiscal 1998, 1997 and 1996 would
have been reduced to the pro forma amounts indicated below:
1998 1997 1996
------------ ------------- -------------
(Dollars in thousands, except per share amounts)
As Reported.............................................................$ 6,460 $ 4,709 $ 441
Pro forma...............................................................$ 4,011 $ 3,328 $ 204
Basic earnings per common share:
As reported.............................................................$ 0.41 $ 0.57 $ 0.10
Pro forma...............................................................$ 0.26 $ 0.41 $ 0.03
Diluted earnings per common share:......................................
As reported.............................................................$ 0.39 $ 0.54 $ 0.10
Pro forma...............................................................$ 0.26 $ 0.38 $ 0.03
The pro forma results of operations reported above are not likely to be
representative of the effects on reported income of future years due to vesting
arrangements and additional option grants.
76
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(15) STOCK BONUS PLAN, OPTION AGREEMENTS AND OTHER BENEFIT PLANS--(CONTINUED)
The fair value of each option has been 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 1998, 1997 and 1996:
1998 1997 1996
------------- ------------- -------------
Dividend yields......................................................... - - -
Expected volatility..................................................... 33.7% 30.1% 30.1%
Risk-free interest rates................................................ 5.55% 6.30% 6.52%
Expected life (in years)................................................ 7.00 9.52 7.88
Based upon the above assumptions, the weighted average fair value of
options granted during 1998, 1997 and 1996 was $5,565,000, $2,484,000 and
$334,000, respectively.
The Company has a 401(k) savings plan pursuant to which eligible employees
are permitted to contribute up to 15% of their annual salary to the savings
plan. Currently, the Company intends to make matching contributions at a rate of
33% of such contributions, up to a maximum of 6% of an employee's salary. The
amount of such matching by the Company for the years ended September 30, 1998,
1997, and 1996 totaled approximately $71,900, $34,600, and $7,000 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%.
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, after the third year, up to 100%. The Board of Directors
authorized a contribution of $100,000, $170,000 and $100,000 in 1998, 1997 and
1996, 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, 1998, all of these options had been exercised.
(16) INCOME TAXES
The Company's effective tax rate differs from the statutory federal income
tax rate as follows:
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
---------- --- ---------- ---- ----------- ----
(Dollars in thousands)
Tax at federal income tax rate.................... $ 4,229 34.2% $ 4,295 34.0% $ 1,443 34.0%
Increase resulting from:
State tax......................................... 480 3.9 314 2.5 154 3.6
Other, net........................................ 300 2.4 424 3.3 60 1.5
----------- --- ---------- ---- ---------- ---
Total........................................... $ 5,009 40.5% $ 5,033 39.8% $ 1,657 39.1%
=========== ===== ========== ===== =========== =====
The components of the provision for income taxes for the year ended September
30, 1998, 1997 and 1996 are as follows:
FOR THE YEARS ENDED
SEPTEMBER 30,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
(Dollars in Thousands)
Current-federal.................... $ 3,874 $ 1,150 $ 1,324
Current-state...................... 663 125 227
Deferred-federal................... 407 3,391 90
Deferred-state..................... 65 367 16
------------- ------------- -------------
Total............................ $ 5,009 $ 5,033 $ 1,657
============= ============= =============
77
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(16) INCOME TAXES--(CONTINUED)
The tax effects of significant temporary differences included in the deferred
tax asset as of September 30, 1998 and 1997 were:
SEPTEMBER 30,
---------------------
1998 1997
-------- --------
(Dollars in thousands)
Deferred tax asset:
Non-accrual interest................................ $ 325 $ 200
Loan loss and other reserves........................ 1,711 875
Fixed assets........................................ 132 77
Deferrals and amortization.......................... - 250
Purchase accounting................................. 1,088 1,605
Other............................................... 771 765
-------- ---------
Gross deferred tax asset.......................... 4,027 3,772
-------- ---------
Deferred tax liability:
FHLB Atlanta stock dividends........................ 106 159
Deferrals and amortizations......................... 1,219 912
Unrealized gains on securities available for sale... 1,150 529
Other............................................... 314 91
-------- ---------
Gross deferred tax liability...................... 2,789 1,691
-------- ---------
Net deferred tax asset............................ $ 1,238 $ 2,081
======== =========
At September 30, 1998, the Company had $565,000 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.
The components of deferred income tax provision (benefit) relate to the
following:
YEARS ENDED SEPTEMBER 30,
---------------------------------
1998 1997 1996
--------- --------- --------
(Dollars in thousands)
Differences in book/tax depreciation.............................. $ 15 $ - $ (10)
Delinquent interest............................................... (71) (18) (7)
FHLB Stock dividends.............................................. (19) - -
Loan fees......................................................... - 15 -
Loan loss and other reserves...................................... (494) (294) 156
Deferrals and amortization........................................ (76) (145) (33)
SAIF special assessment........................................... - 758 -
Purchase accounting............................................... 540 2,635 -
Other............................................................. 577 807 -
--------- -------- --------
Total deferred taxes............................................ $ 472 $ 3,758 $ 106
========= ======== ========
78
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(16) INCOME TAXES--(CONTINUED)
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.
In connection with the acquisition of Consumers and Central, 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. With respect to the Consumers and Central acquisitions,
approximately $19,000 and $7,000, respectively, of net deferred tax assets have
been recognized as net deferred tax benefit during the year ended September 30,
1998 and $287,000 and $16,000, respectively, represent the tax effect at
September 30, 1998 of amounts not deductible for tax purposes in future periods.
The Company also acquired net deferred tax liabilities of approximately
$189,000 in connection with its acquisition of Consumers and net deferred tax
assets of approximately $332,000 in connection with its acquisition of Central.
(17) 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, purchase whole loans and securities, standby letters of credit
and derivative financial instruments. 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 is represented by the contractual amount
and collateral value, if any, of those 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 other termination clauses
and may require payment of a fee. Total commitments to extend credit at
September 30, 1998 were as follows:
SEPTEMBER 30, 1998
-------------------------------------------------
FIXED VARIABLE
RATE RATE TOTAL
-------------- ------------ ---------------
(in thousands)
Commitments to fund loans.................................... $ 54,512 $ 13,394 $ 67,906
Loans in process............................................. 56,211 14,010 70,221
Domestic letters of credit................................... 3,994 - 3,994
International letters of credit.............................. 340 - 340
Commitments to purchase loans................................ 100,000 152,659 252,659
-------------- ------------- --------------
Total...................................................... $ 215,057 $ 180,063 $ 395,120
============== ============= ==============
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.
79
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(17) COMMITMENTS AND CONTINGENCIES--(CONTINUED)
During April 1998, the Bank entered into two interest rate cap contracts
with a major Wall Street firm, in notional amounts of $90.0 million and $60.0
million, terminating on October 23, 1999 and April 23, 2000, respectively. The
contracts require the counter-party to pay the Bank quarterly interest payments
based on the notional amounts and the difference between the "London Inter Bank
Offering Rate", ( the "LIBOR rate") and 5.90% when the LIBOR rate exceeds 5.90%,
in return for a one-time payment by the Bank.
During May 1998, the Bank entered into a third interest rate cap contract
with another major Wall Street firm in a notional amount of $75.0 million
terminating on May 30, 2000. The contract requires the counter-party to pay the
Bank quarterly interest payments based on the notional amount and the difference
between the LIBOR rate and 6.10% when the LIBOR rate exceeds 6.10%, in return
for a one-time payment by the Bank.
The Bank entered into these contracts for the purpose of hedging a portion of
the Company's interest rate risk for rising interest rates. As of September 30,
1998, the 3-month LIBOR rate was 5.42%.
The following table provides additional information regarding the interest
rate caps:
AS OF SEPTEMBER 30,
1998
-----------------------
(Dollars in thousands)
Aggregate notional amount.................................................... $ 225,000
Amortized costs.............................................................. $ 67
Aggregate market value....................................................... $ (55)
The interest rate caps are accounted for as a non-trading hedge for rising
interest rates against certain short-term borrowings.
During November 1998, the Bank completed a program to issue up to $500
million aggregate principal amount of its Senior Notes backed by an irrevocable
standby letter of credit of the FHLB of Atlanta. These notes may have either a
fixed or floating rate of interest determined at the time of issuance and will
mature no sooner than 9 months and no more than 10 years from the date of issue.
The Bank intends to use the net proceeds from the sale of the notes for general
corporate purposes that will ultimately promote home financing or other housing
activity and encourage and assist the Bank's asset/liability management. The
notes have been rated "Aaa" by Moody's Investors Service, Inc. and "AAA" by
Standard & Poor's Ratings Services.
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.
(18) 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, 1998, 1997 and 1996, total fees (a
portion of which were capitalized) paid to this law firm totaled approximately
$2.2 million, $2.2 million, and $986,000, respectively, and amounts paid to this
insurance company totaled approximately $445,000, $373,000, and $147,000,
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 $138,000.
80
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(19) 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,
--------------------------------
1998 1997
-------------- -------------
(in thousands)
Assets:
Cash......................................................................... $ 1,128 $ 623
FHLB overnight deposits...................................................... 10,608 2,822
Tax certificates............................................................. 1,694 40
Investments, net (market value of approximately $60 and $10 at
September 30, 1998 and 1997, respectively)................................. 60 10
Investments available for sale............................................... 15,073 --
Mortgage-backed securities, available for sale............................... 31,642 18,644
Accrued interest receivable.................................................. 885 173
Investment in the Bank....................................................... 350,904 183,807
Investment in subsidiaries................................................... 8,644 4,640
Other assets................................................................. 9,445 9,622
------------- -------------
Total...................................................................... $ 430,083 $ 220,381
============= =============
Liabilities..................................................................... $ 3,551 $ 96
------------- -------------
Junior subordinated deferrable interest debentures.............................. 227,240 120,640
------------- -------------
Stockholders' equity:
Preferred stock.............................................................. 9 22
Common stock................................................................. 181 95
Paid-in capital.............................................................. 178,777 86,679
Retained earnings............................................................ 18,448 11,988
Net unrealized gains on securities available for sale,
net of taxes............................................................... 1,877 861
------------- -------------
Total stockholders' equity................................................. 199,292 99,645
------------- -------------
Total liabilities and stockholders' equity................................. $ 430,083 $ 220,381
============= =============
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1998 1997 1996
------------- ------------- -------------
(in thousands)
Interest income....................................................... $ 4,808 $ 2,626 $ 803
Interest expense...................................................... 17,621 6,726 17
Equity income of the subsidiaries..................................... 16,227 10,927 2,406
Operating expenses.................................................... 1,495 1,166 491
------------- ------------- -------------
Income before income taxes.......................................... 1,919 5,661 2,701
Income tax expense (benefit).......................................... (5,438) (1,938) 115
------------- ------------- -------------
Net income before preferred stock dividends......................... 7,357 7,599 2,586
Preferred stock dividends of the Company.............................. 897 2,890 2,145
------------- ------------- -------------
Net income after preferred stock dividends.......................... $ 6,460 $ 4,709 $ 441
============= ============= =============
81
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(19) BANKUNITED FINANCIAL CORPORATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------
1998 1997 1996
------------ ------------- -------------
(in thousands)
Cash flow from operating activities:
Net income.......................................................... $ 7,357 $ 7,599 $ 2,586
Less: Undistributed income of the subsidiaries...................... (16,227) (11,551) (406)
Other............................................................... (2,508) (2,792) 242
------------- ------------- -------------
Net cash provided by (used in) operating activities............... (11,378) (6,744) 2,422
------------- ------------- -------------
Cash from investing activities:
Equity contributions to the Bank.................................... (110,000) (85,000) (16,000)
Equity contributions to subsidiaries................................ (4,100) (4,640) -
Purchase of investment securities................................... (15,363) - (155)
Proceeds from sale of investments................................... - 155 -
Purchase of mortgage-backed securities.............................. (30,734) (27,411) -
Proceeds from repayments of mortgage-backed securities.............. 18,821 5,054 368
Proceeds from sales of mortgage-backed securities................... - 5,021 -
Net (increase) decrease in tax certificates......................... (1,654) 269 145
------------- ------------- -------------
Net cash used in investing activities............................. (143,030) (106,552) (15,642)
------------- ------------- -------------
Cash flow from financing activities:
Net proceeds from issuance of Junior subordinated
deferrable interest debentures.................................... 103,013 114,776 -
Net proceeds from issuance of common stock.......................... 60,502 1,329 23,198
Net proceeds from issuance of preferred stock....................... 488 - -
Dividends paid on preferred stock................................... (837) (2,855) (2,086)
Preferred Stock, Series 9% tender offer............................. (43) (4,486) -
Preferred Stock redemption.......................................... (424) - -
------------- ------------- -------------
Net cash provided by financing activities......................... 162,699 108,764 21,112
------------- ------------- -------------
(Decrease) increase in cash and cash equivalents...................... 8,291 (4,532) 7,892
Cash and cash equivalents at beginning of year........................ 3,445 7,977 85
------------- ------------- -------------
Cash and cash equivalents at end of year.......................... $ 11,736 $ 3,445 $ 7,977
============= ============= =============
82
BANKUNITED FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(20) 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 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 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.
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 10-1/4% Trust Preferred Securities is estimated
at book value as these securities are privately-placed and have no active
market. The fair value of the 9.60% and 9% Trust Preferred Securities is
estimated based on quoted market prices.
The following table presents information for the Company's financial
instruments at September 30, 1998 and 1997:
AS OF SEPTEMBER 30, 1998
-----------------------------------
CARRYING VALUE FAIR VALUE
-------------- ---------------
(in thousands)
Financial assets:
Cash and overnight investments.......................................... $ 91,511 $ 91,511
Tax certificates and other investments.................................. 78,210 78,367
Mortgage-backed securities.............................................. 345,756 343,115
Loans receivable........................................................ 3,042,014 3,253,845
Mortgage servicing rights............................................... 8,917 8,917
Other interest-earning assets........................................... 51,313 51,313
Financial liabilities:
Deposits................................................................ $ 2,124,824 $ 2,133,186
Borrowings.............................................................. 1,142,614 1,147,283
Trust Preferred Securities.............................................. 218,500 212,915
AS OF SEPTEMBER 30, 1997
-----------------------------------
CARRYING VALUE FAIR VALUE
-------------- ---------------
(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 rights............................................... 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
83
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 1999
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
(PricewaterhouseCoopers LLP).
Consolidated Statements of Financial Condition as of
September 30, 1998 and 1997.
Consolidated Statements of Operations for the years
September 30, 1998, 1997 and 1996.
Consolidated Statements of Stockholder's Equity for the
years ended September 30, 1998, 1997 and 1996.
84
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996.
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).
2.3 Agreement and Plan of Merger between BankUnited and
Central Bank dated December 30, 1997 (Exhibit 20.1 to
BankUnited's Form 8-K dated December 30, 1997, as filed
with the Securities and Exchange Commission on January 2,
1998).
3.1 Articles of Incorporation of BankUnited (Exhibit 3.1 to
BankUnited's Form 10-K Report for the year ended September
30, 1997 [the "1997 10-K"]).
3.2 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 Statement of Designation of Series 1 Class A Common Stock
and Class B Common Stock of BankUnited (included as an
appendix to Exhibit 3.1).
4.2 Statement of Designation of 8% Noncumulative Convertible
Preferred Stock, Series A of BankUnited (included as
appendix to Exhibit 3.1).
4.3 Statement of Designation of Noncumulative Convertible
Preferred Stock, Series B of BankUnited (included as
appendix to Exhibit 3.1).
4.4 Statement of Designation of 8% Noncumulative Convertible
Preferred Stock, Series 1993 of BankUnited (included as
appendix to Exhibit 3.1).
4.5 Statement of Designation of 9% Noncumulative Perpetual
Preferred Stock of BankUnited (included as an appendix to
Exhibit 3.1).
4.6 Statement of Designation of 8% Noncumulative Convertible
Preferred Stock, Series 1996 of BankUnited (included as
appendix to Exhibit 3.1).
4.7 Form of Letter Agreement between BankUnited and the
holders of shares of BankUnited's Noncumulative
Convertible Preferred Stock, Series B.
4.8 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).
4.9 The Advances, Specific Collateral Pledge and Security
Agreement dated March 30, 1998 between BankUnited, FSB and
the Federal Home Loan Bank of Atlanta.
4.91 Indenture dated November 4, 1998 between the Bank and the
Bank of New York to which the Federal Home Loan Bank of
Atlanta has joined as a consenting party (the
"Indenture").
4.92 Form of the Bank's Senior Note (Fixed Rate) issuable
pursuant to the Indenture.
4.93 Form of the Bank's Senior Note (Floating Rate) issuable
pursuant to the Indenture.
4.94 The Letter of Credit Reimbursement Agreement dated
November 14, 1998 between the Bank and the Federal Home
Loan Bank of Atlanta.
85
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, as amended by
approval of the Company's stockholders on January 26,
1998.**
10.6 Form of Employment Agreement between BankUnited and Alfred
R. Camner .***
10.7 Form of Employment Agreement between the Bank and Alfred
R. Camner .***
10.8 Form of Employment Agreement between BankUnited, the Bank
and Mehdi Ghomeshi .***
10.9 Junior Subordinated Indenture with respect to BankUnited's
10 1/4% 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 Underwriting Agreement dated June 1997 between the Company
and BankUnited Capital II and Raymond James and
Associates, Inc. and Ryan, Beck and Co. (Exhibit 1 to
Amendment No. 1 to Form S-2, No. 333-27397, as filed with
the Securities and Exchange Commission on May 30, 1997).
10.19 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).
10.20 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).
10.21 Form of Amended and Restated Trust Agreement of BankUnited
Capital 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).
86
10.22 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).
10.23 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).
10.24 Purchase Agreement between the Company and BankUnited
Capital III and PaineWebber Incorporated (Exhibit 1.1 to
the Company's Amendment No. 3 to Form S-3, No. 333-28677,
as filed with the Securities and Exchange Commission on
March 6, 1998).
10.25 Form of Indenture with respect to BankUnited's 9% Junior
Subordinated Debentures (Exhibit 4.3 to Amendment No. 3 to
the Company's Registration Statement on Form S-3, No.
333-28677, as filed with the Securities and Exchange
Commission on March 6, 1998).
10.26 Trust Agreement of BankUnited Capital III. (Exhibit 4.6 to
the Company's Registration Statement on Form S-3, No.
333-28677, as filed with the Securities and Exchange
Commission on June 6, 1997).
10.27 Form of Amended and Restated Trust Agreement of BankUnited
Capital III. (Exhibit 4.3 to Amendment No. 3 to the
Company's Registration Statement on Form S-3, No.
333-28677, as filed with the Securities and Exchange
Commission on March 6, 1998).
10.28 Form of Guarantee Agreement for BankUnited Capital III.
(Exhibit 4.3 to Amendment No. 3 to the Company's
Registration Statement on Form S-3, No. 333-28677, as
filed with the Securities and Exchange Commission on March
6, 1998).
10.29 Form of Agreement as to Expenses and Liabilities (Exhibit
4.3 to Amendment No. 3 to the Company's Registration
Statement on Form S-3, No. 333-28677, as filed with the
Securities and Exchange Commission on March 6, 1998).
11.1 Statement regarding calculation of earnings per common
share (set forth in Footnote (2) to the Notes to
Consolidated Financial Statements contained in Part II,
Item 8 of this report on Form 10- K for the year ended
September 30, 1998).
12.1 Statement regarding calculation of ratio of earnings to
combined fixed charges and preferred stock dividends.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of attorney (set forth on the signature page in Part
IVof this Report on Form 10-K for the year ended September
30, 1998).
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.
*** Contracts with Management.
(B) REPORTS ON FORM 8-K.
During the quarter ended September 30, 1998, no Current Reports on Form
8-K were filed by the Company.
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.
87
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, 1998.
BANKUNITED FINANCIAL CORPORATION
BY: /s/ ALFRED R. CAMNER
----------------------------
Alfred R. Camner
Chairman of the Board, 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, 1998 on behalf of the Registrant by
the following persons and in the capacities indicated.
/s/ ALFRED R. CAMNER
- ------------------------------------- Chairman of the Board,
ALFRED R. CAMNER Chief Executive Officer,
and Director
(Principal Executive Officer)
/s/ MEHDI GHOMESHI
- ------------------------------------- President and Chief
MEHDI GHOMESHI Operating Officer and Director
/s/ LAWRENCE H. BLUM
- ------------------------------------- Vice Chairman of the Board
LAWRENCE H. BLUM and Director
/s/ EARLINE G. FORD
- ------------------------------------- Executive Vice President,
EARLINE G. FORD Treasurer and Director
/s/ MARC LIPSITZ
- ------------------------------------- Director and Corporate Secretary
MARC LIPSITZ
/s/ MARC D. JACOBSON
- ------------------------------------- Director
MARC D. JACOBSON
/s/ ALLEN M. BERNKRANT
- ------------------------------------- Director
ALLEN M. BERNKRANT
/s/ ANNE W. SOLLOWAY
- ------------------------------------- Director
ANNE W. SOLLOWAY
88
/s/ NEIL MESSINGER
- ------------------------------------- Director
NEIL MESSINGER
/s/ BRUCE FRIESNER
- ------------------------------------- Director
BRUCE FRIESNER
/s/ DIANE DELELLA
- ------------------------------------- Vice President, Chief
DIANE DELELLA Financial Officer and Controller
89
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
4.7 Form of Letter Agreement between BankUnited and the holders of shares
of BankUnited's Noncumulative Convertible Preferred Stock, Series B.
4.9 The Advances, Specific Collateral Pledge and Security Agreement dated
March 30, 1998 between BankUnited, FSB and the Federal Home Loan Bank
of Atlanta.
4.91 Indenture dated November 4, 1998 between the Bank and the Bank of New
York to which the Federal Home Loan Bank of Atlanta has joined as a
consenting party (the "Indenture").
4.92 Form of the Bank's Senior Note (Fixed Rate) issuable pursuant to the
Indenture.
4.93 Form of the Bank's Senior Note (Floating Rate) issuable pursuant to the
Indenture.
4.94 The Letter of Credit Reimbursement Agreement dated November 14, 1998
between the Bank and the Federal Home Loan Bank of Atlanta.
10.5 1996 Incentive Compensation and Stock Award, as amended by approval of
the Company's stockholders on January 26, 1998.*
10.6 Form of Employment Agreement between BankUnited and Alfred R. Camner.
10.7 Form of Employment Agreement between the Bank and Alfred R. Camner.
10.8 Form of Employment Agreement between BankUnited, the Bank and Mehdi
Ghomeshi.
12.1 Statement regarding calculation of ratio of earnings to combined fixed
charges and preferred stock dividends.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule
- -----------------------
* Compensatory plan or arrangement.