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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21850
BANKUNITED FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-037773
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
255 ALHAMBRA CIRCLE, CORAL GABLES, FLORIDA 33134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 569-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, $.01 PAR VALUE
8% NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES 1996
8% NONCUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES 1993
9% NONCUMULATIVE PERPETUAL PREFERRED STOCK
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [ ]
The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant, based upon the average price on December
11, 1996, was $68,776,342.* The other voting securities of the Registrant are
not publicly traded.
The shares of the Registrant's common stock outstanding as of December 11,
1996 were as follows:
CLASS NUMBER OF SHARES
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Class A Common Stock, $.01 par value 7,675,931
Class B Common Stock, $.01 par value 251,515
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders will be filed with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year covered by this Form
10-K pursuant to Rule G(3) of the General Instructions for Form 10-K.
Information from such Definitive Proxy Statement will be incorporated by
reference into Part III, Items 10, 11, 12 and 13 hereof.
1
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* Based on reported beneficial ownership of all directors and executive
officers of the Registrant; this determination does not, however,
constitute an admission of affiliated status for any of these individual
stockholders.
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1
PART I
ITEM 1. BUSINESS
BUSINESS OF BANKUNITED FINANCIAL CORPORATION
BankUnited Financial Corporation (the "Company" or "BankUnited") is a
Florida corporation organized in December 1992 for the purpose of becoming
the savings and loan holding company for BankUnited, FSB (the "Bank"). This
holding company reorganization, together with BankUnited's conversion from a
Florida-chartered stock savings bank to a federally chartered stock savings
bank, became effective in March 1993. Unless the context requires otherwise,
all references herein to the Company include the Company, the Bank and their
subsidiaries on a consolidated basis, and before March 15, 1993, include the
Bank and its subsidiaries only.
The Company currently has 15 branch offices in Dade, Broward and Palm
Beach counties, Florida ("South Florida") and anticipates opening three or
more additional branches there in the next 18 months. 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 its market area single-family
residential mortgage loans, and to a lesser extent, to purchase and originate
commercial real estate, commercial business and consumer loans. 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 savings deposits and borrowings and overhead
expenses incurred in its operations.
The Company's operating plan emphasizes (i) concentrating lending
activities on the origination of single-family residential mortgage loans and
purchasing such loans as favorable market opportunities arise; (ii) expanding
the Company's deposit base by providing convenience, competitive rates and
personalized service in its market area; (iii) continuing expansion of the
Company's branch network through de novo branching or the acquisition of
branches of, and mergers with, existing financial institutions, although
there are no current plans, arrangements, understandings, or agreements
regarding such acquisitions; (iv) expanding the Company's commercial and
multi-family real estate, commercial business, and real estate construction
lending; and (v) managing exposure to interest rate risk, while optimizing
operating results through effective asset/liability management and investment
policies.
In 1995, the Company redefined its strategy to increase its emphasis on
strategic product niches which management believes are being underserved as
South Florida's banking market consolidates. These products include
commercial business and commercial real estate lending and deposit services
for small to mid-size businesses. The Company has also focused on attracting
depositors who are seeking convenience, competitive rates and personalized
service. In order to accomplish this strategy, the Company has attracted
management with expertise in developing and managing its new product lines.
The Bank is a member of the Federal Home Loan Bank ("FHLB") system 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 of the FDIC (the "SAIF") for up to $100,000 for
each insured account holder, which is the maximum 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 words or phrases "will
likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project", "believe" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
2
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 regional and national economic conditions, changes in
levels of market interest rates, credit risks of lending activities, and
competitive and regulatory factors, 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.
SUNCOAST ACQUISITION
As part of the Company's plan to expand within South Florida, on November
15, 1996, the Company completed the purchase of Suncoast Savings & Loan
Association, FSA ("Suncoast"), a federally chartered savings association with
assets of $409.0 million at September 30, 1996 and merged Suncoast into the
Bank (the "Merger"). Suncoast had six branch offices in the South Florida
market of which at least five will continue to operate and one may be
consolidated with an existing Bank branch office. In addition, as of
September 30, 1996, Suncoast serviced or subserviced approximately $1.2
billion in loans for others. The Company is currently exploring the
possibility of selling a portion of Suncoast's servicing portfolio and
discontinuing certain of Suncoast's subservicing activities. Such actions
could substantially reduce the income derived from servicing as well as the
related expenses from the income and expenses previously reported by
Suncoast.
For additional information, see "Unaudited Pro Forma Condensed Combined
Financial Statements" and Note 18 of Notes to the Consolidated Financial
Statements.
MARKET AREA AND COMPETITION
The Company conducts operations in South Florida, which at June 30, 1996
had a total of approximately $73 billion in deposits in commercial banks,
savings institutions, and credit unions (41% of the total of $178 billion of
deposits in Florida). The Company intends to continue to establish or acquire
branches in its market area where the Company can service its customer base.
In 1995, the Company sold its three branches on the west coast of Florida,
including their deposits which totaled $130 million at the date of sale. The
sale was part of a shift in growth strategy to focus on South Florida and
take advantage of consolidation trends in banking there. Also, as part of
this strategy, the Company opened branches in Boca Raton, Florida in December
1995, Delray Beach, Florida in June 1996 and West Palm Beach, Florida in
September 1996. On March 29, 1996, the Company acquired the Bank of Florida
with total assets of $28.1 million which was merged into the Company's South
Miami Branch. Then on November 15, 1996, as discussed above, the Company
acquired Suncoast.
The Company encounters strong competition in attracting deposits and in
its lending activities. Its most direct competition for deposits historically
has been from commercial banks, brokerage houses, other savings associations,
and credit unions located in the Company's market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. Within the Company's market area are branches of several
commercial banks and savings associations that are substantially larger and
that have more extensive operations than does the Company. In addition, many
financial institutions based in South Florida have recently been acquired by
larger institutions based in other parts of the state or based out of state.
The Company's goal is to compete for savings and other deposits by offering
depositors a higher level of personal service and expertise, together with a
wide range of financial services offered at competitive rates. The Company
believes that this strategy will enable it to attract depositors as the
number of local institutions remaining 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
3
originations primarily through the interest rates and loan fees it charges,
the type of loans it offers, and the efficiency and quality of service it
provides. The Company purchases residential first mortgage loans in the
existing secondary mortgage market and competes with other mortgage
purchasers in the secondary market 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 placed more 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 greater
level of personal service and to position itself as a small-to-middle-market
lender to businesses left underserved by larger institutions.
Management's strategy has included and continues to include evaluation of
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. 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
financing 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.
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 and FHLB advances). The Company's net interest income is
significantly affected by (i) the difference (the "interest rate spread")
between yields received on its interest-earning assets and the rates paid on
its interest-bearing liabilities and (ii) the relative amounts of its
interest-earning assets and interest-bearing liabilities. When
interest-earning assets equal or exceed interest-bearing liabilities, any
positive interest rate spread will generate net interest income. The more
such liabilities exceed such assets, the greater the positive interest rate
spread and/or non-interest income must be in order to produce net 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.
To reduce the adverse impact of rapid increases in market interest rates
on the Company's net interest income, the Company has emphasized the
origination and purchase of adjustable-rate mortgage loans. At September 30,
1996, 69.8% of the Company's net loans receivable and mortgage-backed
securities carried adjustable interest rates. The Company has from time to
time acquired longer term fixed-rate mortgage loans when the yields on these
interest-earning assets have been deemed advantageous by management. As a
part of its asset and liability management program, and as market conditions
permit, the Company attempts to lengthen the maturities of its
interest-bearing liabilities (i) with longer term deposits or (ii) when
advantageous, with borrowed funds. The Company's ability to manage interest
rate risk in its loan and investment portfolios depends upon a number of
factors, such as competition for loans and deposits in its market area and
conditions prevailing in the secondary mortgage market.
The Company has rate-sensitive (due or subject to repricing within one
year) liabilities that exceed its rate-sensitive assets, resulting in a
negative cumulative one-year gap position of 6.4% of total assets as of
September 30, 1996. This imbalance, when coupled with the deregulation of the
restrictions
4
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 and affects the ability of the
Company to maintain adequate liquidity levels. The Company constantly
attempts to reduce the sensitivity of its earnings to fluctuations in
interest rates by adjusting the average maturities of its interest-bearing
liabilities and interest-earning assets. There can be no assurance, however,
of the degree to which the Company will be able to effectively maintain the
balance of its short-term interest-earning assets as compared to its
short-term interest-bearing liabilities and manage the risks to liquidity
associated therewith.
5
GAP TABLE. The following table sets forth the amount of interest-earning
assets and interest-bearing liabilities outstanding at September 30, 1996,
which are expected to reprice or mature in each of the future time periods
shown.
SEPTEMBER 30, 1996
--------------------------
INTEREST SENSITIVITY
PERIOD(1)
--------------------------
OVER
6 MONTHS 6 MONTHS
OR LESS -1 YEAR
------------ ------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investments, tax certificates,
Federal funds sold, FHLB overnight
deposits and other interest earning
assets, at cost .................... $ 62,988 $ 20,892
Mortgage-backed securities ........... 10,738 7,491
Loans:
Adjustable-rate mortgages ............ 383,997 61,532
Fixed-rate mortgages ................. 14,207 9,428
Commercial and consumer loans ....... 6,995 547
---------- -----------
Total loans ......................... 405,199 71,507
---------- -----------
Total interest-earning assets ...... 478,925 99,890
Total non-interest-earning assets .. -- --
---------- -----------
Total assets ........................ $478,925 $ 99,890
========== ===========
Interest-bearing liabilities:
Customer deposits:
Money market and NOW accounts ...... $ 33,821 $ --
Passbook accounts ................... 73,780 --
Certificate accounts ................ 229,225 87,337
---------- -----------
Total customer deposits ............... 336,826 87,337
Borrowings:
FHLB advances ........................ 162,000 45,000
Other borrowings ..................... -- --
---------- -----------
Total borrowings .................... 162,000 45,000
---------- -----------
Total interest-bearing liabilities . 498,826 132,337
---------- -----------
Total non-interest-bearing liabilities -- --
Stockholders' equity .................. -- --
---------- -----------
Total liabilities and stockholders'
equity ............................ $498,826 $132,337
========== ===========
Total interest-earning assets less
interest-bearing liabilities ("GAP") $(19,901) $(32,447)
========== ===========
Ratio of GAP to total assets .......... -2.41% -3.94%
========== ===========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ........ $(19,901) $(52,348)
========== ===========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities, as a
percentage of total assets .......... -2.41% -6.35%
========== ===========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
NON-
OVER 1 - OVER 5 - OVER 10 - INTEREST
5 YEARS 10 YEARS YEARS EARNING TOTAL
------------ ----------- ------------ ------------ -----------
Interest-earning assets:
Investments, tax certificates,
Federal funds sold, FHLB overnight
deposits and other interest earning
assets, at cost .................... $ 3,782 $ -- $ -- $ -- $ 87,662
Mortgage-backed securities ........... 36,734 10,353 4,849 -- 70,165
Loans:
Adjustable-rate mortgages ............ 45,940 -- -- 4,600 496,069
Fixed-rate mortgages ................. 56,630 30,949 32,466 324 144,004
Commercial and consumer loans ....... 897 16 -- 15 8,470
---------- ---------- ----------- ------------ -----------
Total loans ......................... 103,467 30,965 32,466 4,939 648,543
6
NON-
OVER 1 - OVER 5 - OVER 10 - INTEREST
5 YEARS 10 YEARS YEARS EARNING TOTAL
------------ ----------- ------------ ------------ -----------
------------ ----------- ------------ ------------ -----------
Total interest-earning assets ...... 143,983 41,318 37,315 4,939 806,370
Total non-interest-earning assets .. -- -- -- 17,990 17,990
---------- ---------- ----------- ------------ -----------
Total assets ........................ $143,983 $41,318 $37,315 $ 22,929 $824,360
========== ========== =========== ============ ===========
Interest-bearing liabilities:
Customer deposits:
Money market and NOW accounts ...... $ -- $ -- $ -- $ 7,301 $ 41,122
Passbook accounts ................... -- -- -- -- 73,780
Certificate accounts ................ 74,642 -- -- -- 391,204
---------- ---------- ----------- ------------ -----------
Total customer deposits ............... 74,642 -- -- 7,301 506,106
Borrowings:
FHLB advances ........................ 30,000 -- -- -- 237,000
Other borrowings ..................... -- 460 315 -- 775
---------- ---------- ----------- ------------ -----------
Total borrowings .................... 30,000 460 315 -- 237,775
---------- ---------- ----------- ------------ -----------
Total interest-bearing liabilities . 104,642 460 315 7,301 743,881
---------- ---------- ----------- ------------ -----------
Total non-interest-bearing liabilities -- -- -- 11,368 11,368
Stockholders' equity .................. -- -- -- 69,111 69,111
---------- ---------- ----------- ------------ -----------
Total liabilities and stockholders'
equity ............................ $104,642 $ 460 $ 315 $ 87,780 $824,360
========== ========== =========== ============ ===========
Total interest-earning assets less
interest-bearing liabilities ("GAP") $ 39,341 $40,858 $37,000 $(64,851) $ --
========== ========== =========== ============ ===========
Ratio of GAP to total assets .......... 4.77% 4.96% 4.49% -7.87% --
========== ========== =========== ============ ===========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities ........ $(13,007) $27,851 $64,851 $ -- $ --
========== ========== =========== ============ ===========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities, as a
percentage of total assets .......... -1.58% 3.38% 7.87% -- --
========== ========== =========== ============ ===========
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(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 be rate sensitive in six months or less.
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.
6
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 and FHLB advances).
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 "Regulations"). 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 the difference between incoming and outgoing
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 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 market value of an
institution's assets will require the institution to deduct from its capital
50% of that excess decline. Implementation of the rule has been postponed
indefinitely.
The following table presents the Company's ratio of NPV to the present
value of total assets as of September 30, 1996, as calculated by the OTS,
based on information provided to the OTS by the Company.
CHANGE IN INTEREST RATES RATIO OF NPV
IN BASIS POINTS PRESENT VALUE OF TO THE PRESENT VALUE OF
(RATE SHOCK) NPV TOTAL ASSETS TOTAL ASSETS CHANGE
- ------------------------- ---------- ----------------- ------------------------ ---------------
(DOLLARS IN THOUSANDS)
+400 $19,142 $763,216 2.51% (5.92)%
+200 48,290 798,031 6.05 (2.38)
Static 69,597 825,359 8.43 --
-200 79,063 841,628 9.39 .96
-400 87,288 856,792 10.19 1.76
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 asset. Further,
in the event of a change in interest rates, prepayment and early withdrawal
levels would likely 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 an 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 is
subject to competitive and other pressures beyond the Company's control. As a
result, certain assets and liabialities indicated as maturing or otherwise
repricing within a stated period may in fact mature or reprice at different
times and at different volumes.
7
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. Yield and rate
information for a period is average information for the period calculated 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 net interest income divided by average interest-earning assets.
Non-accrual loans are included in asset balances for the appropriate periods,
whereas recognition of interest on such loans is discontinued and any
remaining accrued interest receivable is reversed, in conformity with 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,
---------------------------------------
1996
---------------------------------------
AS OF
9/30/96 AVERAGE
YIELD/RATE BALANCE INTEREST
------------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable, net ........... 7.97% $540,313 $41,313
Mortgage-backed securities ..... 6.82 62,711 4,250
Short-term investments(1) ...... 5.30 41,240 2,359
Tax certificates ................ 8.96 34,831 3,018
Long-term investments and FHLB
stock, net .................... 6.98 17,352 1,192
--------- --------- ---------
Total interest-earning assets . 7.80 696,447 52,132
--------- --------- ---------
Interest-bearing liabilities:
NOW/Money Market ................ 2.45 33,148 775
Savings ......................... 4.40 59,965 2,627
Certificate of deposits ......... 5.52 313,521 17,389
FHLB advances and other
borrowings .................... 5.74 235,264 13,831
--------- --------- ---------
Total interest-bearing
liabilities .................. 5.31 641,898 34,622
--------- --------- ---------
Excess of interest-earning assets
over interest-bearing
liabilities .................... $ 54,549
========= ---------
Net interest income .............. $17,510
=========
Interest rate spread ............. 2.49%
=============
Net interest margin .............. 2.90%
=============
Ratio of interest-earning assets
to interest-bearing liabilities 108.50%
=========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
1995 1994
----------------------------------- ----------------------------------------------
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ----------- ----------- --------- ----------- ----------- -------------
Interest-earning assets:
Loans receivable, net ........... 7.65% $419,501 $30,171 7.19% $364,224 $23,513 6.46%
Mortgage-backed securities ..... 6.78 59,204 4,093 6.91 35,215 2,308 6.55
Short-term investments(1) ...... 5.72 23,844 1,491 6.25 21,101 803 3.81
Tax certificates ................ 8.66 37,377 3,087 8.26 39,228 3,207 8.17
Long-term investments and FHLB
stock, net .................... 6.87 7,930 577 7.29 10,041 590 5.89
------- ----------- ----------- --------- ----------- ----------- ---------
Total interest-earning assets . 7.49 547,856 39,419 7.20 469,809 30,421 6.48
------- ----------- ----------- --------- ----------- ----------- ---------
Interest-bearing liabilities:
NOW/Money Market ................ 2.34 41,196 875 2.12 51,860 1,102 2.12
Savings ......................... 4.38 55,950 2,420 4.33 46,925 1,716 3.66
Certificate of deposits ......... 5.55 276,564 14,554 5.26 221,074 8,526 3.86
FHLB advances and other
borrowings .................... 5.88 144,052 8,456 5.87 120,604 4,951 4.11
------- ----------- ----------- --------- ----------- ----------- ---------
Total interest-bearing
liabilities .................. 5.39 517,762 26,305 5.08 440,463 16,295 3.70
------- ----------- ----------- --------- ----------- ----------- ---------
Excess of interest-earning assets
over interest-bearing
liabilities .................... $ 30,094 $ 29,346
1995 1994
----------------------------------- -----------------------------------------------
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ----------- ----------- --------- ----------- ----------- ---------
--------- =========== ----------- --------- ===========
Net interest income .............. $13,114 $14,126
--------- =========== ===========
Interest rate spread ............. 2.10% 2.12% 2.78%
========= ========= =========
Net interest margin .............. 2.51% 2.39% 3.01%
========= ========= =========
Ratio of interest-earning assets
to interest-bearing liabilities 105.81% 106.66%
========= =========== ===========
- --------------
(1) Short-term investments include FHLB overnight deposits, securities
purchased under agreements to resell, federal funds sold and certificates
of deposit.
8
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 in rate and volume.
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1996 V. 1995
--------------------------------------
INCREASE (DECREASE)
DUE TO
--------------------------------------
CHANGES CHANGES CHANGES
IN IN IN
VOLUME RATE RATE/VOLUME
---------- ---------- --------------
(IN THOUSANDS)
Interest income attributable to:
Loans .............................. $ 8,689 $1,905 $548
Mortgage-backed securities and
collateralized mortgage obligations 242 (81) (4)
Short-term investments(1) .......... 1,088 (127) (93)
Tax Certificates ................... (210) 152 (11)
Long-term investments and
FHLB stock ....................... 687 (33) (39)
--------- --------- -----------
Total interest-earning assets .... 10,496 1,816 401
--------- --------- -----------
Interest expense attributable to:
NOW/Money Market ................. (171) 88 (17)
Savings ............................ 173 31 3
Certificates of Deposit ............ 1,946 785 104
FHLB advances and other borrowings 5,354 13 8
--------- --------- -----------
Total interest-bearing liabilities 7,302 917 98
--------- --------- -----------
Increase (decrease) in net interest
income ........................... $ 3,194 $ 899 $303
========= ======== ===========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
1995 V. 1994
------------------------------------------------------------------
INCREASE (DECREASE)
DUE TO
------------------------------------------------------------------
TOTAL CHANGES CHANGES CHANGES TOTAL
INCREASE IN IN IN INCREASE
(DECREASE) VOLUME RATE RATE/VOLUME (DECREASE)
----------- ---------- ----------- -------------- -------------
Interest income attributable to:
Loans .............................. $11,142 $3,568 $ 2,683 $ 407 $ 6,658
Mortgage-backed securities and
collateralized mortgage obligations 157 1,572 126 87 1,785
Short-term investments(1) .......... 868 104 517 67 688
Tax Certificates ................... (69) (151) 33 (2) (120)
Long-term investments and
FHLB stock ....................... 615 (124) 140 (29) (13)
--------- --------- ----------- ---------- ---------
Total interest-earning assets .... 12,713 4,969 3,499 530 8,998
--------- --------- ----------- ---------- ---------
Interest expense attributable to:
NOW/Money Market ................. (100) (227) -- -- (227)
Savings ............................ 207 330 314 60 704
Certificates of Deposit ............ 2,835 2,140 3,108 780 6,028
FHLB advances and other borrowings 5,375 963 2,128 414 3,505
--------- --------- ----------- ---------- ---------
Total interest-bearing liabilities 8,317 3,206 5,550 1,254 10,010
--------- --------- ----------- ---------- ---------
Increase (decrease) in net interest
income ........................... $ 4,396 $1,763 $(2,051) $ (724) $(1,012)
========= ========= =========== ========== =========
- ---------
(1) Short-term investments include FHLB overnight deposits, securities
purchased under agreements to resell, federal funds sold and certificates
of deposit.
9
LENDING ACTIVITIES
GENERAL. The Company focuses its lending activity on purchasing and
originating single-family residential mortgage loans. The Company's lending
strategy also includes expanding its commercial real estate, commercial
business, and real estate construction lending. The Company also currently
offers consumer loans, such as automobile loans and boat loans, primarily as
an accommodation to existing customers.
LOAN PORTFOLIO. The Company's loan portfolio primarily consists of
adjustable-rate mortgage loans and, to a lesser extent, fixed-rate mortgage
loans secured by one-to-four-family residential and commercial real estate.
As of September 30, 1996, the Company's loan portfolio totaled $644.0
million, of which $570.9 million or 79.7% consisted of one-to-four-family
residential first mortgages. At the present time, the Company's residential
real estate loans are primarily "conventional" loans, which means that these
loans are 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. The average yield on the
Company's mortgage loans, of which 76.7% had adjustable rates and 23.3% had
fixed rates, was 7.65%, 7.19% and 6.46% for the fiscal years ended September
30, 1996, 1995 and 1994, respectively. The remainder of the Company's loan
portfolio consisted of $49.3 million of commercial real estate loans (6.9% of
total loans); five or more unit
9
residential loans of $12.6 million (1.7% of total loans); $2.7 million of
second mortgage loans (0.4% of total loans); $2.6 million of consumer loans
(0.4% of total loans); $5.8 million of commercial business loans (0.8% of
total loans); and $2.7 million of other loans (0.4% of total loans).
At September 30, 1996, the Company's loan portfolio included $38.2 million
of residential mortgage loans to nonresident aliens. See "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,
--------------------------------------
1996 1995 1994
------------ ----------- -----------
(IN THOUSANDS)
Total loans receivable, net, at beginning of period(1) ..... $ 453,350 $413,287 $310,441
Loans originated:
Residential real estate .................................... 65,954 54,438 72,108
Commercial, business and consumer .......................... 16,705 7,556 3,885
------------ ----------- -----------
Total loans originated .................................... 82,659 61,994 75,993
Loans purchased ............................................. 250,215 76,081 150,502
Loans sold .................................................. (4,356) (2,449) (21,867)
Principal payments and amortization of discounts and
premiums .................................................. (133,836) (93,787) (96,214)
Loans charged off ........................................... (493) (594) (1,582)
Transfers to real estate owned .............................. (1,154) (1,182) (3,986)
------------ ----------- -----------
Total loans receivable, net, at end of period(1) ........ $ 646,385 $453,350 $413,287
============ =========== ===========
- ---------
(1) Includes loans held for sale.
10
The following table sets forth certain information with respect to the
composition of the Company's loan portfolio, including mortgage loans held
for sale and mortgage-backed securities, as of the dates indicated. For
additional information as to the Company's mortgage-backed securities,
including carrying values and approximate market values of such securities,
see Notes 1 and 4 of the Notes to the Company's Consolidated Financial
Statements included in Appendix D hereto.
AS OF SEPTEMBER 30,
------------------------------------
1996 1995
----------------------- -----------
AMOUNT PERCENT AMOUNT
----------- ---------- -----------
(DOLLARS IN THOUSANDS)
First mortgage loans:
One-to-four-family residential $570,890 79.7% $433,122
Five-or-more-unit residential . 12,559 1.7 1,124
Commercial ..................... 49,318 6.9 10,223
Second mortgage loans ........... 2,748 0.4 2,412
---------- ---------- -----------
Total first and second mortgage
loans ........................... 635,515 88.7 446,881
---------- ---------- -----------
Consumer loans .................. 2,648 0.4 920
Commercial business loans ...... 5,822 0.8 3,632
---------- ---------- -----------
Total loans receivable ......... 643,985 89.9 451,433
---------- ---------- -----------
Deferred loan fees, premiums and
(discounts) ..................... 4,558 0.6 3,386
Allowance for loan losses ...... (2,158) (0.3) (1,469)
---------- ---------- -----------
Loans receivable, net(1) ........ 646,385 90.2 453,350
---------- ---------- -----------
Mortgage-backed securities, net 70,165 9.8 52,998
---------- ---------- -----------
Total loans receivable, net
and mortgage-backed
securities .................. $716,550 100.0% $506,348
========== ========== ===========
Weighted average yield on total
loan losses receivable, net, and
mortgage-backed securities ..... 7.86%
==========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
1994 1993 1992
----------------------- ----------------------- -----------------------
PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ----------- ---------- ----------- ---------- ----------- ----------
First mortgage loans:
One-to-four-family residential 85.5% $395,028 84.0% $301,689 93.3% $224,707 89.7%
Five-or-more-unit residential . 0.2 2,164 0.5 705 0.2 856 0.3
Commercial ..................... 2.0 4,469 0.9 748 0.2 350 0.1
Second mortgage loans ........... 0.5 2,616 0.6 623 0.2 631 0.3
-------- ---------- -------- ---------- ---------- -------- --------
Total first and second mortgage
loans ........................... 88.2 404,277 86.0 303,765 93.9 226,544 90.4
-------- ---------- -------- ---------- ---------- -------- --------
Consumer loans .................. 0.2 2,336 0.5 2,786 0.9 2,664 1.1
Commercial business loans ...... 0.7 4,732 1.0 3,665 1.1 2,143 0.8
-------- ---------- -------- ---------- ---------- -------- --------
Total loans receivable ......... 89.1 411,345 87.5 310,216 95.9 231,351 92.3
-------- ---------- -------- ---------- ---------- -------- --------
Deferred loan fees, premiums and
(discounts) ..................... 0.7 2,783 0.6 1,409 0.4 (437) (0.2)
Allowance for loan losses ...... (0.3) (841) (0.2) (1,184) (0.4) (265) (0.1)
-------- ---------- -------- ---------- ---------- -------- --------
Loans receivable, net(1) ........ 89.5 413,287 87.9 310,441 95.9 230,649 92.0
-------- ---------- -------- ---------- ---------- -------- --------
Mortgage-backed securities, net 10.5 57,155 12.1 13,156 4.1 19,957 8.0
-------- ---------- -------- ---------- ---------- -------- --------
Total loans receivable, net
and mortgage-backed
securities .................. 100.0% $470,442 100.0% $323,597 100.0% $250,606 100.0%
======== ========== ======== ========== ========== ======== ========
Weighted average yield on total
loan losses receivable, net, and
mortgage-backed securities ..... 7.53% 6.60% 6.37% 7.90%
======== ======== ========== ========
- ---------
(1) Includes loans held for sale.
The following table sets forth, as of September 30, 1996 the amount of
11
loans, mortgage loans held for sale and mortgage-backed securities held in
the Company's portfolio by category and expected principal repayments by
year. As of September 30, 1996, the total amount of loans with contractual
maturities greater than one year with fixed and adjustable interest rates
totaled approximately $119.0 million and $368.3 million, respectively.
OUTSTANDING ON
SEPTEMBER 30,
1996 1997 1998
--------------- ----------- -----------
(IN THOUSANDS)
First Mortgage Loans:
One-to-four-family residential $570,890 $133,259 $ 96,871
Five-or-more-unit residential . 12,559 3,763 2,973
Commercial ..................... 49,318 13,415 10,668
Second Mortgage loans ........... 2,748 792 736
--------------- ----------- -----------
Total first and second mortgage
loans ........................ 635,515 151,229 111,248
Consumer ....................... 2,648 1,552 1,096
Commercial business loans ..... 5,822 3,885 1,937
--------------- ----------- -----------
Total loans receivable ......... 643,985 156,666 114,281
Mortgage-backed securities ..... 70,002 17,099 14,128
--------------- ----------- -----------
Total ......................... $713,987 $173,765 $128,409
=============== =========== ===========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
2001- 2003- 2006 AND
1999 2000 2002 2006 THEREAFTER
---------- ---------- ---------- ----------- -----------------
First Mortgage Loans:
One-to-four-family residential $72,613 $55,069 $42,273 $109,147 $61,658
Five-or-more-unit residential . 2,331 1,810 1,390 292 --
Commercial ..................... 8,431 6,614 10,190 -- --
Second Mortgage loans ........... 686 534 -- -- --
--------- ---------- ---------- ---------- -----------
Total first and second mortgage
loans ........................ 84,061 64,027 53,853 109,439 61,658
Consumer ....................... -- -- -- -- --
Commercial business loans ..... -- -- -- -- --
--------- ---------- ---------- ---------- -----------
Total loans receivable ......... 84,061 64,027 53,853 109,439 61,658
Mortgage-backed securities ..... 11,738 6,943 3,951 10,718 5,425
--------- ---------- ---------- ---------- -----------
Total ......................... $95,799 $70,970 $57,804 $120,157 $67,083
========= ========== ========== ========== ===========
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
11
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, 1996, 19.5% of the Company's gross
loans receivable (15.3% of total assets) were secured by properties located
in California and 40.8% of gross loans receivable (31.9% of total assets)
were secured by properties located in Florida. Because of this concentration,
regional economic circumstances in those states could affect the level of the
Company's non-performing loans. The following table sets forth, as of
September 30, 1996 the distribution of the amount of the Company's loans
(including mortgage loans held for sale) by state.
OUTSTANDING ON
STATE SEPTEMBER 30, 1996
- ---------------------------- -------------------
(IN THOUSANDS)
Florida(1) ................. $262,747
California ................. 125,802
Ohio ....................... 27,808
New Jersey ................. 20,411
Maryland ................... 19,346
Colorado ................... 19,099
Virginia ................... 19,038
New York ................... 18,363
Illinois ................... 16,261
Arizona .................... 12,275
Michigan ................... 11,179
Minnesota .................. 10,996
Connecticut ................ 10,661
Massachusetts .............. 10,274
Texas ...................... 6,884
Georgia .................... 5,679
Washington ................. 5,492
Pennsylvania ............... 4,475
Nevada ..................... 2,762
Utah ....................... 1,915
District of Columbia ....... 1,839
Missouri ................... 1,816
Tennessee .................. 1,704
South Carolina ............. 1,664
North Carolina ............. 1,485
Oregon ..................... 1,458
New Hampshire .............. 1,357
Oklahoma ................... 1,331
Kentucky ................... 1,280
Arkansas ................... 1,250
Alabama .................... 1,154
Indiana .................... 1,036
Kansas ..................... 1,036
Wisconsin .................. 1,010
Maine ...................... 858
Louisana ................... 831
Rhode Island ............... 792
Hawaii ..................... 731
Idaho ...................... 641
Others(2) .................. 775
Not secured by real estate 8,470
-------------------
Total ..................... $643,985
===================
- ---------
(1) Does not include $40.1 million of tax certificates representing liens
secured by properties in Florida.
(2) Less than $500,000 in any one state.
12
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 services loans in its portfolio that it
originates. The Company attempts to purchase loans servicing-released, when
available, although at September 30, 1996, the Company's loan portfolio
included $320.0 million of loans that were serviced by others. As of
September 30, 1996, the Company was servicing a total of approximately $318.8
million in mortgage loans, including $3.8 of loans serviced for others.
The Company's first mortgage loans purchased or originated are generally
repayable over 15 or 30 years. Additionally, the Company offers second
mortgage residential loans with maturities ranging from five to 15 years.
Residential loans typically remain outstanding for shorter periods than their
contractual maturities because borrowers prepay the loans in full upon sale
of the mortgaged property or upon refinancing of the original loan. The
Company currently originates and purchases fixed-rate and adjustable-rate
first mortgage loans secured by owner-occupied residences with 15-year term
or 30-year term amortization, and second mortgage loans with 15-year term
amortization or 30-year term amortization with a balloon payment after five
years.
The Company's adjustable-rate mortgage loans ("ARMs") generally have
interest rates that adjust monthly, semi-annually or annually at a margin
over the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of one year published by the Federal Reserve or the FHLB
11th District cost-of-funds index ("COFI") published by the FHLB of San
Francisco. The maximum interest rate adjustment of the Company's ARMs is
generally 1% semi-annually and 6% over the life of the loan, above or below
the initial rate on the loan for semi-annual adjustables, or 2% annually and
6% over the life of the loan, above or below the initial rate on the loan for
annual adjustables. The Company's COFI loans with monthly adjustable interest
rates also provide for a 7.5% cap on monthly payment increases from one
annual payment adjustment to the next, except at the end of five years, when
monthly payments may be adjusted by more than the payment increase cap in
order to provide for the complete amortization by maturity. Because of the
payment cap and the different times at which interest rate adjustments and
payment adjustments are made on these loans, monthly payments on these loans
may not be sufficient to pay the interest accruing on the loan. The amount of
any shortage is added to the principal balance of the loan to be repaid
through future monthly payments to the Company ("negative amortization"). If
the loan-to-value ratio is high, negative amortization could significantly
increase the risk associated with the loan; the Company's management,
however, believes that this risk is mitigated due to the relative stability
of the index used and to conservative underwriting policies.
The Company sometimes purchases or originates loans with "teaser" rates
that are below market rates during an initial period after the loan is x
originated. For loans with teaser rates, the borrower's ability to repay is
determined upon fully indexed rates.
Applicable regulations permit the Company to lend up to 100% of the
appraised value of the real property securing a loan ("loan-to-value ratio").
The Company, however, generally does not make or acquire loans with
loan-to-value ratios that exceed 80% at origination. When terms are
favorable, the Company will 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 that insures that portion of the loan exceeding
the 80% loan-to-value ratio, thereby reducing the risk to no more than 80% of
appraised value.
The Company generally applies the same underwriting criteria to
residential mortgage loans purchased or originated. In its loan purchases,
the Company generally reserves the right to reject particular loans from a
loan package being purchased and does reject loans in a package that do not
meet its underwriting criteria. In determining whether to purchase or
originate a loan, the Company assesses both the borrower's ability to repay
the loan and the adequacy of the proposed collateral. On originations, the
Company obtains appraisals of the property securing the loan. On purchases,
the Company reviews the appraisal obtained by the loan seller or originator
and arranges for an updated
13
review appraisal before purchasing the loan. On purchases and originations,
the Company reviews information concerning the income, financial condition,
employment and credit history of the applicant. On purchases, the Company
generally obtains a credit report on the borrower separate from that provided
by the loan seller.
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
(except as to principal balance and with regard to certain loans discussed
below, as to the borrower's citizenship and related factors) standards
established by Fannie Mae ("FNMA") and the Federal Home Loan Mortgage
Corporation (the "FHLMC"). A loan application is obtained or reviewed by the
Company's underwriters to determine the borrower's ability to repay, and
confirmation of the more significant information is obtained through the use
of credit reports, financial statements, and employment and other
verifications.
The Company generally uses appraisals to determine the value of collateral
for all loans it originates. When originating a real estate mortgage loan,
the Company obtains a new appraisal of the property from an independent third
party to determine the adequacy of the collateral, and such appraisal is
reviewed by one of the underwriters. With respect to a substantial percentage
of loans purchased, the collateral value is determined by reference to a
review appraisal. Otherwise, the collateral value is determined by reference
to the documentation contained in the original file. Borrowers are required
to obtain casualty insurance and, if applicable, flood insurance in amounts
at least equal to the outstanding loan balance or the maximum amount allowed
by law.
The Company also requires that a survey be conducted and title insurance
be obtained, insuring the priority of its mortgage lien. Pursuant to its
underwriting standards, the Company generally requires private mortgage
insurance policies on newly originated mortgage loans with loan-to-value
ratios greater than 80%. All loans are reviewed by the Company's underwriters
to ensure that its guidelines are met or that waivers are obtained in limited
situations where offsetting factors exist.
With regard to loan purchases, a legal review of every loan file is
conducted to determine the adequacy of the legal documentation. The Company
receives various representations and warranties from the sellers of the loans
regarding the quality and characteristics of the loans.
Approximately $38.2 million, or 5.9%, of the Company's gross loans
receivable are first mortgage loans to non-resident aliens secured by
single-family residences located in Florida. These loans are purchased and
originated by the Company in a manner similar to that described above for
other residential loans. Loans to non-resident aliens generally afford the
Company an opportunity to receive rates of interest higher than those
available from other single-family residential loans. Nevertheless, such
loans generally involve a greater degree of risk than other single-family
residential mortgage loans. The ability to obtain access to the borrower is
more limited for non-resident aliens, as is the ability to attach or verify
assets located in foreign countries. The Company has attempted to minimize
these risks through its underwriting standards for such loans (including
generally lower loan-to-value ratios and qualification based on verifiable
assets located in the United States).
COMMERCIAL REAL ESTATE LENDING. The Company's commercial real estate
lending division originates or purchases multi-family and commercial real
estate loans from $250,000 to $4.0 million. The Company's strategy is to
promote commercial lending together with private banking (see "Private
Banking" below), as both areas seek to develop long-term relationships with
select businesses, real estate borrowers, and professionals. At September 30,
1996, the Company had $49.3 million of commercial real estate loans,
representing a total of 6.9% 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
14
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.
Appraisals on properties securing commercial real estate loans originated
by the Company are performed at the time the loan is made by an independent
appraiser. In addition, the Company's underwriting procedures generally
require verification of the borrower's credit history, income and financial
statements, banking relationships, references and income projections for the
property. Personal guarantees are generally obtained for the Company's
commercial real estate loans.
Management's expansion into this area reflects its business strategy to
obtain seasoned loan product divested by the super-regional financial
companies in South Florida and its belief that commercial real estate loans
are generally of short-to moderate-term with higher-yielding variable
interest rates as compared to residential loans. In December 1995, the
Company purchased approximately $32.0 million of commercial real estate loans
in Florida from another financial institution. The loan package comprised 23
loans with principal balances ranging from $430,000 to $4.7 million.
Management believes that with the recent acquisition of several Florida-based
financial institutions by out-of-state regional banks, the Company will be
able to expand its commercial real estate business.
Commercial real estate lending affords the Company an opportunity to
receive interest at rates higher than those generally available from
one-to-four-family residential lending. Nevertheless, loans secured by such
properties are generally larger and involve a greater degree of risk than
one-to-four-family residential mortgage loans. Because payments on loans
secured by commercial real estate properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the
economy. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed), the borrower's ability to repay the loan may be
impaired. In addition, adjustable-rate commercial real estate loans are
subject to increased risk of delinquency or default as interest rates
increase. The Company has attempted to minimize these risks through its
underwriting standards.
REAL ESTATE CONSTRUCTION LENDING. The Company has commenced a program to
make 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, although at September 30, 1996, the Company had no construction
loans.
Construction loans to individuals for their residences may be, but would
not be required to be, structured to be converted to permanent loans with the
Company at the end of the construction phase. Such residential construction
loans would generally be underwritten pursuant to the same guidelines used
for originating permanent residential loans. The Company's construction loans
would typically have terms of up to nine months and have rates higher than
permanent one-to-four-family loans offered by the Company. During the
construction phase, the borrower would pay interest only. Generally, the
maximum loan-to-value ratio of owner-occupied, single-family construction
loans would be 75%.
The Company may from time to time make construction loans on commercial
real estate projects secured by apartments, shopping centers, industrial
properties, small office buildings, medical facilities or other property.
Such loans would generally be structured to be converted to permanent loans
at the end of the construction phase, which generally runs from 12 to 18
months. These construction loans would have rates and terms that match any
permanent commercial real estate loan then offered by the Company, except
that during the construction phase, the borrower would pay interest only.
These loans would generally provide for the payment of interest and loan fees
from loan proceeds.
Because of the uncertainties inherent in estimating construction costs and
the market for the project upon completion, it is relatively difficult to
evaluate accurately the total loan funds that would be required to complete a
project, the related loan-to-value ratios, and the likelihood of ultimate
15
success of a project. Construction loans to borrowers other than
owner-occupants also involve many of the same risks discussed above regarding
commercial real estate loans and tend to be more sensitive to general
economic conditions than many other types of loans. Also, the funding of loan
fees and interest during the construction phase makes the monitoring of the
progress of the project particularly important, as customary early warning
signals of project difficulties may not be present.
COMMERCIAL BUSINESS LENDING. Commercial business loans totaled $5.8
million as of September 30, 1996, representing .8% 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 possesses 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
provides 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. 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.
As of September 30, 1996, the Company had $8.3 million in substandard
assets of which $7.8 million are included in non-performing assets.
Substandard assets consisted of the following:
AS OF
SEPTEMBER 30, 1996
-------------------
(IN THOUSANDS)
One-to-four-family residential loans ........ $6,409
Consumer and business loans ................ 15
REO ......................................... 632
Tax certificates ............................ 1,264
------
Total Substandard Assets ................... $8,320
======
In addition, $259,000 of tax certificates were classified as loss as of
September 30, 1996 and have been specifically reserved for.
16
The following table sets forth information regarding the Company's
allowance for loan losses for the periods indicated:
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- ---------- --------- ----------
(IN THOUSANDS)
Allowance for loan losses balance (at beginning of period $1,469 $ 841 $ 1,184 $ 265 $195
Provisions (credit) for loan losses ...................... (120) 1,221 1,187 1,052 70
Allowance from Bank of Florida ........................... 183 -- -- -- --
Allocation from discounts on loans purchased ............. -- -- -- 90 --
Loans charged off:
One-to four-family residential loans ..................... (493) (535) (1,582) (223) --
Commercial and other ..................................... -- (59) -- -- --
-------- --------- ---------- ---------- --------
Total (493) (594) (1,582) (223) --
-------- --------- ---------- ---------- --------
Recoveries:
One-to four-family residential loans ..................... 1,119 1 52 -- --
-------- --------- ---------- ---------- --------
Allowance for loan losses, balance (at end of period) ... $2,158 $1,469 $ 841 $1,184 $265
======== ========= ========== ========== ========
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.
The following table sets forth the allocation of general allowance for
loan losses by loan category for the periods indicated.
AT SEPTEMBER 30,
------------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ---------------------------
% 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
--------- -------------- --------- -------------- --------- --------------
Balance at end of period
applicable to: ..................
One-to-four-family residential
mortgages ....................... $1,381 88.6% $1,207 95.9% $766 96.0%
Commercial and other loans ..... 739 11.4% 168 4.1% 75 4.0%
Unallocated ..................... 38 N/A 94 N/A -- N/A
-------- --------- ------- -------- -------- ------
Total allowances for loan losses $2,158 100.0% $1,469 100.0% $841 100.0%
======== ========= ======= ======== ======== ======
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--Financial Condition--Credit Quality" in Appendix C hereto.
PRIVATE BANKING
The Company's Private Banking Division focuses on the diverse lending and
deposit needs of professionals and executives in South Florida. Private
banking is customer-oriented, not transaction-oriented, with an emphasis on
building a total banking relationship. The Private Banking target market
includes the upscale markets of metropolitan Miami with emphasis on the Coral
Gables and southwest Dade County areas.
Currently, the Company's commercial business loans and
non-interest-bearing demand deposit accounts are originated primarily by the
Private Banking Division. The Company is developing its
17
capability to deliver loan services to businesses in communities served by
its branch offices. The Private Banking Division is also responsible for a
portion of the residential real estate loans originated by the Company,
particularly the loans with higher balances, which usually generate higher
fees. The Company's consumer lending business is also generated by this
division.
MORTGAGE BANKING
The Company has 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 $54.0 million in fiscal 1996.
INVESTMENTS
The Company maintains an investment portfolio consisting primarily of
federal agency securities, FHLB overnight deposits, securities purchased
under agreements to resell and tax certificates. Federal regulations limit
the instruments in which the Company may invest its funds. The Company's
current investment policy permits purchases only of investments (with the
exception of tax certificates) rated in one of the three highest grades by a
nationally recognized rating agency and does not permit purchases of
securities of non-investment grade quality (such as so-called "junk bonds").
The Company's portfolio also includes tax certificates issued by various
counties in the State of Florida. Tax certificates represent tax obligations
that are auctioned by county taxing authorities on an annual basis in order
to collect delinquent real estate taxes. Although tax certificates have no
stated maturity, the certificate holder has the right to collect the
delinquent tax amount, plus interest, and can file for a tax deed if the
delinquent tax amount is unpaid at the end of two years. Tax certificates
have a claim superior to most other liens. If the holder does not file for
deed within seven years, the certificate becomes null and void. The Company
has adopted detailed policies with regard to its investment in tax
certificates, which specify due diligence procedures, purchasing procedures
(including parameters for the location, type and size of tax certificates
acceptable for purchase) and procedures for managing the portfolio after
acquisition.
The following table sets forth information regarding the Company's
investments as of the dates indicated. Amounts shown are historical amortized
cost. For additional information regarding the Company's investment
securities, including the carrying values and approximate market values of
such investment securities, see Notes 1 and 4 of the Notes to the Company's
Consolidated Financial Statements included in Appendix D hereto.
AS OF SEPTEMBER 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Securities purchased under agreements to
resell ........................................ $ -- $ -- $ 700
Federal funds sold ............................ 400 400 375
Federal agency securities ..................... 4,985 4,675 2,003
FHLB overnight deposits ....................... 28,253 31,813 11,212
Tax certificates .............................. 40,088 39,544 42,612
Other ......................................... 1,711 11 11
--------- --------- ---------
Total investment securities .................. $75,437 $76,443 $56,913
========= ========= =========
Weighted average yield ....................... 7.35% 7.88% 7.61%
========= ========= =========
18
The following table sets forth information regarding the maturities of the
Company's investments as of September 30, 1996. Amounts shown are book
values.
PERIODS TO MATURITY
FROM SEPTEMBER 30, 1996
------------------------------------
WITHIN 1 THROUGH OVER
1 YEAR 5 YEARS 5 YEARS
---------- ------------ -----------
Federal agency securities $ 2,004 $2,981 $ --
FHLB overnight deposits .. 28,253 -- --
Tax certificates(1) ....... 40,088 -- --
Federal funds sold ........ 400 -- --
Other ..................... 910 765 36
--------- --------- -------
Total .................... $71,655 $3,746 $ 36
========= ========= =======
Weighted average yield .. 7.36% 7.15% 6.76%
========= ========= =======
- ----------
(1) Maturities are based on historical experience.
OTHER INTEREST-EARNINGS ASSETS
Included in other interest-earning assets is stock of the FHLB of Atlanta,
which totaled $12.2 million, $12.3 million and $7.9 million as of September
30, 1996, 1995 and 1994, respectively. The Company also had a $25,000 equity
investment in the Community Reinvestment Group as of September 30, 1996 and
1995. Carrying value, which is par, is estimated to be the fair market value
of these assets.
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 and FHLB advances.
DEPOSITS. The Company offers a full variety of deposit accounts ranging
from passbook accounts to certificates of deposit with maturities of up to
five years. The Company also offers transaction accounts, which include
commercial checking accounts, negotiable order of withdrawal ("NOW")
accounts, super NOW accounts and money market deposit accounts. The rates
paid on deposits are established periodically by management based on the
Company's need for funds and the rates being offered by the Company's
competitors with the goal of remaining competitive without offering the
highest rates in the market area. The Company has not utilized brokered
deposits.
The Company has placed increasing reliance on passbook accounts, money
market accounts, certificates of deposit and other savings alternatives that
are more responsive to market conditions than long-term, fixed-rate
certificates. While market-sensitive savings vehicles permit the Company to
reduce its cost of funds during periods of declining interest rates, such
savings alternatives also increase the Company's vulnerability to periods of
high interest rates. There are no regulatory interest rate ceilings on the
Company's accounts.
19
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,
--------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- -----------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- -------- ----------- -------- ----------- -------------
(DOLLARS IN THOUSANDS)
Passbook accounts:
Regular ............................... $ 73,741 4.44% $ 50,327 3.04% $ 44,533 3.04%
Holiday club .......................... 39 2.00 46 2.00 50 1.75
----------- ---------- -------------
Total passbook accounts .............. 73,780 50,373 44,583
----------- ---------- -------------
Checking:
Insured money market .................. 16,556 3.87 7,733 2.68 18,006 1.51
NOW and non-interest-bearing accounts 24,566 1.49 18,157 2.17 29,805 1.67
----------- -------- ---------- ------------
Total transaction accounts ........... 41,122 25,890 47,811
----------- ---------- ------------
Total passbook and checking accounts 114,902 76,263 92,394
----------- ---------- ------------
Certificates:
30-89-day certificates of deposit .... 91 2.73 166 3.01
3-5-month certificates of deposit .... 7,114 4.67 1,465 4.78 4,552 3.95
6-8-month certificates of deposit .... 159,850 5.40 93,684 5.65 87,071 4.23
9-11-month certificates of deposit ... 20,279 5.45 5,654 5.55 1,302 3.53
12-17-month certificates of deposit .. 124,637 5.49 79,637 5.90 71,115 4.44
18-23-month certificates of deposit .. 12,375 5.79 12,382 5.37 33,282 4.31
24-29-month certificates of deposit .. 42,875 5.94 18,593 5.57 24,453 4.36
30-35-month certificates of deposit .. 1,774 5.57 2,868 4.99 4,867 4.66
36-60-month certificates of deposit .. 22,300 5.93 19,437 5.81 28,593 5.46
----------- -------- ---------- ----------- --------
Total certificates ................... 391,204 233,811 255,401
----------- ---------- -----------
Total ............................... $506,106 $310,074 $347,795
=========== ========== ===========
Weighted average rate .............. 5.11% 4.99% 3.88%
======== ======== ========
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, 1996 that mature during the periods indicated:
PERIODS TO MATURITY
FROM SEPTEMBER 30, 1996
-------------------------------------------------
AS OF WITHIN 1 TO 2 TO MORE THAN
SEPTEMBER 30, 1996 1 YEAR 2 YEARS 3 YEARS 3 YEARS
------------------- ----------- ---------- ---------- ------------
(IN THOUSANDS)
Certificate accounts:
3.00% to 3.99% ................... $ 93 $ 93 $ -- $ -- $ --
4.00% to 4.99% ................... 6,700 6,182 366 152 --
5.00% to 5.99% ................... 309,070 257,517 43,406 3,965 4,182
6.00% to 6.99% ................... 21,555 8,819 6,762 2,405 3,569
7.00% to 7.99% ................... 862 368 -- 48 446
8.00% to 8.99% ................... -- -- -- -- --
------------------- ----------- ---------- ---------- ------------
Total certificate accounts (under
$100,000) ....................... $338,280 $272,979 $50,534 $6,570 $8,197
=================== =========== ========== ========== ============
20
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, 1996 that mature during the periods indicated:
PERIODS TO MATURITY
FROM SEPTEMBER 30, 1996
------------------------------------------------
AS OF WITHIN 1 TO 2 TO MORE THAN
SEPTEMBER 30, 1996 1 YEAR 2 YEARS 3 YEARS 3 YEARS
------------------- ---------- ---------- ---------- ---------------
(IN THOUSANDS)
Jumbo certificate accounts:
2.00% to 2.99% .................. $ 100 $ 100 $ 135 $ -- $ --
4.00% to 4.99% .................. 1,733 1,598 6,308 331 219
5.00% to 5.99% .................. 46,969 40,111 1,076 631 540
6.00% to 6.99% .................. 4,021 1,774 -- -- --
7.00% to 7.99% .................. 101 -- -- -- 101
------------------- ---------- ---------- ---------- ------------
Total jumbo certificate accounts $52,924 $43,583 $7,519 $962 $860
=================== ========== ========== ========== ============
Of the Company's total deposits at September 30, 1996, 1995 and 1994,
10.5%, 8.6% and 10.3%, respectively, were deposits of $100,000 or more issued
to the public. Although jumbo certificates of deposit are generally more rate
sensitive than smaller size deposits, management believes that the Company
will retain these deposits.
In 1995, the Company sold its three branches on the west coast of Florida,
including their deposits which totaled $130 million at the date of sale. The
sale was part of a shift in growth strategy to focus on South Florida and
take advantage of consolidation trends in banking there. Also, as part of
this strategy, the Company opened branches in Boca Raton, Florida in December
1995, Delray Beach, Florida in June 1996 and West Palm Beach, Florida in
September 1996. On March 29, 1996, the Company acquired the Bank of Florida
whose single branch with total deposits of $27.3 million was consolidated
with the Company's South Miami branch. On November 15, 1996, as discussed
above, the Company acquired Suncoast which had six branches.
BORROWINGS. When the Company's primary sources of funds are not sufficient
to meet deposit outflows, loan originations and purchases and other cash
requirements, the Company may borrow funds from the FHLB of Atlanta and from
other sources. The FHLB system acts as an additional source of funding for
savings institutions. In addition, the Company uses subordinated notes and
agreements to repurchase in order to increase 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. BankUnited currently meets the qualified thrift lender test.
See "Regulation--Savings Institution Regulation--Qualified Thrift Lender
Test."
21
The following tables set forth information as to the Company's borrowings
as of the dates and for the periods indicated.
AS OF SEPTEMBER 30,
-----------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
PERIOD END BALANCES:
FHLB advances(1) ................... $237,000 5.73% $241,000 5.92% $136,000 5.17%
Subordinated notes ................. 775 9.00 775 9.00 775 9.00
Securities sold under agreements to
repurchase (2) ..................... -- -- -- -- 21,400 4.49
----------- ----------- ----------- ---------- ----------- --------
Total borrowings .................. $237,775 5.74% $241,775 5.93% $158,175 5.10%
========== ========= =========== ========== ========== ========
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
AVERAGE BALANCES:
FHLB advances(1) ................... $234,489 5.77% $136,706 5.86% $116,493 4.03%
Subordinated notes ................. 775 9.00 775 9.00 775 9.00
Securities sold under agreements to
repurchase (2) ................... -- -- 6,571 5.59 3,224 5.68
----------- --------- ----------- ------- --------- -----
Total borrowings .................. $235,264 5.78% $144,052 5.86% $120,492 4.11%
=========== ========= =========== ======= ========= ====
- ----------
(1) The maximum amount of FHLB advances outstanding during the years ended
September 30, 1996, 1995 and 1994 was $244.0 million, $246.0 million and
$149.0 million, respectively.
(2) The maximum amount of securities sold under agreements to repurchase at
any month-end during the years ended September 30, 1995 and 1994 was
$33.6 million and $21.4 million.
ACTIVITIES OF SUBSIDIARY.
T&D Properties of South Florida, Inc., a Florida corporation ("T&D"), is a
wholly owned operating subsidiary of the Bank, organized in 1991 to invest in
tax certificates. T&D also holds title to, maintains, manages and supervises
the disposition of real property acquired through tax deeds.
Bay Holdings, Inc., a Florida corporation ("Bay Holding") 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 ("BU Ventures") 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.
EMPLOYEES
At September 30, 1996, the Company had 126 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
22
savings industry, which include group medical and life insurance, a 401(k)
savings plan and paid vacations. The Company also provides stock awards and a
profit sharing plan for certain officers, directors and employees.
REGULATION
RECENT LEGISLATIVE DEVELOPMENTS
In recent years, measures have been taken to reform the thrift and banking
industries and to strengthen the insurance funds for depository institutions.
The most significant of these measures for savings institutions was the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (the
"FIRREA"), which has had a major impact on the operation and regulation of
savings associations generally. In 1991, the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "FDICIA"), became law. Although the
FDICIA's primary purpose was to recapitalize the Bank Insurance Fund (the
"BIF") of the FDIC, which insures the deposits of commercial banks, the
FDICIA also affected the supervision and regulation of all federally insured
depository institutions, including federal savings banks such as the Bank.
More recent legislation has attempted to resolve the problems of the SAIF in
meeting its minimum required reserve ratio and the related concern facing
SAIF-insured institutions, such as the Bank, of paying significantly higher
deposit insurance premiums than BIF-insured institutions. The following
discussion is a summary of the significant provisions of the recent
legislation affecting the banking industry.
THE FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989.
The FIRREA, which was enacted in response to concerns regarding the soundness
of the thrift industry, brought about a significant regulatory restructuring,
limited savings institutions' business activities, and increased their
regulatory capital requirements. The FIRREA abolished the Federal Home Loan
Bank Board and the Federal Savings and Loan Insurance Corporation (the
"FSLIC"), and established the OTS as the primary federal regulator for
savings institutions. Deposits at the Bank are insured through the SAIF, a
separate fund managed by the FDIC for institutions whose deposits were
formerly insured by the FSLIC. Regulatory functions relating to deposit
insurance are generally exercised by the FDIC. The Resolution Trust
Corporation (the "RTC") was created to manage 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 requires that the federal banking agencies revise their
risk-based capital requirements to include components for interest rate risk,
concentration of credit risk and the risk of non-traditional activities. See
"--Savings Institution Regulations--Regulatory Capital Requirements" below
for a description of the final rule adopted by the OTS that incorporates an
interest rate risk component in the risk-based capital requirement. Although
adopted, implementation of this rule has been postponed indefinitely.
In addition, the FDICIA requires each federal banking agency to establish
standards relating to internal controls, information systems, and internal
audit systems that are designed to assess the financial condition and
management of the institution; loan documentation; credit underwriting;
interest
23
rate exposure; asset growth; and compensation, fees and benefits. The FDICIA
lowered the qualified thrift lender ("QTL") investment percentage applicable
to SAIF-insured institutions. See "--Savings Institution
Regulations--Qualified Thrift Lender Test" below. The FDICIA also provided
that a risk-based assessment system for insured depository institutions must
be established before January 1, 1994. See "--Savings Institution
Regulations--Insurance of Accounts" below. These requirements have been
implemented. The FDICIA further requires annual on-site full examinations of
depository institutions, with certain exceptions, and annual reports on
institutions' financial and management controls.
THE RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT OF 1994.
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Branching Act") became law. Savings
associations, whose primary federal regulator is the OTS, generally are not
directly affected by the Interstate Branching Act except for a provision that
allows an insured savings association that was an affiliate of a bank on July
1, 1994, to act as the bank's agent as though it were an insured bank
affiliate of the bank.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of
Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital")
of at least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premium