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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